Form 10-Q
Table of Contents

 

 

UNITED STATES

SECURITIES AND EXCHANGE COMMISSION

Washington, D.C. 20549

 

 

Form 10-Q

 

 

(Mark One)

 

x QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934

For the quarterly period ended September 30, 2013

or

 

¨ TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934

For the transition period from              to             

Commission File Number: 001-13251

 

 

SLM Corporation

(Exact name of registrant as specified in its charter)

 

 

 

Delaware   52-2013874

(State or other jurisdiction of

incorporation or organization)

 

(I.R.S. Employer

Identification No.)

300 Continental Drive, Newark, Delaware   19713
(Address of principal executive offices)   (Zip Code)

(302) 283-8000

(Registrant’s telephone number, including area code)

(Former name, former address and former fiscal year, if changed since last report)

 

 

Indicate by check mark whether the registrant: (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days.    Yes  x    No  ¨

Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, or a smaller reporting company. See the definitions of “large accelerated filer,” “accelerated filer” and “smaller reporting company” in Rule 12b-2 of the Exchange Act. (Check one):

 

Large accelerated filer   x      Accelerated filer   ¨
Non-accelerated filer   ¨   (Do not check if a smaller reporting company)    Smaller reporting company   ¨

Indicate by check mark whether the registrant has submitted electronically and posted on its corporate Web site, if any, every Interactive Data File required to be submitted and posted pursuant to Rule 405 of Regulation S-T during the preceding 12 months (or for such shorter period that the registrant was required to submit and post such files).    Yes  x    No  ¨

Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act).    Yes  ¨    No  x

Indicate the number of shares outstanding of each of the issuer’s classes of common stock, as of the latest practicable date:

 

Class

  

Outstanding at September 30, 2013

Common Stock, $0.20 par value

   436,264,071 shares

 

 

 


Table of Contents

SLM CORPORATION

Table of Contents

 

Part I. Financial Information

  

Item 1.

  

Financial Statements

     2   

Item 2.

  

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

     44   

Item 3.

  

Quantitative and Qualitative Disclosures about Market Risk

     90   

Item 4.

  

Controls and Procedures

     94   

PART II. Other Information

  

Item 1.

  

Legal Proceedings

     95   

Item 1A.

  

Risk Factors

     96   

Item 2.

  

Unregistered Sales of Equity Securities and Use of Proceeds

     98   

Item 3.

  

Defaults Upon Senior Securities

     98   

Item 4.

  

Mine Safety Disclosures

     98   

Item 5.

  

Other Information

     98   

Item 6.

  

Exhibits

     98   

 

1


Table of Contents

PART I. FINANCIAL INFORMATION

 

Item  1. Financial Statements

SLM CORPORATION

CONSOLIDATED BALANCE SHEETS

(In millions, except share and per share amounts)

(Unaudited)

 

     September 30,
2013
    December 31,
2012
 

Assets

    

FFELP Loans (net of allowance for losses of $130 and $159, respectively)

   $ 106,350      $ 125,612   

Private Education Loans (net of allowance for losses of $2,144 and $2,171 respectively)

     37,752        36,934   

Investments

    

Available-for-sale

     85        72   

Other

     911        1,010   
  

 

 

   

 

 

 

Total investments

     996        1,082   

Cash and cash equivalents

     4,329        3,900   

Restricted cash and investments

     4,287        5,011   

Goodwill and acquired intangible assets, net

     436        448   

Other assets

     7,420        8,273   
  

 

 

   

 

 

 

Total assets

   $ 161,570      $ 181,260   
  

 

 

   

 

 

 

Liabilities

    

Short-term borrowings

   $ 15,572      $ 19,856   

Long-term borrowings

     136,944        152,401   

Other liabilities

     3,422        3,937   
  

 

 

   

 

 

 

Total liabilities

     155,938        176,194   
  

 

 

   

 

 

 

Commitments and contingencies

    

Equity

    

Preferred stock, par value $0.20 per share, 20 million shares authorized

    

Series A: 3.3 million and 3.3 million shares issued, respectively, at stated value of $50 per share

     165        165   

Series B: 4 million and 4 million shares issued, respectively, at stated value of $100 per share

     400        400   

Common stock, par value $0.20 per share, 1.125 billion shares authorized: 544 million and 536 million shares issued, respectively

     109        107   

Additional paid-in capital

     4,373        4,237   

Accumulated other comprehensive income (loss) (net of tax (expense) benefit of $(5) and $3, respectively)

     8        (6

Retained earnings

     2,385        1,451   
  

 

 

   

 

 

 

Total SLM Corporation stockholders’ equity before treasury stock

     7,440        6,354   

Less: Common stock held in treasury at cost: 108 million and 83 million shares, respectively

     (1,813     (1,294
  

 

 

   

 

 

 

Total SLM Corporation stockholders’ equity

     5,627        5,060   

Noncontrolling interest

     5        6   
  

 

 

   

 

 

 

Total equity

     5,632        5,066   
  

 

 

   

 

 

 

Total liabilities and equity

   $ 161,570      $ 181,260   
  

 

 

   

 

 

 

Supplemental information — assets and liabilities of consolidated variable interest entities:

 

     September 30,
2013
     December 31,
2012
 

FFELP Loans

   $ 101,627       $ 121,059   

Private Education Loans

     26,018         26,072   

Restricted cash and investments

     4,044         4,826   

Other assets

     2,380         2,312   

Short-term borrowings

     4,678         9,551   

Long-term borrowings

     116,968         131,518   
  

 

 

    

 

 

 

Net assets of consolidated variable interest entities

   $ 12,423       $ 13,200   
  

 

 

    

 

 

 

See accompanying notes to consolidated financial statements.

 

2


Table of Contents

SLM CORPORATION

CONSOLIDATED STATEMENTS OF INCOME

(In millions, except per share amounts)

(Unaudited)

 

     Three Months Ended
September 30,
    Nine Months Ended
September 30,
 
       2013         2012         2013         2012    

Interest income:

        

FFELP Loans

   $ 698      $ 840      $ 2,138      $ 2,459   

Private Education Loans

     635        615        1,884        1,856   

Other loans

     3        4        9        13   

Cash and investments

     4        5        13        16   
  

 

 

   

 

 

   

 

 

   

 

 

 

Total interest income

     1,340        1,464        4,044        4,344   

Total interest expense

     541        645        1,666        1,968   
  

 

 

   

 

 

   

 

 

   

 

 

 

Net interest income

     799        819        2,378        2,376   

Less: provisions for loan losses

     207        270        649        766   
  

 

 

   

 

 

   

 

 

   

 

 

 

Net interest income after provisions for loan losses

     592        549        1,729        1,610   
  

 

 

   

 

 

   

 

 

   

 

 

 

Other income (loss):

        

Gains on sales of loans and investments

                   307        1   

Losses on derivative and hedging activities, net

     (127     (233     (140     (600

Servicing revenue

     83        71        223        212   

Contingency revenue

     104        85        312        261   

Gains on debt repurchases

            44        42        102   

Other

     9        2        66        39   
  

 

 

   

 

 

   

 

 

   

 

 

 

Total other income (loss)

     69        (31     810        15   
  

 

 

   

 

 

   

 

 

   

 

 

 

Expenses:

        

Salaries and benefits

     128        113        380        343   

Other operating expenses

     129        107        357        329   
  

 

 

   

 

 

   

 

 

   

 

 

 

Total operating expenses

     257        220        737        672   

Goodwill and acquired intangible asset impairment and amortization expense

     4        5        10        13   

Restructuring and other reorganization expenses

     12        2        46        9   
  

 

 

   

 

 

   

 

 

   

 

 

 

Total expenses

     273        227        793        694   
  

 

 

   

 

 

   

 

 

   

 

 

 

Income from continuing operations, before income tax expense

     388        291        1,746        931   

Income tax expense

     136        104        645        340   
  

 

 

   

 

 

   

 

 

   

 

 

 

Net income from continuing operations

     252        187        1,101        591   

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

     8               47        (2
  

 

 

   

 

 

   

 

 

   

 

 

 

Net income

     260        187        1,148        589   

Less: net loss attributable to noncontrolling interest

            (1     (1     (2
  

 

 

   

 

 

   

 

 

   

 

 

 

Net income attributable to SLM Corporation

     260        188        1,149        591   

Preferred stock dividends

     5        5        15        15   
  

 

 

   

 

 

   

 

 

   

 

 

 

Net income attributable to SLM Corporation common stock

   $ 255      $ 183      $ 1,134      $ 576   
  

 

 

   

 

 

   

 

 

   

 

 

 

Basic earnings per common share attributable to SLM Corporation:

        

Continuing operations

   $ .56      $ .39      $ 2.46      $ 1.19   

Discontinued operations

     .02               .10          
  

 

 

   

 

 

   

 

 

   

 

 

 

Total

   $ .58      $ .39      $ 2.56      $ 1.19   
  

 

 

   

 

 

   

 

 

   

 

 

 

Average common shares outstanding

     436        464        442        483   
  

 

 

   

 

 

   

 

 

   

 

 

 

Diluted earnings per common share attributable to SLM Corporation:

        

Continuing operations

   $ .55      $ .39      $ 2.42      $ 1.18   

Discontinued operations

     .02               .10          
  

 

 

   

 

 

   

 

 

   

 

 

 

Total

   $ .57      $ .39      $ 2.52      $ 1.18   
  

 

 

   

 

 

   

 

 

   

 

 

 

Average common and common equivalent shares outstanding

     445        471        450        490   
  

 

 

   

 

 

   

 

 

   

 

 

 

Dividends per common share attributable to SLM Corporation

   $ .15      $ .125      $ .45      $ .375   
  

 

 

   

 

 

   

 

 

   

 

 

 

See accompanying notes to consolidated financial statements.

 

3


Table of Contents

SLM CORPORATION

CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME

(In millions)

(Unaudited)

 

     Three Months Ended
September 30,
    Nine Months Ended
September 30,
 
       2013         2012           2013             2012      

Net income

   $ 260      $ 187      $ 1,148      $ 589   

Other comprehensive income (loss):

        

Unrealized gains (losses) on derivatives:

        

Unrealized hedging gains (losses) on derivatives

     (3     (3     19        (14

Reclassification adjustments for derivative losses included in net income (interest expense)

     1        6        7        22   
  

 

 

   

 

 

   

 

 

   

 

 

 

Total unrealized gains (losses) on derivatives

     (2     3        26        8   

Unrealized gains (losses) on investments

                   (4     1   

Income tax (expense) benefit

     1        (1     (8     (3
  

 

 

   

 

 

   

 

 

   

 

 

 

Other comprehensive income (loss), net of tax

     (1     2        14        6   
  

 

 

   

 

 

   

 

 

   

 

 

 

Comprehensive income

     259        189        1,162        595   

Less: comprehensive loss attributable to noncontrolling interest

            (1     (1     (2
  

 

 

   

 

 

   

 

 

   

 

 

 

Total comprehensive income attributable to SLM Corporation

   $ 259      $ 190      $ 1,163      $ 597   
  

 

 

   

 

 

   

 

 

   

 

 

 

See accompanying notes to consolidated financial statements.

 

4


Table of Contents

SLM CORPORATION

CONSOLIDATED STATEMENTS OF CHANGES IN STOCKHOLDERS’ EQUITY

(Dollars in millions, except share and per share amounts)

(Unaudited)

 

    Preferred
Stock
Shares
    Common Stock Shares     Preferred
Stock
    Common
Stock
    Additional
Paid-In
Capital
    Accumulated
Other
Comprehensive
Income (Loss)
    Retained
Earnings
    Treasury
Stock
    Total
Stockholders’
Equity
    Noncontrolling
Interest
    Total
Equity
 
      Issued     Treasury     Outstanding                    

Balance at June 30, 2012

    7,300,000        532,672,974        (63,270,775     469,402,199      $ 565      $ 107      $ 4,196      $ (10   $ 1,040      $ (967   $ 4,931      $ 7      $ 4,938   

Comprehensive income:

                         

Net income (loss)

                                                    188              188        (1     187   

Other comprehensive income, net of tax

                                              2                    2              2   
                     

 

 

   

 

 

   

 

 

 

Total comprehensive income

                                                                190        (1     189   

Cash dividends:

                         

Common stock ($.125 per share)

                                                    (58           (58           (58

Preferred stock, series A ($.87 per share)

                                                    (3           (3           (3

Preferred stock, series B ($.57 per share)

                                                    (2           (2           (2

Issuance of common shares

          1,654,506              1,654,506                    17                          17              17   

Tax benefit related to employee stock-based compensation plans

                                        (2                       (2           (2

Stock-based compensation expense

                                        8                          8              8   

Common stock repurchased

                (7,643,999     (7,643,999                                   (121     (121           (121

Shares repurchased related to employee stock-based compensation plans

                (1,253,922     (1,253,922                                   (20     (20           (20
 

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Balance at September 30, 2012

    7,300,000        534,327,480        (72,168,696     462,158,784      $ 565      $ 107      $ 4,219      $ (8   $ 1,165      $ (1,108   $ 4,940      $ 6      $ 4,946   
 

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Balance at June 30, 2013

    7,300,000        543,781,184        (107,592,332     436,188,852      $ 565      $ 109      $ 4,355      $ 9      $ 2,195      $ (1,804   $ 5,429      $ 5      $ 5,434   

Comprehensive income:

                         

Net income (loss)

                                                            260               260               260   

Other comprehensive income, net of tax

                                                     (1                   (1            (1
                     

 

 

   

 

 

   

 

 

 

Total comprehensive income

                                                                          259               259   

Cash dividends:

                         

Common stock ($.15 per share)

                                                            (65            (65            (65

Preferred stock, series A ($.87 per share)

                                                            (3            (3            (3

Preferred stock, series B ($.50 per share)

                                                            (2            (2            (2

Issuance of common shares

           326,789               326,789                      8                             8               8   

Tax benefit related to employee stock-based compensation plans

                                              2                             2               2   

Stock-based compensation expense

                                              8                             8               8   

Shares repurchased related to employee stock-based compensation plans

                  (251,570     (251,570                                        (9     (9            (9
 

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Balance at September 30, 2013

    7,300,000        544,107,973        (107,843,902     436,264,071      $ 565      $ 109      $ 4,373      $ 8      $ 2,385      $ (1,813   $ 5,627      $ 5      $ 5,632   
 

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

See accompanying notes to consolidated financial statements.

 

5


Table of Contents

SLM CORPORATION

CONSOLIDATED STATEMENTS OF CHANGES IN STOCKHOLDERS’ EQUITY

(Dollars in millions, except share and per share amounts)

(Unaudited)

 

    Preferred
Stock
Shares
    Common Stock Shares     Preferred
Stock
    Common
Stock
    Additional
Paid-In
Capital
    Accumulated
Other
Comprehensive
Income (Loss)
    Retained
Earnings
    Treasury
Stock
    Total
Stockholders’
Equity
    Noncontrolling
Interest
    Total
Equity
 
      Issued     Treasury     Outstanding                    

Balance at December 31, 2011

    7,300,000        529,075,322        (20,323,997     508,751,325      $ 565      $ 106      $ 4,136      $ (14   $ 770      $ (320   $ 5,243      $ 8      $ 5,251   

Comprehensive income:

                         

Net income (loss)

                                                            591               591        (2     589   

Other comprehensive income, net of tax

                                                     6                      6               6   
                     

 

 

   

 

 

   

 

 

 

Total comprehensive income

                                                                          597        (2     595   

Cash dividends:

                         

Common stock ($.375 per share)

                                                            (180            (180            (180

Preferred stock, series A ($2.61 per share)

                                                            (8            (8            (8

Preferred stock, series B ($1.69 per share)

                                                            (7            (7            (7

Dividend equivalent units related to employee stock-based compensation plans

                                                            (1            (1            (1

Issuance of common shares

           5,252,158               5,252,158               1        47                             48               48   

Tax benefit related to employee stock-based compensation plans

                                              (5                          (5            (5

Stock-based compensation expense

                                              41                             41               41   

Common stock repurchased

                  (48,184,145     (48,184,145                                        (730     (730            (730

Shares repurchased related to employee stock-based compensation plans

                  (3,660,554     (3,660,554                                        (58     (58            (58
 

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Balance at September 30, 2012

    7,300,000        534,327,480        (72,168,696     462,158,784      $ 565      $ 107      $ 4,219      $ (8   $ 1,165      $ (1,108   $ 4,940      $ 6      $ 4,946   
 

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Balance at December 31, 2012

    7,300,000        535,507,965        (82,910,021     452,597,944      $ 565      $ 107      $ 4,237      $ (6   $ 1,451      $ (1,294   $ 5,060      $ 6      $ 5,066   

Comprehensive income:

                         

Net income (loss)

                                                            1,149               1,149        (1     1,148   

Other comprehensive income, net of tax

                                                     14                      14               14   
                     

 

 

   

 

 

   

 

 

 

Total comprehensive income

                                                                          1,163        (1     1,162   

Cash dividends:

                         

Common stock ($.45 per share)

                                                            (199            (199            (199

Preferred stock, series A ($2.61 per share)

                                                            (9            (9            (9

Preferred stock, series B ($1.51 per share)

                                                            (6            (6            (6

Dividend equivalent units related to employee stock-based compensation plans

                                                            (1            (1            (1

Issuance of common shares

           8,600,008               8,600,008               2        92                             94               94   

Tax benefit related to employee stock-based compensation plans

                                              7                             7               7   

Stock-based compensation expense

                                              37                             37               37   

Common stock repurchased

                  (19,316,948     (19,316,948                                        (400     (400            (400

Shares repurchased related to employee stock-based compensation plans

                  (5,616,933     (5,616,933                                        (119     (119            (119
 

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Balance at September 30, 2013

    7,300,000        544,107,973        (107,843,902     436,264,071      $ 565      $ 109      $ 4,373      $ 8      $ 2,385      $ (1,813   $ 5,627      $ 5      $ 5,632   
 

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

See accompanying notes to consolidated financial statements.

 

6


Table of Contents

SLM CORPORATION

CONSOLIDATED STATEMENTS OF CASH FLOWS

(Dollars in millions)

(Unaudited)

 

     Nine Months  Ended
September 30,
 
       2013         2012    

Operating activities

    

Net income

   $ 1,148      $ 589   

Adjustments to reconcile net income to net cash provided by operating activities:

    

(Income) loss from discontinued operations, net of tax

     (47     2   

Gains on sales of loans and investments

     (307     (1

Gains on debt repurchases

     (42     (102

Goodwill and acquired intangible asset impairment and amortization expense

     10        13   

Stock-based compensation expense

     37        41   

Unrealized (gains) losses on derivative and hedging activities

     (384     51   

Provisions for loan losses

     649        766   

(Increase) decrease in restricted cash — other

     (3     5   

(Increase) decrease in accrued interest receivable

     (74     204   

Decrease in accrued interest payable

     (61     (55

Decrease in other assets

     545        403   

(Decrease) increase in other liabilities

     (85     31   
  

 

 

   

 

 

 

Cash provided by operating activities — continuing operations

     1,386        1,947   
  

 

 

   

 

 

 

Cash provided by (used in) operating activities — discontinued operations

     46        (5
  

 

 

   

 

 

 

Total net cash provided by operating activities

     1,432        1,942   
  

 

 

   

 

 

 

Investing activities

    

Student loans acquired and originated

     (3,689     (5,497

Reduction of student loans:

    

Installment payments, claims and other

     9,159        14,167   

Proceeds from sales of student loans

     707        428   

Other investing activities, net

     56        (101

Purchases of available-for-sale securities

     (44     (39

Proceeds from maturities of available-for-sale securities

     28        56   

Purchases of other securities

     (288     (182

Proceeds from maturities of other securities

     289        161   

Decrease (increase) in restricted cash — variable interest entities

     422        (609
  

 

 

   

 

 

 

Total net cash provided by investing activities

     6,640        8,384   
  

 

 

   

 

 

 

Financing activities

    

Borrowings collateralized by loans in trust — issued

     8,542        10,004   

Borrowings collateralized by loans in trust — repaid

     (10,815     (11,565

Asset-backed commercial paper conduits, net

     4,341        140   

ED Conduit Program facility, net

     (9,551     (8,960

Other short-term borrowings issued

            23   

Other short-term borrowings repaid

            (122

Other long-term borrowings issued

     2,712        3,769   

Other long-term borrowings repaid

     (2,343     (2,952

Other financing activities, net

     (782     224   

Retail and other deposits, net

     867        327   

Common stock repurchased

     (400     (730

Common stock dividends paid

     (199     (180

Preferred stock dividends paid

     (15     (15
  

 

 

   

 

 

 

Net cash used in financing activities

     (7,643     (10,037
  

 

 

   

 

 

 

Net increase in cash and cash equivalents

     429        289   

Cash and cash equivalents at beginning of period

     3,900        2,794   
  

 

 

   

 

 

 

Cash and cash equivalents at end of period

   $ 4,329      $ 3,083   
  

 

 

   

 

 

 

Supplemental disclosures of cash flow information:

    

Cash disbursements made (refunds received) for:

    

Interest

   $ 1,646      $ 1,913   
  

 

 

   

 

 

 

Income taxes paid

   $ 520      $ 416   
  

 

 

   

 

 

 

Income taxes received

   $ (19   $ (5
  

 

 

   

 

 

 

Noncash activity:

    

Investing activity — Student loans and other assets acquired

   $      $ 402   
  

 

 

   

 

 

 

Student loans and other assets removed related to sale of Residual Interest in securitization

   $ (11,802   $   
  

 

 

   

 

 

 

Financing activity — Borrowings assumed in acquisition of student loans and other assets

   $      $ 425   
  

 

 

   

 

 

 

Borrowings removed related to sale of Residual Interest in securitization

   $ (12,084   $   
  

 

 

   

 

 

 

See accompanying notes to consolidated financial statements.

 

7


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SLM CORPORATION

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

(Information at September 30, 2013 and for the three and nine months ended

September 30, 2013 and 2012 is unaudited)

 

1. Significant Accounting Policies

Basis of Presentation

The accompanying unaudited, consolidated financial statements of SLM Corporation (“we,” “us,” “our,” or the “Company”) have been prepared in accordance with generally accepted accounting principles in the United States of America (“GAAP”) for interim financial information. Accordingly, they do not include all of the information and footnotes required by GAAP for complete consolidated financial statements. The consolidated financial statements include the accounts of SLM Corporation and its majority-owned and controlled subsidiaries and those Variable Interest Entities (“VIEs”) for which we are the primary beneficiary, after eliminating the effects of intercompany accounts and transactions. In the opinion of management, all adjustments considered necessary for a fair statement of the results for the interim periods have been included. The preparation of financial statements in conformity with GAAP requires management to make estimates and assumptions that affect the amounts reported in the consolidated financial statements and accompanying notes. Actual results could differ from those estimates. Operating results for the three and nine months ended September 30, 2013 are not necessarily indicative of the results for the year ending December 31, 2013 or for any other period. These unaudited financial statements should be read in conjunction with the audited financial statements and related notes included in our Annual Report on Form 10-K for the year ended December 31, 2012 (the “2012 Form 10-K”). Definitions for certain capitalized terms used in this document can be found in the 2012 Form 10-K.

Consolidation

In the first six months of 2013, we sold Residual Interests in FFELP Loan securitization trusts to third parties. We will continue to service the student loans in the trusts under existing agreements. Prior to the sale of the Residual Interests, we had consolidated the trusts as VIEs because we had met the two criteria for consolidation. We had determined we were the primary beneficiary because (1) as servicer to the trust we had the power to direct the activities of the VIE that most significantly affected its economic performance and (2) as the residual holder of the trust, we had an obligation to absorb losses or receive benefits of the trust that could potentially be significant. Upon the sale of the Residual Interests we are no longer the residual holder, thus we determined we no longer met criterion (2) above and deconsolidated the trusts. As a result of these transactions, we removed securitization trust assets of $12.5 billion and the related liabilities of $12.1 billion from the balance sheet and recorded a $312 million gain as part of “gains on sales of loans and investments” for the nine months ended September 30, 2013.

Reclassifications

Certain reclassifications have been made to the balances as of and for the three and nine months ended September 30, 2012 to be consistent with classifications adopted for 2013, and had no effect on net income, total assets, or total liabilities.

Recently Adopted Accounting Standards

Accumulated Other Comprehensive Income

On January 1, 2013, we adopted Accounting Standards Update No. 2013-02, Comprehensive Income (Topic 220), “Reporting Amounts Reclassified out of Accumulated Other Comprehensive Income.” The objective of this new guidance is to improve the reporting of reclassifications out of accumulated other comprehensive income. The impact of adopting this new guidance was immaterial and there was no impact on our results of operations.

 

8


Table of Contents

SLM CORPORATION

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)

 

 

2. Allowance for Loan Losses

Our provisions for loan losses represent the periodic expense of maintaining an allowance sufficient to absorb incurred probable losses, net of expected recoveries, in the held-for-investment loan portfolios. The evaluation of the provisions for loan losses is inherently subjective as it requires material estimates that may be susceptible to significant changes. We believe that the allowance for loan losses is appropriate to cover probable losses incurred in the loan portfolios. We segregate our Private Education Loan portfolio into two classes of loans — traditional and non-traditional. Non-traditional loans are loans to (i) customers attending for-profit schools with an original Fair Isaac and Company (“FICO”) score of less than 670 and (ii) customers attending not-for-profit schools with an original FICO score of less than 640. The FICO score used in determining whether a loan is non-traditional is the greater of the customer or cosigner FICO score at origination. Traditional loans are defined as all other Private Education Loans that are not classified as non-traditional.

Allowance for Loan Losses Metrics

 

     Three Months Ended September 30, 2013  

(Dollars in millions)

   FFELP Loans     Private Education
Loans
    Other
Loans
    Total  

Allowance for Loan Losses

        

Beginning balance

   $ 133      $ 2,149      $ 35      $ 2,317   

Total provision

     12        195               207   

Charge-offs(1)

     (15     (205     (3     (223

Reclassification of interest reserve(2)

            5               5   
  

 

 

   

 

 

   

 

 

   

 

 

 

Ending balance

   $ 130      $ 2,144      $ 32      $ 2,306   
  

 

 

   

 

 

   

 

 

   

 

 

 

Allowance:

        

Ending balance: individually evaluated for impairment

   $      $ 1,091      $ 24      $ 1,115   

Ending balance: collectively evaluated for impairment

   $ 130      $ 1,053      $ 8      $ 1,191   

Loans:

        

Ending balance: individually evaluated for impairment

   $      $ 8,982      $ 49      $ 9,031   

Ending balance: collectively evaluated for impairment

   $ 105,422      $ 31,640      $ 91      $ 137,153   

Charge-offs as a percentage of average loans in repayment (annualized)

     .08     2.57     7.70  

Charge-offs as a percentage of average loans in repayment and forbearance (annualized)

     .06     2.48     7.70  

Allowance as a percentage of the ending total loan balance

     .12     5.28     22.90  

Allowance as a percentage of the ending loans in repayment

     .17     6.77     22.90  

Allowance coverage of charge-offs (annualized)

     2.2        2.6        2.8     

Ending total loans(3)

   $ 105,422      $ 40,622      $ 140     

Average loans in repayment

   $ 78,012      $ 31,630      $ 148     

Ending loans in repayment

   $ 77,618      $ 31,651      $ 140     

 

  (1) 

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

 

  (2) 

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

 

  (3) 

Ending total loans for Private Education Loans includes the receivable for partially charged-off loans.

 

9


Table of Contents

SLM CORPORATION

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)

 

 

2. Allowance for Loan Losses (Continued)

 

     Three Months Ended September 30, 2012  

(Dollars in millions)

   FFELP Loans     Private Education
Loans
    Other
Loans
    Total  

Allowance for Loan Losses

        

Beginning balance

   $ 173      $ 2,186      $ 59      $ 2,418   

Total provision

     18        252               270   

Charge-offs(1)

     (23     (250     (6     (279

Student loan sales

     (2                   (2

Reclassification of interest reserve(2)

            8               8   
  

 

 

   

 

 

   

 

 

   

 

 

 

Ending balance

   $ 166      $ 2,196      $ 53      $ 2,415   
  

 

 

   

 

 

   

 

 

   

 

 

 

Allowance:

        

Ending balance: individually evaluated for impairment

   $      $ 1,056      $ 40      $ 1,096   

Ending balance: collectively evaluated for impairment

   $ 166      $ 1,140      $ 13      $ 1,319   

Loans:

        

Ending balance: individually evaluated for impairment

   $      $ 7,099      $ 76      $ 7,175   

Ending balance: collectively evaluated for impairment

   $ 126,441      $ 33,012      $ 146      $ 159,599   

Charge-offs as a percentage of average loans in repayment (annualized)

     .10     3.23     9.58  

Charge-offs as a percentage of average loans in repayment and forbearance (annualized)

     .08     3.11     9.58  

Allowance as a percentage of the ending total loan balance

     .13     5.48     23.92  

Allowance as a percentage of the ending loans in repayment

     .18     7.09     23.92  

Allowance coverage of charge-offs (annualized)

     1.8        2.2        2.4     

Ending total loans(3)

   $ 126,441      $ 40,111      $ 222     

Average loans in repayment

   $ 90,898      $ 30,816      $ 231     

Ending loans in repayment

   $ 90,481      $ 30,972      $ 222     

 

  (1) 

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

 

  (2) 

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

 

  (3) 

Ending total loans for Private Education Loans includes the receivable for partially charged-off loans.

 

10


Table of Contents

SLM CORPORATION

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)

 

 

2. Allowance for Loan Losses (Continued)

 

     Nine Months Ended September 30, 2013  

(Dollars in millions)

   FFELP Loans     Private Education
Loans
    Other
Loans
    Total  

Allowance for Loan Losses

        

Beginning balance

   $ 159      $ 2,171      $ 47      $ 2,377   

Total provision

     42        607               649   

Charge-offs(1)

     (57     (649     (15     (721

Student loan sales

     (14                   (14

Reclassification of interest reserve(2)

            15               15   
  

 

 

   

 

 

   

 

 

   

 

 

 

Ending balance

   $ 130      $ 2,144      $ 32      $ 2,306   
  

 

 

   

 

 

   

 

 

   

 

 

 

Allowance:

        

Ending balance: individually evaluated for impairment

   $      $ 1,091      $ 24      $ 1,115   

Ending balance: collectively evaluated for impairment

   $ 130      $ 1,053      $ 8      $ 1,191   

Loans:

        

Ending balance: individually evaluated for impairment

   $      $ 8,982      $ 49      $ 9,031   

Ending balance: collectively evaluated for impairment

   $ 105,422      $ 31,640      $ 91      $ 137,153   

Charge-offs as a percentage of average loans in repayment (annualized)

     .09     2.74     12.14  

Charge-offs as a percentage of average loans in repayment and forbearance (annualized)

     .08     2.65     12.14  

Allowance as a percentage of the ending total loan balance

     .12     5.28     22.90  

Allowance as a percentage of the ending loans in repayment

     .17     6.77     22.90  

Allowance coverage of charge-offs (annualized)

     1.7        2.5        1.6     

Ending total loans(3)

   $ 105,422      $ 40,622      $ 140     

Average loans in repayment

   $ 82,196      $ 31,631      $ 163     

Ending loans in repayment

   $ 77,618      $ 31,651      $ 140     

 

  (1) 

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

 

  (2) 

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

 

  (3) 

Ending total loans for Private Education Loans includes the receivable for partially charged-off loans.

