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SLM Corp - Quarter Report: 2013 March (Form 10-Q)

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 March 31, 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 March 31, 2013

Common Stock, $0.20 par value    444,210,360 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

     37   

Item 3.

  

Quantitative and Qualitative Disclosures about Market Risk

     77   

Item 4.

  

Controls and Procedures

     82   

PART II. Other Information

  

Item 1.

  

Legal Proceedings

     83   

Item 1A.

  

Risk Factors

     83   

Item 2.

  

Unregistered Sales of Equity Securities and Use of Proceeds

     83   

Item 3.

  

Defaults Upon Senior Securities

     84   

Item 4.

  

Mine Safety Disclosures

     84   

Item 5.

  

Other Information

     84   

Item 6.

  

Exhibits

     84   

 

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)

 

     March 31,
2013
    December 31,
2012
 

Assets

    

FFELP Loans (net of allowance for losses of $147 and $159, respectively)

   $ 119,195      $ 125,612   

Private Education Loans (net of allowance for losses of $2,170 and $2,171 respectively)

     37,465        36,934   

Investments

    

Available-for-sale

     77        72   

Other

     929        1,010   
  

 

 

   

 

 

 

Total investments

     1,006        1,082   

Cash and cash equivalents

     3,685        3,900   

Restricted cash and investments

     4,828        5,011   

Goodwill and acquired intangible assets, net

     444        448   

Other assets

     7,463        8,273   
  

 

 

   

 

 

 

Total assets

   $ 174,086      $ 181,260   
  

 

 

   

 

 

 

Liabilities

    

Short-term borrowings

   $ 17,254      $ 19,856   

Long-term borrowings

     147,887        152,401   

Other liabilities

     3,791        3,937   
  

 

 

   

 

 

 

Total liabilities

     168,932        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: 540 million and 536 million shares issued, respectively

     108        107   

Additional paid-in capital

     4,291        4,237   

Accumulated other comprehensive loss (net of tax benefit of $2 and $3, respectively)

     (4     (6

Retained earnings

     1,723        1,451   
  

 

 

   

 

 

 

Total SLM Corporation stockholders’ equity before treasury stock

     6,683        6,354   

Less: Common stock held in treasury at cost: 95 million and 83 million shares, respectively

     (1,535     (1,294
  

 

 

   

 

 

 

Total SLM Corporation stockholders’ equity

     5,148        5,060   

Noncontrolling interest

     6        6   
  

 

 

   

 

 

 

Total equity

     5,154        5,066   
  

 

 

   

 

 

 

Total liabilities and equity

   $ 174,086      $ 181,260   
  

 

 

   

 

 

 

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

 

     March 31,
2013
     December 31,
2012
 

FFELP Loans

   $ 114,621       $ 121,059   

Private Education Loans

     26,310         26,072   

Restricted cash and investments

     4,648         4,826   

Other assets

     1,726         2,312   

Short-term borrowings

     7,506         9,551   

Long-term borrowings

     126,697         131,518   
  

 

 

    

 

 

 

Net assets of consolidated variable interest entities

   $ 13,102       $ 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
March 31,
 
       2013         2012    

Interest income:

    

FFELP Loans

   $ 735      $ 842   

Private Education Loans

     623        625   

Other loans

     3        5   

Cash and investments

     5        5   
  

 

 

   

 

 

 

Total interest income

     1,366        1,477   

Total interest expense

     571        666   
  

 

 

   

 

 

 

Net interest income

     795        811   

Less: provisions for loan losses

     241        253   
  

 

 

   

 

 

 

Net interest income after provisions for loan losses

     554        558   
  

 

 

   

 

 

 

Other income (loss):

    

Losses on derivative and hedging activities, net

     (31     (372

Servicing revenue

     96        97   

Contingency revenue

     99        90   

Gains on debt repurchases

     23        37   

Other

     90        40   
  

 

 

   

 

 

 

Total other income (loss)

     277        (108
  

 

 

   

 

 

 

Expenses:

    

Salaries and benefits

     138        127   

Other operating expenses

     132        135   
  

 

 

   

 

 

 

Total operating expenses

     270        262   

Goodwill and acquired intangible assets impairment and amortization expense

     4        5   

Restructuring expenses

            5   
  

 

 

   

 

 

 

Total expenses

     274        272   
  

 

 

   

 

 

 

Income before income tax expense

     557        178   

Income tax expense

     211        67   
  

 

 

   

 

 

 

Net income

     346        111   

Less: net loss attributable to noncontrolling interest

            (1
  

 

 

   

 

 

 

Net income attributable to SLM Corporation

     346        112   

Preferred stock dividends

     5        5   
  

 

 

   

 

 

 

Net income attributable to SLM Corporation common stock

   $ 341      $ 107   
  

 

 

   

 

 

 

Basic earnings per common share attributable to SLM Corporation

   $ .76      $ .21   
  

 

 

   

 

 

 

Average common shares outstanding

     451        503   
  

 

 

   

 

 

 

Diluted earnings per common share attributable to SLM Corporation

   $ .74      $ .21   
  

 

 

   

 

 

 

Average common and common equivalent shares outstanding

     458        510   
  

 

 

   

 

 

 

Dividends per common share attributable to SLM Corporation

   $ .15      $ .125   
  

 

 

   

 

 

 

See accompanying notes to consolidated financial statements.

 

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Table of Contents

SLM CORPORATION

CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME

(In millions)

(Unaudited)

 

     Three Months Ended
March 31,
 
     2013     2012  

Net income

   $ 346      $ 111   

Other comprehensive income (loss):

    

Unrealized gains (losses) on derivatives:

    

Unrealized hedging gains (losses) on derivatives

     1        (2

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

     3        10   
  

 

 

   

 

 

 

Total unrealized gains on derivatives

     4        8   

Unrealized losses on investments

     (1       

Income tax expense

     (1     (3
  

 

 

   

 

 

 

Other comprehensive income, net of tax

     2        5   
  

 

 

   

 

 

 

Comprehensive income

     348        116   

Less: comprehensive loss attributable to noncontrolling interest

            (1
  

 

 

   

 

 

 

Total comprehensive income attributable to SLM Corporation

   $ 348      $ 117   
  

 

 

   

 

 

 

See accompanying notes to consolidated financial statements.

 

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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)

                         112          112        (1     111   

Other comprehensive income, net of tax

                       5            5          5   
                          

 

 

   

 

 

   

 

 

 

Total comprehensive income

                             117        (1     116   

Cash dividends:

                              

Common stock ($0.125 per share)

                         (63       (63       (63

Preferred stock, series A ($0.87 per share)

                         (3       (3       (3

Preferred stock, series B ($0.57 per share)

                         (2       (2       (2

Issuance of common shares

        3,171,484           3,171,484              27              27          27   

Tax benefit related to employee stock-based
compensation plans

                     (3           (3       (3

Stock-based compensation expense

                     22              22          22   

Common stock repurchased

           (16,703,182     (16,703,182                 (268     (268       (268

Shares repurchased related to employee
stock-based compensation plans

           (2,056,977     (2,056,977                 (32     (32       (32
  

 

 

    

 

 

    

 

 

   

 

 

   

 

 

    

 

 

    

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Balance at March 31, 2012

     7,300,000         532,246,806         (39,084,156     493,162,650      $ 565       $ 106       $ 4,182      $ (9   $ 814      $ (620   $ 5,038      $ 7      $ 5,045   
  

 

 

    

 

 

    

 

 

   

 

 

   

 

 

    

 

 

    

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

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

                         346          346          346   

Other comprehensive income, net of tax

                       2            2          2   
                          

 

 

   

 

 

   

 

 

 

Total comprehensive income

                             348          348   

Cash dividends:

                              

Common stock ($0.15 per share)

                         (68       (68       (68

Preferred stock, series A ($0.87 per share)

                         (3       (3       (3

Preferred stock, series B ($0.49 per share)

                         (2       (2       (2

Dividend equivalent units related to
employee stock-based compensation plans

                         (1       (1       (1

Issuance of common shares

        4,157,795           4,157,795           1         33              34          34   

Tax benefit related to employee stock-based
compensation plans

                     2              2          2   

Stock-based compensation expense

                     19              19          19   

Common stock repurchased

           (10,220,804     (10,220,804                 (199     (199       (199

Shares repurchased related to employee stock-based
compensation plans

           (2,324,575     (2,324,575                 (42     (42       (42
  

 

 

    

 

 

    

 

 

   

 

 

   

 

 

    

 

 

    

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Balance at March 31, 2013

     7,300,000         539,665,760         (95,455,400     444,210,360      $ 565       $ 108       $ 4,291      $ (4   $ 1,723      $ (1,535   $ 5,148      $ 6      $ 5,154   
  

 

 

    

 

 

    

 

 

   

 

 

   

 

 

    

 

 

    

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

See accompanying notes to consolidated financial statements.

 

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Table of Contents

SLM CORPORATION

CONSOLIDATED STATEMENTS OF CASH FLOWS

(Dollars in millions)

(Unaudited)

 

     Three Months Ended
March  31,
 
       2013          2012    

Operating activities

     

Net income

   $ 346       $ 111   

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

     

Gains on debt repurchases and loan sales

     (78      (37

Goodwill and acquired intangible assets impairment and amortization expense

     4         5   

Stock-based compensation expense

     19         22   

Unrealized (gains) losses on derivative and hedging activities

     (138      193   

Provisions for loan losses

     241         253   

(Increase) decrease in restricted cash — other

     (3      29   

Decrease in accrued interest receivable

     19         5   

Increase in accrued interest payable

     2         39   

Decrease in other assets

     292         109   

Decrease in other liabilities

     (175      (138
  

 

 

    

 

 

 

Total adjustments

     183         480   
  

 

 

    

 

 

 

Total net cash provided by operating activities

     529         591   
  

 

 

    

 

 

 

Investing activities

     

Student loans acquired and originated

     (1,559      (1,658

Reduction of student loans:

     

Installment payments, claims and other

     3,349         3,391   

Proceeds from sales of student loans

     226         135   

Other investing activities, net

     65         121   

Purchases of available-for-sale securities

     (14      (14

Proceeds from maturities of available-for-sale securities

     9         12   

Purchases of other securities

     (93      (80

Proceeds from maturities of other securities

     94         78   

Decrease (increase) in restricted cash – variable interest entities

     107         (44
  

 

 

    

 

 

 

Total net cash provided by investing activities

     2,184         1,941   
  

 

 

    

 

 

 

Financing activities

     

Borrowings collateralized by loans in trust — issued

     2,588         2,115   

Borrowings collateralized by loans in trust — repaid

     (3,182      (3,817

Asset-backed commercial paper conduits, net

     427         1,728   

ED Conduit Program facility, net

     (2,583      (3,198

Other short-term borrowings issued

             23   

Other short-term borrowings repaid

     (114      (23

Other long-term borrowings issued

     1,489         1,584   

Other long-term borrowings repaid

     (1,319      (454

Other financing activities, net

     (358      (93

Retail and other deposits, net

     396         188   

Common stock repurchased

     (199      (268

Common stock dividends paid

     (68      (63

Preferred stock dividends paid

     (5      (5
  

 

 

    

 

 

 

Net cash used in financing activities

     (2,928      (2,283
  

 

 

    

 

 

 

Net (decrease) increase in cash and cash equivalents

     (215      249   

Cash and cash equivalents at beginning of period

     3,900         2,794   
  

 

 

    

 

 

 

Cash and cash equivalents at end of period

   $ 3,685       $ 3,043   
  

 

 

    

 

 

 

Supplemental disclosures of cash flow information:

     

Cash disbursements made (refunds received) for:

     

Interest

   $ 568       $ 632   
  

 

 

    

 

 

 

Income taxes paid

   $ 15       $ 46   
  

 

 

    

 

 

 

Income taxes received

   $ (1    $ (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

   $ (3,665    $   
  

 

 

    

 

 

 

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

   $       $ 425   
  

 

 

    

 

 

 

Borrowings removed related to sale of Residual Interest in securitization

   $ (3,681    $   
  

 

 

    

 

 

 

See accompanying notes to consolidated financial statements.

 

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Table of Contents

SLM CORPORATION

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

(Information at March 31, 2013 and for the three months ended

March 31, 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 months ended March 31, 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”).

Consolidation

In first-quarter 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. Prior to the sale of the Residual Interest we had consolidated the trust as a VIE because we had met the two criteria for consolidation of a VIE. 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 Interest we are no longer the residual holder, thus we determined we no longer met criterion (2) above and deconsolidated the trust. As a result of this transaction we removed trust assets of $3.8 billion and the related liabilities of $3.7 billion from the balance sheet and recorded a $55 million gain as part of “other income.”

Reclassifications

Certain reclassifications have been made to the balances as of and for the three months ended March 31, 2012 to be consistent with classifications adopted for 2013, and had no effect on net income, total assets, or total liabilities.

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.

 

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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

     Allowance for Loan Losses
 
     Three Months Ended March 31, 2013  

(Dollars in millions)

   FFELP Loans     Private Education
Loans
    Other
Loans
    Total  

Allowance for Loan Losses

        

Beginning balance

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

Total provision

     16        225               241   

Charge-offs(1)

     (22     (232     (5     (259

Student loan sales

     (6                   (6

Reclassification of interest reserve(2)

            6               6   
  

 

 

   

 

 

   

 

 

   

 

 

 

Ending balance

   $ 147      $ 2,170      $ 42      $ 2,359   
  

 

 

   

 

 

   

 

 

   

 

 

 

Allowance:

        

Ending balance: individually evaluated for impairment

   $      $ 1,157      $ 31      $ 1,188   

Ending balance: collectively evaluated for impairment

   $ 147      $ 1,013      $ 11      $ 1,171   

Loans:

        

Ending balance: individually evaluated for impairment

   $      $ 8,018      $ 65      $ 8,083   

Ending balance: collectively evaluated for impairment

   $ 118,058      $ 32,389      $ 106      $ 150,553   

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

     .10     2.97     10.95  

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

     .09     2.87     10.95  

Allowance as a percentage of the ending total loan balance

     .12     5.37     24.55  

Allowance as a percentage of the ending loans in repayment

     .17     6.88     24.55  

Allowance coverage of charge-offs (annualized)

     1.6        2.3        2.1     

Ending total loans(3)

   $ 118,058      $ 40,407      $ 171     

Average loans in repayment

   $ 87,256      $ 31,645      $ 179     

Ending loans in repayment

   $ 85,304      $ 31,533      $ 171     

 

  (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.

 

8


Table of Contents

SLM CORPORATION

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)

 

2. Allowance for Loan Losses (continued)

 

     Allowance for Loan Losses
 
     Three Months Ended March 31, 2012  

(Dollars in millions)

   FFELP Loans     Private Education
Loans
    Other
Loans
    Total  

Allowance for Loan Losses

        

Beginning balance

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

Total provision

     18        235               253   

Charge-offs(1)

     (23     (224     (5     (252

Student loan sales

     (2                   (2

Reclassification of interest reserve(2)

            8               8   
  

 

 

   

 

 

   

 

 

   

 

 

 

Ending balance

   $ 180      $ 2,190      $ 64      $ 2,434   
  

 

 

   

 

 

   

 

 

   

 

 

 

Allowance:

        

Ending balance: individually evaluated for impairment

   $      $ 853      $ 48      $ 901   

Ending balance: collectively evaluated for impairment

   $ 180      $ 1,337      $ 16      $ 1,533   

Loans:

        

Ending balance: individually evaluated for impairment

   $      $ 6,030      $ 88      $ 6,118   

Ending balance: collectively evaluated for impairment

   $ 134,490      $ 33,745      $ 160      $ 168,395   

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

     .10     2.96     7.17  

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

     .08     2.84     7.17  

Allowance as a percentage of the ending total loan balance

     .13     5.51     26.0  

Allowance as a percentage of the ending loans in repayment

     .20     7.24     26.0  

Allowance coverage of charge-offs (annualized)

     2.0        2.4        3.6     

Ending total loans(3)

   $ 134,490      $ 39,775      $ 248     

Average loans in repayment

   $ 93,150      $ 30,378      $ 252     

Ending loans in repayment

   $ 92,224      $ 30,236      $ 248     

 

  (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)

 

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
 
     March 31, 2013     December 31, 2012  

(Dollars in millions)

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

Credit Quality Indicators

          

School Type/FICO Scores:

          

Traditional

   $ 35,947         92   $ 35,347         92

Non-Traditional(1)

     3,121         8        3,207         8   
  

 

 

    

 

 

   

 

 

    

 

 

 

Total

   $ 39,068         100   $ 38,554         100
  

 

 

    

 

 

   

 

 

    

 

 

 

Cosigners:

          

With cosigner

   $ 25,646         66   $ 24,907         65

Without cosigner

     13,422         34        13,647         35   
  

 

 

    

 

 

   

 

 

    

 

 

 

Total

   $ 39,068         100   $ 38,554         100
  

 

 

    

 

 

   

 

 

    

 

 

 

Seasoning(2):

          

1-12 payments

   $ 7,186         19   $ 7,371         19

13-24 payments

     5,834         15        6,137         16   

25-36 payments

     5,908         15        6,037         16   

37-48 payments

     4,838         12        4,780         12   

More than 48 payments

     8,868         23        8,325         22   

Not yet in repayment

     6,434         16        5,904         15   
  

 

 

    

 

 

   

 

 

    

 

 

 

Total

   $ 39,068         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.

