Sallie Mae Reports Third-Quarter 2013 Financial Results

Loan Originations Increase 11 Percent From Year-Ago Quarter

Private Education Loan Charge-off Rates Decline to 2.6 Percent, Lowest Level in Five Years

Wednesday, October 16, 2013 4:16 pm EDT

Dateline:

NEWARK, Del.

Public Company Information:

NASDAQ:
SLM
"Unrealized gains on derivative and hedging activities, net"

NEWARK, Del.--(BUSINESS WIRE)--Sallie Mae (NASDAQ: SLM), formally SLM Corporation, today released third-quarter 2013 financial results that include an 11-percent increase in loan originations compared to the year-ago quarter and a decline in private education loan charge-off rates to 2.6 percent, the lowest level in five years.

“Students and their families are increasingly cost conscious when making education decisions. Even so, our loan originations grew by double digits this quarter, confirming the continuing demand for our responsibly designed products,” said John (Jack) F. Remondi, president and CEO. “I am also proud of our default prevention statistics. Despite numerous reports on rising student loan defaults, our private and federal loan customers experienced lower default rates year over year.”

For the third-quarter 2013, GAAP net income was $260 million ($0.57 diluted earnings per share), compared with $188 million ($0.39 diluted earnings per share) for the year-ago quarter.

Core earnings for the quarter were $271 million ($0.60 diluted earnings per share), compared with $277 million ($0.58 diluted earnings per share) for the year-ago quarter.

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

Sallie Mae provides core basis earnings because management makes its financial decisions on such measures. The changes in GAAP net income are driven by the same core earnings items discussed above, as well as changes in mark-to-market unrealized gains and losses on derivative contracts and amortization and impairment of goodwill and intangible assets that are recognized in GAAP, but not in core earnings results. Third-quarter 2013 GAAP results included $19 million of losses from derivative accounting treatment that are excluded from core earnings results, compared with losses of $140 million in the year-ago period.

Consumer Lending

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

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

Third-quarter 2013 private education loan portfolio results vs. third-quarter 2012 included:

  • Loan originations of $1.5 billion, up 11 percent.
  • Delinquencies of 90 days or more of 3.8 percent of loans in repayment, down from 5.3 percent.
  • Loans in forbearance of 3.4 percent of loans in repayment and forbearance, up from 3.2 percent.
  • Annualized charge-off rate of 2.6 percent of average loans in repayment, down from 3.2 percent.
  • Provision for private education loan losses of $195 million, down from $252 million.
  • Core net interest margin, before loan loss provision, of 4.24 percent, up from 4.05 percent.
  • The portfolio balance, net of loan loss allowance, totaled $37.8 billion, a $651 million increase over the year-ago quarter.

Business Services

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

Business services core earnings were $124 million in third-quarter 2013, compared with $133 million in the year-ago quarter. The decline in business services net income from the year-ago period was primarily the result of a lower outstanding principal balance in the underlying FFELP portfolio serviced.

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

Federally Guaranteed Student Loans (FFELP)

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

Core earnings for the segment were $92 million in third-quarter 2013, compared with the year-ago quarter’s $94 million.

At Sept. 30, 2013, the company held $106 billion of FFELP loans, compared with $128 billion at Sept. 30, 2012. Approximately $12 billion of the $22 billion decline in FFELP loans is a result of the sales of the residual interests in FFELP securitization trusts earlier in the year.

Operating Expenses

Third-quarter 2013 operating expenses were $257 million, compared with $220 million in the year-ago quarter. The increase is primarily the result of increases in third-party servicing and collections activities, increased private education loan marketing activities, continued investments in technology, and an increase in pending litigation settlement expense.

In addition, there were $12 million and $2 million of expenses reported in restructuring and other reorganization expenses in the third quarter of 2013 and 2012, respectively. For the third-quarter 2013, these consisted of expenses related to the company’s previously announced plan to separate its existing organization into two, separate, publicly traded companies. The $2 million of expenses in third-quarter 2012 related to restructuring expenses.

Funding and Liquidity

During the third-quarter 2013, Sallie Mae issued $1.7 billion in FFELP asset-backed securities (ABS), $624 million in private education loan ABS and $1.25 billion in unsecured bonds. In addition, the company closed on a $1.1 billion asset-backed borrowing facility that matures on August 15, 2015. This facility was used to fund the call and redemption of SLM 2009-D Private Education Loan Trust ABS.

Shareholder Distributions

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

In July 2013, the company authorized $400 million to be utilized in a new common share repurchase program that does not have an expiration date. There were no share repurchases in the third-quarter 2013.

Guidance

The company expects 2013 results to be as follows:

  • Full-year 2013 private education loan originations of $3.8 billion.
  • Fully diluted 2013 core earnings per share of $2.94 including $0.44 related to FFELP securitization trust residual sales, $0.08 from the business sale earlier in the year, and the anticipated $0.14 from the business sale to close in fourth-quarter 2013.

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

Definitions for capitalized terms in this document can be found in the company’s Annual Report on Form 10-K for the year ended Dec. 31, 2012 (filed with the SEC on Feb. 26, 2013). Certain reclassifications have been made to the balances as of and for the three months ended Sept. 30, 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, Oct. 17, 2013, at 8 a.m. EDT. Sallie Mae executives will be on hand to discuss various highlights of the quarter and to answer questions related to the company’s performance. Individuals interested in participating in the call should dial 877-356-5689 (USA and Canada) or dial 706-679-0623 (international) and use access code 75317185 starting at 7:45 a.m. EDT. A live audio webcast of the conference call may be accessed at www.SallieMae.com/investors. A replay of the conference call via the company’s website will be available approximately two hours after the call’s conclusion. A telephone replay may be accessed approximately two hours after the call’s conclusion through Oct. 31, by dialing 855-859-2056 (USA and Canada) or 404-537-3406 (international) with access code 75317185.

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. Celebrating 40 years of making a difference, Sallie Mae continues to turn 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 Nine Months Ended
(In millions, except per share data) September 30,
2013
June 30,
2013
September 30,
2012
September 30,
2013
September 30,
2012
 
GAAP Basis

Net income attributable to SLM Corporation

$ 260 $ 543 $ 188 $ 1,149 $ 591
Diluted earnings per common share attributable to SLM Corporation $ .57 $ 1.20 $ .39 $ 2.52 $ 1.18
Weighted average shares used to compute diluted earnings per share 445 448 471 450 490
Return on assets .67 % 1.35 % .42 % .95 % .43 %
 
“Core Earnings” Basis(1)
“Core Earnings” attributable to SLM Corporation $ 271 $ 462 $ 277 $ 1,015 $ 804
“Core Earnings” diluted earnings per common share attributable to SLM Corporation $ .60 $ 1.02 $ .58 $ 2.22 $ 1.61
Weighted average shares used to compute diluted earnings per share 445 448 471 450 490
“Core Earnings” return on assets .70 % 1.15 % .62 % .84 % .59 %
 
Other Operating Statistics
Ending FFELP Loans, net $ 106,350 $ 108,491 $ 127,747 $ 106,350 $ 127,747
Ending Private Education Loans, net   37,752     37,116     37,101     37,752     37,101  
Ending total student loans, net $ 144,102   $ 145,607   $ 164,848   $ 144,102   $ 164,848  
Average student loans $ 145,585 $ 152,135 $ 167,166 $ 152,607 $ 171,499
   
(1)   “Core Earnings” are non-GAAP financial measures and do not represent a comprehensive basis of accounting. For a greater explanation of “Core Earnings,” see the section titled “‘Core Earnings’ — Definition and Limitations” and subsequent sections.
 