 

11


Table of Contents

SLM CORPORATION

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)

 

 

2. Allowance for Loan Losses (Continued)

 

     Nine Months Ended September 30, 2012  

(Dollars in millions)

   FFELP Loans     Private Education
Loans
    Other
Loans
    Total  

Allowance for Loan Losses

        

Beginning balance

   $ 187      $ 2,171      $ 69      $ 2,427   

Total provision

     54        712               766   

Charge-offs(1)

     (68     (709     (16     (793

Student loan sales

     (7                   (7

Reclassification of interest reserve(2)

            22               22   
  

 

 

   

 

 

   

 

 

   

 

 

 

Ending balance

   $ 166      $ 2,196      $ 53      $ 2,415   
  

 

 

   

 

 

   

 

 

   

 

 

 

Allowance:

        

Ending balance: individually evaluated for impairment

   $      $ 1,056      $ 40      $ 1,096   

Ending balance: collectively evaluated for impairment

   $ 166      $ 1,140      $ 13      $ 1,319   

Loans:

        

Ending balance: individually evaluated for impairment

   $      $ 7,099      $ 76      $ 7,175   

Ending balance: collectively evaluated for impairment

   $ 126,441      $ 33,012      $ 146      $ 159,599   

Charge-offs as a percentage of average loans in repayment (annualized)

     .10     3.10     8.79  

Charge-offs as a percentage of average loans in repayment and forbearance (annualized)

     .08     2.97     8.79  

Allowance as a percentage of the ending total loan balance

     .13     5.48     23.92  

Allowance as a percentage of the ending loans in repayment

     .18     7.09     23.92  

Allowance coverage of charge-offs (annualized)

     1.8        2.3        2.5     

Ending total loans(3)

   $ 126,441      $ 40,111      $ 222     

Average loans in repayment

   $ 92,157      $ 30,577      $ 242     

Ending loans in repayment

   $ 90,481      $ 30,972      $ 222     

 

  (1) 

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

 

  (2) 

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

 

  (3) 

Ending total loans for Private Education Loans includes the receivable for partially charged-off loans.

 

12


Table of Contents

SLM CORPORATION

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)

 

 

2. Allowance for Loan Losses (Continued)

 

Key Credit Quality Indicators

FFELP Loans are substantially insured and guaranteed as to their principal and accrued interest in the event of default; therefore, the key credit quality indicator for this portfolio is loan status. The impact of changes in loan status is incorporated quarterly into the allowance for loan losses calculation.

For Private Education Loans, the key credit quality indicators are school type, FICO scores, the existence of a cosigner, the loan status and loan seasoning. The school type/FICO score are assessed at origination and maintained through the traditional/non-traditional loan designation. The other Private Education Loan key quality indicators can change and are incorporated quarterly into the allowance for loan losses calculation. The following table highlights the principal balance (excluding the receivable for partially charged-off loans) of our Private Education Loan portfolio stratified by the key credit quality indicators.

 

     Private Education Loans
Credit Quality Indicators
 
     September 30, 2013     December 31, 2012  

(Dollars in millions)

   Balance(3)      % of Balance     Balance(3)      % of Balance  

Credit Quality Indicators

          

School Type/FICO Scores:

          

Traditional

   $ 36,353         93   $ 35,347         92

Non-Traditional(1)

     2,947         7        3,207         8   
  

 

 

    

 

 

   

 

 

    

 

 

 

Total

   $ 39,300         100   $ 38,554         100
  

 

 

    

 

 

   

 

 

    

 

 

 

Cosigners:

          

With cosigner

   $ 26,277         67   $ 24,907         65

Without cosigner

     13,023         33        13,647         35   
  

 

 

    

 

 

   

 

 

    

 

 

 

Total

   $ 39,300         100   $ 38,554         100
  

 

 

    

 

 

   

 

 

    

 

 

 

Seasoning(2):

          

1-12 payments

   $ 5,855         15   $ 7,371         19

13-24 payments

     5,765         15        6,137         16   

25-36 payments

     6,227         16        6,037         16   

37-48 payments

     4,871         12        4,780         12   

More than 48 payments

     10,041         25        8,325         22   

Not yet in repayment

     6,541         17        5,904         15   
  

 

 

    

 

 

   

 

 

    

 

 

 

Total

   $ 39,300         100   $ 38,554         100
  

 

 

    

 

 

   

 

 

    

 

 

 

 

  (1) 

Defined as loans to customers attending for-profit schools (with a FICO score of less than 670 at origination) and customers attending not-for-profit schools (with a FICO score of less than 640 at origination).

 

  (2) 

Number of months in active repayment for which a scheduled payment was due.

 

  (3) 

Balance represents gross Private Education Loans.

 

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SLM CORPORATION

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)

 

 

2. Allowance for Loan Losses (Continued)

 

The following tables provide information regarding the loan status and aging of past due loans.

 

     FFELP Loan Delinquencies  
     September 30,
2013
    December 31,
2012
 

(Dollars in millions)

   Balance     %     Balance     %  

Loans in-school/grace/deferment(1)

   $ 14,613        $ 17,702     

Loans in forbearance(2)

     13,191          15,902     

Loans in repayment and percentage of each status:

        

    Loans current

     64,144        82.6     75,499        83.2

    Loans delinquent 31-60 days(3)

     3,798        4.9        4,710        5.2   

    Loans delinquent 61-90 days(3)

     2,734        3.5        2,788        3.1   

    Loans delinquent greater than 90 days(3)

     6,942        9.0        7,734        8.5   
  

 

 

   

 

 

   

 

 

   

 

 

 

Total FFELP Loans in repayment

     77,618        100     90,731        100
  

 

 

   

 

 

   

 

 

   

 

 

 

Total FFELP Loans, gross

     105,422          124,335     

FFELP Loan unamortized premium

     1,058          1,436     
  

 

 

     

 

 

   

Total FFELP Loans

     106,480          125,771     

FFELP Loan allowance for losses

     (130       (159  
  

 

 

     

 

 

   

FFELP Loans, net

   $ 106,350        $ 125,612     
  

 

 

     

 

 

   

Percentage of FFELP Loans in repayment

       73.6       73.0
    

 

 

     

 

 

 

Delinquencies as a percentage of FFELP Loans in repayment

       17.4       16.8
    

 

 

     

 

 

 

FFELP Loans in forbearance as a percentage of loans in repayment and forbearance

       14.5       14.9
    

 

 

     

 

 

 

 

  (1) 

Loans for customers who may still be attending school or engaging in other permitted educational activities and are not required to make payments on their loans, e.g., residency periods for medical students or a grace period for bar exam preparation, as well as loans for customers who have requested and qualify for other permitted program deferments such as military, unemployment, or economic hardships.

 

  (2) 

Loans for customers who have used their allowable deferment time or do not qualify for deferment, that need additional time to obtain employment or who have temporarily ceased making full payments due to hardship or other factors.

 

  (3) 

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

 

14


Table of Contents

SLM CORPORATION

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)

 

 

2. Allowance for Loan Losses (Continued)

 

     Private Education Traditional Loan
Delinquencies
 
     September 30,
2013
    December 31,
2012
 

(Dollars in millions)

   Balance     %     Balance     %  

Loans in-school/grace/deferment(1)

   $ 6,112        $ 5,421     

Loans in forbearance(2)

     971          996     

Loans in repayment and percentage of each status:

        

    Loans current

     27,015        92.3     26,597        91.9

    Loans delinquent 31-60 days(3)

     812        2.8        837        2.9   

    Loans delinquent 61-90 days(3)

     519        1.7        375        1.3   

    Loans delinquent greater than 90 days(3)

     924        3.2        1,121        3.9   
  

 

 

   

 

 

   

 

 

   

 

 

 

    Total traditional loans in repayment

     29,270        100     28,930        100
  

 

 

   

 

 

   

 

 

   

 

 

 

Total traditional loans, gross

     36,353          35,347     

Traditional loans unamortized discount

     (650       (713  
  

 

 

     

 

 

   

Total traditional loans

     35,703          34,634     

Traditional loans receivable for partially charged-off loans

     798          797     

Traditional loans allowance for losses

     (1,611       (1,637  
  

 

 

     

 

 

   

Traditional loans, net

   $ 34,890        $ 33,794     
  

 

 

     

 

 

   

Percentage of traditional loans in repayment

       80.5       81.9
    

 

 

     

 

 

 

Delinquencies as a percentage of traditional loans in repayment

       7.7       8.1
    

 

 

     

 

 

 

Loans in forbearance as a percentage of loans in repayment and forbearance

       3.2       3.3
    

 

 

     

 

 

 

 

  (1) 

Deferment includes customers who have returned to school or are engaged in other permitted educational activities and are not required to make payments on their 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.

 

15


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SLM CORPORATION

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)

 

 

2. Allowance for Loan Losses (Continued)

 

     Private Education Non-Traditional
Loan Delinquencies
 
     September 30,
2013
    December 31,
2012
 

(Dollars in millions)

   Balance     %     Balance     %  

Loans in-school/grace/deferment(1)

   $ 429        $ 483     

Loans in forbearance(2)

     137          140     

Loans in repayment and percentage of each status:

        

    Loans current

     1,841        77.3     1,978        76.5

    Loans delinquent 31-60 days(3)

     154        6.5        175        6.8   

    Loans delinquent 61-90 days(3)

     122        5.1        106        4.1   

    Loans delinquent greater than 90 days(3)

     264        11.1        325        12.6   
  

 

 

   

 

 

   

 

 

   

 

 

 

    Total non-traditional loans in repayment

     2,381        100     2,584        100
  

 

 

   

 

 

   

 

 

   

 

 

 

Total non-traditional loans, gross

     2,947          3,207     

Non-traditional loans unamortized discount

     (76       (83  
  

 

 

     

 

 

   

Total non-traditional loans

     2,871          3,124     

Non-traditional loans receivable for partially charged-off loans

     524          550     

Non-traditional loans allowance for losses

     (533       (534  
  

 

 

     

 

 

   

Non-traditional loans, net

   $ 2,862        $ 3,140     
  

 

 

     

 

 

   

Percentage of non-traditional loans in repayment

       80.8       80.6
    

 

 

     

 

 

 

Delinquencies as a percentage of non-traditional loans in repayment

       22.7       23.4
    

 

 

     

 

 

 

Loans in forbearance as a percentage of loans in repayment and forbearance

       5.4       5.1
    

 

 

     

 

 

 

 

  (1) 

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

 

  (2) 

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

 

  (3) 

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

Receivable for Partially Charged-Off Private Education Loans

At the end of each month, for loans that are 212 days past due, we charge off the estimated loss of a defaulted loan balance. Actual recoveries are applied against the remaining loan balance that was not charged off. We refer to this remaining loan balance as the “receivable for partially charged-off loans.” If actual periodic recoveries are less than expected, the difference is immediately charged off through the allowance for loan losses with an offsetting reduction in the receivable for partially charged-off Private Education Loans. If actual periodic recoveries are greater than expected, they will be reflected as a recovery through the allowance for Private Education Loan losses once the cumulative recovery amount exceeds the cumulative amount originally expected to be recovered. Private Education Loans which defaulted between 2008 and 2012 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. In the third quarter of

 

16


Table of Contents

SLM CORPORATION

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)

 

 

2. Allowance for Loan Losses (Continued)

 

2013 we increased our allowance related to these potential recovery shortfalls by approximately $112 million. 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 $329 million and $187 million in allowance for Private Education Loan losses at September 30, 2013 and 2012, respectively, providing for possible additional future charge-offs related to the receivable for partially charged-off Private Education Loans.

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

 

     Three Months Ended
September 30,
    Nine Months Ended
September 30,
 

(Dollars in millions)

   2013     2012     2013     2012  

Receivable at beginning of period

   $ 1,334      $ 1,277      $ 1,347      $ 1,241   

Expected future recoveries of current period defaults(1)

     68        86        216        237   

Recoveries(2)

     (55     (45     (177     (139

Charge-offs(3)

     (25     (15     (64     (36
  

 

 

   

 

 

   

 

 

   

 

 

 

Receivable at end of period

     1,322        1,303        1,322        1,303   

Allowance for estimated recovery shortfalls(4)

     (329     (187     (329     (187
  

 

 

   

 

 

   

 

 

   

 

 

 

Net receivable at end of period

   $ 993      $ 1,116      $ 993      $ 1,116   
  

 

 

   

 

 

   

 

 

   

 

 

 

 

  (1) 

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

 

  (2) 

Current period cash collections.

 

  (3) 

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

 

  (4) 

The allowance for estimated recovery shortfalls of the receivable for partially charged-off Private Education Loans is a component of the $2.1 billion and $2.2 billion overall allowance for Private Education Loan losses as of September 30, 2013 and 2012, respectively.

Troubled Debt Restructurings (“TDRs”)

We modify the terms of loans for certain customers when we believe such modifications may increase the ability and willingness of a customer to make payments and thus increase the ultimate overall amount collected on a loan. These modifications generally take the form of a forbearance, a temporary interest rate reduction or an extended repayment plan. For customers experiencing financial difficulty, certain Private Education Loans for which we have granted either cumulative forbearance of greater than three months, an interest rate reduction or an extended repayment plan are classified as TDRs. Forbearance provides customers the ability to defer payments for a period of time, but does not result in the forgiveness of any principal or interest. While in forbearance status, interest continues to accrue and is capitalized to principal when the loan re-enters repayment status. At September 30, 2013 and December 31, 2012, the percentage of loans granted forbearance that have migrated to a TDR classification due to the extension of the original forbearance period was 43 percent for each period. The unpaid principal balance of TDR loans that were in an interest rate reduction plan as of September 30, 2013 and December 31, 2012 was $1.5 billion and $1.0 billion, respectively.

 

17


Table of Contents

SLM CORPORATION

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)

 

 

2. Allowance for Loan Losses (Continued)

 

At September 30, 2013 and December 31, 2012, all of our TDR loans had a related allowance recorded. The following table provides the recorded investment, unpaid principal balance and related allowance for our TDR loans.

 

     TDR Loans  

(Dollars in millions)

   Recorded
Investment(1)
     Unpaid
Principal
Balance
     Related
Allowance
 

September 30, 2013

        

Private Education Loans — Traditional

   $ 7,251       $ 7,307       $ 830   

Private Education Loans — Non-Traditional

     1,423         1,424         261   
  

 

 

    

 

 

    

 

 

 

Total

   $ 8,674       $ 8,731       $ 1,091   
  

 

 

    

 

 

    

 

 

 

December 31, 2012

        

Private Education Loans — Traditional

   $ 5,999       $ 6,074       $ 844   

Private Education Loans — Non-Traditional

     1,295         1,303         282   
  

 

 

    

 

 

    

 

 

 

Total

   $ 7,294       $ 7,377       $ 1,126   
  

 

 

    

 

 

    

 

 

 

 

  (1) 

The recorded investment is equal to the unpaid principal balance and accrued interest receivable net of unamortized deferred fees and costs.

The following table provides the average recorded investment and interest income recognized for our TDR loans.

 

     Three Months Ended September 30,  
     2013      2012  

(Dollars in millions)

   Average
Recorded
Investment
     Interest
Income
Recognized
     Average
Recorded
Investment
     Interest
Income
Recognized
 

Private Education Loans — Traditional

   $ 7,246       $ 108       $ 5,481       $ 87   

Private Education Loans — Non-Traditional

     1,477         29         1,274         27   
  

 

 

    

 

 

    

 

 

    

 

 

 

Total

   $ 8,723       $ 137       $ 6,755       $ 114   
  

 

 

    

 

 

    

 

 

    

 

 

 

 

     Nine Months Ended September 30,  
     2013      2012  

(Dollars in millions)

   Average
Recorded

Investment
     Interest
Income
Recognized
     Average
Recorded
Investment
     Interest
Income
Recognized
 

Private Education Loans — Traditional

   $ 6,768       $ 304       $ 5,010       $ 241   

Private Education Loans — Non-Traditional

     1,420         83         1,197         78   
  

 

 

    

 

 

    

 

 

    

 

 

 

Total

   $ 8,188       $ 387       $ 6,207       $ 319   
  

 

 

    

 

 

    

 

 

    

 

 

 

 

18


Table of Contents

SLM CORPORATION

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)

 

 

2. Allowance for Loan Losses (Continued)

 

The following table provides information regarding the loan status and aging of TDR loans that are past due.

 

     TDR Loan Delinquencies  
     September 30,
2013
    December 31, 2012  

(Dollars in millions)

   Balance      %     Balance      %  

Loans in deferment(1)

   $ 789         $ 574      

Loans in forbearance(2)

     768           544      

Loans in repayment and percentage of each status:

          

Loans current

     5,384         75.1     4,619         73.8

Loans delinquent 31-60 days(3)

     555         7.7        478         7.6   

Loans delinquent 61-90 days(3)

     408         5.7        254         4.1   

Loans delinquent greater than 90 days(3)

     827         11.5        908         14.5   
  

 

 

    

 

 

   

 

 

    

 

 

 

Total TDR loans in repayment

     7,174         100     6,259         100
  

 

 

    

 

 

   

 

 

    

 

 

 

Total TDR loans, gross

   $ 8,731         $ 7,377      
  

 

 

      

 

 

    

 

  (1) 

Deferment includes loans for customers who have returned to school and are not currently required to make payments on their loans.

 

  (2) 

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

 

  (3) 

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

The following table provides the amount of modified loans that resulted in a TDR in the periods presented. Additionally, the table summarizes charge-offs occurring in the TDR portfolio, as well as TDRs for which a payment default occurred in the current period within 12 months of the loan first being designated as a TDR. We define payment default as 60 days past due for this disclosure. The majority of our loans that are considered TDRs involve a temporary forbearance of payments and do not change the contractual interest rate of the loan.

 

     Three Months Ended September 30,  
     2013      2012  

(Dollars in millions)

   Modified
Loans(1)
     Charge-
Offs(2)
     Payment
Default
     Modified
Loans(1)
     Charge-
Offs(2)
     Payment
Default
 

Private Education Loans — Traditional

   $ 651       $ 88       $ 168       $ 573       $ 96       $ 332   

Private Education Loans — Non-Traditional

     94         32         48         101         37         97   
  

 

 

    

 

 

    

 

 

    

 

 

    

 

 

    

 

 

 

Total

   $    745       $ 120       $ 216       $ 674       $ 133       $ 429   
  

 

 

    

 

 

    

 

 

    

 

 

    

 

 

    

 

 

 

 

     Nine Months Ended September 30,  
     2013      2012  

(Dollars in millions)

   Modified
Loans(1)
     Charge-
Offs(2)
     Payment
Default
     Modified
Loans(1)
     Charge-
Offs(2)
     Payment
Default
 

Private Education Loans — Traditional

   $ 1,686       $ 269       $ 547       $ 1,783       $ 244       $ 1,111   

Private Education Loans — Non-Traditional

     259         97         150         346         99         350   
  

 

 

    

 

 

    

 

 

    

 

 

    

 

 

    

 

 

 

Total

   $ 1,945       $ 366       $ 697       $ 2,129       $ 343       $ 1,461   
  

 

 

    

 

 

    

 

 

    

 

 

    

 

 

    

 

 

 

 

(1) 

Represents period ending balance of loans that have been modified during the period and resulted in a TDR.

 

(2) 

Represents loans that charged off that were classified as TDRs.

 

19


Table of Contents

SLM CORPORATION

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)

 

 

2. Allowance for Loan Losses (Continued)

 

Accrued Interest Receivable

The following table provides information regarding accrued interest receivable on our Private Education Loans. The table also discloses the amount of accrued interest on loans greater than 90 days past due as compared to our allowance for uncollectible interest. The allowance for uncollectible interest exceeds the amount of accrued interest on our 90 days past due portfolio for all periods presented.

 

     Accrued Interest Receivable  

(Dollars in millions)

   Total      Greater Than
90 Days
Past Due
     Allowance for
Uncollectible
Interest
 

September 30, 2013

        

Private Education Loans — Traditional

   $ 940       $ 33       $ 46   

Private Education Loans — Non-Traditional

     97         13         21   
  

 

 

    

 

 

    

 

 

 

Total

   $ 1,037       $ 46       $ 67   
  

 

 

    

 

 

    

 

 

 

December 31, 2012

        

Private Education Loans — Traditional

   $ 798       $ 39       $ 45   

Private Education Loans — Non-Traditional

     106         16         22   
  

 

 

    

 

 

    

 

 

 

Total

   $ 904       $ 55       $ 67   
  

 

 

    

 

 

    

 

 

 

 

3. Borrowings

The following table summarizes our borrowings.

 

     September 30, 2013      December 31, 2012  

(Dollars in millions)

   Short
Term
     Long
Term
     Total      Short
Term
     Long
Term
     Total  

Unsecured borrowings:

                 

Senior unsecured debt

   $ 3,201       $ 15,509       $ 18,710       $ 2,319       $ 15,446       $ 17,765   

Bank deposits

     5,732         1,896         7,628         4,226         3,088         7,314   

Other(1)

     806                 806         1,609                 1,609   
  

 

 

    

 

 

    

 

 

    

 

 

    

 

 

    

 

 

 

Total unsecured borrowings

     9,739         17,405         27,144         8,154         18,534         26,688   
  

 

 

    

 

 

    

 

 

    

 

 

    

 

 

    

 

 

 

Secured borrowings:

                 

FFELP Loan securitizations

             91,690         91,690                 105,525         105,525   

Private Education Loan securitizations

             19,434         19,434                 19,656         19,656   

FFELP Loans — other facilities

     5,794         5,394         11,188         11,651         4,827         16,478   

Private Education Loans — other facilities

             878         878                 1,070         1,070   
  

 

 

    

 

 

    

 

 

    

 

 

    

 

 

    

 

 

 

Total secured borrowings

     5,794         117,396         123,190         11,651         131,078         142,729   
  

 

 

    

 

 

    

 

 

    

 

 

    

 

 

    

 

 

 

Total before hedge accounting adjustments

     15,533         134,801         150,334         19,805         149,612         169,417   

Hedge accounting adjustments

     39         2,143         2,182         51         2,789         2,840   
  

 

 

    

 

 

    

 

 

    

 

 

    

 

 

    

 

 

 

Total

   $ 15,572       $ 136,944       $ 152,516       $ 19,856       $ 152,401       $ 172,257   
  

 

 

    

 

 

    

 

 

    

 

 

    

 

 

    

 

 

 

 

(1) 

“Other” primarily consists of the obligation to return cash collateral held related to derivative exposures.

 

20


Table of Contents

SLM CORPORATION

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)

 

 

3. Borrowings (Continued)

 

Secured Borrowings

The tables below summarize all of our financing entities that are VIEs which we consolidate as a result of being the entities’ primary beneficiary. As such, these financing VIEs are accounted for as secured borrowings. We consolidate the following financing VIEs:

 

    September 30, 2013  
    Debt Outstanding     Carrying Amount of Assets Securing
Debt Outstanding
 

(Dollars in millions)

  Short
Term
    Long
Term
    Total     Loans     Cash     Other Assets     Total  

Secured Borrowings — VIEs:

             

FFELP Loan securitizations

  $      $ 91,690      $ 91,690      $ 92,865      $ 3,538      $ 715      $ 97,118   

Private Education Loan securitizations

           19,434        19,434        24,413        337        575        25,325   

FFELP Loans — other facilities

    4,678        3,777        8,455        8,762        151        108        9,021   

Private Education Loans — other facilities

           878        878        1,605        18        31        1,654   
 

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Total before hedge accounting adjustments

    4,678        115,779        120,457        127,645        4,044        1,429        133,118   

Hedge accounting adjustments

           1,189        1,189                      951        951   
 

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Total

  $ 4,678      $ 116,968      $ 121,646      $ 127,645      $ 4,044      $ 2,380      $ 134,069   
 

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

 

    December 31, 2012  
    Debt Outstanding     Carrying Amount of Assets Securing
Debt Outstanding
 

(Dollars in millions)

  Short
Term
    Long
Term
    Total     Loans     Cash     Other Assets     Total  

Secured Borrowings — VIEs:

             

FFELP Loan securitizations

  $      $ 105,525      $ 105,525      $ 107,009      $ 3,652      $ 608      $ 111,269   

Private Education Loan securitizations

           19,656        19,656        24,618        385        545        25,548   

FFELP Loans — other facilities

    9,551        4,154        13,705        14,050        487        197        14,734   

Private Education Loans — other facilities

           1,070        1,070        1,454        302        33        1,789   
 

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Total before hedge accounting adjustments

    9,551        130,405        139,956        147,131        4,826        1,383        153,340   

Hedge accounting adjustments

           1,113        1,113                      929        929   
 

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Total

  $ 9,551      $ 131,518      $ 141,069      $ 147,131      $ 4,826      $ 2,312      $ 154,269   
 

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

 

21


Table of Contents

SLM CORPORATION

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)

 

 

3. Borrowings (Continued)

 

Securitizations

The following table summarizes the securitization transactions that occurred during the year ended December 31, 2012 and the nine months ended September 30, 2013.

 

(Dollars in millions)

               

AAA-rated bonds

 

Issue

   Date Issued      Total
Issued
   

Weighted Average
Interest Rate

   Weighted
Average
Life
 

FFELP:

          

2012-1

     January 2012       $ 765      1 month LIBOR plus 0.91%      4.6 years   

2012-2

     March 2012         824      1 month LIBOR plus 0.70%      4.7 years   

2012-3

     May 2012         1,252      1 month LIBOR plus 0.65%      4.6 years   

2012-4

     June 2012         1,491 (1)    1 month LIBOR plus 1.10%      8.2 years   

2011-3

     July 2012         24      N/A (Retained B Notes sold)   

2012-4

     July 2012         45      N/A (Retained B Notes sold)   

2012-5

     July 2012         1,252      1 month LIBOR plus 0.67%      4.5 years   

2012-6

     September 2012         1,249      1 month LIBOR plus 0.62%      4.6 years   

2012-7

     November 2012         1,251      1 month LIBOR plus 0.55%      4.5 years   

2012-8

     December 2012         1,527      1 month LIBOR plus 0.90%      7.8 years   
     

 

 

      

Total bonds issued in 2012

      $ 9,680        
     

 

 

      

Total loan amount securitized in 2012

      $ 9,565        
     

 

 

      

2013-1

     February 2013       $ 1,249      1 month LIBOR plus 0.46%      4.3 years   

2013-2

     April 2013         1,246      1 month LIBOR plus 0.45%      4.4 years   

2013-3

     June 2013         1,246      1 month LIBOR plus 0.54%      4.5 years   

2013-4

     August 2013         747      1 month LIBOR plus 0.55%      4.4 years   

2013-5

     September 2013         996      1 month LIBOR plus 0.64%      4.6 years   
     

 

 

      

Total bonds issued in nine months ended September 30, 2013

      $ 5,484        
     

 

 

      

Total loan amount securitized in nine months ended September 30, 2013

      $ 5,496        
     

 

 

      

Private Education:

          

2012-A

     February 2012       $ 547      1 month LIBOR plus 2.17%      3.0 years   

2012-B

     April 2012         891      1 month LIBOR plus 2.12%      2.9 years   

2012-C

     May 2012         1,135      1 month LIBOR plus 1.77%      2.6 years   

2012-D

     July 2012         640      1 month LIBOR plus 1.69%      2.5 years   

2012-E

     October 2012         976      1 month LIBOR plus 1.22%      2.6 years   
     

 

 

      

Total bonds issued in 2012

      $ 4,189        
     

 

 

      

Total loan amount securitized in 2012

      $ 5,557        
     

 

 

      

2013-R1

     January 2013       $ 254      1 month LIBOR plus 1.75%      6.3 years   

2013-A

     March 2013         1,108      1 month LIBOR plus 0.81%      2.6 years   

2013-B

     May 2013         1,135      1 month LIBOR plus 0.89%      2.7 years   

2013-C

     September 2013         624      1 month LIBOR plus 1.21%      3.1 years   
     

 

 

      

Total bonds issued in nine months ended September 30, 2013

      $ 3,121        
     

 

 

      

Total loan amount securitized in nine months ended September 30, 2013

      $ 3,387        
     

 

 

      

 

(1) 

Total size excludes subordinated tranche that was retained at issuance totaling $45 million.

 

22


Table of Contents

SLM CORPORATION

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)

 

 

3. Borrowings (Continued)

 

2013 Sales of FFELP Securitization Trust Residual Interests

On February 13, 2013, we sold the Residual Interest in a FFELP Loan securitization trust to a third party. We will continue to service the student loans in the trust under existing agreements. The sale removed securitization trust assets of $3.82 billion and related liabilities of $3.68 billion from our balance sheet.

On April 11, 2013, we sold the Residual Interest in a FFELP Loan securitization trust to a third party. We will continue to service the student loans in the trust under existing agreements. The sale removed securitization trust assets of $2.03 billion and related liabilities of $1.99 billion from our balance sheet.

On June 13, 2013, we sold the three Residual Interests in FFELP Loan securitization trusts to a third party. We will continue to service the student loans in the trusts under existing agreements. The sale removed securitization trust assets of $6.60 billion and related liabilities of $6.42 billion from our balance sheet.

Additional, Recent Borrowing-Related Transactions

Senior Unsecured Debt

On January 28, 2013 and September 20, 2013, we issued $1.5 billion and $1.25 billion of senior unsecured bonds, respectively.

FFELP ABCP Facility

On June 10, 2013, we closed on a new $6.8 billion asset-backed commercial paper (“ABCP”) credit facility that matures in June 2014 to facilitate the term securitization of FFELP Loans. The facility was used in June 2013 to refinance all of the FFELP Loans previously financed through the U.S. Department of Education’s (“ED”) Conduit Program. The facility cannot be used to borrow any additional amounts. As a result, we ended our participation in the ED Conduit Program.

The cost of borrowing under the facility is the yield rate (either 30-day LIBOR daily average or commercial paper issuance cost) plus 0.50 percent, excluding up-front-commitment fees. Failure to pay off the facility on the maturity date would result in a 90-day extension of the facility with the interest rate increasing from LIBOR plus 0.75 percent to LIBOR plus 1.50 percent over that period. If, at the end of that period the facility has not been repaid, a default rate of LIBOR plus 3.00 percent would be payable until either the notes are repaid in full or the collateral is foreclosed upon. This default rate would also be triggered by the occurrence of a termination event. The facility is subject to termination under certain circumstances. Our borrowings under the facility are non-recourse. As of September 30, 2013, there was $4.7 billion outstanding under the facility. The book basis of the assets securing the facility as of September 30, 2013 was $4.9 billion.

Private Education Loan Facility

On July 17, 2013, we closed on a $1.1 billion asset-backed borrowing facility that matures on August 15, 2015. The facility was used to fund the call and redemption of our SLM 2009-D Private Education Loan Trust ABS, which occurred on August 15, 2013. The cost of borrowing under the facility is commercial paper issuance cost plus 0.75 percent, excluding up-front commitment fees. If outstanding borrowings under the facility exceed $825 million after July 15, 2014 and $550 million after January 15, 2015, the cost of borrowing increases to commercial paper issuance cost plus 1.50 percent. Failure to pay off the facility on the maturity date would result in the interest rate increasing to LIBOR plus 3.00 percent until the notes are repaid in full or the collateral is foreclosed upon. Our borrowings under the facility are non-recourse. As of September 30, 2013, there was $878 million outstanding under the facility. The book basis of the assets securing the facility as of September 30, 2013 was $1.7 billion.

 

23


Table of Contents

SLM CORPORATION

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)

 

 

4. Derivative Financial Instruments

Our risk management strategy and use of and accounting for derivatives have not materially changed from that discussed in our 2012 Form 10-K. Please refer to “Note 7 — Derivative Financial Instruments” in our 2012 Form 10-K for a full discussion.

Summary of Derivative Financial Statement Impact

The following tables summarize the fair values and notional amounts of all derivative instruments at September 30, 2013 and December 31, 2012, and their impact on other comprehensive income and earnings for the three and nine months ended September 30, 2013 and 2012.

