Sallie Mae Reports Second-Quarter 2012 Financial Results

Loan Originations Increase 22 Percent, Operating Expenses Drop

NEWARK, Del.--()--Sallie Mae (NASDAQ: SLM), formally SLM Corporation, today released second-quarter 2012 financial results that included increased private education loan originations and lower operating expenses compared with the year-ago period.

“We continue to grow our private credit business and find productivity gains in challenging economic conditions,” said Albert L. Lord, vice chairman and CEO. “We head into this academic year with loan products that promote and reward in-school payments. The performance of these loans over recent years foreshadows better credit ratings for our customers and lower defaults for Sallie Mae.”

For the second-quarter 2012, GAAP net income was $292 million ($.59 diluted earnings per share), compared with net loss of $6 million ($.02 diluted loss per share) for the year-ago quarter.

Core earnings for the quarter were $243 million ($.49 per diluted share), compared with $260 million ($.48 per diluted share) in the year-ago period. Versus the prior-year quarter, earnings benefited from a $48 million lower loan loss provision and a $29 million operating expense reduction. Debt repurchase gains were $20 million higher. However, the acceleration of $50 million of non-cash loan premium amortization in the quarter contributed to offset these improvements. This amount is attributable to approximately $4.5 billion of federally guaranteed student loans (approximately 3 percent of that portfolio) expected to be consolidated under the recently completed Special Direct Consolidation Loan Initiative. Net interest income declined by an additional $56 million primarily due to higher funding costs, which in turn was partly due to refinancing debt into longer term liabilities, and lower federally guaranteed student loan balances.

The company provides results on a core earnings basis because management utilizes this information in making management decisions. 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. Second-quarter 2012 and 2011 GAAP results included an $82 million gain and a $414 million loss, respectively, resulting from derivative accounting treatment compared to core earnings results.

Consumer Lending

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

Quarterly core earnings improved to $85 million from $49 million in 2011, driven primarily by lower loan loss provision.

Private education loan portfolio highlights vs. second-quarter 2011 included:

  • Loan originations of $321 million, up 22 percent.
  • Provision for loan losses of $225 million, compared to $265 million.
  • Delinquencies of 90 days or more (as a percentage of loans in repayment) of 4.5 percent, vs. 4.6 percent.
  • Charge-off rate (as a percentage of loans in repayment) of 3.09 percent (annualized), vs. 3.71 percent.
  • A net interest margin, before loan loss provision, of 4.14 percent compared to 4.05 percent.
  • The portfolio balance, net of loan loss allowance, was $36 billion at the end of each period.

Business Services

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

Business Services core earnings were $138 million in second-quarter 2012, compared with $140 million in the year-ago quarter.

Federally Guaranteed Student Loans (FFELP)

This segment represents earnings from Sallie Mae’s amortizing portfolio of federally guaranteed student loans.

Core earnings for the segment were $44 million in second-quarter 2012, compared with the year-ago quarter’s $108 million. This quarter’s net interest income included the acceleration of $50 million of non-cash loan premium amortization as described above. The remaining decrease was primarily due to higher funding costs and lower net interest income resulting from the declining balance of the FFELP loan portfolio.

During the second-quarter 2012, the company acquired $1.9 billion of FFELP loans. At June 30, 2012, the company held $133 billion of FFELP loans compared with $143 billion at June 30, 2011.

Operating Expenses

Second-quarter operating expenses were $239 million in 2012, down from $268 million in the year-ago quarter primarily due to the current-year benefit of cost-cutting efforts.

Funding and Liquidity

During second-quarter 2012, the company issued $2.7 billion in FFELP asset-backed securities (ABS), $2.0 billion in private education loan ABS, and $350 million of unsecured bonds.

Shareholder Distributions

In second-quarter 2012, Sallie Mae paid a common stock dividend of $0.125 per share, and authorized an additional $400 million to be utilized in its ongoing share repurchase program. In second-quarter 2012, the company repurchased 23.8 million shares of common stock at an aggregate purchase price of $341 million. During the first six months of 2012, the company repurchased 40.5 million shares at an aggregate purchase price of $609 million. At June 30, 2012, the company had $291 million of remaining share repurchase authorization.

Guidance

The company updated its guidance for 2012 results as follows:

  • Full-year 2012 private education loan originations of at least $3.2 billion.
  • Fully diluted 2012 core earnings per share of $2.15.

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, 2011 (filed with the SEC on Feb. 27, 2012). Certain reclassifications have been made to the balances as of and for the three and six months ended June 30, 2011, to be consistent with classifications adopted for 2012, and had no effect on net income, total assets or total liabilities.

The company will host an earnings conference call tomorrow, July 19, 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 91287061 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 within two hours after the call’s conclusion. A telephone replay may be accessed two hours after the call’s conclusion through Aug. 1, by dialing (855) 859-2056 (USA and Canada) or (404) 537-3406 (international) with access code 91287061.

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, 2011, first-quarter Form 10-Q and subsequent filings with the SEC; increases in financing costs; limits on liquidity; increases in costs associated with compliance with laws and regulations; changes in accounting standards and the impact of related changes in significant accounting estimates; any adverse outcomes in any significant litigation to which the company is a party; credit risk associated with the company’s exposure to third parties, including counterparties to the company’s derivative transactions; and changes in the terms of student loans and the educational credit marketplace (including changes resulting from new laws and the implementation of existing laws). The company could also be affected by, among other things: changes in its funding costs and availability; reductions to its credit ratings or the credit ratings of the United States of America; failures of its operating systems or infrastructure, including those of third-party vendors; damage to its reputation; failures to successfully implement cost-cutting and restructuring initiatives and adverse effects of such initiatives on its business; changes in the demand for educational financing or in financing preferences of lenders, educational institutions, students and their families; changes in law and regulations with respect to the student lending business and financial institutions generally; increased competition from banks and other consumer lenders; the creditworthiness of its customers; changes in the general interest rate environment, including the rate relationships among relevant money-market instruments and those of its earning assets vs. its funding arrangements; changes in general economic conditions; and changes in the demand for debt management services. The preparation of the company’s consolidated financial statements also requires management to make 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 its 25 million customers. With products and services that include college savings programs, scholarship search 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 Six Months Ended

(Dollars and shares in millions, except per share data)

June 30,

2012

  March 31,

2012

  June 30,

2011

June 30,

2012

  June 30,

2011

GAAP Basis
Net income (loss) attributable to SLM Corporation $ 292 $ 112 $ (6 ) $ 403 $ 169

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

$ .59 $ .21 $ (.02 ) $ .79 $ .30

Weighted average shares used to compute diluted earnings (loss) per share

488 510 524 499 531
Return on assets .64 % .24 % (.01 )%

.44

% .18 %
 
“Core Earnings” Basis(1)
“Core Earnings” attributable to SLM Corporation $ 243 $ 284 $ 260 $ 527 $ 520
“Core Earnings” diluted earnings per common share attributable to SLM Corporation $ .49 $ .55 $ .48 $ 1.03 $ .96
Weighted average shares used to compute diluted earnings per share 488 510 530 499 531
“Core Earnings” return on assets .53 % .62 % .54 %

.58

% .54 %
 
Other Operating Statistics
Ending FFELP Loans, net $ 132,833 $ 135,934 $ 142,635 $ 132,833 $ 142,635
Ending Private Education Loans, net   36,454     36,732     35,753     36,454     35,753  
Ending total student loans, net $ 169,287   $ 172,666   $ 178,388   $ 169,287   $ 178,388  
 
Average student loans $ 172,436 $ 174,942 $ 180,783 $ 173,689 $ 182,575

____________

(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)

     

 

 

 

Quarters Ended

June 30, 2012 vs.
March 31, 2012
Increase
(Decrease)

June 30, 2012 vs.
June 30, 2011
Increase
(Decrease)

June 30,

  March 31,   June 30,    

(In millions, except per share data)

2012 2012 2011 $

%

$ %
Interest income:
FFELP Loans $ 777 $ 842 $ 850 $ (65 ) (8 )% $ (73 ) (9 )%
Private Education Loans 616 625 600 (9 ) (1 ) 16 3
Other loans 4 5 5 (1 ) (20 ) (1 ) (20 )
Cash and investments   6     5     5     1   20     1   20  
Total interest income 1,403 1,477 1,460 (74 ) (5 ) (57 ) (4 )
Total interest expense   657     666     592     (9 ) (1 )   65   11  
Net interest income 746 811 868 (65 ) (8 ) (122 ) (14 )
Less: provisions for loan losses   243     253     291     (10 ) (4 )   (48 ) (16 )
Net interest income after provisions for loan losses 503 558 577 (55 ) (10 ) (74 ) (13 )
Other income (loss):
Gains (losses) on derivative and hedging

activities, net

6 (372 ) (510 ) 378 102 516 101
Servicing revenue 92 97 93 (5 ) (5 ) (1 ) (1 )
Contingency revenue 87 90 86 (3 ) (3 ) 1 1
Gains on debt repurchases 20 37 (17 ) (46 ) 20 100
Other income (loss)   (2 )   40     3     (42 ) (105 )   (5 ) (167 )
Total other income (loss) 203 (108 ) (328 ) 311 288 531 162
Expenses:
Operating expenses 239 262 268 (23 ) (9 ) (29 ) (11 )
Goodwill and acquired intangible assets impairment and amortization expense 5 5 6 (1 ) (17 )
Restructuring expenses   3     5     2     (2 ) (40 )   1   50  
Total expenses 247 272 276 (25 ) (9 ) (29 ) (11 )
Income (loss) from continuing operations before income tax expense (benefit) 459 178 (27 ) 281 158 486 1,800
Income tax expense (benefit)   168     67     (10 )   101   151     178   1,780  
Net income (loss) from continuing operations 291 111 (17 ) 180 162 308 1,812
Income from discontinued operations, net of tax expense           11           (11 ) (100 )
Net income (loss) 291 111 (6 ) 180 162 297 4,950
Less: net loss attributable to noncontrolling interest   (1 )   (1 )             (1 ) (100 )
Net income (loss) attributable to SLM Corporation 292 112 (6 ) 180 161 298 4,967
Preferred stock dividends   5     5     4           1   25  
Net income (loss) attributable to SLM Corporation common stock $ 287   $ 107   $ (10 ) $ 180   168 % $ 297   2,970 %
 