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)

 
September 30, September 30,
2013 vs. 2013 vs.
June 30, 2013   September 30, 2012
Increase Increase
Quarters Ended (Decrease) (Decrease)
(In millions, except per share data) September 30,
2013
June 30,
2013
September 30,
2012
  $   %   $     %
Interest income:
FFELP Loans $ 698 $ 703 $ 840 $ (5 ) (1 ) % $ (142 ) (17 ) %
Private Education Loans 635 627 615 8 1 20 3
Other loans 3 3 4 (1 ) (25 )
Cash and investments   4     4     5           (1 ) (20 )
Total interest income 1,340 1,337 1,464 3 (124 ) (8 )
Total interest expense   541     553     645     (12 ) (2 )   (104 ) (16 )
Net interest income 799 784 819 15 2 (20 ) (2 )
Less: provisions for loan losses   207     201     270     6   3     (63 ) (23 )
Net interest income after provisions for loan losses 592 583 549 9 2 43 8
Other income (loss):
Gains on sales of loans and investments 251 (251 ) (100 )
Gains (losses) on derivative and hedging activities, net (127 ) 18 (233 ) (145 ) (806 ) 106 (45 )
Servicing revenue 83 69 71 14 20 12 17
Contingency revenue 104 109 85 (5 ) (5 ) 19 22
Gains on debt repurchases 19 44 (19 ) (100 ) (44 ) (100 )
Other income   9     24     2     (15 ) (63 )   7   350  
Total other income (loss) 69 490 (31 ) (421 ) (86 ) 100 323
Expenses:
Operating expenses 257 244 220 13 5 37 17
Goodwill and acquired intangible asset impairment and amortization expense 4 3 5 1 33 (1 ) (20 )
Restructuring and other reorganization expenses   12     23     2     (11 ) (48 )   10   500  
Total expenses   273     270     227     3   1     46   20  
Income from continuing operations before income tax expense 388 803 291 (415 ) (52 ) 97 33
Income tax expense   136     299     104     (163 ) (55 )   32   31  
Net income from continuing operations 252 504 187 (252 ) (50 ) 65 35
Income from discontinued operations, net of tax expense   8     38         (30 ) (79 )   8   100  
Net income 260 542 187 (282 ) (52 ) 73 39
Less: net loss attributable to noncontrolling interest       (1 )   (1 )   1   (100 )   1   (100 )
Net income attributable to SLM Corporation 260 543 188 (283 ) (52 ) 72 38
Preferred stock dividends   5     5     5              
 
Net income attributable to SLM Corporation common
stock
$ 255   $ 538   $ 183   $ (283 ) (53 )% $ 72   39 %
 
Basic earnings (loss) per common share attributable to SLM Corporation:
Continuing operations $ .56 $ 1.14 $ .39 $ (.58 ) (51 )% $ .17 44 %
Discontinued operations   .02     .08         (.06 ) (75 )   .02   100  
Total $ .58   $ 1.22   $ .39   $ (.64 ) (52 )% $ .19   49 %
 
Diluted earnings (loss) per common share attributable to SLM Corporation:
Continuing operations $ .55 $ 1.12 $ .39 $ (.57 ) (51 )% $ .16 41 %
Discontinued operations   .02     .08         (.06 ) (75 )   .02   100  
Total $ .57   $ 1.20   $ .39   $ (.63 ) (53 )% $ .18   46 %
Dividends per common share attributable to SLM Corporation $ .15   $ .15   $ .125   $   % $ .025   20 %
       
Nine Months
Ended Increase
September 30, (Decrease)
(In millions, except per share data)   2013     2012     $   %
Interest income:
FFELP Loans $ 2,138 $ 2,459 $ (321 ) (13 )%
Private Education Loans 1,884 1,856 28 2
Other loans 9 13 (4 ) (31 )
Cash and investments   13     16     (3 ) (19 )
Total interest income 4,044 4,344 (300 ) (7 )
Total interest expense   1,666     1,968     (302 ) (15 )
Net interest income 2,378 2,376 2
Less: provisions for loan losses   649     766     (117 ) (15 )
Net interest income after provisions for loan losses 1,729 1,610 119 7
Other income (loss):
Gains on sales of loans and investments 307 1 306 30,600
Losses on derivative and hedging activities, net (140 ) (600 ) 460 (77 )
Servicing revenue 223 212 11 5
Contingency revenue 312 261 51 20
Gains on debt repurchases 42 102 (60 ) (59 )
Other income   66     39     27   69  
Total other income 810 15 795 5,300
Expenses:
Operating expenses 737 672 65 10
Goodwill and acquired intangible asset impairment and amortization expense 10 13 (3 ) (23 )
Restructuring and other reorganization expenses   46     9     37   411  
Total expenses   793     694     99   14  
Income from continuing operations, before income tax expense 1,746 931 815 88
Income tax expense   645     340     305   90  
Net income from continuing operations 1,101 591 510 86
Income (loss) from discontinued operations, net of tax expense (benefit)   47     (2 )   49   2,450  
Net income 1,148 589 559 95
Less: net loss attributable to noncontrolling interest   (1 )   (2 )   1   (50 )
Net income attributable to SLM Corporation 1,149 591 558 94
Preferred stock dividends   15     15        
 
Net income attributable to SLM Corporation common stock $ 1,134   $ 576   $ 558   97 %
Basic earnings (loss) per common share attributable to SLM Corporation:
Continuing operations $ 2.46 $ 1.19 $ 1.27 107 %
Discontinued operations   .10         .10   100  
Total $ 2.56   $ 1.19   $ 1.37   115 %
Diluted earnings (loss) per common share attributable to SLM Corporation:
Continuing operations $ 2.42 $ 1.18 $ 1.24 105 %
Discontinued operations   .10         .10   100  
Total $ 2.52   $ 1.18   $ 1.34   114 %
Dividends per common share attributable to SLM Corporation $ .45   $ .375   $ .075   20 %
     

GAAP Balance Sheet (Unaudited)

 
(In millions, except share and per share data) September 30,
2013
June 30,
2013
September 30,
2012
 
Assets
FFELP Loans (net of allowance for losses of $130; $133 and $166, respectively) $ 106,350 $ 108,491 $ 127,747
Private Education Loans (net of allowance for losses of $2,144; $2,149 and $2,196, respectively) 37,752 37,116 37,101
Cash and investments 5,325 4,265 4,283
Restricted cash and investments 4,287 4,109 6,331
Goodwill and acquired intangible assets, net 436 440 462
Other assets   7,420     7,047     8,279  
Total assets $ 161,570   $ 161,468   $ 184,203  
 
 
Liabilities
Short-term borrowings $ 15,572 $ 16,558 $ 20,457
Long-term borrowings 136,944 135,879 154,786
Other liabilities   3,422     3,597     4,014  
Total liabilities   155,938     156,034     179,257  
 
 
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: 544 million; 544 million and 534 million shares, respectively, issued 109 109 107
Additional paid-in capital 4,373 4,355 4,219
Accumulated other comprehensive income (loss), net of tax expense (benefit) 8 9 (8 )
Retained earnings   2,385     2,195     1,165  
Total SLM Corporation stockholders’ equity before treasury stock 7,440 7,233 6,048
Less: Common stock held in treasury: 108 million; 108 million and 72 million shares, respectively   (1,813 )   (1,804 )   (1,108 )
Total SLM Corporation stockholders’ equity 5,627 5,429 4,940
Noncontrolling interest   5     5     6  
Total equity   5,632     5,434     4,946  
Total liabilities and equity $ 161,570   $ 161,468   $ 184,203  
 

Consolidated Earnings Summary — GAAP basis

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

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

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

  • Net interest income decreased by $20 million in the current quarter compared with the prior-year quarter primarily due to a reduction in FFELP net interest income from a $22 billion decline in average FFELP Loans outstanding in part due to the sale of Residual Interests in FFELP Loan securitization trusts in the first half of 2013. There were approximately $12 billion of FFELP Loans in these trusts.
  • Provisions for loan losses declined $63 million compared with the year-ago quarter primarily as a result of the overall improvement in Private Education Loans’ credit quality, delinquency and charge-off trends leading to decreases in expected future charge-offs.
  • Losses on derivative and hedging activities, net, resulted in a net loss of $127 million in the current quarter compared with a net loss of $233 million in the year-ago period. The primary factors affecting the change were interest rate and foreign currency fluctuations, which primarily affected the valuations of our Floor Income Contracts, basis swaps and foreign currency hedges during each period. Valuations of derivative instruments vary based upon many factors including changes in interest rates, credit risk, foreign currency fluctuations and other market factors. As a result, net gains and losses on derivative and hedging activities may continue to vary significantly in future periods.
  • Servicing and contingency revenue increased $31 million primarily from an increase in the number of accounts serviced and in collection volumes in third-quarter 2013.
  • Gains on debt repurchases decreased $44 million from third-quarter 2012 as we did not repurchase any debt in the current period. Debt repurchase activity will fluctuate based on market fundamentals and our liability management strategy.
  • Operating expenses increased $37 million primarily as a result of increases in our third-party servicing and collections activities, continued investments in technology, increased Private Education Loan marketing and an increase in pending litigation settlement expense.
  • Restructuring and other reorganization expenses were $12 million compared with $2 million in the year-ago quarter. For third-quarter 2013, these consisted of expenses primarily related to third-party costs incurred in connection with the Company’s previously announced plan to separate its existing organization into two, separate, publicly traded companies. The $2 million of expenses in third-quarter 2012 related to restructuring expenses.