Impact of Derivatives on Consolidated Balance Sheet

 

         Cash Flow     Fair Value     Trading     Total  

(Dollars in millions)

   Hedged Risk
Exposure
  Sept. 30,
2013
    Dec. 31,
2012
    Sept. 30,
2013
    Dec. 31,
2012
    Sept. 30,
2013
    Dec. 31,
2012
    Sept. 30,
2013
    Dec. 31,
2012
 

Fair Values(1)

                  

Derivative Assets:

                  

Interest rate swaps

   Interest rate   $ 16      $      $ 881      $ 1,396      $ 69      $ 150      $ 966      $ 1,546   

Cross-currency interest rate swaps

   Foreign currency
& interest rate
                  1,163        1,165        1        70        1,164        1,235   

Other(2)

   Interest rate                                 3        4        3        4   
    

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Total derivative assets(3)

       16               2,044        2,561        73        224        2,133        2,785   

Derivative Liabilities:

                  

Interest rate swaps

   Interest rate     (1     (11     (98     (1     (202     (197     (301     (209

Floor Income Contracts

   Interest rate                                 (1,564     (2,154     (1,564     (2,154

Cross-currency interest rate swaps

   Foreign currency
& interest rate
                  (175     (136     (7            (182     (136

Other(2)

   Interest rate                                 (21            (21       
    

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Total derivative liabilities(3)

       (1     (11     (273     (137     (1,794     (2,351     (2,068     (2,499
    

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Net total derivatives

     $ 15      $ (11   $ 1,771      $ 2,424      $ (1,721   $ (2,127   $ 65      $ 286   
    

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

 

(1) 

Fair values reported are exclusive of collateral held and pledged and accrued interest. Assets and liabilities are presented without consideration of master netting agreements. Derivatives are carried on the balance sheet based on net position by counterparty under master netting agreements, and classified in other assets or other liabilities depending on whether in a net receivable or payable position.

 

(2) 

“Other” includes embedded derivatives bifurcated from securitization debt as well as derivatives related to our Total Return Swap Facility and back-to-back private credit floors.

 

(3) 

The following table reconciles gross positions without the impact of master netting agreements to the balance sheet classification:

 

    Other Assets     Other Liabilities  

(Dollar in millions)

  September 30,
2013
    December 31,
2012
    September 30,
2013
    December 31,
2012
 

Gross position

  $ 2,133      $ 2,785      $ (2,068   $ (2,499

Impact of master netting agreements

    (404     (544     404        544   
 

 

 

   

 

 

   

 

 

   

 

 

 

Derivative values with impact of master netting agreements (as carried on balance sheet)

    1,729        2,241        (1,664     (1,955

Cash collateral (held) pledged

    (804     (1,423     872        973   
 

 

 

   

 

 

   

 

 

   

 

 

 

Net position

  $ 925      $ 818      $ (792   $ (982
 

 

 

   

 

 

   

 

 

   

 

 

 

 

24


Table of Contents

SLM CORPORATION

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)

 

 

4. Derivative Financial Instruments (Continued)

 

The above fair values include adjustments for counterparty credit risk both for when we are exposed to the counterparty, net of collateral postings, and when the counterparty is exposed to us, net of collateral postings. The net adjustments decreased the overall net asset positions at September 30, 2013 and December 31, 2012 by $111 million and $111 million, respectively. In addition, the above fair values reflect adjustments for illiquid derivatives as indicated by a wide bid/ask spread in the interest rate indices to which the derivatives are indexed. These adjustments decreased the overall net asset positions at September 30, 2013 and December 31, 2012 by $89 million and $107 million, respectively.

 

     Cash Flow      Fair Value      Trading      Total  

(Dollars in billions)

   Sept. 30,
2013
     Dec. 31,
2012
     Sept. 30,
2013
     Dec. 31,
2012
     Sept. 30,
2013
     Dec. 31,
2012
     Sept. 30,
2013
     Dec. 31,
2012
 

Notional Values:

                       

Interest rate swaps

   $ 0.5       $ 0.7       $ 16.7       $ 15.8       $ 48.0       $ 56.9       $ 65.2       $ 73.4   

Floor Income Contracts

                                     31.8         51.6         31.8         51.6   

Cross-currency interest rate swaps

                     11.7         13.7         0.3         0.3         12.0         14.0   

Other(1)

                                     3.3         1.4         3.3         1.4   
  

 

 

    

 

 

    

 

 

    

 

 

    

 

 

    

 

 

    

 

 

    

 

 

 

Total derivatives

   $ 0.5       $ 0.7       $ 28.4       $ 29.5       $ 83.4       $ 110.2       $ 112.3       $ 140.4   
  

 

 

    

 

 

    

 

 

    

 

 

    

 

 

    

 

 

    

 

 

    

 

 

 

 

(1) 

“Other” includes embedded derivatives bifurcated from securitization debt, as well as derivatives related to our Total Return Swap Facility and back to back private credit floors.

Impact of Derivatives on Consolidated Statements of Income

 

     Three Months Ended September 30,  
     Unrealized
Gain
(Loss) on
Derivatives(1)(2)
    Realized
Gain
(Loss) on
Derivatives(3)
    Unrealized
Gain
(Loss) on
Hedged
Item(1)
    Total Gain
(Loss)
 

(Dollars in millions)

     2013         2012       2013     2012     2013     2012     2013     2012  

Fair Value Hedges:

                

Interest rate swaps

   $ (36   $ 20      $ 103      $ 111      $ 33      $ (33   $ 100      $ 98   

Cross-currency interest rate swaps

     482        203        29        37        (531     (239     (20     1   
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Total fair value derivatives

     446        223        132        148        (498     (272     80        99   

Cash Flow Hedges:

                

Interest rate swaps

                   (1     (6                   (1     (6
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Total cash flow derivatives

                   (1     (6                   (1     (6

Trading:

                

Interest rate swaps

     (8     (6     21        24                      13        18   

Floor Income Contracts

     115        (12     (201     (206                   (86     (218

Cross-currency interest rate swaps

     3        14               2                      3        16   

Other

     (4            (1                          (5       
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Total trading derivatives

     106        (4     (181     (180                   (75     (184
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Total

     552        219        (50     (38     (498     (272     4        (91

Less: realized gains (losses) recorded in interest expense

                   131        142                      131        142   
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Gains (losses) on derivative and hedging activities, net

   $ 552      $ 219      $ (181   $ (180   $ (498   $ (272   $ (127   $ (233
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

 

(1) 

Recorded in “Gains (losses) on derivative and hedging activities, net” in the consolidated statements of income.

 

(2) 

Represents ineffectiveness related to cash flow hedges.

 

(3) 

For fair value and cash flow hedges, recorded in interest expense. For trading derivatives, recorded in “Gains (losses) on derivative and hedging activities, net.”

 

25


Table of Contents

SLM CORPORATION

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)

 

 

4. Derivative Financial Instruments (Continued)

 

     Nine Months Ended September 30,  
     Unrealized
Gain
(Loss) on
Derivatives(1)(2)
    Realized
Gain
(Loss) on
Derivatives(3)
    Unrealized
Gain
(Loss) on
Hedged
Item(1)
    Total Gain
(Loss)
 

(Dollars in millions)

     2013         2012       2013     2012     2013     2012     2013     2012  

Fair Value Hedges:

                

Interest rate swaps

   $ (613   $ 66      $ 317      $ 339      $ 671      $ (98   $ 375      $ 307   

Cross-currency interest rate swaps

     (40     (260     76        139        (58     126        (22     5   
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Total fair value derivatives

     (653     (194     393        478        613        28        353        312   

Cash Flow Hedges:

                

Interest rate swaps

            (1     (6     (21                   (6     (22
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Total cash flow derivatives

            (1     (6     (21                   (6     (22

Trading:

                

Interest rate swaps

     (85     (55     58        91                      (27     36   

Floor Income Contracts

     601        174        (612     (643                   (11     (469

Cross-currency interest rate swaps

     (76     (9     31        5                      (45     (4

Other

     (16     5        (1     (1                   (17     4   
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Total trading derivatives

     424        115        (524     (548                   (100     (433
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Total

     (229     (80     (137     (91     613        28        247        (143

Less: realized gains (losses) recorded in interest expense

                   387        457                      387        457   
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Gains (losses) on derivative and hedging activities, net

   $ (229   $ (80   $ (524   $ (548   $ 613      $ 28      $ (140   $ (600
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

 

(1) 

Recorded in “Gains (losses) on derivative and hedging activities, net” in the consolidated statements of income.

 

(2) 

Represents ineffectiveness related to cash flow hedges.

 

(3) 

For fair value and cash flow hedges, recorded in interest expense. For trading derivatives, recorded in “Gains (losses) on derivative and hedging activities, net.”

Collateral

Collateral held and pledged related to derivative exposures between us and our derivative counterparties are detailed in the following table:

 

(Dollars in millions)

  September 30,
2013
    December 31,
2012
 

Collateral held:

   

Cash (obligation to return cash collateral is recorded in short-term borrowings)(1)

  $ 804      $ 1,423   

Securities at fair value — on-balance sheet securitization derivatives (not recorded in financial statements)(2)

    555        613   
 

 

 

   

 

 

 

Total collateral held

  $ 1,359      $ 2,036   
 

 

 

   

 

 

 

Derivative asset at fair value including accrued interest

  $ 1,946      $ 2,570   
 

 

 

   

 

 

 

Collateral pledged to others:

   

Cash (right to receive return of cash collateral is recorded in investments)

  $ 872      $ 973   
 

 

 

   

 

 

 

Total collateral pledged

  $ 872      $ 973   
 

 

 

   

 

 

 

Derivative liability at fair value including accrued interest and premium receivable

  $ 1,072      $ 1,204   
 

 

 

   

 

 

 

 

(1) 

At September 30, 2013 and December 31, 2012, $0 and $9 million, respectively, were held in restricted cash accounts.

 

(2) 

The trusts do not have the ability to sell or re-pledge securities they hold as collateral.

Our corporate derivatives contain credit contingent features. At our current unsecured credit rating, we have fully collateralized our corporate derivative liability position (including accrued interest and net of premiums receivable) of $883 million with our counterparties. Further downgrades would not result in any additional

 

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SLM CORPORATION

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)

 

 

4. Derivative Financial Instruments (Continued)

 

collateral requirements, except to increase the frequency of collateral calls. Two counterparties have the right to terminate the contracts with further downgrades. We currently have a liability position with these derivative counterparties (including accrued interest and net of premiums receivable) of $203 million and have posted $196 million of collateral to these counterparties. If the credit contingent feature was triggered for these two counterparties and the counterparties exercised their right to terminate, we would be required to deliver additional assets of $7 million to settle the contracts. Trust related derivatives do not contain credit contingent features related to our or the trusts’ credit ratings.

 

5. Other Assets

The following table provides the detail of our other assets.

 

    September 30, 2013     December 31, 2012  

(Dollars in millions)

  Ending
Balance
    % of
Balance
    Ending
Balance
    % of
Balance
 

Accrued interest receivable, net

  $ 2,167        29   $ 2,147        26

Derivatives at fair value

    1,729        23        2,241        27   

Income tax asset, net current and deferred

    1,344        18        1,478        18   

Accounts receivable

    873        12        1,111        13   

Benefit and insurance-related investments

    477        6        474        6   

Fixed assets, net

    240        3        215        3   

Other loans, net

    108        1        137        2   

Other

    482        8        470        5   
 

 

 

   

 

 

   

 

 

   

 

 

 

Total

  $ 7,420        100   $ 8,273        100
 

 

 

   

 

 

   

 

 

   

 

 

 

The “Derivatives at fair value” line in the above table represents the fair value of our derivatives in a gain position by counterparty, exclusive of accrued interest and collateral. At September 30, 2013 and December 31, 2012, these balances included $1.8 billion and $2.4 billion, respectively, of cross-currency interest rate swaps and interest rate swaps designated as fair value hedges that were offset by an increase in interest-bearing liabilities related to the hedged debt. As of September 30, 2013 and December 31, 2012, the cumulative mark-to-market adjustment to the hedged debt was $(2.2) billion and $(2.8) billion, respectively.

 

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SLM CORPORATION

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)

 

 

6. Stockholders’ Equity

The following table summarizes our common share repurchases and issuances.

 

    Three Months Ended
September 30,
    Nine Months Ended
September 30,
 
    2013     2012     2013     2012  

Common shares repurchased(1)

           7,643,999        19,316,948        48,184,145   

Average purchase price per share(2)

  $      $ 15.81      $ 20.72      $ 15.16   

Shares repurchased related to employee stock-based compensation plans(3)

    251,570        1,253,922        5,616,933        3,660,554   

Average purchase price per share

  $ 24.73      $ 16.13      $ 21.23      $ 15.56   

Common shares issued(4)

    326,789        1,654,506        8,600,008        5,252,158   

 

  (1) 

Common shares purchased under our share repurchase program, of which $400 million remained available as of September 30, 2013.

 

  (2) 

Average purchase price per share includes purchase commission costs.

 

  (3) 

Comprises shares withheld from stock option exercises and vesting of restricted stock for employees’ tax withholding obligations and shares tendered by employees to satisfy option exercise costs.

 

  (4) 

Common shares issued under our various compensation and benefit plans.

The closing price of our common stock on September 30, 2013 was $24.90.

Dividend and Share Repurchase Program

In the third quarter 2013, we paid a common stock dividend of $0.15 per common share.

In July 2013, the Company authorized $400 million to be utilized in a new common share repurchase program that does not have an expiration date. There were no share repurchases in the third-quarter 2013. We repurchased an aggregate of 19 million shares for $400 million in the six months ended June 30, 2013, fully utilizing the Company’s February 2013 share repurchase program.

In 2012, we authorized the repurchase of up to $900 million of outstanding common stock in open market transactions and we repurchased 58 million shares for an aggregate purchase price of $900 million.

 

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Table of Contents

SLM CORPORATION

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)

 

 

7. Earnings per Common Share

Basic earnings per common share (“EPS”) are calculated using the weighted average number of shares of common stock outstanding during each period. A reconciliation of the numerators and denominators of the basic and diluted EPS calculations follows.

 

    Three Months Ended
September 30,
     Nine Months Ended
September 30,
 

(In millions, except per share data)

      2013             2012              2013             2012      

Numerator:

        

Net income attributable to SLM Corporation

  $ 260      $ 188       $ 1,149      $ 591   

Preferred stock dividends

    5        5         15        15   
 

 

 

   

 

 

    

 

 

   

 

 

 

Net income attributable to SLM Corporation common stock

  $ 255      $ 183       $ 1,134      $ 576   
 

 

 

   

 

 

    

 

 

   

 

 

 

Denominator:

        

Weighted average shares used to compute basic EPS

    436        464         442        483   

Effect of dilutive securities:

        

Dilutive effect of stock options, non-vested deferred compensation and restricted stock, restricted stock units and Employee Stock Purchase Plan (“ESPP”)(1)

    9        7         8        7   
 

 

 

   

 

 

    

 

 

   

 

 

 

Dilutive potential common shares(2)

    9        7         8        7   
 

 

 

   

 

 

    

 

 

   

 

 

 

Weighted average shares used to compute diluted EPS

    445        471         450        490   
 

 

 

   

 

 

    

 

 

   

 

 

 

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

        

Continuing operations

  $ .56      $ .39       $ 2.46      $ 1.19   

Discontinued operations

    .02                .10          
 

 

 

   

 

 

    

 

 

   

 

 

 

Total

  $ .58      $ .39       $ 2.56      $ 1.19   
 

 

 

   

 

 

    

 

 

   

 

 

 

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

        

Continuing operations

  $ .55      $ .39       $ 2.42      $ 1.18   

Discontinued operations

    .02                .10          
 

 

 

   

 

 

    

 

 

   

 

 

 

Total

  $ .57      $ .39       $ 2.52      $ 1.18   
 

 

 

   

 

 

    

 

 

   

 

 

 

 

  (1) 

Includes the potential dilutive effect of additional common shares that are issuable upon exercise of outstanding stock options, non-vested deferred compensation and restricted stock, restricted stock units, and the outstanding commitment to issue shares under the ESPP, determined by the treasury stock method.

 

  (2) 

For the three months ended September 30, 2013 and 2012, securities covering approximately 3 million and 10 million shares, respectively, were outstanding but not included in the computation of diluted earnings per share because they were anti-dilutive. For the nine months ended September 30, 2013 and 2012, securities covering approximately 4 million and 13 million shares, respectively, were outstanding but not included in the computation of diluted earnings per share because they were anti-dilutive.

 

8. Fair Value Measurements

We use estimates of fair value in applying various accounting standards in our financial statements.

We categorize our fair value estimates based on a hierarchical framework associated with three levels of price transparency utilized in measuring financial instruments at fair value. Please refer to “Note 13 — Fair Value Measurements” in our 2012 Form 10-K for a full discussion.

During the three and nine months ended September 30, 2013, there were no significant transfers of financial instruments between levels, or changes in our methodology or assumptions used to value our financial instruments.

 

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Table of Contents

SLM CORPORATION

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)

 

 

8. Fair Value Measurements (Continued)

 

The following table summarizes the valuation of our financial instruments that are marked-to-market on a recurring basis.

 

    Fair Value Measurements on a Recurring Basis  
    September 30, 2013     December 31, 2012  

(Dollars in millions)

  Level 1     Level 2     Level 3     Total     Level 1     Level 2     Level 3     Total  

Assets

               

Available-for-sale investments:

               

Agency residential mortgage-backed securities

  $   —      $ 77      $      $ 77      $   —      $ 63      $      $ 63   

Guaranteed investment contracts

           8               8               9               9   

Other

           8               8               9               9   
 

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Total available-for-sale investments

           93               93               81               81   

Derivative instruments:(1)

               

Interest rate swaps

           917        49        966               1,444        102        1,546   

Cross-currency interest rate swaps

           32        1,132        1,164               48        1,187        1,235   

Other

                  3        3                      4        4   
 

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Total derivative assets(3)

           949        1,184        2,133               1,492        1,293        2,785   
 

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Total

  $   —      $ 1,042      $ 1,184      $ 2,226      $   —      $ 1,573      $ 1,293      $ 2,866   
 

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Liabilities(2)

               

Derivative instruments(1)

               

Interest rate swaps

  $   —      $ (164   $ (137   $ (301   $      $ (34   $ (175   $ (209

Floor Income Contracts

           (1,564            (1,564            (2,154            (2,154

Cross-currency interest rate swaps

           (11     (171     (182            (2     (134     (136

Other

                  (21     (21                            
 

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Total derivative liabilities(3)

           (1,739     (329     (2,068            (2,190     (309     (2,499
 

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Total

  $   —      $ (1,739   $ (329   $ (2,068   $   —      $ (2,190   $ (309   $ (2,499
 

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

 

(1) 

Fair value of derivative instruments excludes accrued interest and the value of collateral.

 

(2) 

Borrowings which are the hedged items in a fair value hedge relationship and which are adjusted for changes in value due to benchmark interest rates only are not carried at full fair value and are not reflected in this table.

 

(3) 

See “Note 4 — Derivative Financial Instruments” for a reconciliation of gross positions without the impact of master netting agreements to the balance sheet classification.

 

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SLM CORPORATION

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)

 

 

8. Fair Value Measurements (Continued)

 

The following tables summarize the change in balance sheet carrying value associated with level 3 financial instruments carried at fair value on a recurring basis.

 

    Three Months Ended September 30,  
    2013     2012  
    Derivative instruments     Derivative instruments  

(Dollars in millions)

  Interest
Rate Swaps
    Cross
Currency
Interest
Rate Swaps
    Other     Total
Derivative
Instruments
    Interest
Rate Swaps
    Cross
Currency
Interest
Rate Swaps
    Other     Total
Derivative
Instruments
 

Balance, beginning of period

  $ (88   $ 486      $ (15   $ 383      $ (83   $ 620      $ 5      $ 542   

Total gains/(losses) (realized and unrealized):

               

Included in earnings(1)

    10        499        (5     504        19        251               270   

Included in other comprehensive income

                                                       

Settlements

    (10     (24     2        (32     (4     (28            (32

Transfers in and/or out of level 3

                                                       
 

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Balance, end of period

  $ (88   $ 961      $ (18   $ 855      $ (68   $ 843      $ 5      $ 780   
 

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Change in unrealized gains/(losses) relating to instruments still held at the reporting date(2)

  $ 8      $ 475      $ (4   $ 479      $ 15      $ 224      $ (1   $ 238   
 

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 
    Nine Months Ended September 30,  
    2013     2012  
    Derivative instruments     Derivative instruments  

(Dollars in millions)

  Interest
Rate Swaps
    Cross
Currency
Interest
Rate Swaps
    Other     Total
Derivative
Instruments
    Interest
Rate Swaps
    Cross
Currency
Interest
Rate Swaps
    Other     Total
Derivative
Instruments
 

Balance, beginning of period

  $ (73   $ 1,053      $ 4      $ 984      $ (40   $ 1,021      $ 1      $ 982   

Total gains/(losses) (realized and unrealized):

               

Included in earnings(1)

    6               (18     (12     (3     (73     4        (72

Included in other comprehensive income

                                                       

Settlements

    (21     (92     (4     (117     (25     (105            (130

Transfers in and/or out of level 3

                                                       
 

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Balance, end of period

  $ (88   $ 961      $ (18   $ 855      $ (68   $ 843      $ 5      $ 780   
 

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Change in unrealized gains/(losses) relating to instruments still held at the reporting date(2)

  $ (3   $ 45      $ (16   $ 26      $ (26   $ (178   $ 5      $ (199
 

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

 

  (1) 

“Included in earnings” is comprised of the following amounts recorded in the specified line item in the consolidated statements of income:

 

     Three Months  Ended
September 30,
     Nine Months  Ended
September 30,
 

(Dollars in millions)

       2013              2012              2013              2012      

Gains (losses) on derivative and hedging activities, net

   $ 480       $ 245       $ (73    $ (172

Interest expense

     24         25         61         100   
  

 

 

    

 

 

    

 

 

    

 

 

 

Total

   $ 504       $ 270       $ (12    $ (72
  

 

 

    

 

 

    

 

 

    

 

 

 

 

  (2) 

Recorded in “gains (losses) on derivative and hedging activities, net” in the consolidated statements of income.

 

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SLM CORPORATION

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)

 

 

8. Fair Value Measurements (Continued)

 

The following table presents the significant inputs that are unobservable or from inactive markets used in the recurring valuations of the level 3 financial instruments detailed above.

 

(Dollars in millions)

  Fair Value at
September 30, 2013
    Valuation
Technique
  Input   Range
(Weighted Average)

Derivatives

       

Consumer Price Index/
LIBOR basis swaps

  $ 41      Discounted cash flow   Bid/ask adjustment

to discount rate

  0.05% — 0.05%

(0.05%)

Prime/LIBOR basis
swaps

    (129   Discounted cash flow   Constant prepayment rate   4.3%
      Bid/ask adjustment to
discount rate
  0.08% — 0.08%

(0.08%)

Cross-currency interest
rate swaps

    961      Discounted cash flow   Constant prepayment rate   2.6%

Other

    (18      
 

 

 

       

Total

  $ 855         
 

 

 

       

The significant inputs that are unobservable or from inactive markets related to our level 3 derivatives detailed in the table above would be expected to have the following impacts to the valuations:

 

   

Consumer Price Index/LIBOR basis swaps — These swaps do not actively trade in the markets as indicated by a wide bid/ask spread. A wider bid/ask spread will result in a decrease in the overall valuation.

 

   

Prime/LIBOR basis swaps — These swaps do not actively trade in the markets as indicated by a wide bid/ask spread. A wider bid/ask spread will result in a decrease in the overall valuation. In addition, the unobservable inputs include constant prepayment rates of the underlying securitization trust the swap references. A decrease in this input will result in a longer weighted average life of the swap which will increase the value for swaps in a gain position and decrease the value for swaps in a loss position, everything else equal. The opposite is true for an increase in the input.

 

   

Cross-currency interest rate swaps — The unobservable inputs used in these valuations are constant prepayment rates of the underlying securitization trust the swap references. A decrease in this input will result in a longer weighted average life of the swap. All else equal in a typical currency market, this will result in a decrease to the valuation due to the delay in the cash flows of the currency exchanges as well as diminished liquidity in the forward exchange markets as you increase the term. The opposite is true for an increase in the input.

 

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SLM CORPORATION

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)

 

 

8. Fair Value Measurements (Continued)

 

The following table summarizes the fair values of our financial assets and liabilities, including derivative financial instruments.

 

     September 30, 2013     December 31, 2012  

(Dollars in millions)

   Fair
Value
    Carrying
Value
    Difference     Fair
Value
    Carrying
Value
    Difference  

Earning assets

            

FFELP Loans

   $ 105,809      $ 106,350      $ (541   $ 125,042      $ 125,612      $ (570

Private Education Loans

     37,625        37,752        (127     36,081        36,934        (853

Cash and investments(1)

     9,612        9,612               9,994        9,994          
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Total earning assets

     153,046        153,714        (668     171,117        172,540        (1,423
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Interest-bearing liabilities

            

Short-term borrowings

     15,588        15,572        (16     19,861        19,856        (5

Long-term borrowings

     133,102        136,944        3,842        146,210        152,401        6,191   
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Total interest-bearing liabilities

     148,690        152,516        3,826        166,071        172,257        6,186   
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Derivative financial instruments

            

Floor Income Contracts

     (1,564     (1,564            (2,154     (2,154       

Interest rate swaps

     665        665               1,337        1,337          

Cross-currency interest rate swaps

     982        982               1,099        1,099          

Other

     (18     (18            4        4          
      

 

 

       

 

 

 

Excess of net asset fair value over carrying value

       $ 3,158          $ 4,763   
      

 

 

       

 

 

 

 

(1) 

“Cash and investments” includes available-for-sale investments that consist of investments that are primarily agency securities whose cost basis is $94 million and $78 million at September 30, 2013 and December 31, 2012, respectively, versus a fair value of $93 million and $81 million at September 30, 2013 and December 31, 2012, respectively.

The following includes a discussion of financial instruments whose fair value is included for disclosure purposes only in the table above along with their level in the fair value hierarchy.

Student Loans

FFELP Loans

Fair values for FFELP Loans were determined by modeling loan cash flows using stated terms of the loans and internally-developed assumptions. The significant assumptions used to determine fair value are prepayment speeds, default rates, cost of funds, capital levels, and expected Repayment Borrower Benefits to be earned. In addition, the Floor Income component of our FFELP Loan portfolio is valued with option models using both observable market inputs and internally developed inputs. A number of significant inputs into the models are internally derived and not observable to market participants. While the resulting fair value can be validated against market transactions where we are a participant, these markets are not considered active. As such, these are level 3 valuations.

Private Education Loans

Fair values for Private Education Loans were determined by modeling loan cash flows using stated terms of the loans and internally-developed assumptions. The significant assumptions used to determine fair value are prepayment speeds, default rates, recovery rates, cost of funds and capital levels. A number of significant inputs into the models are internally derived and not observable to market participants nor can the resulting fair values be validated against market transactions. As such, these are level 3 valuations.

 

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Table of Contents

SLM CORPORATION

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)

 

 

8. Fair Value Measurements (Continued)

 

Cash and Investments (Including “Restricted Cash and Investments”)

Cash and cash equivalents are carried at cost. Carrying value approximated fair value. These are level 2 valuations.

Borrowings

The full fair value of all borrowings is disclosed. Fair value was determined through standard bond pricing models and option models (when applicable) using the stated terms of the borrowings, observable yield curves, foreign currency exchange rates, volatilities from active markets or from quotes from broker-dealers. Fair value adjustments for unsecured corporate debt are made based on indicative quotes from observable trades and spreads on credit default swaps specific to the Company. Fair value adjustments for secured borrowings are based on indicative quotes from broker-dealers. These fair value adjustments are based on inputs from inactive markets. As such, these are level 3 valuations.

 

9. Commitments and Contingencies

At the time of this filing, Sallie Mae Bank (the “Bank”) remains subject to a cease and desist order originally issued in August 2008 by the Federal Deposit Insurance Corporation (“FDIC”) and the Utah Department of Financial Institutions (“UDFI”). In July 2013, the FDIC notified the Bank that it plans to replace the existing cease and desist order with a new formal enforcement action that will more specifically address certain cited violations of Section 5 of the Federal Trade Commission Act, including with respect to the Servicemembers Civil Relief Act (“SCRA”), and the Equal Credit Opportunity Act (“ECOA”) and its implementing regulation, Regulation B, which will likely include civil money penalties and restitution. The Bank has been notified by the UDFI that it does not intend to join the FDIC in issuing the new enforcement action.

With respect to the alleged civil violations of Section 5 of the Federal Trade Commission Act relating to the SCRA, we are also in discussions with the Department of Justice (“DOJ”), as the agency having primary authority for enforcement of SCRA matters, regarding settlement, remediation and a comprehensive restitution plan. In September 2013, we also received a Civil Investigative Demand from the Consumer Financial Protection Bureau (“CFPB”) as part of its separate investigation regarding allegations relating to our existing payment allocation practices and procedures, the same as those previously raised by the FDIC.

We have made and continue to make changes to the Bank’s oversight of significant activities performed outside the Bank by Company affiliates and to our business practices in order to comply with all applicable laws and regulations and the terms of any cease and desist orders, including in connection with our pursuit of a strategic plan to separate our existing organization into two publicly traded companies. We are cooperating fully with the FDIC, DOJ and CFPB in response to their investigations and requests for information and are in active discussions with each with respect to any potential actions to be taken against us. We could be required to, or otherwise determine to, make further changes to the business practices and products of the Bank and our other affiliates to respond to regulatory concerns. At the time of the filing, it is not possible to estimate a range of potential exposure, if any, to amounts that may be payable or costs that must be incurred to comply with the terms of any order.

In the ordinary course of business, we and our subsidiaries are defendants in or parties to pending and threatened legal actions and proceedings including actions brought on behalf of various classes of claimants. These actions and proceedings may be based on alleged violations of consumer protection, securities,

 

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SLM CORPORATION

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)

 

 

9. Commitments and Contingencies (Continued)

 

employment and other laws. In certain of these actions and proceedings, claims for substantial monetary damage are asserted against us and our subsidiaries.

In the ordinary course of business, we and our subsidiaries are subject to regulatory examinations, information gathering requests, inquiries and investigations. In connection with formal and informal inquiries in these cases, we and our subsidiaries receive numerous requests, subpoenas and orders for documents, testimony and information in connection with various aspects of our regulated activities.

In view of the inherent difficulty of predicting the outcome of such litigation and regulatory matters, we cannot predict what the eventual outcome of the pending matters will be, what the timing or the ultimate resolution of these matters will be, or what the eventual loss, fines or penalties related to each pending matter may be.

We are required to establish reserves for litigation and regulatory matters where those matters present loss contingencies that are both probable and estimable. When loss contingencies are not both probable and estimable, we do not establish reserves.

Based on current knowledge, reserves have been established for certain litigation or regulatory matters where the loss is both probable and estimable. Based on current knowledge, management does not believe that loss contingencies, if any, arising from pending investigations, litigation or regulatory matters will have a material adverse effect on our consolidated financial position, liquidity, results of operations or cash flows.

 

10. Segment Reporting

Consumer Lending Segment

In this segment, we originate, acquire, finance and service Private Education Loans. The Private Education Loans we make are primarily to bridge the gap between the cost of higher education and the amount funded through financial aid, federal loans or customers’ resources. In this segment, we earn net interest income on the Private Education Loan portfolio (after provision for loan losses) as well as servicing fees, primarily consisting of late fees.

