Sallie Mae 2012 Annual Report Download - page 35

Core Earnings
We report financial results on a GAAP basis and also present certain “Core Earnings” performance
measures. Our management, equity investors, credit rating agencies and debt capital providers use these “Core
Earnings” measures to monitor our business performance. “Core Earnings” is the basis in which we prepare our
segment disclosures as required by GAAP under ASC 280 “Segment Reporting” (see “Note 16 — Segment
Reporting”). For a full explanation of the contents and limitations of “Core Earnings,” see “‘Core Earnings’ —
Definition and Limitations” of this Item 7.
2012 Summary of Results
We operate in a challenging economic environment marked by high unemployment and uncertainty which
adds uncertainty to Private Education Loan collectibility. On July 1, 2010, the Health Care and Education
Reconciliation Act of 2010 (“HCERA”) eliminated FFELP Loan originations, a major source of our net income.
All federal loans to students are now made through the DSLP.
Our 2012 accomplishments are discussed below.
GAAP 2012 net income was $939 million ($1.90 diluted earnings per share), versus net income of
$633 million ($1.18 diluted earnings per share) in the prior year. The changes in GAAP net income are driven by
the same “Core Earnings” items discussed below as well as changes in “mark-to-market” unrealized gains and
losses on derivative contracts and amortization and impairment of goodwill and intangible assets that are
recognized in GAAP but not in “Core Earnings” results. In 2012 and 2011, GAAP results included losses of $194
million and $540 million, respectively, resulting from derivative accounting treatment which is excluded from
“Core Earnings” results.
“Core Earnings” for the year were $1.06 billion compared with $977 million in 2011. “Core Earnings” were
up due to an $81 million increase in debt repurchase gains, a $215 million lower loan loss provision and a $104
million reduction in operating expenses, offset in part by a $246 million decrease in net interest income.
During 2012, we raised $2.7 billion of unsecured debt and issued $9.7 billion of FFELP ABS and
$4.2 billion of Private Education Loan ABS. We also repurchased $711 million of debt and realized “Core
Earnings” gains of $145 million in 2012, compared with $894 million and $64 million, respectively, in 2011.
2012 Management Objectives
In 2012 we set out five major goals to create shareholder value. They were: (1) prudently grow Consumer
Lending segment assets and revenue; (2) sustain Business Services segment revenue; (3) maximize cash flows from
FFELP Loans; (4) reduce our operating expenses; and (5) improve our financial strength. We believe we achieved
each of these objectives in 2012. The following describes our performance relative to each of our 2012 goals.
Prudently Grow Consumer Lending Segment Assets and Revenues
We continued to pursue managed growth in our Private Education Loan portfolio in 2012, exceeding our
target with $3.3 billion in new originations for the year compared with $2.7 billion in 2011, a 22 percent increase.
The average FICO score of our 2012 originations was 748 and 90 percent of the originated loans were cosigned.
We have reduced our Private Education Loan charge-off rate and provision for loan losses in the three years
since 2009. For the year ended December 31, 2012 compared with the year ended December 31, 2009, “Core
Earnings” charge-off rates (as a percentage of loans in repayment) and “Core Earnings” provision for loan losses
declined by 43 percent and 28 percent, respectively.
“Core Earnings” net interest margin increased from 4.09 percent to 4.13 percent. Charge-offs decreased to
3.37 percent of loans in repayment from 3.72 percent in 2011. Provision for loan losses decreased to $1.01 billion
from $1.18 billion in 2011.
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