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

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

For the nine months ended September 30, 2013, net income was $1.1 billion, or $2.52 diluted earnings per common share, compared with net income of $591 million, or $1.18 diluted earnings per common share, for the nine months ended September 30, 2012. The increase in net income was primarily due to a $460 million decrease in net losses on derivative and hedging activities, a $306 million increase in net gains on sales of loans and investments, a $117 million decrease in provisions for loan losses, a $49 million after-tax increase in income from discontinued operations and a $62 million increase in servicing and contingency revenue, which were partially offset by $60 million of lower gains on debt repurchases, higher operating expenses of $65 million and higher restructuring and other reorganization expenses of $37 million.

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

  • Net interest income increased by $2 million primarily due to a $50 million acceleration of non-cash premium expense recorded in the first half of 2012 related to ED’s consolidation of $5.2 billion of loans under the Special Direct Consolidation Loan (“SDCL”) initiative that ended June 30, 2012. Offsetting this increase was a $19.5 billion decline in average FFELP Loans outstanding in part due to the sale of Residual Interests in FFELP Loan securitization trusts in the first half of 2013. There were approximately $12 billion of FFELP Loans in these trusts.
  • Provisions for loan losses declined $117 million primarily as a result of the overall improvement in Private Education Loans’ credit quality, delinquency and charge-off trends leading to decreases in expected future charge-offs.
  • Gains on sales of loans and investments increased by $306 million as a result of $312 million in gains on the sales of the Residual Interests in FFELP Loan securitization trusts in 2013. See “Business Segment Earnings Summary—‘Core Earnings’ Basis—FFELP Loans Segment” for further discussion.
  • Losses on derivative and hedging activities, net, resulted in a net loss of $140 million in the current nine-month period compared with a net loss of $600 million in the year-ago period. The primary factors affecting the change were interest rate and foreign currency fluctuations, which primarily affected the valuations of our Floor Income Contracts, basis swaps and foreign currency hedges during each period. Valuations of derivative instruments vary based upon many factors including changes in interest rates, credit risk, foreign currency fluctuations and other market factors. As a result, net gains and losses on derivative and hedging activities may continue to vary significantly in future periods.
  • Servicing and contingency revenue increased $62 million primarily from an increase in the number of accounts serviced and collection volumes in the nine months ended September 30, 2013 compared with the prior-year period.
  • Gains on debt repurchases decreased $60 million as we repurchased less debt in the current period. Debt repurchase activity will fluctuate based on market fundamentals and our liability management strategy.
  • Operating expenses increased $65 million primarily as a result of increases in our third-party servicing and collections activities, investments in technology, increased Private Education Loan marketing and an increase in pending litigation settlement expense.
  • Restructuring and other reorganization expenses were $46 million compared with $9 million in the year-ago period. For 2013, these consisted of $24 million primarily related to third-party costs incurred in connection with the Company’s previously announced plan to separate its existing organization into two, separate, publicly traded companies and $22 million related to severance. The $9 million of expenses in 2012 related to restructuring expenses.
  • Income from discontinued operations increased $49 million primarily as a result of the sale of our Campus Solutions business in the second quarter of 2013 which resulted in a $38 million after-tax gain.

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

“Core Earnings” — Definition and Limitations

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

“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 September 30, 2013

(Dollars in millions)

 

 

 

 

 

 

 

 

 

 

 

  Adjustments  

 

Consumer
Lending

Business
Services

FFELP
Loans

Other

Eliminations(1)

Total
“Core
Earnings”

Reclassifications   Additions/
(Subtractions)
  Total
Adjustments(2)

Total
GAAP

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
Net Impact of Net Impact of
Derivative Goodwill and

(Dollars in millions)

Accounting 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 June 30, 2013

(Dollars in millions)

 

 

 

 

 

 

 

 

 

 

 

  Adjustments  

 

Consumer
Lending

Business
Services

FFELP
Loans

Other

Eliminations(1)

Total
“Core
Earnings”

Reclassifications   Additions/
(Subtractions)
  Total
Adjustments(2)

Total
GAAP

Interest income:  
Student loans $ 627 $ $ 581 $ $ $ 1,208 $ 198 $ (76 ) $ 122 $ 1,330
Other loans 3 3 3
Cash and investments   1   1     2   1     (1 )   4                 4  
 
Total interest income 628 1 583 4 (1 ) 1,215 198 (76 ) 122 1,337
Total interest expense   206       325   10     (1 )   540     13         13     553  
 
Net interest income (loss) 422 1 258 (6 ) 675 185 (76 ) 109 784
Less: provisions for loan losses   187       14           201                 201  
 
Net interest income (loss) after provisions for loan losses 235 1 244 (6 ) 474 185 (76 ) 109 583
Other income (loss):
Gains (losses) on sales of loans and investments 257 (6 ) 251 251
Servicing revenue 10 180 16 (137 ) 69 69
Contingency revenue 109 109 109
Gains on debt repurchases 19 19 19
Other income     8               8     (185 )  

219

 (4)

  34     42  
 
Total other income (loss) 10 297 273 13 (137 ) 456 (185 ) 219 34 490
Expenses:
Direct operating expenses 77 99 144 3 (137 ) 186 186
Overhead expenses           58         58                 58  
 
Operating expenses 77 99 144 61 (137 ) 244 244

Goodwill and acquired intangible asset impairment and amortization

3 3 3

Restructuring and other reorganization expenses

  1   1       21         23                 23  
 
Total expenses   78   100     144   82     (137 )   267         3     3     270  
 
Income (loss) from continuing operations, before income tax expense (benefit) 167 198 373 (75 ) 663 140 140 803
Income tax expense (benefit)(3)   60   71     136   (26 )       241         58     58     299  
 
Net income (loss) from continuing operations 107 127 237 (49 ) 422 82 82 504
Income (loss) from discontinued operations, net of tax expense (benefit)     39               39         (1 )   (1 )   38  
 
Net income (loss) 107 166 237 (49 ) 461 81 81 542
Less: net loss attributable to noncontrolling interest     (1 )             (1 )               (1 )
 
Net income (loss) attributable to SLM Corporation $ 107 $ 167   $ 237 $ (49 ) $   $ 462   $   $ 81   $ 81   $ 543  
   
(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 June 30, 2013
Net Impact of Net Impact of
Derivative Goodwill and

(Dollars in millions)

Accounting Acquired Intangibles Total
Net interest income after provisions for loan losses $ 109 $ $ 109
Total other income 34 34
Goodwill and acquired intangible asset impairment and amortization     3     3  
 
“Core Earnings” adjustments to GAAP $ 143 $ (3 ) 140
 
Income tax expense 58
Loss from discontinued operations, net of tax benefit   (1 )
 
Net income $ 81  
 
(3) Income taxes are based on a percentage of net income before tax for the individual reportable segment.
(4) Represents the $203 million of “unrealized gains on derivative and hedging activities, net” as well as the $16 million of “other derivative accounting adjustments.”
 
