Sallie Mae Reports Fourth-Quarter and Full-Year 2013 Financial Results

Full-Year Loan Originations Increase 14 Percent from the Prior Year

Full-Year Private Education Loan Charge-off Rates Decline to 2.8 Percent, Lowest since 2007

Asset Sales Contribute to Core Earnings Growth

Thursday, January 16, 2014 4:16 pm EST

Dateline:

NEWARK, Del.

Public Company Information:

NASDAQ:
SLM

NEWARK, Del.--(BUSINESS WIRE)--Sallie Mae (NASDAQ: SLM), formally SLM Corporation, today released fourth-quarter 2013 and full-year 2013 financial results that include annual 14 percent private education loan origination growth to $3.8 billion and lower year-over-year charge-offs.

“As we begin 2014, we remain on track to separate our business into two public companies, each poised for growth and enhanced value for our customers, shareholders and other stakeholders,” said John (Jack) F. Remondi, president and CEO. “In 2013, we demonstrated the value of our FFELP cash flows, continued to return excess capital to our shareholders and ended the year with strong capital and reserve positions. Our consumer lending segment generated strong earnings and solid loan origination growth as more families turned to us to meet their responsible borrowing needs. Portfolio performance continues to improve: a higher percentage of our customers experienced payment success due to our sound underwriting and emphasis on establishing early repayment habits. In 2014, our top priority remains to provide the quality service and innovative tools our customers need to successfully manage their loans and avoid the devastating consequences of default.”

For the fourth-quarter 2013, GAAP net income was $270 million ($0.60 diluted earnings per share), compared with $348 million ($0.74 diluted earnings per share) for the year-ago quarter. For 2013, GAAP net income was $1.4 billion ($3.12 diluted earnings per share), compared with $939 million ($1.90 diluted earnings per share) for 2012.

Core earnings for the quarter were $275 million ($0.61 diluted earnings per share), compared with $257 million ($0.55 diluted earnings per share) for the year-ago quarter.

Core earnings for the year were $1.29 billion ($2.83 diluted earnings per share), compared with $1.06 billion ($2.16 diluted earnings per share) for 2012.

The increase in core earnings for fourth-quarter and full-year 2013 compared with fourth-quarter and full-year 2012 was primarily the result of lower provision for loan losses, gains on asset sales, and increases in servicing and contingency revenue:

 
Increase/(Decrease) in Core Earnings

over year-ago periods

Fourth-quarter   Full-year

(Dollars in millions)

2013 vs. 2012 2013 vs. 2012

Decrease in provision for loan losses, pre-tax

$ 124 $ 241
Increase in gains from the sale of subsidiaries, after-tax 62 109
Increase in servicing and contingency revenue, pre-tax 12 75
Increase in gains from sale of residual interests in FFELP securitization trusts, pre-tax 312
Increase in restructuring and other reorganization expenses, pre-tax (25 ) (61 )
Decrease in net interest income before provision for loan loss, pre-tax (39 ) (106 )
Decrease in debt repurchase gains, pre-tax (43 ) (97 )
Increase in operating expenses, pre-tax (79 ) (145 )
 

Sallie Mae provides core earnings because management makes its financial decisions based on such measures. The changes in GAAP net income are driven by the same core earnings items discussed above, as well as changes in mark-to-market unrealized gains and losses on derivative contracts and amortization and impairment of goodwill and intangible assets that are recognized in GAAP, but not in core earnings results. Fourth-quarter and full-year 2013 GAAP results included gains of $8 million and $243 million, respectively, from derivative accounting treatment that are excluded from core earnings results. In fourth-quarter and full-year 2012, these amounts were gains of $129 million and losses of $194 million, respectively.

Consumer Lending

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

Quarterly core earnings were $114 million, compared with $45 million in the year-ago quarter. The increase is primarily the result of a $116 million decrease in the provision for private education loan losses.

Fourth-quarter 2013 private education loan portfolio results vs. fourth-quarter 2012 included:

  • Loan originations of $524 million, up 2 percent.
  • Delinquencies of 90 days or more of 4.1 percent of loans in repayment, down from 4.6 percent.
  • Loans in forbearance of 3.4 percent of loans in repayment and forbearance, down from 3.5 percent.
  • Annualized charge-off rate of 2.9 percent of average loans in repayment, down from 4.2 percent.
  • Provision for private education loan losses of $180 million, down from $296 million.
  • Core net interest margin, before loan loss provision, of 4.1 percent, unchanged from 4.1 percent.
  • The portfolio balance, net of loan loss allowance, was $37.5 billion, up 2 percent.

Full year core earnings were $412 million, compared with $277 million in 2012. This increase was primarily the result of a $221 million decrease in the provision for loan losses.

During 2013, originations were $3.8 billion, up 14 percent.

Business Services

Sallie Mae’s business services segment includes fees primarily from servicing and collection activities.

Business services core earnings were $184 million in fourth-quarter 2013, compared with $135 million in the year-ago quarter. The increase was primarily due to the $62 million after-tax gain recognized with the sale of the 529 college savings plan administration business. The results of this business were moved to discontinued operations for all periods presented.

Full year core earnings were $599 million compared with $541 million in 2012. This increase was primarily the result of $109 million of after-tax gains from the sale of two subsidiaries in 2013.

The company now services loans for 5.7 million customers on behalf the U.S. Department of Education, up from 4.3 million last year. Federal loan customers with loans serviced by Sallie Mae default at a rate 30 percent lower than the national average.

Federally Guaranteed Student Loans (FFELP)

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

Core earnings for the segment were $82 million in fourth-quarter 2013, compared with the year-ago quarter’s $89 million.

For 2013, core earnings were $515 million compared with $307 million in 2012. This increase was primarily due to $312 million of gains from the sale of residual interests in FFELP securitization trusts in 2013.

At Dec. 31, 2013, the company held $104.6 billion of FFELP loans, compared with $125.6 billion at Dec. 31, 2012. FFELP securitization residual sales in the first half of the year accounted for $12 billion of this decrease.

Operating Expenses

In the fourth quarter of 2013, the company reserved $70 million for expected compliance remediation efforts related to pending regulatory inquiries.

Excluding this compliance remediation expense, fourth-quarter 2013 operating expenses were $235 million, compared with $226 million in the year-ago quarter, and full-year 2013 operating expenses were $972 million compared with $897 million for 2012. The increase for both periods was primarily the result of increases in third-party servicing and collection activities, and continued investments in technology. In addition, the increase in full-year 2013 operating expenses was also due to increased private education loan marketing activities.

In addition, there were $26 million and $1 million of expenses reported in restructuring and other reorganization expenses in the fourth quarter of 2013 and 2012, respectively, and $72 million and $11 million of expenses reported in restructuring and other reorganization expenses for 2013 and 2012, respectively. For the fourth-quarter 2013 and full-year 2013, these consisted of expenses related to the company’s previously announced plan to separate its existing organization into two, separate, publicly traded companies.

Funding and Liquidity

During the fourth-quarter 2013, Sallie Mae issued $1.0 billion in FFELP asset-backed securities and $1.0 billion in unsecured bonds. On January 10, 2014, the company refinanced a FFELP ABCP facility resulting in $2.5 billion of additional borrowing capacity and an extension of the remaining term from 2015 to 2016.

During 2013, Sallie Mae issued $6.5 billion in FFELP asset-backed securities, $3.1 billion in private education loan asset-backed securities and $3.75 billion in unsecured bonds.

Shareholder Distributions

In the fourth-quarter 2013, Sallie Mae paid a common stock dividend of $0.15 per share, resulting in full-year common stock dividends paid of $0.60 per share.

For the fourth-quarter and year ended 2013, Sallie Mae repurchased 8 million and 27 million shares of common stock for $200 million and $600 million, respectively. At December 31, 2013, there was $200 million remaining authorization for additional common stock repurchases under our current stock repurchase program.

Guidance

The company expects to initiate EPS guidance for 2014 upon resolution of its separation plan.

The company expects full-year 2014 private education loan originations of $4 billion.

Update on Separation Plan

In May of 2013 the company announced plans to separate its consumer banking and education loan management operations into two distinct businesses and complete the separation in the first half of 2014. Company management continues to believe a first-half 2014 separation to be achievable. The separation remains subject to final review and approval by the company’s Board of Directors.

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

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

The company will host an earnings conference call tomorrow, Jan. 17, 2014, at 8 a.m. EST. Sallie Mae executives will be on hand to discuss various highlights of the quarter and to answer questions related to the company’s performance. Individuals interested in participating in the call should dial 877-356-5689 (USA and Canada) or dial 706-679-0623 (international) and use access code 28486534 starting at 7:45 a.m. EST. A live audio webcast of the conference call may be accessed at www.SallieMae.com/investors. A replay of the conference call via the company’s website will be available approximately two hours after the call’s conclusion. A telephone replay may be accessed approximately two hours after the call’s conclusion through Jan. 31, by dialing 855-859-2056 (USA and Canada) or 404-537-3406 (international) with access code 28486534.

