Sallie Mae Reports Third-Quarter 2012 Financial Results

Loan Originations Increase 25 Percent

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

“The quarter further confirms the rebound of our private credit business,” said Albert L. Lord, vice chairman and CEO. “While our balance sheet and earnings quality grow, so do our future prospects.”

For the third-quarter 2012, GAAP net income was $188 million ($.39 diluted earnings per share), compared with net loss of $47 million ($.10 diluted loss per share) for the year-ago quarter.

Core earnings for the quarter were $277 million ($.58 diluted earnings per share), compared with $188 million ($.36 diluted earnings per share) in the year-ago quarter. Earnings improvement was primarily due to a $139 million lower loan loss provision largely attributable to the adoption of new accounting guidance for troubled debt restructurings (TDRs) in the year-ago quarter. Also, debt repurchase gains were $44 million higher and operating expenses were $41 million lower. Net interest income was $40 million lower primarily due to higher funding costs which were partly due to refinancing debt into longer-term liabilities and lower federally guaranteed student loan balances.

Sallie Mae 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. Third-quarter 2012 and 2011 GAAP results included losses of $140 million and $371 million, respectively, resulting from derivative accounting treatment which is excluded from core earnings results.

Consumer Lending

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

Quarterly core earnings improved to $63 million from a loss of $27 million in 2011, driven primarily by lower loan loss provision.

Private education loan portfolio results vs. third-quarter 2011 included:

  • Loan originations of $1.3 billion, up 25 percent.
  • Provision for private education loan losses of $252 million, down from $384 million, primarily due to an additional $124 million of provision attributable to last year’s adoption of new accounting guidance for TDRs.
  • Delinquencies of 90 days or more of 5.3 percent, up from 5.0 percent of loans in repayment.
  • Loans in forbearance of 3.2 percent, down from 4.5 percent of loans in repayment and forbearance.
  • Annualized charge-off rate of 3.23 percent, down from 3.74 percent of loans in repayment.
  • Core net interest margin, before loan loss provision, of 4.05 percent, up from 4.03 percent.
  • The portfolio balance, net of loan loss allowance, grew to $37 billion from $36 billion.

Business Services

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

Business services core earnings were $131 million in third-quarter 2012, compared with $139 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 $94 million in third-quarter 2012, compared with the year-ago quarter’s $107 million. The decrease was primarily due to lower net interest income in the current quarter resulting from higher funding costs and the declining balance of the FFELP loan portfolio.

Year-to-date Sept. 30, 2012, the company acquired $3.1 billion of FFELP loans. At Sept. 30, 2012, the company held $128 billion of FFELP loans compared with $141 billion at Sept. 30, 2011.

Operating Expenses

Third-quarter operating expenses were $244 million in 2012, down from $285 million in the year-ago quarter.

Funding and Liquidity

During third-quarter 2012, the company issued $2.6 billion in FFELP asset-backed securities (ABS), $640 million in private education loan ABS, and $800 million of unsecured bonds.

Shareholder Distributions

In third-quarter 2012, Sallie Mae paid a common stock dividend of $0.125 per share and repurchased 7.6 million shares of common stock for $121 million. Year-to-date Sept. 30, 2012, Sallie Mae has repurchased 48.2 million common shares for $730 million. At Sept. 30, 2012, $170 million was available for additional common share repurchases.

Guidance

The company expects 2012 results to be 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 nine months ended Sept. 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, Oct. 18, 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 34705817 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 Nov. 1, by dialing (855) 859-2056 (USA and Canada) or (404) 537-3406 (international) with access code 34705817.

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 and second-quarter Forms 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 529 college savings plans, Upromise rewards, 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     Nine Months Ended

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

September 30,
2012
    June 30,
2012
    September 30,
2011
September 30,
2012
    September 30,
2011
 
GAAP Basis
Net income (loss) attributable to SLM Corporation $ 188 $ 292 $ (47 ) $ 591 $ 122
Diluted earnings (loss) per common share attributable to SLM Corporation $ .39 $ .59 $ (.10 ) $ 1.18 $ .21
Weighted average shares used to compute diluted earnings per share 471 488 511 490 526
Return on assets .42 % .64 % (.10 )% .43 % .09 %
 
“Core Earnings” Basis(1)
“Core Earnings” attributable to SLM Corporation $ 277 $ 243 $ 188 $ 804 $ 708
“Core Earnings” diluted earnings per common share attributable to SLM Corporation $ .58 $ .49 $ .36 $ 1.61 $ 1.32
Weighted average shares used to compute diluted earnings per share 471 488 517 490 526
“Core Earnings” return on assets .62 % .53 % .39 % .59 % .49 %
 
Other Operating Statistics
Ending FFELP Loans, net $ 127,747 $ 132,833 $ 140,659 $ 127,747 $ 140,659
Ending Private Education Loans, net   37,101     36,454     36,157     37,101     36,157  
 
Ending total student loans, net $ 164,848   $ 169,287   $ 176,816   $ 164,848   $ 176,816  
 
Average student loans $ 167,166 $ 172,436 $ 178,620 $ 171,499 $ 181,242

 

 

(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, 2012

vs. June 30, 2012

   

September 30, 2012 vs.

September 30, 2011

Quarters Ended Increase (Decrease) Increase (Decrease)
September 30,     June 30,     September 30,        

(In millions, except per share data)

2012 2012 2011 $ % $ %
Interest income:
FFELP Loans $ 840 $ 777 $ 858 $ 63 8 % $ (18 ) (2 )%
Private Education Loans 615 616 609 (1 ) 6 1
Other loans 4 4 5 (1 ) (20 )
Cash and investments   5     6     4     (1 ) (17 )   1   25  
Total interest income 1,464 1,403 1,476 61 4 (12 ) (1 )
Total interest expense   645     657     591     (12 ) (2 )   54   9  
Net interest income 819 746 885 73 10 (66 ) (7 )
Less: provisions for loan losses   270     243     409     27   11     (139 ) (34 )
Net interest income after provisions for loan losses 549 503 476 46 9 73 15
Other income (loss):

Gains (losses) on derivative and hedging activities, net

(233 ) 6 (480 ) (239 ) (3,983 ) 247 (51 )
Servicing revenue 94 92 95 2 2 (1 ) (1 )
Contingency revenue 85 87 84 (2 ) (2 ) 1 1
Gains on debt repurchases 44 20 24 120 44 100
Other income (loss)   3     (2 )   1     5   250     2   200  
Total other income (loss) (7 ) 203 (300 ) (210 ) (103 ) 293 (98 )
Expenses:
Operating expenses 244 239 285 5 2 (41 ) (14 )
Goodwill and acquired intangible assets impairment and amortization expense 5 5 6 (1 ) (17 )
Restructuring expenses   2     3     1     (1 ) (33 )   1   100  
Total expenses 251 247 292 4 2 (41 ) (14 )
Income (loss) from continuing operations before income tax expense (benefit) 291 459 (116 ) (168 ) (37 ) 407 351
Income tax expense (benefit)   104     168     (46 )   (64 ) (38 )   150   326  
Net income (loss) from continuing operations 187 291 (70 ) (104 ) (36 ) 257 367
Income from discontinued operations, net of tax expense           23           (23 ) (100 )
Net income (loss) 187 291 (47 ) (104 ) (36 ) 234 498
Less: net loss attributable to noncontrolling interest   (1 )   (1 )             (1 ) (100 )
Net income (loss) attributable to SLM Corporation 188 292 (47 ) (104 ) (36 ) 235 500
Preferred stock dividends   5     5     5              
Net income (loss) attributable to SLM Corporation common stock $ 183   $ 287   $ (52 ) $ (104 ) (36 )% $ 235   452 %
 