Quarter Ended September 30, 2012

(Dollars in millions)

 

 

 

 

 

 

 

 

 

 

 

  Adjustments  

 

Consumer
Lending

Business
Services

FFELP
Loans

Other

Eliminations(1)

Total
“Core
Earnings”

Reclassifications   Additions/
(Subtractions)
  Total
Adjustments(2)

Total
GAAP

Interest income:  
Student loans $ 615 $ $ 712 $ $ $ 1,327 $ 206 $ (78 ) $ 128 $ 1,455
Other loans 4 4 4
Cash and investments   2     2     3       (2 )   5                 5  
 
Total interest income 617 2 715 4 (2 ) 1,336 206 (78 ) 128 1,464
Total interest expense   209         399   12     (2 )   618     26    

1

 (4)

  27     645  
 
Net interest income (loss) 408 2 316 (8 ) 718 180 (79 ) 101 819
Less: provisions for loan losses   252         18           270                 270  
 
Net interest income (loss) after provisions for loan losses 156 2 298 (8 ) 448 180 (79 ) 101 549
Other income (loss):
Gains on sales of loans and investments
Servicing revenue 12 201 22 (164 ) 71 71
Contingency revenue 85 85 85
Gains on debt repurchases 44 44 44
Other income (loss)       7       3         10     (180 )  

(61

) (5)

  (241 )   (231 )
 
Total other income (loss) 12 293 22 47 (164 ) 210 (180 ) (61 ) (241 ) (31 )
Expenses:
Direct operating expenses 68 88 171 3 (164 ) 166 166
Overhead expenses             54         54                 54  
 
Operating expenses 68 88 171 57 (164 ) 220 220

Goodwill and acquired intangible asset impairment and amortization

5 5 5

Restructuring and other reorganization expenses

  1           1         2                 2  
 
Total expenses   69     88     171   58     (164 )   222         5     5     227  
 
Income (loss) from continuing operations, before income tax expense (benefit) 99 207 149 (19 ) 436 (145 ) (145 ) 291
Income tax expense (benefit)(3)   36     76     55   (7 )       160         (56 )   (56 )   104  
 
Net income (loss) from continuing operations 63 131 94 (12 ) 276 (89 ) (89 ) 187
Income (loss) from discontinued operations, net of tax expense (benefit)   (1 )   1                                
 
Net income (loss) 62 132 94 (12 ) 276 (89 ) (89 ) 187
Less: net loss attributable to noncontrolling interest       (1 )             (1 )               (1 )
 
Net income (loss) attributable to SLM Corporation $ 62   $ 133   $ 94 $ (12 ) $   $ 277   $   $ (89 ) $ (89 ) $ 188  
   
(1)   The eliminations in servicing revenue and direct operating expense represent the elimination of intercompany servicing revenue where the Business Services segment performs the loan servicing function for the FFELP Loans segment.
(2) “Core Earnings” adjustments to GAAP:
           
Quarter Ended September 30, 2012
Net Impact of Net Impact of
Derivative Goodwill and

(Dollars in millions)

Accounting Acquired Intangibles Total
Net interest income after provisions for loan losses $ 101 $ $ 101
Total other loss (241 ) (241 )
Goodwill and acquired intangible asset impairment and amortization       5     5  
 
“Core Earnings” adjustments to GAAP $ (140 ) $ (5 ) (145 )
 
Income tax benefit   (56 )
 
Net loss $ (89 )
 
(3) Income taxes are based on a percentage of net income before tax for the individual reportable segment.
(4) Represents a portion of the $(9) million of “other derivative accounting adjustments.”
(5)

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

 
Nine Months Ended September 30, 2013
 

(Dollars in millions)

 

 

 

 

 

 

 

 

 

 

 

  Adjustments  

 

Consumer
Lending

Business
Services

FFELP
Loans

Other

Eliminations(1)

Total
“Core
Earnings”

Reclassifications   Additions/
(Subtractions)
  Total
Adjustments(2)

Total
GAAP

Interest income:  
Student loans $ 1,884 $ $ 1,755 $ $ $ 3,639 $ 612 $ (229 ) $ 383 $ 4,022
Other loans 9 9 9
Cash and investments   5     4     5   3     (4 )   13                 13  
 
Total interest income 1,889 4 1,760 12 (4 ) 3,661 612 (229 ) 383 4,044
Total interest expense   613         978   36     (4 )   1,623     44     (1

) (4)

  43     1,666  
 
Net interest income (loss) 1,276 4 782 (24 ) 2,038 568 (228 ) 340 2,378
Less: provisions for loan losses   607         42           649                 649  
 
Net interest income (loss) after provisions for loan losses 669 4 740 (24 ) 1,389 568 (228 ) 340 1,729
Other income (loss):
Gains (losses) on sales of loans and investments 312 (5 ) 307 307
Servicing revenue 31 541 60 (409 ) 223 223
Contingency revenue 312 312 312
Gains on debt repurchases 48 48 (6 ) (6 ) 42
Other income (loss)       20       6         26     (562 )  

462

 (5)

  (100 )   (74 )
 
Total other income (loss) 31 873 372 49 (409 ) 916 (568 ) 462 (106 ) 810
Expenses:
Direct operating expenses 228 299 430 9 (409 ) 557 557
Overhead expenses             180         180                 180  
 
Operating expenses 228 299 430 189 (409 ) 737 737

Goodwill and acquired intangible asset impairment and amortization

10 10 10

Restructuring and other reorganization expenses

  2     1       43         46                 46  
 
Total expenses   230     300     430   232     (409 )   783         10     10     793  
 
Income (loss) from continuing operations, before income tax expense (benefit) 470 577 682 (207 ) 1,522 224 224 1,746
Income tax expense (benefit)(3)   171     211     249   (75 )       556         89     89     645  
 
Net income (loss) from continuing operations 299 366 433 (132 ) 966 135 135 1,101
Income (loss) from discontinued operations, net of tax expense (benefit)   (1 )   49               48         (1 )   (1 )   47  
 
Net income (loss) 298 415 433 (132 ) 1,014 134 134 1,148
Less: net loss attributable to noncontrolling interest       (1 )             (1 )               (1 )
 
Net income (loss) attributable to SLM Corporation $ 298   $ 416   $ 433 $ (132 ) $   $ 1,015   $   $ 134   $ 134   $ 1,149  
   
(1)   The eliminations in servicing revenue and direct operating expense represent the elimination of intercompany servicing revenue where the Business Services segment performs the loan servicing function for the FFELP Loans segment.
(2) “Core Earnings” adjustments to GAAP:
           
Nine Months Ended September 30, 2013
Net Impact of Net Impact of
Derivative Goodwill and

(Dollars in millions)

Accounting Acquired Intangibles Total
Net interest income after provisions for loan losses $ 340 $ $ 340
Total other loss (106 ) (106 )
Goodwill and acquired intangible asset impairment and amortization       10     10  
 
“Core Earnings” adjustments to GAAP $ 234   $ (10 ) 224
 
Income tax expense 89
Loss from discontinued operations, net of tax benefit   (1 )
 
Net income $ 134  
 
(3) Income taxes are based on a percentage of net income before tax for the individual reportable segment.
(4) Represents a portion of the $41 million of “other derivative accounting adjustments.”
(5) Represents the $422 million of “unrealized losses on derivative and hedging activities, net” as well as the remaining portion of the $41 million of “other derivative accounting adjustments.”
 