 

10


Table of Contents

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  
     March 31,
2013
    December 31,
2012
 

(Dollars in millions)

   Balance     %     Balance     %  

Loans in-school/grace/deferment(1)

   $ 17,324        $ 17,702     

Loans in forbearance(2)

     15,430          15,902     

Loans in repayment and percentage of each status:

        

    Loans current

     71,792        84.2     75,499        83.2

    Loans delinquent 31-60 days(3)

     4,186        4.9        4,710        5.2   

    Loans delinquent 61-90 days(3)

     2,441        2.9        2,788        3.1   

    Loans delinquent greater than 90 days(3)

     6,885        8.0        7,734        8.5   
  

 

 

   

 

 

   

 

 

   

 

 

 

Total FFELP Loans in repayment

     85,304        100     90,731        100
  

 

 

   

 

 

   

 

 

   

 

 

 

Total FFELP Loans, gross

     118,058          124,335     

FFELP Loan unamortized premium

     1,284          1,436     
  

 

 

     

 

 

   

Total FFELP Loans

     119,342          125,771     

FFELP Loan allowance for losses

     (147       (159  
  

 

 

     

 

 

   

FFELP Loans, net

   $ 119,195        $ 125,612     
  

 

 

     

 

 

   

Percentage of FFELP Loans in repayment

       72.3       73.0
    

 

 

     

 

 

 

Delinquencies as a percentage of FFELP Loans in repayment

       15.8       16.8
    

 

 

     

 

 

 

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

       15.3       14.9
    

 

 

     

 

 

 

 

  (1) 

Loans for customers who may still be attending school or engaging in other permitted educational activities and are not yet required to make payments on 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.

 

11


Table of Contents

SLM CORPORATION

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)

 

2. Allowance for Loan Losses (continued)

 

     Private Education Traditional Loan
Delinquencies
 
     March 31,
2013
    December 31,
2012
 

(Dollars in millions)

   Balance     %     Balance     %  

Loans in-school/grace/deferment(1)

   $ 5,959        $ 5,421     

Loans in forbearance(2)

     966          996     

Loans in repayment and percentage of each status:

        

    Loans current

     27,072        93.2     26,597        91.9

    Loans delinquent 31-60 days(3)

     597        2.1        837        2.9   

    Loans delinquent 61-90 days(3)

     393        1.4        375        1.3   

    Loans delinquent greater than 90 days(3)

     960        3.3        1,121        3.9   
  

 

 

   

 

 

   

 

 

   

 

 

 

    Total traditional loans in repayment

     29,022        100     28,930        100
  

 

 

   

 

 

   

 

 

   

 

 

 

Total traditional loans, gross

     35,947          35,347     

Traditional loans unamortized discount

     (691       (713  
  

 

 

     

 

 

   

Total traditional loans

     35,256          34,634     

Traditional loans receivable for partially charged-off loans

     799          797     

Traditional loans allowance for losses

     (1,643       (1,637  
  

 

 

     

 

 

   

Traditional loans, net

   $ 34,412        $ 33,794     
  

 

 

     

 

 

   

Percentage of traditional loans in repayment

       80.7       81.9
    

 

 

     

 

 

 

Delinquencies as a percentage of traditional loans in repayment

       6.7       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 yet 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.

 

12


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SLM CORPORATION

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)

 

2. Allowance for Loan Losses (continued)

 

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

(Dollars in millions)

   Balance     %     Balance     %  

Loans in-school/grace/deferment(1)

   $ 475        $ 483     

Loans in forbearance(2)

     135          140     

Loans in repayment and percentage of each status:

        

    Loans current

     1,997        79.6     1,978        76.5

    Loans delinquent 31-60 days(3)

     134        5.3        175        6.8   

    Loans delinquent 61-90 days(3)

     98        3.9        106        4.1   

    Loans delinquent greater than 90 days(3)

     282        11.2        325        12.6   
  

 

 

   

 

 

   

 

 

   

 

 

 

    Total non-traditional loans in repayment

     2,511        100     2,584        100
  

 

 

   

 

 

   

 

 

   

 

 

 

Total non-traditional loans, gross

     3,121          3,207     

Non-traditional loans unamortized discount

     (81       (83  
  

 

 

     

 

 

   

Total non-traditional loans

     3,040          3,124     

Non-traditional loans receivable for partially charged-off loans

     540          550     

Non-traditional loans allowance for losses

     (527       (534  
  

 

 

     

 

 

   

Non-traditional loans, net

   $ 3,053        $ 3,140     
  

 

 

     

 

 

   

Percentage of non-traditional loans in repayment

       80.4       80.6
    

 

 

     

 

 

 

Delinquencies as a percentage of non-traditional loans in repayment

       20.5       23.4
    

 

 

     

 

 

 

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

       5.1       5.1
    

 

 

     

 

 

 

 

  (1) 

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

 

13


Table of Contents

SLM CORPORATION

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)

 

2. Allowance for Loan Losses (continued)

 

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 $209 million and $151 million in allowance for Private Education Loan losses at March 31, 2013 and 2012, respectively, providing for possible additional future charge-offs related to the receivable for partially charged-off Private Education Loans.

The following table summarizes the activity in the receivable for partially charged-off loans.

 

     Three Months Ended
March 31,
 

(Dollars in millions)

   2013     2012  

Receivable at beginning of period

   $ 1,347      $ 1,241   

Expected future recoveries of current period defaults(1)

     78        69   

Recoveries(2)

     (68     (50

Charge-offs(3)

     (18     (10
  

 

 

   

 

 

 

Receivable at end of period

     1,339        1,250   

Allowance for estimated recovery shortfalls(4)

     (209     (151
  

 

 

   

 

 

 

Net receivable at end of period

   $ 1,130      $ 1,099   
  

 

 

   

 

 

 

 

  (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 $2.2 billion overall allowance for Private Education Loan losses as of March 31, 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

 

14


Table of Contents

SLM CORPORATION

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)

 

2. Allowance for Loan Losses (continued)

 

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. The recorded investment of loans granted a forbearance that were classified as TDRs was $6.8 billion and $6.4 billion at March 31, 2013 and December 31, 2012, respectively. The recorded investment for TDRs from loans granted interest rate reductions or extended repayment plans was $0.9 billion at both March 31, 2013 and December 31, 2012. At March 31, 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 45 percent and 43 percent, respectively.

At March 31, 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
 

March 31, 2013

        

Private Education Loans — Traditional

   $ 6,379       $ 6,460       $ 874   

Private Education Loans — Non-Traditional

     1,335         1,345         283   
  

 

 

    

 

 

    

 

 

 

Total

   $ 7,714       $ 7,805       $ 1,157   
  

 

 

    

 

 

    

 

 

 

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 troubled debt restructuring loans.

 

     Three Months Ended March 31,  
     2013      2012  

(Dollars in millions)

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

Private Education Loans — Traditional

   $ 6,328       $ 96       $ 4,507       $ 73   

Private Education Loans — Non-Traditional

     1,370         27         1,110         25   
  

 

 

    

 

 

    

 

 

    

 

 

 

Total

   $ 7,698       $ 123       $ 5,617       $ 98   
  

 

 

    

 

 

    

 

 

    

 

 

 

 

15


Table of Contents

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 TDR loans that are past due.

 

     TDR Loan Delinquencies  
     March 31, 2013     December 31, 2012  

(Dollars in millions)

   Balance      %     Balance      %  

Loans in deferment(1)

   $ 687         $ 574      

Loans in forbearance(2)

     565           544      

Loans in repayment and percentage of each status:

          

Loans current

     5,073         77.4     4,619         73.8

Loans delinquent 31-60 days(3)

     397         6.1        478         7.6   

Loans delinquent 61-90 days(3)

     293         4.5        254         4.1   

Loans delinquent greater than 90 days(3)

     790         12.0        908         14.5   
  

 

 

    

 

 

   

 

 

    

 

 

 

Total TDR loans in repayment

     6,553         100     6,259         100
  

 

 

    

 

 

   

 

 

    

 

 

 

Total TDR loans, gross

   $ 7,805         $ 7,377      
  

 

 

      

 

 

    

 

  (1) 

Loans for customers who have requested and qualify for 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.

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 March 31,  
     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

   $ 545       $ 97       $ 216       $ 657       $ 65       $ 404   

Private Education Loans — Non-Traditional

     90         34         57         140         29         128   
  

 

 

    

 

 

    

 

 

    

 

 

    

 

 

    

 

 

 

Total

   $ 635       $ 131       $ 273       $ 797       $ 94       $ 532   
  

 

 

    

 

 

    

 

 

    

 

 

    

 

 

    

 

 

 

 

(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.

 

16


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
 

March 31, 2013

        

Private Education Loans — Traditional

   $ 822       $ 34       $ 47   

Private Education Loans — Non-Traditional

     96         14         21   
  

 

 

    

 

 

    

 

 

 

Total

   $ 918       $ 48       $ 68   
  

 

 

    

 

 

    

 

 

 

December 31, 2012

        

Private Education Loans — Traditional

   $ 798       $ 39       $ 45   

Private Education Loans — Non-Traditional

     106         16         22   
  

 

 

    

 

 

    

 

 

 

Total

   $ 904       $ 55       $ 67   
  

 

 

    

 

 

    

 

 

 

 

17


Table of Contents

SLM CORPORATION

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)

 

3. Borrowings

The following table summarizes our borrowings.

 

     March 31, 2013      December 31, 2012  

(Dollars in millions)

   Short
Term
     Long
Term
     Total      Short
Term
     Long
Term
     Total  

Unsecured borrowings:

                 

Senior unsecured debt

   $ 2,778       $ 15,167       $ 17,945       $ 2,319       $ 15,446       $ 17,765   

Brokered deposits

     1,170         2,782         3,952         979         3,088         4,067   

Retail and other deposits

     3,643                 3,643         3,247                 3,247   

Other(1)

     1,240                 1,240         1,609                 1,609   
  

 

 

    

 

 

    

 

 

    

 

 

    

 

 

    

 

 

 

Total unsecured borrowings

     8,831         17,949         26,780         8,154         18,534         26,688   
  

 

 

    

 

 

    

 

 

    

 

 

    

 

 

    

 

 

 

Secured borrowings:

                 

FFELP Loan securitizations

             100,750         100,750                 105,525         105,525   

Private Education Loan securitizations

             20,252         20,252                 19,656         19,656   

ED Conduit Program Facility

     6,967                 6,967         9,551                 9,551   

FFELP ABCP Facility

             5,114         5,114                 4,154         4,154   

Private Education Loan ABCP Facility

     539                 539                 1,070         1,070   

Acquisition financing(2)

             576         576                 673         673   

FHLB-DM Facility

     880         1,220         2,100         2,100                 2,100   
  

 

 

    

 

 

    

 

 

    

 

 

    

 

 

    

 

 

 

Total secured borrowings

     8,386         127,912         136,298         11,651         131,078         142,729   
  

 

 

    

 

 

    

 

 

    

 

 

    

 

 

    

 

 

 

Total before hedge accounting adjustments

     17,217         145,861         163,078         19,805         149,612         169,417   

Hedge accounting adjustments

     37         2,026         2,063         51         2,789         2,840   
  

 

 

    

 

 

    

 

 

    

 

 

    

 

 

    

 

 

 

Total

   $ 17,254       $ 147,887       $ 165,141       $ 19,856       $ 152,401       $ 172,257   
  

 

 

    

 

 

    

 

 

    

 

 

    

 

 

    

 

 

 

 

(1) 

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

 

(2)

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

 

18


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:

 

 

     March 31, 2013  
     Debt Outstanding      Carrying Amount of Assets Securing
Debt Outstanding
 

(Dollars in millions)

   Short
Term
     Long
Term
     Total      Loans      Cash      Other Assets      Total  

Secured Borrowings — VIEs:

                    

ED Conduit Program Facility

   $ 6,967       $       $ 6,967       $ 7,056       $ 295       $ 99       $ 7,450   

FFELP ABCP Facility

             5,114         5,114         5,430         108         76         5,614   

Private Education Loan ABCP Facility

     539                 539         989         173         21         1,183   

Securitizations — FFELP Loans

             100,750         100,750         102,135         3,618         575         106,328   

Securitizations — Private Education Loans

             20,252         20,252         25,321         454         550         26,325   
  

 

 

    

 

 

    

 

 

    

 

 

    

 

 

    

 

 

    

 

 

 

Total before hedge accounting adjustments

     7,506         126,116         133,622         140,931         4,648         1,321         146,900   

Hedge accounting adjustments

             581         581                         405         405   
  

 

 

    

 

 

    

 

 

    

 

 

    

 

 

    

 

 

    

 

 

 

Total

   $ 7,506       $ 126,697       $ 134,203       $ 140,931       $ 4,648       $ 1,726       $ 147,305   
  

 

 

    

 

 

    

 

 

    

 

 

    

 

 

    

 

 

    

 

 

 
     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:

                    

ED Conduit Program Facility

   $ 9,551       $       $ 9,551       $ 9,645       $ 410       $ 134       $ 10,189   

FFELP ABCP Facility

             4,154         4,154         4,405         77         63         4,545   

Private Education Loan ABCP Facility

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

Securitizations — FFELP Loans

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

Securitizations — Private Education Loans

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

 

 

    

 

 

    

 

 

    

 

 

    

 

 

    

 

 

    

 

 

 

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   
  

 

 

    

 

 

    

 

 

    

 

 

    

 

 

    

 

 

    

 

 

 

 

19


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 three months ended March 31, 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   
     

 

 

      

Total bonds issued in first-quarter 2013

      $ 1,249        
     

 

 

      

Total loan amount securitized in first-quarter 2013

      $ 1,250        
     

 

 

      

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   
     

 

 

      

Total bonds issued in first-quarter 2013

      $ 1,362        
     

 

 

      

Total loan amount securitized in first-quarter 2013

      $ 1,307        
     

 

 

      

 

(1) 

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

 

20


Table of Contents

SLM CORPORATION

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)

 

3. Borrowings (continued)

 

2013 Sale of FFELP Securitization Trust Residual Interest

On February 13, 2013, we sold the Residual Interest in a FFELP Loan securitization trust to a third party. We will continue to service the student loans in the trust under existing agreements. The sale removed student loan assets of $3.8 billion and related liabilities of $3.7 billion from our balance sheet.

Additional, Recent Borrowing-Related Transactions

Senior Unsecured Debt

On January 28, 2013, we issued $1.5 billion of senior unsecured bonds.

 

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 March 31, 2013 and December 31, 2012, and their impact on other comprehensive income and earnings for the three months ended March 31, 2013 and 2012.