Basic earnings (loss) per common share attributable to SLM Corporation:
Continuing operations $ .39 $ .59 $ (.14 ) $ (.20 ) (34 )% $ .53 379 %
Discontinued operations           .04           (.04 ) (100 )
Total $ .39   $ .59   $ (.10 ) $ (.20 ) (34 )% $ .49   490 %
Diluted earnings (loss) per common share attributable to SLM Corporation:
Continuing operations $ .39 $ .59 $ (.14 ) $ (.20 ) (34 )% $ .53 379 %
Discontinued operations           .04           (.04 ) (100 )
Total $ .39   $ .59   $ (.10 ) $ (.20 ) (34 )% $ .49   490 %
Dividends per common share attributable to SLM Corporation $ .125   $ .125   $ .10   $   % $ .025   25 %
 
               

 

Nine Months

Ended

September 30,

Increase

(Decrease)

 

(In millions, except per share data)

2012 2011 $ %
Interest income:
FFELP Loans $ 2,459 $ 2,584 $ (125 ) (5 )%
Private Education Loans 1,856 1,813 43 2
Other loans 13 17 (4 ) (24 )
Cash and investments   16     14     2   14  
Total interest income 4,344 4,428 (84 ) (2 )
Total interest expense   1,968     1,777     191   11  
Net interest income 2,376 2,651 (275 ) (10 )
Less: provisions for loan losses   766     1,003     (237 ) (24 )
Net interest income after provisions for loan losses 1,610 1,648 (38 ) (2 )
Other income (loss):
Gains (losses) on derivative and hedging activities, net (600 ) (1,231 ) 631 (51 )
Servicing revenue 283 286 (3 ) (1 )
Contingency revenue 261 248 13 5
Gains on debt repurchases 102 38 64 168
Other income   40     25     15   60  
Total other income (loss) 86 (634 ) 720 114
Expenses:
Operating expenses 743 857 (114 ) (13 )
Goodwill and acquired intangible assets impairment and amortization expense 14 18 (4 ) (22 )
Restructuring expenses   11     6     5   83  
Total expenses 768 881 (113 ) (13 )
Income from continuing operations before income tax expense 928 133 795 598
Income tax expense   339     44     295   670  
Net income from continuing operations 589 89 500 562
Income from discontinued operations, net of tax expense       33     (33 ) (100 )
Net income 589 122 467 383
Less: net loss attributable to noncontrolling interest   (2 )       (2 ) (100 )
Net income attributable to SLM Corporation 591 122 469 384
Preferred stock dividends   15     13     2   15  
Net income attributable to common stock $ 576   $ 109   $ 467   428 %
 
Basic earnings per common share attributable to SLM Corporation:
Continuing operations $ 1.19 $ .15 $ 1.04 693 %
Discontinued operations       .06     (.06 ) (100 )
Total $ 1.19   $ .21   $ .98   467 %
Diluted earnings per common share attributable to SLM Corporation:
Continuing operations $ 1.18 $ .15 $ 1.03 687 %
Discontinued operations       .06     (.06 ) (100 )
Total $ 1.18   $ .21   $ .97   462 %
Dividends per common share attributable to SLM Corporation $ .375   $ .20   $ .175   88 %
 
           

GAAP Balance Sheet (Unaudited)

 
 

(In millions, except share and per share data)

September 30,
2012
June 30,
2012
September 30,
2011
 
Assets
FFELP Loans (net of allowance for losses of $166; $173 and $189, respectively) $ 127,747 $ 132,833 $ 140,659
Private Education Loans (net of allowance for losses of $2,196; $2,186 and $2,167, respectively) 37,101 36,454 36,157
Cash and investments 4,283 4,123 4,950
Restricted cash and investments 6,331 6,717 5,847
Goodwill and acquired intangible assets, net 462 467 484
Other assets   8,279     8,485     9,447  
 
Total assets $ 184,203   $ 189,079   $ 197,544  
 
 
Liabilities
Short-term borrowings $ 20,457 $ 24,493 $ 31,745
Long-term borrowings 154,786 155,476 156,810
Other liabilities   4,014     4,172     4,207  
 
Total liabilities   179,257     184,141     192,762  
 
 
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: 534 million; 533 million and 529 million shares, respectively, issued 107 107 106
Additional paid-in capital 4,219 4,196 4,127
Accumulated other comprehensive loss, net of tax benefit (8 ) (10 ) (20 )
Retained earnings   1,165     1,040     315  
 
Total SLM Corporation stockholders’ equity before treasury stock 6,048 5,898 5,093
Less: Common stock held in treasury: 72 million; 63 million and 20 million shares, respectively   ( 1,108 )   (967 )   (319 )
 
Total SLM Corporation stockholders’ equity 4,940 4,931 4,774
Noncontrolling interest   6     7     8  
 
Total equity   4,946     4,938     4,782  
 
Total liabilities and equity $ 184,203   $ 189,079   $ 197,544  
 
 

Consolidated Earnings Summary — GAAP basis

 

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

 
For the three months ended September 30, 2012, net income was $188 million, or $.39 diluted earnings per common share, compared with a net loss of $47 million, or $.10 diluted loss per common share, for the three months ended September 30, 2011. The increase in net income was primarily due to a $247 million decrease in net losses on derivative and hedging activities, a $139 million decrease in provisions for loan losses, a $41 million decrease in operating expenses, and a $44 million increase in gains on debt repurchases, which were partially offset by a $66 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 $66 million primarily due to a $12 billion decline in average FFELP Loans outstanding and higher funding costs, which were partly due to refinancing debt into longer term liabilities. 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 (“SDCL”) which expired in June 2012. (See “FFELP Loans Segment” for further discussion.)
  • Provisions for loan losses decreased by $139 million, primarily as a result of $124 million of additional provision included in the year-ago quarter attributable to the cumulative effect of the implementation of new accounting guidance for troubled debt restructurings (“TDRs”) (see “Consumer Lending Segment — Private Education Loan Provision for Loan Losses and Charge-offs” for a further discussion). The remaining decrease was a result of overall improvements in credit quality and delinquency and charge-off trends.
  • Gains (losses) on derivative and hedging activities resulted in a net loss of $233 million in the current quarter compared with a net loss of $480 million in the year-ago quarter. The primary factors affecting the change were interest rate and foreign currency fluctuations, which primarily affected the valuations of our Floor Income Contracts, basis swaps and foreign currency hedges during each period. Valuations of derivative instruments vary based upon many factors including changes in interest rates, credit risk, foreign currency fluctuations and other market factors. As a result, net gains and losses on derivative and hedging activities may continue to vary significantly in future periods.
  • Gains on debt repurchases increased $44 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 $41 million primarily due to the current-year benefit of the cost-cutting efforts we implemented throughout 2011.
  • Net income from discontinued operations decreased $23 million primarily due to the sale of our Purchased Paper—Non-Mortgage portfolio in third-quarter 2011.
  • The effective tax rates for the third quarters of 2012 and 2011 were 36 percent and 40 percent, respectively. The movement in the effective tax rate was primarily driven by the impact of significantly higher reported pre-tax income in the current period.
 