Basic earnings (loss) per common share attributable to SLM Corporation:
Continuing operations $ .59 $ .21 $ (.04 ) $ .38 181 % $ .63 1,575 %
Discontinued operations           .02           (.02 ) (100 )
Total $ .59   $ .21   $ (.02 ) $ .38   181 % $ .61   3,050 %
Diluted earnings (loss) per common share attributable to SLM Corporation:
Continuing operations $ .59 $ .21 $ (.04 ) $ .38 181 % $ .63 1,575 %
Discontinued operations           .02           (.02 ) (100 )
Total $ .59   $ .21   $ (.02 ) $ .38   181 % $ .61   3,050 %
Dividends per common share attributable to SLM Corporation $ .125   $ .125   $ .10   $   % $ .025   25 %
 
   

 

Six Months
Ended
June 30,

Increase
(Decrease)

   

(In millions, except per share data)

  2012     2011     $   %  
Interest income:
FFELP Loans $ 1,619 $ 1,727 $ (108 ) (6 )%
Private Education Loans 1,241 1,204 37 3
Other loans 9 11 (2 ) (18 )
Cash and investments   10     10        
Total interest income 2,879 2,952 (73 ) (2 )
Total interest expense   1,323     1,186     137   12  
Net interest income 1,556 1,766 (210 ) (12 )
Less: provisions for loan losses   496     594     (98 ) (16 )
Net interest income after provisions for loan losses 1,060 1,172 (112 ) (10 )
Other income (loss):
Gains (losses) on derivative and hedging activities, net (366 ) (752 ) 386 (51 )
Servicing revenue 189 191 (2 ) (1 )
Contingency revenue 176 164 12 7
Gains on debt repurchases 58 38 20 53
Other income   38     25     13   52  
Total other income (loss) 95 (334 ) 429 128
Expenses:
Operating expenses 501 572 (71 ) (12 )
Goodwill and acquired intangible assets impairment and amortization expense 9 12 (3 ) (25 )
Restructuring expenses   8     5     3   60  
Total expenses 518 589 (71 ) (12 )
Income from continuing operations before income tax expense 637 249 388 156
Income tax expense   235     90     145   161  
Net income from continuing operations 402 159 243 153
Income (loss) from discontinued operations, net of tax expense       10     (10 ) (100 )
Net income 402 169 233 138
Less: net loss attributable to noncontrolling interest   (1 )       (1 ) (100 )
Net income attributable to SLM Corporation 403 169 234 138
Preferred stock dividends   10     8     2   25  
Net income attributable to common stock $ 393   $ 161   $ 232   144 %
 
Basic earnings per common share attributable to SLM Corporation:
Continuing operations $ .80 $ .29 $ .51 176 %
Discontinued operations       .02     (.02 ) (100 )
Total $ .80   $ .31   $ .49   158 %
Diluted earnings per common share attributable to SLM Corporation:
Continuing operations $ .79 $ .28 $ .51 182 %
Discontinued operations       .02     (.02 ) (100 )
Total $ .79   $ .30   $ .49   163 %
Dividends per common share attributable to SLM Corporation $ .25   $ .10   $ .15   150 %
 
 

GAAP Balance Sheet (Unaudited)

     
 

(In millions, except share and per share data)

June 30,
2012
March 31,
2012
June 30,
2011
 
Assets
FFELP Loans (net of allowance for losses of $173; $180 and $189, respectively) $ 132,833 $ 135,934 $ 142,635
Private Education Loans (net of allowance for losses of $2,186; $2,190 and $2,043, respectively) 36,454 36,732 35,753
Cash and investments 4,123 4,042 5,284
Restricted cash and investments 6,717 5,884 6,075
Goodwill and acquired intangible assets, net 467 471 480
Other assets   8,485     8,629     10,130  
 
Total assets $ 189,079   $ 191,692   $ 200,357  
 
 
Liabilities
Short-term borrowings $ 24,493 $ 27,123 $ 30,766
Long-term borrowings 155,476 155,588 160,765
Other liabilities   4,172     3,935     3,814  
 
Total liabilities   184,141     186,646     195,345  
 
 
Commitments and contingencies
 
Equity
Preferred stock, par value $.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 $.20 per share, 1.125 billion shares authorized: 533 million; 532 million and 529 million shares, respectively, issued 107 106 106
Additional paid-in capital 4,196 4,182 4,114
Accumulated other comprehensive loss, net of tax benefit (10 ) (9 ) (30 )
Retained earnings   1,040     814     418  
 
Total SLM Corporation stockholders’ equity before treasury stock 5,898 5,658 5,173
Less: Common stock held in treasury: 63 million; 39 million and 10 million shares, respectively   (967 )   (620 )   (170 )
 
Total SLM Corporation stockholders’ equity 4,931 5,038 5,003
Noncontrolling interest   7     8     9  
 
Total equity   4,938     5,046     5,012  
 
Total liabilities and equity $ 189,079   $ 191,692   $ 200,357  
 

Consolidated Earnings Summary — GAAP-basis

Three Months Ended June 30, 2012 Compared with Three Months Ended June 30, 2011

For the three months ended June 30, 2012 and 2011, net income (loss) was $292 million, or $.59 diluted earnings per common share, and $(6) million, or $(.02) diluted (loss) per common share, respectively. The increase in net income was primarily due to a $516 million difference in net gains (losses) on derivative and hedging activities, a $48 million decrease in provisions for loan losses, a $29 million decrease in operating expenses, and a $20 million increase in gains on debt repurchases, which was partially offset by a $122 million decline in net interest income.

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

  • Net interest income declined by $122 million due to a combination of factors. Net interest income for the quarter was affected by the Special Direct Consolidation Loan Initiative that ended June 30, 2012, resulting in the acceleration of $50 million of non-cash loan premium amortization in the quarter related to approximately $4.5 billion of loans (approximately 3 percent of our FFELP portfolio) expected to consolidate. The remaining decrease was primarily due to higher funding costs, which in turn was partly due to refinancing debt into longer term liabilities, and a decline in FFELP Loans outstanding. The decline in FFELP Loans outstanding was driven by normal loan amortization as well as loans that were consolidated under ED’s Special Direct Consolidation Loan Initiative. (See “FFELP Loans Segment” for further discussion.)
  • Provisions for loan losses decreased by $48 million as a result of overall improvements in credit quality and delinquency and charge-off trends.
  • Gains (losses) on derivatives and hedging activities resulted in a net gain of $6 million in the current-quarter compared to a net loss of $510 million in the year-ago quarter. The primary factors affecting the change were interest rate and foreign currency fluctuations, which primarily affected the valuations of our Floor Income Contracts, basis swaps and foreign currency hedges during each period. Valuations of derivative instruments vary based upon many factors including changes in interest rates, credit risk, foreign currency fluctuations and other market factors. As a result, net gains and losses on derivatives and hedging activities may continue to vary significantly in future periods.
  • Gains on debt repurchases increased $20 million as we repurchased more debt in the current period. Debt repurchase activity will fluctuate based on market fundamentals and our liability management strategy.
  • Operating expenses decreased $29 million primarily due to the current-year benefit of the cost-cutting efforts we implemented throughout 2011.
  • The effective tax rates for the second quarters of 2012 and 2011 were 37 percent and 36 percent, respectively.
  • We repurchased 23.8 million shares during the second-quarter 2012 as part of our ongoing share repurchase program. Primarily as a result of these ongoing repurchases, our average outstanding diluted shares decreased during the quarter by 36 million shares.

Six Months Ended June 30, 2012 Compared with Six Months Ended June 30, 2011

For the six months ended June 30, 2012 and 2011, net income was $403 million, or $.79 diluted earnings per common share, and $169 million, or $.30 diluted earnings per common share, respectively. The increase in net income was primarily due to a $386 million decrease in net losses on derivative and hedging activities, a $98 million decrease in provisions for loan losses and a $71 million decrease in operating expenses, which was partially offset by a $210 million decline in net interest income.