 

21


Table of Contents

SLM CORPORATION

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)

 

4. Derivative Financial Instruments (continued)

 

Impact of Derivatives on Consolidated Balance Sheet

 

        Cash Flow     Fair Value     Trading     Total  

(Dollars in millions)

 

Hedged Risk
Exposure

  Mar. 31,
2013
    Dec. 31,
2012
    Mar. 31,
2013
    Dec. 31,
2012
    Mar. 31,
2013
    Dec. 31,
2012
    Mar. 31,
2013
    Dec. 31,
2012
 

Fair Values(1)

                 

Derivative Assets:

                 

Interest rate swaps

  Interest rate   $ 1      $      $ 1,237      $ 1,396      $ 127      $ 150      $ 1,365      $ 1,546   

Cross-currency interest rate swaps

  Foreign currency
& interest rate
                  731        1,165        23        70        754        1,235   

Other(2)

  Interest rate                                        4               4   
   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Total derivative assets(3)

      1               1,968        2,561        150        224        2,119        2,785   

Derivative Liabilities:

                 

Interest rate swaps

  Interest rate     (8     (11     (14     (1     (193     (197     (215     (209

Floor Income Contracts

  Interest rate                                 (1,969     (2,154     (1,969     (2,154

Cross-currency interest rate swaps

  Foreign currency
& interest rate
                  (258     (136                   (258     (136
   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Total derivative liabilities(3)

      (8     (11     (272     (137     (2,162     (2,351     (2,442     (2,499
   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Net total derivatives

    $ (7   $ (11   $ 1,696      $ 2,424      $ (2,012   $ (2,127   $ (323   $ 286   
   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

 

(1) 

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

 

(2) 

“Other” includes embedded derivatives bifurcated from securitization debt as well as derivatives related to our Total Return Swap Facility.

 

(3) 

The following table reconciles gross positions with the impact of master netting agreements to the balance sheet classification:

 

     Other Assets      Other Liabilities  

(Dollar in millions)

   March 31,
2013
     December 31,
2012
     March 31,
2013
     December 31,
2012
 

Gross position

   $ 2,119       $ 2,785       $ (2,442    $ (2,499

Impact of master netting agreements

     (435      (544      435         544   
  

 

 

    

 

 

    

 

 

    

 

 

 

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

     1,684         2,241         (2,007      (1,955

Cash collateral (held) pledged

     (1,239      (1,423      893         973   
  

 

 

    

 

 

    

 

 

    

 

 

 

Net position

   $ 445       $ 818       $ (1,114    $ (982
  

 

 

    

 

 

    

 

 

    

 

 

 

 

22


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 March 31, 2013 and December 31, 2012 by $71 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 March 31, 2013 and December 31, 2012 by $102 million and $107 million, respectively.

 

     Cash Flow      Fair Value      Trading      Total  

(Dollars in billions)

   Mar. 31,
2013
     Dec. 31,
2012
     Mar. 31,
2013
     Dec. 31,
2012
     Mar. 31,
2013
     Dec. 31,
2012
     Mar. 31,
2013
     Dec. 31,
2012
 

Notional Values:

                       

Interest rate swaps

   $ 0.7       $ 0.7       $ 15.8       $ 15.8       $ 55.5       $ 56.9       $ 72.0       $ 73.4   

Floor Income Contracts

                                     36.8         51.6         36.8         51.6   

Cross-currency interest rate swaps

                     12.5         13.7         .3         0.3         12.8         14.0   

Other(1)

                                     1.2         1.4         1.2         1.4   
  

 

 

    

 

 

    

 

 

    

 

 

    

 

 

    

 

 

    

 

 

    

 

 

 

Total derivatives

   $ 0.7       $ 0.7       $ 28.3       $ 29.5       $ 93.8       $ 110.2       $ 122.8       $ 140.4   
  

 

 

    

 

 

    

 

 

    

 

 

    

 

 

    

 

 

    

 

 

    

 

 

 

 

(1) 

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

Impact of Derivatives on Consolidated Statements of Income

 

     Three Months Ended March 31,  
     Unrealized
Gain

(Loss) on
Derivatives(1)(2)
    Realized
Gain

(Loss)  on
Derivatives(3)
    Unrealized
Gain
(Loss) on
Hedged
Item(1)
    Total Gain
(Loss)
 

(Dollars in millions)

     2013         2012       2013     2012     2013      2012     2013     2012  

Fair Value Hedges:

                 

Interest rate swaps

   $ (172   $ (148   $ 109      $ 113      $ 195       $ 156      $ 132      $ 121   

Cross-currency interest rate swaps

     (556     192        21        61        552         (453     17        (200
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

    

 

 

   

 

 

   

 

 

 

Total fair value derivatives

     (728     44        130        174        747         (297     149        (79

Cash Flow Hedges:

                 

Interest rate swaps

                   (3     (7                    (3     (7
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

    

 

 

   

 

 

   

 

 

 

Total cash flow derivatives

                   (3     (7                    (3     (7

Trading:

                 

Interest rate swaps

     (19     (39     24        35                       5        (4

Floor Income Contracts

     189        136        (213     (215                    (24     (79

Cross-currency interest rate swaps

     (47     (33     20        2                       (27     (31

Other

     (4     (4            (1                    (4     (5
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

    

 

 

   

 

 

   

 

 

 

Total trading derivatives

     119        60        (169     (179                    (50     (119
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

    

 

 

   

 

 

   

 

 

 

Total

     (609     104        (42     (12     747         (297     96        (205

Less: realized gains (losses) recorded in interest expense

                   127        167                       127        167   
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

    

 

 

   

 

 

   

 

 

 

Gains (losses) on derivative and hedging activities, net

   $ (609   $ 104      $ (169   $ (179   $ 747       $ (297   $ (31   $ (372
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

    

 

 

   

 

 

   

 

 

 

 

(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.”

 

23


Table of Contents

SLM CORPORATION

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)

 

4. Derivative Financial Instruments (continued)

 

Collateral

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

 

(Dollars in millions)

   March 31,
2013
     December 31,
2012
 

Collateral held:

     

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

   $ 1,239       $ 1,423   

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

     488         613   
  

 

 

    

 

 

 

Total collateral held

   $ 1,727       $ 2,036   
  

 

 

    

 

 

 

Derivative asset at fair value including accrued interest

   $ 1,972       $ 2,570   
  

 

 

    

 

 

 

Collateral pledged to others:

     

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

   $ 893       $ 973   
  

 

 

    

 

 

 

Total collateral pledged

   $ 893       $ 973   
  

 

 

    

 

 

 

Derivative liability at fair value including accrued interest and premium receivable

   $ 1,231       $ 1,204   
  

 

 

    

 

 

 

 

(1)

At March 31, 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 $940 million with our counterparties. Further downgrades would not result in any additional collateral requirements, except to increase the frequency of collateral calls. Two counterparties have the right to terminate the contracts with further downgrades. We currently have a liability position with these derivative counterparties (including accrued interest and net of premiums receivable) of $254 million and have posted $251 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 $3 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.

 

     March 31, 2013     December 31, 2012  

(Dollars in millions)

   Ending
Balance
     % of
Balance
    Ending
Balance
     % of
Balance
 

Accrued interest receivable, net

   $ 2,129         29   $ 2,147         26

Derivatives at fair value

     1,684         23        2,241         27   

Income tax asset, net current and deferred

     1,280         17        1,478         18   

Accounts receivable

     1,099         15        1,111         13   

Benefit and insurance-related investments

     475         6        474         6   

Fixed assets, net

     226         3        215         3   

Other loans, net

     129         2        137         2   

Other

     441         5        470         5   
  

 

 

    

 

 

   

 

 

    

 

 

 

Total

   $ 7,463         100   $ 8,273         100
  

 

 

    

 

 

   

 

 

    

 

 

 

 

24


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SLM CORPORATION

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)

 

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 March 31, 2013 and December 31, 2012, these balances included $1.7 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 March 31, 2013 and December 31, 2012, the cumulative mark-to-market adjustment to the hedged debt was $(2.1) billion and $(2.8) billion, respectively.

 

6. Stockholders’ Equity

The following table summarizes our common share repurchases and issuances.

 

     Three Months Ended
March 31,
 
     2013      2012  

Common shares repurchased(1)

     10,220,804         16,703,182   

Average purchase price per share(2)

   $ 19.49       $ 16.04   

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

     2,324,575         2,056,977   

Average purchase price per share

   $ 18.11       $ 15.33   

Common shares issued(4)

     4,157,795         3,171,484   

 

  (1) 

Common shares purchased under our share repurchase program, of which $201 million remains available as of March 31, 2013.

 

  (2) 

Average purchase price per share includes purchase commission costs.

 

  (3) 

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

 

  (4) 

Common shares issued under our various compensation and benefit plans.

The closing price of our common stock on March 28, 2013 was $20.50.

Dividend and Share Repurchase Program

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

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

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.

 

25


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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
March 31,
 

(In millions, except per share data)

   2013      2012  

Numerator:

     

Net income attributable to SLM Corporation

   $ 346       $ 112   

Preferred stock dividends

     5         5   
  

 

 

    

 

 

 

Net income attributable to SLM Corporation common stock

   $ 341       $ 107   
  

 

 

    

 

 

 

Denominator:

     

Weighted average shares used to compute basic EPS

     451         503   

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)

     7         7   
  

 

 

    

 

 

 

Dilutive potential common shares(2)

     7         7   
  

 

 

    

 

 

 

Weighted average shares used to compute diluted EPS

     458         510   
  

 

 

    

 

 

 

Basic earnings per common share attributable to SLM Corporation

   $ .76       $ .21   
  

 

 

    

 

 

 

Diluted earnings per common share attributable to SLM Corporation

   $ .74       $ .21   
  

 

 

    

 

 

 

 

  (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 March 31, 2013 and 2012, securities covering approximately 5 million and 12 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 months ended March 31, 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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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  
     March 31, 2013     December 31, 2012  

(Dollars in millions)

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

Assets

                  

Available-for-sale investments:

                  

Agency residential mortgage-backed securities

   $   —       $ 67      $      $ 67      $   —       $ 63      $      $ 63   

Guaranteed investment contracts

             8               8                9               9   

Other

             10               10                9               9   
  

 

 

    

 

 

   

 

 

   

 

 

   

 

 

    

 

 

   

 

 

   

 

 

 

Total available-for-sale investments

             85               85                81               81   

Derivative instruments:(1)

                  

Interest rate swaps

             1,275        90        1,365                1,444        102        1,546   

Cross-currency interest rate swaps

             26        728        754                48        1,187        1,235   

Other

                                                 4        4   
  

 

 

    

 

 

   

 

 

   

 

 

   

 

 

    

 

 

   

 

 

   

 

 

 

Total derivative assets(3)

             1,301        818        2,119                1,492        1,293        2,785   
  

 

 

    

 

 

   

 

 

   

 

 

   

 

 

    

 

 

   

 

 

   

 

 

 

Total

   $   —       $ 1,386      $ 818      $ 2,204      $   —       $ 1,573      $ 1,293      $ 2,866   
  

 

 

    

 

 

   

 

 

   

 

 

   

 

 

    

 

 

   

 

 

   

 

 

 

Liabilities(2)

                  

Derivative instruments(1)

                  

Interest rate swaps

   $   —       $ (49   $ (166   $ (215   $       $ (34   $ (175   $ (209

Floor Income Contracts

             (1,969            (1,969             (2,154            (2,154

Cross-currency interest rate swaps

                    (258     (258             (2     (134     (136

Other

                                                          
  

 

 

    

 

 

   

 

 

   

 

 

   

 

 

    

 

 

   

 

 

   

 

 

 

Total derivative liabilities(3)

             (2,018     (424     (2,442             (2,190     (309     (2,499
  

 

 

    

 

 

   

 

 

   

 

 

   

 

 

    

 

 

   

 

 

   

 

 

 

Total

   $   —       $ (2,018   $ (424   $ (2,442   $   —       $ (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 March 31, 2013  
     Derivative Instruments  

(Dollars in millions)

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

Balance, beginning of period

   $ (73   $ 1,053      $ 4      $ 984   

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

        

Included in earnings(1)

     5        (546     (5     (546

Included in other comprehensive income

                            

Settlements

     (8     (37     1        (44

Transfers in and/or out of level 3

                            
  

 

 

   

 

 

   

 

 

   

 

 

 

Balance, end of period

   $ (76   $ 470      $   —      $ 394   
  

 

 

   

 

 

   

 

 

   

 

 

 

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

   $ (3   $ (514   $ (5   $ (522
  

 

 

   

 

 

   

 

 

   

 

 

 

 

     Three Months Ended March 31, 2012  
     Derivative instruments  

(Dollars in millions)

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

Balance, beginning of period

   $ (40   $ 1,021      $ 1      $ 982   

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

        

Included in earnings(1)

     (4     170        (5     161   

Included in other comprehensive income

                            

Settlements

     (12     (46            (58

Transfers in and/or out of level 3

                            
  

 

 

   

 

 

   

 

 

   

 

 

 

Balance, end of period

   $ (56   $ 1,145      $ (4   $ 1,085   
  

 

 

   

 

 

   

 

 

   

 

 

 

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

   $ (16   $ 124      $ (4   $ 104   
  

 

 

   

 

 

   

 

 

   

 

 

 

 

  (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
March 31,
 

(Dollars in millions)

   2013      2012  

Gains (losses) on derivative and hedging activities, net

   $ (562    $ 116   

Interest expense

     16         45   
  

 

 

    

 

 

 

Total

   $ (546    $ 161   
  

 

 

    

 

 

 

 

  (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
March 31, 2013
    Valuation
Technique
  Input   Range
(Weighted Average)

Derivatives

       

Consumer Price Index/LIBOR basis swaps

  $ 81      Discounted cash flow   Bid/ask adjustment

to discount rate

  0.03% — 0.05%

(0.04%)

Prime/LIBOR basis swaps

    (157)      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

    470      Discounted cash flow   Constant prepayment rate   2.6%
 

 

 

       

Total

  $ 394         
 

 

 

       

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.

 

     March 31, 2013     December 31, 2012  

(Dollars in millions)

   Fair
Value
    Carrying
Value
    Difference     Fair
Value
    Carrying
Value
    Difference  

Earning assets

            

FFELP Loans

   $ 119,294      $ 119,195      $ 99      $ 125,042      $ 125,612      $ (570

Private Education Loans

     37,214        37,465        (251     36,081        36,934        (853

Cash and investments(1)

     9,519        9,519               9,994        9,994          
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Total earning assets

     166,027        166,179        (152     171,117        172,540        (1,423
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Interest-bearing liabilities

            

Short-term borrowings

     17,250        17,254        4        19,861        19,856        (5

Long-term borrowings

     144,203        147,887        3,684        146,210        152,401        6,191   
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Total interest-bearing liabilities

     161,453        165,141        3,688        166,071        172,257        6,186   
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Derivative financial instruments

            

Floor Income Contracts

     (1,969     (1,969            (2,154     (2,154       

Interest rate swaps

     1,150        1,150               1,337        1,337          

Cross-currency interest rate swaps

     496        496               1,099        1,099          

Other

                          4        4          
      

 

 

       

 

 

 

Excess of net asset fair value over carrying value

       $ 3,536          $ 4,763   
      

 

 

       

 

 

 

 

(1) 

“Cash and investments” includes available-for-sale investments that consist of investments that are primarily agency securities whose cost basis is $83 million and $78 million at March 31, 2013 and December 31, 2012, respectively, versus a fair value of $85 million and $81 million at March 31, 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

 

30


Table of Contents

SLM CORPORATION

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)

 

8. Fair Value Measurements (continued)

 

prepayment speeds, default rates, recovery rates, cost of funds and capital levels. A number of significant inputs into the models are internally derived and not observable to market participants nor can the resulting fair values be validated against market transactions. As such, these are level 3 valuations.

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

Cash and cash equivalents are carried at cost. Carrying value 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

In the ordinary course of business, we and our subsidiaries are defendants in or parties to pending and threatened legal actions and proceedings including actions brought on behalf of various classes of claimants. These actions and proceedings may be based on alleged violations of consumer protection, securities, employment and other laws. In certain of these actions and proceedings, claims for substantial monetary damage are asserted against us and our subsidiaries.