Nine Months Ended September 30, 2012

(Dollars in millions)

 

 

 

 

 

 

 

 

 

 

 

  Adjustments  

 

Consumer
Lending

Business
Services

FFELP
Loans

Other

Eliminations(1)

Total
“Core
Earnings”

Reclassifications   Additions/
(Subtractions)
  Total
Adjustments(2)

Total
GAAP

Interest income:  
Student loans $ 1,856 $ $ 2,090 $ $ $ 3,946 $ 643 $ (274 ) $ 369 $ 4,315
Other loans 13 13 13
Cash and investments   6     5     10       (5 )   16                 16  
 
Total interest income 1,862 5 2,100 13 (5 ) 3,975 643 (274 ) 369 4,344
Total interest expense   616         1,233   26     (5 )   1,870     95    

3

 (4)

  98     1,968  
 
Net interest income (loss) 1,246 5 867 (13 ) 2,105 548 (277 ) 271 2,376
Less: provisions for loan losses   712         54           766                 766  
 
Net interest income (loss) after provisions for loan losses 534 5 813 (13 ) 1,339 548 (277 ) 271 1,610
Other income (loss):
Gains on sales of loans and investments 1 1 1
Servicing revenue 36 619 68 1 (512 ) 212 212
Contingency revenue 261 261 261
Gains on debt repurchases 102 102 102
Other income (loss)       25       9         34     (548 )   (47

(5)

  (595 )   (561 )
 
Total other income (loss) 36 905 68 113 (512 ) 610 (548 ) (47 ) (595 ) 15
Expenses:
Direct operating expenses 199 269 537 10 (512 ) 503 503
Overhead expenses             169         169                 169  
 
Operating expenses 199 269 537 179 (512 ) 672 672

Goodwill and acquired intangible asset impairment and amortization

13 13 13

Restructuring and other reorganization expenses

 

  3     2       4         9                 9  
 
Total expenses   202     271     537   183     (512 )   681         13     13     694  
 
Income (loss) from continuing operations, before income tax expense (benefit) 368 639 344 (83 ) 1,268 (337 ) (337 ) 931
Income tax expense (benefit)(3)   134     234     126   (29 )       465         (125 )   (125 )   340  
 
Net income (loss) from continuing operations 234 405 218 (54 ) 803 (212 ) (212 ) 591
Loss from discontinued operations, net of tax benefit   (1 )                 (1 )       (1 )   (1 )   (2 )
 
Net income (loss) 233 405 218 (54 ) 802 (213 ) (213 ) 589
Less: net loss attributable to noncontrolling interest       (2 )             (2 )               (2 )
 
Net income (loss) attributable to SLM Corporation $ 233   $ 407   $ 218 $ (54 ) $   $ 804   $   $ (213 ) $ (213 ) $ 591  
   
(1)   The eliminations in servicing revenue and direct operating expense represent the elimination of intercompany servicing revenue where the Business Services segment performs the loan servicing function for the FFELP Loans segment.
(2) “Core Earnings” adjustments to GAAP:
           
Nine Months Ended September 30, 2012
Net Impact of Net Impact of
Derivative Goodwill and

(Dollars in millions)

Accounting Acquired Intangibles Total
Net interest income after provisions for loan losses $ 271 $ $ 271
Total other loss (595 ) (595 )
Goodwill and acquired intangible asset impairment and amortization       13     13  
 
“Core Earnings” adjustments to GAAP $ (324 ) $ (13 ) (337 )
 
Income tax benefit (125 )
Loss from discontinued operations, net of tax benefit   (1 )
 
Net loss $ (213 )
 
(3) Income taxes are based on a percentage of net income before tax for the individual reportable segment.
(4) Represents a portion of the $2 million of “other derivative accounting adjustments.”
(5)

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

 

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 Nine Months Ended

(Dollars in millions)

September 30,
2013
  June 30,
2013
  September 30,
2012
September 30,
2013
  September 30,
2012
“Core Earnings” adjustments to GAAP:
Net impact of derivative accounting $ (19 ) $ 143 $ (140 ) $ 234 $ (324 )
Net impact of goodwill and acquired intangible assets (4 ) (3 ) (5 ) (10 ) (13 )
Net tax effect 12 (58 ) 56 (89 ) 125
Net effect from discontinued operations       (1 )       (1 )   (1 )
 
Total “Core Earnings” adjustments to GAAP $ (11 ) $ 81   $ (89 ) $ 134   $ (213 )
 
1)

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

         

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

 
Quarters Ended Nine Months Ended

(Dollars in millions)

September 30,
2013
June 30,
2013
September 30,
2012
September 30,
2013
September 30,
2012
“Core Earnings” derivative adjustments:
Gains (losses) on derivative and hedging activities, net, included in other income(1) $ (127 ) $ 18 $ (233 ) $ (140 ) $ (600 )

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

  189     185     180     562     548  
 

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

62 203 (53 ) 422 (52 )
Amortization of net premiums on Floor Income Contracts in net interest income for “Core Earnings” (77 ) (76 ) (78 ) (229 ) (274 )
Other derivative accounting adjustments(3)   (4 )   16     (9 )   41     2  
Total net impact of derivative accounting(4) $ (19 ) $ 143   $ (140 ) $ 234   $ (324 )
 
(1) See “Reclassification of Realized Gains (Losses) on Derivative and Hedging Activities” below for a detailed breakdown of the components of realized losses on derivative and hedging activities.
(2) “Unrealized gains on derivative and hedging activities, net” comprises the following unrealized mark-to-market gains (losses):
         
Quarters Ended Nine Months Ended

(Dollars in millions)

September 30,
2013
June 30,
2013
September 30,
2012
September 30,
2013
September 30,
2012
Floor Income Contracts $ 115 $ 297 $ (12 ) $ 601 $ 174
Basis swaps 5 (15 ) (7 ) (13 ) (55 )
Foreign currency hedges (45 ) (67 ) (22 ) (145 ) (144 )
Other   (13 )   (12 )   (12 )   (21 )   (27 )
 
Total unrealized gains (losses) on derivative and hedging activities, net $ 62   $ 203   $ (53 ) $ 422   $ (52 )
 
(3) Other derivative accounting adjustments consist of adjustments related to: (1) foreign currency denominated debt that is adjusted to spot foreign exchange rates for GAAP where such 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 Nine Months Ended

(Dollars in millions)

September 30,
2013
  June 30,
2013
  September 30,
2012
September 30,
2013
  September 30,
2012
Reclassification of realized gains (losses) on derivative and hedging activities:
Net settlement expense on Floor Income Contracts reclassified to net interest income $ (201 ) $ (198 ) $ (206 ) $ (612 ) $ (643 )
Net settlement income on interest rate swaps reclassified to net interest income 12 13 26 44 95
 
Net realized gains on terminated derivative contracts reclassified to other income               6      
Total reclassifications of realized losses on derivative and hedging activities $ (189 ) $ (185 ) $ (180 ) $ (562 ) $ (548 )
 

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

 
As of September 30, 2013, derivative accounting has reduced GAAP equity by approximately $936 million as a result of cumulative net unrealized losses (after tax) recognized under GAAP, but not in “Core Earnings.” The following table rolls forward the cumulative impact to GAAP equity due to these unrealized after-tax net losses related to derivative accounting.
   
Quarters Ended Nine Months Ended

(Dollars in millions)

September 30,
2013
  June 30,
2013
  September 30,
2012
September 30,
2013
  September 30,
2012
Beginning impact of derivative accounting on GAAP equity $ (923 ) $ (1,027 ) $ (1,098 ) $ (1,080 ) $ (977 )
Net impact of net unrealized gains (losses) under derivative accounting(1)   (13 )   104     (85 )   144     (206 )
 
Ending impact of derivative accounting on GAAP equity $ (936 ) $ (923 ) $ (1,183 ) $ (936 ) $ (1,183 )
   
(1)   Net impact of net unrealized gains (losses) under derivative accounting is composed of the following:
         
Quarters Ended Nine Months Ended

(Dollars in millions)

September 30,
2013
June 30,
2013
September 30,
2012
September 30,
2013
September 30,
2012
Total pre-tax net impact of derivative accounting recognized in net income(a) $ (19 ) $ 143 $ (140 ) $ 234 $ (324 )
Tax impact of derivative accounting adjustments recognized in net income 7 (54 ) 53 (107 ) 112
Change in unrealized gain (losses) on derivatives, net of tax recognized in other comprehensive income   (1 )   15     2     17     6  
 
Net impact of net unrealized gains (losses) under derivative accounting $ (13 ) $ 104   $ (85 ) $ 144   $ (206 )
   
(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 September 30, 2013, the remaining amortization term of the net floor premiums was approximately 2.75 years for existing contracts. Historically, we have sold Floor Income Contracts on a periodic basis and depending upon market conditions and pricing, we may enter into additional Floor Income Contracts in the future. The balance of unamortized Floor Income Contracts will increase as we sell new contracts and decline due to the amortization of existing contracts.
     