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

This press release contains “forward-looking statements” and information based on management’s current expectations as of the date of this release. Statements that are not historical facts, including statements about the company’s beliefs or expectations and statements that assume or are dependent upon future events, are forward-looking statements. Forward-looking statements are subject to risks, uncertainties, assumptions and other factors that may cause actual results to be materially different from those reflected in such forward-looking statements. These factors include, among others, the risks and uncertainties set forth in Item 1A “Risk Factors” and elsewhere in the company’s Annual Report on Form 10-K for the year ended Dec. 31, 2012 and subsequent filings with the Securities and Exchange Commission; increases in financing costs; limits on liquidity; increases in costs associated with compliance with laws and regulations; changes in accounting standards and the impact of related changes in significant accounting estimates; any adverse outcomes in any significant litigation to which the company is a party; credit risk associated with the company’s exposure to third parties, including counterparties to the company’s derivative transactions; and changes in the terms of student loans and the educational credit marketplace (including changes resulting from new laws and the implementation of existing laws). The company could also be affected by, among other things: changes in its funding costs and availability; reductions to its credit ratings or the credit ratings of the United States of America; failures of its operating systems or infrastructure, including those of third-party vendors; damage to its reputation; failures to successfully implement cost-cutting and adverse effects of such initiatives on its business; risks associated with restructuring initiatives, including the company’s recently announced strategic plan to separate its existing operations into two, separate, publicly traded companies; changes in the demand for educational financing or in financing preferences of lenders, educational institutions, students and their families; changes in law and regulations with respect to the student lending business and financial institutions generally; increased competition from banks and other consumer lenders; the creditworthiness of its customers; changes in the general interest rate environment, including the rate relationships among relevant money-market instruments and those of its earning assets vs. its funding arrangements; changes in general economic conditions; its ability to successfully effectuate any acquisitions and other strategic initiatives; and changes in the demand for debt management services. The preparation of the company’s 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 release are qualified by these cautionary statements and are made only as of the date of this release. The company does not undertake any obligation to update or revise these forward-looking statements to conform the statement to actual results or changes in its expectations.

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

         
Selected Financial Information and Ratios
(Unaudited)
 
Quarters Ended Years Ended
(In millions, except per share data) December 31,
2013
September 30,
2013
December 31,
2012
December 31,
2013
December 31,
2012
 
GAAP Basis

Net income attributable to SLM Corporation

$ 270 $ 260 $ 348 $ 1,418 $ 939
Diluted earnings per common share attributable to SLM Corporation $ .60 $ .57 $ .74 $ 3.12 $ 1.90
Weighted average shares used to compute diluted earnings per share 443 445 463 449 483
Return on assets .70 % .67 % .79 % .89 % .52 %
 
“Core Earnings” Basis(1)
“Core Earnings” attributable to SLM Corporation $ 275 $ 271 $ 257 $ 1,290 $ 1,062
“Core Earnings” diluted earnings per common share attributable to SLM Corporation $ .61 $ .60 $ .55 $ 2.83 $ 2.16
Weighted average shares used to compute diluted earnings per share 443 445 463 449 483
“Core Earnings” return on assets .71 % .70 % .58 % .81 % .59 %
 
Other Operating Statistics
Ending FFELP Loans, net $ 104,588 $ 106,350 $ 125,612 $ 104,588 $ 125,612
Ending Private Education Loans, net   37,512     37,752     36,934     37,512     36,934  
Ending total student loans, net $ 142,100   $ 144,102   $ 162,546   $ 142,100   $ 162,546  
Average student loans $ 144,026 $ 145,585 $ 164,800 $ 150,444 $ 169,815
   
(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.
 

Results of Operations

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

GAAP Statements of Income (Unaudited)

 
December 31, 2013
vs.
September 30, 2013
December 31, 2013
vs.
December 31, 2012
Quarters Ended Increase
(Decrease)
Increase
(Decrease)
(In millions, except per share data) December 31,
2013
September 30,
2013
December 31,
2012

$

 

%

$

%
Interest income:
FFELP Loans $ 685 $ 698 $ 792 $ (13 ) (2 )% $ (107 ) (14 )%
Private Education Loans 642 635 625 7 1 17 3
Other loans 3 3 4 (1 ) (25 )
Cash and investments   4     4     5         (1 ) (20 )
 
Total interest income 1,334 1,340 1,426 (6 ) (92 ) (6 )
Total interest expense   545     541     594   4   1     (49 ) (8 )
 
Net interest income 789 799 832 (10 ) (1 ) (43 ) (5 )
Less: provisions for loan losses   190     207     314   (17 ) (8 )   (124 ) (39 )
 
Net interest income after provisions for loan losses 599 592 518 7 1 81 16
Other income (loss):
Gains (losses) on sales of loans and investments (5 ) 1 (5 ) (100 ) (6 ) (600 )
Losses on derivative and hedging activities, net (128 ) (127 ) (28 ) (1 ) 1 (100 ) 357
Servicing revenue 67 83 68 (16 ) (19 ) (1 ) (1 )
Contingency revenue 108 104 95 4 4 13 14
Gains on debt repurchases 43 (43 ) (100 )
Other income   33     9     49   24   267     (16 ) (33 )
 
Total other income (loss) 75 69 228 6 9 (153 ) (67 )
Expenses:
Operating expenses 305 257 226 48 19 79 35
Goodwill and acquired intangible asset impairment and amortization expense 3 4 14 (1 ) (25 ) (11 ) (79 )
Restructuring and other reorganization expenses   26     12     1   14   117     25   2,500  
 
Total expenses   334     273     241   61   22     93   39  
 
Income from continuing operations before income tax expense 340 388 505 (48 ) (12 ) (165 ) (33 )
Income tax expense   129     136     157   (7 ) (5 )   (28 ) (18 )
 
Net income from continuing operations 211 252 348 (41 ) (16 ) (137 ) (39 )
Income from discontinued operations, net of tax expense   59     8       51   638     59   100  
 
Net income 270 260 348 10 4 (78 ) (22 )
Less: net loss attributable to noncontrolling interest                      
 
Net income attributable to SLM Corporation 270 260 348 10 4 (78 ) (22 )
Preferred stock dividends   5     5     5            
 
Net income attributable to SLM Corporation common stock $ 265   $ 255   $ 343   $ 10   4   $ (78 ) (23 )%
 
Basic earnings per common share attributable to SLM Corporation:
Continuing operations $ .47 $ .56 $ .75 $ (.09 ) (16 )% $ (.28 ) (37 )%
Discontinued operations   .14     .02       .12   600     .14   100  
 
Total $ .61   $ .58   $ .75   $ .03   5 % $ (.14 ) (19 )%
 
Diluted earnings per common share attributable to SLM Corporation:
Continuing operations $ .47 $ .55 $ .74 $ (.08 ) (15 )% $ (.27 ) (36 )%
Discontinued operations   .13     .02       .11   550     .13   100  
 
Total $ .60   $ .57   $ .74   $ .03   5 % $ (.14 ) (19 )%
 
Dividends per common share attributable to SLM Corporation $ .15   $ .15   $ .125   $ —   % $ .025   20 %
       
Years
Ended Increase
December 31, (Decrease)
(In millions, except per share data)   2013     2012     $   %
Interest income:
FFELP Loans $ 2,822 $ 3,251 $ (429 ) (13 )%
Private Education Loans 2,527 2,481 46 2
Other loans 11 16 (5 ) (31 )
Cash and investments   17     21     (4 ) (19 )
 
Total interest income 5,377 5,769 (392 ) (7 )
Total interest expense   2,210     2,561     (351 ) (14 )
 
Net interest income 3,167 3,208 (41 ) (1 )
Less: provisions for loan losses   839     1,080     (241 ) (22 )
 
Net interest income after provisions for loan losses 2,328 2,128 200 9
Other income (loss):
Gains on sales of loans and investments 302 302 100
Losses on derivative and hedging activities, net (268 ) (628 ) 360 (57 )
Servicing revenue 290 279 11 4
Contingency revenue 420 356 64 18
Gains on debt repurchases 42 145 (103 ) (71 )
Other income   100     92     8   9  
 
Total other income 886 244 642 263
Expenses:
Operating expenses 1,042 897 145 16
Goodwill and acquired intangible asset impairment and amortization expense 13 27 (14 ) (52 )
Restructuring and other reorganization expenses   72     11     61   555  
 
Total expenses   1,127     935     192   21  
 
Income from continuing operations, before income tax expense 2,087 1,437 650 45
Income tax expense   776     498     278   56  
 
Net income from continuing operations 1,311 939 372 40
Income (loss) from discontinued operations, net of tax expense (benefit)   106     (2 )   108   5,400  
 
Net income 1,417 937 480 51
Less: net loss attributable to noncontrolling interest   (1 )   (2 )   1   (50 )
 
Net income attributable to SLM Corporation 1,418 939 479 51
Preferred stock dividends   20     20        
 
Net income attributable to SLM Corporation common stock $ 1,398   $ 919   $ 479   52 %
 
Basic earnings per common share attributable to SLM Corporation:
Continuing operations $ 2.94 $ 1.93 $ 1.01 52 %
Discontinued operations   .24         .24   100  
 
Total $ 3.18   $ 1.93   $ 1.25   65 %
 
Diluted earnings per common share attributable to SLM Corporation:
Continuing operations $ 2.89 $ 1.90 $ 0.99 52 %
Discontinued operations   .23         .23   100  
 
Total $ 3.12   $ 1.90   $ 1.22   64 %
 
Dividends per common share attributable to SLM Corporation $ .60   $ .50   $ .10   20 %
     

GAAP Balance Sheet (Unaudited)

 
(In millions, except share and per share data) December 31,
2013
September 30,
2013
December 31,
2012
 