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

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

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

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.

 

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SLM CORPORATION

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)

 

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)

   March 31,
2013
     December 31,
2012
 

Private Education Loans, net

   $ 37,465       $ 36,934   

Cash and investments(1)

     3,107         2,731   

Other

     3,095         3,275   
  

 

 

    

 

 

 

Total assets

   $ 43,667       $ 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, as well as processing capabilities to educational institutions and 529 college-savings plan programs. We also operate a consumer savings network that provides financial rewards on everyday purchases to help families save for college.

At March 31, 2013 and December 31, 2012, the Business Services segment had total assets of $883 million and $867 million, respectively.

FFELP Loans Segment

Our FFELP Loans segment consists of our $119.2 billion FFELP Loan portfolio at March 31, 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)

   March 31,
2013
     December 31,
2012
 

FFELP Loans, net

   $ 119,195       $ 125,612   

Cash and investments(1)

     5,489         5,766   

Other

     3,703         4,286   
  

 

 

    

 

 

 

Total assets

   $ 128,387       $ 135,664   
  

 

 

    

 

 

 

 

  (1) 

Includes restricted cash and investments.

 

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SLM CORPORATION

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)

 

10. Segment Reporting (continued)

 

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 March 31, 2013 and December 31, 2012, the Other segment had total assets of $1.1 billion and $1.8 billion, respectively.

Measure of Profitability

The tables below include the condensed operating results for each of our reportable segments. Management, including the chief operating decision makers, evaluates the Company on certain performance measures that we refer to as “Core Earnings” performance measures for each operating segment. We use “Core Earnings” to manage each business segment because “Core Earnings” reflect adjustments to GAAP financial results for two items, discussed below, that create significant volatility mostly due to timing factors generally beyond the control of management. Accordingly, we believe that “Core Earnings” provide management with a useful basis from which to better evaluate results from ongoing operations against the business plan or against results from prior periods. Consequently, we disclose this information as we believe it provides investors with additional information regarding the operational and performance indicators that are most closely assessed by management. The two items adjusted for in our “Core Earnings” presentations are (1) our use of derivative instruments to hedge our economic risks that do not qualify for hedge accounting treatment or do qualify for hedge accounting treatment but result in ineffectiveness and (2) the accounting for goodwill and acquired intangible assets. The tables presented below reflect “Core Earnings” operating measures reviewed and utilized by management to manage the business. Reconciliation of the “Core Earnings” segment totals to our consolidated operating results in accordance with GAAP is also included in the tables below.

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.

 

33


Table of Contents

SLM CORPORATION

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)

 

10. Segment Reporting (continued)

 

Segment Results and Reconciliations to GAAP

 

    Three Months Ended March 31, 2013  

(Dollars in millions)

  Consumer
Lending
    Business
Services
    FFELP
Loans
    Other     Eliminations(1)     Total
“Core
Earnings”
    Adjustments     Total
GAAP
 
              Reclassifications     Additions/
(Subtractions)
    Total
Adjustments(2)
   

Interest income:

                   

Student loans

  $ 623      $      $ 599      $      $      $ 1,222      $ 212      $ (76   $ 136      $ 1,358   

Other loans

                         3               3                             3   

Cash and investments

    1        2        2        2        (2     5                             5   
 

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Total interest income

    624        2        601        5        (2     1,230        212        (76     136        1,366   

Total interest expense

    204               340        13        (2     555        18        (2 )(4)      16        571   
 

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Net interest income (loss)

    420        2        261        (8            675        194        (74     120        795   

Less: provisions for loan losses

    225               16                      241                             241   
 

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Net interest income (loss) after provisions for loan losses

    195        2        245        (8            434        194        (74     120        554   

Servicing revenue

    10        212        23               (149     96                             96   

Contingency revenue

           99                             99                             99   

Gains on debt repurchases

                         29               29        (6            (6     23   

Other income

           8        55                      63        (188     184 (5)      (4     59   
 

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Total other income (loss)

    10        319        78        29        (149     287        (194     184        (10     277   

Expenses:

                   

Direct operating expenses

    66        122        157               (149     196                             196   

Overhead expenses

                         74               74                             74   
 

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Operating expenses

    66        122        157        74        (149     270                             270   

Goodwill and acquired intangible assets impairment and amortization

                                                     4        4        4   
 

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Total expenses

    66        122        157        74        (149     270               4        4        274   
 

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Income (loss) before income tax expense (benefit)

    139        199        166        (53            451               106        106        557   

Income tax expense (benefit)(3)

    51        75        62        (20            168               43        43        211   
 

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Net income (loss)

  $ 88      $ 124      $ 104      $ (33   $      $ 283      $      $ 63      $ 63      $ 346   
 

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

 

(1)

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

 

(2)

“Core Earnings” adjustments to GAAP:

 

    Three Months Ended March 31, 2013  

(Dollars in millions)

  Net Impact of
Derivative
Accounting
    Net Impact of
Goodwill andAcquired Intangibles
    Total  

Net interest income after provisions for loan losses

  $ 120      $  —     $ 120   

Total other loss

    (10            (10

Goodwill and acquired intangible assets impairment and amortization

           4        4   
 

 

 

   

 

 

   

 

 

 

Total “Core Earnings” adjustments to GAAP

  $ 110      $ (4     106   
 

 

 

   

 

 

   

Income tax expense

        43   
     

 

 

 

Net income

      $ 63   
     

 

 

 

 

(3)

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

 

(4) 

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

 

(5)

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

 

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SLM CORPORATION

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)

 

10. Segment Reporting (continued)

 

    Three Months Ended March 31, 2012  

(Dollars in millions)

  Consumer
Lending
    Business
Services
    FFELP
Loans
    Other     Eliminations(1)     Total
“Core
Earnings”
    Adjustments     Total
GAAP
 
              Reclassifications     Additions/
(Subtractions)
    Total
Adjustments(2)
   

Interest income:

                   

Student loans

  $ 625      $      $ 725      $      $      $ 1,350      $ 215      $ (98   $ 117      $ 1,467   

Other loans

                         5               5                             5   

Cash and investments

    2        3        3               (3     5                             5   
 

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Total interest income

    627        3        728        5        (3     1,360        215        (98     117        1,477   

Total interest expense

    202               424        5        (3     628        36        2 (4)      38        666   
 

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Net interest income (loss)

    425        3        304                      732        179        (100     79        811   

Less: provisions for loan losses

    235               18                      253                             253   
 

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Net interest income (loss) after provisions for loan losses

    190        3        286                      479        179        (100     79        558   

Servicing revenue

    12        236        25               (176     97                             97   

Contingency revenue

           90                             90                             90   

Gains on debt repurchases

                         37               37                             37   

Other income (loss)

           8               3               11        (179     (164 )(5)      (343     (332
 

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Total other income (loss)

    12        334        25        40        (176     235        (179     (164     (343     (108

Expenses:

                   

Direct operating expenses

    69        120        185               (176     198                             198   

Overhead expenses

                         64               64                             64   
 

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Operating expenses

    69        120        185        64        (176     262                             262   

Goodwill and acquired intangible assets impairment and amortization

                                                     5        5        5   

Restructuring expenses

    1        1               3               5                             5   
 

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Total expenses

    70        121        185        67        (176     267               5        5        272   
 

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Income (loss) before income tax expense (benefit)

    132        216        126        (27            447               (269     (269     178   

Income tax expense (benefit)(3)

    48        80        46        (10            164               (97     (97     67   
 

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Net income (loss)

    84        136        80        (17            283               (172     (172     111   

Less: net loss attributable to noncontrolling interest

           (1                          (1                          (1
 

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Net income (loss) attributable to SLM Corporation

  $ 84      $ 137      $ 80      $ (17   $      $ 284      $      $ (172   $ (172   $ 112   
 

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

 

(1)

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

 

(2)

“Core Earnings” adjustments to GAAP:

 

    Three Months Ended March 31, 2012  

(Dollars in millions)

  Net Impact of
Derivative
Accounting
    Net Impact of
Goodwill and
Acquired Intangibles
    Total  

Net interest income after provisions for loan losses

  $ 79      $   —      $ 79   

Total other loss

    (343            (343

Goodwill and acquired intangible assets impairment and amortization

           5        5   
 

 

 

   

 

 

   

 

 

 

Total “Core Earnings” adjustments to GAAP

  $ (264   $ (5     (269
 

 

 

   

 

 

   

Income tax benefit

        (97
     

 

 

 

Net loss

      $ (172
     

 

 

 

 

(3)

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

 

(4) 

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

 

(5)

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

 

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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
March 31,
 

(Dollars in millions)

   2013     2012  

“Core Earnings” adjustments to GAAP:

    

Net impact of derivative accounting(1)

   $ 110      $ (264

Net impact of goodwill and acquired intangible assets(2)

     (4     (5

Net tax effect(3)

     (43     97   
  

 

 

   

 

 

 

Total “Core Earnings” adjustments to GAAP

   $ 63      $ (172
  

 

 

   

 

 

 

 

  (1)

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

 

  (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. Subsequent Event

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

 

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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 our Annual Report on Form 10-K for the year ended December 31, 2012 (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 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 and restructuring initiatives and adverse effects of such initiatives on our business; changes in the demand for educational financing or in financing preferences of lenders, educational institutions, students and their families; changes in law and regulations with respect to the student lending business and financial institutions generally; increased competition from banks and other consumer lenders; the creditworthiness of 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 months ended March 31, 2012 to be consistent with classifications adopted for 2013, and had no effect on net income, total assets, or total liabilities.

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
March 31,
 

(In millions, except per share data)

   2013     2012  

GAAP Basis

    

Net income attributable to SLM Corporation

   $ 346      $ 112   

Diluted earnings per common share attributable to SLM Corporation

   $ .74      $ .21   

Weighted average shares used to compute diluted earnings per share

     458        510   

Return on assets

     .82     .24

“Core Earnings” Basis(1)

    

“Core Earnings” attributable to SLM Corporation

   $ 283      $ 284   

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

   $ .61      $ .55   

Weighted average shares used to compute diluted earnings per share

     458        510   

“Core Earnings” return on assets

     .67     .62

Other Operating Statistics

    

Ending FFELP Loans, net

   $ 119,195      $ 135,934   

Ending Private Education Loans, net

     37,465        36,732   
  

 

 

   

 

 

 

Ending total student loans, net

   $ 156,660      $ 172,666   
  

 

 

   

 

 

 

Average student loans

   $ 160,261      $ 174,942   

 

  (1) 

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

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 providing processing capabilities to educational institutions, 529 college-savings plan program management services and 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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Table of Contents

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, as well as processing capabilities to educational institutions and 529 college-savings plan programs. 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 $119.2 billion FFELP Loan portfolio at March 31, 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

Many aspects of our businesses are subject to federal and state regulation and administrative oversight, including by the Consumer Financial Protection Bureau (the “CFPB”). We expect the CFPB and other regulatory agencies will continue proposing new or additional regulatory requirements or oversight over our various businesses (most notably, private student lending and servicing, default aversion and debt collection), or, generally to large nonbank financial services companies. Additional information on supervision and regulation of our businesses can be found in Item 1, “Business — Supervision and Regulation” in our 2012 Form 10-K.

CFPB Oversight of Nonbank Student Loan Servicers

On March 14, 2013, the CFPB proposed a new rule allowing the CFPB to federally supervise certain nonbank student loan servicers for the first time. As proposed, the CFPB will have supervisory authority over any nonbank student loan servicer that services more than one million borrower accounts, including accounts for both Private Education Loans and federal student loans. We would be subject to this new oversight. Under the proposal, the CFPB’s supervision would include gathering reports, conducting examinations for compliance with federal consumer financial laws and taking enforcement actions as appropriate, similar to the CFPB’s current supervisory authority over large bank student loan servicers. The CFPB expects to issue a final rule by the end of this year.

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 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.

 

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Table of Contents

First-Quarter 2013 Summary of Results

We operate in a challenging economic environment marked by continued high unemployment resulting in uncertainty to Private Education Loan collectibility.

Our first-quarter 2013 accomplishments are discussed below.

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.”

First-quarter 2013 GAAP net income was $346 million ($0.74 diluted earnings per share), versus net income of $112 million ($0.21 diluted earnings per share) in the first-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. First-quarter 2013 results included a $110 million gain from derivative accounting treatment that is excluded from “Core Earnings” results. In the year-ago period, these amounts were losses of $264 million.

“Core Earnings” for the quarter were $283 million ($0.61 diluted earnings per share), compared with $284 million ($0.55 diluted earnings per share) in the year-ago period. The improvement in “Core Earnings” earnings per share was primarily the result of a $55 million gain from the sale of the Residual Interest in a FFELP Loan securitization trust, a $12 million decline in the provision for loan losses and a decline in the number of common shares outstanding, which more than offset lower net interest income before provision for loan losses of $57 million and lower debt repurchase gains of $8 million.

During the first quarter of 2013, we:

 

   

issued $1.2 billion of FFELP asset-backed securities (“ABS”), $1.4 billion of Private Education Loan ABS and $1.5 billion of unsecured bonds;

 

   

repurchased $927 million of debt and realized “Core Earnings” gains of $29 million, compared with $204 million of debt repurchased and $37 million of gains in the first quarter of 2012;

 

   

repurchased 10 million common shares for $199 million on the open market as part of our previously announced share repurchase program authorization of up to $400 million;

 

   

increased our regular quarterly common stock dividend to $0.15 per share, up from $0.125 per share in the prior quarter. We paid our quarterly dividend on March 15, 2013; and

 

   

sold the Residual Interest in a FFELP Loan securitization trust to a third party. We will continue to service the student loans in the trust under existing agreements. The sale removed student loan assets of $3.8 billion and related liabilities of $3.7 billion from our balance sheet.

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 Bank’s capabilities. Here is how we plan to achieve these objectives and the progress we have made to date:

 

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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 at least $4 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 22 percent higher in the first quarter of 2013 compared with the year-ago quarter. Charge-offs remained unchanged at 3.0 percent in both quarters. Provision for Private Education Loan losses decreased $10 million from the year-ago quarter.

Maximize Cash Flows from FFELP Loans

In 2013, we will continue to purchase additional FFELP Loan portfolios. In February 2013, we sold our ownership interest in one of our FFELP Loan securitization trusts. 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 quarter of 2013, we purchased $154 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). First-quarter 2013 operating expenses were $270 million compared with $262 million in the year-ago quarter. Excluding the result of a non-recurring $8 million pension termination gain in first-quarter 2012, operating expenses were unchanged.

Maintain Our Financial Strength

In January 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 also plan to continue to issue FFELP ABS primarily to refinance our remaining FFELP Loans in ED’s Conduit Program prior to the Conduit Program’s January 19, 2014 maturity date. During the first quarter of 2013, $2.3 billion in principal amount of FFELP Loans were refinanced out of the ED Conduit Program leaving $6.9 billion in principal amount of FFELP Loans remaining in the ED Conduit Program as of March 31, 2013. During the first quarter of 2013, we repurchased 10 million shares of common stock at an aggregate purchase price of $199 million.

Expand Bank Capabilities

The Bank will 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.”

 

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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”).