(Dollars in millions)

September 30,
2013
June 30,
2013
September 30,
2012
Unamortized net Floor premiums (net of tax) $ (403 ) $ (452 ) $ (600 )
 
2)

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

         
Quarters Ended Nine Months Ended

(Dollars in millions)

September 30,
2013
June 30,
2013
September 30,
2012
September 30,
2013
September 30,
2012
“Core Earnings” goodwill and acquired intangible asset adjustments(1) $ (4 ) $ (3 ) $ (5 ) $ ( 10 ) $ (13 )
   
(1)   Negative amounts are subtracted from “Core Earnings” net income to arrive at GAAP net income.
 

Business Segment Earnings Summary — “Core Earnings” Basis

 

Consumer Lending Segment

 
The following table includes “Core Earnings” results for our Consumer Lending segment.
               
Nine Months % Increase
Quarters Ended % Increase (Decrease) Ended (Decrease)

(Dollars in millions)

Sept. 30,
2013
June 30,
2013
Sept. 30,
2012
Sept. 30,
2013 vs.
June 30,
2013
Sept. 30,
2013 vs.
Sept 30,
2012
Sept. 30,
2013
Sept. 30,
2012
Sept. 30,
2013 vs.
Sept. 30,
2012
“Core Earnings” interest income:
Private Education Loans $ 635 $ 627 $ 615 1 % 3 % $ 1,884 $ 1,856 2 %
Cash and investments   1   1   2     (50 )   5     6   (17 )
 
Total “Core Earnings” interest income 636 628 617 1 3 1,889 1,862 1
Total “Core Earnings” interest expense   203   206   209   (1 ) (3 )   613     616    
 
Net “Core Earnings” interest income 433 422 408 3 6 1,276 1,246 2
Less: provision for loan losses   195   187   252   4   (23 )   607     712   (15 )
 
Net “Core Earnings” interest income after provision for loan losses 238 235 156 1 53 669 534 25
Servicing revenue 11 10 12 10 (8 ) 31 36 (14 )
 
Direct operating expenses 85 77 68 10 25 228 199 15
Restructuring and other reorganization expenses     1   1   (100 ) (100 )   2     3   (33 )
 
Total expenses   85   78   69   9   23     230     202   14  
 
Income from continuing operations, before income tax expense 164 167 99 (2 ) 66 470 368 28
Income tax expense   59   60   36   (2 ) 64     171     134   28  
 
Net income from continuing operations 105 107 63 (2 ) 67 299 234 28
Loss from discontinued operations, net of tax benefit       (1 )   (100 )   (1 )   (1 )  
 
“Core Earnings” $ 105 $ 107 $ 62   (2 )% 69 % $ 298   $ 233   28 %
 

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 Nine Months Ended
Sept. 30, June 30, Sept. 30, Sept. 30, Sept. 30,
2013 2013 2012 2013 2012
“Core Earnings” basis Private Education Loan yield 6.42 % 6.37 % 6.35 % 6.38 % 6.38 %
Discount amortization .19   .22   .17   .21   .22  
“Core Earnings” basis Private Education Loan net yield 6.61 6.59 6.52 6.59 6.60
“Core Earnings” basis Private Education Loan cost of funds (2.01 ) (2.04 ) (2.08 ) (2.02 ) (2.05 )
“Core Earnings” basis Private Education Loan spread 4.60 4.55 4.44 4.57 4.55
“Core Earnings” basis other interest-earning asset spread impact (.36 ) (.43 ) (.39 ) (.40 ) (.40 )
“Core Earnings” basis Consumer Lending net interest margin(1) 4.24 % 4.12 % 4.05 % 4.17 % 4.15 %
                     
“Core Earnings” basis Consumer Lending net interest margin(1) 4.24 % 4.12 % 4.05 % 4.17 % 4.15 %
Adjustment for GAAP accounting treatment(2) (.03 ) (.04 ) (.08 ) (.04 ) (.11 )
GAAP-basis Consumer Lending net interest margin(1) 4.21 % 4.08 % 3.97 % 4.13 % 4.04 %
   

(1)

 

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

         
Quarters Ended Nine Months Ended
Sept. 30, June 30, Sept. 30, Sept. 30, Sept. 30,
2013 2013 2012 2013 2012

(Dollars in millions)

Private Education Loans $ 38,102 $ 38,154 $ 37,545 $ 38,220 $ 37,612
Other interest-earning assets   2,385   2,937   2,436   2,660   2,436
Total Consumer Lending “Core Earnings” basis interest-earning assets $ 40,487 $ 41,091 $ 39,981 $ 40,880 $ 40,048
 
(2) Represents the reclassification of periodic interest accruals on derivative contracts from net interest income to other income and other derivative accounting adjustments. For further discussion of these adjustments, see section titled “‘Core Earnings’ — Definition and Limitations — Difference between ‘Core Earnings’ and GAAP” above.
 

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 Nine Months Ended
Sept. 30, June 30, Sept. 30, Sept. 30, Sept. 30,

(Dollars in millions)

2013 2013 2012 2013 2012
Private Education Loan provision for loan losses $ 195 $ 187 $ 252 $ 607 $ 712
Private Education Loan charge-offs $ 205 $ 212 $ 250 $ 649 $ 709
 
In establishing the allowance for Private Education Loan losses as of September 30, 2013, we considered several factors with respect to our Private Education Loan portfolio. In particular, we continue to see improvement in credit quality and continuing positive delinquency and charge-off trends in connection with this portfolio. Improving credit quality is seen in higher FICO scores and cosigner rates as well as a more seasoned portfolio. Total loans delinquent (as a percentage of loans in repayment) have decreased to 8.8 percent from 10.0 percent in the year-ago quarter. Loans greater than 90 days delinquent (as a percentage of loans in repayment) have decreased to 3.8 percent from 5.3 percent in the year-ago quarter. The charge-off rate decreased to 2.6 percent from 3.2 percent in the year-ago quarter. Loans in forbearance (as a percentage of loans in repayment and forbearance) increased to 3.4 percent from 3.2 percent in the year-ago quarter.
 

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

 
Apart from these overall improvements in credit quality, delinquency trends and charge-off trends that had the effect of reducing the provision for loan loss in the third quarter of 2013, Private Education Loans that have defaulted between 2008 and 2012 for which we have previously charged off estimated losses have, to varying degrees, not met our post-default recovery expectations to date and may continue to not do so. Our allowance for loan losses takes into account these potential recovery uncertainties. In the third quarter of 2013 we increased our allowance related to these potential recovery shortfalls by approximately $112 million. See “Financial Condition — Consumer Lending Portfolio Performance – Receivable for Partially Charged-Off Private Education Loans” for further discussion.
 
The Private Education Loan provision for loan losses was $195 million in the third quarter of 2013, down $57 million from the third quarter of 2012, and $607 million for the first nine months of 2013, down $105 million from the year-ago period. The decline in both periods was a result of the overall improvement in credit quality and performance trends discussed above, leading to decreases in expected future charge-offs. This overall decrease in expected future charge-offs is the net effect of a decrease in expected future defaults less a smaller decrease in what we expect to recover on such defaults.
 
For a more detailed discussion of our policy for determining the collectability of Private Education Loans and maintaining our allowance for Private Education Loan losses, see Item 7 “Management’s Discussion and Analysis of Financial Condition and Results of Operations — Critical Accounting Policies and Estimates — Allowance for Loan Losses” in our Annual Report on Form 10-K for the year ended December 31, 2012.
 

Operating Expenses — Consumer Lending Segment

 

Operating expenses for our Consumer Lending segment include costs incurred to originate Private Education Loans and to service and collect on our Private Education Loan portfolio. The increase in operating expenses in the quarter ended September 30, 2013 compared with the year-ago quarter was primarily the result of increased loan marketing activities and collection costs as well as continued investments in technology and an increase in pending litigation settlement expense. Direct operating expenses as a percentage of revenues (revenues calculated as net interest income after provision plus total other income) were 34 percent and 40 percent in the quarters ended September 30, 2013 and 2012, respectively, and 33 percent and 35 percent in the nine months ended September 30, 2013 and 2012, respectively.

 

Business Services Segment

 
The following table includes “Core Earnings” results for our Business Services segment.
               