In addition, we repurchased 7.6 million shares of our common stock during the third-quarter 2012 as part of our ongoing common share repurchase program. Primarily as a result of these ongoing repurchases, our average outstanding diluted shares decreased by 40 million common shares.
 

Nine Months Ended September 30, 2012 Compared with Nine Months Ended September 30, 2011

 
For the nine months ended September 30, 2012 and 2011, net income was $591 million, or $1.18 diluted earnings per common share, and $122 million, or $.21 diluted earnings per common share, respectively. The increase in net income was primarily due to a $631 million decrease in net losses on derivative and hedging activities, a $237 million decrease in provisions for loan losses, a $114 million decrease in operating expenses and a $64 million increase in gains on debt repurchases, which more than offset the $275 million decline in net interest income.
 
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 declined by $275 million primarily due to a $10.5 billion reduction in average FFELP Loans outstanding, higher cost of funds, which were partly due to refinancing debt into longer term liabilities, as well as the impact from the acceleration of $50 million of non-cash loan premium amortization in the second-quarter 2012 related to SDCL (see “FFELP Loans Segment” for further discussion). The decline in FFELP Loans outstanding was driven by normal loan amortization as well as loans that were consolidated under SDCL.
  • Provisions for loan losses decreased by $237 million. Excluding the effect of $124 million of additional provision in the nine months ended September 30, 2011, related to the implementation of new accounting guidance for TDRs referred to above (see also “Consumer Lending Segment — Private Education Loan Provision for Loan Losses and Charge-offs” for further discussion), the provision for loan losses decreased by $113 million as a result of overall improvements in credit quality and delinquency and charge-off trends.
  • Net losses on derivative and hedging activities decreased by $631 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 derivative and hedging activities may continue to vary significantly in future periods.
  • Gains on debt repurchases increased $64 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 $114 million primarily due to the current-year benefit of the cost-cutting efforts we implemented throughout 2011.
  • Net income from discontinued operations decreased $33 million due to the sale of our Purchased Paper—Non-Mortgage portfolio in third-quarter 2011.
  • The effective tax rates for the nine months ended September 30, 2012 and 2011 were 37 percent and 33 percent, respectively. The movement in the effective tax rate was primarily driven by the impact of significantly higher reported pre-tax income in the current period.
 
In addition, we repurchased 48.2 million shares of our common stock during the nine months ended September 30, 2012, as part of our ongoing common share repurchase program. Primarily as a result of these ongoing repurchases, our average outstanding diluted shares decreased by 36 million common 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 September 30, 2012

(Dollars in millions)

Consumer
Lending
  Business
Services
  FFELP
Loans
  Other  

Eliminations(1)

  Total
“Core
Earnings”
  Adjustments   Total
GAAP
Reclassifications   Additions/
(Subtractions)
  Total
Adjustments(2)
Interest income:
Student loans $ 615 $ $ 712 $ $ $ 1,327 $ 206 $ (78 ) $ 128 $ 1,455
Other loans 4 4 4
Cash and investments   1   3     3       (2 )   5                 5  
 
Total interest income 616 3 715 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) 407 3 316 (8 ) 718 180 (79 ) 101 819
Less: provisions for loan losses   252       18           270                 270  
 
Net interest income (loss) after provisions for loan losses 155 3 298 (8 ) 448 180 (79 ) 101 549
Servicing revenue 12 224 22 (164 ) 94 94
Contingency revenue 85 85 85
Gains on debt repurchases 44 44 44
Other income (loss)     7       4         11     (180 )   (61

) (5)

  (241 )   (230 )
 
Total other income (loss) 12 316 22 48 (164 ) 234 (180 ) (61 ) (241 ) (7 )
Expenses:
Direct operating expenses 67 112 171 3 (164 ) 189 189
Overhead expenses           55         55                 55  
 
Operating expenses 67 112 171 58 (164 ) 244 244
Goodwill and acquired intangible assets impairment and amortization 5 5 5
Restructuring expenses   1   1               2                 2  
 
Total expenses   68   113     171   58     (164 )   246         5     5     251  
 
Income (loss) from continuing operations, before income tax expense (benefit) 99 206 149 (18 ) 436 (145 ) (145 ) 291
Income tax expense (benefit)(3)   36   76     55   (7 )       160         (56 )   (56 )   104  
 
Net income (loss) from continuing operations 63 130 94 (11 ) 276 (89 ) (89 ) 187
Income from discontinued operations, net of tax expense                                    
 
Net income (loss) 63 130 94 (11 ) 276 (89 ) (89 ) 187
Less: net loss attributable to noncontrolling interest     (1 )             (1 )               (1 )
 
Net income (loss) attributable to SLM Corporation $ 63 $ 131   $ 94 $ (11 ) $   $ 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

(Dollars in millions)

Net Impact of
Derivative
Accounting
    Net Impact of
Goodwill and
Acquired
Intangibles
    Total
Net interest income after provisions for loan losses $ 101 $ $ 101
Total other loss (241 ) (241 )
Goodwill and acquired intangible assets impairment and amortization       5     5  
 
Total “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 on derivative and hedging activities, net” as well as the remaining portion of the $(9) million of “other derivative accounting adjustments.”
 
 
Quarter Ended June 30, 2012

(Dollars in millions)

Consumer
Lending
  Business
Services
  FFELP
Loans
  Other   Eliminations(1)   Total
“Core
Earnings”
  Adjustments   Total
GAAP
Reclassifications   Additions/
(Subtractions)
  Total
Adjustments(2)
Interest income:
Student loans $ 616 $ $ 652 $ $ $ 1,268 $ 223 $ (98 ) $ 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 ) 1,278 223 (98 ) 125 1,403
Total interest expense   206       409   10     (2 )   623     34         34     657  
 
Net interest income (loss) 412 2 246 (5 ) 655 189 (98 ) 91 746
Less: provisions for loan losses   225       18           243                 243  
 
Net interest income (loss) after provisions for loan losses 187 2 228 (5 ) 412 189 (98 ) 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     (189 )  

180

(4)

 

  (9 )   4  
 
Total other income (loss) 12 325 22 25 (172 ) 212 (189 ) 180 (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 5
Restructuring expenses   1   2               3                 3  
 
Total expenses   65   111     181   57     (172 )   242         5     5     247  
 
Income (loss) from continuing operations, before income tax expense (benefit) 134 216 69 (37 ) 382 77 77 459
Income tax expense (benefit)(3)   49   79     25   (13 )       140         28     28     168  
 
Net income (loss) from continuing operations 85 137 44 (24 ) 242 49 49 291
Income from discontinued operations, net of tax expense                                    
 
Net income (loss) 85 137 44 (24 ) 242 49 49 291
Less: net loss attributable to noncontrolling interest     (1 )             (1 )               (1 )
 
Net income (loss) attributable to SLM Corporation $ 85 $ 138   $ 44 $ (24 ) $   $ 243   $   $ 49   $ 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.
 