Assets
FFELP Loans (net of allowance for losses of $119; $130 and $159, respectively) $ 104,588 $ 106,350 $ 125,612
Private Education Loans (net of allowance for losses of $2,097; $2,144 and $2,171, respectively) 37,512 37,752 36,934
Cash and investments 6,082 5,325 4,982
Restricted cash and investments 3,650 4,287 5,011
Goodwill and acquired intangible assets, net 424 436 448
Other assets   7,287     7,420     8,273  
 
Total assets $ 159,543   $ 161,570   $ 181,260  
 
 
Liabilities
Short-term borrowings $ 13,795 $ 15,572 $ 19,856
Long-term borrowings 136,648 136,944 152,401
Other liabilities   3,458     3,422     3,937  
 
Total liabilities   153,901     155,938     176,194  
 
 
Commitments and contingencies
 
Equity
Preferred stock, par value $0.20 per share, 20 million shares authorized:
Series A: 3.3 million; 3.3 million and 3.3 million shares, respectively, issued at stated value of $50 per share 165 165 165
Series B: 4 million; 4 million and 4 million shares, respectively, issued at stated value of $100 per share 400 400 400
Common stock, par value $0.20 per share, 1.125 billion shares authorized: 545 million; 544 million and 536 million shares, respectively, issued 109 109 107
Additional paid-in capital 4,399 4,373 4,237
Accumulated other comprehensive income (loss), net of tax expense (benefit) 13 8 (6 )
Retained earnings   2,584     2,385     1,451  
 
Total SLM Corporation stockholders’ equity before treasury stock 7,670 7,440 6,354
Less: Common stock held in treasury: 116 million; 108 million and 83 million shares, respectively   (2,033 )   (1,813 )   (1,294 )
 
Total SLM Corporation stockholders’ equity 5,637 5,627 5,060
Noncontrolling interest   5     5     6  
 
Total equity   5,642     5,632     5,066  
 
Total liabilities and equity $ 159,543   $ 161,570   $ 181,260  
 

Consolidated Earnings Summary — GAAP basis

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

For the three months ended December 31, 2013, net income was $270 million, or $.60 diluted earnings per common share, compared with net income of $348 million, or $0.74 diluted earnings per common share, for the three months ended December 31, 2012. The decrease in net income was primarily due to a $100 million increase in net losses on derivative and hedging activities, a $43 million decline in net interest income, a $43 million decrease in debt repurchase gains, higher operating expenses of $79 million and higher restructuring and other reorganization costs of $25 million, which was partially offset by a $124 million decline in the provision for loan losses and a $59 million after-tax increase in income from discontinued operations.

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

  • Net interest income decreased by $43 million in the current quarter compared with the prior-year quarter primarily due to a reduction in FFELP net interest income from a $21 billion decline in average FFELP Loans outstanding in part due to the sale of Residual Interests in FFELP Loan securitization trusts in the first half of 2013. There were approximately $12 billion of FFELP Loans in these trusts.
  • Provisions for loan losses declined $124 million compared with the year-ago quarter primarily as a result of the overall improvement in Private Education Loans’ credit quality, delinquency and charge-off trends leading to decreases in expected future charge-offs.
  • Losses on derivative and hedging activities, net, resulted in a net loss of $128 million in the current quarter compared with a net loss of $28 million in the year-ago period. The primary factors affecting the change were interest rate and foreign currency fluctuations, which primarily affected the valuations of our Floor Income Contracts, basis swaps and foreign currency hedges during each period. Valuations of derivative instruments vary based upon many factors including changes in interest rates, credit risk, foreign currency fluctuations and other market factors. As a result, net gains and losses on derivative and hedging activities may continue to vary significantly in future periods.
  • Servicing and contingency revenue increased $12 million from the year-ago quarter primarily from an increase in the number of accounts serviced and in collection volumes in fourth-quarter 2013.
  • Gains on debt repurchases decreased $43 million from fourth-quarter 2012. Debt repurchase activity will fluctuate based on market fundamentals and our liability management strategy.
  • Operating expenses increased $79 million primarily as a result of increases in our third-party servicing and collection activities, continued investments in technology and an increase in compliance remediation expense. In the fourth quarter of 2013, the Company reserved $70 million for expected compliance remediation efforts relating to pending regulatory inquiries.
  • Restructuring and other reorganization expenses were $26 million compared with $1 million in the year-ago quarter. For fourth-quarter 2013, these consisted of $20 million of expenses primarily related to third-party costs incurred in connection with the Company’s previously announced plan to separate its existing organization into two, separate, publicly traded companies and $6 million related to severance costs. The $1 million of expenses in 2012 related to restructuring expenses.
  • The effective tax rates for the fourth quarters of 2013 and 2012 were 38 percent and 31 percent, respectively. The movement in the effective tax rate was primarily driven by the impact of state law changes recorded in the year-ago quarter.
  • Income from discontinued operations increased by $59 million primarily as a result of the sale of our 529 college savings plan administration business in the fourth quarter of 2013, which resulted in an after-tax gain of $56 million.

We repurchased 8 million shares and 10 million shares of our common stock during the three months ended December 31, 2013 and 2012, respectively, as part of our common share repurchase program. Primarily as a result of these repurchases, our average outstanding diluted shares decreased by 20 million common shares from the year-ago quarter.

Year Ended December 31, 2013 Compared with Year Ended December 31, 2012

For the years ended December 31, 2013 and 2012, net income was $1.4 billion, or $3.12 diluted earnings per common share, and $939 million, or $1.90 diluted earnings per common share, respectively. The increase in net income was primarily due to a $360 million decrease in net losses on derivative and hedging activities, a $302 million increase in gains on sales of loans and investments, a $241 million decrease in provisions for loan losses, and a $108 million after-tax increase in income from discontinued operations, which were partially offset by $103 million of lower gains on debt repurchases, higher operating expenses of $145 million and higher restructuring and other reorganization expenses of $61 million.

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

  • Net interest income decreased by $41 million in the current period compared with the prior-year period primarily due to a reduction in FFELP net interest income from a $20 billion decline in average FFELP Loans outstanding in part due to the sale of Residual Interests in FFELP Loan securitization trusts in the first half of 2013. There were approximately $12 billion of FFELP Loans in these trusts.
  • Provisions for loan losses decreased by $241 million primarily as a result of the overall improvement in Private Education Loans’ credit quality, delinquency and charge-off trends leading to decreases in expected future charge-offs.
  • Gains on sales of loans and investments increased by $302 million as a result of $312 million in gains on the sales of the Residual Interests in FFELP Loan securitization trusts in 2013. See “Business Segment Earnings Summary – ‘Core Earnings’ Basis – FFELP Loans Segment” for further discussion.
  • Losses on derivative and hedging activities, net, resulted in a net loss of $268 million in the current period compared with a net loss of $628 million in the year-ago period. The primary factors affecting the change were interest rate and foreign currency fluctuations, which primarily affected the valuations of our Floor Income Contracts, basis swaps and foreign currency hedges during each period. Valuations of derivative instruments vary based upon many factors including changes in interest rates, credit risk, foreign currency fluctuations and other market factors. As a result, net gains and losses on derivative and hedging activities may continue to vary significantly in future periods.
  • Servicing and contingency revenue increased $75 million from the prior year primarily from an increase in the number of accounts serviced and in collection volumes in 2013.
  • Gains on debt repurchases decreased $103 million. Debt repurchase activity will fluctuate based on market fundamentals and our liability management strategy.
  • Operating expenses increased $145 million primarily as a result of increases in our third-party servicing and collection activities, increased Private Education Loan marketing activities, continued investments in technology and an increase in compliance remediation expense. In the fourth quarter of 2013, the Company reserved $70 million for expected compliance remediation efforts relating to pending regulatory inquiries.
  • Restructuring and other reorganization expenses were $72 million compared with $11 million in the year-ago period. For 2013, these consisted of $43 million primarily related to third-party costs incurred in connection with the Company’s previously announced plan to separate its existing organization into two, separate, publicly traded companies and $29 million related to severance costs. The $11 million of expenses in 2012 related to restructuring expenses.
  • The effective tax rates for the years ended December 31, 2013 and 2012 were 37 percent and 35 percent, respectively. The movement in the effective tax rate was primarily driven by the impact of state law changes recorded in the year-ago period.
  • Income from discontinued operations increased $108 million primarily as a result of the sale of our Campus Solutions business in the second quarter of 2013 and our 529 college savings plan administration business in the fourth quarter of 2013, which resulted in after-tax gains of $38 million and $56 million, respectively.

We repurchased 27 million shares and 58 million shares of our common stock during the years ended December 31, 2013 and 2012, respectively, as part of our common share repurchase program. Primarily as a result of these repurchases, our average outstanding diluted shares decreased by 34 million common shares in 2013.