GAAP Statements of Income (Unaudited)

 

     Three Months
Ended
March 31,
    Increase
(Decrease)
 

(Dollars in millions, except per share data)

   2013     2012     $     %  

Interest income:

        

FFELP Loans

   $ 735      $ 842      $ (107     (13 )% 

Private Education Loans

     623        625        (2       

Other loans

     3        5        (2     (40

Cash and investments

     5        5                 
  

 

 

   

 

 

   

 

 

   

 

 

 

Total interest income

     1,366        1,477        (111     (8

Total interest expense

     571        666        (95     (14
  

 

 

   

 

 

   

 

 

   

 

 

 

Net interest income

     795        811        (16     (2

Less: provisions for loan losses

     241        253        (12     (5
  

 

 

   

 

 

   

 

 

   

 

 

 

Net interest income after provisions for loan losses

     554        558        (4     (1

Other income (loss):

        

Losses on derivative and hedging activities, net

     (31     (372     341        (92

Servicing revenue

     96        97        (1     (1

Contingency revenue

     99        90        9        10   

Gains on debt repurchases

     23        37        (14     (38

Other income

     90        40        50        125   
  

 

 

   

 

 

   

 

 

   

 

 

 

Total other income (loss)

     277        (108     385        356   

Expenses:

        

Operating expenses

     270        262        8        3   

Goodwill and acquired intangible assets impairment and amortization expense

     4        5        (1     (20

Restructuring expenses

            5        (5     (100
  

 

 

   

 

 

   

 

 

   

 

 

 

Total expenses

     274        272        2        1   
  

 

 

   

 

 

   

 

 

   

 

 

 

Income before income tax expense

     557        178        379        213   

Income tax expense

     211        67        144        215   
  

 

 

   

 

 

   

 

 

   

 

 

 

Net income

     346        111        235        212   

Less: net loss attributable to noncontrolling interest

            (1     1        (100
  

 

 

   

 

 

   

 

 

   

 

 

 

Net income attributable to SLM Corporation

     346        112        234        209   

Preferred stock dividends

     5        5                 
  

 

 

   

 

 

   

 

 

   

 

 

 

Net income attributable to SLM Corporation common stock

   $ 341      $ 107      $ 234        219
  

 

 

   

 

 

   

 

 

   

 

 

 

Basic earnings per common share attributable to SLM Corporation

   $ .76      $ .21      $ .55        262
  

 

 

   

 

 

   

 

 

   

 

 

 

Diluted earnings per common share attributable to SLM Corporation

   $ .74      $ .21      $ .53        252
  

 

 

   

 

 

   

 

 

   

 

 

 

Dividends per common share attributable to SLM Corporation

   $ .15      $ .125      $ .025        20
  

 

 

   

 

 

   

 

 

   

 

 

 

 

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Consolidated Earnings Summary — GAAP-basis

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

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

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

 

   

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

 

   

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

 

   

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

 

   

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

 

   

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

 

   

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

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

“Core Earnings” — Definition and Limitations

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

 

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“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.

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.”

 

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Table of Contents
    Three Months Ended March 31, 2013  

(Dollars in millions)

  Consumer
Lending
    Business
Services
    FFELP
Loans
    Other     Eliminations(1)     Total
“Core
Earnings”
    Adjustments     Total
GAAP
 
              Reclassifications     Additions/
(Subtractions)
    Total
Adjustments(2)
   

Interest income:

                   

Student loans

  $ 623      $      $ 599      $      $      $ 1,222      $ 212      $ (76   $ 136      $ 1,358   

Other loans

                         3               3                             3   

Cash and investments

    1        2        2        2        (2     5                             5   
 

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Total interest income

    624        2        601        5        (2     1,230        212        (76     136        1,366   

Total interest expense

    204               340        13        (2     555        18        (2 )(4)      16        571   
 

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Net interest income (loss)

    420        2        261        (8            675        194        (74     120        795   

Less: provisions for loan losses

    225               16                      241                             241   
 

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Net interest income (loss) after provisions for loan losses

    195        2        245        (8            434        194        (74     120        554   

Servicing revenue

    10        212        23               (149     96                             96   

Contingency revenue

           99                             99                             99   

Gains on debt repurchases

                         29               29        (6            (6     23   

Other income

           8        55                      63        (188     184 (5)      (4     59   
 

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Total other income (loss)

    10        319        78        29        (149     287        (194     184        (10     277   

Expenses:

                   

Direct operating expenses

    66        122        157               (149     196                             196   

Overhead expenses

                         74               74                             74   
 

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Operating expenses

    66        122        157        74        (149     270                             270   

Goodwill and acquired intangible assets impairment and amortization

                                                     4        4        4   
 

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Total expenses

    66        122        157        74        (149     270               4        4        274   
 

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Income (loss) before income tax expense (benefit)

    139        199        166        (53            451               106        106        557   

Income tax expense (benefit)(3)

    51        75        62        (20            168               43        43        211   
 

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Net income (loss)

  $ 88      $ 124      $ 104      $ (33   $      $ 283      $      $ 63      $ 63      $ 346   
 

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

 

(1)

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

(2)

“Core Earnings” adjustments to GAAP:

 

    Three Months Ended March 31, 2013  

(Dollars in millions)

  Net Impact  of
Derivative

Accounting
    Net Impact of
Goodwill  and
Acquired Intangibles
    Total  

Net interest income after provisions for loan losses

  $ 120      $   —      $ 120   

Total other loss

    (10            (10

Goodwill and acquired intangible assets impairment and amortization

           4        4   
 

 

 

   

 

 

   

 

 

 

Total “Core Earnings” adjustments to GAAP

  $ 110      $ (4     106   
 

 

 

   

 

 

   

Income tax expense

        43   
     

 

 

 

Net income

      $ 63   
     

 

 

 

 

(3)

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

(4)

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

(5)

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

 

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    Three Months Ended March 31, 2012  

(Dollars in millions)

  Consumer
Lending
    Business
Services
    FFELP
Loans
    Other     Eliminations(1)     Total
“Core
Earnings”
    Adjustments     Total
GAAP
 
              Reclassifications     Additions/
(Subtractions)
    Total
Adjustments(2)
   

Interest income:

                   

Student loans

  $ 625      $      $ 725      $      $      $ 1,350      $ 215      $ (98   $ 117      $ 1,467   

Other loans

                         5               5                             5   

Cash and investments

    2        3        3               (3     5                             5   
 

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Total interest income

    627        3        728        5        (3     1,360        215        (98     117        1,477   

Total interest expense

    202               424        5        (3     628        36        2 (4)      38        666   
 

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Net interest income (loss)

    425        3        304                      732        179        (100     79        811   

Less: provisions for loan losses

    235               18                      253                             253   
 

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Net interest income (loss) after provisions for loan losses

    190        3        286                      479        179        (100     79        558   

Servicing revenue

    12        236        25               (176     97                             97   

Contingency revenue

           90                             90                             90   

Gains on debt repurchases

                         37               37                             37   

Other income (loss)

           8               3               11        (179     (164 )(5)      (343     (332
 

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Total other income (loss)

    12        334        25        40        (176     235        (179     (164     (343     (108

Expenses:

                   

Direct operating expenses

    69        120        185               (176     198                             198   

Overhead expenses

                         64               64                             64   
 

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Operating expenses

    69        120        185        64        (176     262                             262   

Goodwill and acquired intangible assets impairment and amortization

                                                     5        5        5   

Restructuring expenses

    1        1               3               5                             5   
 

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Total expenses

    70        121        185        67        (176     267               5        5        272   
 

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Income (loss) before income tax expense (benefit)

    132        216        126        (27            447               (269     (269     178   

Income tax expense (benefit)(3)

    48        80        46        (10            164               (97     (97     67   
 

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Net income (loss)

    84        136        80        (17            283               (172     (172     111   

Less: net loss attributable to noncontrolling interest

           (1                          (1                          (1
 

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Net income (loss) attributable to SLM Corporation

  $ 84      $ 137      $ 80      $ (17   $      $ 284      $      $ (172   $ (172   $ 112   
 

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

 

(1)

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

(2) 

“Core Earnings” adjustments to GAAP:

 

    Three Months Ended March 31, 2012  

(Dollars in millions)

  Net Impact  of
Derivative
Accounting
    Net Impact of
Goodwill  and
Acquired Intangibles
    Total  

Net interest income after provisions for loan losses

  $ 79      $  —      $ 79   

Total other loss

    (343            (343

Goodwill and acquired intangible assets impairment and amortization

           5        5   
 

 

 

   

 

 

   

 

 

 

Total “Core Earnings” adjustments to GAAP

  $ (264   $ (5     (269
 

 

 

   

 

 

   

Income tax benefit

        (97
     

 

 

 

Net loss

      $ (172
     

 

 

 

 

(3)

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

(4)

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

(5)

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

 

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Differences between “Core Earnings” and GAAP

The 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
March  31,
 

(Dollars in millions)

   2013     2012  

“Core Earnings” adjustments to GAAP:

    

Net impact of derivative accounting

   $ 110      $ (264

Net impact of goodwill and acquired intangible assets

     (4     (5

Net income tax effect

     (43     97   
  

 

 

   

 

 

 

Total “Core Earnings” adjustments to GAAP

   $ 63      $ (172
  

 

 

   

 

 

 

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

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 purposes of “Core Earnings,” we have removed the unrealized gains and losses related to these contracts and

 

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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
March  31,
 

(Dollars in millions)

     2013         2012    

“Core Earnings” derivative adjustments:

    

Losses on derivative and hedging activities, net, included in other income(1)

   $ (31   $ (372

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

     188        179   
  

 

 

   

 

 

 

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

     157        (193

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

     (76     (98

Other derivative accounting adjustments(3)

     29        27   
  

 

 

   

 

 

 

Total net impact of derivative accounting(4)

   $ 110      $ (264
  

 

 

   

 

 

 

 

  (1)

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

 

  (2)

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

 

     Three Months Ended
March 31,
 

(Dollars in millions)

   2013     2012  

Floor Income Contracts

   $ 189      $ 136   

Basis swaps

     (4     (22

Foreign currency hedges

     (32     (294

Other

     4        (13
  

 

 

   

 

 

 

Total unrealized gains (losses) on derivative and hedging activities, net

   $ 157      $ (193
  

 

 

   

 

 

 

 

  (3) 

Other derivative accounting adjustments consist of adjustments related to: (1) foreign currency denominated debt that is adjusted to spot foreign exchange rates for GAAP where such 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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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

March 31,
 

(Dollars in millions)

   2013     2012  

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

    

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

   $ (212   $ (215

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

     18        36   

Net realized gains on terminated derivative contracts reclassified to other income

     6         
  

 

 

   

 

 

 

Total reclassifications of realized losses on derivative and hedging activities

   $ (188   $ (179
  

 

 

   

 

 

 

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

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

 

     Three Months Ended
March  31,
 

(Dollars in millions)

   2013     2012  

Beginning impact of derivative accounting on GAAP equity

   $ (1,080   $ (977

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

     53        (172
  

 

 

   

 

 

 

Ending impact of derivative accounting on GAAP equity

   $ (1,027   $ (1,149
  

 

 

   

 

 

 

 

  (1)

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

 

     Three Months Ended
March 31,
 

(Dollars in millions)

   2013      2012  

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

   $ 110       $ (264

Tax impact of derivative accounting adjustment recognized in net income

     (60      87   

Change in unrealized gains on derivatives, net of tax recognized in Other Comprehensive Income

     3         5   
  

 

 

    

 

 

 

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

   $ 53       $ (172
  

 

 

    

 

 

 

 

  (a) 

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

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

 

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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.

 

      March 31,  

(Dollars in millions)

   2013     2012  

Unamortized net Floor premiums (net of tax)

   $ (498   $ (711

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

 

     Three Months Ended
March  31,
 

(Dollars in millions)

   2013     2012  

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

   $ (4   $ (5

 

  (1)

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

Business Segment Earnings Summary — “Core Earnings” Basis

Consumer Lending Segment

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

 

     Three Months Ended
March 31,
     % Increase
(Decrease)
 

(Dollars in millions)

   2013      2012      March 31, 2013
vs. March 31, 2012
 

“Core Earnings” interest income:

        

Private Education Loans

   $ 623       $ 625        

Cash and investments

     1         2         (50
  

 

 

    

 

 

    

 

 

 

Total “Core Earnings” interest income

     624         627           

Total “Core Earnings” interest expense

     204         202         1   
  

 

 

    

 

 

    

 

 

 

Net “Core Earnings” interest income

     420         425         (1

Less: provision for loan losses

     225         235         (4
  

 

 

    

 

 

    

 

 

 

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

     195         190         3   

Servicing revenue

     10         12         (17
  

 

 

    

 

 

    

 

 

 

Total other income

     10         12         (17

Direct operating expenses

     66         69         (4

Restructuring expenses

             1         (100
  

 

 

    

 

 

    

 

 

 

Total expenses

     66         70         (6
  

 

 

    

 

 

    

 

 

 

Income before income tax expense

     139         132         5   

Income tax expense

     51         48         6   
  

 

 

    

 

 

    

 

 

 

“Core Earnings”

   $ 88       $ 84         5
  

 

 

    

 

 

    

 

 

 

“Core Earnings” were $88 million for the three months ended March 31, 2013, compared with $84 million in the year-ago period. This improvement was primarily the result of reduced loan loss provision.

Highlights compared to first-quarter 2012 included:

 

   

Loan originations of $1.4 billion, up 22 percent.

 

   

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

 

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

 

   

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

 

   

Provision for Private Education Loan losses of $225 million, down from $235 million.

 

   

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

 

   

The portfolio balance, net of loan loss allowance, totaled $37 billion, a $733 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
March 31,
 
       2013         2012    

“Core Earnings” basis Private Education Loan yield

     6.35     6.42

Discount amortization

     .23        .24   
  

 

 

   

 

 

 

“Core Earnings” basis Private Education Loan net yield

     6.58        6.66   

“Core Earnings” basis Private Education Loan cost of funds

     (2.02     (2.01
  

 

 

   

 

 

 

“Core Earnings” basis Private Education Loan spread

     4.56        4.65   

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

     (.41     (.39
  

 

 

   

 

 

 

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

     4.15     4.26
  

 

 

   

 

 

 

 

 

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

     4.15     4.26

Adjustment for GAAP accounting treatment

     (.03     (.13
  

 

 

   

 

 

 

GAAP-basis Consumer Lending net interest margin(1)

     4.12     4.13
  

 

 

   

 

 

 

 

  (1) 

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

 

(Dollars in millions)

             

Private Education Loans

   $ 38,406       $ 37,749   

Other interest-earning assets

     2,662         2,327   
  

 

 

    

 

 

 

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

   $ 41,068       $ 40,076   
  

 

 

    

 

 

 

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
March  31,
 

(Dollars in millions)

     2013          2012    

Private Education Loan provision for loan losses

   $ 225       $ 235   

Private Education Loan charge-offs

   $ 232       $ 224   

In establishing the allowance for Private Education Loan losses as of March 31, 2013, we considered several factors with respect to our Private Education Loan portfolio. In particular, as compared with the year-ago period, we continue to see improving credit quality and continuing positive delinquency, forbearance and charge-off

 

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trends in connection with this portfolio. Improving credit quality is seen in higher FICO scores and cosigner rates as well as a more seasoned portfolio. Total loans delinquent (as a percentage of loans in repayment) has decreased to 7.8 percent from 9.1 percent in the year-ago quarter. Loans greater than 90 days delinquent (as a percentage of loans in repayment) has decreased to 3.9 percent from 4.4 percent in the year-ago quarter. Loans in forbearance (as a percentage of loans in repayment and forbearance) have decreased to 3.4 percent from 4.3 percent in the year-ago quarter. The charge-off rate remained unchanged at 3.0 percent in both quarters.

Additionally, 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.

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

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

Operating Expenses — Consumer Lending Segment

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

 

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Business Services Segment

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

 

     Three Months Ended
March 31,
    % Increase
(Decrease)
 

(Dollars in millions)

     2013          2012       2013 vs. 2012  

Net interest income

   $ 2       $ 3        (33 )% 

Servicing revenue:

       

Intercompany loan servicing

     149         176        (15

Third-party loan servicing

     27         22        23   

Guarantor servicing

     10         11        (9

Other servicing

     26         27        (4
  

 

 

    

 

 

   

 

 

 

Total servicing revenue

     212         236        (10

Contingency revenue

     99         90        10   

Other Business Services revenue

     8         8          
  

 

 

    

 

 

   

 

 

 

Total other income

     319         334        (4

Direct operating expenses

     122         120        2   

Restructuring expenses

             1        (100
  

 

 

    

 

 

   

 

 

 

Total expenses

     122         121        1   
  

 

 

    

 

 

   

 

 

 

Income before income tax expense

     199         216        (8

Income tax expense

     75         80        (6
  

 

 

    

 

 

   

 

 

 

“Core Earnings”

     124         136        (9

Less: net loss attributable to noncontrolling interest

             (1     (100
  

 

 

    

 

 

   

 

 

 

“Core Earnings” attributable to SLM Corporation

   $ 124       $ 137        (9 )% 
  

 

 

    

 

 

   

 

 

 

“Core Earnings” were $124 million in the first quarter of 2013, compared to $137 million in the year-ago quarter. The decrease was primarily due to the lower balance of FFELP Loans 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 $121 billion and $135 billion for the quarters ended March 31, 2013 and 2012, respectively. The decline in intercompany loan servicing revenue from the year-ago period is primarily the result of a lower outstanding principal balance in the underlying portfolio.