(4)

Represents the $194 million of “unrealized gains on derivative and hedging activities, net” as well as the $14 million of “other derivative accounting adjustments.”
 
  Quarter Ended September 30, 2011

(Dollars in millions)

Consumer
Lending
  Business
Services
  FFELP
Loans
  Other   Eliminations(1)   Total
“Core
Earnings”
  Adjustments   Total
GAAP
Reclassifications   Additions/
(Subtractions)
  Total
Adjustments(2)
Interest income:
Student loans $ 609 $ $ 711 $ $ $ 1,320 $ 246 $ (99 ) $ 147 $ 1,467
Other loans 5 5 5
Cash and investments   2     3   1   1     (3 )   4               4  
 
Total interest income 611 3 712 6 (3 ) 1,329 246 (99 ) 147 1,476
Total interest expense   204       354   16     (3 )   571   17    

3

(4)

  20     591  
 
Net interest income (loss) 407 3 358 (10 ) 758 229 (102 ) 127 885
Less: provisions for loan losses   384       21   4         409               409  
 
Net interest income (loss) after provisions for loan losses 23 3 337 (14 ) 349 229 (102 ) 127 476
Servicing revenue 16 242 20 (183 ) 95 95
Contingency revenue 84 84 84
Gains on debt repurchases

 

Other income (loss)       11     8         19   (229 )   (269 ) (5)   (498 )   (479 )
 
Total other income (loss) 16 337 20 8 (183 ) 198 (229 ) (269 ) (498 ) (300 )
Expenses:
Direct operating expenses 82 119 188 2 (183 ) 208 208
Overhead expenses           77         77               77  
 
Operating expenses 82 119 188 79 (183 ) 285 285
Goodwill and acquired intangible assets impairment and amortization 6 6 6
Restructuring expenses       1             1               1  
 
Total expenses   82     120   188   79     (183 )   286       6     6     292  
 
Income (loss) from continuing operations, before income tax expense (benefit) (43 ) 220 169 (85 ) 261 (377 ) (377 ) (116 )
Income tax expense (benefit)(3)   (16 )   81   62   (31 )       96       (142 )   (142 )   (46 )
 
Net income (loss) from continuing operations (27 ) 139 107 (54 ) 165 (235 ) (235 ) (70 )
Income from discontinued operations, net of tax expense           23         23               23  
 
Net income (loss) $ (27 ) $ 139 $ 107 $ (31 ) $   $ 188 $   $ (235 ) $ (235 ) $ (47 )
 
 

(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, 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 $ 127 $ $ 127
Total other loss (498 ) (498 )
Goodwill and acquired intangible assets impairment and amortization       6     6  
 
Total “Core Earnings” adjustments to GAAP $ (371 ) $ (6 ) (377 )
 
Income tax benefit   (142 )
 
Net loss $ (235 )
 
 

(3)

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

(4)

Represents a portion of the $20 million of “other derivative accounting adjustments.”
 

(5)

Represents the $252 million of “unrealized gains on derivative and hedging activities, net” as well as the remaining portion of the $20 million of “other derivative accounting adjustments.”
 
 
Nine Months Ended September 30, 2012

(Dollars in millions)

Consumer
Lending
  Business
Services
  FFELP
Loans
  Other   Eliminations(1)   Total
“Core
Earnings”
  Adjustments   Total
GAAP
Reclassifications   Additions/
(Subtractions)
  Total
Adjustments(2)
Interest income:
Student loans $ 1,856 $ $ 2,090 $ $ $ 3,946 $ 643 $ (274 ) $ 369 $ 4,315
Other loans 13 13 13
Cash and investments   6   7     8   2     (7 )   16                 16  
 
Total interest income 1,862 7 2,098 15 (7 ) 3,975 643 (274 ) 369 4,344
Total interest expense   618       1,231   28     (7 )   1,870     95    

3

(4)

  98     1,968  
 
Net interest income (loss) 1,244 7 867 (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 532 7 813 (13 ) 1,339 548 (277 ) 271 1,610
Servicing revenue 35 691 69 (512 ) 283 283
Contingency revenue 261 261 261
Gains on debt repurchases 102 102 102
Other income (loss)     24       11         35     (548 )   (47 ) (5)   (595 )   (560 )
 
Total other income (loss) 35 976 69 113 (512 ) 681 (548 ) (47 ) (595 ) 86
Expenses:
Direct operating expenses 199 342 537 6 (512 ) 572 572
Overhead expenses           171         171                 171  
 
Operating expenses 199 342 537 177 (512 ) 743 743
Goodwill and acquired intangible assets impairment and amortization 14 14 14
Restructuring expenses   3   3       5         11                 11  
 
Total expenses   202   345     537   182     (512 )   754         14     14     768  
 
Income (loss) from continuing operations, before income tax expense (benefit) 365 638 345 (82 ) 1,266 (338 ) (338 ) 928
Income tax expense (benefit)(3)   133   233     127   (29 )       464         (125 )   (125 )   339  
 
Net income (loss) from continuing operations 232 405 218 (53 ) 802 (213 ) (213 ) 589
Income from discontinued operations, net of tax expense                                    
 
Net income (loss) 232 405 218 (53 ) 802 (213 ) (213 ) 589
Less: net loss attributable to noncontrolling interest     (2 )             (2 )               (2 )
 
Net income (loss) attributable to SLM Corporation $ 232 $ 407   $ 218 $ (53 ) $   $ 804   $   $ (213 ) $ (213 ) $ 591  
 
 

(1)

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

(2)

“Core Earnings” adjustments to GAAP:
 
    Nine Months Ended September 30, 2012
 

(Dollars in millions)

Net Impact of
Derivative
Accounting

    Net Impact of
Goodwill and
Acquired
Intangibles
    Total
Net interest income after provisions for loan losses $ 271 $ $ 271
Total other loss (595 ) (595 )
Goodwill and acquired intangible assets impairment and amortization       14     14  
 
Total “Core Earnings” adjustments to GAAP $ (324 ) $ (14 ) (338 )
 
Income tax benefit   (125 )
 
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 on derivative and hedging activities, net” as well as the remaining portion of the $2 million of “other derivative accounting adjustments.”
 