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

  • Net interest income declined by $210 million due to a combination of factors. Net interest income for the quarter was affected by the Special Direct Consolidation Loan Initiative that ended June 30, 2012, resulting in the acceleration of $50 million of non-cash loan premium amortization in the quarter related to approximately $4.5 billion of loans (approximately 3 percent of our FFELP portfolio) expected to consolidate. The remaining decrease was primarily due to higher funding costs, which in turn was partly due to refinancing debt into longer term liabilities, and a decline in FFELP Loans outstanding. The decline in FFELP Loans outstanding was driven by normal loan amortization as well as loans that were consolidated under ED’s Special Direct Consolidation Loan Initiative. (See “FFELP Loans Segment” for further discussion.)
  • Provisions for loan losses decreased by $98 million as a result of overall improvements in credit quality and delinquency and charge-off trends.
  • Net losses on derivatives and hedging activities decreased by $386 million. 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 derivatives and hedging activities may continue to vary significantly in future periods.
  • Contingency revenue increased by $12 million due to an increase in collections.
  • Gains on debt repurchases increased $20 million as we repurchased more debt in the current period. Debt repurchase activity will fluctuate based on market fundamentals and our liability management strategy.
  • Other income increased $13 million as a result of a $14 million increase in foreign currency translation gains. The foreign currency translation gains relate to a portion of our foreign currency denominated debt that does not receive hedge accounting treatment. These gains were partially offset by losses on derivative and hedging activities related to the derivatives used to economically hedge these debt instruments.
  • Operating expenses decreased $71 million primarily due to the current-year benefit of the cost-cutting efforts we implemented throughout 2011.
  • The effective tax rates for the six months ended June 30, 2012 and 2011 were 37 percent and 36 percent, respectively.
  • We repurchased 40.5 million shares during the six months ended June 30, 2012, as part of our ongoing share repurchase program. Primarily as a result of these ongoing repurchases, our average outstanding diluted shares decreased by 32 million shares.

“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 internally review 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.
 
The following tables show “Core Earnings” for each business segment and our business as a whole along with the adjustments made to the income/expense items to reconcile the amounts to our reported GAAP results as required by GAAP.
 
               
Quarter Ended June 30, 2012

(Dollars in millions)

Consumer

Lending

Business

Services

FFELP

Loans

Other

Eliminations(1)

Total “Core

Earnings”

Adjustments(2)

Total

GAAP

Interest income:
Student loans $ 616 $ $ 652 $ $ $ 1,268 $ 125 $ 1,393
Other loans 4 4 4
Cash and investments   2   2     3   1     (2 )   6         6  
Total interest income 618 2 655 5 (2 ) 1,278 125 1,403
Total interest expense   206       409   10     (2 )   623     34     657  
Net interest income (loss) 412 2 246 (5 ) 655 91 746
Less: provisions for loan losses   225       18           243         243  
Net interest income (loss) after provisions for loan losses 187 2 228 (5 ) 412 91 503
Servicing revenue 12 230 22 (172 ) 92 92
Contingency revenue 87 87 87
Gains on debt repurchases 20 20 20
Other income (loss)     8       5         13     (9 )   4  
Total other income (loss) 12 325 22 25 (172 ) 212 (9 ) 203
Expenses:
Direct operating expenses 64 109 181 3 (172 ) 185 185
Overhead expenses           54         54         54  
Operating expenses 64 109 181 57 (172 ) 239 239
Goodwill and acquired intangible assets impairment and amortization 5 5
Restructuring expenses   1   2               3         3  
Total expenses   65   111     181   57     (172 )   242     5     247  
Income (loss) from continuing operations, before income tax expense (benefit) 134 216 69 (37 ) 382 77 459
Income tax expense (benefit)(3)   49   79     25   (13 )       140     28     168  
Net income (loss) from continuing operations 85 137 44 (24 ) 242 49 291
Income from discontinued operations, net of taxes                            
Net income (loss) 85 137 44 (24 ) 242 49 291
Less: loss attributable to noncontrolling interest     (1 )             (1 )       (1 )
Net income (loss) attributable to SLM Corporation $ 85 $ 138   $ 44 $ (24 ) $   $ 243   $ 49   $ 292  

____________

(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, 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 $ 91 $ $ 91
Total other loss (9 ) (9 )
Goodwill and acquired intangible assets impairment and amortization       5     5  
Total “Core Earnings” adjustments to GAAP $ 82   $ (5 ) 77
Income tax expense   28  
Net income $ 49  
 
(3)   Income taxes are based on a percentage of net income before tax for the individual reportable segment.
 
               
Quarter Ended March 31, 2012

(Dollars in millions)

Consumer

Lending

Business

Services

FFELP

Loans

Other Eliminations(1)

Total “Core

Earnings”

Adjustments(2)

Total

GAAP

Interest income:
Student loans $ 625 $ $ 725 $ $ $ 1,350 $ 117 $ 1,467
Other loans 5 5 5
Cash and investments   2   3     3       (3 )   5         5  
 
Total interest income 627 3 728 5 (3 ) 1,360 117 1,477
Total interest expense   202       424   5     (3 )   628     38     666  
 
Net interest income 425 3 304 732 79 811
Less: provisions for loan losses   235       18           253         253  
 
Net interest income after provisions for loan losses 190 3 286 479 79 558
Servicing revenue 12 236 25 (176 ) 97 97
Contingency revenue 90 90 90
Gains on debt repurchases 37 37 37
Other income (loss)     8       3         11     (343 )   (332 )
 
Total other income (loss) 12 334 25 40 (176 ) 235 (343 ) (108 )
Expenses:
Direct operating expenses 69 120 185 (176 ) 198 198
Overhead expenses           64         64         64  
 
Operating expenses 69 120 185 64 (176 ) 262 262
Goodwill and acquired intangible assets impairment and amortization 5 5
Restructuring expenses   1   1       3         5         5  
 
Total expenses   70   121     185   67     (176 )   267     5     272  
 
Income (loss) from continuing operations, before income tax expense (benefit) 132 216 126 (27 ) 447 (269 ) 178
Income tax expense (benefit)(3)   48   80     46   (10 )       164     (97 )   67  
 
Net income (loss) from continuing operations 84 136 80 (17 ) 283 (172 ) 111
Income from discontinued operations, net of taxes                            
 
Net income (loss) 84 136 80 (17 ) 283 (172 ) 111
Less: net loss attributable to noncontrolling interest     (1 )             (1 )       (1 )
 
Net income (loss) attributable to SLM Corporation $ 84 $ 137   $ 80 $ (17 ) $   $ 284   $ (172 ) $ 112  

____________

(1)   The eliminations in servicing revenue and direct operating expense represent the elimination of intercompany servicing revenue where the Business Services segment performs the loan servicing function for the FFELP Loans segment.
 
(2) “Core Earnings” adjustments to GAAP:
     
Quarter Ended March 31, 2012

(Dollars in millions)

Net Impact of

Derivative

Accounting

Net Impact of

Goodwill and

Acquired

Intangibles

Total
Net interest income after provisions for loan losses $ 79 $ $ 79
Total other loss (343 ) (343 )
Goodwill and acquired intangible assets impairment and amortization       5     5  
 
Total “Core Earnings” adjustments to GAAP $ (264 ) $ (5 ) (269 )
 
Income tax benefit   (97 )
 
Net loss $ (172 )
 
(3)   Income taxes are based on a percentage of net income before tax for the individual reportable segment.
 
               
Quarter Ended June 30, 2011

(Dollars in millions)

Consumer

Lending

Business

Services

FFELP

Loans

Other

Eliminations(1)

Total “Core

Earnings”

Adjustments(2)

Total

GAAP

Interest income:
Student loans $ 600 $ $ 721 $ $ $ 1,321 $ 129 $ 1,450
Other loans 5 5 5
Cash and investments   2   2   1   2     (2 )   5       5  
Total interest income 602 2 722 7 (2 ) 1,331 129 1,460
Total interest expense   201     357   14     (2 )   570   22     592  
Net interest income (loss) 401 2 365 (7 ) 761 107 868
Less: provisions for loan losses   265     23   3         291       291  
Net interest income (loss) after provisions for loan losses 136 2 342 (10 ) 470 107 577
Servicing revenue 15 244 21 (187 ) 93 93
Contingency revenue 86 86 86
Gains on debt repurchases
Other income (loss)     11     3         14   (521 )   (507 )
Total other income (loss) 15 341 21 3 (187 ) 193 (521 ) (328 )
Expenses:
Direct operating expenses 73 121 192 (187 ) 199 199
Overhead expenses         69         69       69  
Operating expenses 73 121 192 69 (187 ) 268 268
Goodwill and acquired intangible assets impairment and amortization 6 6
Restructuring expenses   1       1         2       2  
Total expenses   74   121   192   70     (187 )   270   6     276  
Income (loss) from continuing operations, before income tax expense (benefit) 77 222 171 (77 ) 393 (420 ) (27 )
Income tax expense (benefit)(3)   28   82   63   (29 )       144   (154 )   (10 )
Net income (loss) from continuing operations 49 140 108 (48 ) 249 (266 ) (17 )
Income from discontinued operations, net of taxes         11         11       11  
Net income (loss) $ 49 $ 140 $ 108 $ (37 ) $   $ 260 $ (266 ) $ (6 )

____________

(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, 2011

 

 

(Dollars in millions)

Net Impact of

Derivative

Accounting

Net Impact of

Goodwill and

Acquired

Intangibles

 

 

Total

Net interest income after provisions for loan losses $ 107 $ $ 107
Total other loss (521 ) (521 )
Goodwill and acquired intangible assets impairment and amortization       6     6  
Total “Core Earnings” adjustments to GAAP $ (414 ) $ (6 ) (420 )
Income tax benefit   (154 )
Net loss $ (266 )
 
(3)   Income taxes are based on a percentage of net income before tax for the individual reportable segment.
 