% Increase
Quarters Ended % Increase (Decrease) Nine Months Ended (Decrease)
Sept. 30, June 30, Sept. 30, Sept. 30, 2013 vs. Sept. 30, 2013 vs. Sept. 30, Sept. 30, Sept. 30, 2013 vs.

(Dollars in millions)

2013 2013 2012 June 30, 2013 Sept. 30, 2012 2013 2012 Sept. 30, 2012
Net interest income $ 1 $ 1 $ 2 % (50 )% $ 4 $ 5 (20 )%
Servicing revenue:
Intercompany loan servicing 123 137 164 (10 ) (25 ) 409 512 (20 )

Third-party loan servicing

40 33 26 21 54 101 74 36
Guarantor servicing 10 10 11 (9 ) 29 33 (12 )
Other servicing   1         100   100     2       100  
Total servicing revenue 174 180 201 (3 ) (13 ) 541 619 (13 )
Contingency revenue 104 109 85 (5 ) 22 312 261 20

Other Business Services revenue

  6   8     7   (25 ) (14 )   20     25   (20 )
Total other income 284 297 293 (4 ) (3 ) 873 905 (4 )
Direct operating expenses 103 99 88 4 17 299 269 11

Restructuring and other reorganization expenses

    1       (100 )     1     2   (50 )
Total expenses   103   100     88   3   17     300     271   11  

Income from continuing operations, before income tax expense

182 198 207 (8 ) (12 ) 577 639 (10 )
Income tax expense   66   71     76   (7 ) (13 )   211     234   (10 )

Net income from continuing operations

116 127 131 (9 ) (11 ) 366 405 (10 )

Income from discontinued operations, net of tax expense

  8   39     1   (79 ) 700     49       100  
“Core Earnings” 124 166 132 (25 ) (6 ) 415 405 2

Less: net loss attributable to noncontrolling interest

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

“Core Earnings” attributable to SLM Corporation

$ 124 $ 167   $ 133   (26 ) % (7 )% $ 416   $ 407   2 %
 
Our Business Services segment includes intercompany loan servicing fees from servicing the FFELP Loans in our FFELP Loans segment. The average balance of this portfolio was $106 billion and $129 billion for the quarters ended September 30, 2013 and 2012, respectively, and $115 billion and $132 billion for the nine months ended September 30, 2013 and 2012, respectively. The decline in average balance of FFELP loans outstanding along with the related intercompany loan servicing revenue from the year-ago period is primarily the result of normal amortization of the portfolio as well as the sale of $12.2 billion of securitized FFELP loans in the first half of 2013.
 

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

 
Third-party loan servicing income increased $14 million from the year-ago quarter and $27 million for the first nine months compared with the prior-year period primarily due to the increase in ED servicing revenue (discussed above) as well as a result of the sale of Residual Interests in FFELP Loan securitization trusts in 2013. (See “FFELP Loans Segment” for further discussion.) When we sold the Residual Interests, we retained the right to service the loans in the trusts. As such, servicing income that had previously been recorded as intercompany loan servicing is now recognized as third-party loan servicing income.
 
Our contingency revenue consists of fees we receive for collections of delinquent debt on behalf of third-party clients performed on a contingent basis. Contingency revenue increased $19 million in the current quarter compared with the year-ago quarter and $51 million for the first nine months of 2013 compared with the prior-year period as a result of the higher volume of collections.
 
The following table presents the outstanding inventory of contingent collections receivables that our Business Services segment will collect on behalf of others. We expect the inventory of contingent collections receivables to decline over time as a result of the elimination of FFELP.
     

(Dollars in millions)

September 30,
2013
June 30,
2013
September 30,
2012
Contingent collections receivables:
Student loans $ 12,852 $ 12,230 $ 11,866
Other   2,357   2,377   2,018
 
Total $ 15,209 $ 14,607 $ 13,884
 
 
In the second quarter of 2013, we sold our Campus Solutions business and recorded an after-tax gain of $38 million. The results related to this business for all periods presented have been reclassified as discontinued operations and are shown on an after-tax basis. In addition, on September 25, 2013, we announced the sale of our 529 college savings plan administration business. This sale is expected to close in the fourth quarter of 2013, at which time we expect to recognize a gain of $0.14 per diluted share. As a result of this announcement, the results of this business were moved to discontinued operations for all periods presented.
 
Revenues related to services performed on FFELP Loans accounted for 76 percent and 82 percent, respectively, of total segment revenues for the quarters ended September 30, 2013 and 2012 and 78 percent and 82 percent, respectively, of total segment revenues for the nine months ended September 30, 2013 and 2012.
 

Operating Expenses — Business Services Segment

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

FFELP Loans Segment

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

(Dollars in millions)

Sept. 30,
2013
  June 30,
2013
  Sept. 30,
2012
Sept. 30, 2013 vs.
June 30, 2013
  Sept. 30, 2013 vs.
Sept. 30, 2012
Sept. 30,
2013
  Sept. 30,
2012
Sept. 30, 2013 vs.
Sept. 30, 2012
“Core Earnings” interest income:
FFELP Loans

$

574

$

581

$ 712 (1 )% (19 )%

$

1,755

$

2,090

(16 )%
Cash and investments   2   2   3   (33 )   5   10 (50 )
 
Total “Core Earnings” interest income 576 583 715 (1 ) (19 ) 1,760 2,100 (16 )
Total “Core Earnings” interest expense   313   325   399 (4 ) (22 )   978   1,233 (21 )
 
Net “Core Earnings” interest income 263 258 316 2 (17 ) 782 867 (10 )

Less: provision for loan losses

  12   14   18 (14 ) (33 )   42   54 (22 )
 

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

251 244 298 3 (16 ) 740 813 (9 )
Gains on sales of loans and investments 257 (100 ) 312 100
Servicing revenue   21   16   22 31   (5 )   60   68 (12 )
 
Total other income 21 273 22 (92 ) (5 ) 372 68 447
Direct operating expenses 129 144 171 (10 ) (25 ) 430 537 (20 )
Restructuring and other reorganization expenses                
 
Total expenses   129   144   171 (10 ) (25 )   430   537 (20 )
 
Income before income tax expense 143 373 149 (62 ) (4 ) 682 344 98
Income tax expense   51   136   55 (63 ) (7 )   249   126 98  
 
“Core Earnings”

$

92

$

237

$ 94 (61 )% (2 )% $ 433 $ 218 99 %
 
 

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 Nine Months Ended
September 30,
2013
June 30,
2013
September 30,
2012
September 30,
2013
September 30,
2012
“Core Earnings” basis FFELP Loan yield 2.60 % 2.60 % 2.65 % 2.60 % 2.65 %
Hedged Floor Income .28 .27 .24 .27 .27
Unhedged Floor Income .10 .10 .13 .09 .10
Consolidation Loan Rebate Fees (.64 ) (.65 ) (.66 ) (.66 ) (.66 )
Repayment Borrower Benefits (.11 ) (.11 ) (.11 ) (.11 ) (.12 )
Premium amortization (.11 ) (.16 ) (.07 ) (.14 ) (.16 )
 
“Core Earnings” basis FFELP Loan net yield 2.12 2.05 2.18 2.05 2.08
“Core Earnings” basis FFELP Loan cost of funds (1.09 ) (1.08 ) (1.13 ) (1.07 ) (1.15 )
 
“Core Earnings” basis FFELP Loan spread 1.03 .97 1.05 .98 .93
“Core Earnings” basis other interest-earnings asset spread impact (.10 ) (.10 ) (.13 ) (.11 ) (.11 )
 
“Core Earnings” basis FFELP Loan net interest margin(1) .93 % .87 % .92 % .87 % .82 %
 
“Core Earnings” basis FFELP Loan net interest margin(1) .93 % .87 % .92 % .87 % .82 %
Adjustment for GAAP accounting treatment(2) .41   .38   .32   .40   .30  
 
GAAP-basis FFELP Loan net interest margin 1.34 % 1.25 % 1.24 % 1.27 % 1.12 %
 
   
(1)   The average balances of our FFELP “Core Earnings” basis interest-earning assets for the respective periods are:
 
         
Quarters Ended Nine Months Ended
Sept. 30,
2013
June 30,
2013
Sept. 30,
2012
Sept. 30,
2013
Sept. 30,
2012

(Dollars in millions)

FFELP Loans $ 107,483 $ 113,981 $ 129,621 $ 114,387 $ 133,887
Other interest-earning assets   4,751   5,264   7,601   5,187   6,776
 
Total FFELP “Core Earnings” basis interest-earning assets $ 112,234 $ 119,245 $ 137,222 $ 119,574 $ 140,663
 
(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 September 30, 2013, our FFELP Loan portfolio totaled approximately $106.3 billion, comprised of $40.8 billion of FFELP Stafford and $65.5 billion of FFELP Consolidation Loans. The weighted-average life of these portfolios is 4.9 years and 9.4 years, respectively, assuming a Constant Prepayment Rate (“CPR”) of 4 percent and 3 percent, respectively.
 