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

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

Other servicing revenue includes account asset servicing revenue and Campus Solutions revenue. Account asset servicing revenue represents fees earned on program management, transfer and servicing agent services and administration services for our various 529 college-savings plans. Assets under administration of 529 college-savings plans totaled $47.9 billion as of March 31, 2013, a 16 percent increase from the year-ago quarter. Campus Solutions revenue is earned from our Campus Solutions business whose services include comprehensive

 

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financing and transaction processing solutions that we provide to college financial aid offices and students to streamline the financial aid process.

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

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

 

(Dollars in millions)

   March 31,
2013
     December 31,
2012
     March 31,
2012
 

Contingency:

        

Student loans

   $ 13,549       $ 13,189       $ 11,004   

Other

     2,239         2,139         1,752   
  

 

 

    

 

 

    

 

 

 

Total

   $ 15,788       $ 15,328       $ 12,756   
  

 

 

    

 

 

    

 

 

 

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

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

Operating Expenses — Business Services Segment

Operating expenses for the quarter ended March 31, 2013 remained consistent with the year-ago quarter.

FFELP Loans Segment

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

 

     Three Months Ended
March 31,
     % Increase
(Decrease)
 

(Dollars in millions)

   2013      2012      2013 vs. 2012  

“Core Earnings” interest income:

        

FFELP Loans

   $ 599       $ 725         (17 )% 

Cash and investments

     2         3         (33
  

 

 

    

 

 

    

 

 

 

Total “Core Earnings” interest income

     601         728         (17

Total “Core Earnings” interest expense

     340         424         (20
  

 

 

    

 

 

    

 

 

 

Net “Core Earnings” interest income

     261         304         (14

Less: provision for loan losses

     16         18         (11
  

 

 

    

 

 

    

 

 

 

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

     245         286         (14

Servicing revenue

     23         25         (8

Other income

     55         —           100   
  

 

 

    

 

 

    

 

 

 

Total other income

     78         25         212   

Direct operating expenses

     157         185         (15
  

 

 

    

 

 

    

 

 

 

Total expenses

     157         185         (15
  

 

 

    

 

 

    

 

 

 

Income before income tax expense

     166         126         32   

Income tax expense

     62         46         35   
  

 

 

    

 

 

    

 

 

 

“Core Earnings”

   $ 104       $ 80         30
  

 

 

    

 

 

    

 

 

 

 

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“Core Earnings” from the FFELP Loans segment were $104 million in the first quarter of 2013, compared with $80 million in the year-ago quarter. The increase was the result of a $55 million gain from the sale of the Residual Interest in a FFELP Loan securitization trust, which more than offset the decline in net interest income from the amortizing FFELP portfolio. Key financial measures include:

 

   

Net interest margin of .83 percent in the first quarter of 2013 compared with .85 percent in the year-ago quarter (see “FFELP Loan Net Interest Margin” for a further discussion of this decrease).

 

   

The provision for loan losses of $16 million in the first quarter of 2013 decreased from $18 million in the year-ago quarter.

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
March 31,
 
       2013         2012    

“Core Earnings” basis FFELP Loan yield

     2.61     2.67

Hedged Floor Income

     .25        .28   

Unhedged Floor Income

     .06        .11   

Consolidation Loan Rebate Fees

     (.68     (.66

Repayment Borrower Benefits

     (.11     (.13

Premium amortization

     (.14     (.14
  

 

 

   

 

 

 

“Core Earnings” basis FFELP Loan net yield

     1.99        2.13   

“Core Earnings” basis FFELP Loan cost of funds

     (1.06     (1.17
  

 

 

   

 

 

 

“Core Earnings” basis FFELP Loan spread

     .93        .96   

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

     (.10     (.11
  

 

 

   

 

 

 

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

     .83     .85
  

 

 

   

 

 

 

 

 

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

     .83     .85

Adjustment for GAAP accounting treatment

     .40        .27   
  

 

 

   

 

 

 

GAAP-basis FFELP Loan net interest margin(1)

     1.23     1.12
  

 

 

   

 

 

 

 

  (1) 

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

 

(Dollars in millions)

             

FFELP Loans

   $ 121,855       $ 137,193   

Other interest-earning assets

     5,555         6,427   
  

 

 

    

 

 

 

Total FFELP “Core Earnings” basis interest-earning assets

   $ 127,410       $ 143,620   
  

 

 

    

 

 

 

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

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

 

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Floor Income

The following table analyzes the ability of the FFELP Loans in our portfolio to earn Floor Income after March 31, 2013 and 2012, based on interest rates as of those dates.

 

     March 31, 2013     March 31, 2012  

(Dollars in billions)

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

Student loans eligible to earn Floor Income

   $ 102.9      $ 14.6      $ 117.5      $ 116.7      $ 17.1      $ 133.8   

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

     (52.9     (1.0     (53.9     (62.0     (1.2     (63.2

Less: economically hedged Floor Income Contracts

     (31.7     —          (31.7     (41.5     —          (41.5
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Student loans eligible to earn Floor Income

   $ 18.3      $ 13.6      $ 31.9      $ 13.2      $ 15.9      $ 29.1   
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Student loans earning Floor Income

   $ 18.3      $ 1.9      $ 20.2      $ 13.2      $ 1.0      $ 14.2   
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

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 April 1, 2013 to June 30, 2016. The hedges related to these loans do not qualify as effective hedges.

 

(Dollars in billions)

   April 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 months March 31, 2013 and 2012.

 

     Three Months Ended
March 31,
 

(Dollars in millions)

     2013          2012    

FFELP Loan provision for loan losses

   $ 16       $ 18   

FFELP Loan charge-offs

     22         23   

Other Income

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

Operating Expenses — FFELP Loans Segment

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

 

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Other Segment

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

 

     Three Months Ended
March 31,
    % Increase
(Decrease)
 

(Dollars in millions)

   2013     2012     2013 vs. 2012  

Net interest loss after provision for loan losses

   $ (8   $        100

Gains on debt repurchases

     29        37        (22

Other income

            3        (100
  

 

 

   

 

 

   

 

 

 

Total other income

     29        40        (28

Overhead expenses:

      

Corporate overhead

     46        36        28   

Unallocated information technology costs

     28        28          
  

 

 

   

 

 

   

 

 

 

Total overhead expenses

     74        64        16   
  

 

 

   

 

 

   

 

 

 

Total operating expenses

     74        64        16   

Restructuring expenses

            3        (100
  

 

 

   

 

 

   

 

 

 

Total expenses

     74        67        10   
  

 

 

   

 

 

   

 

 

 

Loss before income tax benefit

     (53     (27     96   

Income tax benefit

     (20     (10     100   
  

 

 

   

 

 

   

 

 

 

“Core Earnings” (loss)

   $ (33   $ (17     94
  

 

 

   

 

 

   

 

 

 

Net Interest Loss after Provision for Loan Losses

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

Gains on Debt Repurchases

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

Overhead

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

The increase in overhead for the quarter ended March 31, 2013 compared with the year-ago period was primarily the result of a non-recurring $8 million pension termination gain in first-quarter 2012.

 

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Table of Contents

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 March 31,  
     2013     2012  

(Dollars in millions)

   Balance      Rate     Balance      Rate  

Average Assets

          

FFELP Loans

   $ 121,855         2.45   $ 137,193         2.47

Private Education Loans

     38,406         6.58        37,749         6.66   

Other loans

     133         9.36        187         9.67   

Cash and investments

     9,878         .19        9,198         .22   
  

 

 

    

 

 

   

 

 

    

 

 

 

Total interest-earning assets

     170,272         3.25     184,327         3.22
     

 

 

      

 

 

 

Non-interest-earning assets

     4,567           4,768      
  

 

 

      

 

 

    

Total assets

   $ 174,839         $ 189,095      
  

 

 

      

 

 

    

Average Liabilities and Equity

          

Short-term borrowings

   $ 19,070         1.03   $ 29,037         .93

Long-term borrowings

     146,977         1.44        151,081         1.59   
  

 

 

    

 

 

   

 

 

    

 

 

 

Total interest-bearing liabilities

     166,047         1.39        180,118         1.49   
     

 

 

      

 

 

 

Non-interest-bearing liabilities

     3,674           3,904      

Equity

     5,118           5,073      
  

 

 

      

 

 

    

Total liabilities and equity

   $ 174,839         $ 189,095      
  

 

 

      

 

 

    

Net interest margin

        1.89        1.77
     

 

 

      

 

 

 

Rate/Volume Analysis — GAAP

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

 

(Dollars in millions)

   Increase
(Decrease)
    Change Due To(1)  
     Rate     Volume  

Three Months Ended March 31, 2013 vs. 2012

      

Interest income

   $ (111   $ 14      $ (125

Interest expense

     (95     (40     (55
  

 

 

   

 

 

   

 

 

 

Net interest income

   $ (16   $ 54      $ (70
  

 

 

   

 

 

   

 

 

 

 

  (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.

 

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Table of Contents

Summary of our Student Loan Portfolio

Ending Student Loan Balances, net

 

     March 31, 2013  

(Dollars in millions)

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

Total student loan portfolio:

          

In-school(1)

   $ 1,350      $      $ 1,350      $ 2,546      $ 3,896   

Grace, repayment and other(2)

     41,080        75,628        116,708        36,522        153,230   
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Total, gross

     42,430        75,628        118,058        39,068        157,126   

Unamortized premium/(discount)

     667        617        1,284        (772     512   

Receivable for partially charged-off loans

                          1,339        1,339   

Allowance for loan losses

     (92     (55     (147     (2,170     (2,317
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Total student loan portfolio

   $ 43,005      $ 76,190      $ 119,195      $ 37,465      $ 156,660   
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

% of total FFELP

     36     64     100    

% of total

     27     49     76     24     100

 

     December 31, 2012  

(Dollars in millions)

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

Total student loan portfolio:

          

In-school(1)

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

Grace, repayment and other(2)

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

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Total, gross

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

Unamortized premium/(discount)

     691        745        1,436        (796     640   

Receivable for partially charged-off loans

                       1,347        1,347   

Allowance for loan losses

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

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Total student loan portfolio

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

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

% of total FFELP

     35     65     100    

% of total

     27     50     77     23     100

 

(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.

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

 

     Three Months Ended March 31, 2013  

(Dollars in millions)

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

Total

   $ 43,721      $ 78,134      $ 121,855      $ 38,406      $ 160,261   

% of FFELP

     36     64     100    

% of total

     27     49     76     24     100
     Three Months Ended March 31, 2012  

(Dollars in millions)

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

Total

   $ 50,149      $ 87,044      $ 137,193      $ 37,749      $ 174,942   

% of FFELP

     37     63     100    

% of total

     28     50     78     22     100

 

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Table of Contents

Student Loan Activity

 

     Three Months Ended March 31, 2013  

(Dollars in millions)

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

Beginning balance

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

Acquisitions and originations

     101        53        154        1,405        1,559   

Capitalized interest and premium/discount amortization

     295        313        608        200        808   

Consolidations to third parties

     (445     (275     (720     (24     (744

Sales(1)

     (72     (3,749     (3,821            (3,821

Repayments and other

     (1,163     (1,475     (2,638     (1,050     (3,688
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Ending balance

   $ 43,005      $ 76,190      $ 119,195      $ 37,465      $ 156,660   
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 
     Three Months Ended March 31, 2012  

(Dollars in millions)

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

Beginning balance

   $ 50,440      $ 87,690      $ 138,130      $ 36,290      $ 174,420   

Acquisitions and originations

     819        78        897        1,151        2,048   

Capitalized interest and premium/discount amortization

     335        398        733        245        978   

Consolidations to third parties

     (719     (225     (944     (23     (967

Sales

     (135            (135            (135

Repayments and other

     (1,232     (1,515     (2,747     (931     (3,678
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Ending balance

   $ 49,508      $ 86,426      $ 135,934      $ 36,732      $ 172,666   
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

 

(1)

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

 

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Table of Contents

Student Loan Allowance for Loan Losses Activity

 

     Three Months Ended March 31,  
     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)

     (22     (232     (254     (23     (224     (247

Student loan sales

     (6           (6     (2           (2

Plus:

            

Provision for loan losses

     16        225        241        18        235        253   

Reclassification of interest reserve(2)

           6        6              8        8   
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Ending balance

   $ 147      $ 2,170      $ 2,317      $ 180      $ 2,190      $ 2,370   
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Troubled debt restructuring(3)

   $      $ 7,714      $ 7,714      $      $ 5,957      $ 5,957   

 

(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
March  31,
 

(Dollars in millions)

     2013          2012    

Smart Option — interest only(1)

   $ 365       $ 358   

Smart Option — fixed pay(1)

     439         345   

Smart Option — deferred(1)

     590         432   

Other

     17         25   
  

 

 

    

 

 

 

Total Private Education Loan originations

   $ 1,411       $ 1,160   
  

 

 

    

 

 

 

 

  (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  
     March 31,
2013
    March 31,
2012
 

(Dollars in millions)

   Balance     %     Balance     %  

Loans in-school/grace/deferment(1)

   $ 6,434        $ 6,917     

Loans in forbearance(2)

     1,101          1,372     

Loans in repayment and percentage of each status:

        

Loans current

     29,069        92.2     27,499        90.9

Loans delinquent 31-60 days(3)

     731        2.3        859        2.8   

Loans delinquent 61-90 days(3)

     491        1.6        544        1.9   

Loans delinquent greater than 90 days(3)

     1,242        3.9        1,334        4.4   
  

 

 

   

 

 

   

 

 

   

 

 

 

Total Private Education Loans in repayment

     31,533        100     30,236        100
  

 

 

   

 

 

   

 

 

   

 

 

 

Total Private Education Loans, gross

     39,068          38,525     

Private Education Loan unamortized discount

     (772       (853  
  

 

 

     

 

 

   

Total Private Education Loans

     38,296          37,672     

Private Education Loan receivable for partially charged-off loans

     1,339          1,250     

Private Education Loan allowance for losses

     (2,170       (2,190  
  

 

 

     

 

 

   

Private Education Loans, net

   $ 37,465        $ 36,732     
  

 

 

     

 

 

   

Percentage of Private Education Loans in repayment

       80.7       78.5
    

 

 

     

 

 

 

Delinquencies as a percentage of Private Education Loans in repayment

       7.8       9.1
    

 

 

     

 

 

 

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

       3.4       4.3
    

 

 

     

 

 

 

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

       79.1       74.1
    

 

 

     

 

 

 

 

(1) 

Deferment includes customers who have returned to school or are engaged in other permitted educational activities and are not yet required to make payments on 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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Table of Contents

Allowance for Private Education Loan Losses

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

 

     Three Months Ended
March 31,
 

(Dollars in millions)

   2013     2012  

Allowance at beginning of period

   $ 2,171      $ 2,171   

Provision for Private Education Loan losses

     225        235   

Charge-offs(1)

     (232     (224

Reclassification of interest reserve(2)

     6        8   
  

 

 

   

 

 

 

Allowance at end of period

   $ 2,170      $ 2,190   
  

 

 

   

 

 

 

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

     2.97     2.96

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

     2.87     2.84

Allowance as a percentage of the ending total loan balance

     5.37     5.51

Allowance as a percentage of ending loans in repayment

     6.88     7.24

Average coverage of charge-offs (annualized)