  Six Months Ended June 30, 2012

(Dollars in millions)

Consumer
Lending
  Business
Services
  FFELP
Loans
  Other  

Eliminations(1)

  Total “Core
Earnings”
 

Adjustments(2)

  Total
GAAP
Interest income:
Student loans $ 1,241 $ $ 1,378 $ $ $ 2,619 $ 241 $ 2,860
Other loans 9 9 9
Cash and investments   4   5     5   1     (5 )   10         10  
Total interest income 1,245 5 1,383 10 (5 ) 2,638 241 2,879
Total interest expense   408       832   16     (5 )   1,251     72     1,323  
Net interest income (loss) 837 5 551 (6 ) 1,387 169 1,556
Less: provisions for loan losses   460       36           496         496  
Net interest income (loss) after provisions for loan losses 377 5 515 (6 ) 891 169 1,060
Servicing revenue 23 466 48 (348 ) 189 189
Contingency revenue 176 176 176
Gains on debt repurchases 58 58 58
Other income (loss)     18       6         24     (352 )   (328 )
Total other income (loss) 23 660 48 64 (348 ) 447 (352 ) 95
Expenses:
Direct operating expenses 132 229 366 4 (348 ) 383 383
Overhead expenses           118         118         118  
Operating expenses 132 229 366 122 (348 ) 501 501
Goodwill and acquired intangible assets impairment and amortization 9 9
Restructuring expenses   2   3       3         8         8  
Total expenses   134   232     366   125     (348 )   509     9     518  
Income (loss) from continuing operations, before income tax expense (benefit) 266 433 197 (67 ) 829 (192 ) 637
Income tax expense (benefit)(3)   97   159     73   (26 )       303     (68 )   235  
Net income (loss) from continuing operations 169 274 124 (41 ) 526 (124 ) 402
Income from discontinued operations, net of taxes                            
Net income (loss) 169 274 124 (41 ) 526 (124 ) 402
Less: loss attributable to noncontrolling interest     (1 )             (1 )       (1 )
Net income (loss) attributable to SLM Corporation $ 169 $ 275   $ 124 $ (41 ) $   $ 527   $ (124 ) $ 403  

____________

(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:
 
  Six Months Ended June 30, 2012

(Dollars in millions)

Net Impact
of
Derivative
Accounting
  Net Impact of
Goodwill and
Acquired
Intangibles
  Total
Net interest income after provisions for loan losses $ 169 $ $ 169
Total other loss (352 ) (352 )
Goodwill and acquired intangible assets impairment and amortization       9     9  
Total “Core Earnings” adjustments to GAAP $ (183 ) $ (9 ) (192 )
Income tax benefit   (68 )
Net loss $ (124 )
 
(3) Income taxes are based on a percentage of net income before tax for the individual reportable segment.
 
  Six Months Ended June 30, 2011

(Dollars in millions)

Consumer
Lending
  Business
Services
  FFELP
Loans
  Other  

Eliminations(1)

 

Total “Core
Earnings”

 

Adjustments(2)

  Total
GAAP
Interest income:
Student loans $ 1,204 $ $ 1,457 $ $ $ 2,661 $ 270 $ 2,931
Other loans 11 11 11
Cash and investments   5  

5

  2   3     (5 )   10       10  
Total interest income (loss) 1,209 5 1,459 14 (5 ) 2,682 270 2,952
Total interest expense   399     726   29     (5 )   1,149   37     1,186  
Net interest income (loss) 810 5 733 (15 ) 1,533 233 1,766
Less: provisions for loan losses   540     46   8         594       594  
Net interest income (loss) after provisions for loan losses 270 5 687 (23 ) 939 233 1,172
Servicing revenue 32 489 46 (376 ) 191 191
Contingency revenue 164 164 164
Gains on debt repurchases 64 64 (26 ) 38
Other income (loss)     21     6         27   (754 )   (727 )
Total other income (loss) 32 674 46 70 (376 ) 446 (780 ) (334 )
Expenses:
Direct operating expenses 155 249 387 9 (376 ) 424 424
Overhead expenses         148         148       148  
Operating expenses 155 249 387 157 (376 ) 572 572
Goodwill and acquired intangible assets impairment and amortization 12 12
Restructuring expenses   2   1   1   1         5       5  
Total expenses   157   250   388   158     (376 )   577   12     589  
Income (loss) from continuing operations, before income tax expense (benefit) 145 429 345 (111 ) 808 (559 ) 249
Income tax expense (benefit)(3)   54   158   127   (41 )       298   (208 )   90  
Net income (loss) from continuing operations 91 271 218 (70 ) 510 (351 ) 159
Income from discontinued operations, net of taxes         10         10       10  
Net income (loss) $ 91 $ 271 $ 218 $ (60 ) $   $ 520 $ (351 ) $ 169  

____________

(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:
 
  Six Months Ended June 30, 2011

 

 

(Dollars in millions)

Net Impact of
Derivative
Accounting

 

Net Impact of
Goodwill and
Acquired
Intangibles

 

 

 

Total

Net interest income after provisions for loan losses $ 233 $ $ 233
Total other loss (780 ) (780 )
Goodwill and acquired intangible assets impairment and amortization       12     12  
Total “Core Earnings” adjustments to GAAP $ (547 ) $ (12 ) (559 )
Income tax benefit   (208 )
Net loss $ (351 )
 
(3)   Income taxes are based on a percentage of net income before tax for the individual reportable segment.
 

Differences between “Core Earnings” and GAAP

 

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

 
  Quarters Ended       Six Months Ended
June 30,   March 31,   June 30, June 30,   June 30,

(Dollars in millions)

2012 2012 2011 2012 2011
“Core Earnings” adjustments to GAAP:
Net impact of derivative accounting $ 82 $ (264 ) $ (414 ) $ (183 ) $ (547 )
Net impact of goodwill and acquired intangibles (5 ) (5 ) (6 ) (9 ) (12 )
Net income tax effect   (28 )   97     154     68     208  
 
Total “Core Earnings” adjustments to GAAP $ 49   $ (172 ) $ (266 ) $ (124 ) $ (351 )
 
      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 we make for derivative accounting.
 
  Quarters Ended       Six Months Ended
June 30,   March 31,   June 30, June 30,   June 30,

(Dollars in millions)

2012 2012 2011 2012 2011
“Core Earnings” derivative adjustments:
Gains (losses) on derivative and hedging activities, net, included in other income(1) $ 6 $ (372 ) $ (510 ) $ (366 ) $ (752 )
Plus: Realized losses on derivative and hedging activities, net(1)   188     179     185     367     371  
 
Unrealized gains (losses) on derivative and hedging activities, net 194 (193 ) (325 ) 1 (381 )
Amortization of net premiums on Floor Income Contracts in net interest income for “Core Earnings” (98 ) (97 ) (74 ) (195 ) (159 )
Other derivative accounting adjustments   (14 )   26     (15 )   11     (7 )
 
Total net impact derivative accounting(2) $ 82   $ (264 ) $ (414 ) $ (183 ) $ (547 )

____________

(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)

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   Six Months Ended

(Dollars in millions)

June 30,
2012

 

March 31,
2012

 

June 30,
2011

June 30,
2012

 

June 30,
2011

Reclassification of realized gains (losses) on derivative and hedging activities:
Net settlement expense on Floor Income Contracts reclassified to net interest income $ (223 ) $ (215 ) $ (202 ) $ (437 ) $ (428 )
Net settlement income on interest rate swaps reclassified to net interest income 34 36 17 70 33
Foreign exchange derivatives gains (losses) reclassified to other income 1 (1 )
Net realized gains (losses) on terminated derivative contracts reclassified to other income                   25  
Total reclassifications of realized losses on derivative and hedging activities (188 ) (179 ) (185 ) (367 ) (371 )
Add: Unrealized gains (losses) on derivative and hedging activities, net(1)   194     (193 )   (325 )   1     (381 )
Gains (losses) on derivative and hedging activities, net $ 6   $ (372 ) $ (510 ) $ (366 ) $ (752 )
 
         

 ____________

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

(Dollars in millions)

June 30,
2012

 

March 31,
2012

 

June 30,
2011

June 30,
2012

 

June 30,
2011

Floor Income Contracts $ 50 $ 136 $ (277 ) $ 186 $ (126 )
Basis swaps (26 ) (22 ) 25 (48 ) 19
Foreign currency hedges 172 (294 ) (110 ) (122 ) (304 )
Other   (2 )   (13 )   37     (15 )   30  
Total unrealized gains (losses) on derivative and hedging activities, net $ 194   $ (193 ) $ (325 ) $ 1   $ (381 )
 

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

 
As of June 30, 2012, derivative accounting has reduced GAAP equity by approximately $1.1 billion as a result of approximately $1.1 billion (after tax) of cumulative net unrealized losses recognized for GAAP, but not in “Core Earnings.” The following table rolls forward the cumulative impact to GAAP equity due to these unrealized net losses related to derivative accounting.
 