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 Nine Months Ended

(Dollars in millions)

Sept. 30,
2013
June 30,
2013
Sept. 30,
2012
Sept. 30,
2013
Sept. 30,
2012
FFELP Loan provision for loan losses $ 12 $ 14 $ 18 $ 42 $ 54
FFELP Loan charge-offs $ 15 $ 20 $ 23 $ 57 $ 68
 

Gains on Sales of Loans and Investments

 
The increase in gains on sales of loans and investments for the nine months ended September 30, 2013 from the nine months ended September 30, 2012, was the result of $312 million in gains from the sale of Residual Interests in FFELP Loan securitization trusts in 2013.
 
We will continue to service the student loans in the trusts that were sold under existing agreements. The sales removed securitization trust assets of $12.5 billion and related liabilities of $12.1 billion from the balance sheet during the nine months ended September 30, 2013.
 

Operating Expenses — FFELP Loans

 
Operating expenses for our FFELP Loans segment primarily include the contractual rates we pay to service loans in term asset-backed securitization trusts or a similar rate if a loan is not in a term financing facility (which is presented as an intercompany charge from the Business Services segment who services the loans), the fees we pay for third-party loan servicing and costs incurred to acquire loans. The intercompany revenue charged by the Business Services segment and included in those amounts was $123 million and $164 million for the quarters ended September 30, 2013 and 2012, respectively, and $409 million and $512 million for the nine months ended September 30, 2013 and 2012, respectively. These amounts exceed the actual cost of servicing the loans. Operating expenses were 48 basis points and 53 basis points of average FFELP Loans in the quarters ended September 30, 2013 and 2012, respectively, and 50 basis points and 54 basis points of average FFELP Loans in the nine months ended September 30, 2013 and 2012, respectively. The decline in operating expenses from the prior-year quarter was primarily the result of the reduction in the average outstanding balance of our FFELP Loan portfolio.
 

Other Segment

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

(Dollars in millions)

Sept. 30,
2013
June 30,
2013
Sept. 30,
2012
Sept. 30, 2013 vs.
June 30, 2013
Sept. 30, 2013 vs.
Sept. 30, 2012
Sept. 30,
2013
Sept. 30,
2012
Sept. 30, 2013 vs.
Sept. 30, 2012
Net interest loss after provision for loan losses $ (9 ) $ (6 ) $ (8 ) 50 % 13 % $ (24 ) $ (13 ) 85 %
Gains (losses) on sales of loans and investments (6 ) (100 ) (5 ) 1 (600 )
Gains on debt repurchases 19 44 (100 ) (100 ) 48 102 (53 )
Other income   6         3   100   100     6     10   (40 )
 
Total income 6 13 47 (54 ) (87 ) 49 113 (57 )
Direct operating expenses 4 3 3 33 33 9 10 (10 )
Overhead expenses:
Corporate overhead 27 29 27 (7 ) 90 89 1
Unallocated information technology costs   32     29     27   10   19     90     80   13  
 
Total overhead expenses   59     58     54   2   9     180     169   7  
 
Total operating expenses 63 61 57 3 11 189 179 6
Restructuring and other reorganization expenses   12     21     1   (43 ) 1,100     43     4   975  
 
Total expenses   75     82     58   (9 ) 29     232     183   27  
 
Loss before income tax benefit (78 ) (75 ) (19 ) 4 311 (207 ) (83 ) 149
Income tax benefit   (28 )   (26 )   (7 ) 8   300     (75 )   (29 ) 159  
 
“Core Earnings” (loss) $ (50 ) $ (49 ) $ (12 ) 2 % 317 % $ (132 ) $ (54 ) 144 %
 

Net Interest Loss after Provision for Loan Losses

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

Gains on Debt Repurchases

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

Overhead

 
Corporate overhead is comprised of costs related to executive management, the board of directors, accounting, finance, legal, human resources and stock-based compensation expense. Unallocated information technology costs are related to infrastructure and operations. The increase in overhead for the nine months ended September 30, 2013 compared with the year-ago period was primarily the result of a non-recurring $10 million pension termination gain in the first nine months of 2012.
 

Restructuring and Other Reorganization Expenses

 

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

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

Financial Condition

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

Summary of our Student Loan Portfolio

 

Ending Student Loan Balances, net

 
  September 30, 2013
FFELP   FFELP   Total   Private  
Stafford and Consolidation FFELP Education Total

(Dollars in millions)

Other Loans Loans Loans Portfolio
Total student loan portfolio:
In-school(1) $ 844 $ $ 844 $ 2,540 $ 3,384
Grace, repayment and other(2)   39,425     65,153     104,578     36,760     141,338  
 
Total, gross 40,269 65,153 105,422 39,300 144,722
Unamortized premium/(discount) 618 440 1,058 (726 ) 332

Receivable for partially charged-off loans

1,322 1,322
Allowance for loan losses   (82 )   (48 )   (130 )   (2,144 )   (2,274 )
 
Total student loan portfolio $ 40,805   $ 65,545   $ 106,350   $ 37,752   $ 144,102  
 
% of total FFELP 38 % 62 % 100 %
% of total 28 % 46 % 74 % 26 % 100 %
 
June 30, 2013
FFELP FFELP Total Private
Stafford and Consolidation FFELP Education Total

(Dollars in millions)

Other Loans Loans Loans Portfolio
Total student loan portfolio:
In-school(1) $ 1,050 $ $ 1,050 $ 2,132 $ 3,182
Grace, repayment and other(2)   40,271     66,217     106,488     36,551     143,039  
 
Total, gross 41,321 66,217 107,538 38,683 146,221
Unamortized premium/(discount) 641 445 1,086 (752 ) 334

Receivable for partially charged-off loans

1,334 1,334
Allowance for loan losses   (88 )   (45 )   (133 )   (2,149 )   (2,282 )
 
Total student loan portfolio $ 41,874   $ 66,617   $ 108,491   $ 37,116   $ 145,607  
 
% of total FFELP 39 % 61 % 100 %
% of total 29 % 46 % 75 % 25 % 100 %
 
September 30, 2012
FFELP FFELP Total Private
Stafford and Consolidation FFELP Education Total

(Dollars in millions)

Other Loans Loans Loans Portfolio
Total student loan portfolio:
In-school(1) $ 1,721 $ $ 1,721 $ 2,144 $ 3,865
Grace, repayment and other(2)   42,949     81,771     124,720     36,664     161,384  
 
Total, gross 44,670 81,771 126,441 38,808 165,249
Unamortized premium/(discount) 710 762 1,472 (814 ) 658

Receivable for partially charged-off loans

1,303 1,303
Allowance for loan losses   (102 )   (64 )   (166 )   (2,196 )   (2,362 )
 
Total student loan portfolio $ 45,278   $ 82,469   $ 127,747   $ 37,101   $ 164,848  
 
% 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)

 
  Quarter Ended September 30, 2013
FFELP   FFELP   Total   Private  
Stafford and Consolidation FFELP Education Total

(Dollars in millions)

Other Loans Loans Loans Portfolio
Total $ 41,445 $ 66,038 $ 107,483 $ 38,102 $ 145,585
% of FFELP 39 % 61 % 100 %
% of total 29 % 45 % 74 % 26 % 100 %
 
Quarter Ended June 30, 2013
FFELP FFELP Total Private