“Core Earnings” — Definition and Limitations

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

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

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

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

 

Quarter Ended December 31, 2013
(Dollars in millions) Consumer
Lending
  Business
Services
  FFELP
Loans
  Other   Elimina-
tions(1)
  Total
“Core
Earnings”
  Adjustments   Total
GAAP
Reclassi-
fications
  Additions/
(Subtractions)
  Total
Adjustments(2)
Interest income:
Student loans $ 642 $ $ 558 $ $ $ 1,200 $ 204 $ (77 ) $ 127 $ 1,327
Other loans 3 3 3
Cash and investments   2   1   1   1     (1 )   4                 4  
 
Total interest income 644 1 559 4 (1 ) 1,207 204 (77 ) 127 1,334
Total interest expense   211     307   16     (1 )   533     11    

1

(4)

  12     545  
 
Net interest income (loss) 433 1 252 (12 ) 674 193 (78 ) 115 789

Less: provisions for loan losses

  180     10           190                 190  
 
Net interest income (loss) after provisions for loan losses 253 1 242 (12 ) 484 193 (78 ) 115 599
Losses on sales of loans and investments (5 ) (5 ) (5 )
Servicing revenue 2 171 15 (121 ) 67 67
Contingency revenue 108 108 108
Gains on debt repurchases
Other income (loss)     11     1         12     (193 )  

86

(5)

  (107 )   (95 )
 
Total other income (loss) 2 290 15 (4 ) (121 ) 182 (193 ) 86 (107 ) 75
Expenses:
Direct operating expenses 70 101 127 72 (121 ) 249 249
Overhead expenses     1     55         56                 56  
 
Operating expenses 70 102 127 127 (121 ) 305 305
Goodwill and acquired intangible assets impairment and amortization 3 3 3

Restructuring and other reorganization expenses

  4       22         26                 26  
 
Total expenses   74   102   127   149     (121 )   331         3     3     334  
 
Income (loss) from continuing operations, before income tax expense (benefit) 181 189 130 (165 ) 335 5 5 340

Income tax expense (benefit)(3)

  67   69   48   (60 )       124         5     5     129  
 
Net income (loss) from continuing operations 114 120 82 (105 ) 211 211
Income (loss) from discontinued operations, net of tax expense (benefit)     64             64         (5 )   (5 )   59  
 
Net income (loss) 114 184 82 (105 ) 275 (5 ) (5 ) 270
Less: net loss attributable to noncontrolling interest                                  
 
Net income (loss) attributable to SLM Corporation $ 114 $ 184 $ 82 $ (105 ) $   $ 275   $   $ (5 ) $ (5 ) $ 270  
   
(1)   The eliminations in servicing revenue and direct operating expense represent the elimination of intercompany servicing revenue where the Business Services segment performs the loan servicing function for the FFELP Loans segment.
(2) “Core Earnings” adjustments to GAAP:
     
Quarter Ended December 31, 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 $ 115 $ $ 115
Total other loss (107 ) (107 )
Goodwill and acquired intangible assets impairment and amortization       3     3  
 
Total “Core Earnings” adjustments to GAAP $ 8   $ (3 ) 5
 
Income tax expense 5
Loss from discontinued operations, net of tax benefit   (5 )
 
Net loss $ (5 )
 
(3) Income taxes are based on a percentage of net income before tax for the individual reportable segment.
(4) Represents a portion of the $20 million of “other derivative accounting adjustments.”
(5) Represents the $65 million of “unrealized gains on derivative and hedging activities, net” as well as the remaining portion of the $20 million of “other derivative accounting adjustments.”
                   
Quarter Ended September 30, 2013
(Dollars in millions) Consumer
Lending
Business
Services
FFELP
Loans
Other Eliminations(1) Total
“Core
Earnings”
Adjustments Total
GAAP
Reclassifications Additions/
(Subtractions)
Total
Adjustments(2)
Interest income:
Student loans $ 635 $ $ 574 $ $ $ 1,209 $ 201 $ (77 ) $ 124 $ 1,333
Other loans 3 3 3
Cash and investments   1   1   2   1     (1 )   4               4  
 
Total interest income 636 1 576 4 (1 ) 1,216 201 (77 ) 124 1,340
Total interest expense   203     313   13     (1 )   528   12    

1

(4)

  13     541  
 
Net interest income (loss) 433 1 263 (9 ) 688 189 (78 ) 111 799
Less: provisions for loan losses   195     12           207               207  
 
Net interest income (loss) after provisions for loan losses 238 1 251 (9 ) 481 189 (78 ) 111 592
Other income (loss):
Gains on sales of loans and investments
Servicing revenue 11 174 21 (123 ) 83 83
Contingency revenue 104 104 104
Gains on debt repurchases
Other income (loss)     6     6         12   (189 )  

59

(5)

  (130 )   (118 )
 
Total other income (loss) 11 284 21 6 (123 ) 199 (189 ) 59 (130 ) 69
Expenses:
Direct operating expenses 85 103 129 4 (123 ) 198 198
Overhead expenses         59         59               59  
 
Operating expenses 85 103 129 63 (123 ) 257 257
Goodwill and acquired intangible asset impairment and amortization 4 4 4
Restructuring and other reorganization expenses         12         12               12  
 
Total expenses   85   103   129   75     (123 )   269       4     4     273  
 
Income (loss) from continuing operations, before income tax expense (benefit) 164 182 143 (78 ) 411 (23 ) (23 ) 388
Income tax expense (benefit)(3)   59   66   51   (28 )       148       (12 )   (12 )   136  
 
Net income (loss) from continuing operations 105 116 92 (50 ) 263 (11 ) (11 ) 252
Income from discontinued operations, net of tax expense     8             8               8  
 
Net income (loss) 105 124 92 (50 ) 271 (11 ) (11 ) 260
Less: net loss attributable to noncontrolling interest                                
 
Net income (loss) attributable to SLM Corporation $ 105 $ 124 $ 92 $ (50 ) $   $ 271 $   $ (11 ) $ (11 ) $ 260  
   
(1)   The eliminations in servicing revenue and direct operating expense represent the elimination of intercompany servicing revenue where the Business Services segment performs the loan servicing function for the FFELP Loans segment.
(2) “Core Earnings” adjustments to GAAP:
     
Quarter Ended September 30, 2013
(Dollars in millions) Net Impact of
Derivative
Accounting
Net Impact of
Goodwill and
Acquired Intangibles
Total
Net interest income after provisions for loan losses $ 111 $ $ 111
Total other loss (130 ) (130 )
Goodwill and acquired intangible asset impairment and amortization       4     4  
 
“Core Earnings” adjustments to GAAP $ (19 ) $ (4 ) (23 )
 
Income tax benefit   (12 )
 
Net loss $ (11 )
 
(3) Income taxes are based on a percentage of net income before tax for the individual reportable segment.
(4) Represents a portion of the $(4) million of “other derivative accounting adjustments.”
(5) Represents the $62 million of “unrealized gains on derivative and hedging activities, net” as well as the remaining portion of the $(4) million of “other derivative accounting adjustments.”
 

Quarter Ended December 31, 2012
(Dollars in millions) Consumer
Lending
  Business
Services
  FFELP
Loans
  Other   Elimina-
tions(1)
  Total
“Core
Earnings”
  Adjustments   Total
GAAP
Reclassi-
fications
  Additions/
(Subtractions)
  Total
Adjustments(2)
Interest income:
Student loans $ 625 $ $ 654 $ $ $ 1,279 $ 215 $ (77

)

 

$ 138 $ 1,417
Other loans 4 4 4
Cash and investments   1     3   3       (2 )   5               5
 
Total interest income 626 3 657 4 (2 ) 1,288 215 (77

)

 

138 1,426
Total interest expense   207       360   10     (2 )   575   20     (1

)

(4)

  19   594
 
Net interest income (loss) 419 3 297 (6 ) 713 195 (76

)

 

119 832

Less: provisions for loan losses

  296       18           314               314
 
Net interest income (loss) after provisions for loan losses 123 3 279 (6 ) 399 195 (76

)

 

119 518
Gains on sales of loans and investments 1 1 1
Servicing revenue 11 193 22 (158 ) 68 68
Contingency revenue 95 95 95
Gains on debt repurchases 43 43 43
Other income (loss)       8     3         11   (195 )  

205

 

(5)

  10   21
 
Total other income (loss) 11 296 22 47 (158 ) 218 (195 ) 205 10 228
Expenses:
Direct operating expenses 67 94 165 3 (158 ) 171 171
Overhead expenses           55         55               55
 
Operating expenses 67 94 165 58 (158 ) 226 226
Goodwill and acquired intangible assets impairment and amortization 14 14 14

Restructuring and other reorganization expenses

      2     (1 )       1               1
 
Total expenses   67     96   165   57     (158 )   227       14       14   241
 
Income (loss) from continuing operations, before income tax expense (benefit) 67 203 136 (16 ) 390 115 115 505

Income tax expense (benefit)(3)

  21     69   47   (4 )       133       24       24   157
 
Net income (loss) from continuing operations 46 134 89 (12 ) 257 91 91 348
Income (loss) from discontinued operations, net of tax expense (benefit)   (1 )   1                          
 
Net income (loss) 45 135 89 (12 ) 257 91 91 348
Less: net loss attributable to noncontrolling interest                                
 
Net income (loss) attributable to SLM Corporation $ 45   $ 135 $ 89 $ (12 ) $   $ 257 $   $ 91     $ 91 $ 348
   

(1)

  The eliminations in servicing revenue and direct operating expense represent the elimination of intercompany servicing revenue where the Business Services segment performs the loan servicing function for the FFELP Loans segment.
(2) “Core Earnings” adjustments to GAAP:
     
Quarter Ended December 31, 2012
(Dollars in millions) Net Impact of
Derivative
Accounting
Net Impact of
Goodwill and
Acquired Intangibles
Total
Net interest income after provisions for loan losses $ 119 $ $ 119
Total other income 10 10
Goodwill and acquired intangible assets impairment and amortization     14     14
 
Total “Core Earnings” adjustments to GAAP $ 129 $ (14 ) 115
 
Income tax expense   24
 

Net income

$ 91
 
(3) Income taxes are based on a percentage of net income before tax for the individual reportable segment.
(4) Represents a portion of the $39 million of “other derivative accounting adjustments.”
(5) Represents the $167 million of “unrealized gains on derivative and hedging activities, net” as well as the remaining portion of the $39 million of “other derivative accounting adjustments.”
 