  Quarters Ended   Six Months Ended

(Dollars in millions)

June 30,
2012

 

March 31,
2012

 

June 30,
2011

June 30,
2012

 

June 30,
2011

Beginning impact of derivative accounting on GAAP equity

$

(1,149

)

$

(977

)

$

(752

)

$

(977

)

$

(676

)

Net impact of net unrealized gains (losses) under derivative accounting   51    

(172

)

 

(257

)

 

(121

)

 

(333

)

 
Ending impact of derivative accounting on GAAP equity

$

(1,098

)

$

(1,149

)

$

(1,009

)

$

(1,098

)

$

(1,009

)

 
In addition, 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 below net of tax. As of June 30, 2012, the remaining amortization term of the net Floor premiums was approximately 4 years on existing contracts.
 
  As of
(Dollars in millions) June 30,
2012
  March 31,
2012
  June 30,
2011
Unamortized net Floor premiums (net of tax)

$

(650

)

$

(711

)

$

(899

)

 
      2)  

Goodwill and Acquired Intangibles: Our “Core Earnings” exclude goodwill and intangible impairment and the amortization of acquired intangibles. The following table summarizes the acquired intangible adjustments.

 
  Quarters Ended   Six Months Ended

(Dollars in millions)

June 30,
2012
  March 31,
2012
  June 30,
2011
June 30,
2012
  June 30,
2011
“Core Earnings” goodwill and acquired intangibles adjustments(1):
Amortization of acquired intangibles

$

(5

)

$

(5

)

$

(6

)

$ (9 )

$

(12

)

 
Total “Core Earnings” goodwill and acquired intangibles adjustments(1)

$

(5

)

$

(5

)

$

(6

)

 

$ (9 )

$

(12

)

     

 ____________

(1)   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.
 

Business Segment Earnings Summary — “Core Earnings” Basis

 

Consumer Lending Segment

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

Quarters Ended

 

% Increase (Decrease)

 

Six Months Ended

 

% Increase
(Decrease)

    June 30, 2012   June 30, 2012   June 30, 2012

 

June 30, March 31, June 30, vs. vs. June 30, June 30, vs.

(Dollars in millions)

2012 2012 2011 Mar. 31, 2012 June 30, 2011 2012 2011 June 30, 2011
“Core Earnings” interest income:
Private Education Loans $ 616 $ 625 $ 600 (1 )% 3 % $ 1,241 $ 1,204 3 %
Cash and investments   2   2   2       4   5 (20 )
Total “Core Earnings” interest income 618 627 602 (1 ) 3 1,245 1,209 3
Total “Core Earnings” interest expense   206   202   201 2   2     408   399 2  
Net “Core Earnings” interest income 412 425 401 (3 ) 3 837 810 3
Less: provisions for loan losses   225   235   265 (4 ) (15 )   460   540 (15 )
Net “Core Earnings” interest income after provisions for loan losses 187 190 136 (2 ) 38 377 270 40
 
Servicing revenue 12 12 15 (20 ) 23 32 (28 )
 
Direct operating expenses 64 69 73 (7 ) (12 ) 132 155 (15 )
Restructuring expenses   1   1   1       2   2  
Total expenses   65   70   74 (7 ) (12 )   134   157 (15 )
Income from continuing operations, before income tax expense 134 132 77 2 74 266 145 83
Income tax expense   49   48   28 2   75     97   54 80  
“Core Earnings” $ 85 $ 84 $ 49 1 % 73 % $ 169 $ 91 86 %
 

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 provisions for loan losses.
 
  Quarters Ended   Six Months Ended

 

June 30,
2012

 

March 31,
2012

 

June 30,
2011

June 30,
2012

 

June 30,
2011

“Core Earnings” basis Private Education Student Loan yield 6.36 % 6.42 % 6.29 % 6.39 % 6.32 %
Discount amortization .24   .24   .26   .24   .26  
“Core Earnings” basis Private Education Loan net yield 6.60 6.66 6.55 6.63 6.58
“Core Earnings” basis Private Education Loan cost of funds (2.05 ) (2.01 ) (2.02 ) (2.03 ) (1.99 )
“Core Earnings” basis Private Education Loan spread 4.55 4.65 4.53 4.60 4.59
“Core Earnings” basis other asset spread impact (.41 ) (.39 ) (.48 ) (.40 ) (.51 )
“Core Earnings” basis Consumer Lending net interest margin(1) 4.14 % 4.26 % 4.05 % 4.20 % 4.08 %
                     
 
“Core Earnings” basis Consumer Lending net interest margin(1) 4.14 % 4.26 % 4.05 % 4.20 % 4.08 %
Adjustment for GAAP accounting treatment (.11 ) (.13 ) (.05 ) (.12 ) (.05 )
GAAP-basis Consumer Lending net interest margin(1) 4.03 % 4.13 % 4.00 % 4.08 % 4.03 %
 

____________

(1)

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

(Dollars in millions)

         
Private Education Loans $ 37,543 $ 37,749 $ 36,784 $ 37,646 $ 36,894
Other interest-earning assets   2,544   2,327   2,910   2,436   3,134
Total Consumer Lending “Core Earnings” basis interest-earning assets $ 40,087 $ 40,076 $ 39,694 $ 40,082 $ 40,028
 
The increase in the “Core Earnings” basis Consumer Lending net interest margin for the three and six month periods ended June 30, 2012 over the year-ago periods was primarily due to a benefit from the decline in the average balance of our other asset portfolio. The size of the other asset portfolio, which is primarily securitization trust restricted cash and cash held at Sallie Mae Bank (the “Bank”), has decreased significantly. This other asset portfolio earns a negative yield and as a result, when its relative weighting decreases compared to the Private Education Loan portfolio, the overall net interest margin increases.
 

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   Six Months Ended

(Dollars in millions)

June 30,
2012

 

March 31,
2012

 

June 30,
2011

June 30,
2012

 

June 30,
2011

Private Education Loan provision for loan losses $ 225 $ 235 $ 265 $ 460 $ 540
Private Education Loan charge-offs $ 235 $ 224 $ 263 $ 459 $ 537
 
In establishing the allowance for Private Education Loan losses as of June 30, 2012, we considered several factors with respect to our Private Education Loan portfolio. In particular, we continue to see improving 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 compared with the year-ago quarter. Loans delinquent greater than 90 days has declined to 4.5 percent from 4.6 percent and charge-off rate has declined to 3.09 percent from 3.71 percent compared with the year-ago quarter. Apart from these overall improvements , Private Education Loans that have defaulted between 2008 and 2011 for which we have previously charged off estimated losses have, to varying degrees, not met our post-default recovery expectations to date and may continue not to do so. Our allowance for loan losses takes into account these potential recovery uncertainties.
 

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 “Critical Accounting Policies and Estimates—Allowance for Loan Losses” in our Annual Report on Form 10-K for the year ended December 31, 2011.

 

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 decreases in operating expenses in the quarter ended June 30, 2012 compared with the quarter ended June 30, 2011 were primarily the result of the current-year benefit of the cost-cutting efforts we implemented throughout 2011. Operating expenses were 69 basis points and 80 basis points of average Private Education Loans in the quarters ended June 30, 2012 and 2011, respectively, and 71 basis points and 85 basis points of average Private Education Loans in the six months ended June 30, 2012 and 2011, respectively.

 

Business Services Segment

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

Quarters Ended

 

% Increase (Decrease)

 

Six Months Ended

 

% Increase
(Decrease)

    June 30, 2012   June 30, 2012   June 30, 2012

 

June 30, March 31, June 30, vs. vs. June 30, June 30, vs.

(Dollars in millions)

  2012     2012   2011 Mar. 31, 2012 June 30, 2011   2012   2011 June 30, 2011
 
Net interest income after provision $ 2 $ 3 $ 2 (33 )% % $ 5 $ 5 %
 
Servicing revenue:
Intercompany loan servicing 172 176 187 (2 ) (8 ) 348 376 (7 )
Third-party loan servicing 26 22 20 18 30 48 40 20
Guarantor servicing 11 11 15 (27 )

22

25 (12 )
Other servicing   21     27     22 (22 ) (5 )   48     48  
Total servicing revenue 230 236 244 (3 ) (6 ) 466 489 (5 )
Contingency revenue 87 90 86 (3 ) 1 176 164 7
Other Business Services revenue   8     8     11   (27 )   18     21 (14 )
Total other income 325 334 341 (3 ) (5 ) 660 674 (2 )
 
Direct operating expenses 109 120 121 (9 ) (10 ) 229 249 (8 )
Restructuring expenses   2     1     100   100     3     1 200  
Total expenses   111     121     121 (8 ) (8 )   232     250 (7 )
Income from continuing operations, before income tax expense 216 216 222 (3 ) 433 429 1
Income tax expense   79     80     82 (1 ) (4 )   159     158 1  
“Core Earnings” 137 136 140 1 (2 ) 274 271 1
Less: net loss attributable to noncontrolling interest   (1 )   (1 )     (100 )   (1 )   (100 )
“Core Earnings” attributable to SLM Corporation $ 138   $ 137   $ 140 1 % (1 )% $ 275   $ 271 1 %
 
Our Business Services segment earns intercompany loan servicing fees from servicing the FFELP Loans in our FFELP Loans segment. The average balance of this portfolio was $133 billion and $142 billion for the quarters ended June 30, 2012 and 2011, respectively, and $134 billion and $143 billion for the six months ended June 30, 2012 and 2011, respectively. The decline in intercompany loan servicing revenue from the year-ago period is primarily the result of a lower outstanding principal balance in the underlying portfolio.
 