The following table includes asset information for our Consumer Lending segment.

 

(Dollars in millions)

   September 30,
2013
     December 31,
2012
 

Private Education Loans, net

   $ 37,752       $ 36,934   

Cash and investments(1)

     2,268         2,731   

Other

     3,599         3,275   
  

 

 

    

 

 

 

Total assets

   $ 43,619       $ 42,940   
  

 

 

    

 

 

 

 

  (1) 

Includes restricted cash and investments.

Business Services Segment

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

 

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SLM CORPORATION

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)

 

 

10. Segment Reporting (Continued)

 

On September 25, 2013, we announced the sale of our 529 college savings plan administration business. Upon the transaction’s closing, which is anticipated to occur in the fourth-quarter 2013, we will recognize a gain of approximately $0.14 per diluted share. Due to the pending sale, the results of this business were moved to discontinued operations for all periods presented.

At September 30, 2013 and December 31, 2012, the Business Services segment had total assets of $826 million and $867 million, respectively.

FFELP Loans Segment

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

The following table includes asset information for our FFELP Loans segment.

 

(Dollars in millions)

   September 30,
2013
     December 31,
2012
 

FFELP Loans, net

   $ 106,350       $ 125,612   

Cash and investments(1)

     5,025         5,766   

Other

     3,114         4,286   
  

 

 

    

 

 

 

Total assets

   $ 114,489       $ 135,664   
  

 

 

    

 

 

 

 

  (1) 

Includes restricted cash and investments.

Other Segment

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

At September 30, 2013 and December 31, 2012, the Other segment had total assets of $2.6 billion and $1.8 billion, respectively.

Measure of Profitability

The tables below include the condensed operating results for each of our reportable segments. Management, including the chief operating decision makers, evaluates the Company on certain performance measures that we refer to as “Core Earnings” performance measures for each operating segment. We use “Core Earnings” to manage each business segment because “Core Earnings” reflect adjustments to GAAP financial results for two items, discussed below, that create significant volatility mostly due to timing factors generally beyond the control of management. Accordingly, we believe that “Core Earnings” provide management with a useful basis from which to better evaluate results from ongoing operations against the business plan or against results from prior periods. Consequently, we disclose this information as we believe it provides investors with additional information regarding the operational and performance indicators that are most closely assessed by management.

 

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SLM CORPORATION

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)

 

 

10. Segment Reporting (Continued)

 

The two items adjusted for in our “Core Earnings” presentations are (1) our use of derivative instruments to hedge our economic risks that do not qualify for hedge accounting treatment or do qualify for hedge accounting treatment but result in ineffectiveness and (2) the accounting for goodwill and acquired intangible assets. The tables presented below reflect “Core Earnings” operating measures reviewed and utilized by management to manage the business. Reconciliation of the “Core Earnings” segment totals to our consolidated operating results in accordance with GAAP is also included in the tables below.

Our “Core Earnings” performance measures are not defined terms within GAAP and may not be comparable to similarly titled measures reported by other companies. Unlike financial accounting, there is no comprehensive, authoritative guidance for management reporting. The management reporting process measures the performance of the operating segments based on the management structure of the Company and is not necessarily comparable with similar information for any other financial institution. Our operating segments are defined by the products and services they offer or the types of customers they serve, and they reflect the manner in which financial information is currently evaluated by management. Intersegment revenues and expenses are netted within the appropriate financial statement line items consistent with the income statement presentation provided to management. Changes in management structure or allocation methodologies and procedures may result in changes in reported segment financial information.

 

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SLM CORPORATION

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)

 

 

10. Segment Reporting (Continued)

 

Segment Results and Reconciliations to GAAP

 

    Three Months Ended September 30, 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

  $ 635      $      $ 574      $      $      $ 1,209      $ 201      $ (77   $ 124      $ 1,333   

Other loans

                         3               3                             3   

Cash and investments

    1        1        2        1        (1     4                             4   
 

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Total interest income

    636        1        576        4        (1     1,216        201        (77     124        1,340   

Total interest expense

    203               313        13        (1     528        12        1 (4)      13        541   
 

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Net interest income (loss)

    433        1        263        (9            688        189        (78     111        799   

Less: provisions for loan losses

    195               12                      207                             207   
 

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Net interest income (loss) after provisions for loan losses

    238        1        251        (9            481        189        (78     111        592   

Other income (loss):

                   

Gains on sales of loans and investments

                                                                     

Servicing revenue

    11        174        21               (123     83                             83   

Contingency revenue

           104                             104                             104   

Gains on debt repurchases

                                                                     

Other income (loss)

           6               6               12        (189     59 (5)      (130     (118
 

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Total other income (loss)

    11        284        21        6        (123     199        (189     59        (130     69   

Expenses:

                   

Direct operating expenses

    85        103        129        4        (123     198                             198   

Overhead expenses

                         59               59                             59   
 

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Operating expenses

    85        103        129        63        (123     257                             257   

Goodwill and acquired intangible asset impairment and amortization

                                                     4        4        4   

Restructuring and other reorganization expenses

                         12               12                             12   
 

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Total expenses

    85        103        129        75        (123     269               4        4        273   
 

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Income (loss) from continuing operations, before income tax expense (benefit)

    164        182        143        (78            411               (23     (23     388   

Income tax expense (benefit)(3)

    59        66        51        (28            148               (12     (12     136   
 

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Net income (loss) from continuing operations

    105        116        92        (50            263               (11     (11     252   

Income from discontinued operations, net of tax expense

           8                             8                             8   
 

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Net income (loss)

    105        124        92        (50            271               (11     (11     260   

Less: net loss attributable to noncontrolling interest

                                                                     
 

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Net income (loss) attributable to SLM Corporation

  $ 105      $ 124      $ 92      $ (50   $      $ 271      $      $ (11   $ (11   $ 260   
 

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

 

(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:

 

     Three Months Ended September 30, 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

   $ 111      $   —      $ 111   

Total other loss

     (130            (130

Goodwill and acquired intangible asset impairment and amortization

            4        4   
  

 

 

   

 

 

   

 

 

 

“Core Earnings” adjustments to GAAP

   $ (19   $ (4     (23
  

 

 

   

 

 

   

Income tax benefit

         (12
      

 

 

 

Net loss

       $ (11
      

 

 

 

 

(3) 

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

 

(4) 

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

 

(5) 

Represents the $62 million of “unrealized gains on derivative and hedging activities, net” as well as the remaining portion of the $(4) million of “other derivative accounting adjustments.”

 

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SLM CORPORATION

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)

 

 

10. Segment Reporting (Continued)

 

    Three Months Ended September 30, 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

  $ 615      $      $ 712      $      $      $ 1,327      $ 206      $ (78   $ 128      $ 1,455   

Other loans

                         4               4                             4   

Cash and investments

    2        2        3               (2     5                             5   
 

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Total interest income

    617        2        715        4        (2     1,336        206        (78     128        1,464   

Total interest expense

    209               399        12        (2     618        26        1 (4)      27        645   
 

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Net interest income (loss)

    408        2        316        (8            718        180        (79     101        819   

Less: provisions for loan losses

    252               18                      270                             270   
 

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Net interest income (loss) after provisions for loan losses

    156        2        298        (8            448        180        (79     101        549   

Other income (loss):

                   

Gains on sales of loans and investments

                                                                     

Servicing revenue

    12        201        22               (164     71                             71   

Contingency revenue

           85                             85                             85   

Gains on debt repurchases

                         44               44                             44   

Other income (loss)

           7               3               10        (180     (61 )(5)      (241     (231
 

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Total other income (loss)

    12        293        22        47        (164     210        (180     (61     (241     (31

Expenses:

                   

Direct operating expenses

    68        88        171        3        (164     166                             166   

Overhead expenses

                         54               54                             54   
 

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Operating expenses

    68        88        171        57        (164     220                             220   

Goodwill and acquired intangible asset impairment and amortization

                                                     5        5        5   

Restructuring and other reorganization expenses

    1                      1               2                             2   
 

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Total expenses

    69        88        171        58        (164     222               5        5        227   
 

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Income (loss) from continuing operations, before income tax expense (benefit)

    99        207        149        (19            436               (145     (145     291   

Income tax expense (benefit)(3)

    36        76        55        (7            160               (56     (56     104   
 

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Net income (loss) from continuing operations

    63        131        94        (12            276               (89     (89     187   

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

    (1     1                                                           
 

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Net income (loss)

    62        132        94        (12            276               (89     (89     187   

Less: net loss attributable to noncontrolling interest

           (1                          (1                          (1
 

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Net income (loss) attributable to SLM Corporation

  $ 62      $ 133      $ 94      $ (12   $      $ 277      $      $ (89   $ (89   $ 188   
 

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

 

(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:

 

     Three Months Ended September 30, 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

   $ 101      $   —      $ 101   

Total other loss

     (241            (241

Goodwill and acquired intangible asset impairment and amortization

            5        5   
  

 

 

   

 

 

   

 

 

 

“Core Earnings” adjustments to GAAP

   $ (140   $ (5     (145
  

 

 

   

 

 

   

Income tax benefit

         (56
      

 

 

 

Net loss

       $ (89
      

 

 

 

 

(3) 

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

 

(4) 

Represents a portion of the $(9) million of “other derivative accounting adjustments.”

 

(5) 

Represents the $(53) million of “unrealized gains (losses) on derivative and hedging activities, net” as well as the remaining portion of the $(9) million of “other derivative accounting adjustments.”

 

39


Table of Contents

SLM CORPORATION

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)

 

 

10. Segment Reporting (Continued)

 

    Nine Months Ended September 30, 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

  $ 1,884      $      $ 1,755      $      $      $ 3,639      $ 612      $ (229   $ 383      $ 4,022   

Other loans

                         9               9                             9   

Cash and investments

    5        4        5        3        (4     13                             13   
 

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Total interest income

    1,889        4        1,760        12        (4     3,661        612        (229     383        4,044   

Total interest expense

    613               978        36        (4     1,623        44        (1 )(4)      43        1,666   
 

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Net interest income (loss)

    1,276        4        782        (24            2,038        568        (228     340        2,378   

Less: provisions for loan losses

    607               42                      649                             649   
 

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Net interest income (loss) after provisions for loan losses

    669        4        740        (24            1,389        568        (228     340        1,729   

Other income (loss):

                   

Gains (losses) on sales of loans and investments

                  312        (5            307                             307   

Servicing revenue

    31        541        60               (409     223                             223   

Contingency revenue

           312                             312                             312   

Gains on debt repurchases

                         48               48        (6            (6     42   

Other income (loss)

           20               6               26        (562     462 (5)      (100     (74
 

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Total other income (loss)

    31        873        372        49        (409     916        (568     462        (106     810   

Expenses:

                   

Direct operating expenses

    228        299        430        9        (409     557                             557   

Overhead expenses

                         180               180                             180   
 

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Operating expenses

    228        299        430        189        (409     737                             737   

Goodwill and acquired intangible asset impairment and amortization

                                                     10        10        10   

Restructuring and other reorganization expenses

    2        1               43               46                             46   
 

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Total expenses

    230        300        430        232        (409     783               10        10        793   
 

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Income (loss) from continuing operations, before income tax expense (benefit)

    470        577        682        (207            1,522               224        224        1,746   

Income tax expense (benefit)(3)

    171        211        249        (75            556               89        89        645   
 

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Net income (loss) from continuing operations

    299        366        433        (132            966               135        135        1,101   

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

    (1     49                             48               (1     (1     47   
 

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Net income (loss)

    298        415        433        (132            1,014               134        134        1,148   

Less: net loss attributable to noncontrolling interest

           (1                          (1                          (1
 

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Net income (loss) attributable to SLM Corporation

  $ 298      $ 416      $ 433      $ (132   $      $ 1,015      $      $ 134      $ 134      $ 1,149   
 

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

 

(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:

 

     Nine Months Ended September 30, 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

   $ 340      $   —      $ 340   

Total other loss

     (106            (106

Goodwill and acquired intangible asset impairment and amortization

            10        10   
  

 

 

   

 

 

   

 

 

 

“Core Earnings” adjustments to GAAP

   $ 234      $ (10     224   
  

 

 

   

 

 

   

Income tax expense

         89   

Loss from discontinued operations, net of tax benefit

         (1
      

 

 

 

Net income

       $ 134   
      

 

 

 

 

(3) 

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

 

(4) 

Represents a portion of the $41 million of “other derivative accounting adjustments.”

 

(5) 

Represents the $422 million of “unrealized gains on derivative and hedging activities, net” as well as the remaining portion of the $41 million of “other derivative accounting adjustments.”

 

40


Table of Contents

SLM CORPORATION

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)

 

 

10. Segment Reporting (Continued)

 

    Nine Months Ended September 30, 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

  $ 1,856      $      $ 2,090      $      $      $ 3,946      $ 643      $ (274   $ 369      $ 4,315   

Other loans

                         13               13                             13   

Cash and investments

    6        5        10               (5     16                             16   
 

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Total interest income

    1,862        5        2,100        13        (5     3,975        643        (274     369        4,344   

Total interest expense

    616               1,233        26        (5     1,870        95        3 (4)      98        1,968   
 

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Net interest income (loss)

    1,246        5        867        (13            2,105        548        (277     271        2,376   

Less: provisions for loan losses

    712               54                      766                             766   
 

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Net interest income (loss) after provisions for loan losses

    534        5        813        (13            1,339        548        (277     271        1,610   

Other income (loss):

                   

Gains on sales of loans and investments

                         1               1                             1   

Servicing revenue

    36        619        68        1        (512     212                             212   

Contingency revenue

           261                             261                             261   

Gains on debt repurchases

                         102               102                             102   

Other income (loss)

           25               9               34        (548     (47 )(5)      (595     (561
 

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Total other income (loss)

    36        905        68        113        (512     610        (548     (47     (595     15   

Expenses:

                   

Direct operating expenses

    199        269        537        10        (512     503                             503   

Overhead expenses

                         169               169                             169   
 

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Operating expenses

    199        269        537        179        (512     672                             672   

Goodwill and acquired intangible asset impairment and amortization

                                                     13        13        13   

Restructuring and other reorganization expenses

    3        2               4               9                             9   
 

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Total expenses

    202        271        537        183        (512     681               13        13        694   
 

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Income (loss) from continuing operations, before income tax expense (benefit)

    368        639        344        (83            1,268               (337     (337     931   

Income tax expense (benefit)(3)

    134        234        126        (29            465               (125     (125     340   
 

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Net income (loss) from continuing operations

    234        405        218        (54            803               (212     (212     591   

Loss from discontinued operations, net of tax benefit

    (1                                 (1            (1     (1     (2
 

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Net income (loss)

    233        405        218        (54            802               (213     (213     589   

Less: net loss attributable to noncontrolling interest

           (2                          (2                          (2
 

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Net income (loss) attributable to SLM Corporation

  $ 233      $ 407      $ 218      $ (54   $      $ 804      $      $ (213   $ (213   $ 591   
 

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

 

(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:

 

     Nine Months Ended September 30, 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

   $ 271      $   —      $ 271   

Total other loss

     (595            (595

Goodwill and acquired intangible asset impairment and amortization

            13        13   
  

 

 

   

 

 

   

 

 

 

“Core Earnings” adjustments to GAAP

   $ (324   $ (13     (337
  

 

 

   

 

 

   

Income tax benefit

         (125

Loss from discontinued operations, net of tax benefit

         (1
      

 

 

 

Net loss

       $ (213
      

 

 

 

 

(3) 

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

 

(4) 

Represents a portion of the $2 million of “other derivative accounting adjustments.”

 

(5) 

Represents the $(52) million of “unrealized gains (losses) on derivative and hedging activities, net” as well as the remaining portion of the $2 million of “other derivative accounting adjustments.”

 

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Table of Contents

SLM CORPORATION

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)

 

 

10. Segment Reporting (Continued)

 

Summary of “Core Earnings” Adjustments to GAAP

The two adjustments required to reconcile from our “Core Earnings” results to our GAAP results of operations relate to differing treatments for: (1) our use of derivative instruments to hedge our economic risks that do not qualify for hedge accounting treatment or do qualify for hedge accounting treatment but result in ineffectiveness and (2) the accounting for goodwill and acquired intangible assets. The following table reflects aggregate adjustments associated with these areas.

 

     Three Months Ended
September 30,
    Nine Months Ended
September 30,
 

(Dollars in millions)

       2013             2012             2013             2012      

“Core Earnings” adjustments to GAAP:

        

Net impact of derivative accounting(1)

   $ (19   $ (140   $ 234      $ (324

Net impact of goodwill and acquired intangibles assets(2)

     (4     (5     (10     (13

Net tax effect(3)

     12        56        (89     125   

Net effect from discontinued operations

                   (1     (1
  

 

 

   

 

 

   

 

 

   

 

 

 

Total “Core Earnings” adjustments to GAAP

   $ (11   $ (89   $ 134      $ (213
  

 

 

   

 

 

   

 

 

   

 

 

 

 

  (1) 

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

 

  (2) 

Goodwill and acquired intangible assets: Our “Core Earnings” exclude goodwill and intangible asset impairment and amortization of acquired intangible assets.

 

  (3) 

Net tax effect: Such tax effect is based upon our “Core Earnings” effective tax rate for the year.

 

11. Discontinued Operations

In the second quarter of 2013, we sold our Campus Solutions business and recorded an after-tax gain of $38 million. This business provided processing capabilities to educational institutions. The Campus Solutions business comprises operations and cash flows that can be clearly distinguished operationally and for financial reporting purposes from the rest of the Company and we will have no continuing involvement. As a result, our Campus Solutions business is presented in discontinued operations for the current and prior periods.

On September 25, 2013, we announced the sale of our 529 college savings plan administration business. Upon the transaction’s closing, which is anticipated to occur in the fourth-quarter 2013, we will recognize a gain of approximately $0.14 per diluted share. Due to the pending sale, the results of this business were moved to discontinued operations for all periods presented.

 

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Table of Contents

SLM CORPORATION

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)

 

 

11. Discontinued Operations (Continued)

 

The following table summarizes the discontinued operations.

 

     Three Months Ended
September 30,
     Nine Months Ended
September 30,
 

(Dollars in millions)

   2013     2012      2013     2012  

Operations:

         

Income (loss) from discontinued operations before income taxes

   $ 1      $       $ 36      $ (3

Income tax benefit

     (7             (11     (1
  

 

 

   

 

 

    

 

 

   

 

 

 

Income (loss) from discontinued operations, net of taxes

   $ 8      $       $ 47      $ (2
  

 

 

   

 

 

    

 

 

   

 

 

 

 

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Table of Contents
Item 2. Management’s Discussion and Analysis of Financial Condition and Results of Operations

The following discussion and analysis should be read in conjunction with our consolidated financial statements and related notes included elsewhere in this Quarterly Report on Form 10-Q and our audited consolidated financial statements and related notes thereto and “Management’s Discussion and Analysis of Financial Condition and Results of Operations” included in the 2012 Form 10-K.

This report contains “forward-looking” statements and information based on management’s current expectations as of the date of this document. Statements that are not historical facts, including statements about our beliefs, opinions, or expectations and statements that assume or are dependent upon future events, are forward-looking statements. 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 this Quarterly Report on Form 10-Q, our 2012 Form 10-K and subsequent filings with the Securities and Exchange Commission (“SEC”); increases in financing costs; limits on liquidity; increases in costs associated with compliance with laws and regulations; changes in accounting standards and the impact of related changes in significant accounting estimates; any adverse outcomes in any significant litigation to which we are a party; credit risk associated with our exposure to third parties, including counterparties to our derivative transactions; and changes in the terms of student loans and the educational credit marketplace (including changes resulting from new laws and the implementation of existing laws). We could also be affected by, among other things: changes in our funding costs and availability; reductions to our credit ratings or the credit ratings of the United States of America; failures of our operating systems or infrastructure, including those of third-party vendors; damage to our reputation; failures to successfully implement cost-cutting initiatives and adverse effects of such initiatives on our business; risks associated with restructuring initiatives, including our recently announced strategic plan to separate our existing operations into two, separate, publicly traded companies; changes in the demand for educational financing or in financing preferences of lenders, educational institutions, students and their families; changes in law and regulations with respect to the student lending business and financial institutions generally; increased competition from banks and other consumer lenders; the creditworthiness of our customers; changes in the general interest rate environment, including the rate relationships among relevant money-market instruments and those of our earning assets versus our funding arrangements; changes in general economic conditions; our ability to successfully effectuate any acquisitions and other strategic initiatives; and changes in the demand for debt management services. The preparation of our consolidated financial statements also requires management to make certain estimates and assumptions including estimates and assumptions about future events. These estimates or assumptions may prove to be incorrect. All forward-looking statements contained in this report are qualified by these cautionary statements and are made only as of the date of this document. We do not undertake any obligation to update or revise these forward-looking statements to conform the statement to actual results or changes in our expectations.

Definitions for certain capitalized terms used in this document can be found in the 2012 Form 10-K.

Certain reclassifications have been made to the balances as of and for the three and nine months ended September 30, 2012 to be consistent with classifications adopted for 2013, and had no effect on net income, total assets, or total liabilities.

Through this discussion and analysis, we intend to provide the reader with some narrative context for how our management views our consolidated financial statements, additional context within which to assess our operating results, and information on the quality and variability of our earnings, liquidity and cash flows.

 

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Table of Contents

Selected Financial Information and Ratios

 

     Three Months Ended
September 30,
    Nine Months Ended
September 30,
 

(In millions, except per share data)

   2013     2012     2013     2012  

GAAP Basis

        

Net income attributable to SLM Corporation

   $ 260      $ 188      $ 1,149      $ 591   

Diluted earnings per common share attributable to SLM Corporation

   $ .57      $ .39      $ 2.52      $ 1.18   

Weighted average shares used to compute diluted earnings per share

     445        471        450        490   

Return on assets

     .67     .42     .95     .43

“Core Earnings” Basis(1)

        

“Core Earnings” attributable to SLM Corporation

   $ 271      $ 277      $ 1,015      $ 804   

“Core Earnings” diluted earnings per common share attributable to SLM Corporation

   $ .60      $ .58      $ 2.22      $ 1.61   

Weighted average shares used to compute diluted earnings per share

     445        471        450        490   

“Core Earnings” return on assets

     .70     .62     .84     .59

Other Operating Statistics

        

Ending FFELP Loans, net

   $ 106,350      $ 127,747      $ 106,350      $ 127,747   

Ending Private Education Loans, net

     37,752        37,101        37,752        37,101   
  

 

 

   

 

 

   

 

 

   

 

 

 

Ending total student loans, net

   $ 144,102      $ 164,848      $ 144,102      $ 164,848   
  

 

 

   

 

 

   

 

 

   

 

 

 

Average student loans

   $ 145,585      $ 167,166      $ 152,607      $ 171,499   

 

  (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.

Overview

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

In addition we are the largest holder, servicer and collector of loans made under FFELP, a program that was discontinued in 2010.

We monitor and assess our ongoing operations and results based on the following four reportable segments:

(1) Consumer Lending, (2) Business Services, (3) FFELP Loans and (4) Other.

Consumer Lending Segment

In this segment, we originate, acquire, finance and service Private Education Loans. The Private Education Loans we make are primarily to bridge the gap between the cost of higher education and the amount funded through financial aid, federal loans or customers’ resources. In this segment, we earn net interest income on the Private Education Loan portfolio (after provision for loan losses) as well as servicing fees, primarily consisting of late fees.

 

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Business Services Segment

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

FFELP Loans Segment

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

Other

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

Recent Developments

Strategic Plan to Create Separate Education Loan Management and Consumer Banking Companies

On May 29, 2013, our Board of Directors authorized a plan to pursue the separation of the Company’s existing businesses into two, separate, publicly traded entities — an education loan management business and a consumer banking business.

The separation transaction will be effected as a pro-rata dividend of shares of the education loan management business to our shareholders. Upon consummation of the separation, the education loan management business will become a separate public company and will trade under a new stock ticker symbol. The consumer banking business will retain the stock ticker symbol “SLM” and will operate under the Sallie Mae brand.

The completion of the separation will be subject to certain customary conditions, including final approval by the Company’s Board of Directors, confirmation of the tax-free nature of the separation transaction and the effectiveness of a registration statement that will be filed with the SEC. The contemplated separation and distribution will not require a shareholder vote. Subject to the satisfaction of all necessary conditions, including the conditions described above, the separation is currently anticipated to occur in the first half of 2014; however, there can be no assurance that the separation and distribution will ultimately occur.

Sale of 529 College Savings Plan Administration Business

On September 25, 2013, we announced the sale of our 529 college savings plan administration business. Upon the transaction’s closing, which is anticipated to occur in the fourth-quarter 2013, we will recognize a gain of approximately $0.14 per diluted share. Due to the pending sale, the results of this business were moved to discontinued operations for all periods presented.

Key Financial Measures

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

 

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for loan losses; charge-offs and delinquencies; servicing and contingency revenues; other income (loss); operating expenses; and “Core Earnings”) can be found in Item 7 “Management’s Discussion and Analysis of Financial Condition and Results of Operations” in our 2012 Form 10-K.

Third-Quarter 2013 Summary of Results

We report financial results on a GAAP basis and also present certain “Core Earnings” performance measures. Our management, equity investors, credit rating agencies and debt capital providers use these “Core Earnings” measures to monitor our business performance. See “‘Core Earnings’ — Definition and Limitations” for a further discussion and a complete reconciliation between GAAP net income and “Core Earnings.”

Third-quarter 2013 GAAP net income was $260 million ($.57 diluted earnings per share), versus net income of $188 million ($0.39 diluted earnings per share) in the third-quarter 2012. The changes in GAAP net income are driven by the same types of “Core Earnings” items discussed below as well as changes in “mark-to-market” unrealized gains and losses on derivative contracts and amortization and impairment of goodwill and intangible assets that are recognized in GAAP but not in “Core Earnings” results. Third-quarter 2013 results included $19 million of losses from derivative accounting treatment that are excluded from “Core Earnings” results, compared with losses of $140 million in the year-ago period.

“Core Earnings” for the quarter were $271 million ($.60 diluted earnings per share), compared with $277 million ($0.58 diluted earnings per share) in the year-ago period. The increase in third-quarter 2013 core diluted earnings per share was primarily the result of a $63 million decline in the provision for loan losses, a $31 million increase in servicing and contingency revenue, as well as fewer common shares outstanding. These items more than offset lower debt repurchase gains of $44 million, a decrease in net interest income before provision for loan losses of $30 million (primarily as a result of the sales of residual interests in FFELP loan securitization trusts), higher operating expenses of $37 million (in part due to higher servicing and contingency volumes) and higher restructuring and other reorganization expenses of $10 million.

During the first nine months of 2013, we:

 

   

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

 

   

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

 

   

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

 

   

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

 

   

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

 

   

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

 

   

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

 

   

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

 

   

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

 

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2013 Management Objectives

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

Prudently Grow Consumer Lending Segment Assets and Revenues

We will continue to pursue managed growth in our Private Education Loan portfolio in 2013 by leveraging our Sallie Mae and Upromise brand while sustaining the credit quality of, and percentage of cosigners for, new originations. We are currently targeting $3.8 billion in new loan originations for 2013, compared with $3.3 billion in 2012. We will also continue to help our customers manage their borrowings and succeed in its payoff, which we expect will result in lower charge-offs and provision for loan losses. Originations were 11 percent higher in the third quarter of 2013 compared with the year-ago quarter. Charge-offs were 2.6 percent in the current quarter, down from 3.2 percent in the year-ago quarter. Provision for Private Education Loan losses decreased $57 million from the year-ago quarter. Our quarterly charge-off rate in the third-quarter of 2013 was at the lowest level in five years.

Maximize Cash Flows from FFELP Loans

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

Reduce Operating Expenses While Improving Efficiency and Customer Experience

For 2013, we will reduce unit costs, and balance our Private Education Loan growth and the challenge of increased regulatory oversight. We also plan to improve efficiency and customer experience by replacing certain of our legacy systems and making enhancements to our self-service platform and call centers (including improved call segmentation that routes an in-bound customer call directly to the appropriate agent who can answer the customer’s inquiry). Third-quarter 2013 operating expenses were $257 million compared with $220 million in the year-ago quarter. The increase is primarily the result of increases in our third-party servicing and collections activities, increased Private Education Loan marketing activities, continued investments in technology, and an increase in pending litigation settlement expense. An example of becoming more efficient can be seen in our Consumer Lending segment; direct operating expenses as a percentage of revenues (revenues calculated as net interest income after provision plus total other income) were 34 percent and 40 percent in the three months ended September 30, 2013 and 2012, respectively, and 33 percent and 35 percent in the nine months ended September 30, 2013 and 2012, respectively.

Maintain Our Financial Strength

In February 2013, we announced an increase in our quarterly common stock dividend to $0.15 per share and a new $400 million common share repurchase program. It is management’s objective for 2013 to provide these shareholder distributions while ending 2013 with capital and reserve positions as strong as those with which we ended 2012. We repurchased an aggregate of 19 million shares for $400 million in the six months ended June 30, 2013, fully utilizing the Company’s February 2013 share repurchase program authorization. On July 16, 2013, we authorized $400 million to be utilized in a new common share repurchase program that does not have an expiration date. There were no share repurchases during the third-quarter 2013. Additionally, on June 10, 2013,

 

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we closed on a new $6.8 billion credit facility that matures in June 2014, to facilitate the term securitization of FFELP Loans. The facility was used in June 2013 to refinance all of the FFELP Loans previously financed through the ED Conduit Program. As a result, we ended our participation in the ED Conduit Program. On July 17, 2013, we closed on a $1.1 billion asset-backed borrowing facility that matures on August 15, 2015. The facility was used to fund the call and redemption of our SLM 2009-D Private Education Loan Trust ABS, which occurred on August 15, 2013.

Expand Bank Capabilities

The Bank continues to fund our Private Education Loan originations in 2013. We are continuing to evolve the operational and enterprise risk oversight program at the Bank in preparation for expected growth and designation as a “large bank,” which will entail enhanced regulatory scrutiny. In addition, we plan to voluntarily make similar changes at SLM Corporation. See the 2012 10-K, Item 1 “Business — Supervision and Regulation — Regulatory Outlook — Evolving Regulation of the Bank” for additional information about the Bank’s regulatory environment once it becomes a “large bank.”

Results of Operations

We present the results of operations below first on a consolidated basis in accordance with GAAP. Following our discussion of consolidated earnings results on a GAAP basis, we present our results on a segment basis. We have four business segments: FFELP Loans, Consumer Lending, Business Services 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”).