     2.3        2.4   

Ending total loans(3)

   $ 40,407      $ 39,775   

Average loans in repayment

   $ 31,645      $ 30,378   

Ending loans in repayment

   $ 31,533      $ 30,236   

 

  (1)

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

 

  (2)

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

 

  (3)

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

 

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Table of Contents

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

 

     March 31, 2013     March 31, 2012  

(Dollars in millions)

   Traditional     Non-
Traditional
    Total     Traditional     Non-
Traditional
    Total  

Ending total loans(1)

   $ 36,746      $ 3,661      $ 40,407      $ 35,755      $ 4,020      $ 39,775   

Ending loans in repayment

     29,022        2,511        31,533        27,588        2,648        30,236   

Private Education Loan allowance for losses

     1,643        527        2,170        1,587        603        2,190   

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

     2.5     8.7     3.0     2.3     10.3     3.0

Allowance as a percentage of ending total loan balance

     4.5     14.4     5.4     4.4     15.0     5.5

Allowance as a percentage of ending loans in repayment

     5.7     21.0     6.9     5.8     22.8     7.2

Average coverage of charge-offs (annualized)

     2.3        2.4        2.3        2.5        2.2        2.4   

Delinquencies as a percentage of Private Education Loans in repayment

     6.7     20.5     7.8     7.7     23.3     9.1

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

     3.3     11.2     3.9     3.6     12.5     4.4

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

     3.2     5.1     3.4     4.1     6.8     4.3

Loans that entered repayment during the period(2)

   $ 553      $ 23      $ 576      $ 729      $ 54      $ 783   

Percentage of Private Education Loans with a cosigner

     69     30     66     66     29     63

Average FICO at origination

     728        624        720        727        624        718   

 

(1) 

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

 

(2) 

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

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

Receivable for Partially Charged-Off Private Education Loans

At the end of each month, for loans that are 212 days past due, we charge off the estimated loss of a defaulted loan balance. Actual recoveries are applied against the remaining loan balance that was not charged off. We refer to this remaining loan balance as the “receivable for partially charged-off loans.” If actual periodic recoveries are less than expected, the difference is immediately charged off through the allowance for loan losses with an offsetting reduction in the receivable for partially charged-off Private Education Loans. If actual periodic recoveries are greater than expected, they will be reflected as a recovery through the allowance for Private Education Loan losses once the cumulative recovery amount exceeds the cumulative amount originally expected to be recovered. Private Education Loans which defaulted between 2008 and 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 $209 million and $151 million in allowance for Private Education Loan losses at March 31, 2013 and 2012, respectively, providing for

 

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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).

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

 

     Three Months Ended
March 31,
 

(Dollars in millions)

   2013     2012  

Receivable at beginning of period

   $ 1,347      $ 1,241   

Expected future recoveries of current period defaults(1)

     78        69   

Recoveries(2)

     (68     (50

Charge-offs(3)

     (18     (10
  

 

 

   

 

 

 

Receivable at end of period

     1,339        1,250   

Allowance for estimated recovery shortfalls(4)

     (209     (151
  

 

 

   

 

 

 

Net receivable at end of period

   $ 1,130      $ 1,099   
  

 

 

   

 

 

 

 

  (1)

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

 

  (2)

Current period cash collections.

 

  (3)

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

 

  (4)

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

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.

 

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The table below reflects the historical effectiveness of using forbearance. Our experience has shown that three years after being granted forbearance for the first time, 66 percent of the loans are current, paid in full, or receiving an in-school grace or deferment, and 20 percent have defaulted. The default experience associated with loans which utilize forbearance is considered in our allowance for loan losses. The number of loans in a forbearance status as a percentage of loans in repayment and forbearance decreased to 3.4 percent in the first quarter of 2013 compared with 4.3 percent in the year-ago quarter. As of March 31, 2013, 2.2 percent of loans in current status were delinquent as of the end of the prior month, but were granted a forbearance that made them current as of March 31, 2013 (customers made payments on approximately 37 percent of these loans as a prerequisite to being granted forbearance).

 

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

Portfolio data through March 31, 2013

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

In-school/grace/deferment

     9.6     9.0     5.5

Current

     50.7        59.1        66.8   

Delinquent 31-60 days

     3.2        2.0        .4   

Delinquent 61-90 days

     1.9        1.2        .2   

Delinquent greater than 90 days

     4.8        2.8        .3   

Forbearance

     4.0        3.1          

Defaulted

     20.0        11.4        7.3   

Paid

     5.8        11.4        19.5   
  

 

 

   

 

 

   

 

 

 

Total

     100     100     100
  

 

 

   

 

 

   

 

 

 

The tables below show the composition and status of the Private Education Loan portfolio aged by number of months in active repayment status (months for which a scheduled monthly payment was due). As indicated in the tables, the percentage of loans in forbearance status decreases the longer the loans have been in active repayment status. At March 31, 2013, loans in forbearance status as a percentage of loans in repayment and

 

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forbearance was 5.9 percent for loans that have been in active repayment status for less than 25 months. The percentage drops to 1.2 percent for loans that have been in active repayment status for more than 48 months. Approximately 70 percent of our Private Education Loans in forbearance status has been in active repayment status less than 25 months.

 

(Dollars in millions)

 

March 31, 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

  $      $      $      $      $      $ 6,434      $ 6,434   

Loans in forbearance

    587        184        145        79        106               1,101   

Loans in repayment — current

    5,645        5,156        5,345        4,505        8,418               29,069   

Loans in repayment — delinquent 31-60 days

    252        139        132        85        123               731   

Loans in repayment — delinquent 61-90 days

    189        95        82        54        71               491   

Loans in repayment — delinquent greater

than 90 days

    513        260        204        115        150               1,242   
 

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Total

  $ 7,186      $ 5,834      $ 5,908      $ 4,838      $ 8,868      $ 6,434        39,068   
 

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

Unamortized discount

                (772

Receivable for partially charged-off loans

                1,339   

Allowance for loan losses

                (2,170
             

 

 

 

Total Private Education Loans, net

              $ 37,465   
             

 

 

 

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

    8.2     3.2     2.5     1.6     1.2         3.4
 

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

 

(Dollars in millions)

 

March 31, 2012

  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

  $      $      $      $      $      $ 6,917      $ 6,917   

Loans in forbearance

    892        198        132        64        86               1,372   

Loans in repayment — current

    6,529        5,920        5,204        3,626        6,220               27,499   

Loans in repayment — delinquent 31-60 days

    381        171        136        72        99               859   

Loans in repayment — delinquent 61-90 days

    265        107        79        39        54               544   

Loans in repayment — delinquent greater

than 90 days

    663        270        186        93        122               1,334   
 

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Total

  $ 8,730      $ 6,666      $ 5,737      $ 3,894      $ 6,581      $ 6,917        38,525   
 

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

Unamortized discount

                (853

Receivable for partially charged-off loans

                1,250   

Allowance for loan losses

                (2,190
             

 

 

 

Total Private Education Loans, net

              $ 36,732   
             

 

 

 

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

    10.2     3.0     2.3     1.7     1.3         4.3
 

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

 

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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, 5 percent of loans currently in forbearance have cumulative forbearance of more than 24 months.

 

     March 31, 2013     March 31, 2012  

(Dollars in millions)

   Forbearance
Balance
     % of
Total
    Forbearance
Balance
     % of
Total
 

Cumulative number of months customer has used forbearance

          

Up to 12 months

   $ 867         79   $ 839         61

13 to 24 months

     178         16        477         35   

More than 24 months

     56         5        56         4   
  

 

 

    

 

 

   

 

 

    

 

 

 

Total

   $ 1,101         100   $ 1,372         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 March 31, 2013.

 

     Loan Program  

(Dollars in millions)

   Signature and
Other
     Smart Option      Career
Training
     Total  

$ in repayment

     $23,701         $6,421         $ 1,411         $31,533   

$ in total

     28,943         8,658         1,467         39,068   

Payment method by enrollment status:

           

In-school/grace

     Deferred(1)        

 
 

Deferred(1),

interest-only or fixed
$25/month

 

  
  

    
 
Interest-only or fixed
$25/month
  
  
  

Repayment

    
 
Level principal and
interest or graduated
  
  
    
 
Level principal and
interest
  
  
    
 
Level principal and
interest
  
  
  

 

(1) 

“Deferred” includes loans for which no payments are required and interest charges are capitalized into the loan balance.

The graduated repayment program that is part of Signature and Other Loans includes an interest-only payment feature that may be selected at the option of the customer. Customers elect to participate in this program at the time they enter repayment following their grace period. This program is available to customers in repayment, after their grace period, who would like a temporary lower payment from the required principal and interest payment amount. Customers participating in this program pay monthly interest with no amortization of their principal balance for up to 48 payments after entering repayment (dependent on the loan product type). The maturity date of the loan is not extended when a customer participates in this program. As of March 31, 2013 and 2012, customers in repayment owing approximately $6.1 billion (19 percent of loans in repayment) and $7.0 billion (23 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 March 31, 2013 and 2012, respectively.

Accrued Interest Receivable

The following table provides information regarding accrued interest receivable on our Private Education Loans. The table also discloses the amount of accrued interest on loans greater than 90 days past due as

 

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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
 

March 31, 2013

   $ 918       $ 48       $ 68   

December 31, 2012

   $ 904       $ 55       $ 67   

March 31, 2012

   $ 1,007       $ 50       $ 71   

FFELP Loan Portfolio Performance

FFELP Loan Delinquencies and Forbearance

The table below presents our FFELP Loan delinquency trends.

 

     FFELP Loan Delinquencies  
     March 31,  
     2013     2012  

(Dollars in millions)

   Balance     %     Balance     %  

Loans in-school/grace/deferment(1)

   $ 17,324        $ 22,788     

Loans in forbearance(2)

     15,430          19,478     

Loans in repayment and percentage of each status:

        

Loans current

     71,792        84.2     77,099        83.6

Loans delinquent 31-60 days(3)

     4,186        4.9        5,173        5.6   

Loans delinquent 61-90 days(3)

     2,441        2.9        2,666        2.9   

Loans delinquent greater than 90 days(3)

     6,885        8.0        7,286        7.9   
  

 

 

   

 

 

   

 

 

   

 

 

 

Total FFELP Loans in repayment

     85,304        100     92,224        100
  

 

 

   

 

 

   

 

 

   

 

 

 

Total FFELP Loans, gross

     118,058          134,490     

FFELP Loan unamortized premium

     1,284          1,624     
  

 

 

     

 

 

   

Total FFELP Loans

     119,342          136,114     

FFELP Loan allowance for losses

     (147       (180  
  

 

 

     

 

 

   

FFELP Loans, net

   $ 119,195        $ 135,934     
  

 

 

     

 

 

   

Percentage of FFELP Loans in repayment

       72.3       68.6
    

 

 

     

 

 

 

Delinquencies as a percentage of FFELP Loans in repayment

       15.8       16.4
    

 

 

     

 

 

 

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

       15.3       17.4
    

 

 

     

 

 

 

 

  (1) 

Loans for customers who may still be attending school or engaging in other permitted educational activities and are not yet required to make payments on the loans, e.g., residency periods for medical students or a grace period for bar exam preparation, as well as loans for customers who have requested 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
March 31,
 

(Dollars in millions)

   2013     2012  

Allowance at beginning of period

   $ 159      $ 187   

Provision for FFELP Loan losses

     16        18   

Charge-offs

     (22     (23

Student loan sales

     (6     (2
  

 

 

   

 

 

 

Allowance at end of period

   $ 147      $ 180   
  

 

 

   

 

 

 

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

     .10     .10

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

     .09     .08

Allowance as a percentage of the ending total loans, gross

     .12     .13

Allowance as a percentage of ending loans in repayment

     .17     .20

Allowance coverage of charge-offs (annualized)

     1.6        2.0   

Ending total loans, gross

   $ 118,058      $ 134,490   

Average loans in repayment

   $ 87,256      $ 93,150   

Ending loans in repayment

   $ 85,304      $ 92,224   

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

 

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influence our credit ratings include the ratings agencies’ assessment of the general operating environment, our relative positions in the markets in which we compete, reputation, liquidity position, the level and volatility of earnings, corporate governance and risk management policies, capital position and capital management practices. A negative change in our credit rating could have a negative effect on our liquidity because it would raise the cost and availability of funding and potentially require additional cash collateral or restrict cash currently held as collateral on existing borrowings or derivative collateral arrangements. It is our objective to improve our credit ratings so that we can continue to efficiently access the capital markets even in difficult economic and market conditions.

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

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

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

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

 

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Sources of Liquidity and Available Capacity

Ending Balances

 

(Dollars in millions)

   March 31, 2013      December 31, 2012  

Sources of primary liquidity:

     

Unrestricted cash and liquid investments:

     

Holding Company and other non-bank subsidiaries

   $ 2,290       $ 2,376   

Sallie Mae Bank(1)

     1,472         1,598   
  

 

 

    

 

 

 

Total unrestricted cash and liquid investments

   $ 3,762       $ 3,974   
  

 

 

    

 

 

 

Unencumbered FFELP Loans

   $ 1,753       $ 1,656   

Average Balances

 

     Three Months Ended  

(Dollars in millions)

   March 31, 2013      March 31, 2012  

Sources of primary liquidity:

     

Unrestricted cash and liquid investments:

     

Holding Company and other non-bank subsidiaries

   $ 2,820       $ 1,656   

Sallie Mae Bank(1)

     1,229         880   
  

 

 

    

 

 

 

Total unrestricted cash and liquid investments

   $ 4,049       $ 2,536   
  

 

 

    

 

 

 

Unencumbered FFELP Loans

   $ 1,695       $ 1,080   

 

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

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

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

The Bank’s ability to pay dividends is subject to the laws of Utah and the regulations of the FDIC. Generally, under Utah’s industrial bank laws and regulations as well as FDIC regulations, the Bank may pay dividends from its net profits without regulatory approval if, following the payment of the dividend, the Bank’s capital and surplus would not be impaired. While applicable Utah and FDIC regulations differ in approach as to determinations of impairment of capital and surplus, neither method of determination has historically required the Bank to obtain consent to the payment of dividends. For the three months ended March 31, 2013 and 2012, the Bank paid dividends of $120 million and $50 million, respectively.

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

 

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

 

(Dollars in billions)

   March 31,
2013
    December 31,
2012
 

Net assets of consolidated variable interest entities (encumbered assets) — FFELP Loans

   $ 6.4      $ 6.6   

Net assets of consolidated variable interest entities (encumbered assets) — Private Education Loans

     6.7        6.6   

Tangible unencumbered assets(1)

     21.2        21.2   

Unsecured debt

     (26.7     (26.7

Mark-to-market on unsecured hedged debt(2)

     (1.5     (1.7

Other liabilities, net

     (1.4     (1.4
  

 

 

   

 

 

 

Total tangible equity

   $ 4.7      $ 4.6   
  

 

 

   

 

 

 

 

  (1)

Excludes goodwill and acquired intangible assets.

 

  (2)

At March 31, 2013 and December 31, 2012, there were $1.2 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 First-Quarter 2013

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

Unsecured Financings:

 

   

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

FFELP Financings:

 

   

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

Private Education Loan Financings:

 

   

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

 

   

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

Shareholder Distributions

On February 5, 2013, we increased our quarterly dividend on our common stock from $0.125 per common share to $0.15 per common share. The Board of Directors also authorized a $400 million share repurchase program for our outstanding common stock. The program does not have an expiration date. For the first-quarter 2013, we repurchased 10 million shares of common stock for $199 million.

2013 Sale of FFELP Securitization Trust Residual Interest

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

Recent Second-Quarter 2013 Transactions

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

 

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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 March 31, 2013.