We are servicing approximately 3.8 million accounts under the ED Servicing Contract as of June 30, 2012 compared with 3.7 million and 3.0 million accounts at March 31, 2012 and June 30, 2011, respectively. The increase in the third-party loan servicing fees for the current quarter and six-month period compared with the prior-year periods was driven by the increase in the number of accounts serviced as well as an increase in ancillary servicing fees earned. The second quarters of 2012 and 2011 included $22 million and $15 million, respectively, of servicing revenue related to the ED Servicing Contract.

 

Other servicing revenue includes account asset servicing revenue and Campus Solutions revenue. Account asset servicing revenue represents fees earned on program management, transfer and servicing agent services and administration services for 529 college savings plans we service. Assets under administration of 529 college savings plans totaled $41.4 billion as of June 30, 2012, a 10 percent increase from the year-ago quarter. Campus Solutions revenue is earned from our Campus Solutions business whose services include comprehensive financing and transaction processing solutions that we provide to college financial aid offices and students to streamline the financial aid process.

 
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 in July 2010.
 

(Dollars in millions)

 

June 30,
2012

 

March 31,
2012

 

June 30,
2011

Student loans $ 10,620 $ 11,004 $ 10,475
Other   1,864   1,752   2,042
Total $ 12,484 $ 12,756 $ 12,517
 

Other Business Services revenue is primarily transaction fees that are earned in conjunction with our rewards program from participating companies based on member purchase activity, either online or in stores, depending on the contractual arrangement with the participating company. Typically, a percentage of the purchase price of the consumer members’ eligible purchases with participating companies is set aside in an account maintained by us on behalf of our members.

 
Revenues related to services performed on FFELP Loans accounted for 77 percent and 79 percent, respectively, of total segment revenues for the quarters ended June 30, 2012 and 2011 and 76 percent and 78 percent, respectively, of total segment revenues for the six months ended June 30, 2012 and 2011.
 

Operating Expenses — Business Services Segment

 

Operating expenses for the quarter and six month periods ended June 30, 2012 decreased from the prior-year periods, primarily as a result of the current-year benefit of the cost-cutting efforts we implemented throughout 2011.

 

FFELP Loans Segment

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

Quarters Ended

 

% Increase (Decrease)

 

Six Months Ended

 

% Increase
(Decrease)

   

June 30, 2012

  June 30, 2012   June 30, 2012

 

June 30, March 31, June 30, vs. vs. June 30, June 30, vs.

(Dollars in millions)

2012 2012 2011 Mar. 31, 2012 June 30, 2011 2012 2011 June 30, 2011
“Core Earnings” interest income:
FFELP Loans $ 652 $ 725 $ 721 (10 )% (10 )% $ 1,378 $ 1,457 (5 )%
Cash and investments   3   3   1   200     5   2 150  
Total “Core Earnings” interest income 655 728 722 (10 ) (9 ) 1,383 1,459 (5 )
Total “Core Earnings” interest expense   409   424   357 (4 ) 15     832   726 15  
Net “Core Earnings” interest income 246 304 365 (19 ) (33 ) 551 733 (25 )
Less: provisions for loan losses   18   18   23   (22 )   36   46 (22 )
Net “Core Earnings” interest income after provisions for loan losses 228 286 342 (20 ) (33 ) 515 687 (25 )
Servicing revenue 22 25 21 (12 ) 5 48 46 4
 
Direct operating expenses 181 185 192 (2 ) (6 ) 366 387 (5 )
Restructuring expenses               1 (100 )
Total expenses   181   185   192 (2 ) (6 )   366   388 (6 )
Income from continuing operations, before income tax expense 69 126 171 (45 ) (60 ) 197 345 (43 )
Income tax expense   25   46   63 (46 ) (60 )   73   127 (43 )
“Core Earnings” $ 44 $ 80 $ 108 (45 )% (59 )% $ 124 $ 218 (43 )%
 

FFELP Loans Net Interest Margin

 
The following table shows the FFELP Loans “Core Earnings” basis net interest margin along with reconciliation to the GAAP-basis FFELP Loans net interest margin.
 
  Quarters Ended   Six Months Ended
June 30,
2012
  March 31,
2012
  June 30,
2011
June 30,
2012
  June 30,
2011
“Core Earnings” basis FFELP student loan yield

2.66

%

2.67

%

2.57

%

2.65

%

2.60

%

Hedged Floor Income .29 .28 .20 .29 .22
Unhedged Floor Income .07 .11 .19 .09 .13
Consolidation Loan Rebate Fees

(.67

)

(.66

)

(.66

)

(.66

)

(.66

)

Repayment Borrower Benefits

(.14

)

(.13

)

(.12

)

(.13

)

(.11

)

Premium amortization

(.27

)

(.14

)

(.17

)

(.20

)

(.16

)

 
“Core Earnings” basis FFELP student loan net yield 1.94 2.13 2.01 2.04 2.02
“Core Earnings” basis FFELP student loan cost of funds

(1.14

)

(1.17

)

(.96

)

(1.16

)

(.96

)

 
“Core Earnings” basis FFELP student loan spread .80 .96 1.05 .88 1.06
“Core Earnings” basis FFELP other asset spread impact

(.10

)

(.11

)

(.07

)

(.10

)

(.08

)

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

.70

%

.85

%

.98

%

.78

%

.98

%

 

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

.70

%

.85

%

.98

%

.78

%

.98

%

Adjustment for GAAP accounting treatment .30   .27   .32   .28   .34  
 
GAAP-basis FFELP Loans net interest margin

1.00

%

1.12

%

1.30

%

1.06

%

1.32

%

 

 

 

____________

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

(Dollars in millions)

         
FFELP Loans $ 134,893 $ 137,193 $ 143,999 $ 136,043 $ 145,681
Other interest-earning assets   6,291   6,427   4,982   6,359   4,999
 
Total FFELP “Core Earnings” basis interest-earning assets $ 141,184 $ 143,620 $ 148,981 $ 142,402 $ 150,680
 
The decrease in the “Core Earnings” basis FFELP Loans net interest margin of 15 basis points for the quarter ended June 30, 2012 compared with the quarter ended March 31, 2012 and of 28 basis points for the quarter ended and 20 basis points for the six months ended June 30, 2012 compared with the year-ago periods was primarily the result of the ED’s Special Direct Consolidation Loan Initiative that occurred in 2012 as well as a widening of our asset and liability basis indices and a general increase in our funding costs related to unsecured and ABS debt issuances over the last year.
 
During the fourth-quarter 2011, the Administration announced a Special Direct Consolidation Loan Initiative. The initiative provided an incentive to borrowers who have at least one student loan owned by the Department of Education and at least one held by a FFELP lender to consolidate the FFELP lender’s loans into the Direct Loan program by providing a 0.25 percentage point interest rate reduction on the FFELP loans that are eligible for consolidation. The program was available from January 17, 2012 through June 30, 2012.
 

We expect approximately $4.5 billion of our FFELP loans will consolidate to ED during the second and third quarters of 2012, of which $2.2 billion had consolidated as of June 30, 2012. The remaining volume we expect to consolidate in the third-quarter 2012 relates to loans where consolidation applications have been received and are in process for consolidation as of June 30, 2102. The expected consolidation of these loans resulted in the acceleration of $42 million of non-cash loan premium amortization and $8 million of non-cash debt discount amortization during second-quarter 2012. This combined $50 million acceleration of non-cash amortization related to this activity reduced the FFELP Loans net interest margin by 14 basis points and 7 basis points for the three and six month periods ended June 30, 2012, respectively. The Special Direct Consolidation Loan Initiative ended June 30, 2012. As such, we do not expect the “Core Earnings” basis FFELP Loans net interest margin to be materially affected in the future by any significant additional loan premium expense or debt discount expense related to this initiative.

 
On December 23, 2011, the President signed the Consolidated Appropriations Act of 2012 into law. This law includes changes that permit FFELP lenders or beneficial holders to change the index on which the Special Allowance Payments (“SAP”) are calculated for FFELP Loans first disbursed on or after January 1, 2000. We elected to use the one-month LIBOR rate rather than the CP rate commencing on April 1, 2012 in connection with our entire $128 billion of CP indexed loans. This change will help us to better match loan yields with our financing costs. This election did not materially affect our results for the second quarter of 2012. As a result of the current low interest rate environment, only $84.2 billion of loans were affected by this change during the second quarter of 2012.
 