 

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GAAP Statements of Income (Unaudited)

 

     Three Months
Ended September 30,
    Increase
(Decrease)
    Nine Months
Ended September 30,
    Increase
(Decrease)
 

(In millions, except per share data)

       2013             2012         $     %         2013             2012         $     %  

Interest income:

                

FFELP Loans

   $ 698      $ 840      $ (142     (17 )%    $ 2,138      $ 2,459      $ (321     (13 )% 

Private Education Loans

     635        615        20        3        1,884        1,856        28        2   

Other loans

     3        4        (1     (25     9        13        (4     (31

Cash and investments

     4        5        (1     (20     13        16        (3     (19
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Total interest income

     1,340        1,464        (124     (8     4,044        4,344        (300     (7

Total interest expense

     541        645        (104     (16     1,666        1,968        (302     (15
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Net interest income

     799        819        (20     (2     2,378        2,376        2          

Less: provisions for loan losses

     207        270        (63     (23     649        766        (117     (15
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Net interest income after provisions for loan losses

     592        549        43        8        1,729        1,610        119        7   

Other income (loss):

                

Gains on sales of loans and investments

                                 307        1        306        30,600   

Gains (losses) on derivative and hedging activities, net

     (127     (233     106        (45     (140     (600     460        (77

Servicing revenue

     83        71        12        17        223        212        11        5   

Contingency revenue

     104        85        19        22        312        261        51        20   

Gains on debt repurchases

            44        (44     (100     42        102        (60     (59

Other income (loss)

     9        2        7        350        66        39        27        69   
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Total other income (loss)

     69        (31     100        323        810        15        795        5,300   

Expenses:

                

Operating expenses

     257        220        37        17        737        672        65        10   

Goodwill and acquired intangible asset impairment and amortization expense

     4        5        (1     (20     10        13        (3     (23

Restructuring and other reorganization expenses

     12        2        10        500        46        9        37        411   
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Total expenses

     273        227        46        20        793        694        99        14   
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Income from continuing operations, before income tax expense

     388        291        97        33        1,746        931        815        88   

Income tax expense

     136        104        32        31        645        340        305        90   
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Net income from continuing operations

     252        187        65        35        1,101        591        510        86   

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

     8               8        100        47        (2     49        2,450   
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Net income

     260        187        73        39        1,148        589        559        95   

Less: net loss attributable to noncontrolling interest

            (1     1        (100     (1     (2     1        (50
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Net income attributable to SLM Corporation

     260        188        72        38        1,149        591        558        94   

Preferred stock dividends

     5        5                      15        15                 
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Net income attributable to SLM Corporation common stock

   $ 255      $ 183      $ 72        39   $ 1,134      $ 576      $ 558        97
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Basic earnings per common share attributable to SLM Corporation:

                

Continuing operations

   $ .56      $ .39      $ .17        44   $ 2.46      $ 1.19      $ 1.27        107

Discontinued operations

     .02               .02        100        .10               .10        100   
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Total

   $ .58      $ .39      $ .19        49   $ 2.56      $ 1.19      $ 1.37        115
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Diluted earnings per common share attributable to SLM Corporation:

                

Continuing operations

   $ .55      $ .39      $ .16        41   $ 2.42      $ 1.18      $ 1.24        105

Discontinued operations

     .02               .02        100        .10               .10        100   
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Total

   $ .57      $ .39      $ .18        46   $ 2.52      $ 1.18      $ 1.34        114
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Dividends per common share attributable to SLM Corporation

   $ .15      $ .125      $ .025        20   $ .45      $ .375      $ .075        20
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

 

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Consolidated Earnings Summary — GAAP-basis

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

For the three months ended September 30, 2013, net income was $260 million, or $0.57 diluted earnings per common share, compared with net income of $188 million, or $0.39 diluted earnings per common share, for the three months ended September 30, 2012. The increase in net income was primarily due to a $106 million decrease in net losses on derivative and hedging activities, a $63 million decline in the provision for loan losses, and a $31 million increase in servicing and contingency revenue, which more than offset a $44 million decline in debt repurchase gains, higher operating expenses of $37 million, a $20 million decline in net interest income and higher restructuring and other reorganization expenses of $10 million.

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:

 

   

Net interest income decreased by $20 million in the current quarter compared with the prior-year quarter primarily due to a reduction in FFELP net interest income from a $22 billion decline in average FFELP Loans outstanding in part due to the sale of Residual Interests in FFELP Loan securitization trusts in the first half of 2013. There were approximately $12 billion of FFELP Loans in these trusts.

 

   

Provisions for loan losses declined $63 million compared with the year-ago quarter primarily as a result of the overall improvement in Private Education Loans’ credit quality, delinquency and charge-off trends leading to decreases in expected future charge-offs.

 

   

Losses on derivative and hedging activities, net, resulted in a net loss of $127 million in the current quarter compared with a net loss of $233 million in the year-ago period. The primary factors affecting the change were interest rate and foreign currency fluctuations, which primarily affected the valuations of our Floor Income Contracts, basis swaps and foreign currency hedges during each period. Valuations of derivative instruments vary based upon many factors including changes in interest rates, credit risk, foreign currency fluctuations and other market factors. As a result, net gains and losses on derivative and hedging activities may continue to vary significantly in future periods.

 

   

Servicing and contingency revenue increased $31 million primarily from an increase in the number of accounts serviced and in collection volumes in third-quarter 2013.

 

   

Gains on debt repurchases decreased $44 million from third-quarter 2012 as we did not repurchase any debt in the current period. Debt repurchase activity will fluctuate based on market fundamentals and our liability management strategy.

 

   

Operating expenses increased $37 million primarily as a result of increases in our third-party servicing and collections activities, continued investments in technology, increased Private Education Loan marketing and an increase in pending litigation settlement expense.

 

   

Restructuring and other reorganization expenses were $12 million compared with $2 million in the year-ago quarter. For third-quarter 2013, these consisted of expenses primarily related to third-party costs incurred in connection with the Company’s previously announced plan to separate its existing organization into two, separate, publicly traded companies. The $2 million of expenses in third-quarter 2012 related to restructuring expenses.

There were no share repurchases during the third-quarter 2013. Primarily as a result of common share repurchases in previous quarters, our average outstanding diluted shares decreased by 26 million shares from the year-ago quarter.

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

For the nine months ended September 30, 2013, net income was $1.1 billion, or $2.52 diluted earnings per common share, compared with net income of $591 million, or $1.18 diluted earnings per common share, for the

 

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

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

 

   

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

 

   

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

 

   

Gains on sales of loans and investments increased by $306 million as a result of $312 million in gains on the sales of the Residual Interests in FFELP Loan securitization trusts in 2013. See “Business Segment Earnings Summary —‘Core Earnings’ Basis — FFELP Loans Segment” for further discussion.

 

   

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

 

   

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

 

   

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

 

   

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

 

   

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

 

   

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

 

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We repurchased 19 million shares of our common stock for $400 million during the nine months ended September 30, 2013, as part of a common share repurchase program. Primarily as a result of these common share repurchases, our average outstanding diluted shares decreased by 40 million shares from the year-ago period.

“Core Earnings” — Definition and Limitations

We prepare financial statements in accordance with GAAP. However, we also evaluate our business segments on a basis that differs from GAAP. We refer to this different basis of presentation as “Core Earnings.” We provide this “Core Earnings” basis of presentation on a consolidated basis for each business segment because this is what we review internally when making management decisions regarding our performance and how we allocate resources. We also refer to this information in our presentations with credit rating agencies, lenders and investors. Because our “Core Earnings” basis of presentation corresponds to our segment financial presentations, we are required by GAAP to provide “Core Earnings” disclosure in the notes to our consolidated financial statements for our business segments. For additional information, see “Note 10 — Segment Reporting.”

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

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

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” of this Item 2.

 

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Table of Contents

The following tables show “Core Earnings” for each business segment and our business as a whole along with the adjustments made to the income/expense items to reconcile the amounts to our reported GAAP results as required by GAAP and reported in “Note 10 — Segment Reporting.”

 

    Three Months Ended September 30, 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

  $ 635      $      $ 574      $      $      $ 1,209      $ 201      $ (77   $ 124      $ 1,333   

Other loans

                         3               3                             3   

Cash and investments

    1        1        2        1        (1     4                             4   
 

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Total interest income

    636        1        576        4        (1     1,216        201        (77     124        1,340   

Total interest expense

    203               313        13        (1     528        12        1 (4)      13        541   
 

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Net interest income (loss)

    433        1        263        (9            688        189        (78     111        799   

Less: provisions for loan losses

    195               12                      207                             207   
 

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Net interest income (loss) after provisions for loan losses

    238        1        251        (9            481        189        (78     111        592   

Other income (loss):

                   

Gains on sales of loans and investments

                                                                     

Servicing revenue

    11        174        21               (123     83                             83   

Contingency revenue

           104                             104                             104   

Gains on debt repurchases

                                                                     

Other income (loss)

           6               6               12        (189     59 (5)      (130     (118
 

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Total other income (loss)

    11        284        21        6        (123     199        (189     59        (130     69   

Expenses:

                   

Direct operating expenses

    85        103        129        4        (123     198                             198   

Overhead expenses

                         59               59                             59   
 

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Operating expenses

    85        103        129        63        (123     257                             257   

Goodwill and acquired intangible asset impairment and amortization

                                                     4        4        4   

Restructuring and other reorganization expenses

                         12               12                             12   
 

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Total expenses

    85        103        129        75        (123     269               4        4        273   
 

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Income (loss) from continuing operations, before income tax expense (benefit)

    164        182        143        (78            411               (23     (23     388   

Income tax expense (benefit)(3)

    59        66        51        (28            148               (12     (12     136   
 

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Net income (loss) from continuing operations

    105        116        92        (50            263               (11     (11     252   

Income from discontinued operations, net of tax expense

           8                             8                             8   
 

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Net income (loss)

    105        124        92        (50            271               (11     (11     260   

Less: net loss attributable to noncontrolling interest

                                                                     
 

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Net income (loss) attributable to SLM Corporation

  $ 105      $ 124      $ 92      $ (50   $      $ 271      $      $ (11   $ (11   $ 260   
 

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

 

(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:

 

    Three Months Ended September 30, 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

  $ 111      $   —      $ 111   

Total other loss

    (130            (130

Goodwill and acquired intangible asset impairment and amortization

           4        4   
 

 

 

   

 

 

   

 

 

 

“Core Earnings” adjustments to GAAP

  $ (19   $ (4     (23
 

 

 

   

 

 

   

Income tax benefit

        (12
     

 

 

 

Net loss

      $ (11
     

 

 

 
(3) 

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

 

(4) 

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

 

(5) 

Represents the $62 million of “unrealized gains on derivative and hedging activities, net” as well as the remaining portion of the $(4) million of “other derivative accounting adjustments.”

 

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Table of Contents
    Three Months Ended September 30, 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

  $ 615      $      $ 712      $      $      $ 1,327      $ 206      $ (78   $ 128      $ 1,455   

Other loans

                         4               4                             4   

Cash and investments

    2        2        3               (2     5                             5   
 

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Total interest income

    617        2        715        4        (2     1,336        206        (78     128        1,464   

Total interest expense

    209               399        12        (2     618        26        1 (4)      27        645   
 

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Net interest income (loss)

    408        2        316        (8            718        180        (79     101        819   

Less: provisions for loan losses

    252               18                      270                             270   
 

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Net interest income (loss) after provisions for loan losses

    156        2        298        (8            448        180        (79     101        549   

Other income (loss):

                   

Gains on sales of loans and investments

                                                                     

Servicing revenue

    12        201        22               (164     71                             71   

Contingency revenue

           85                             85                             85   

Gains on debt repurchases

                         44               44                             44   

Other income (loss)

           7               3               10        (180     (61 )(5)      (241     (231
 

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Total other income (loss)

    12        293        22        47        (164     210        (180     (61     (241     (31

Expenses:

                   

Direct operating expenses

    68        88        171        3        (164     166                             166   

Overhead expenses

                         54               54                             54   
 

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Operating expenses

    68        88        171        57        (164     220                             220   

Goodwill and acquired intangible asset impairment and amortization

                                                     5        5        5   

Restructuring and other reorganization expenses

    1                      1               2                             2   
 

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Total expenses

    69        88        171        58        (164     222               5        5        227   
 

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Income (loss) from continuing operations, before income tax expense (benefit)

    99        207        149        (19            436               (145     (145     291   

Income tax expense (benefit)(3)

    36        76        55        (7            160               (56     (56     104   
 

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Net income (loss) from continuing operations

    63        131        94        (12            276               (89     (89     187   

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

    (1     1                                                           
 

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Net income (loss)

    62        132        94        (12            276               (89     (89     187   

Less: net loss attributable to noncontrolling interest

           (1                          (1                          (1
 

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Net income (loss) attributable to SLM Corporation

  $ 62      $ 133      $ 94      $ (12   $      $ 277      $      $ (89   $ (89   $ 188   
 

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

 

(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:

 

    Three Months Ended September 30, 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

  $ 101      $      $ 101   

Total other loss

    (241            (241

Goodwill and acquired intangible asset impairment and amortization

           5        5   
 

 

 

   

 

 

   

 

 

 

“Core Earnings” adjustments to GAAP

  $ (140   $ (5     (145
 

 

 

   

 

 

   

Income tax benefit

        (56
     

 

 

 

Net loss

      $ (89
     

 

 

 

 

(3) 

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

 

(4) 

Represents a portion of the $(9) million of “other derivative accounting adjustments.”

 

(5) 

Represents the $(53) million of “unrealized gains (losses) on derivative and hedging activities, net” as well as the remaining portion of the $(9) million of “other derivative accounting adjustments.”

 

55


Table of Contents
    Nine Months Ended September 30, 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

  $ 1,884      $      $ 1,755      $      $      $ 3,639      $ 612      $ (229   $ 383      $ 4,022   

Other loans

                         9               9                             9   

Cash and investments

    5        4        5        3        (4     13                             13   
 

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Total interest income

    1,889        4        1,760        12        (4     3,661        612        (229     383        4,044   

Total interest expense

    613               978        36        (4     1,623        44        (1 )(4)      43        1,666   
 

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Net interest income (loss)

    1,276        4        782        (24            2,038        568        (228     340        2,378   

Less: provisions for loan losses

    607               42                      649                             649   
 

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Net interest income (loss) after provisions for loan losses

    669        4        740        (24            1,389        568        (228     340        1,729   

Other income (loss):

                   

Gains (losses) on sales of loans and investments

                  312        (5            307                             307   

Servicing revenue

    31        541        60               (409     223                             223   

Contingency revenue

           312                             312                             312   

Gains on debt repurchases

                         48               48        (6            (6     42   

Other income (loss)

           20               6               26        (562     462 (5)      (100     (74
 

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Total other income (loss)

    31        873        372        49        (409     916        (568     462        (106     810   

Expenses:

                   

Direct operating expenses

    228        299        430        9        (409     557                             557   

Overhead expenses

                         180               180                             180   
 

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Operating expenses

    228        299        430        189        (409     737                             737   

Goodwill and acquired intangible asset impairment and amortization

                                                     10        10        10   

Restructuring and other reorganization expenses

    2        1               43               46                             46   
 

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Total expenses

    230        300        430        232        (409     783               10        10        793   
 

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Income (loss) from continuing operations, before income tax expense (benefit)

    470        577        682        (207            1,522               224        224        1,746   

Income tax expense (benefit)(3)

    171        211        249        (75            556               89        89        645   
 

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Net income (loss) from continuing operations

    299        366        433        (132            966               135        135        1,101   

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

    (1     49                             48               (1     (1     47   
 

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Net income (loss)

    298        415        433        (132            1,014               134        134        1,148   

Less: net loss attributable to noncontrolling interest

           (1                          (1                          (1
 

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Net income (loss) attributable to SLM Corporation

  $ 298      $ 416      $ 433      $ (132   $      $ 1,015      $      $ 134      $ 134      $ 1,149   
 

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

 

(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:

 

    Nine Months Ended September 30, 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

  $ 340      $      $ 340   

Total other loss

    (106            (106

Goodwill and acquired intangible asset impairment and amortization

           10        10   
 

 

 

   

 

 

   

 

 

 

“Core Earnings” adjustments to GAAP

  $ 234      $ (10     224   
 

 

 

   

 

 

   

Income tax expense

        89   

Loss from discontinued operations, net of tax benefit

        (1
     

 

 

 

Net income

      $ 134   
     

 

 

 

 

(3) 

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

 

(4) 

Represents a portion of the $41 million of “other derivative accounting adjustments.”

 

(5) 

Represents the $422 million of “unrealized gains on derivative and hedging activities, net” as well as the remaining portion of the $41 million of “other derivative accounting adjustments.”

 

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Table of Contents
    Nine Months Ended September 30, 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

  $ 1,856      $      $ 2,090      $      $      $ 3,946      $ 643      $ (274   $ 369      $ 4,315   

Other loans

                         13               13                             13   

Cash and investments

    6        5        10               (5     16                             16   
 

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Total interest income

    1,862        5        2,100        13        (5     3,975        643        (274     369        4,344   

Total interest expense

    616               1,233        26        (5     1,870        95        3 (4)      98        1,968   
 

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Net interest income (loss)

    1,246        5        867        (13            2,105        548        (277     271        2,376   

Less: provisions for loan losses

    712               54                      766                             766   
 

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Net interest income (loss) after provisions for loan losses

    534        5        813        (13            1,339        548        (277     271        1,610   

Other income (loss):

                   

Gains on sales of loans and investments

                         1               1                             1   

Servicing revenue

    36        619        68        1        (512     212                             212   

Contingency revenue

           261                             261                             261   

Gains on debt repurchases

                         102               102                             102   

Other income (loss)

           25               9               34        (548     (47 )(5)      (595     (561
 

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Total other income (loss)

    36        905        68        113        (512     610        (548     (47     (595     15   

Expenses:

                   

Direct operating expenses

    199        269        537        10        (512     503                             503   

Overhead expenses

                         169               169                             169   
 

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Operating expenses

    199        269        537        179        (512     672                             672   

Goodwill and acquired intangible asset impairment and amortization

                                                     13        13        13   

Restructuring and other reorganization expenses

    3        2               4               9                             9   
 

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Total expenses

    202        271        537        183        (512     681               13        13        694   
 

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Income (loss) from continuing operations, before income tax expense (benefit)

    368        639        344        (83            1,268               (337     (337     931   

Income tax expense (benefit)(3)

    134        234        126        (29            465               (125     (125     340   
 

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Net income (loss) from continuing operations

    234        405        218        (54            803               (212     (212     591   

Loss from discontinued operations, net of tax benefit

    (1                                 (1            (1     (1     (2
 

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Net income (loss)

    233        405        218        (54            802               (213     (213     589   

Less: net loss attributable to noncontrolling interest

           (2                          (2                          (2
 

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Net income (loss) attributable to SLM Corporation

  $ 233      $ 407      $ 218      $ (54   $      $ 804      $      $ (213   $ (213   $ 591   
 

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

 

(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:

 

    Nine Months Ended September 30, 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

  $ 271      $   —      $ 271   

Total other loss

    (595            (595

Goodwill and acquired intangible asset impairment and amortization

           13        13   
 

 

 

   

 

 

   

 

 

 

“Core Earnings” adjustments to GAAP

  $ (324   $ (13     (337
 

 

 

   

 

 

   

Income tax benefit

        (125

Loss from discontinued operations, net of tax benefit

        (1
     

 

 

 

Net loss

      $ (213
     

 

 

 

 

(3) 

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

 

(4) 

Represents a portion of the $2 million of “other derivative accounting adjustments.”

 

(5) 

Represents the $(52) million of “unrealized gains (losses) on derivative and hedging activities, net” as well as the remaining portion of the $2 million of “other derivative accounting adjustments.”

 

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Differences between “Core Earnings” and GAAP

The two adjustments required to reconcile from our “Core Earnings” results to our GAAP results of operations relate to differing treatments for: (1) our use of derivative instruments to hedge our economic risks that do not qualify for hedge accounting treatment or do qualify for hedge accounting treatment but result in ineffectiveness and (2) the accounting for goodwill and acquired intangible assets. The following table reflects aggregate adjustments associated with these areas.

 

     Three Months Ended
September 30,
    Nine Months Ended
September 30,
 

(Dollars in millions)

     2013         2012         2013         2012    

“Core Earnings” adjustments to GAAP:

        

Net impact of derivative accounting

   $ (19   $ (140   $ 234      $ (324

Net impact of goodwill and acquired intangible assets

     (4     (5     (10     (13

Net income tax effect

     12        56        (89     125   

Net effect from discontinued operations

                   (1     (1
  

 

 

   

 

 

   

 

 

   

 

 

 

Total “Core Earnings” adjustments to GAAP

   $ (11   $ (89   $ 134      $ (213
  

 

 

   

 

 

   

 

 

   

 

 

 

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

The accounting for derivatives requires that changes in the fair value of derivative instruments be recognized currently in earnings, with no fair value adjustment of the hedged item, unless specific hedge accounting criteria are met. We believe that our derivatives are effective economic hedges, and as such, are a critical element of our interest rate and foreign currency risk management strategy. However, some of our derivatives, primarily Floor Income Contracts and certain basis swaps, do not qualify for hedge accounting treatment and the stand-alone derivative must be marked-to-market in the income statement with no consideration for the corresponding change in fair value of the hedged item. These gains and losses recorded in “Gains (losses) on derivative and hedging activities, net” are primarily caused by interest rate and foreign currency exchange rate volatility and changing credit spreads during the period as well as the volume and term of derivatives not receiving hedge accounting treatment.

Our Floor Income Contracts are written options that must meet more stringent requirements than other hedging relationships to achieve hedge effectiveness. Specifically, our Floor Income Contracts do not qualify for hedge accounting treatment because the pay down of principal of the student loans underlying the Floor Income embedded in those student loans does not exactly match the change in the notional amount of our written Floor Income Contracts. Additionally, the term, the interest rate index, and the interest rate index reset frequency of the Floor Income Contract can be different than that of the student loans. Under derivative accounting treatment, the upfront payment is deemed a liability and changes in fair value are recorded through income throughout the life of the contract. The change in the value of Floor Income Contracts is primarily caused by changing interest rates that cause the amount of Floor Income earned on the underlying student loans and paid to the counterparties to vary. This is economically offset by the change in value of the student loan portfolio earning Floor Income but that offsetting change in value is not recognized. We believe the Floor Income Contracts are economic hedges because they effectively fix the amount of Floor Income earned over the contract period, thus eliminating the timing and uncertainty that changes in interest rates can have on Floor Income for that period. Therefore, for

 

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Table of Contents

purposes of “Core Earnings,” we have removed the unrealized gains and losses related to these contracts and added back the amortization of the net premiums received on the Floor Income Contracts. The amortization of the net premiums received on the Floor Income Contracts for “Core Earnings” is reflected in student loan interest income. Under GAAP accounting, the premiums received on the Floor Income Contracts are recorded as revenue in the “losses on derivative and hedging activities, net” line item by the end of the contracts’ lives.

Basis swaps are used to convert floating rate debt from one floating interest rate index to another to better match the interest rate characteristics of the assets financed by that debt. We primarily use basis swaps to hedge our student loan assets that are primarily indexed to LIBOR, Prime or Treasury bill index (for $128 billion of our FFELP assets as of April 1, 2012, we elected to change the index from commercial paper to LIBOR). In addition, we use basis swaps to convert debt indexed to the Consumer Price Index to three-month LIBOR debt. The accounting for derivatives requires that when using basis swaps, the change in the cash flows of the hedge effectively offset both the change in the cash flows of the asset and the change in the cash flows of the liability. Our basis swaps hedge variable interest rate risk; however, they generally do not meet this effectiveness test because the index of the swap does not exactly match the index of the hedged assets as required for hedge accounting treatment. Additionally, some of our FFELP Loans can earn at either a variable or a fixed interest rate depending on market interest rates and therefore swaps economically hedging these FFELP Loans do not meet the criteria for hedge accounting treatment. As a result, under GAAP, these swaps are recorded at fair value with changes in fair value reflected currently in the income statement.

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

 

     Three Months Ended
September 30,
    Nine Months Ended
September 30,
 

(Dollars in millions)

     2013         2012         2013         2012    

“Core Earnings” derivative adjustments:

        

Gains (losses) on derivative and hedging activities, net, included in other income

   $ (127   $ (233   $ (140   $ (600

Plus: Realized losses on derivative and hedging activities, net(1)

     189        180        562        548   
  

 

 

   

 

 

   

 

 

   

 

 

 

Unrealized gains on derivative and hedging activities, net(2)

     62        (53     422        (52

Amortization of net premiums on Floor Income Contracts in net interest income for “Core Earnings”

     (77     (78     (229     (274

Other derivative accounting adjustments(3)

     (4     (9     41        2   
  

 

 

   

 

 

   

 

 

   

 

 

 

Total net impact of derivative accounting(4)

   $ (19   $ (140   $ 234      $ (324
  

 

 

   

 

 

   

 

 

   

 

 

 

 

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

 

     Three Months Ended
September 30,
    Nine Months Ended
September 30,
 

(Dollars in millions)

     2013         2012         2013         2012    

Floor Income Contracts

   $ 115      $ (12   $ 601      $ 174   

Basis swaps

     5        (7     (13     (55

Foreign currency hedges

     (45     (22     (145     (144

Other

     (13     (12     (21     (27
  

 

 

   

 

 

   

 

 

   

 

 

 

Total unrealized gains on derivative and hedging activities, net

   $ 62      $ (53   $ 422      $ (52
  

 

 

   

 

 

   

 

 

   

 

 

 

 

  (3) 

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

 

  (4) 

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

 

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Table of Contents

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.

 

     Three Months Ended
September 30,
    Nine Months Ended
September 30,
 

(Dollars in millions)

     2013         2012         2013         2012    

Reclassification of realized gains (losses) on derivative and hedging activities:

        

Net settlement expense on Floor Income Contracts reclassified to net interest income

   $ (201   $ (206   $ (612   $ (643

Net settlement income on interest rate swaps reclassified to net interest income

     12        26        44        95   

Net realized gains on terminated derivative contracts reclassified to other income

                   6          
  

 

 

   

 

 

   

 

 

   

 

 

 

Total reclassifications of realized losses on derivative and hedging activities

   $ (189   $ (180   $ (562   $ (548
  

 

 

   

 

 

   

 

 

   

 

 

 

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

As of September 30, 2013, derivative accounting has reduced GAAP equity by approximately $936 million 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.

 

     Three Months Ended
September 30,
    Nine Months Ended
September 30,
 

(Dollars in millions)

       2013              2012         2013      2012  

Beginning impact of derivative accounting on GAAP equity

   $ (923    $ (1,098   $ (1,080    $ (977

Net impact of net unrealized gains (losses) under derivative accounting(1)

     (13      (85     144         (206
  

 

 

    

 

 

   

 

 

    

 

 

 

Ending impact of derivative accounting on GAAP equity

   $ (936    $ (1,183   $ (936    $ (1,183
  

 

 

    

 

 

   

 

 

    

 

 

 

 

  (1) 

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

 

     Three Months Ended
September 30,
     Nine Months Ended
September 30,
 

(Dollars in millions)

     2013          2012          2013          2012    

Total pre-tax net impact of derivative accounting recognized in net income(a)

   $ (19    $ (140    $ 234       $ (324

Tax impact of derivative accounting adjustments recognized in net income

     7         53         (107      112   

Change in unrealized gain (losses) on derivatives, net of tax recognized in other comprehensive income

     (1      2         17         6   
  

 

 

    

 

 

    

 

 

    

 

 

 

Net impact of net unrealized gains (losses) under derivative accounting

   $ (13    $ (85    $ 144       $ (206
  

 

 

    

 

 

    

 

 

    

 

 

 

 

  (a) 

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

 

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Table of Contents

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 September 30, 2013, the remaining amortization term of the net floor premiums was approximately 2.75 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.

 

     September 30,  

(Dollars in millions)

   2013     2012  

Unamortized net Floor premiums (net of tax)

   $ (403   $ (600

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.

 

     Three Months Ended
September 30,
     Nine Months Ended
September 30,
 

(Dollars in millions)

     2013          2012          2013          2012    

“Core Earnings” goodwill and acquired intangible asset adjustments(1)

   $ (4    $ (5    $ (10    $ (13
  

 

 

    

 

 

    

 

 

    

 

 

 

 

  (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.

 

     Three Months Ended
September 30,
    % Increase
(Decrease)
    Nine Months Ended
September 30,
    % Increase
(Decrease)
 

(Dollars in millions)

     2013          2012         2013 vs. 2012           2013             2012           2013 vs. 2012    

“Core Earnings” interest income:

             

Private Education Loans

   $ 635       $ 615        3   $ 1,884      $ 1,856        2

Cash and investments

     1         2        (50     5        6        (17
  

 

 

    

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Total “Core Earnings” interest income

     636         617        3        1,889        1,862        1   

Total “Core Earnings” interest expense

     203         209        (3     613        616          
  

 

 

    

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Net “Core Earnings” interest income

     433         408        6        1,276        1,246        2   

Less: provision for loan losses

     195         252        (23     607        712        (15
  

 

 

    

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Net “Core Earnings” interest income after provision for loan losses

     238         156        53        669        534        25   

Servicing revenue

     11         12        (8     31        36        (14

Direct operating expenses

     85         68        25        228        199        15   

Restructuring and other reorganization expenses

             1        (100     2        3        (33
  

 

 

    

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Total expenses

     85         69        23        230        202        14   
  

 

 

    

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Income from continuing operations, before income tax expense

     164         99        66        470        368        28   

Income tax expense

     59         36        64        171        134        28   
  

 

 

    

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Net income from continuing operations

     105         63        67        299        234        28   

Loss from discontinued operations, net of tax benefit

             (1     (100     (1     (1       
  

 

 

    

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

“Core Earnings”

   $ 105       $ 62        69   $ 298      $ 233        28
  

 

 

    

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

 

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Quarterly core earnings were $105 million, compared with $62 million in the year-ago quarter. The increase is primarily the result of a $57 million decrease in the provision for Private Education Loan losses.

Third-quarter 2013 Private Education Loan portfolio results vs. third-quarter 2012 included:

 

   

Loan originations of $1.5 billion, up 11 percent.

 

   

Delinquencies of 90 days or more of 3.8 percent of loans in repayment, down from 5.3 percent.

 

   

Loans in forbearance of 3.4 percent of loans in repayment and forbearance, up from 3.2 percent.

 

   

Annualized charge-off rate of 2.6 percent of average loans in repayment, down from 3.2 percent.

 

   

Provision for Private Education Loan losses of $195 million, down from $252 million.

 

   

Core net interest margin, before loan loss provision, of 4.24 percent, up from 4.05 percent.

 

   

The portfolio balance, net of loan loss allowance, totaled $37.8 billion, a $651 million increase over the year-ago quarter.

Consumer Lending Net Interest Margin

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

 

     Three Months Ended

September 30,
    Nine Months Ended

September 30,
 
       2013         2012         2013         2012    

“Core Earnings” basis Private Education Loan yield

     6.42     6.35     6.38     6.38

Discount amortization

     .19        .17        .21        .22   
  

 

 

   

 

 

   

 

 

   

 

 

 

“Core Earnings” basis Private Education Loan net yield

     6.61        6.52        6.59        6.60   

“Core Earnings” basis Private Education Loan cost of funds

     (2.01     (2.08     (2.02     (2.05
  

 

 

   

 

 

   

 

 

   

 

 

 

“Core Earnings” basis Private Education Loan spread

     4.60        4.44        4.57        4.55   

“Core Earnings” basis other interest-earning asset spread impact

     (.36     (.39     (.40     (.40
  

 

 

   

 

 

   

 

 

   

 

 

 

“Core Earnings” basis Consumer Lending net interest margin(1)

     4.24     4.05     4.17     4.15
  

 

 

   

 

 

   

 

 

   

 

 

 

 

 

“Core Earnings” basis Consumer Lending net interest margin(1)

     4.24     4.05     4.17     4.15

Adjustment for GAAP accounting treatment(2)

     (.03     (.08     (.04     (.11
  

 

 

   

 

 

   

 

 

   

 

 

 

GAAP basis Consumer Lending net interest margin(1)

     4.21     3.97     4.13     4.04
  

 

 

   

 

 

   

 

 

   

 

 

 

 

  (1) 

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

 

     Three Months Ended

September 30,
     Nine Months Ended

September 30,
 

(Dollars in millions)

   2013      2012      2013      2012  

Private Education Loans

   $ 38,102       $ 37,545       $ 38,220       $ 37,612   

Other interest-earning assets

     2,385         2,436         2,660         2,436   
  

 

 

    

 

 

    

 

 

    

 

 

 

Total Consumer Lending “Core Earnings” basis interest-earning assets

   $ 40,487       $ 39,981       $ 40,880       $ 40,048   
  

 

 

    

 

 

    

 

 

    

 

 

 

 

  (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.

