Sallie Mae 2012 Annual Report Download - page 40

Consolidated Earnings Summary — GAAP-basis
Year Ended December 31, 2012 Compared with Year Ended December 31, 2011
For the years ended December 31, 2012 and 2011, net income was $939 million, or $1.90 diluted earnings per
common share, and $633 million, or $1.18 diluted earnings per common share, respectively. The increase in net
income was primarily due to a $331 million decrease in net losses on derivative and hedging activities, a $215
million decrease in provisions for loan losses, a $104 million decrease in operating expenses and a $107 million
increase in gains on debt repurchases, which more than offset the $321 million decline in net interest income.
The primary contributors to each of the identified drivers of changes in net income for the current year-end
period compared with the year-ago period are as follows:
• Net interest income declined by $321 million primarily due to an $11 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 $215 million primarily as a result of overall improvements in the
credit quality and delinquency trends of the Private Education Loan portfolio. In second-quarter 2012, we
increased our focus on encouraging our customers to enter repayment plans in lieu of additional
forbearance usage to better help customers manage their overall payment obligations. This change was
expected to, and resulted in, an increase in charge-offs in fourth-quarter 2012 which are expected to
decline in 2013. See “Consumer Lending Segment — Private Education Loan Provision for Loan Losses
and Charge-offs” for a further discussion of this change and impact.
• We did not incur any losses on loans and investments in the current year. In 2011, we recorded $26
million of impairment on certain investments in aircraft leveraged leases and a $9 million mark-to-market
loss related to classifying our entire $12 million portfolio of non-U.S. dollar-denominated student loans as
held-for-sale.
• Net losses on derivative and hedging activities decreased by $331 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 $107 million. Debt repurchase activity will fluctuate based on
market fundamentals and our liability management strategy.
• Operating expenses decreased $104 million primarily due to the current-year benefit of the cost-cutting
efforts we implemented throughout 2011.
• Net income from discontinued operations decreased $32 million due to the sale of our Purchased Paper —
Non-Mortgage portfolio in 2011.
In addition, we repurchased 58.0 million shares and 19.1 million shares of our common stock during the
years ended December 31, 2012 and 2011, respectively, as part of our common share repurchase program.
Primarily as a result of these repurchases, our average outstanding diluted shares decreased by 40 million
common shares.
Year Ended December 31, 2011 Compared with Year Ended December 31, 2010
For the years ended December 31, 2011 and 2010, net income was $633 million, or $1.18 diluted earnings
per common share, and $530 million, or $.94 diluted earnings per common share, respectively. The increase in
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