As of June 30, 2012, our FFELP Loan portfolio totaled approximately $132.8 billion, comprised of $48.1 billion of FFELP Stafford and $84.7 billion of FFELP Consolidation Loans. The weighted-average life of these portfolios is 4.9 years and 9.1 years, respectively, assuming a Constant Prepayment Rate (“CPR”) of 5 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   Six Months Ended

(Dollars in millions)

June 30,
2012

 

March 31,
2012

 

June 30,
2011

June 30,
2012

 

June 30,
2011

FFELP Loan provision for loan losses $ 18 $ 18 $ 23 $ 36 $ 46
FFELP Loan charge-offs $ 23 $ 23 $ 21 $ 46 $ 41
 

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 from the Business Services segment and included in those amounts was $172 million and $187 million for the quarters ended June 30, 2012 and 2011, respectively, and $348 million and $376 million for the six month period ended June 30, 2012 and June 30, 2011, respectively. These amounts exceed the actual cost of servicing the loans. Operating expenses were 54 basis points and 53 basis points of average FFELP Loans in the quarters ended June 30, 2012 and 2011, respectively and 54 basis points and 54 basis points for the six months ended June 30, 2012 and 2011, respectively. The decline in operating expenses from the prior-year quarter was primarily the result of the reduction in the average outstanding balance of our FFELP Loans portfolio.

 

Other Segment

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

Quarters Ended

 

% Increase (Decrease)

 

Six Months Ended

 

% Increase
(Decrease)

    June 30, 2012   June 30, 2012   June 30, 2012

 

June 30, March 31, June 30, vs. vs. June 30, June 30, vs.

(Dollars in millions)

  2012     2012     2011   Mar. 31, 2012 June 30, 2011   2012     2011   June 30, 2011
 
Net interest loss after provision $ (5 ) $ $ (10 ) 100 % (50 )% $ (6 ) $ (23 ) (74 )%
 
Gains on debt repurchases 20 37 (46 ) 100 58 64 (9 )
Other   5     3     3   67   67     6     6    
Total income 25 40 3 (38 ) 733 64 70 (9 )
Direct operating expenses 3 100 100 4 9 (56 )
Overhead expenses:
Corporate overhead 29 36 38 (19 ) (24 ) 65 87 (25 )
Unallocated information technology costs   25     28     31   (11 ) (19 )   53     61   (13 )
Total overhead expenses   54     64     69   (16 ) (22 )   118     148   (20 )
Operating expenses 57 64 69 (11 ) (17 ) 122 157 (22 )
Restructuring expenses       3     1   (100 ) (100 )   3     1   200  
Total expenses   57     67     70   (15 ) (19 )   125     158   (21 )
Loss from continuing operations, before income tax enefi) (37 ) (27 ) (77 ) 37 (52 ) (67 ) (111 ) (40 )
Income tax benefit   (13 )   (10 )   (29 ) 30   (55 )   (26 )   (41 ) (37 )
Net loss from continuing operations (24 ) (17 ) (48 ) 41 (50 ) (41 ) (70 ) (41 )
Income from discontinued operations, net of tax           11     (100 )       10   (100 )
“Core Earnings” (loss) $ (24 ) $ (17 ) $ (37 ) 41 % (35 )% $ (41 ) $ (60 ) (32 )%
 

Net Interest Income (Loss) after Provision for Loan Losses

 

Net interest income (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. The improvement in the current quarter and six-month periods compared with the prior-year periods was primarily the result of our not recording any provision for loan losses related to our mortgage and consumer loan portfolios in 2012. Each quarter we perform an analysis regarding the adequacy of the loan loss allowance for these portfolios and we determined that no additional allowance for loan losses was required related to this $157 million portfolio.

 

Gains on Debt Repurchases

 

We began repurchasing our outstanding debt in 2008. We repurchased $85 million and $60 million face amount of our debt for the quarters ended June 30, 2012 and 2011, respectively, and $290 million and $885 million face amount of our debt for the six months ended June 30, 2012 and 2011, respectively.

 

Overhead

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

The decrease in overhead for the quarter and six-month periods ending June 30, 2012 compared with the prior-year periods was primarily the result of the current-year benefit of the cost-cutting efforts we implemented throughout 2011.

 

Financial Condition

 
This section provides additional information regarding the changes related to 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

 
  June 30, 2012
FFELP   FFELP   Total   Private  
Stafford and Consolidation FFELP Education

(Dollars in millions)

Other Loans Loans Loans Total
Total student loan portfolio:
In-school(1) $ 2,152 $ $ 2,152 $ 1,848 $ 4,000
Grace, repayment and other(2)   45,348     84,012     129,360     36,349     165,709  
 
Total, gross 47,500 84,012 131,512 38,197 169,709
Unamortized premium/(discount) 720 774 1,494 (834 ) 660
Receivable for partially charged-off loans 1,277 1,277
Allowance for loan losses   (107 )   (66 )   (173 )   (2,186 )   (2,359 )
 
Total student loan portfolio $ 48,113   $ 84,720   $ 132,833   $ 36,454   $ 169,287  
 
% of total FFELP 36 % 64 % 100 %
% of total 28 % 50 % 78 % 22 % 100 %
 
March 31, 2012
FFELP FFELP Total Private
Stafford and Consolidation FFELP Education

(Dollars in millions)

Other Loans Loans Loans Total
Total student loan portfolio:
In-school(1) $ 2,850 $ $ 2,850 $ 2,421 $ 5,271
Grace, repayment and other(2)   45,966     85,674     131,640     36,104     167,744  
 
Total, gross 48,816 85,674 134,490 38,525 173,015
Unamortized premium/(discount) 803 821 1,624 (853 ) 771
Receivable for partially charged-off loans 1,250 1,250
Allowance for loan losses   (111 )   (69 )   (180 )   (2,190 )   (2,370 )
 
Total student loan portfolio $ 49,508   $ 86,426   $ 135,934   $ 36,732   $ 172,666  
 
% of total FFELP 36 % 64 % 100 %
% of total 29 % 50 % 79 % 21 % 100 %
 
June 30, 2011
FFELP FFELP Private
Stafford and Consolidation Total Education

(Dollars in millions)

Other Loans FFELP Loans Total
Total student loan portfolio:
In-school(1) $ 4,109 $ $ 4,109 $ 2,341 $ 6,450
Grace, repayment and other(2)   47,933     89,006     136,939     35,176     172,115  
 
Total, gross 52,042 89,006 141,048 37,517 178,565
Unamortized premium/(discount) 901 875 1,776 (861 ) 915
Receivable for partially charged-off loans 1,140 1,140
Allowance for loan losses   (119 )   (70 )   (189 )   (2,043 )   (2,232 )
 
Total student loan portfolio $ 52,824   $ 89,811   $ 142,635   $ 35,753   $ 178,388  
 
% of total FFELP 37 % 63 % 100 %
% of total 30 % 50 % 80 % 20 % 100 %
 

____________

(1) Loans for borrowers 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 June 30, 2012
FFELP   FFELP     Private  
Stafford and Consolidation Total Education

(Dollars in millions)

Other Loans FFELP Loans Total
Total $ 49,159 $ 85,734 $ 134,893 $ 37,543 $ 172,436
% of FFELP

36

%

64

%

100

%

% of total

28

%

50

%

78

%

22

%

100

%

 
Quarter Ended March 31, 2012
FFELP FFELP Private
Stafford and Consolidation Total Education

(Dollars in millions)

Other Loans FFELP Loans Total
Total $ 50,149 $ 87,044 $ 137,193 $ 37,749 $ 174,942
% of FFELP

37

%

63

%

100

%

% of total

28

%

50

%

78

%

22

%

100

%

 
Quarter Ended June 30, 2011
FFELP FFELP Private
Stafford and Consolidation Total Education

(Dollars in millions)

Other Loans FFELP Loans Total
Total $ 53,667 $ 90,332 $ 143,999 $ 36,784 $ 180,783
% of FFELP 37 %

63

%

100

%

% of total 30 %

50

%

80

%

20

%

100

%

 
  Six Months Ended June 30, 2012
FFELP   FFELP     Private  
Stafford and Consolidation Total Education

(Dollars in millions)

Other Loans FFELP Loans Total
Total $ 49,654 $ 86,389 $ 136,043 $ 37,646 $ 173,689
% of FFELP 36 % 64 % 100 %
% of total 28 % 50 % 78 % 22 % 100 %
 
Six Months Ended June 30, 2011
FFELP FFELP Private
Stafford and Consolidation Total Education

(Dollars in millions)

Other Loans FFELP Loans Total
Total $ 54,597 $ 91,084 $ 145,681 $ 36,894 $ 182,575
% of FFELP 37 % 63 % 100 %
% of total 30 % 50 % 80 % 20 % 100 %
 

Student Loan Activity

 
  Three Months Ended June 30, 2012
FFELP   FFELP     Total Private  
Stafford and Consolidation Total Education Total