 
Nine Months Ended September 30, 2011

(Dollars in millions)

Consumer
Lending
  Business
Services
  FFELP
Loans
  Other   Eliminations(1)   Total
“Core
Earnings”
  Adjustments   Total
GAAP
Reclassifications   Additions/
(Subtractions)
  Total
Adjustments(2)
Interest income:
Student loans $ 1,813 $ $ 2,168 $ $ $ 3,981 $ 674 $ (258 ) $ 416 $ 4,397
Other loans 17 17 17
Cash and investments   7   8   3   4     (8 )   14               14  
 
Total interest income 1,820 8 2,171 21 (8 ) 4,012 674 (258 ) 416 4,428
Total interest expense   603     1,080   46     (8 )   1,721   51    

5

(4)

  56     1,777  
 
Net interest income (loss) 1,217 8 1,091 (25 ) 2,291 623 (263 ) 360 2,651
Less: provisions for loan losses   924     67   12         1,003               1,003  
 
Net interest income (loss) after provisions for loan losses 293 8 1,024 (37 ) 1,288 623 (263 ) 360 1,648
Servicing revenue 48 731 66 (559 ) 286 286
Contingency revenue 248 248 248
Gains on debt repurchases 64 64 (26 ) (26 ) 38
Other income (loss)     31     14         45   (597 )   (654

) (5)

  (1,251 )   (1,206 )
 
Total other income (loss) 48 1,010 66 78 (559 ) 643 (623 ) (654 ) (1,277 ) (634 )
Expenses:
Direct operating expenses 237 368 575 10 (559 ) 631 631
Overhead expenses         226         226               226  
 
Operating expenses 237 368 575 236 (559 ) 857 857
Goodwill and acquired intangible assets impairment and amortization 18 18 18
Restructuring expenses   2   2   1   1         6               6  
 
Total expenses   239   370   576   237     (559 )   863       18     18     881  
 
Income (loss) from continuing operations, before income tax expense (benefit) 102 648 514 (196 ) 1,068 (935 ) (935 ) 133
Income tax expense (benefit)(3)   37   238   189   (71 )       393       (349 )   (349 )   44  
 
Net income (loss) from continuing operations 65 410 325 (125 ) 675 (586 ) (586 ) 89
Income from discontinued operations, net of tax expense         33         33               33  
 
Net income (loss) $ 65 $ 410 $ 325 $ (92 ) $   $ 708 $   $ (586 ) $ (586 ) $ 122  
 
 

(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, 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 $ 360 $ $ 360
Total other loss (1,277 ) (1,277 )
Goodwill and acquired intangible assets impairment and amortization       18     18  
 
Total “Core Earnings” adjustments to GAAP $ (917 ) $ (18 ) (935 )
 
Income tax benefit   (349 )
 
Net loss $ (586 )
 
 

(3)

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

(4)

Represents a portion of the $26 million of “other derivative accounting adjustments.”
 

(5)

Represents the $633 million of “unrealized gains on derivative and hedging activities, net” as well as the remaining portion of the $26 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 (loss) 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,
2012
    June 30,
2012
    September 30,
2011
September 30,
2012
    September 30,
2011
“Core Earnings” adjustments to GAAP:
Net impact of derivative accounting $ (140 ) $ 82 $ (371 ) $ (324 ) $ (917 )
Net impact of goodwill and acquired intangible assets (5 ) (5 ) (6 ) (14 ) (18 )
Net tax effect   56     (28 )   142     125     349  
 
Total “Core Earnings” adjustments to GAAP $ (89 ) $ 49   $ (235 ) $ (213 ) $ (586 )
 
 
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,
2012
    June 30,
2012
    September 30,
2011
September 30,
2012
    September 30,
2011
“Core Earnings” derivative adjustments:
Gains (losses) on derivative and hedging activities, net, included in other income(1) $ (233 ) $ 6 $ (480 ) $ (600 ) $ (1,231 )
Plus: Realized losses on derivative and hedging activities, net(1)   180     188     228     548     598  
 
Unrealized gains (losses) on derivative and hedging activities, net(2) (53 ) 194 (252 ) (52 ) (633 )
Amortization of net premiums on Floor Income Contracts in net interest income for “Core Earnings” (78 ) (98 ) (99 ) (274 ) (258 )
Other derivative accounting adjustments(3)   (9 )   (14 )   (20 )   2     (26 )
 
Total net impact of derivative accounting(4) $ (140 ) $ 82   $ (371 ) $ (324 ) $ (917 )
 
     
(1)

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

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

(Dollars in millions)

September 30,
2012
    June 31,
2012
    September 30,
2011
September 30,
2012
    September 30,
2011
Floor Income Contracts $ (12 ) $ 50 $ (356 ) $ 174 $ (482 )
Basis swaps (7 ) (26 ) 57 (55 ) 76
Foreign currency hedges (22 ) 172 43 (144 ) (261 )
Other   (12 )   (2 )   4     (27 )   34  
 
Total unrealized gains (losses) on derivative and hedging activities, net $ (53 ) $ 194   $ (252 ) $ (52 ) $ (633 )
 
     

(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,
2012
    June 30,
2012
    September 30,
2011
September 30,
2012
    September 30,
2011
Reclassification of realized gains (losses) on derivative and hedging activities:
Net settlement expense on Floor Income Contracts reclassified to net interest income $ (206 ) $ (223 ) $ (246 ) $ (643 ) $ (674 )
Net settlement income on interest rate swaps reclassified to net interest income 26 34 17 95 51
Foreign exchange derivative gains 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 $ (180 ) $ (188 ) $ (228 ) $ (548 ) $ (598 )
 
 

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

 
As of September 30, 2012, derivative accounting has reduced GAAP equity by approximately $1.2 billion as a result of cumulative net unrealized losses (after tax) recognized under GAAP, but not in “Core Earnings.” The following table rolls forward the cumulative impact to GAAP equity due to these unrealized after tax net losses related to derivative accounting.
 
       
Quarters Ended Nine Months Ended

(Dollars in millions)

September 30,
2012
    June 30,
2012
    September 30,
2011
September 30,
2012
    September 30,
2011
Beginning impact of derivative accounting on GAAP equity $ (1,098 ) $ (1,149 ) $ (1,009 ) $ (977 ) $ (676 )
Net impact of net unrealized gains (losses) under derivative accounting(1)   (85 )   51     (223 )   (206 )   (556 )
 
Ending impact of derivative accounting on GAAP equity $ (1,183 ) $ (1,098 ) $ (1,232 ) $ (1,183 ) $ (1,232 )
 
 
(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,
2012
    June 31,
2012
    September 30,
2011
September 30,
2012
    September 30,
2011
Total pre-tax net impact of derivative accounting recognized in net income(a) $ (140 ) $ 82 $ (371 ) $ (324 ) $ (917 )
Tax impact of derivative accounting adjustments recognized in net income 53 (30 ) 139 112 338
Change in unrealized gain (losses) on derivatives, net of tax recognized in other comprehensive income   2     (1 )   9     6     23  
 
Net impact of net unrealized gains (losses) under derivative accounting $ (85 ) $ 51   $ (223 ) $ (206 ) $ (556 )
 
 

(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, 2012, the remaining amortization term of the net floor premiums was approximately 3.75 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.
 
   
As of

(Dollars in millions)

September 30,
2012
    June 30,
2012
    September 30,
2011
Unamortized net Floor premiums (net of tax) $ (600 ) $ (650 ) $ (834 )
 
 
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 acquired intangible asset adjustments.