 

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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.

 

     Three Months Ended
September 30,
     Nine Months Ended
September 30,
 

(Dollars in millions)

     2013          2012          2013          2012    

Private Education Loan provision for loan losses

   $ 195       $ 252       $ 607       $ 712   

Private Education Loan charge-offs

     205         250         649         709   

In establishing the allowance for Private Education Loan losses as of September 30, 2013, we considered several factors with respect to our Private Education Loan portfolio. In particular, we continue to see improvement in credit quality and continuing positive delinquency and charge-off trends in connection with this portfolio. Improving credit quality is seen in higher FICO scores and cosigner rates as well as a more seasoned portfolio. Total loans delinquent (as a percentage of loans in repayment) have decreased to 8.8 percent from 10.0 percent in the year-ago quarter. Loans greater than 90 days delinquent (as a percentage of loans in repayment) have decreased to 3.8 percent from 5.3 percent in the year-ago quarter. The charge-off rate decreased to 2.6 percent from 3.2 percent in the year-ago quarter. Loans in forbearance (as a percentage of loans in repayment and forbearance) increased to 3.4 percent from 3.2 percent in the year-ago quarter.

Total loans delinquent, however, increased to 8.8 percent from 7.7 percent in the prior quarter. Our collections and servicing personnel invested significant time this quarter answering customer questions, routing payments and addressing other issues resulting from the transition of our Private Education Loan portfolio to a new loan servicing platform. We are increasing our communication efforts with our customers to ensure a smooth transition. Based on the information we have, we do not believe this increase is indicative of future performance trends of these loans.

Apart from these overall improvements in credit quality, delinquency trends and charge-off trends that had the effect of reducing the provision for loan loss in the third quarter of 2013, Private Education Loans that have defaulted between 2008 and 2012 for which we have previously charged off estimated losses have, to varying degrees, not met our post-default recovery expectations to date and may continue to not do so. Our allowance for loan losses takes into account these potential recovery uncertainties. In the third quarter of 2013 we increased our allowance related to these potential recovery shortfalls by approximately $112 million. See “Financial Condition — Consumer Lending Portfolio Performance — Receivable for Partially Charged-Off Private Education Loans” for further discussion.

The Private Education Loan provision for loan losses was $195 million in the third quarter of 2013, down $57 million from the third quarter of 2012, and $607 million for the first nine months of 2013, down $105 million from the year-ago period. The decline in both periods was a result of the overall improvement in credit quality and performance trends discussed above, leading to decreases in expected future charge-offs. This overall decrease in expected future charge-offs is the net effect of a decrease in expected future defaults less a smaller decrease in what we expect to recover on such defaults.

For a more detailed discussion of our policy for determining the collectability of Private Education Loans and maintaining our allowance for Private Education Loan losses, see 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 increase in operating expenses in the quarter ended September 30, 2013 compared with the year-ago quarter was primarily the result of increased loan marketing activities and collection costs as well as continued investments in technology and an increase in pending

 

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litigation settlement expense. Direct operating expenses as a percentage of revenues (revenues calculated as net interest income after provision plus total other income) were 34 percent and 40 percent in the quarters ended September 30, 2013 and 2012, respectively, and 33 percent and 35 percent in the nine months ended September 30, 2013 and 2012, respectively.

Business Services Segment

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

 

    Three Months Ended
September 30,
    % Increase
(Decrease)
    Nine Months Ended
September 30,
    % Increase
(Decrease)
 

(Dollars in millions)

      2013             2012         2013 vs. 2012         2013             2012         2013 vs. 2012  

Net interest income

  $ 1      $ 2        (50 )%    $ 4      $ 5        (20 )% 

Servicing revenue:

           

Intercompany loan servicing

    123        164        (25     409        512        (20

Third-party loan servicing

    40        26        54        101        74        36   

Guarantor servicing

    10        11        (9     29        33        (12

Other servicing

    1               100        2               100   
 

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Total servicing revenue

    174        201        (13     541        619        (13

Contingency revenue

    104        85        22        312        261        20   

Other Business Services revenue

    6        7        (14     20        25        (20
 

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Total other income

    284        293        (3     873        905        (4

Direct operating expenses

    103        88        17        299        269        11   

Restructuring and other reorganization expenses

                         1        2        (50
 

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Total expenses

    103        88        17        300        271        11   
 

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Income from continuing operations, before income tax expense

    182        207        (12     577        639        (10

Income tax expense

    66        76        (13     211        234        (10
 

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Net income from continuing operations

    116        131        (11     366        405        (10

Income from discontinued operations, net of tax expense

    8        1        700        49               100   
 

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

“Core Earnings”

    124        132        (6     415        405        2   

Less: net loss attributable to noncontrolling interest

           (1     (100     (1     (2     (50
 

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

“Core Earnings” attributable to SLM Corporation

  $ 124      $ 133        (7 )%    $ 416      $ 407        2
 

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

“Core Earnings” were $124 million in the third quarter of 2013, compared with $133 million in the year-ago quarter. The decrease was primarily the result of a lower outstanding principal balance in the underlying FFELP portfolio serviced.

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 $106 billion and $129 billion for the quarters ended September 30, 2013 and 2012, respectively, and $115 billion and $132 billion for the nine months ended September 30, 2013 and 2012, respectively. The decline in average balance of FFELP loans outstanding along with the related intercompany loan servicing revenue from the year-ago period is primarily the result of normal amortization of the portfolio as well as the sale of approximately $12 billion of securitized FFELP loans in the first half of 2013.

 

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We are servicing approximately 5.7 million accounts under the ED Servicing Contract as of September 30, 2013, compared with 5.2 million and 4.1 million accounts serviced at June 30, 2013 and September 30, 2012, respectively. Third-party loan servicing fees in the quarters ended September 30, 2013 and 2012 included $29 million and $23 million, respectively, of servicing revenue related to the ED Servicing Contract. The increase in ED loan servicing fees for both the quarter and nine-month periods was driven by the increase in the number of accounts serviced.

Third-party loan servicing income increased $14 million from the year-ago quarter and $27 million for the first nine months compared with the prior-year period primarily due to the increase in ED servicing revenue (discussed above) as well as a result of the sale of Residual Interests in FFELP Loan securitization trusts in 2013. (See “FFELP Loans Segment” for further discussion.) When we sold the Residual Interests, we retained the right to service the loans in the trusts. As such, servicing income that had previously been recorded as intercompany loan servicing is now recognized as third-party loan servicing income.

At September 30, 2013, we serviced approximately $301 billion principal balance of student loans compared with approximately $252 billion serviced at December 31, 2012. The increase in the principal balance serviced in 2013 was primarily due to the growth in the ED serviced accounts discussed above.

Our contingency revenue consists of fees we receive for collections of delinquent debt on behalf of third-party clients performed on a contingent basis. Contingency revenue increased $19 million in the current quarter compared with the year-ago quarter and $51 million for the first nine months of 2013 compared with the prior-year period 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)

   September 30,
2013
     December 31,
2012
     September 30,
2012
 

Contingent collections receivables:

        

Student loans

   $ 12,852       $ 13,189       $ 11,866   

Other

     2,357         2,139         2,018   
  

 

 

    

 

 

    

 

 

 

Total

   $ 15,209       $ 15,328       $ 13,884   
  

 

 

    

 

 

    

 

 

 

In the second quarter of 2013, we sold our Campus Solutions business and recorded an after-tax gain of $38 million. The results related to this business for all periods presented have been reclassified as discontinued operations and are shown on an after-tax basis. In addition, on September 25, 2013, we announced the sale of our 529 college savings plan administration business. This sale is expected to close in the fourth quarter of 2013, at which time we expect to recognize a gain of $0.14 per diluted share. As a result of this pending sale, the results of this business were moved to discontinued operations for all periods presented.

Revenues related to services performed on FFELP Loans accounted for 76 percent and 82 percent, respectively, of total segment revenues for the quarters ended September 30, 2013 and 2012 and 78 percent and 82 percent, respectively, of total segment revenues for the nine months ended September 30, 2013 and 2012.

Operating Expenses — Business Services Segment

Operating expenses for our Business Services segment primarily include costs incurred to service our FFELP Loan portfolio, third-party servicing and collection costs, and other operating costs. The increase in operating expenses in the quarter ended September 30, 2013 compared with the year-ago quarter was primarily the result of an increase in our third-party servicing and collection activities as well as continued investments in technology.

 

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FFELP Loans Segment

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

 

     Three Months Ended
September 30,
     % Increase
(Decrease)
    Nine Months Ended
September 30,
     % Increase
(Decrease)
 

(Dollars in millions)

       2013              2012            2013 vs. 2012           2013              2012            2013 vs. 2012    

“Core Earnings” interest income:

                

FFELP Loans

   $ 574       $ 712         (19 )%    $ 1,755       $ 2,090         (16 )% 

Cash and investments

     2         3         (33     5         10         (50
  

 

 

    

 

 

    

 

 

   

 

 

    

 

 

    

 

 

 

Total “Core Earnings” interest income

     576         715         (19     1,760         2,100         (16

Total “Core Earnings” interest expense

     313         399         (22     978         1,233         (21
  

 

 

    

 

 

    

 

 

   

 

 

    

 

 

    

 

 

 

Net “Core Earnings” interest income

     263         316         (17     782         867         (10

Less: provision for loan losses

     12         18         (33     42         54         (22
  

 

 

    

 

 

    

 

 

   

 

 

    

 

 

    

 

 

 

Net “Core Earnings” interest income after provision for loan losses

     251         298         (16     740         813         (9

Gains on sales of loans and investments

                           312                100   

Servicing revenue

     21         22         (5     60         68         (12
  

 

 

    

 

 

    

 

 

   

 

 

    

 

 

    

 

 

 

Total other income

     21         22         (5     372         68         447   

Direct operating expenses

     129         171         (25     430         537         (20

Restructuring and other reorganization expenses

                                        
  

 

 

    

 

 

    

 

 

   

 

 

    

 

 

    

 

 

 

Total expenses

     129         171         (25     430         537         (20
  

 

 

    

 

 

    

 

 

   

 

 

    

 

 

    

 

 

 

Income from continuing operations, before income tax expense

     143         149         (4     682         344         98   

Income tax expense

     51         55         (7     249         126         98   
  

 

 

    

 

 

    

 

 

   

 

 

    

 

 

    

 

 

 

“Core Earnings”

   $ 92       $ 94         (2 )%    $ 433       $ 218         99
  

 

 

    

 

 

    

 

 

   

 

 

    

 

 

    

 

 

 

“Core Earnings” from the FFELP Loans segment were $92 million in the third quarter of 2013, compared with $94 million in the year-ago quarter. Key financial measures include:

 

   

Net interest margin of .93 percent in the third quarter of 2013 compared with .92 percent in the year-ago quarter (see “FFELP Loan Net Interest Margin” for a further discussion of this increase).

 

   

The provision for loan losses of $12 million in the third quarter of 2013 decreased from $18 million in the year-ago quarter.

 

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FFELP Loan Net Interest Margin

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

 

     Three Months Ended
September 30,
    Nine Months Ended
September 30,
 
     2013     2012     2013     2012  

“Core Earnings” basis FFELP Loan yield

     2.60     2.65     2.60     2.65

Hedged Floor Income

     .28        .24        .27        .27   

Unhedged Floor Income

     .10        .13        .09        .10   

Consolidation Loan Rebate Fees

     (.64     (.66     (.66     (.66

Repayment Borrower Benefits

     (.11     (.11     (.11     (.12

Premium amortization

     (.11     (.07     (.14     (.16
  

 

 

   

 

 

   

 

 

   

 

 

 

“Core Earnings” basis FFELP Loan net yield

     2.12        2.18        2.05        2.08   

“Core Earnings” basis FFELP Loan cost of funds

     (1.09     (1.13     (1.07     (1.15
  

 

 

   

 

 

   

 

 

   

 

 

 

“Core Earnings” basis FFELP Loan spread

     1.03        1.05        .98        .93   

“Core Earnings” basis other interest-earning asset spread impact

     (.10     (.13     (.11     (.11
  

 

 

   

 

 

   

 

 

   

 

 

 

“Core Earnings” basis FFELP Loan net interest margin(1)

     .93     .92     .87     .82
  

 

 

   

 

 

   

 

 

   

 

 

 

 

 

“Core Earnings” basis FFELP Loan net interest margin(1)

     .93     .92     .87     .82

Adjustment for GAAP accounting treatment(2)

     .41        .32        .40        .30   
  

 

 

   

 

 

   

 

 

   

 

 

 

GAAP-basis FFELP Loan net interest margin(1)

     1.34     1.24     1.27     1.12
  

 

 

   

 

 

   

 

 

   

 

 

 

 

  (1) 

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

 

     Three Months Ended
September 30,
     Nine Months Ended
September 30,
 

(Dollars in millions)

   2013      2012      2013      2012  

FFELP Loans

   $ 107,483       $ 129,621       $ 114,387       $ 133,887   

Other interest-earning assets

     4,751         7,601         5,187         6,776   
  

 

 

    

 

 

    

 

 

    

 

 

 

Total FFELP “Core Earnings” basis interest-earning assets

   $ 112,234       $ 137,222       $ 119,574       $ 140,663   
  

 

 

    

 

 

    

 

 

    

 

 

 

 

  (2) 

Represents the reclassification of periodic interest accruals on derivative contracts from net interest income to other income, the reversal of the amortization of premiums received on Floor Income Contracts, 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.

As of September 30, 2013, our FFELP Loan portfolio totaled approximately $106.3 billion, comprised of $40.8 billion of FFELP Stafford and $65.5 billion of FFELP Consolidation Loans. The weighted-average life of these portfolios is 4.9 years and 9.4 years, respectively, assuming a Constant Prepayment Rate (“CPR”) of 4 percent and 3 percent, respectively.

 

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Floor Income

The following table analyzes the ability of the FFELP Loans in our portfolio to earn Floor Income after September 30, 2013 and 2012, based on interest rates as of those dates.

 

     September 30, 2013     September 30, 2012  

(Dollars in billions)

   Fixed
Borrower
Rate
    Variable
Borrower
Rate
    Total     Fixed
Borrower
Rate
    Variable
Borrower
Rate
    Total  

Student loans eligible to earn Floor Income

   $ 91.4      $ 13.6      $ 105.0      $ 110.3      $ 15.5      $ 125.8   

Less: post-March 31, 2006 disbursed loans required to rebate Floor Income

     (46.1     (1.0     (47.1     (58.2     (1.1     (59.3

Less: economically hedged Floor Income Contracts

     (31.7            (31.7     (35.2            (35.2
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Student loans eligible to earn Floor Income

   $ 13.6      $ 12.6      $ 26.2      $ 16.9      $ 14.4      $ 31.3   
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Student loans earning Floor Income

   $ 13.5      $ 1.7      $ 15.2      $ 9.3      $ .8      $ 10.1   
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

We have sold Floor Income Contracts to hedge the potential Floor Income from specifically identified pools of FFELP Consolidation Loans that are eligible to earn Floor Income.

The following table presents a projection of the average balance of FFELP Consolidation Loans for which Fixed Rate Floor Income has been economically hedged through Floor Income Contracts for the period October 1, 2013 to June 30, 2016. The hedges related to these loans do not qualify as accounting hedges.

 

(Dollars in billions)

   October 1, 2013 to
December 31, 2013
     2014      2015      2016  

Average balance of FFELP Consolidation Loans whose Floor Income is economically hedged

   $ 31.7       $ 28.3       $ 27.2       $ 10.4   
  

 

 

    

 

 

    

 

 

    

 

 

 

FFELP Loan Provision for Loan Losses and Charge-Offs

The following table summarizes the total FFELP Loan provision for loan losses and charge-offs for the three and nine months September 30, 2013 and 2012.

 

     Three Months Ended
September 30,
     Nine Months Ended
September 30,
 

(Dollars in millions)

   2013      2012      2013      2012  

FFELP Loan provision for loan losses

   $ 12       $ 18       $ 42       $ 54   

FFELP Loan charge-offs

     15         23         57         68   

Gains on Sales of Loans and Investments

The increase in gains on sales of loans and investments for the nine months ended September 30, 2013 from the nine months ended September 30, 2012, was the result of $312 million in gains from the sale of Residual Interests in FFELP Loan securitization trusts in 2013.

We will continue to service the student loans in the trusts that were sold under existing agreements. The sales removed securitization trust assets of $12.5 billion and related liabilities of $12.1 billion from the balance sheet during the nine months ended September 30, 2013.

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

 

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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 $123 million and $164 million for the quarters ended September 30, 2013 and 2012, respectively, and $409 million and $512 million for the nine months ended September 30, 2013 and 2012, respectively. These amounts exceed the actual cost of servicing the loans. Operating expenses were 48 basis points and 53 basis points of average FFELP Loans in the quarters ended September 30, 2013 and 2012, respectively, and 50 basis points and 54 basis points of average FFELP Loans in the nine months ended September 30, 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 Loan portfolio.

Other Segment

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

 

    Three Months Ended
September 30,
    % Increase
(Decrease)
    Nine Months Ended
September 30,
    % Increase
(Decrease)
 

(Dollars in millions)

    2013       2012     2013 vs. 2012       2013         2012       2013 vs. 2012  

Net interest loss after provision for loan losses

  $ (9   $ (8     13   $ (24   $ (13     85

Gains (losses) on sales of loans and investments

                         (5     1        (600

Gains on debt repurchases

           44        (100     48        102        (53

Other

    6        3        100        6        10        (40
 

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Total other income

    6        47        (87     49        113        (57

Direct operating expenses

    4        3        33        9        10        (10

Overhead expenses:

           

Corporate overhead

    27        27               90        89        1   

Unallocated information technology costs

    32        27        19        90        80        13   
 

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Total overhead expenses

    59        54        9        180        169        7   
 

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Total operating expenses

    63        57        11        189        179        6   

Restructuring and other reorganization expenses

    12        1        1,100        43        4        975   
 

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Total expenses

    75        58        29        232        183        27   
 

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Loss before income tax benefit

    (78     (19     311        (207     (83     149   

Income tax benefit

    (28     (7     300        (75     (29     159   
 

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

“Core Earnings” (loss)

  $ (50   $ (12     317   $ (132   $ (54     144
 

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

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 $0 and $230 million face amount of our debt for the quarters ended September 30, 2013 and 2012, respectively and $997 million and $520 million face amount of our debt for the nine months ended September 30, 2013 and 2012, respectively. Debt repurchase activity will fluctuate based on market fundamentals and our liability management strategy.

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

 

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technology costs are related to infrastructure and operations. The increase in overhead for the nine months ended September 30, 2013 compared with the year-ago period was primarily the result of a non-recurring $10 million pension termination gain in the first nine months of 2012.

Restructuring and Other Reorganization Expenses

Restructuring and other reorganization expenses for the quarter ended September 30, 2013 were $12 million compared with $1 million in the year-ago quarter. For the quarter ended September 30, 2013, these consisted of expenses primarily related to third-party costs incurred in connection with the Company’s previously announced plan to separate its existing organization into two, separate, publicly traded companies.

For the nine months ended September 30, 2013, restructuring and other reorganization expenses were $43 million compared with $4 million in the year-ago period. For the nine months ended September 30, 2013, these consisted of $24 million of expenses related to third-party costs incurred in connection with the Company’s previously announced plan to separate its existing organization into two, separate publicly traded companies and $19 million related to severance. The $4 million of expenses in the nine months ended September 30, 2012 was related to restructuring expenses.

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 loan portfolio.

Average Balance Sheets — GAAP

The following table reflects the rates earned on interest-earning assets and paid on interest-bearing liabilities and reflects our net interest margin on a consolidated basis.

 

     Three Months Ended September 30,     Nine Months Ended September 30,  
     2013     2012     2013     2012  

(Dollars in millions)

   Balance      Rate     Balance      Rate     Balance      Rate     Balance      Rate  

Average Assets

                    

FFELP Loans

   $ 107,483         2.58   $ 129,621         2.58   $ 114,387         2.50   $ 133,887         2.45

Private Education Loans

     38,102         6.61        37,545         6.52        38,220         6.59        37,612         6.59   

Other loans

     113         10.39        173         9.20        123         9.77        180         9.40   

Cash and investments

     8,721         .17        11,578         .19        9,327         .18        10,340         .21   
  

 

 

    

 

 

   

 

 

    

 

 

   

 

 

    

 

 

   

 

 

    

 

 

 

Total interest-earning assets

     154,419         3.44     178,917         3.26     162,057         3.34     182,019         3.19
     

 

 

      

 

 

      

 

 

      

 

 

 

Non-interest-earning assets

     4,356           4,842           4,402           4,802      
  

 

 

      

 

 

      

 

 

      

 

 

    

Total assets

   $ 158,775         $ 183,759         $ 166,459         $ 186,821      
  

 

 

      

 

 

      

 

 

      

 

 

    

Average Liabilities and Equity

                    

Short-term borrowings

   $ 16,365         1.01   $ 22,935         .85   $ 17,509         1.01   $ 26,070         .89

Long-term borrowings

     133,542         1.48        152,013         1.56        140,181         1.46        151,865         1.58   
  

 

 

    

 

 

   

 

 

    

 

 

   

 

 

    

 

 

   

 

 

    

 

 

 

Total interest-bearing liabilities

     149,907         1.43     174,948         1.47     157,690         1.41     177,935         1.48
     

 

 

      

 

 

      

 

 

      

 

 

 

Non-interest-bearing liabilities

     3,315           3,938           3,458           3,896      

Equity

     5,553           4,873           5,311           4,990      
  

 

 

      

 

 

      

 

 

      

 

 

    

Total liabilities and equity

   $ 158,775         $ 183,759         $ 166,459         $ 186,821      
  

 

 

      

 

 

      

 

 

      

 

 

    

Net interest margin

        2.05        1.82        1.96        1.74
     

 

 

      

 

 

      

 

 

      

 

 

 

 

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Rate/Volume Analysis — GAAP

The following rate/volume analysis shows the relative contribution of changes in interest rates and asset volumes.

 

     Increase
(Decrease)
    Change Due To(1)  

(Dollars in millions)

     Rate     Volume  

Three Months Ended September 30, 2013 vs. 2012

      

Interest income

   $ (124   $ 81      $ (205

Interest expense

     (104     (15     (89
  

 

 

   

 

 

   

 

 

 

Net interest income

   $ (20   $ 97      $ (117
  

 

 

   

 

 

   

 

 

 

Nine Months Ended September 30, 2013 vs. 2012

      

Interest income

   $ (300   $ 195      $ (495

Interest expense

     (302     (84     (218
  

 

 

   

 

 

   

 

 

 

Net interest income

   $ 2      $ 280      $ (278
  

 

 

   

 

 

   

 

 

 

 

  (1) 

Changes in income and expense due to both rate and volume have been allocated in proportion to the relationship of the absolute dollar amounts of the change in each. The changes in income and expense are calculated independently for each line in the table. The totals for the rate and volume columns are not the sum of the individual lines.

Summary of our Student Loan Portfolio

Ending Student Loan Balances, net

 

     September 30, 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)

   $ 844      $      $ 844      $ 2,540      $ 3,384   

Grace, repayment and other(2)

     39,425        65,153        104,578        36,760        141,338   
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Total, gross

     40,269        65,153        105,422        39,300        144,722   

Unamortized premium/(discount)

     618        440        1,058        (726     332   

Receivable for partially charged-off loans

                          1,322        1,322   

Allowance for loan losses

     (82     (48     (130     (2,144     (2,274
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Total student loan portfolio

   $ 40,805      $ 65,545      $ 106,350      $ 37,752      $ 144,102   
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

% of total FFELP

     38     62     100    

% of total

     28     46     74     26     100

 

     December 31, 2012  

(Dollars in millions)

   FFELP
Stafford and
Other
    FFELP
Consolidation
Loans
    Total
FFELP
Loans
    Private
Education
Loans
    Total
Portfolio
 

Total student loan portfolio:

          

In-school(1)

   $ 1,506      $      $ 1,506      $ 2,194      $ 3,700   

Grace, repayment and other(2)

     42,189        80,640        122,829        36,360        159,189   
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Total, gross

     43,695        80,640        124,335        38,554        162,889   

Unamortized premium/(discount)

     691        745        1,436        (796     640   

Receivable for partially charged-off loans

                          1,347        1,347   

Allowance for loan losses

     (97     (62     (159     (2,171     (2,330
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Total student loan portfolio

   $ 44,289      $ 81,323      $ 125,612      $ 36,934      $ 162,546   
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

% of total FFELP

     35     65     100    

% of total

     27     50     77     23     100

 

(1) 

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

 

(2) 

Includes loans in deferment or forbearance.

 

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Table of Contents

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

 

     Three Months Ended September 30, 2013  

(Dollars in millions)

   FFELP
Stafford and
Other
    FFELP
Consolidation
Loans
    Total
FFELP
Loans
    Private
Education
Loans
    Total
Portfolio
 

Total

   $ 41,445      $ 66,038      $ 107,483      $ 38,102      $ 145,585   

% of FFELP

     39     61     100    

% of total

     29     45     74     26     100

 

     Three Months Ended September 30, 2012  

(Dollars in millions)

   FFELP
Stafford and
Other
    FFELP
Consolidation
Loans
    Total
FFELP
Loans
    Private
Education
Loans
    Total
Portfolio
 

Total

   $ 46,294      $ 83,327      $ 129,621      $ 37,545      $ 167,166   

% of FFELP

     36     64     100    

% of total

     28     50     78     22     100

 

     Nine Months Ended September 30, 2013  

(Dollars in millions)

   FFELP
Stafford and
Other
    FFELP
Consolidation
Loans
    Total
FFELP
Loans
    Private
Education
Loans
    Total
Portfolio
 

Total

   $ 42,552      $ 71,835      $ 114,387      $ 38,220      $ 152,607   

% of FFELP

     37     63     100    

% of total

     28     47     75     25     100

 

     Nine Months Ended September 30, 2012  

(Dollars in millions)

   FFELP
Stafford and
Other
    FFELP
Consolidation
Loans
    Total
FFELP
Loans
    Private
Education
Loans
    Total
Portfolio
 

Total

   $ 48,526      $ 85,361      $ 133,887      $ 37,612      $ 171,499   

% of FFELP

     36     64     100    

% of total

     28     50     78     22     100

 

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Table of Contents

Student Loan Activity

 

     Three Months Ended September 30, 2013  

(Dollars in millions)

   FFELP
Stafford and
Other
    FFELP
Consolidation
Loans
    Total
FFELP
Loans
    Total Private
Education
Loans
    Total
Portfolio
 

Beginning balance

   $ 41,874      $ 66,617      $ 108,491      $ 37,116      $ 145,607   

Acquisitions and originations

     57        54        111        1,498        1,609   

Capitalized interest and premium/discount amortization

     294        277        571        112        683   

Consolidations to third parties

     (382     (254     (636     (19     (655

Sales

                                   

Repayments and other

     (1,038     (1,149     (2,187     (955     (3,142
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Ending balance

   $ 40,805      $ 65,545      $ 106,350      $ 37,752      $ 144,102   
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

 

     Three Months Ended September 30, 2012  

(Dollars in millions)

   FFELP
Stafford and
Other
    FFELP
Consolidation
Loans
    Total
FFELP
Loans
    Total Private
Education
Loans
    Total
Portfolio
 

Beginning balance

   $ 48,113      $ 84,720      $ 132,833      $ 36,454      $ 169,287   

Acquisitions and originations

     225        63        288        1,384        1,672   

Capitalized interest and premium/discount amortization

     335        371        706        193        899   

Consolidations to third parties

     (2,071     (1,276     (3,347     (13     (3,360

Sales

     (144            (144            (144

Repayments and other

     (1,180     (1,409     (2,589     (917     (3,506
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Ending balance

   $ 45,278      $ 82,469      $ 127,747      $ 37,101      $ 164,848   
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

 

     Nine Months Ended September 30, 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

     215        181        396        3,293        3,689   

Capitalized interest and premium/discount amortization

     874        862        1,736        522        2,258   

Consolidations to third parties

     (1,205     (764     (1,969     (68     (2,037

Sales(1)

     (102     (12,147     (12,249            (12,249

Repayments and other

     (3,266     (3,910     (7,176     (2,929     (10,105
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Ending balance

   $ 40,805      $ 65,545      $ 106,350      $ 37,752      $ 144,102   
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

 

     Nine Months Ended September 30, 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

     2,375        636        3,011        2,876        5,887   

Capitalized interest and premium/discount amortization

     980        1,118        2,098        701        2,799   

Consolidations to third parties

     (4,501     (2,536     (7,037     (55     (7,092

Sales

     (428            (428            (428

Repayments and other

     (3,588     (4,439     (8,027     (2,711     (10,738
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Ending balance

   $ 45,278      $ 82,469      $ 127,747      $ 37,101      $ 164,848   
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

 

(1) 

Includes $12.0 billion of student loans in connection with the sale of Residual Interests in FFELP Loan securitization trusts.

 

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Student Loan Allowance for Loan Losses Activity

 

     Three Months Ended September 30,  
     2013     2012  

(Dollars in millions)

   FFELP
Loans
    Private
Education
Loans
    Total
Portfolio
    FFELP
Loans
    Private
Education
Loans
    Total
Portfolio
 

Beginning balance

   $ 133      $ 2,149      $ 2,282      $ 173      $ 2,186      $ 2,359   

Less:

            

Charge-offs(1)

     (15     (205     (220     (23     (250     (273

Student loan sales

                          (2            (2

Plus:

            

Provision for loan losses

     12        195        207        18        252        270   

Reclassification of interest reserve(2)

            5        5               8        8   
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Ending balance

   $ 130      $ 2,144      $ 2,274      $ 166      $ 2,196      $ 2,362   
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Troubled debt restructuring(3)

   $      $ 8,674      $ 8,674      $      $ 6,897      $ 6,897   

 

     Nine Months Ended September 30,  
     2013     2012  

(Dollars in millions)

   FFELP
Loans
    Private
Education
Loans
    Total
Portfolio
    FFELP
Loans
    Private
Education
Loans
    Total
Portfolio
 

Beginning balance

   $ 159      $ 2,171      $ 2,330      $ 187      $ 2,171      $ 2,358   

Less:

            

Charge-offs(1)

     (57     (649     (706     (68     (709     (777

Student loan sales

     (14            (14     (7            (7

Plus:

            

Provision for loan losses

     42        607        649        54        712        766   

Reclassification of interest reserve(2)

            15        15               22        22   
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Ending balance

   $ 130      $ 2,144      $ 2,274      $ 166      $ 2,196      $ 2,362   
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Troubled debt restructuring(3)

   $      $ 8,674      $ 8,674      $      $ 6,897      $ 6,897   

 

(1) 

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

 

(2) 

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

 

(3) 

Represents the recorded investment of loans classified as troubled debt restructuring.

Private Education Loan Originations

The following table summarizes our Private Education Loan originations.

 

     Three Months Ended
September 30,
     Nine Months Ended
September 30,
 

(Dollars in millions)

       2013              2012              2013              2012      

Smart Option — interest only(1)

   $ 361       $ 351       $ 811       $ 809   

Smart Option — fixed pay(1)

     481         428         1,026         845   

Smart Option — deferred(1)

     643         555         1,378         1,108   

Other

     13         15         62         69   
  

 

 

    

 

 

    

 

 

    

 

 

 

Total Private Education Loan originations

   $ 1,498       $ 1,349       $ 3,277       $ 2,831   
  

 

 

    

 

 

    

 

 

    

 

 

 

 

(1) 

Interest only, fixed pay and deferred describe the payment option while in school or in grace period. See “Consumer Lending Portfolio Performance — Private Education Loan Repayment Options” for further discussion.