 

(Dollars in millions)

   SLM Corporation
and Sallie Mae Bank
Contracts
    Securitization  Trust
Contracts
 

Exposure, net of collateral(1)

   $ 83      $ 587   

Percent of exposure to counterparties with credit ratings below S&P AA- or Moody’s Aa3

     88     31

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 $519 million related to financial institutions located in France; of this amount, $400 million carries a guaranty from the French government. The total exposure relates to $5.8 billion notional amount of cross-currency interest rate swaps held in our securitization trusts, of which $3.5 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 March 31, 2013, no collateral was required to be posted and we are not holding any collateral related to these contracts. Adjustments are made to our derivative valuations for counterparty credit risk. The adjustments made at March 31, 2013 related to derivatives with French financial institutions (including those that carry a guaranty from the French government) decreased the derivative asset value by $53 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 March 31, 2013 and December 31, 2012, and average balances and average interest rates of our “Core Earnings” basis borrowings for the three months ended March 31, 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

 

     March 31, 2013      December 31, 2012  

(Dollars in millions)

   Short
Term
     Long
Term
     Total      Short
Term
     Long
Term
     Total  

Unsecured borrowings:

                 

Senior unsecured debt

   $ 2,778       $ 15,167       $ 17,945       $ 2,319       $ 15,446       $ 17,765   

Brokered deposits

     1,170         2,782         3,952         979         3,088         4,067   

Retail and other deposits

     3,643                 3,643         3,247                3,247   

Other(1)

     1,240                 1,240         1,609                1,609   
  

 

 

    

 

 

    

 

 

    

 

 

    

 

 

    

 

 

 

Total unsecured borrowings

     8,831         17,949         26,780         8,154         18,534         26,688   
  

 

 

    

 

 

    

 

 

    

 

 

    

 

 

    

 

 

 

Secured borrowings:

                 

FFELP Loan securitizations

             100,750         100,750                105,525         105,525   

Private Education Loan securitizations

             20,252         20,252                19,656         19,656   

ED Conduit Program Facility

     6,967                 6,967         9,551                9,551   

FFELP ABCP Facility

             5,114         5,114                4,154         4,154   

Private Education Loan ABCP Facility

     539                 539                1,070         1,070   

Acquisition financing(2)

             576         576                673         673   

FHLB-DM Facility

     880         1,220         2,100         2,100                2,100   
  

 

 

    

 

 

    

 

 

    

 

 

    

 

 

    

 

 

 

Total secured borrowings

     8,386         127,912         136,298         11,651         131,078         142,729   
  

 

 

    

 

 

    

 

 

    

 

 

    

 

 

    

 

 

 

Total “Core Earnings” basis

     17,217         145,861         163,078         19,805         149,612         169,417   

Hedge accounting adjustments

     37         2,026         2,063         51         2,789         2,840   
  

 

 

    

 

 

    

 

 

    

 

 

    

 

 

    

 

 

 

Total GAAP basis

   $ 17,254       $ 147,887       $ 165,141       $ 19,856       $ 152,401       $ 172,257   
  

 

 

    

 

 

    

 

 

    

 

 

    

 

 

    

 

 

 

 

(1)

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

 

(2)

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

Secured borrowings comprised 84 percent of our “Core Earnings” basis debt outstanding at both March 31, 2013 and December 31, 2012.

 

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Average Balances

 

     Three Months Ended March 31,  
     2013     2012  

(Dollars in millions)

   Average
Balance
     Average
Rate
    Average
Balance
     Average
Rate
 

Unsecured borrowings:

          

Senior unsecured debt

   $ 18,324         3.17   $ 18,004         2.88

Brokered deposits

     4,012         1.56        3,515         2.08   

Retail and other deposits

     3,540         .83        2,283         .95   

Other(1)

     1,396         .22        1,400         .11   
  

 

 

    

 

 

   

 

 

    

 

 

 

Total unsecured borrowings

     27,272         2.48        25,202         2.44   
  

 

 

    

 

 

   

 

 

    

 

 

 

Secured borrowings:

          

FFELP Loan securitizations

     102,532         .97        107,230         1.14   

Private Education Loan securitizations

     19,712         2.06        18,577         2.09   

ED Conduit Program Facility

     8,446         .94        20,515         .81   

FFELP ABCP Facility

     4,464         .99        4,018         1.19   

Private Education Loan ABCP Facility

     919         1.74        2,633         1.69   

Acquisition financing(2)

     602         4.79        872         4.85   

FHLB-DM Facility

     2,100         .30        1,071         .29   
  

 

 

    

 

 

   

 

 

    

 

 

 

Total secured borrowings

     138,775         1.13        154,916         1.23   
  

 

 

    

 

 

   

 

 

    

 

 

 

Total

   $ 166,047         1.35   $ 180,118         1.40
  

 

 

    

 

 

   

 

 

    

 

 

 

“Core Earnings” average balance and rate

   $ 166,047         1.35   $ 180,118         1.40

Adjustment for GAAP accounting treatment

            .04               .09   
  

 

 

    

 

 

   

 

 

    

 

 

 

GAAP-basis average balance and rate

   $ 166,047         1.39   $ 180,118         1.49
  

 

 

    

 

 

   

 

 

    

 

 

 

 

(1)

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

 

(2)

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

Critical Accounting Policies and Estimates

Management’s Discussion and Analysis of Financial Condition and Results of Operations addresses our consolidated financial statements, which have been prepared in accordance with generally accepted accounting principles in the United States of America. 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 quarter 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 March 31, 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 in 2013.

 

    As of March 31, 2013     As of March 31, 2012  
    Impact on Annual Earnings If:     Impact on Annual Earnings If:  
    Interest Rates     Funding Indices     Interest Rates     Funding Indices  

(Dollars in millions, except

per share amounts)

  Increase
100 Basis
Points
    Increase
300 Basis
Points
    Increase
25 Basis
Points(1)
    Increase
100 Basis
Points
    Increase
300 Basis
Points
    Increase
25 Basis
Points(1)
 

Effect on Earnings:

           

Change in pre-tax net income before unrealized gains (losses) on derivative and hedging activities

  $ (32   $ (17   $ (281   $ (19   $ 8      $ (343

Unrealized gains (losses) on derivative and hedging activities

    368        593        (2     503        857        (12
 

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Increase in net income before taxes

  $ 336      $ 576      $ (283   $ 484      $ 865      $ (355
 

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Increase in diluted earnings per common share

  $ .733      $ 1.257      $ (.618   $ .949      $ 1.697      $ (.696
 

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

 

(1) 

If an asset is not funded with the same index/frequency reset of the asset then it is assumed the funding index increases 25 basis points while holding the asset index constant.

 

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     At March 31, 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

   $ 119,294       $ (672     (1 )%    $ (1,317     (1 )% 

Private Education Loans

     37,214                            

Other earning assets

     9,519                     (1      

Other assets

     7,907         (461     (6     (936     (12 )% 
  

 

 

    

 

 

   

 

 

   

 

 

   

 

 

 

Total assets gain/(loss)

   $ 173,934       $ (1,133     (1 )%    $ (2,254     (1 )% 
  

 

 

    

 

 

   

 

 

   

 

 

   

 

 

 

Liabilities

           

Interest-bearing liabilities

   $ 161,453       $ (855     (1 )%    $ (2,371     (1 )% 

Other liabilities

     3,791         (213     (6     195        5   
  

 

 

    

 

 

   

 

 

   

 

 

   

 

 

 

Total liabilities (gain)/loss

   $ 165,244       $ (1,068     (1 )%    $ (2,176     (1 )% 
  

 

 

    

 

 

   

 

 

   

 

 

   

 

 

 

 

     At December 31, 2012  
            Interest Rates:  
            Change from
Increase of
100 Basis
Points
    Change from
Increase of
300 Basis
Points
 

(Dollars in millions)

   Fair Value      $     %     $     %  

Effect on Fair Values:

           

Assets

           

FFELP Loans

   $ 125,042       $ (738     (1 )%    $ (1,438     (1 )% 

Private Education Loans

     36,081                            

Other earning assets

     9,994                     (1      

Other assets

     8,721         (560     (6     (1,187     (14 )% 
  

 

 

    

 

 

   

 

 

   

 

 

   

 

 

 

Total assets gain/(loss)

   $ 179,838       $ (1,298     (1 )%    $ (2,626     (1 )% 
  

 

 

    

 

 

   

 

 

   

 

 

   

 

 

 

Liabilities

           

Interest-bearing liabilities

   $ 166,071       $ (829       $ (2,298     (1 )% 

Other liabilities

     3,937         (422     (11     (274     (7
  

 

 

    

 

 

   

 

 

   

 

 

   

 

 

 

Total liabilities (gain)/loss

   $ 170,008       $ (1,251     (1 )%    $ (2,572     (2 )% 
  

 

 

    

 

 

   

 

 

   

 

 

   

 

 

 

A primary objective in our funding is to minimize our sensitivity to changing interest rates by generally funding our floating rate student loan portfolio with floating rate debt. However, due to the ability of some FFELP loans to earn Floor Income, we can have a fixed versus floating mismatch in funding if the student loan earns at the fixed borrower rate and the funding remains floating. In addition, we can have a mismatch in the index (including the frequency of reset) of floating rate debt versus floating rate assets.

During the three months ended March 31, 2013 and 2012, certain FFELP Loans were earning Floor Income and we locked in a portion of that Floor Income through the use of Floor Income contracts. The result of these hedging transactions was to convert a portion of the fixed rate nature of student loans to variable rate, and to fix the relative spread between the student loan asset rate and the variable rate liability.

In the preceding tables, under the scenario where interest rates increase 100 and 300 basis points, the change in pre-tax net income before the unrealized gains (losses) on derivative and hedging activities is primarily due to

 

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the impact of (i) our unhedged loans being in a fixed-rate mode due to Floor Income, while being funded with variable debt in low interest rate environments; and (ii) a portion of our variable assets being funded with fixed rate liabilities and equity. Item (i) will generally cause income to decrease when interest rates increase from a low interest rate environment, whereas item (ii) will generally offset this decrease.

Under the scenario in the tables above labeled “Impact on Annual Earnings If: Funding Indices Increase 25 Basis Points,” the main driver of the decrease in pre-tax income before unrealized gains (losses) on derivative and hedging activities in both the March 31, 2013 and March 31, 2012 analyses is the result of one-month LIBOR-indexed FFELP Loans (loans formerly indexed to commercial paper) being funded with three-month LIBOR and other non-discrete indexed liabilities. See “Asset and Liability Funding Gap” 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 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.

 

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Asset and Liability Funding Gap

The tables below present our assets and liabilities (funding) arranged by underlying indices as of March 31, 2013. In the following GAAP presentation, the funding gap only includes derivatives that qualify as effective hedges (those derivatives which are reflected in net interest margin, as opposed to those reflected in the “gains (losses) on derivatives and hedging activities, net” line on the consolidated statements of income). The difference between the asset and the funding is the funding gap for the specified index. This represents our exposure to interest rate risk in the form of basis risk and repricing risk, which is the risk that the different indices may reset at different frequencies or may not move in the same direction or at the same magnitude.

Management analyzes interest rate risk and in doing so includes all derivatives that are economically hedging our debt whether they qualify as effective hedges or not (“Core Earnings” basis). Accordingly, we are also presenting the asset and liability funding gap on a “Core Earnings” basis in the table that follows the GAAP presentation.

GAAP-Basis

 

(Dollars in billions)

Index

   Frequency of
Variable
Resets
   Assets(1)      Funding(2)      Funding
Gap
 

3-month Treasury bill

   weekly    $ 6.0       $      $ 6.0   

Prime

   annual      0.6                0.6   

Prime

   quarterly      4.2                4.2   

Prime

   monthly      19.1                19.1   

Prime

   daily             1.3         (1.3

PLUS Index

   annual      0.4                0.4   

3-month LIBOR

   daily                     

3-month LIBOR

   quarterly             100.4         (100.4

1-month LIBOR

   monthly      12.8         32.2         (19.4

1-month LIBOR daily

   daily      112.0                112.0   

CMT/CPI Index

   monthly/quarterly             1.3         (1.3

Non-Discrete reset(3)

   monthly             17.6         (17.6

Non-Discrete reset(4)

   daily/weekly      9.5         4.9         4.6   

Fixed Rate(5)

        9.5         16.4         (6.9
     

 

 

    

 

 

    

 

 

 

Total

      $ 174.1       $ 174.1       $  
     

 

 

    

 

 

    

 

 

 

 

  (1)

FFELP Loans of $51.9 billion ($47.1 billion LIBOR index and $4.8 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, the ABCP Facilities, the ED Conduit Program Facility and the FHLB-DM Facility.

 

  (4)

Assets include restricted and unrestricted cash equivalents and other overnight type instruments. Funding includes retail and other deposits and the obligation to return cash collateral held related to derivatives exposures.

 

  (5)

Assets include receivables and other assets (including goodwill and acquired intangibles). Funding includes other liabilities and stockholders’ equity (excluding series B Preferred Stock).

The “Funding Gaps” in the above table are primarily interest rate mismatches in short-term indices between our assets and liabilities. We 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.

 

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“Core Earnings” Basis

 

(Dollars in billions)

Index

   Frequency of
Variable
Resets
   Assets(1)      Funding(2)      Funding
Gap
 

3-month Treasury bill

   weekly    $ 6.0       $      $ 6.0   

Prime

   annual      .6                .6   

Prime

   quarterly      4.2                4.2   

Prime

   monthly      19.1         4.5         14.6   

Prime

   daily             1.3         (1.3

PLUS Index

   annual      .4                .4   

3-month LIBOR

   daily             6.0         (6.0

3-month LIBOR

   quarterly             78.8         (78.8

1-month LIBOR

   monthly      12.8         41.9         (29.1

1-month LIBOR

   daily      112.0         5.0         107.0   

Non-Discrete reset(3)

   monthly             17.6         (17.6

Non-Discrete reset(4)

   daily/weekly      9.5         4.9         4.6   

Fixed Rate(5)

        7.2         11.8         (4.6
     

 

 

    

 

 

    

 

 

 

Total

      $ 171.8       $ 171.8       $  
     

 

 

    

 

 

    

 

 

 

 

  (1) 

FFELP Loans of $20.2 billion ($18.5 billion LIBOR index and $1.7 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, the ABCP Facilities, the ED Conduit Program Facility and the FHLB-DM Facility.

 

  (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 March 31, 2013.

 

(Averages in Years)

   Weighted Average
Life
 

Earning assets

  

Student loans

     7.9   

Other loans

     7.2   

Cash and investments

     .1   
  

 

 

 

Total earning assets

     7.5   
  

 

 

 

Borrowings

  

Short-term borrowings

     .3   

Long-term borrowings

     6.7   
  

 

 

 

Total borrowings

     6.0   
  

 

 

 

 

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 March 31, 2013. Based on this evaluation, our chief principal executive and principal financial officers concluded that, as of March 31, 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 March 31, 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

We and our subsidiaries and affiliates also 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.

 

Item  1A. Risk Factors

There have been no material changes from the risk factors previously disclosed in our Annual Report on Form 10-K for the year ended December 31, 2012.

 

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 March 31, 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:

           

January 1 — January 31, 2013

     .6       $ 16.99               $   

February 1 — February 28, 2013

     3.9         18.74         2.6         351   

March 1 — March 31, 2013

     8.0         19.65         7.6         201   
  

 

 

    

 

 

    

 

 

    

Total first-quarter 2013

     12.5       $ 19.23         10.2      
  

 

 

    

 

 

    

 

 

    

 

  (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 February 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 March 28, 2013 was $20.50.

 

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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:

 

10.1       

Form of SLM Corporation 2012 Omnibus Incentive Plan, Performance Stock Unit Term Sheet — 2013†

10.2       

Form of SLM Corporation 2012 Omnibus Incentive Plan, Bonus Restricted Stock Unit Term Sheet — 2013†

10.3       

Form of SLM Corporation 2012 Omnibus Incentive Plan, Stock Option Agreement, Net Settled Options—2013†

10.4       

Form of SLM Corporation 2012 Omnibus Incentive Plan, Independent Director Restricted Stock Agreement — 2013†

10.5       

Form of SLM Corporation 2012 Omnibus Incentive Plan, Independent Director Stock Option Agreement — 2013†

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.

 

Management Contract or Compensatory Plan or Arrangement

 

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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: May 3, 2013

 

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