Year Ended December 31, 2013
(Dollars in millions) Consumer
Lending
  Business
Services
  FFELP
Loans
  Other   Elimina-
tions(1)
  Total
“Core
Earnings”
  Adjustments   Total
GAAP
Reclassi-
fications
  Additions/
(Subtractions)
  Total
Adjustments(2)
Interest income:
Student loans $ 2,527 $ $ 2,313 $ $ $ 4,840 $ 816 $ (307

)

 

$ 509 $ 5,349
Other loans 11 11 11
Cash and investments   7     5     6   4     (5 )   17                   17  
 
Total interest income 2,534 5 2,319 15 (5 ) 4,868 816 (307

)

 

509 5,377
Total interest expense   825         1,285   51     (5 )   2,156     55     (1

)

(4)

  54     2,210  
 
Net interest income (loss) 1,709 5 1,034 (36 ) 2,712 761 (306

)

 

455 3,167

Less: provisions for loan losses

  787         52           839                   839  
 
Net interest income (loss) after provisions for loan losses 922 5 982 (36 ) 1,873 761

(306

)

 

455 2,328
Gains (losses) on sales of loans and investments 312 (10 ) 302 302
Servicing revenue 34 710 76 (530 ) 290 290
Contingency revenue 420 420 420
Gains on debt repurchases 48 48 (6 ) (6 ) 42
Other income (loss)       34       4         38     (755 )  

549

 

(5)

  (206 )   (168 )
 
Total other income (loss) 34 1,164 388 42 (530 ) 1,098 (761 ) 549 (212 ) 886
Expenses:
Direct operating expenses 299 400 557 80 (530 ) 806 806
Overhead expenses   (1 )         237         236                   236  
 
Operating expenses 298 400 557 317 (530 ) 1,042 1,042
Goodwill and acquired intangible assets impairment and amortization 13 13 13

Restructuring and other reorganization expenses

  6     2       64         72                   72  
 
Total expenses   304     402     557   381     (530 )   1,114         13       13     1,127  
 
Income (loss) from continuing operations, before income tax expense (benefit) 652 767 813 (375 ) 1,857 230 230 2,087

Income tax expense (benefit)(3)

  239     281     298   (138 )       680         96       96     776  
 
Net income (loss) from continuing operations 413 486 515 (237 ) 1,177 134 134 1,311
Income (loss) from discontinued operations, net of tax expense (benefit)   (1 )   112       1         112         (6

)

 

  (6 )   106  
 
Net income (loss) 412 598 515 (236 ) 1,289 128 128 1,417
Less: net loss attributable to noncontrolling interest       (1 )             (1 )                 (1 )
 
Net income (loss) attributable to SLM Corporation $ 412   $ 599   $ 515 $ (236 ) $   $ 1,290   $   $ 128     $ 128   $ 1,418  
   
(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:
     
Year Ended December 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 $ 455 $ $ 455
Total other loss (212 ) (212 )
Goodwill and acquired intangible assets impairment and amortization       13     13  
 
Total “Core Earnings” adjustments to GAAP $ 243   $ (13 ) 230
 
Income tax expense 96
Loss from discontinued operations, net of tax benefit   (6 )
 
Net income $ 128  
 
(3) Income taxes are based on a percentage of net income before tax for the individual reportable segment.
(4) Represents a portion of the $63 million of “other derivative accounting adjustments.”
(5) Represents the $487 million of “unrealized gains on derivative and hedging activities, net” as well as the remaining portion of the $63 million of “other derivative accounting adjustments.”
 

Year Ended December 31, 2012
(Dollars in millions) Consumer
Lending
  Business
Services
  FFELP
Loans
  Other   Elimina-
tions(1)
  Total
“Core
Earnings”
  Adjustments   Total
GAAP
Reclassi-
fications
  Additions/
(Subtractions)
  Total
Adjustments(2)
Interest income:
Student loans $ 2,481 $ $ 2,744 $ $ $ 5,225 $ 858 $ (351 ) $ 507 $ 5,732
Other loans 16 16 16
Cash and investments   7     7     11   2     (6 )   21                 21  
 
Total interest income 2,488 7 2,755 18 (6 ) 5,262 858 (351 ) 507 5,769
Total interest expense   822         1,591   37     (6 )   2,444     115    

2

(4)

  117     2,561  
 
Net interest income (loss) 1,666 7 1,164 (19 ) 2,818 743 (353 ) 390 3,208

Less: provisions for loan losses

  1,008         72           1,080                 1,080  
 
Net interest income (loss) after provisions for loan losses 658 7 1,092 (19 ) 1,738 743 (353 ) 390 2,128
Gains on sales of loans and investments
Servicing revenue 46 813 90 (670 ) 279 279
Contingency revenue 356 356 356
Gains on debt repurchases 145 145 145
Other income (loss)       33       15         48     (743 )  

159

(5)

  (584 )   (536 )
 
Total other income (loss) 46 1,202 90 160 (670 ) 828 (743 ) 159 (584 ) 244
Expenses:
Direct operating expenses 265 364 702 12 (670 ) 673 673
Overhead expenses             224         224                 224  
 
Operating expenses 265 364 702 236 (670 ) 897 897
Goodwill and acquired intangible assets impairment and amortization 27 27 27

Restructuring and other reorganization expenses

  3     3       5         11                 11  
 
Total expenses   268     367     702   241     (670 )   908         27     27     935  
 
Income (loss) from continuing operations, before income tax expense (benefit) 436 842 480 (100 ) 1,658 (221 ) (221 ) 1,437

Income tax expense (benefit)(3)

  157     303     173   (36 )       597         (99 )   (99 )   498  
 
Net income (loss) from continuing operations 279 539 307 (64 ) 1,061 (122 ) (122 ) 939
Income (loss) from discontinued operations, net of tax expense (benefit)   (2 )         1         (1 )       (1 )   (1 )   (2 )
 
Net income (loss) 277 539 307 (63 ) 1,060 (123 ) (123 ) 937
Less: net loss attributable to noncontrolling interest       (2 )             (2 )               (2 )
 
Net income (loss) attributable to SLM Corporation $ 277   $ 541   $ 307 $ (63 ) $   $ 1,062   $   $ (123 ) $ (123 ) $ 939  
   
(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:
     
Year Ended December 31, 2012
(Dollars in millions) Net Impact of
Derivative
Accounting
Net Impact of
Goodwill and
Acquired Intangibles
Total
Net interest income after provisions for loan losses $ 390 $ $ 390
Total other loss (584 ) (584 )
Goodwill and acquired intangible assets impairment and amortization       27     27  
 
Total “Core Earnings” adjustments to GAAP $ (194 ) $ (27 ) (221 )
 
Income tax benefit (99 )
Loss from discontinued operations, net of tax benefit   (1 )
 
Net loss $ (123 )
 
(3) Income taxes are based on a percentage of net income before tax for the individual reportable segment.
(4) Represents a portion of the $42 million of “other derivative accounting adjustments.”
(5) Represents the $115 million of “unrealized gains on derivative and hedging activities, net” as well as the remaining portion of the $42 million of “other derivative accounting adjustments.”
 

Differences between “Core Earnings” and GAAP

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

(Dollars in millions)

December 31,
2013
September 30,
2013
December 31,
2012
December 31,
2013
December 31,
2012
“Core Earnings” adjustments to GAAP:
Net impact of derivative accounting $ 8 $ (19 ) $ 129 $ 243 $ (194 )
Net impact of goodwill and acquired intangible assets (3 ) (4 ) (14 ) (13 ) (27 )
Net tax effect (5 ) 12 (24 ) (96 ) 99
Net effect from discontinued operations   (5 )           (6 )   (1 )
 
Total “Core Earnings” adjustments to GAAP $ (5 ) $ (11 ) $ 91   $ 128   $ (123 )
 
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 table below quantifies the adjustments for derivative accounting between GAAP and “Core Earnings” net income.
         
Quarters Ended Years Ended

(Dollars in millions)

December 31,
2013
September 30,
2013
December 31,
2012
December 31,
2013
December 31,
2012
“Core Earnings” derivative adjustments:
Gains (losses) on derivative and hedging activities, net, included in other income(1) $ (128 ) $ (127 ) $ (28 ) $ (268 ) $ (628 )
Plus: Realized losses on derivative and hedging activities, net(1)   193     189     195     755     743  
 
Unrealized gains (losses) on derivative and hedging activities, net(2) 65 62 167 487 115
Amortization of net premiums on Floor Income Contracts in net interest income for “Core Earnings” (77 ) (77 ) (77 ) (307 ) (351 )
Other derivative accounting adjustments(3)   20     (4 )   39     63     42  
 
Total net impact of derivative accounting(4) $ 8   $ (19 ) $ 129   $ 243   $ (194 )
   
(1)   See “Reclassification of Realized Gains (Losses) on Derivative and Hedging Activities” below for a detailed breakdown of the components of realized losses on derivative and hedging activities.
(2) “Unrealized gains on derivative and hedging activities, net” comprises the following unrealized mark-to-market gains (losses):
         
Quarters Ended Years Ended

(Dollars in millions)

December 31,
2013
September 30,
2013
December 31,
2012
December 31,
2013
December 31,
2012
Floor Income Contracts $ 183 $ 115 $ 237 $ 785 $ 412
Basis swaps (1 ) 5 (10 ) (14 ) (66 )
Foreign currency hedges (103 ) (45 ) (55 ) (248 ) (199 )
Other   (14 )   (13 )   (5 )   (36 )   (32 )
 
Total unrealized gains (losses) on derivative and hedging activities, net $ 65   $ 62   $ 167   $ 487   $ 115  
 
(3) Other derivative accounting adjustments consist of adjustments related to: (1) foreign currency denominated debt that is adjusted to spot foreign exchange rates for GAAP where such adjustments are reversed for “Core Earnings” and (2) certain terminated derivatives that did not receive hedge accounting treatment under GAAP but were economic hedges under “Core Earnings” and, as a result, such gains or losses are amortized into “Core Earnings” over the life of the hedged item.
(4) Negative amounts are subtracted from “Core Earnings” net income to arrive at GAAP net income and positive amounts are added to “Core Earnings” net income to arrive at GAAP net income.
 