 

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Table of Contents

Consumer Lending Portfolio Performance

Private Education Loan Delinquencies and Forbearance

The table below presents our Private Education Loan delinquency trends.

 

     Private Education Loan Delinquencies  
     September 30,  
     2013     2012  

(Dollars in millions)

   Balance     %     Balance     %  

Loans in-school/grace/deferment(1)

   $ 6,541        $ 6,800     

Loans in forbearance(2)

     1,108          1,036     

Loans in repayment and percentage of each status:

        

Loans current

     28,856        91.2     27,886        90.0

Loans delinquent 31-60 days(3)

     966        3.0        954        3.1   

Loans delinquent 61-90 days(3)

     641        2.0        504        1.6   

Loans delinquent greater than 90 days(3)

     1,188        3.8        1,628        5.3   
  

 

 

   

 

 

   

 

 

   

 

 

 

Total Private Education Loans in repayment

     31,651        100     30,972        100
  

 

 

   

 

 

   

 

 

   

 

 

 

Total Private Education Loans, gross

     39,300          38,808     

Private Education Loan unamortized discount

     (726       (814  
  

 

 

     

 

 

   

Total Private Education Loans

     38,574          37,994     

Private Education Loan receivable for partially charged-off loans

     1,322          1,303     

Private Education Loan allowance for losses

     (2,144       (2,196  
  

 

 

     

 

 

   

Private Education Loans, net

   $ 37,752        $ 37,101     
  

 

 

     

 

 

   

Percentage of Private Education Loans in repayment

       80.5       79.8
    

 

 

     

 

 

 

Delinquencies as a percentage of Private Education Loans in repayment

       8.8       10.0
    

 

 

     

 

 

 

Loans in forbearance as a percentage of loans in repayment and forbearance

       3.4       3.2
    

 

 

     

 

 

 

Loans in repayment greater than 12 months as a percentage of loans in repayment(4)

       83.2       77.1
    

 

 

     

 

 

 

 

(1) 

Deferment includes customers who have returned to school or are engaged in other permitted educational activities and are not required to make payments on their 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.

 

     Three Months Ended
September 30,
    Nine Months Ended
September 30,
 

(Dollars in millions)

   2013     2012     2013     2012  

Allowance at beginning of period

   $ 2,149      $ 2,186      $ 2,171      $ 2,171   

Provision for Private Education Loan losses

     195        252        607        712   

Charge-offs(1)

     (205     (250     (649     (709

Reclassification of interest reserve(2)

     5        8        15        22   
  

 

 

   

 

 

   

 

 

   

 

 

 

Allowance at end of period

   $ 2,144      $ 2,196      $ 2,144      $ 2,196   
  

 

 

   

 

 

   

 

 

   

 

 

 

Charge-offs as a percentage of average loans in repayment (annualized)

     2.6     3.2     2.7     3.1

Charge-offs as a percentage of average loans in repayment and forbearance (annualized)

     2.5     3.1     2.6     3.0

Allowance as a percentage of ending total loans

     5.3     5.5     5.3     5.5

Allowance as a percentage of ending loans in repayment

     6.8     7.1     6.8     7.1

Average coverage of charge-offs (annualized)

     2.6        2.2        2.5        2.3   

Ending total loans(3)

   $ 40,622      $ 40,111      $ 40,622      $ 40,111   

Average loans in repayment

   $ 31,630      $ 30,816      $ 31,631      $ 30,577   

Ending loans in repayment

   $ 31,651      $ 30,972      $ 31,651      $ 30,972   

 

(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 the detail for our traditional and non-traditional Private Education Loans for the quarters ended.

 

    September 30, 2013     September 30, 2012  

(Dollars in millions)

  Traditional     Non-
Traditional
    Total     Traditional     Non-
Traditional
    Total  

Ending total loans(1)

  $ 37,151      $ 3,471      $ 40,622      $ 36,250      $ 3,861      $ 40,111   

Ending loans in repayment

    29,270        2,381        31,651        28,356        2,616        30,972   

Private Education Loan allowance for losses

    1,611        533        2,144        1,634        562        2,196   

Charge-offs as a percentage of average loans in repayment (annualized)

    2.1     8.8     2.6     2.6     10.5     3.2

Allowance as a percentage of ending total loan balance

    4.3     15.4     5.3     4.5     14.6     5.5

Allowance as a percentage of ending loans in repayment

    5.5     22.4     6.8     5.8     21.5     7.1

Average coverage of charge-offs (annualized)

    2.7        2.5        2.6        2.3        2.0        2.2   

Delinquencies as a percentage of Private Education Loans in repayment

    7.7     22.7     8.8     8.6     25.1     10.0

Delinquencies greater than 90 days as a percentage of Private Education Loans in repayment

    3.2     11.1     3.8     4.4     14.6     5.3

Loans in forbearance as a percentage of loans in repayment and forbearance

    3.2     5.4     3.4     3.1     5.0     3.2

Loans that entered repayment during the period(2)

  $ 1,009      $ 13      $ 1,022      $ 884      $ 23      $ 907   

Percentage of Private Education Loans with a cosigner

    70     31     67     67     30     64

Average FICO at origination

    729        625        722        727        624        719   

 

(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 2012 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 $329 million and $187 million in allowance for Private Education Loan losses at September 30, 2013 and 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.

 

     Three Months Ended
September 30,
    Nine Months Ended
September 30,
 

(Dollars in millions)

       2013             2012             2013             2012      

Receivable at beginning of period

   $ 1,334      $ 1,277      $ 1,347      $ 1,241   

Expected future recoveries of current period defaults(1)

     68        86        216        237   

Recoveries(2)

     (55     (45     (177     (139

Charge-offs(3)

     (25     (15     (64     (36
  

 

 

   

 

 

   

 

 

   

 

 

 

Receivable at end of period

     1,322        1,303        1,322        1,303   

Allowance for estimated recovery shortfalls(4)

     (329     (187     (329     (187
  

 

 

   

 

 

   

 

 

   

 

 

 

Net receivable at end of period

   $ 993      $ 1,116      $ 993      $ 1,116   
  

 

 

   

 

 

   

 

 

   

 

 

 

 

(1) 

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

 

(2) 

Current period cash collections.

 

(3) 

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

 

(4) 

The allowance for estimated recovery shortfalls of the receivable for partially charged-off Private Education Loans is a component of the $2.1 billion and $2.2 billion overall allowance for Private Education Loan losses as of September 30, 2013 and 2012, respectively.

Use of Forbearance as a Private Education Loan Collection Tool

Forbearance involves granting the customer a temporary cessation of payments (or temporary acceptance of smaller than scheduled payments) for a specified period of time. Using forbearance extends the original term of the loan. Forbearance does not grant any reduction in the total repayment obligation (principal or interest). While in forbearance status, interest continues to accrue and is capitalized to principal when the loan re-enters repayment status. Our forbearance policies include limits on the number of forbearance months granted consecutively and the total number of forbearance months granted over the life of the loan. In some instances, we require good-faith payments before granting forbearance. Exceptions to forbearance policies are permitted when such exceptions are judged to increase the likelihood of collection of the loan. Forbearance as a collection tool is used most effectively when applied based on a customer’s unique situation, including historical information and judgments. We leverage updated customer information and other decision support tools to best determine who will be granted forbearance based on our expectations as to a customer’s ability and willingness to repay their obligation. This strategy is aimed at mitigating the overall risk of the portfolio as well as encouraging cash resolution of delinquent loans.

Forbearance may be granted to customers who are exiting their grace period to provide additional time to obtain employment and income to support their obligations, or to current customers who are faced with a hardship and request forbearance time to provide temporary payment relief. In these circumstances, a customer’s loan is placed into a forbearance status in limited monthly increments and is reflected in the forbearance status at month-end during this time. At the end of their granted forbearance period, the customer will enter repayment status as current and is expected to begin making their scheduled monthly payments on a go-forward basis.

Forbearance may also be granted to customers who are delinquent in their payments. In these circumstances, the forbearance cures the delinquency and the customer is returned to a current repayment status. In more limited instances, delinquent customers will also be granted additional forbearance time.

The table below reflects the historical effectiveness of using forbearance. Our experience has shown that three years after being granted forbearance for the first time, 66 percent of the loans are current, paid in full, or receiving an in-school grace or deferment, and 20 percent have defaulted. The default experience associated with loans which utilize forbearance is considered in our allowance for loan losses. The number of loans in a forbearance status as a percentage of loans in repayment and forbearance increased to 3.4 percent in the third quarter of 2013 compared

 

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with 3.2 percent in the year-ago quarter. As of September 30, 2013, one 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 September 30, 2013 (customers made payments on approximately 29 percent of these loans as a prerequisite to being granted forbearance).

 

Tracking by First Time in Forbearance Compared to All Loans Entering Repayment —

Portfolio data through September 30, 2013

 
    Status distribution
36 months after
being granted
forbearance
for the first time
    Status distribution
36 months after
entering repayment
(all loans)
    Status distribution
36 months after
entering repayment for
loans never entering
forbearance
 

In-school/grace/deferment

    9.6     9.0     5.4

Current

    51.0        59.5        67.3   

Delinquent 31-60 days

    3.1        2.0        0.4   

Delinquent 61-90 days

    1.9        1.1        0.1   

Delinquent greater than 90 days

    4.7        2.7        0.3   

Forbearance

    3.9        3.0          

Defaulted

    20.2        11.5        7.5   

Paid

    5.6        11.2        19.0   
 

 

 

   

 

 

   

 

 

 

Total

    100     100     100
 

 

 

   

 

 

   

 

 

 

The tables below show the composition and status of the Private Education Loan portfolio aged by number of months in active repayment status (months for which a scheduled monthly payment was due). As indicated in the tables, the percentage of loans in forbearance status decreases the longer the loans have been in active repayment status. At September 30, 2013, loans in forbearance status as a percentage of loans in repayment and forbearance were 6.2 percent for loans that have been in active repayment status for less than 25 months. The percentage drops to 1.4 percent for loans that have been in active repayment status for more than 48 months. Approximately 65 percent of our Private Education Loans in forbearance status has been in active repayment status less than 25 months.

 

(Dollars in millions)

 

September 30, 2013

  Monthly Scheduled Payments Due     Not Yet in
Repayment
    Total  
  0 to 12     13 to 24     25 to 36     37 to 48     More than 48      

Loans in-school/grace/deferment

  $      $      $      $      $      $ 6,541      $ 6,541   

Loans in forbearance

    529        187        157        97        138               1,108   

Loans in repayment — current

    4,482        4,987        5,568        4,424        9,395               28,856   

Loans in repayment — delinquent 31-60 days

    247        193        180        134        212               966   

Loans in repayment — delinquent 61-90 days

    214        131        109        77        110               641   

Loans in repayment — delinquent greater than 90 days

    383        267        213        139        186               1,188   
 

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Total

  $ 5,855      $ 5,765      $ 6,227      $ 4,871      $ 10,041      $ 6,541        39,300   
 

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

Unamortized discount

                (726

Receivable for partially charged-off loans

                1,322   

Allowance for loan losses

                (2,144
             

 

 

 

Total Private Education Loans, net

              $ 37,752   
             

 

 

 

Loans in forbearance as a percentage of loans in repayment and forbearance

    9.0     3.2     2.5     2.0     1.4         3.4
 

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

 

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(Dollars in millions)

 

September 30, 2012

  Monthly Scheduled Payments Due     Not Yet in
Repayment
    Total  
  1 to 12     13 to 24     25 to 36     37 to 48     More than 48      

Loans in-school/grace/deferment

  $      $      $      $      $      $ 6,800      $ 6,800   

Loans in forbearance

    588        169        122        65        92               1,036   

Loans in repayment — current

    5,697        6,078        5,115        3,913        7,083               27,886   

Loans in repayment — delinquent 31-60 days

    341        198        165        104        146               954   

Loans in repayment — delinquent 61-90 days

    221        94        80        46        63               504   

Loans in repayment — delinquent greater than 90 days

    841        306        221        116        144               1,628   
 

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Total

  $ 7,688      $ 6,845      $ 5,703      $ 4,244      $ 7,528      $ 6,800        38,808   
 

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

Unamortized discount

                (814

Receivable for partially charged-off loans

                1,303   

Allowance for loan losses

                (2,196
             

 

 

 

Total Private Education Loans, net

              $ 37,101   
             

 

 

 

Loans in forbearance as a percentage of loans in repayment and forbearance

    7.7     2.5     2.1     1.5     1.2         3.2
 

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

The table below stratifies the portfolio of Private Education Loans in forbearance by the cumulative number of months the customer has used forbearance as of the dates indicated. As detailed in the table below, 6 percent of loans currently in forbearance have cumulative forbearance of more than 24 months.

 

     September 30, 2013     September 30, 2012  

(Dollars in millions)

   Forbearance
Balance
     % of
Total
    Forbearance
Balance
     % of
Total
 

Cumulative number of months customer has used forbearance

          

Up to 12 months

   $ 838         76   $ 796         77

13 to 24 months

     202         18        180         17   

More than 24 months

     68         6        60         6   
  

 

 

    

 

 

   

 

 

    

 

 

 

Total

   $ 1,108         100   $ 1,036         100
  

 

 

    

 

 

   

 

 

    

 

 

 

Private Education Loan Repayment Options

Certain loan programs allow customers to select from a variety of repayment options depending on their loan type and their enrollment/loan status, which include the ability to extend their repayment term or change their monthly payment. The chart below provides the optional repayment offerings in addition to the standard level principal and interest payments as of September 30, 2013.

 

    Loan Program  

(Dollars in millions)

  Signature and
Other
    Smart Option     Career
Training
    Total  

$ in repayment

    $ 23,090        $ 7,278        $ 1,283        $31,651   

$ in total

    27,838        10,127        1,335        39,300   

Payment method by enrollment status:

       

In-school/grace

    Deferred(1)       

 
 

Deferred(1),

interest-only or fixed
$25/month

  

  
  

   

 

Interest-only or fixed

$25/month

  

  

 

Repayment

   

 

Level principal and

interest or graduated

  

  

   

 

Level principal and

interest

  

  

   

 

Level principal and

interest

  

  

 

 

(1) 

“Deferred” includes loans for which no payments are required and interest charges are capitalized into the loan balance.

 

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The graduated repayment program that is part of Signature and Other Loans includes an interest-only payment feature that may be selected at the option of the customer. Customers elect to participate in this program at the time they enter repayment following their grace period. This program is available to customers in repayment, after their grace period, who would like a temporary lower payment from the required principal and interest payment amount. Customers participating in this program pay monthly interest with no amortization of their principal balance for up to 48 payments after entering repayment (dependent on the loan product type). The maturity date of the loan is not extended when a customer participates in this program. As of September 30, 2013 and 2012, customers in repayment owing approximately $5.0 billion (16 percent of loans in repayment) and $6.7 billion (22 percent of loans in repayment), respectively, were enrolled in the interest-only program. Of these amounts, 10 percent and 11 percent were non-traditional loans as of September 30, 2013 and 2012, respectively.

Accrued Interest Receivable

The following table provides information regarding accrued interest receivable on our Private Education Loans. The table also discloses the amount of accrued interest on loans greater than 90 days past due as compared to our allowance for uncollectible interest. The allowance for uncollectible interest exceeds the amount of accrued interest on our 90 days past due portfolio for all periods presented.

 

     Accrued Interest Receivable  

(Dollars in millions)

   Total      Greater Than
90 Days
Past Due
     Allowance for
Uncollectible
Interest
 

September 30, 2013

   $ 1,037       $ 46       $ 67   

December 31, 2012

   $ 904       $ 55       $ 67   

September 30, 2012

   $ 1,015       $ 62       $ 72   

 

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FFELP Loan Portfolio Performance

FFELP Loan Delinquencies and Forbearance

The table below presents our FFELP Loan delinquency trends.

 

     FFELP Loan Delinquencies  
     September 30,  
     2013     2012  

(Dollars in millions)

   Balance     %     Balance     %  

Loans in-school/grace/deferment(1)

   $ 14,613        $ 19,512     

Loans in forbearance(2)

     13,191          16,448     

Loans in repayment and percentage of each status:

        

Loans current

     64,144        82.6     75,085        83.0

Loans delinquent 31-60 days(3)

     3,798        4.9        4,970        5.5   

Loans delinquent 61-90 days(3)

     2,734        3.5        2,546        2.8   

Loans delinquent greater than 90 days(3)

     6,942        9.0        7,880        8.7   
  

 

 

   

 

 

   

 

 

   

 

 

 

Total FFELP Loans in repayment

     77,618        100     90,481        100
  

 

 

   

 

 

   

 

 

   

 

 

 

Total FFELP Loans, gross

     105,422          126,441     

FFELP Loan unamortized premium

     1,058          1,472     
  

 

 

     

 

 

   

Total FFELP Loans

     106,480          127,913     

FFELP Loan allowance for losses

     (130       (166  
  

 

 

     

 

 

   

FFELP Loans, net

   $ 106,350        $ 127,747     
  

 

 

     

 

 

   

Percentage of FFELP Loans in repayment

       73.6       71.6
    

 

 

     

 

 

 

Delinquencies as a percentage of FFELP Loans in repayment

       17.4       17.0
    

 

 

     

 

 

 

FFELP Loans in forbearance as a percentage of loans in repayment and forbearance

       14.5       15.4
    

 

 

     

 

 

 

 

  (1) 

Loans for customers who may still be attending school or engaging in other permitted educational activities and are not required to make payments on the loans, e.g., residency periods for medical students or a grace period for bar exam preparation, as well as loans for customers who have requested extension of grace period during employment transition or who have temporarily ceased making payments due to hardship or other factors.

 

  (2) 

Loans for customers who have used their allowable deferment time or do not qualify for deferment, that need additional time to obtain employment or who have temporarily ceased making payments due to hardship or other factors.

 

  (3) 

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

 

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Allowance for FFELP Loan Losses

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

 

     Three Months Ended
September 30,
    Nine Months Ended
September 30,
 

(Dollars in millions)

   2013     2012     2013     2012  

Allowance at beginning of period

     133        173        159        187   

Provision for FFELP Loan losses

     12        18        42        54   

Charge-offs

     (15     (23     (57     (68

Student loan sales

            (2     (14     (7
  

 

 

   

 

 

   

 

 

   

 

 

 

Allowance at end of period

   $ 130      $ 166      $ 130      $ 166   
  

 

 

   

 

 

   

 

 

   

 

 

 

Charge-offs as a percentage of average loans in repayment (annualized)

     .08     .10     .09     .10

Charge-offs as a percentage of average loans in repayment and forbearance (annualized)

     .06     .08     .08     .08

Allowance as a percentage of ending total loans, gross

     .12     .13     .12     .13

Allowance as a percentage of ending loans in repayment

     .17     .18     .17     .18

Allowance coverage of charge-offs (annualized)

     2.2        1.8        1.7        1.8   

Ending total loans, gross

   $ 105,422      $ 126,441      $ 105,422      $ 126,441   

Average loans in repayment

   $ 78,012      $ 90,898      $ 82,196      $ 92,157   

Ending loans in repayment

   $ 77,618      $ 90,481      $ 77,618      $ 90,481   

Liquidity and Capital Resources

Funding and Liquidity Risk Management

The following “Liquidity and Capital Resources” discussion concentrates on our Consumer Lending and FFELP Loans segments. Our Business Services and Other segments require minimal capital and funding.

We define liquidity risk as the potential inability to meet our obligations when they become due without incurring unacceptable losses, such as the ability to fund liability maturities and deposit withdrawals, or invest in future asset growth and business operations at reasonable market rates, as well as the potential inability to fund Private Education Loan originations. Our three primary liquidity needs include our ongoing ability to meet our funding needs for our businesses throughout market cycles, including during periods of financial stress and to avoid any mismatch between the maturity of assets and liabilities, our ongoing ability to fund originations of Private Education Loans and servicing our indebtedness and bank deposits. To achieve these objectives we analyze and monitor our liquidity needs, maintain excess liquidity and access diverse funding sources including the issuance of unsecured debt, the issuance of secured debt primarily through asset-backed securitizations and/or other financing facilities and through deposits at the Bank.

We define liquidity as cash and high-quality liquid securities that we can use to meet our funding requirements. Our primary liquidity risk relates to our ability to fund new originations and raise replacement funding at a reasonable cost as our unsecured debt and bank deposits mature. In addition, we must continue to obtain funding at reasonable rates to meet our other business obligations and to continue to grow our business. Key risks associated with our liquidity relate to our ability to access the capital markets and bank deposits and access them at reasonable rates. This ability may be affected by our credit ratings, as well as the overall availability of funding sources in the marketplace. In addition, credit ratings may be important to customers or counterparties when we compete in certain markets and when we seek to engage in certain transactions, including over-the-counter derivatives.

Credit ratings and outlooks are opinions subject to ongoing review by the ratings agencies and may change from time to time based on our financial performance, industry dynamics and other factors. Other factors that influence our credit ratings include the ratings agencies’ assessment of the general operating environment, our

 

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relative positions in the markets in which we compete, reputation, liquidity position, the level and volatility of earnings, corporate governance and risk management policies, capital position and capital management practices. A negative change in our credit rating could have a negative effect on our liquidity because it would raise the cost and availability of funding and potentially require additional cash collateral or restrict cash currently held as collateral on existing borrowings or derivative collateral arrangements. It is our objective to improve our credit ratings so that we can continue to efficiently access the capital markets even in difficult economic and market conditions.

We expect to fund our ongoing liquidity needs, including the origination of new Private Education Loans and the repayment of $3.2 billion of senior unsecured notes that mature in the next twelve months, primarily through our current cash and investment portfolio, the issuance of additional bank deposits and unsecured debt, the predictable operating cash flows provided by earnings, the repayment of principal on unencumbered student loan assets and the distributions from our securitization trusts (including servicing fees which are priority payments within the trusts). We may also draw down on our secured FFELP facilities.

Currently, new Private Education Loan originations are initially funded through deposits and subsequently securitized to term. We have $1.2 billion of cash at the Bank as of September 30, 2013 available to fund future originations. We no longer originate FFELP Loans and therefore no longer have liquidity requirements for new FFELP Loan originations, but will continue to opportunistically purchase FFELP Loan portfolios from others.

Sources of Liquidity and Available Capacity

Ending Balances

 

(Dollars in millions)

   September 30, 2013      December 31, 2012  

Sources of primary liquidity:

     

Unrestricted cash and liquid investments:

     

Holding Company and other non-bank subsidiaries

   $ 3,194       $ 2,376   

Sallie Mae Bank(1)

     1,222         1,598   
  

 

 

    

 

 

 

Total unrestricted cash and liquid investments

   $ 4,416       $ 3,974   
  

 

 

    

 

 

 

Unencumbered FFELP Loans

   $ 2,013       $ 1,656   

Average Balances

 

     Three Months Ended
September 30,
     Nine Months Ended
September 30,
 

(Dollars in millions)

   2013      2012      2013      2012  

Sources of primary liquidity:

           

Unrestricted cash and liquid investments:

           

Holding Company and other non-bank subsidiaries

   $ 2,270       $ 2,785       $ 2,445       $ 2,343   

Sallie Mae Bank(1)

     1,375         794         1,432         778   
  

 

 

    

 

 

    

 

 

    

 

 

 

Total unrestricted cash and liquid investments

   $ 3,645       $ 3,579       $ 3,877       $ 3,121   
  

 

 

    

 

 

    

 

 

    

 

 

 

Unencumbered FFELP Loans

   $ 1,932       $ 1,040       $ 1,839       $ 1,132   

 

(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.

Liquidity may also be available under secured credit facilities to the extent we have eligible collateral and capacity available. Maximum borrowing capacity under the FFELP Loan — other facilities will vary and be subject to each agreement’s borrowing conditions, including, among others, facility size, current usage and availability of qualifying collateral from unencumbered FFELP Loans. As of September 30, 2013 and December 31, 2012, the maximum additional capacity under these facilities was $11.2 billion and $11.8 billion, respectively. For the three months ended September 30, 2013 and 2012, the average maximum additional

 

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capacity under these facilities was $11.4 billion and $11.1 billion, respectively. For the nine months ended September 30, 2013 and 2012, the average maximum additional capacity under these facilities was $11.1 billion and $11.3 billion, respectively.

We also hold a number of other unencumbered assets, consisting primarily of Private Education Loans and other assets. Total unencumbered student loans, net, comprised $13.5 billion of our unencumbered assets of which $11.5 billion and $2.0 billion related to Private Education Loans, net and FFELP Loans, net, respectively. At September 30, 2013, we had a total of $22.8 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. The Bank paid no dividends for the three months ended September 30, 2013. For the three months ended September 30, 2012, the Bank paid dividends of $75 million. For the nine months ended September 30, 2013 and 2012, the Bank paid dividends of $120 million and $345 million, respectively.

For further discussion of our various sources of liquidity, such as the FFELP Loan — other facilities, the Bank, our continued access to the ABS market, our Private Education Loans — other facilities and our issuance of unsecured debt, see “Note 6 — Borrowings” in our 2012 Form 10-K.

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

 

(Dollars in billions)

   September 30,
2013
    December 31,
2012
 

Net assets of consolidated variable interest entities (encumbered assets) — FFELP Loans

   $ 5.8      $ 6.6   

Net assets of consolidated variable interest entities (encumbered assets) — Private Education Loans

     6.6        6.6   

Tangible unencumbered assets(1)

     22.8        21.2   

Unsecured borrowings

     (27.1     (26.7

Mark-to-market on unsecured hedged debt(2)

     (1.0     (1.7

Other liabilities, net

     (1.9     (1.4
  

 

 

   

 

 

 

Total tangible equity

   $ 5.2      $ 4.6   
  

 

 

   

 

 

 

 

  (1) 

Excludes goodwill and acquired intangible assets.

 

  (2) 

At September 30, 2013 and December 31, 2012, there were $1.0 billion and $1.4 billion, respectively, of net gains on derivatives hedging this debt in unencumbered assets, which partially offset these losses.

Transactions during the Nine Months Ended September 30, 2013

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

Unsecured Financings:

 

   

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

 

   

September 20, 2013 — issued $1.25 billion senior unsecured bonds.

 

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FFELP ABS Financings:

 

   

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

 

   

April 11, 2013 — issued $1.2 billion FFELP ABS.

 

   

June 20, 2013 — issued $1.2 billion FFELP ABS.

 

   

August 15, 2013 — issued $747 million FFELP ABS.

 

   

September 19, 2013 — issued $996 million FFELP ABS.

Private Education Loan ABS Financings:

 

   

January 31, 2013 — issued $0.3 billion Private Education Loan ABS funding a portfolio of previously issued auction rate securities that we had reacquired.

 

   

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

 

   

May 2, 2013 — issued $1.1 billion Private Education Loan ABS.

 

   

September 26, 2013 — issued $624 million Private Education Loan ABS.

FFELP ABCP Facility

On June 10, 2013, we closed on a new $6.8 billion credit facility that matures in June 2014 to facilitate the term securitization of FFELP Loans. The facility was used in June 2013 to refinance all of the FFELP Loans previously financed through the ED Conduit Program. As a result, we ended our participation in the ED Conduit Program.

Private Education Loan Facility

On July 17, 2013, we closed on a $1.1 billion asset-backed borrowing facility that matures on August 15, 2015. The facility was used to fund the call and redemption of our SLM 2009-D Private Education Loan Trust ABS, which occurred on August 15, 2013.

Shareholder Distributions

In third-quarter 2013, we paid a common stock dividend of $0.15 per share.

In July 2013, we authorized $400 million to be utilized in a new common share repurchase program that does not have an expiration date. There were no share repurchases in the third-quarter 2013.

2013 Sales of FFELP Loan Securitization Trust Residual Interests

On February 13, 2013, we sold the Residual Interest in a FFELP Loan securitization trust to a third party. We will continue to service the student loans in the trust under existing agreements. The sale removed securitization trust assets of $3.82 billion and related liabilities of $3.68 billion from our balance sheet.

On April 11, 2013, we sold the Residual Interest in a FFELP Loan securitization trust to a third party. We will continue to service the student loans in the trust under existing agreements. The sale removed securitization trust assets of $2.03 billion and related liabilities of $1.99 billion from our balance sheet.

On June 13, 2013, we sold the three Residual Interests in FFELP Loan securitization trusts to a third party. We will continue to service the student loans in the trusts under existing agreements. The sale removed securitization trust assets of $6.60 billion and related liabilities of $6.42 billion from our balance sheet.

 

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Counterparty Exposure

Counterparty exposure related to financial instruments arises from the risk that a lending, investment or derivative counterparty will not be able to meet its obligations to us. Risks associated with our lending portfolio are discussed in Item 2 “Management’s Discussion and Analysis of Financial Condition and Results of Operations — Financial Condition — Consumer Lending Portfolio Performance” and “— FFELP Loan Portfolio Performance.”

Our investment portfolio is composed of very short-term securities issued by a diversified group of highly rated issuers, limiting our counterparty exposure. Additionally, our investing activity is governed by Board approved limits on the amount that is allowed to be invested with any one issuer based on the credit rating of the issuer, further minimizing our counterparty exposure. Counterparty credit risk is considered when valuing investments and considering impairment.

Related to derivative transactions, protection against counterparty risk is generally provided by International Swaps and Derivatives Association, Inc. (“ISDA”) Credit Support Annexes (“CSAs”). CSAs require a counterparty to post collateral if a potential default would expose the other party to a loss. All derivative contracts entered into by SLM Corporation and the Bank are covered under such agreements and require collateral to be exchanged based on the net fair value of derivatives with each counterparty. Our securitization trusts require collateral in all cases if the counterparty’s credit rating is withdrawn or downgraded below a certain level. Additionally, securitizations involving foreign currency notes issued after November 2005 also require the counterparty to post collateral to the trust based on the fair value of the derivative, regardless of credit rating. The trusts are not required to post collateral to the counterparties. In all cases, our exposure is limited to the value of the derivative contracts in a gain position net of any collateral we are holding. We consider counterparties’ credit risk when determining the fair value of derivative positions on our exposure net of collateral.

We have liquidity exposure related to collateral movements between us and our derivative counterparties. Movements in the value of the derivatives, which are primarily affected by changes in interest rate and foreign exchange rates, may require us to return cash collateral held or may require us to access primary liquidity to post collateral to counterparties. If our credit ratings are downgraded from current levels, we may be required to segregate additional unrestricted cash collateral into restricted accounts.

The table below highlights exposure related to our derivative counterparties at September 30, 2013.

 

(Dollars in millions)

  SLM Corporation
and Sallie Mae Bank
Contracts
    Securitization Trust
Contracts
 

Exposure, net of collateral(1)

  $ 83      $ 860   

Percent of exposure to counterparties with credit ratings below S&P AA- or Moody’s Aa3

    90     37

Percent of exposure to counterparties with credit ratings below S&P A- or Moody’s A3

    0     0

 

  (1) 

Recent turmoil in the European markets has led to increased disclosure of exposure to those markets. Our securitization trusts had total net exposure of $740 million related to financial institutions located in France; of this amount, $540 million carries a guaranty from the French government. The total exposure relates to $5.7 billion notional amount of cross-currency interest rate swaps held in our securitization trusts, of which $3.4 billion notional amount carries a guaranty from the French government. Counterparties to the cross currency interest rate swaps are required to post collateral when their credit rating is withdrawn or downgraded below a certain level. As of September 30, 2013, no collateral was required to be posted and we are not holding any collateral related to these contracts. Adjustments are made to our derivative valuations for counterparty credit risk. The adjustments made at September 30, 2013 related to derivatives with French financial institutions (including those that carry a guaranty from the French government) decreased the derivative asset value by $90 million. Credit risks for all derivative counterparties are assessed internally on a continual basis.