 
             
Quarters Ended Nine Months Ended

(Dollars in millions)

September 30,
2012
    June 30,
2012
    September 30,
2011
September 30,
2012
    September 30,
2011
 
“Core Earnings” goodwill and acquired intangible asset adjustments(1) $ (5 ) $ (5 ) $ (6 ) $ (14 ) $ (18 )
 
           

(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 shows “Core Earnings” results for our Consumer Lending segment.

 
 
 

Quarters Ended

 

% Increase (Decrease)

 

Nine Months Ended

  % Increase

(Decrease)

(Dollars in millions)

Sept. 30,

2012

 

June 30,

2012

 

Sept. 30,

2011

Sept. 30, 2012

vs.

June 30, 2012

 

Sept. 30, 2012

vs.

Sept. 30, 2011

Sept. 30,

2012

 

Sept. 30,

2011

Sept. 30, 2012

vs.

Sept. 30, 2011

“Core Earnings” interest income:
Private Education Loans $ 615 $ 616 $ 609 % 1 % $ 1,856 $ 1,813 2 %
Cash and investments   1   2   2   (50 ) (50 )   6   7 (14 )
Total “Core Earnings” interest income 616 618 611 1 1,862 1,820 2
Total “Core Earnings” interest expense   209   206   204   1   2     618   603 2  
Net “Core Earnings” interest income 407 412 407 (1 ) 1,244 1,217 2
Less: provision for loan losses   252   225   384   12   (34 )   712   924 (23 )
Net “Core Earnings” interest income after provision for loan losses 155 187 23 (17 ) 574 532 293 82
 
Servicing revenue 12 12 16 (25 ) 35 48 (27 )
 
Direct operating expenses 67 64 82 5 (18 ) 199 237 (16 )
Restructuring expenses   1   1           3   2 50  
Total expenses   68   65   82   5   (17 )   202   239 (15 )
Income before income tax expense 99 134 (43 ) (26 ) 330 365 102 258
Income tax expense   36   49   (16 ) (27 ) 325     133   37 259  
“Core Earnings” $ 63 $ 85 $ (27 ) (26 )% 333 % $ 232 $ 65 257 %
 
 

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

 

September 30,

2012

  June 30,

2012

  September 30,

2011

September 30,

2012

  September 30,

2011

“Core Earnings” basis Private Education student loan yield 6.35 % 6.36 % 6.39 % 6.38 % 6.34 %
Discount amortization .17   .24   .18   .22   .24  
“Core Earnings” basis Private Education Loan net yield 6.52 6.60 6.57 6.60 6.58
“Core Earnings” basis Private Education Loan cost of funds (2.08 ) (2.05 ) (2.00 ) (2.05 ) (2.00 )
“Core Earnings” basis Private Education Loan spread 4.44 4.55 4.57 4.55 4.58
“Core Earnings” basis other interest-earning asset spread impact (.39 ) (.41 ) (.54 ) (.40 ) (.52 )
“Core Earnings” basis Consumer Lending net interest margin(1) 4.05 % 4.14 % 4.03 % 4.15 % 4.06 %
                           
“Core Earnings” basis Consumer Lending net interest margin(1) 4.05 % 4.14 % 4.03 % 4.15 % 4.06 %
Adjustment for GAAP accounting treatment(2) (.08 ) (.11 ) (.09 ) (.11 ) (.06 )
GAAP basis Consumer Lending net interest margin(1) 3.97 % 4.03 % 3.94 % 4.04 % 4.00 %
 
                         

(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 $ 37,545 $ 37,543 $ 36,772 $ 37,612 $ 36,853
Other interest-earning assets   2,436   2,544   3,280   2,436   3,183
Total Consumer Lending “Core Earnings” basis interest-earning assets $ 39,981 $ 40,087 $ 40,052 $ 40,048 $ 40,036
 
    (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.
 
 
The increases in the “Core Earnings” basis Consumer Lending net interest margin for the three and nine month periods ended September 30, 2012 over the prior-year periods were primarily due to reduced spread impacts from declines in the average balances of our other interest-earning assets. These assets consist primarily of securitization trust restricted cash and cash held at Sallie Mae Bank (the “Bank”). Our other interest-earning asset portfolio yields a negative net interest margin and as a result, when its relative weighting decreases compared to the Private Education Loan portfolio, the overall net interest margin increases. Partially offsetting this benefit was an increase in the cost of funds related to unsecured debt and asset-backed securities issued in 2011 and 2012.
 

Private Education Loan Provision for Loan Losses and Charge-Offs

 
The following table summarizes the Private Education Loan provision for loan losses and charge-offs.
  Quarters Ended   Nine Months Ended
September 30,   June 30,   September 30, September 30,   September 30,

(Dollars in millions)

2012 2012

2011(1)

2012

2011(1)

Private Education Loan provision for loan losses $ 252 $ 225 $ 384 $ 712 $ 924
 
Private Education Loan charge-offs $ 250 $ 235 $ 272 $ 709 $ 809
 
         

(1)

 

We recorded an additional $124 million of provision for Private Education Loan losses in the third quarter of 2011 in connection with adopting new accounting rules related to TDRs. For a discussion of the effect of these new rules on our provision for Private Education Loan losses, please refer to “Note 2 — Significant Accounting Policies — Allowance for Loan Losses” in our 2011 Form 10-K.

 
In establishing the allowance for Private Education Loan losses as of September 30, 2012, we considered several factors with respect to our Private Education Loan portfolio. In particular, as compared to the year-ago periods 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. Total loans delinquent (as a percentage of loans in repayment) has decreased to 10.0 percent from 10.3 percent and the charge-off rate has declined to 3.23 percent from 3.74 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.
 
The decline in the Private Education Loan provision for loan losses compared to the year-ago periods (excluding the effect of the TDR implementation) reflects the improving credit quality and performance trends discussed above.
 
During the second quarter of 2012, we increased our focus on encouraging our borrowers to enter into repayment plans in lieu of using forbearance to better help our borrowers manage their overall payment obligations. This resulted in what we expect will be a one-time increase in late stage delinquencies and charge-offs that are expected to occur through the end of 2012. We believe most of this increase is an acceleration of future charge-offs that would have occurred in future periods. As a result of this change, the percentage of loans in forbearance dropped to 3.2 percent as of September 30, 2012 compared to 4.3 percent and 4.5 percent as of June 30, 2012 and September 30, 2011, respectively. The increase in the Private Education Loan provision for loan losses for third-quarter 2012 compared with second-quarter 2012 was primarily the result of this change discussed above.
 
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, 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 decrease in operating expenses in the quarter ended September 30, 2012 compared with the quarter ended September 30, 2011 was primarily the result of the current-year benefit of the cost-cutting efforts we implemented throughout 2011. Operating expenses were 71 basis points and 88 basis points of average Private Education Loans in the quarters ended September 30, 2012 and 2011, respectively, and 71 basis points and 86 basis points of average Private Education Loans in the nine months ended September 30, 2012 and 2011, respectively.
 