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

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

(Dollars in millions)

December 31,
2013
September 30,
2013
December 31,
2012
December 31,
2013
December 31,
2012
Reclassification of realized gains (losses) on derivative and hedging activities:
Net settlement expense on Floor Income Contracts reclassified to net interest income $ (204 ) $ (201 ) $ (215 ) $ (816 ) $ (858 )
Net settlement income on interest rate swaps reclassified to net interest income 11 12 20 55 115
Net realized gains on terminated derivative contracts reclassified to other income               6      
 
Total reclassifications of realized losses on derivative and hedging activities $ (193 ) $ (189 ) $ (195 ) $ (755 ) $ (743 )
 

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

 
As of December 31, 2013, derivative accounting has reduced GAAP equity by approximately $926 million as a result of cumulative net unrealized losses (after tax) recognized under GAAP, but not in “Core Earnings.” The following table rolls forward the cumulative impact to GAAP equity due to these unrealized after-tax net losses related to derivative accounting.
         
Quarters Ended Years Ended

(Dollars in millions)

December 31,
2013
September 30,
2013
December 31,
2012
December 31,
2013
December 31,
2012
Beginning impact of derivative accounting on GAAP equity $ (936 ) $ (923 ) $ (1,183 ) $ (1,080 ) $ (977 )

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

  10     (13 )   103     154     (103 )
 
Ending impact of derivative accounting on GAAP equity $ (926 ) $ (936 ) $ (1,080 ) $ (926 ) $ (1,080 )
   
(1)   Net impact of net unrealized gains (losses) under derivative accounting is composed of the following:
         
Quarters Ended Years Ended

(Dollars in millions)

December 31,
2013
September 30,
2013
December 31,
2012
December 31,
2013
December 31,
2012
Total pre-tax net impact of derivative accounting recognized in net income(a) $ 8 $ (19 ) $ 129 $ 243 $ (194 )
Tax impact of derivative accounting adjustments recognized in net income (3 ) 7 (29 ) (111 ) 82
Change in unrealized gain (losses) on derivatives, net of tax recognized in other comprehensive income   5     (1 )   3     22     9  
 
Net impact of net unrealized gains (losses) under derivative accounting $ 10   $ (13 ) $ 103   $ 154   $ (103 )
   
(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 December 31, 2013, the remaining amortization term of the net floor premiums was approximately 2.50 years for existing contracts. Historically, we have sold Floor Income Contracts on a periodic basis and depending upon market conditions and pricing, we may enter into additional Floor Income Contracts in the future. The balance of unamortized Floor Income Contracts will increase as we sell new contracts and decline due to the amortization of existing contracts.
     
(Dollars in millions) December 31,
2013
September 30,
2013
December 31,
2012
Unamortized net Floor premiums (net of tax) $ (354 ) $ (403 ) $ (551 )
 
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 from continuing operations.

         
Quarters Ended Years Ended

(Dollars in millions)

December 31,
2013
September 30,
2013
December 31,
2012
December 31,
2013
December 31,
2012
“Core Earnings” goodwill and acquired intangible asset adjustments(1):
Goodwill and intangible impairment of acquired intangible assets $ $ $ $ $ (9 )
Amortization of acquired intangible assets   (3 )   (4 )   (14 )   (13 )   (18 )
 
“Core Earnings” goodwill and acquired intangible asset adjustments(1) $ (3 ) $ (4 ) $ (14 ) $ (13 ) $ (27 )
   
(1)   Negative amounts are subtracted from “Core Earnings” net income to arrive at GAAP net income.
 

Business Segment Earnings Summary — “Core Earnings” Basis

 

Consumer Lending Segment

 
The following table includes “Core Earnings” results for our Consumer Lending segment.
               
Quarters Ended % Increase (Decrease) Years
Ended
% Increase
(Decrease)
(Dollars in millions) Dec. 31,
2013
Sept. 30,
2013
Dec. 31,
2012
Dec. 31,
2013 vs.
Sept. 30,
2013
Dec. 31,
2013 vs.
Dec. 31,
2012
Dec. 31,
2013
Dec. 31,
2012
Dec. 31,
2013 vs.
Dec. 31,
2012
“Core Earnings” interest income:
Private Education Loans $ 642 $ 635 $ 625 1 % 3 % $ 2,527 $ 2,481 2 %
Cash and investments   2   1   1   100   100     7     7    
 
Total “Core Earnings” interest income 644 636 626 1 3 2,534 2,488 2
Total “Core Earnings” interest expense   211   203   207   4   2     825     822    
 
Net “Core Earnings” interest income 433 433 419 3 1,709 1,666 3
Less: provision for loan losses   180   195   296   (8 ) (39 )   787     1,008   (22 )
 
Net “Core Earnings” interest income after provision for loan losses 253 238 123 6 106 922 658 40
Servicing revenue 2 11 11 (82 ) (82 ) 34 46 (26 )
 
Direct operating expenses 70 85 67 (18 ) 4 298 265 12
Restructuring and other reorganization expenses   4       100   100     6     3   100  
 
Total expenses   74   85   67   (13 ) 10     304     268   13  
 
Income from continuing operations, before income tax expense 181 164 67 10 170 652 436 50
Income tax expense   67   59   21   14   219     239     157   52  
 
Net income from continuing operations 114 105 46 9 148 413 279 48
Loss from discontinued operations, net of tax benefit       (1 )   (100 )   (1 )   (2 ) (50 )
 
“Core Earnings” $ 114 $ 105 $ 45   9 % 153 % $ 412   $ 277   49 %
 

Consumer Lending Net Interest Margin

 
The following table shows the Consumer Lending “Core Earnings” net interest margin along with reconciliation to the GAAP-basis Consumer Lending net interest margin before provision for loan losses.
         
Quarters Ended Years Ended
Dec. 31,
2013
Sept. 30,
2013
Dec. 31,
2012
Dec. 31,
2013
Dec. 31,
2012
“Core Earnings” basis Private Education Loan yield 6.43 % 6.42 % 6.34 % 6.39 % 6.36 %
Discount amortization .19   .19   .22   .21   .22  
 
“Core Earnings” basis Private Education Loan net yield 6.62 6.61 6.56 6.60 6.58
“Core Earnings” basis Private Education Loan cost of funds (2.06 ) (2.01 ) (2.02 ) (2.03 ) (2.04 )
 
“Core Earnings” basis Private Education Loan spread 4.56 4.60 4.54 4.57 4.54
“Core Earnings” basis other interest-earning asset spread impact (.42 ) (.36 ) (.47 ) (.41 ) (.41 )
 
“Core Earnings” basis Consumer Lending net interest margin(1) 4.14 % 4.24 % 4.07 % 4.16 % 4.13 %
                     
 
“Core Earnings” basis Consumer Lending net interest margin(1) 4.14 % 4.24 % 4.07 % 4.16 % 4.13 %
Adjustment for GAAP accounting treatment(2) (.03 ) (.03 ) (.05 )

(.03

) (.10 )
 
GAAP-basis Consumer Lending net interest margin(1) 4.11 % 4.21 % 4.02 % 4.13 % 4.03 %
   
(1)   The average balances of our Consumer Lending “Core Earnings” basis interest-earning assets for the respective periods are:
         
Quarters Ended Years Ended
Dec. 31,
2013
Sept. 30,
2013
Dec. 31,
2012
Dec. 31,
2013
Dec. 31,
2012

(Dollars in millions)

Private Education Loans $ 38,508 $ 38,102 $ 37,926 $ 38,292 $ 37,691
Other interest-earning assets   2,925   2,385   2,977   2,727   2,572
 
Total Consumer Lending “Core Earnings” basis interest-earning assets $ 41,433 $ 40,487 $ 40,903 $ 41,019 $ 40,263
 
(2) Represents the reclassification of periodic interest accruals on derivative contracts from net interest income to other income and other derivative accounting adjustments. For further discussion of these adjustments, see section titled “‘Core Earnings’ — Definition and Limitations — Difference between ‘Core Earnings’ and GAAP” above.
 

Private Education Loan Provision for Loan Losses and Charge-Offs

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

(Dollars in millions)

Dec. 31,
2013
Sept. 30,
2013
Dec. 31,
2012
Dec. 31,
2013
Dec. 31,
2012
Private Education Loan provision for loan losses $ 180 $ 195 $ 296 $ 787 $ 1,008
Private Education Loan charge-offs $ 230 $ 205 $ 329 $ 878 $ 1,037
 
In establishing the allowance for Private Education Loan losses as of December 31, 2013, we considered several factors with respect to our Private Education Loan portfolio. In particular, we continue to see improvement in credit quality and continuing positive delinquency, forbearance and charge-off trends in connection with this portfolio. Improving credit quality is seen in higher FICO scores and cosigner rates as well as a more seasoned portfolio. Total loans delinquent (as a percentage of loans in repayment) have decreased to 8.3 percent from 9.3 percent in the year-ago quarter. Loans greater than 90 days delinquent (as a percentage of loans in repayment) have decreased to 4.1 percent from 4.6 percent in the year-ago quarter. The charge-off rate decreased to 2.9 percent from 4.2 percent in the year-ago quarter. Loans in forbearance (as a percentage of loans in repayment and forbearance) decreased to 3.4 percent from 3.5 percent in the year-ago quarter.
 