 

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“Core Earnings” Basis Borrowings

The following tables present the ending balances of our “Core Earnings” basis borrowings at September 30, 2013 and December 31, 2012, and average balances and average interest rates of our “Core Earnings” basis borrowings for the three and nine months ended September 30, 2013 and 2012. The average interest rates include derivatives that are economically hedging the underlying debt but do not qualify for hedge accounting treatment. (See “‘Core Earnings’ — Definition and Limitations — Differences between ‘Core Earnings’ and GAAP — Reclassification of Realized Gains (Losses) on Derivative and Hedging Activities” of this Item 2).

Ending Balances

 

     September 30, 2013      December 31, 2012  

(Dollars in millions)

   Short
Term
     Long
Term
     Total      Short
Term
     Long
Term
     Total  

Unsecured borrowings:

                 

Senior unsecured debt

   $ 3,201       $ 15,509       $ 18,710       $ 2,319       $ 15,446       $ 17,765   

Bank deposits

     5,732         1,896         7,628         4,226         3,088         7,314   

Other(1)

     806                 806         1,609                 1,609   
  

 

 

    

 

 

    

 

 

    

 

 

    

 

 

    

 

 

 

Total unsecured borrowings

     9,739         17,405         27,144         8,154         18,534         26,688   
  

 

 

    

 

 

    

 

 

    

 

 

    

 

 

    

 

 

 

Secured borrowings:

                 

FFELP Loan securitizations

             91,690         91,690                 105,525         105,525   

Private Education Loan securitizations

             19,434         19,434                 19,656         19,656   

FFELP Loan — other facilities

     5,794         5,394         11,188         11,651         4,827         16,478   

Private Education Loan — other facilities

             878         878                 1,070         1,070   
  

 

 

    

 

 

    

 

 

    

 

 

    

 

 

    

 

 

 

Total secured borrowings

     5,794         117,396         123,190         11,651         131,078         142,729   
  

 

 

    

 

 

    

 

 

    

 

 

    

 

 

    

 

 

 

Total before hedge accounting adjustments

     15,533         134,801         150,334         19,805         149,612         169,417   

Hedge accounting adjustments

     39         2,143         2,182         51         2,789         2,840   
  

 

 

    

 

 

    

 

 

    

 

 

    

 

 

    

 

 

 

Total

   $ 15,572       $ 136,944       $ 152,516       $ 19,856       $ 152,401       $ 172,257   
  

 

 

    

 

 

    

 

 

    

 

 

    

 

 

    

 

 

 

 

(1) 

“Other” primarily consists of the obligation to return cash collateral held related to derivative exposures.

Secured borrowings comprised 82 percent and 84 percent of our “Core Earnings” basis debt outstanding at September 30, 2013 and December 31, 2012, respectively.

 

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Average Balances

 

     Three Months Ended September 30,     Nine Months Ended September 30,  
     2013     2012     2013     2012  

(Dollars in millions)

   Average
Balance
     Average
Rate
    Average
Balance
     Average
Rate
    Average
Balance
     Average
Rate
    Average
Balance
     Average
Rate
 

Unsecured borrowings:

                    

Senior unsecured debt

   $ 17,642         3.24   $ 18,342         3.03   $ 17,936         3.21   $ 18,225         2.95

Bank deposits

     7,418         1.11        5,191         1.37        7,471         1.16        5,409         1.49   

Other(1)

     759         .09        1,508         .24        1,108         .16        1,425         .17   
  

 

 

    

 

 

   

 

 

    

 

 

   

 

 

    

 

 

   

 

 

    

 

 

 

Total unsecured borrowings

     25,819         2.53        25,041         2.52        26,515         2.50        25,059         2.47   
  

 

 

    

 

 

   

 

 

    

 

 

   

 

 

    

 

 

   

 

 

    

 

 

 

Secured borrowings:

                    

FFELP Loan securitizations

     91,777         1.00        106,652         1.10        96,949         .98        106,962         1.12   

Private Education Loan securitizations

     19,689         2.00        19,647         2.13        20,001         2.04        19,147         2.11   

FFELP Loan — other facilities

     12,079         1.01        22,030         .98        13,678         1.01        24,646         .97   

Private Education Loan — other facilities

     543         1.37        1,578         1.73        547         1.70        2,121         1.77   
  

 

 

    

 

 

   

 

 

    

 

 

   

 

 

    

 

 

   

 

 

    

 

 

 

Total secured borrowings

     124,088         1.16        149,907         1.22        131,175         1.15        152,876         1.23   
  

 

 

    

 

 

   

 

 

    

 

 

   

 

 

    

 

 

   

 

 

    

 

 

 

Total

   $ 149,907         1.40   $ 174,948         1.41   $ 157,690         1.38   $ 177,935         1.40
  

 

 

    

 

 

   

 

 

    

 

 

   

 

 

    

 

 

   

 

 

    

 

 

 

“Core Earnings” average balance and rate

   $ 149,907         1.40   $ 174,948         1.41   $ 157,690         1.38   $ 177,935         1.40

Adjustment for GAAP accounting treatment

             .03                .06                .03                .08   
  

 

 

    

 

 

   

 

 

    

 

 

   

 

 

    

 

 

   

 

 

    

 

 

 

GAAP basis average balance and rate

   $ 149,907         1.43   $ 174,948         1.47   $ 157,690         1.41   $ 177,935         1.48
  

 

 

    

 

 

   

 

 

    

 

 

   

 

 

    

 

 

   

 

 

    

 

 

 

 

(1) 

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

Critical Accounting Policies and Estimates

Management’s Discussion and Analysis of Financial Condition and Results of Operations addresses our consolidated financial statements, which have been prepared in accordance with GAAP. A discussion of our critical accounting policies, which include allowance for loan losses, premium and discount amortization related to our loan portfolio, fair value measurement, transfers of financial assets and the VIE consolidation model, derivative accounting and goodwill and intangible assets can be found in our 2012 Form 10-K. There were no significant changes to these critical accounting policies during the first nine months of 2013.

 

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Item 3. Quantitative and Qualitative Disclosures about Market Risk

Interest Rate Sensitivity Analysis

Our interest rate risk management seeks to limit the impact of short-term movements in interest rates on our results of operations and financial position. The following tables summarize the potential effect on earnings over the next 12 months and the potential effect on fair values of balance sheet assets and liabilities at September 30, 2013 and December 31, 2012, based upon a sensitivity analysis performed by management assuming a hypothetical increase in market interest rates of 100 basis points and 300 basis points while funding spreads remain constant. Additionally, as it relates to the effect on earnings, a sensitivity analysis was performed assuming the funding index increases 25 basis points while holding the asset index constant, if the funding index is different than the asset index. The earnings sensitivity is applied only to financial assets and liabilities, including hedging instruments that existed at the balance sheet date and does not take into account new assets, liabilities or hedging instruments that may arise over the ensuing twelve months.

 

    As of September 30, 2013     As of September 30, 2012  
    Impact on Annual Earnings If:     Impact on Annual Earnings If:  
    Interest Rates     Funding Indices     Interest Rates     Funding Indices  

(Dollars in millions, except

per share amounts)

  Increase
100 Basis
Points
    Increase
300 Basis
Points
    Increase
25 Basis
Points(1)
    Increase
100 Basis
Points
    Increase
300 Basis
Points
    Increase
25 Basis
Points(1)
 

Effect on Earnings:

           

Change in pre-tax net income before unrealized gains (losses) on derivative and hedging activities

  $ (41   $ 5      $ (244   $ (27   $ 6      $ (313

Unrealized gains (losses) on derivative and hedging activities

    273        446        1        548        952        (6
 

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Increase in net income before taxes

  $ 232      $ 451      $ (243   $ 521      $ 958      $ (319
 

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Increase in diluted earnings per common share

  $ .52      $ 1.01      $ (.55   $ 1.06      $ 1.96      $ (.651
 

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

 

(1) 

If an asset is not funded with the same index/frequency reset of the asset then it is assumed the funding index increases 25 basis points while holding the asset index constant.

 

     At September 30, 2013  
            Interest Rates:  
            Change from
Increase of
100 Basis
Points
    Change from
Increase of
300 Basis
Points
 

(Dollars in millions)

   Fair Value      $     %     $     %  

Effect on Fair Values:

           

Assets

           

FFELP Loans

   $ 105,809       $ (510       $ (1,047     (1 )% 

Private Education Loans

     37,625                                

Other earning assets

     9,612                       (1       

Other assets

     7,855         (340     (4     (604     (8 )% 
  

 

 

    

 

 

   

 

 

   

 

 

   

 

 

 

Total assets gain/(loss)

   $ 160,901       $ (850     (1 )%    $ (1,652     (1 )% 
  

 

 

    

 

 

   

 

 

   

 

 

   

 

 

 

Liabilities

           

Interest-bearing liabilities

   $ 148,690       $ (804     (1 )%    $ (2,239     (2 )% 

Other liabilities

     3,422         (28     (1     595        17   
  

 

 

    

 

 

   

 

 

   

 

 

   

 

 

 

Total liabilities (gain)/loss

   $ 152,112       $ (832     (1 )%    $ (1,644     (1 )% 
  

 

 

    

 

 

   

 

 

   

 

 

   

 

 

 

 

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     At December 31, 2012  
            Interest Rates:  
            Change from
Increase of
100 Basis
Points
    Change from
Increase of
300 Basis
Points
 

(Dollars in millions)

   Fair Value      $     %     $     %  

Effect on Fair Values:

           

Assets

           

FFELP Loans

   $ 125,042       $ (738     (1 )%    $ (1,438     (1 )% 

Private Education Loans

     36,081                                

Other earning assets

     9,994                       (1       

Other assets

     8,721         (560     (6     (1,187     (14 )% 
  

 

 

    

 

 

   

 

 

   

 

 

   

 

 

 

Total assets gain/(loss)

   $ 179,838       $ (1,298     (1 )%    $ (2,626     (1 )% 
  

 

 

    

 

 

   

 

 

   

 

 

   

 

 

 

Liabilities

           

Interest-bearing liabilities

   $ 166,071       $ (829       $ (2,298     (1 )% 

Other liabilities

     3,937         (422     (11     (274     (7
  

 

 

    

 

 

   

 

 

   

 

 

   

 

 

 

Total liabilities (gain)/loss

   $ 170,008       $ (1,251     (1 )%    $ (2,572     (2 )% 
  

 

 

    

 

 

   

 

 

   

 

 

   

 

 

 

A primary objective in our funding is to minimize our sensitivity to changing interest rates by generally funding our floating rate student loan portfolio with floating rate debt. However, due to the ability of some FFELP loans to earn Floor Income, we can have a fixed versus floating mismatch in funding if the student loan earns at the fixed borrower rate and the funding remains floating. In addition, we can have a mismatch in the index (including the frequency of reset) of floating rate debt versus floating rate assets.

During the three months ended September 30, 2013 and 2012, certain FFELP Loans were earning Floor Income and we locked in a portion of that Floor Income through the use of Floor Income contracts. The result of these hedging transactions was to convert a portion of the fixed rate nature of student loans to variable rate, and to fix the relative spread between the student loan asset rate and the variable rate liability.

In the preceding tables, under the scenario where interest rates increase 100 and 300 basis points, the change in pre-tax net income before the unrealized gains (losses) on derivative and hedging activities is primarily due to the impact of (i) our unhedged loans being in a fixed-rate mode due to Floor Income, while being funded with variable debt in low interest rate environments; and (ii) a portion of our variable assets being funded with fixed rate liabilities and equity. Item (i) will generally cause income to decrease when interest rates increase from a low interest rate environment, whereas item (ii) will generally offset this decrease.

Under the scenario in the tables above labeled “Impact on Annual Earnings If: Funding Indices Increase 25 Basis Points,” the main driver of the decrease in pre-tax income before unrealized gains (losses) on derivative and hedging activities in both the September 30, 2013 and September 30, 2012 analyses is the result of one-month LIBOR-indexed FFELP Loans (loans formerly indexed to commercial paper) being funded with three-month LIBOR and other non-discrete indexed liabilities. See “Asset and Liability Funding Gap” of this Item 7A for a further discussion. Increasing the spread between indices will also impact the unrealized gains (losses) on derivative and hedging activities as it relates to basis swaps that hedge the mismatch between the asset and funding indices.

In addition to interest rate risk addressed in the preceding tables, we are also exposed to risks related to foreign currency exchange rates. Foreign currency exchange risk is primarily the result of foreign currency denominated debt issued by us. When we issue foreign denominated corporate unsecured and securitization debt, our policy is to use cross currency interest rate swaps to swap all foreign currency denominated debt payments (fixed and floating) to U.S. dollar LIBOR using a fixed exchange rate. In the tables above, there would be an immaterial impact on earnings if exchange rates were to decrease or increase, due to the terms of the hedging instrument and hedged items

 

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matching. The balance sheet interest bearing liabilities would be affected by a change in exchange rates; however, the change would be materially offset by the cross currency interest rate swaps in other assets or other liabilities. In the current economic environment, volatility in the spread between spot and forward foreign exchange rates has resulted in material mark-to-market impacts to current-period earnings which have not been factored into the above analysis. The earnings impact is noncash, and at maturity of the instruments the cumulative mark-to-market impact will be zero.

Asset and Liability Funding Gap

The tables below present our assets and liabilities (funding) arranged by underlying indices as of September 30, 2013. In the following GAAP presentation, the funding gap only includes derivatives that qualify as effective hedges (those derivatives which are reflected in net interest margin, as opposed to those reflected in the “gains (losses) on derivatives and hedging activities, net” line on the consolidated statements of income). The difference between the asset and the funding is the funding gap for the specified index. This represents our exposure to interest rate risk in the form of basis risk and repricing risk, which is the risk that the different indices may reset at different frequencies or may not move in the same direction or at the same magnitude.

Management analyzes interest rate risk and in doing so includes all derivatives that are economically hedging our debt whether they qualify as effective hedges or not (“Core Earnings” basis). Accordingly, we are also presenting the asset and liability funding gap on a “Core Earnings” basis in the table that follows the GAAP presentation.

GAAP-Basis

 

Index

(Dollars in billions)

   Frequency of
Variable
Resets
   Assets(1)      Funding(2)      Funding
Gap
 

3-month Treasury bill

   weekly    $ 5.6       $       $ 5.6   

Prime

   annual      0.6                 0.6   

Prime

   quarterly      4.1                 4.1   

Prime

   monthly      19.3                 19.3   

Prime

   daily              0.1         (0.1

PLUS Index

   annual      0.4                 0.4   

3-month LIBOR

   daily                        

3-month LIBOR

   quarterly              87.6         (87.6

1-month LIBOR

   monthly      14.1         36.3         (22.2

1-month LIBOR daily

   daily      99.9                 99.9   

CMT/CPI Index

   monthly/quarterly              1.3         (1.3

Non-Discrete reset(3)

   monthly              14.3         (14.3

Non-Discrete reset(4)

   daily/weekly      9.6         4.9         4.7   

Fixed Rate(5)

        8.0         17.1         (9.1
     

 

 

    

 

 

    

 

 

 

Total

      $ 161.6       $ 161.6       $   
     

 

 

    

 

 

    

 

 

 

 

  (1) 

FFELP Loans of $46.9 billion ($42.5 billion LIBOR index and $4.4 billion Treasury bill index) are currently earning a fixed rate of interest as a result of the low interest rate environment.

 

  (2) 

Funding (by index) includes all derivatives that qualify as hedges.

 

  (3) 

Funding consists of auction rate securities and FFELP Loan-other facilities.

 

  (4) 

Assets include restricted and unrestricted cash equivalents and other overnight type instruments. Funding includes retail and other deposits and the obligation to return cash collateral held related to derivatives exposures.

 

  (5) 

Assets include receivables and other assets (including goodwill and acquired intangibles). Funding includes other liabilities and stockholders’ equity (excluding series B Preferred Stock).

 

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The “Funding Gaps” in the above table are primarily interest rate mismatches in short-term indices between our assets and liabilities. We address this issue typically through the use of basis swaps that typically convert quarterly reset three-month LIBOR to other indices that are more correlated to our asset indices. These basis swaps do not qualify as effective hedges and as a result the effect on the funding index is not included in our interest margin and is therefore excluded from the GAAP presentation.

“Core Earnings” Basis

 

Index

(Dollars in billions)

   Frequency of
Variable
Resets
   Assets(1)      Funding(2)      Funding
Gap
 

3-month Treasury bill

   weekly    $ 5.6       $       $ 5.6   

Prime

   annual      0.6                 0.6   

Prime

   quarterly      4.1                 4.1   

Prime

   monthly      19.3         2.5         16.8   

Prime

   daily              0.1         (0.1

PLUS Index

   annual      0.4                 0.4   

3-month LIBOR

   daily                        

3-month LIBOR

   quarterly              71.6         (71.6

1-month LIBOR

   monthly      14.1         48.4         (34.3

1-month LIBOR

   daily      99.9         5.0         94.9   

Non-Discrete reset(3)

   monthly              14.3         (14.3

Non-Discrete reset(4)

   daily/weekly      9.6         4.9         4.7   

Fixed Rate(5)

        5.7         12.5         (6.8
     

 

 

    

 

 

    

 

 

 

Total

      $ 159.3       $ 159.3       $   
     

 

 

    

 

 

    

 

 

 

 

  (1) 

FFELP Loans of $15.2 billion ($13.9 billion LIBOR index and $1.3 billion Treasury bill index) are currently earning a fixed rate of interest as a result of the low interest rate environment.

 

  (2) 

Funding (by index) includes all derivatives that management considers economic hedges of interest rate risk and reflects how we internally manage our interest rate exposure.

 

  (3) 

Funding consists of auction rate securities and FFELP Loan-other facilities.

 

  (4) 

Assets include restricted and unrestricted cash equivalents and other overnight type instruments. Funding includes retail and other deposits and the obligation to return cash collateral held related to derivatives exposures.

 

  (5) 

Assets include receivables and other assets (including goodwill and acquired intangibles). Funding includes other liabilities and stockholders’ equity (excluding series B Preferred Stock).

We use interest rate swaps and other derivatives to achieve our risk management objectives. Our asset liability management strategy is to match assets with debt (in combination with derivatives) that have the same underlying index and reset frequency or, when economical, have interest rate characteristics that we believe are highly correlated. The use of funding with index types and reset frequencies that are different from our assets exposes us to interest rate risk in the form of basis and repricing risk. This could result in our cost of funds not moving in the same direction or with the same magnitude as the yield on our assets. While we believe this risk is low, as all of these indices are short-term with rate movements that are highly correlated over a long period of time, market disruptions (which have occurred in recent years) can lead to a temporary divergence between indices resulting in a negative impact to our earnings.

 

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Weighted Average Life

The following table reflects the weighted average life of our earning assets and liabilities at September 30, 2013.

 

(Averages in Years)

   Weighted Average
Life
 

Earning assets

  

Student loans

     7.5   

Other loans

     7.2   

Cash and investments

     .1   
  

 

 

 

Total earning assets

     7.1   
  

 

 

 

Borrowings

  

Short-term borrowings

     .3   

Long-term borrowings

     6.4   
  

 

 

 

Total borrowings

     5.8   
  

 

 

 

 

Item 4. Controls and Procedures

Disclosure Controls and Procedures

Our management, with the participation of our chief principal executive and principal financial officers, evaluated the effectiveness of our disclosure controls and procedures (as defined in Rules 13a-15(e) and 15d-15(e) under the Securities Exchange Act of 1934, as amended (the “Exchange Act”)) as of September 30, 2013. Based on this evaluation, our chief principal executive and principal financial officers concluded that, as of September 30, 2013, our disclosure controls and procedures were effective to ensure that information required to be disclosed by us in the reports that we file or submit under the Exchange Act is (a) recorded, processed, summarized and reported within the time periods specified in the SEC’s rules and forms and (b) accumulated and communicated to our management, including our chief principal executive and principal financial officers as appropriate, to allow timely decisions regarding required disclosure.

Changes in Internal Control over Financial Reporting

No change in our internal control over financial reporting (as defined in Rules 13a-15(f) and 15d-15(f) under the Exchange Act) occurred during the fiscal quarter ended September 30, 2013 that has materially affected, or is reasonably likely to materially affect, our internal control over financial reporting.

 

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PART II. OTHER INFORMATION

 

Item 1. Legal Proceedings

At the time of this filing, the Bank remains subject to a cease and desist order originally issued in August 2008 by the FDIC and the UDFI. In July 2013, the FDIC notified the Bank that it plans to replace the existing cease and desist order with a new formal enforcement action that will more specifically address certain cited violations of Section 5 of the Federal Trade Commission Act, including with respect to the SCRA, and the ECOA and its implementing regulation, Regulation B, which will likely include civil money penalties and restitution. The Bank has been notified by the UDFI that it does not intend to join the FDIC in issuing the new enforcement action.

With respect to the alleged civil violations of Section 5 of the Federal Trade Commission Act relating to the SCRA, we are also in discussions with the DOJ, as the agency having primary authority for enforcement of SCRA matters, regarding settlement, remediation and a comprehensive restitution plan. In September 2013, we also received a Civil Investigative Demand from the CFPB as part of its separate investigation regarding allegations relating to our existing payment allocation practices and procedures, the same as those previously raised by the FDIC.

We have made and continue to make changes to the Bank’s oversight of significant activities performed outside the Bank by Company affiliates and to our business practices in order to comply with all applicable laws and regulations and the terms of any cease and desist orders, including in connection with our pursuit of a strategic plan to separate our existing organization into two publicly traded companies. We are cooperating fully with the FDIC, DOJ and CFPB in response to their investigations and requests for information and are in active discussions with each with respect to any potential actions to be taken against us. We could be required to, or otherwise determine to, make further changes to the business practices and products of the Bank and our other affiliates to respond to regulatory concerns. At the time of the filing, it is not possible to estimate a range of potential exposure, if any, to amounts that may be payable or costs that must be incurred to comply with the terms of any order.

We and our subsidiaries and affiliates are subject to various claims, lawsuits and other actions that arise in the normal course of business. Most of these matters are claims by borrowers disputing the manner in which their loans have been processed or the accuracy of our reports to credit bureaus. In addition, our collections subsidiaries are routinely named in individual plaintiff or class action lawsuits in which the plaintiffs allege that those subsidiaries have violated a federal or state law in the process of collecting their accounts. We believe that these claims, lawsuits and other actions will not have a material adverse effect on our business, financial condition or results of operations. Finally, from time to time, we and our subsidiaries and affiliates receive information and document requests from state attorneys general, legislative committees and administrative agencies concerning certain business practices. Our practice has been and continues to be to cooperate with these bodies and to be responsive to any such requests.

For a description of these items and other litigation to which we are a party, see our 2012 Form 10-K and subsequent filings with the SEC.

 

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Item 1A. Risk Factors

Readers should carefully consider the following risk factors, in addition to the risk factors disclosed in Item 1A, Risk Factors, of our 2012 Form 10-K.

Our businesses are regulated by various state and federal laws and regulations, and our failure to comply with these laws and regulations may result in significant costs, sanctions, litigation or the loss of insurance and guarantees on affected FFELP Loans.

The Bank is subject to state and FDIC regulation, oversight and regular examination, including by the CFPB. The FDIC and state regulators have the authority to impose fines, penalties or other limitations on the Bank’s operations should they conclude that its operations are not compliant with applicable laws and regulations. At the time of this filing, the Bank is subject to a 2008 cease and desist order issued jointly by the FDIC and the UDFI for weaknesses in its compliance function. Many of these weaknesses have previously been attributed to the Bank’s oversight of significant activities performed outside the Bank by Company affiliates.

At the time of this filing, the Bank remains subject to a cease and desist order originally issued in August 2008 by the FDIC and the UDFI. In July 2013, the FDIC notified the Bank that it plans to replace the existing cease and desist order with a new formal enforcement action that will more specifically address certain cited violations of Section 5 of the Federal Trade Commission Act, including with respect to the SCRA, and the ECOA and its implementing regulation, Regulation B, which will likely include civil money penalties and restitution. The Bank has been notified by the UDFI that it does not intend to join the FDIC in issuing the new enforcement action.

With respect to the alleged civil violations of Section 5 of the Federal Trade Commission Act relating to the SCRA, we are also in discussions with the DOJ, as the agency having primary authority for enforcement of SCRA matters, regarding settlement, remediation and a comprehensive restitution plan. In September 2013, we also received a Civil Investigative Demand from the CFPB as part of its separate investigation regarding allegations relating to our existing payment allocation practices and procedures, the same as those previously raised by the FDIC.

We have made and continue to make changes to the Bank’s oversight of significant activities performed outside the Bank by Company affiliates and to our business practices in order to comply with all applicable laws and regulations and the terms of any cease and desist orders, including in connection with our pursuit of a strategic plan to separate our existing organization into two publicly traded companies. We are cooperating fully with the FDIC, DOJ and CFPB in response to their investigations and requests for information and are in active discussions with each with respect to any potential actions to be taken against us. We could be required to, or otherwise determine to, make further changes to the business practices and products of the Bank and our other affiliates to respond to regulatory concerns. Such changes to the business practices and products of the Bank or our other affiliates in response to current or future regulatory concerns and enforcement, or other action by the above referenced or other regulators, which may include civil money penalties and require restitution to customers, could materially and adversely impact our business, financial condition and results of operations.

The proposed separation of our current business into two, separate, publicly traded entities is contingent upon the satisfaction of a number of conditions, which may not be consummated on the terms or timeline currently contemplated or may not achieve the intended results. Though we are unaware of any applicable requirement that the FDIC, UDFI or CFPB approve of the proposed separation, we can give no assurances that they or other consumer or financial regulators will not affect the timing, manner or terms of the separation.

We are currently pursuing a strategic plan to separate our existing organization into two publicly traded companies, an education loan management company and a consumer banking company. It is expected the separation, if completed, will occur in the first half of 2014. Our ability to timely effect the separation is subject

 

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to several conditions, including, among others, the receipt of a favorable private letter ruling from the Internal Revenue Service and the SEC declaring effective a registration statement relating to the securities of the separated entity. We cannot assure that we will be able to complete the separation in a timely fashion, if at all. For these and other reasons, the separation may not be completed on the terms or timeline contemplated. Further, if the separation is completed, it may not achieve the intended results. Any such difficulties could adversely affect our business, results of operations or financial condition.

The Bank is subject to state and FDIC regulation, oversight and regular examination and it remains subject to a cease and desist order originally issued in 2008 citing weaknesses in its compliance function. Many of these weaknesses have previously been attributed to the Bank’s oversight of significant activities performed outside the Bank by Company affiliates-a condition that we are seeking, in part, to eliminate through the separation of our current business into two companies. There can be no assurance the FDIC, UDFI and CFPB will approve of our efforts to operationalize the Bank and minimize the number of activities performed by Company affiliates or acknowledge these efforts under the existing cease and desist order. Our failure to comply with various laws and regulations or with the terms of the cease and desist order, or any assertion of any such failure that is raised by any regulator could result in litigation expenses, restitution, fines, business sanctions, and limitations on our ability to fund Private Education Loans, which are currently funded by deposits raised by the Bank, or restrictions on the operations of the Bank. Furthermore, the FDIC, UDFI or CFPB could require us to undertake significant changes to the manner in which we currently provide services to the Bank through our affiliates. If we are unable to demonstrate to the FDIC, UDFI and CFPB the benefits of the design and execution of the proposed separation, these changes could come at significant cost and impede or delay our ability to complete the separation of our business in the time or manner we currently estimate. The imposition of fines, penalties or other limitations on the Bank’s business or our ability to complete the separation could materially and adversely impact our business, financial condition and results of operations.

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

As a result of the proposed separation, the rating agencies have taken certain negative ratings actions with regard to the Company, including, in one instance, the lowering of the Company’s senior unsecured long-term credit rating to below investment grade level with negative implications and with respect to certain other rating agencies, placing the senior unsecured long-term credit ratings on negative watch. The Company’s senior unsecured long-term credit rating had already been rated below investment grade level by one agency. There can be no assurance that the Company’s credit ratings will not be reduced further or reduced by other rating agencies at the conclusion of their credit review. There can be no assurance as to the ratings, if any, of the new entities or holding companies if the separation occurs as currently contemplated.

 

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Item 2. Unregistered Sales of Equity Securities and Use of Proceeds

Share Repurchases

The following table provides information relating to our purchase of shares of our common stock in the three months ended September 30, 2013.

 

(In millions, except per share data)

   Total Number
of Shares
Purchased(1)
     Average Price
Paid per
Share
     Total Number of
Shares Purchased
as Part of Publicly
Announced Plans
or Programs(2)
     Approximate Dollar
Value of Shares
That May Yet Be
Purchased Under
Publicly Announced
Plans or
Programs(2)
 

Period:

           

July 1 — July 31, 2013

     .1       $ 24.72               $ 400   

August 1 — August 31, 2013

     .1         24.85                 400   

September 1 — September 30, 2013

     .1         24.89                 400   
  

 

 

    

 

 

    

 

 

    

Total third-quarter 2013

     .3       $ 24.73              
  

 

 

    

 

 

    

 

 

    

 

(1) 

The total number of shares purchased includes: (i) shares purchased under the stock repurchase program discussed below, and (ii) shares of our common stock tendered to us to satisfy the exercise price in connection with cashless exercise of stock options, and tax withholding obligations in connection with exercise of stock options and vesting of restricted stock and restricted stock units.

 

(2) 

In July 2013, our board of directors authorized us to purchase up to $400 million of shares of our common stock.

The closing price of our common stock on the NASDAQ Global Select Market on September 30, 2013 was $24.90.

 

Item 3. Defaults upon Senior Securities

Nothing to report.

 

Item 4. Mine Safety Disclosures

Nothing to report.

 

Item 5. Other Information

Nothing to report.

 

Item 6. Exhibits

The following exhibits are furnished or filed, as applicable:

 

12.1         

Computation of Ratio of Earnings to Fixed Charges and Preferred Stock Dividends

31.1         

Certification Pursuant to Section 302 of the Sarbanes-Oxley Act of 2002

31.2         

Certification Pursuant to Section 302 of the Sarbanes-Oxley Act of 2002

32.1         

Certification Pursuant to 18 U.S.C. Section 1350, as Adopted Pursuant to Section 906 of the Sarbanes-Oxley Act of 2002

32.2         

Certification Pursuant to 18 U.S.C. Section 1350, as Adopted Pursuant to Section 906 of the Sarbanes-Oxley Act of 2002

101.INS      

XBRL Instance Document.

101.SCH     

XBRL Taxonomy Extension Schema Document.

101.CAL     

XBRL Taxonomy Extension Calculation Linkbase Document.

101.DEF     

XBRL Taxonomy Extension Definition Linkbase Document.

101.LAB     

XBRL Taxonomy Extension Label Linkbase Document.

101.PRE     

XBRL Taxonomy Extension Presentation Linkbase Document.

 

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SIGNATURES

Pursuant to the requirements of the Securities Exchange Act of 1934, as amended, the Registrant has duly caused this report to be signed on its behalf by the undersigned hereunto duly authorized.

 

SLM CORPORATION

(Registrant)

By:

 

/s/ JOSEPH A. DEPAULO

  Joseph A. DePaulo
 

Executive Vice President - Banking and Finance

(Principal Financial Officer)

Date: October 28, 2013

 

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