(Dollars in millions)

Other Loans FFELP Loans Portfolio
Beginning balance $ 49,508 $ 86,426 $ 135,934 $ 36,732 $ 172,666
Acquisitions and originations 1,331 495 1,826 341 2,167
Capitalized interest and premium/discount amortization 310 349 659 263 922
Consolidations to third parties (1,711 ) (1,035 ) (2,746 ) (19 ) (2,765 )
Sales (149 ) (149 ) (149 )
Repayments/defaults/other   (1,176 )   (1,515 )   (2,691 )   (863 )   (3,554 )
 
Ending balance $ 48,113   $ 84,720   $ 132,833   $ 36,454   $ 169,287  
 
  Three Months Ended March 31, 2012
FFELP   FFELP     Total Private  
Stafford and Consolidation Total Education Total

(Dollars in millions)

Other Loans FFELP Loans Portfolio
Beginning balance $ 50,440 $ 87,690 $ 138,130 $ 36,290 $ 174,420
Acquisitions and originations 819 78 897 1,151 2,048
Capitalized interest and premium/discount amortization 335 398 733 245 978
Consolidations to third parties

(719)

(225)

(944)

(23)

(967)

Sales

(135)

(135)

(135)

Repayments/defaults/other

(1,232)

(1,515)

(2,747)

(931)

(3,678)

 
Ending balance $ 49,508 $ 86,426 $ 135,934 $ 36,732 $ 172,666
 
  Three Months Ended June 30, 2011
FFELP   FFELP   Total   Total Private  

 

Stafford and Consolidation FFELP Education Total

(Dollars in millions)

Other Loans Loans Loans Portfolio
Beginning balance $ 54,366 $ 91,192 $ 145,558 $ 35,966 $ 181,524
Acquisitions and originations 190 58 248 292 540
Capitalized interest and premium/discount amortization 360 370 730 330 1,060
Consolidations to third parties (730 ) (280 ) (1,010 ) (15 ) (1,025 )
Sales (192 ) (192 ) (192 )
Repayments/defaults/other   (1,170 )   (1,529 )   (2,699 )   (820 )   (3,519 )
Ending balance $ 52,824   $ 89,811   $ 142,635   $ 35,753   $ 178,388  
 
  Six Months Ended June 30, 2012

(Dollars in millions)

FFELP
Stafford and
Other

 

FFELP
Consolidation
Loans

 

Total
FFELP

 

Total Private
Education
Loans

 

Total
Portfolio

Beginning balance $ 50,440 $ 87,690 $ 138,130 $ 36,290 $ 174,420
Acquisitions and originations 2,150 573 2,723 1,492 4,215
Capitalized interest and premium/discount amortization 645 747 1,392 508 1,900
Consolidations to third parties (2,430 ) (1,260 ) (3,690 ) (42 ) (3,732 )
Sales (284 ) (284 ) (284 )
Repayments/defaults/other   (2,408 )   (3,030 )   (5,438 )   (1,794 )   (7,232 )
Ending balance $ 48,113   $ 84,720   $ 132,833   $ 36,454   $ 169,287  
 
  Six Months Ended June 30, 2011

 

(Dollars in millions)

FFELP
Stafford and
Other

 

FFELP
Consolidation
Loans

 

Total
FFELP
Loans

 

Total Private
Education
Loans

 

Total
Portfolio

Beginning balance $ 56,252 $ 92,397 $ 148,649 $ 35,656 $ 184,305
Acquisitions and originations 293 305 598 1,221 1,819
Capitalized interest and premium/discount amortization 682 741 1,423 624 2,047
Consolidations to third parties (1,581 ) (558 ) (2,139 ) (32 ) (2,171 )
Sales (381 ) (381 ) (381 )
Repayments/defaults/other   (2,441 )   (3,074 )   (5,515 )   (1,716 )   (7,231 )
Ending balance $ 52,824   $ 89,811   $ 142,635   $ 35,753   $ 178,388  
 

Private Education Loan Originations

 
Total Private Education Loan originations increased 22 percent from the year-ago quarter to $321 million in the quarter ended June 30, 2012.
 
The following table summarizes our Private Education Loan originations.
 
  Quarters Ended       Six Months Ended

(Dollars in millions)

June 30,
2012

 

March 31,
2012

 

June 30,
2011

June 30,
2012
  June 30,
2011
Private Education Loan originations $ 321 $ 1,160 $ 264 $ 1,482 $ 1,204
 

Consumer Lending Portfolio Performance

 

Private Education Loan Delinquencies and Forbearance

 
  Private Education Loan Delinquencies

June 30,
2012

 

March 31,
2012

  June 30,
2011

(Dollars in millions)

Balance   % Balance   % Balance   %
Loans in-school/grace/deferment(1) $ 6,098 $ 6,917 $ 7,216
Loans in forbearance(2) 1,368 1,372 1,430
Loans in repayment and percentage of each status:
Loans current 27,650 90.0 % 27,499 90.9 % 25,994 90.0 %
Loans delinquent 31-60 days(3) 1,058 3.4 859 2.8 963 3.4
Loans delinquent 61-90 days(3) 643 2.1 544 1.9 575 2.0
Loans delinquent greater than 90 days(3)   1,380   4.5     1,334   4.4     1,339   4.6  
 
Total Private Education Loans in repayment   30,731   100 %   30,236   100 %   28,871   100 %
 
Total Private Education Loans, gross 38,197 38,525 37,517
Private Education Loan unamortized discount   (834 )   (853 )   (861 )
 
Total Private Education Loans 37,363 37,672 36,656
Private Education Loan receivable for partially charged-off loans 1,277 1,250 1,140
Private Education Loan allowance for losses   (2,186 )   (2,190 )   (2,043 )
 
Private Education Loans, net $ 36,454   $ 36,732   $ 35,753  
 
Percentage of Private Education Loans in repayment 80.5 % 78.5 % 77.0 %
 
Delinquencies as a percentage of Private Education Loans in repayment 10.0 % 9.1 % 10.0 %
 
Loans in forbearance as a percentage of loans in repayment and forbearance 4.3 % 4.3 % 4.7 %
 
Loans in repayment greater than 12 months as a percentage of loans in repayment(4) 74.3 % 74.1 % 66.0 %
 

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(1)   Deferment includes borrowers who have returned to school or are engaged in other permitted educational activities and are not yet required to make payments on their loans, e.g., residency periods for medical students or a grace period for bar exam preparation.
(2) Loans for borrowers who have requested extension of grace period generally during employment transition or who have temporarily ceased making payments due to hardship or other factors, consistent with established loan program servicing policies and procedures.
(3) The period of delinquency is based on the number of days scheduled payments are contractually past due.
(4) Based on number of months in an active repayment status for which a scheduled monthly payment was due.
 

Allowance for Private Education Loan Losses

 
The following table summarizes changes in the allowance for Private Education Loan losses.
                   
Quarters Ended Six Months Ended
June 30, March 31, June 30, June 30, June 30,

(Dollars in millions)

2012 2012 2011 2012 2011
Allowance at beginning of period $ 2,190 $ 2,171 $ 2,034 $ 2,171 $ 2,022
Provisions for Private Education Loan losses 225 235 265 460 540
Charge-offs (235 ) (224 ) (263 ) (459 ) (537 )
Reclassification of interest reserve   6     8     7     14     18  
 
Allowance at end of period $ 2,186   $ 2,190   $ 2,043   $ 2,186   $ 2,043  
 
Charge-offs as a percentage of average loans in repayment (annualized) 3.09 % 2.96 % 3.71 % 3.03 % 3.82 %
Charge-offs as a percentage of average loans in repayment and forbearance (annualized) 2.96 % 2.84 % 3.54 % 2.90 % 3.65 %
Allowance as a percentage of the ending total loan balance 5.5 % 5.5 % 5.3 % 5.5 % 5.3 %
Allowance as a percentage of ending loans in repayment 7.1 % 7.2 % 7.1 % 7.1 % 7.1 %
Average coverage of charge-offs (annualized) 2.3 2.4 1.9 2.4 1.9
Ending total loans(1) $ 39,474 $ 39,775 $ 38,657 $ 39,474 $ 38,657
Average loans in repayment $ 30,533 $ 30,378 $ 28,489 $ 30,456 $ 28,309
Ending loans in repayment $ 30,731 $ 30,236 $ 28,871 $ 30,731 $ 28,871

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

 
 

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

 
  June 30, 2012   March 31, 2012   June 30, 2011

(Dollars in millions)

Traditional

    Non-

Traditional

 

Total

Traditional

  Non-

Traditional

 

Total

Traditional

  Non-

Traditional

 

Total

Ending total loans(1) $ 35,529 $ 3,945 $ 39,474 $ 35,755 $ 4,020 $ 39,775 $ 34,419 $ 4,238 $ 38,657
Ending loans in repayment 28,075 2,656 30,731 27,588 2,648 30,236 26,134 2,737 28,871
Private Education Loan allowance for loan losses 1,589 597 2,186 1,587 603 2,190 1,363 680 2,043
Charge-offs as a percentage of average loans in repayment (annualized) 2.46 % 9.76 %