Business Services Segment

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

 

Sept. 30,   June 30,   Sept. 30, Sept. 30, 2012 vs.   Sept. 30, 2012 vs. Sept. 30,   Sept. 30, Sept. 30, 2012 vs.

(Dollars in millions)

  2012     2012   2011 June 30, 2012 Sept. 30, 2011   2012   2011 Sept. 30, 2011
Net interest income $ 3 $ 2 $ 3 50 % % $ 7 $ 8 (13 ) %
Servicing revenue:
Intercompany loan servicing 164 172 183 (5 ) (10 ) 512 559 (8 )

Third-party loan servicing

26 26 20 30 74 60 23
Guarantor servicing 11 11 15 (27 ) 33 40 (18 )
Other servicing   23     21     24 10   (4 )   72     72  
Total servicing revenue 224 230 242 (3 ) (7 ) 691 731 (5 )
Contingency revenue 85 87 84 (2 ) 1 261 248 5
Other Business Services revenue   7     8     11 (13 ) (36 )   24     31 (23 )
Total other income 316 325 337 (3 ) (6 ) 976 1,010 (3 )
Direct operating expenses 112 109 119 3 (6 ) 342 368 (7 )
Restructuring expenses   1     2     1 (50 )     3     2 50  
Total expenses   113     111     120 2   (6 )   345     370 (7 )
Income from continuing operations, before income tax expense 206 216 220 (5 ) (6 ) 638 648 (2 )
Income tax expense   76     79     81 (4 ) (6 )   233     238 (2 )
“Core Earnings” 130 137 139 (5 ) (6 ) 405 410 (1 )
Less: net loss attributable to noncontrolling interest   (1 )   (1 )     (100 )   (2 )   (100 )
“Core Earnings” attributable to SLM Corporation $ 131   $ 138   $ 139 (5 ) % (6 )% $ 407   $ 410 (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 $129 billion and $140 billion for the quarters ended September 30, 2012 and 2011, respectively, and $132 billion and $142 billion for the nine months ended September 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.
 
As of September 30, 2012, we are servicing approximately 4.1 million accounts under the ED Servicing Contract compared with 3.8 million and 3.4 million accounts serviced at June 30, 2012 and September 30, 2011, respectively. The increase in the third-party loan servicing fees for the current quarter and nine-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 third quarters of 2012 and 2011 included $23 million and $16 million, respectively, of servicing revenue related to the ED Servicing Contract.
 
Guarantor Servicing revenue declined for the three and nine month periods ending September 30, 2012 compared with the prior-year periods primarily due to the declining balance of FFELP loans outstanding for which we earn fees.
 
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 $43.1 billion as of September 30, 2012, a 25 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.
 
Our contingency revenue consists of fees we receive for collections of delinquent debt on behalf of clients performed on a contingency basis. 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.
 
  September 30,   June 30,   September 30,

(Dollars in millions)

2012 2012 2011
Student loans $ 12,151 $ 10,620 $ 10,839
Other   2,018   1,864   2,133
 
Total $ 14,169 $ 12,484 $ 12,972
 
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 76 percent and 78 percent, respectively, of total segment revenues for the quarters ended September 30, 2012 and 2011 and 76 percent and 78 percent, respectively, of total segment revenues for the nine months ended September 30, 2012 and 2011.
 

Operating Expenses — Business Services Segment

 
Operating expenses for the three and nine month periods ended September 30, 2012 decreased from the year-ago 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.
 
        % Increase
Quarters Ended % Increase (Decrease) Nine Months Ended (Decrease)
    Sept. 30, 2012   Sept. 30, 2012   Sept. 30, 2012
Sept. 30, June 30, Sept. 30, vs. vs. Sept. 30, Sept. 30, vs.

(Dollars in millions)

2012 2012 2011 June 30, 2012 Sept. 30, 2011 2012 2011 Sept. 30, 2011
“Core Earnings” interest income:
FFELP Loans $ 712 $ 652 $ 711 9 % % $ 2,090 $ 2,168 (4 )%
Cash and investments   3   3   1   200     8   3 167  
Total “Core Earnings” interest income 715 655 712 9 2,098 2,171 (3 )
Total “Core Earnings” interest expense   399   409   354 (2 ) 13     1,231   1,080 14  
Net “Core Earnings” interest income 316 246 358 28 (12 ) 867 1,091 (21 )
Less: provision for loan losses   18   18   21  

(14

)

  54   67 (19 )
Net “Core Earnings” interest income after provision for loan losses 298 228 337 31 (12 ) 813 1,024 (21 )

Servicing revenue

22 22 20 10 69 66 5
 
Direct operating expenses 171 181 188 (6 ) (9 ) 537 575 (7 )
Restructuring expenses               1 (100 )
Total expenses   171   181   188 (6 ) (9 )   537   576 (7 )
Income from continuing operations, before income tax expense 149 69 169 116 (12 ) 345 514 (33 )
Income tax expense   55   25   62 120   (11 )   127   189 (33 )
“Core Earnings” $ 94 $ 44 $ 107 114 % (12 )% $ 218 $ 325 (33 )%
 

FFELP Loan Net Interest Margin

 
The following table shows the FFELP Loan “Core Earnings” basis net interest margin along with reconciliation to the GAAP basis FFELP Loan net interest margin.
 
  Quarters Ended   Nine Months Ended
September 30,   June 30,   September 30, September 30,   September 30,
2012 2012 2011 2012 2011

“Core Earnings” basis FFELP student loan yield

2.65 % 2.66 % 2.55 % 2.65 % 2.57 %
Hedged Floor Income .24 .29 .27 .27 .24
Unhedged Floor Income .13 .07 .09 .10 .12
Consolidation Loan Rebate Fees (.66 ) (.67 ) (.65 ) (.66 ) (.66 )
Repayment Borrower Benefits (.11 ) (.14 ) (.13 ) (.12 ) (.11 )
Premium amortization (.07 ) (.27 ) (.14 ) (.16 ) (.15 )
 
“Core Earnings” basis FFELP student loan net yield 2.18 1.94 1.99 2.08 2.01
“Core Earnings” basis FFELP student loan cost of funds (1.13 ) (1.14 ) (.96 ) (1.15 ) (.96 )
 
“Core Earnings” basis FFELP student loan spread 1.05 .80 1.03 .93 1.05
“Core Earnings” basis FFELP other interest-earning asset spread impact (.13 ) (.10 ) (.06 ) (.11 ) (.07 )
 
“Core Earnings” basis FFELP Loan net interest margin(1) .92 % .70 % .97 % .82 % .98 %
                     
 
“Core Earnings” basis FFELP Loan net interest margin(1) .92 % .70 % .97 % .82 % .98 %
Adjustment for GAAP accounting treatment(2) .32   .30   .38   .30   .35  
 
GAAP basis FFELP Loan net interest margin 1.24 % 1.00 % 1.35 % 1.12 % 1.33 %
 
        (1)   The average balances of our FFELP “Core Earnings” basis interest-earning assets for the respective periods are:
 
                         

(Dollars in millions)

FFELP Loans $ 129,621 $ 134,893 $ 141,848 $ 133,887 $ 144,389
Other interest-earning assets   7,601   6,291   4,784   6,776   4,927
 
Total FFELP “Core Earnings” basis interest-earning assets $ 137,222 $ 141,184 $ 146,632 $ 140,663 $ 149,316
 
        (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.
 