Apart from the overall improvements discussed above that had the effect of reducing the provision for loan losses in both the fourth-quarter and full-year 2013 compared to prior year periods, Private Education Loans that have defaulted between 2008 and 2013 for which we have previously charged off estimated losses have, to varying degrees, not met our post-default recovery expectations to date and may continue to not do so. Our allowance for loan losses takes into account these potential recovery uncertainties. In the third quarter of 2013, we increased our allowance related to these potential recovery shortfalls by approximately $112 million. See “Financial Condition — Consumer Lending Portfolio Performance — Receivable for Partially Charged-Off Private Education Loans” for further discussion.
 
The Private Education Loan provision for loan losses was $180 million in the fourth quarter of 2013, down $116 million from the fourth quarter of 2012, and $787 million for the year ended December 31, 2013, down $221 million from the year-ago period. The decline in both periods was a result of the overall improvement in credit quality and performance trends discussed above, leading to decreases in expected future charge-offs. This overall decrease in expected future charge-offs is the net effect of a decrease in expected future defaults less a smaller decrease in what we expect to recover on such defaults.
 
For a more detailed discussion of our policy for determining the collectability of Private Education Loans and maintaining our allowance for Private Education Loan losses, see Item 7 “Management’s Discussion and Analysis of Financial Condition and Results of Operations — Critical Accounting Policies and Estimates — Allowance for Loan Losses” in our Annual Report on Form 10-K for the year ended December 31, 2012.
 

Operating Expenses — Consumer Lending Segment

 
Operating expenses for our Consumer Lending segment include costs incurred to originate Private Education Loans and to service and collect on our Private Education Loan portfolio. The increase in operating expenses of $3 million in the quarter ended December 31, 2013 compared with the year-ago quarter was primarily the result of continued investments in technology. The increase in operating expenses of $33 million for full-year 2013 compared with full-year 2012 was primarily the result of increased loan marketing and collection activities as well as continued investments in technology. Direct operating expenses as a percentage of revenues (revenues calculated as net interest income after provision plus total other income) were 27 percent and 50 percent in the quarters ended December 31, 2013 and 2012, respectively, and 31 percent and 38 percent in the years ended December 31, 2013 and 2012, respectively.
 

Business Services Segment

The following table includes “Core Earnings” results for our Business Services segment.
                               
Quarters Ended % Increase (Decrease) Years Ended % Increase
(Decrease)

(Dollars in millions)

Dec. 31,
2013
Sept. 30,
2013
Dec. 31,
2012
Dec. 31, 2013 vs.
Sept. 30, 2013
Dec. 31, 2013 vs.
Dec. 31, 2012
Dec. 31,
2013
Dec. 31,
2012
Dec. 31, 2013 vs.
Dec. 31, 2012
Net interest income $ 1 $ 1 $ 3 % (67 )% $ 5 $ 7 (29 ) %
Servicing revenue:
Intercompany loan servicing 121 123 158 (2 ) (23 ) 530 670 (21 )
Third-party loan servicing 40 40 24 67 142 98 45
Guarantor servicing 10 10 10 38 44 (14 )
Other servicing     1   1 (100 ) (100 )       1   (100 )
 
Total servicing revenue 171 174 193 (2 ) (11 ) 710 813 (13 )
Contingency revenue 108 104 95 4 14 420 356 18
Other Business Services revenue   11   6   8 83   38     34     33   3  
 
Total other income 290 284 296 2 (2 ) 1,164 1,202 (3 )
 
Direct operating expenses 102 103 94 (1 ) 9 400 364 10
Restructuring and other reorganization expenses       2   (100 )   2     3   (33 )
 
Total expenses   102   103   96 (1 ) 6     402     367   10  
 
Income from continuing operations, before income tax expense 189 182 203 4 (7 ) 767 842 (9 )
Income tax expense   69   66   69 5       281     303   (7 )
 
Net income from continuing operations 120 116 134 3 (10 ) 486 539 (10 )
Income from discontinued operations, net of tax expense   64   8   1 700   6,300     112       100  
 
“Core Earnings” 184 124 135 48 36 598 539 11
Less: net loss attributable to noncontrolling interest             (1 )   (2 ) (50 )
 
“Core Earnings” attributable to SLM Corporation $ 184 $ 124 $ 135 48 % 36 % $ 599   $ 541   11 %
 
 
Our Business Services segment includes intercompany loan servicing fees from servicing the FFELP Loans in our FFELP Loans segment. The average balance of this portfolio was $106 billion and $127 billion for the quarters ended December 31, 2013 and 2012, respectively, and $112 billion and $132 billion for the years ended December 31, 2013 and 2012, respectively. The decline in average balance of FFELP loans outstanding along with the related intercompany loan servicing revenue from the year-ago period is primarily the result of normal amortization of the portfolio, as well as the sale of our Residual Interests in $12 billion of securitized FFELP loans in the first half of 2013.
 
Third-party loan servicing income for the current quarter and year-to-date periods compared with prior-year periods increased $17 million and $44 million, respectively, primarily due to the increase in ED servicing revenue (discussed below) as well as a result of the sale of Residual Interests in FFELP Loan securitization trusts in 2013. (See “FFELP Loans Segment” for further discussion.) When we sold the Residual Interests, we retained the right to service the loans in the trusts. As such, servicing income that had previously been recorded as intercompany loan servicing is now recognized as third-party loan servicing income.
 
We are servicing approximately 5.7 million accounts under the ED Servicing Contract as of December 31, 2013, compared with 5.7 million and 4.3 million accounts serviced at September 30, 2013 and December 31, 2012, respectively. Third-party loan servicing fees in the quarters ended December 31, 2013 and 2012 included $31 million and $22 million, respectively, of servicing revenue related to the ED Servicing Contract. The years ended December 31, 2013 and 2012 included $109 million and $84 million, respectively, of servicing revenue related to the ED Servicing Contract.
 
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 $13 million in the current quarter compared with the year-ago quarter and $64 million for the years ended December 31, 2013 compared with the prior-year periods as a result of the higher volume of collections.
 
The following table presents the outstanding inventory of contingent collection receivables that our Business Services segment will collect on behalf of others. We expect the inventory of contingent collection receivables to decline over time as a result of the elimination of FFELP.
 
           

(Dollars in millions)

December 31,
2013
September 30,
2013
December 31,
2012
Contingent collection receivables:
Student loans $ 13,481 $ 12,852 $ 13,189
Other   2,693   2,357   2,139
 
Total $ 16,174 $ 15,209 $ 15,328
 
 
In the second quarter of 2013, we sold our Campus Solutions business and recorded an after-tax gain of $38 million. The results related to this business for all periods presented have been reclassified as discontinued operations and are shown on an after-tax basis.
 
In the fourth quarter of 2013, we sold our 529 college savings plan administration business and recorded an after-tax gain of $62 million. The results related to this business for all periods presented have been reclassified as discontinued operations and are shown on an after-tax basis.
 
Revenues related to services performed on FFELP Loans accounted for 76 percent and 81 percent, respectively, of total segment revenues for the quarters ended December 31, 2013 and 2012 and 77 percent and 82 percent, respectively, of total segment revenues for the years ended December 31, 2013 and 2012.
 

Operating Expenses — Business Services Segment

Operating expenses for our Business Services segment primarily include costs incurred to service our FFELP Loan portfolio, third-party servicing and collection costs, and other operating costs. The increase in operating expenses of $8 million and $36 million in the quarter and year ended December 31, 2013, respectively, compared with the year-ago periods was primarily the result of an increase in our third-party servicing and collection activities as well as continued investments in technology.
 

FFELP Loans Segment

The following table includes “Core Earnings” results for our FFELP Loans segment.
                               
Quarters Ended % Increase (Decrease) Years Ended % Increase (Decrease)

(Dollars in millions)

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

“Core Earnings” interest income:

FFELP Loans $ 558 $ 574 $ 654 (3 )% (15 )% $ 2,313 $ 2,744 (16 )%
Cash and investments   1   2   3 (50 ) (67 )   6   11 (45 )
 
Total “Core Earnings” interest income 559 576 657 (3 ) (15 ) 2,319 2,755 (16 )
Total “Core Earnings” interest expense   307   313   360 (2 ) (15 )   1,285   1,591 (19 )
 
Net “Core Earnings” interest income 252 263 297 (4 ) (15 ) 1,034 1,164 (11 )
Less: provision for loan losses   10   12   18 (17 ) (44 )   52   72 (28 )
 
Net “Core Earnings” interest income after provision for loan losses 242 251 279 (4 ) (13 ) 982 1,092 (10 )
 
Gains on sales of loans and investments 312 100
Servicing revenue   15   21   22 (29 ) (32 )   76   90 (16 )
 
Total other income 15 21 22 (29 ) (32 ) 388 90 331
 
Direct operating expenses 127 129 165 (2 ) (23 ) 557 702 (21 )

Restructuring and other reorganization expenses

               
 
Total expenses   127   129   165 (2 ) (23 )   557   702 (21 )
 
Income before income tax expense 130 143 136 (9 ) (4 ) 813 480 69
Income tax expense   48   51   47 (6 ) 2     298   173 72  
 
“Core Earnings” $ 82 $ 92 $ 89 (11 )% (8 )% $ 515 $ 307 68 %
 
 

FFELP Loan Net Interest Margin

The following table shows the “Core Earnings” basis FFELP Loan net interest margin along with reconciliation to the GAAP basis FFELP Loan net interest margin.
                   
Quarters Ended Years Ended
December 31,
2013
September 30,
2013
December 31,
2012
December 31,
2013
December 31,
2012
“Core Earnings” basis FFELP Loan yield 2.58 % 2.60 % 2.63 % 2.59 % 2.66 %
Hedged Floor Income .29 .28 .24 .27 .26
Unhedged Floor Income .09 .10 .11 .09 .11
Consolidation Loan Rebate Fees (.64 ) (.64 ) (.67 ) (.65 ) (.67 )
Repayment Borrower Benefits (.11 ) (.11 ) (.13 ) (.11 ) (.13 )
Premium amortization (.11 ) (.11 ) (.13 ) (.13 ) (.15 )
 
“Core Earnings” basis FFELP Loan net yield 2.10 2.12 2.05 2.06 2.08
“Core Earnings” basis FFELP Loan cost of funds (1.09 ) (1.09 ) (1.05 ) (1.07 ) (1.13 )
 
“Core Earnings” basis FFELP Loan spread 1.01 1.03 1.00 .99 .95
“Core Earnings” basis other interest-earnings asset spread impact (.10 ) (.10 ) (.11 ) (.11 ) (.11 )
 
“Core Earnings” basis FFELP Loan net interest margin(1) .91 % .93 % .89 % .88 % .84 %
                                         
 
“Core Earnings” basis FFELP Loan net interest margin(1) .91 % .93 % .89 % .88 % .84 %
Adjustment for GAAP accounting treatment(2) .43   .41   .37   .41   .31  
 
GAAP-basis FFELP Loan net interest margin 1.34 % 1.34 % 1.26 % 1.29 % 1.15 %

____________________

(1)

  The average balances of our FFELP “Core Earnings” basis interest-earning assets for the respective periods are:
    Quarters Ended     Years Ended
Dec. 31,
2013
    Sept. 30,
2013
    Dec. 31,
2012
Dec. 31,
2013
    Dec. 31,
2012

(Dollars in millions)

FFELP Loans $ 105,518 $ 107,483 $ 126,874 $ 112,152 $ 132,124
Other interest-earning assets   4,498 4,751   6,152   5,013   6,619
 
Total FFELP “Core Earnings” basis interest-earning assets $ 110,016 $ 112,234 $ 133,026 $ 117,165 $ 138,743

(2)

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

As of December 31, 2013, our FFELP Loan portfolio totaled approximately $105 billion, comprised of $40 billion of FFELP Stafford loans and $65 billion of FFELP Consolidation Loans. The weighted-average life of these portfolios is 4.9 years and 9.3 years, respectively, assuming a Constant Prepayment Rate (“CPR”) of 4 percent and 3 percent, respectively.

 

FFELP Loan Provision for Loan Losses and Charge-Offs

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

                   
Quarters Ended Years Ended

(Dollars in millions)

Dec. 31,
2013
Sept. 30,
2013
Dec. 31,
2012
Dec. 31,
2013
Dec. 31,
2012
FFELP Loan provision for loan losses $ 10 $ 12 $ 18 $ 52 $ 72
FFELP Loan charge-offs $ 21 $ 15 $ 23 $ 78 $ 92
 
 

Gains on Sales of Loans and Investments

The increase in gains on sales of loans and investments for the year ended December 31, 2013 from the year ended December 31, 2012 was the result of $312 million in gains from the sale of Residual Interests in FFELP Loan securitization trusts in 2013. We will continue to service the student loans in the trusts that were sold under existing agreements. The sales removed securitization trust assets of $12.5 billion and related liabilities of $12.1 billion from the balance sheet.

 

Operating Expenses — FFELP Loans

Operating expenses for our FFELP Loans segment primarily include the contractual rates we pay to service loans in term asset-backed securitization trusts or a similar rate if a loan is not in a term financing facility (which is presented as an intercompany charge from the Business Services segment who services the loans), the fees we pay for third-party loan servicing and costs incurred to acquire loans. The intercompany revenue charged by the Business Services segment and included in those amounts was $121 million and $158 million for the quarters ended December 31, 2013 and 2012, respectively, and $530 million and $670 million for the years ended December 31, 2013 and 2012, respectively. These amounts exceed the actual cost of servicing the loans. Operating expenses were 48 basis points and 52 basis points of average FFELP Loans in the quarters ended December 31, 2013 and 2012, respectively, and 50 basis points and 53 basis points of average FFELP Loans in the years ended December 31, 2013 and 2012, respectively. The decrease in operating expenses of $38 million and $145 million in the quarter and year ended December 31, 2013, respectively, compared with the year-ago periods was primarily the result of the reduction in the average outstanding balance of our FFELP Loan portfolio.
 

Other Segment

The following table shows “Core Earnings” results of our Other segment.
                               
Quarters Ended % Increase (Decrease)

Years Ended

% Increase (Decrease)

(Dollars in millions)

Dec. 31,
2013
Sept. 30,
2013
Dec. 31,
2012
Dec. 31, 2013 vs.
Sept. 30, 2013
Dec. 31, 2013 vs.
Dec. 31, 2012
Dec. 31,
2013
Dec. 31,
2012
Dec. 31, 2013 vs.
Dec. 31, 2012
Net interest loss after provision for loan losses $ (12 ) $ (9 ) $ (6 ) 33 % 100 % $ (36 ) $ (19 ) 89 %
 
Gains (losses) on sales of loans and investments (5 ) 1 (100 ) (600 ) (10 ) (100 )
Gains on debt repurchases 43 (100 ) 48 145 (67 )
Other income   1     6     3   (83 ) (67 )   4     15   (73 )
 
Total income (4 ) 6 47 (167 ) (109 ) 42 160 (74 )
 
Direct operating expenses 72 4 3 1,700 2,300 80 12 567
Overhead expenses:
Corporate overhead 25 27 27 (7 ) (7 ) 116 116
Unallocated information technology costs   30     32     28   (6 ) 7     121     108   12  
 
Total overhead expenses   55     59     55   (7 )     237     224   6  
 
Total operating expenses 127 63 58 102 119 317 236 34
Restructuring and other reorganization expenses   22     12     (1 ) 83   2,300     64     5   1,180  
 
Total expenses   149     75     57   99   161     381     241   58  
 
Loss before income tax expense (benefit) (165 ) (78 ) (16 ) 112 931 (375 ) (100 ) 275
Income tax expense (benefit)   (60 )   (28 )   (4 ) 114   1,400     (138 )   (36 ) 283  
 
Net loss from continuing operations   (105 )   (50 )   (12 ) 110   775     (237 )   (64 ) 270  
 
Income from discontinued operations, net of tax expense                   1     1    
 
“Core Earnings” (loss) $ (105 ) $ (50 ) $ (12 ) 110 % 775 % $ (236 ) $ (63 ) 275 %
 
 

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 $282 million and $191 million face amount of our debt for the quarters ended December 31, 2013 and 2012, respectively, and $1.3 billion and $711 million face amount of our debt for the years ended December 31, 2013 and 2012, respectively. Debt repurchase activity will fluctuate based on market fundamentals and our liability management strategy.
 

Direct Operating Expenses – Other Segment

In the fourth quarter of 2013, the Company reserved $70 million for expected compliance remediation efforts relating to pending regulatory inquiries. This is the primary reason for the increase in direct operating expenses of $69 million and $68 million, respectively, for the quarter and year ended December 31, 2013 over the year-ago periods.

 

Overhead – Other Segment

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.
 

Restructuring and Other Reorganization Expenses – Other Segment

Restructuring and other reorganization expenses for the quarter ended December 31, 2013 were $22 million compared with $(1) million in the year-ago quarter. For the quarter ended December 31, 2013, these consisted of expenses primarily related to third-party costs incurred in connection with the Company’s previously announced plan to separate its existing organization into two, separate, publicly traded companies.
 
For the year ended December 31, 2013, restructuring and other reorganization expenses were $64 million compared with $5 million in the year-ago period. For the year ended December 31, 2013, these consisted of $43 million of expenses related to third-party costs incurred in connection with the Company’s previously announced plan to separate its existing organization into two, separate publicly traded companies and $21 million related to severance. The $5 million of expenses in the year ended December 31, 2012 was related to restructuring expenses.
 

Financial Condition

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

Summary of our Student Loan Portfolio

Ending Student Loan Balances, net

 
December 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) $ 742 $ $ 742 $ 2,629 $ 3,371
Grace, repayment and other(2)   38,752     64,178     102,930     36,371     139,301  
 
Total, gross 39,494 64,178 103,672 39,000 142,672
Unamortized premium/(discount) 602 433 1,035 (704 ) 331
Receivable for partially charged-off loans 1,313 1,313
Allowance for loan losses   (75 )   (44 )   (119 )   (2,097 )   (2,216 )
 
Total student loan portfolio $ 40,021   $ 64,567   $ 104,588   $ 37,512   $ 142,100  
 
% of total FFELP 38 %