The decrease in the “Core Earnings” basis FFELP Loan net interest margin of 5 basis points for the quarter ended September 30, 2012 compared with the quarter ended September 30, 2011 and of 16 basis points for the nine months ended September 30, 2012 compared with the year-ago period was primarily the result of a general increase in our funding costs related to unsecured and ABS debt issuances over the last year and increased spread impacts from increases in the average balance of our other interest-earning assets. These assets are primarily securitization trust restricted cash. Our other interest-earning asset portfolio yields a negative net interest margin and as a result, when its relative weighting increases, the overall net interest margin declines. Offsetting these negative effects on the FFELP Loan net interest margin was lower premium amortization due to lower prepayment speeds.
 
During the fourth-quarter 2011, the Administration announced the SDCL. The initiative provided an incentive to borrowers who have at least one student loan owned by the Department of Education (“ED”) 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.
 

While borrowers initiated the application process prior to June 30, 2012 to consolidate approximately $5 billion of our FFELP Loans to ED as part of this initiative, the actual consolidation of these loans occurred in both the second and third quarters of 2012. During second-quarter 2012, $2.2 billion were consolidated with the remaining balance being consolidated in third-quarter 2012. The 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 Loan net interest margin by 14 basis points in the second quarter of 2012 and 5 basis points for the nine months ended September 30, 2012. The SDCL ended June 30, 2012. The “Core Earnings” basis FFELP Loan net interest margin was not affected for the quarter ended September 30, 2012 by any 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 nine months ended September 30, 2012.
 
As of September 30, 2012, our FFELP Loan portfolio totaled approximately $127.7 billion, comprised of $45.3 billion of FFELP Stafford and $82.4 billion of FFELP Consolidation Loans. The weighted-average life of these portfolios is 5.2 years and 9.1 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
September 30, June 30, September 30, September 30, September 30,

(Dollars in millions)

2012 2012 2011 2012 2011
FFELP Loan provision for loan losses $ 18 $ 18 $ 21 $ 54 $ 67
FFELP Loan charge-offs $ 23 $ 23 $ 18 $ 68 $ 59
 

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 $164 million and $183 million for the quarters ended September 30, 2012 and 2011, respectively, and $512 million and $559 million for the nine month period ended September 30, 2012 and September 30, 2011, respectively. These amounts exceed the actual cost of servicing the loans. Operating expenses were 53 basis points and 52 basis points of average FFELP Loans in the quarters ended September 30, 2012 and 2011, respectively, and 54 basis points and 53 basis points for the nine months ended September 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.
 
        % Increase
Quarters Ended % Increase (Decrease) Nine Months Ended (Decrease)
    Sept. 30, 2012   Sept. 30, 2012   Sept. 30, 2012
Sept. 30, June 30, Sept. 30, vs. vs. Sept. 30, Sept. 30, vs.

(Dollars in millions)

  2012     2012     2011   June 30, 2012 Sept. 30, 2011   2012     2011   Sept. 30, 2011
 
Net interest loss after provision $ (8 ) $ (5 ) $ (14 ) 60 % (43 )% $ (13 ) $ (37 ) (65 )%
 
Gains on debt repurchases 44 20 120 100 102 64 59
Other   4     5     8   (20 ) (50 )   11     14   (21 )
Total income 48 25 8 92 500 113 78 45
 
Expenses:
Direct operating expenses 3 3 2 50 6 10 (40 )
Overhead expenses:
Corporate overhead 28 29 47 (3 ) (40 ) 92 134 (31 )

Unallocated Information technology costs

  27     25     30   8   (10 )   79     92   (14 )
Total overhead expenses   55     54     77   2   (29 )   171     226   (24 )
Total operating expenses 58 57 79 2 (27 ) 177 236 (25 )
Restructuring expenses                   5     1   400  
Total expenses   58     57     79   2   (27 )   182     237   (23 )
Loss from continuing operations, before income tax benefit (18 ) (37 ) (85 ) (51 ) (79 ) (82 ) (196 ) (58 )
Income tax benefit   (7 )   (13 )   (31 ) (46 ) (77 )   (29 )   (71 ) (59 )
Net loss from continuing operations (11 ) (24 ) (54 ) (54 ) (80 ) (53 ) (125 ) (58 )
Income from discontinued operations, net of tax expense           23     (100 )       33   (100 )
“Core Earnings” (loss) $ (11 ) $ (24 ) $ (31 ) (54 )% (65 )% $ (53 ) $ (92 ) (42 )%
 

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 three and nine-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 $147 million portfolio.
 

Gains on Debt Repurchases

 
We repurchased $230 million and $9 million face amount of our debt for the quarters ended September 30, 2012 and 2011, respectively, and $520 million and $894 million face amount of our debt for the nine months ended September 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 three and nine months ended September 30, 2012 compared with the year-ago periods was primarily the result of adjustments recorded during both years related to the termination of our defined benefit pension plan and the current-year benefit of the cost-cutting efforts we implemented throughout 2011. Related to the termination of our defined benefit pension plan, operating expenses decreased by $15 million and $25 million in the three and nine months ended September 30, 2012 compared with the year-ago periods, respectively, due to changes in estimates related to employee termination benefits as well as changes in interest rates.
 

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, 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) $ 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 %
 
 
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 %
 
September 30, 2011
FFELP FFELP Total Private
Stafford and Consolidation FFELP Education

(Dollars in millions)

Other Loans Loans Loans Total
Total student loan portfolio:
In-school(1) $ 3,483 $ $ 3,483 $ 2,339 $ 5,822
Grace, repayment and other(2)   47,451     88,196     135,647     35,636     171,283  
Total, gross 50,934 88,196 139,130 37,975 177,105
Unamortized premium/(discount) 868 850 1,718 (843 ) 875
Receivable for partially charged-off loans 1,192 1,192
Allowance for loan losses   (120 )   (69 )   (189 )   (2,167 )   (2,356 )
Total student loan portfolio $ 51,682   $ 88,977   $ 140,659   $ 36,157   $ 176,816  
% of total FFELP 37 % 63 % 100 %
% of total 29 % 51 % 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 September 30, 2012
(Dollars in millions)

FFELP
Stafford and
Other

  FFELP
Consolidation
Loans
  Total
FFELP

Loans

  Private
Education
Loans
  Total
Total $ 46,294 $ 83,327 $ 129,621 $ 37,545 $ 167,166
% of FFELP 36 % 64 % 100 %
% of total 28 % 50 % 78 % 22 % 100 %
 
Quarter Ended June 30, 2012
(Dollars in millions) FFELP
Stafford and
Other
FFELP
Consolidation
Loans
Total
FFELP

Loans

Private
Education
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 September 30, 2011
(Dollars in millions) FFELP
Stafford and
Other
FFELP
Consolidation
Loans
Total
FFELP

Loans

Private
Education
Loans