Sallie Mae Reports Second-Quarter 2013 Financial Results

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Sallie Mae Reports Second-Quarter 2013 Financial Results Jul 17th 2013, 13:31 NEWARK, Del.--(BUSINESS WIRE)-- Sallie Mae ( SLM ), formally SLM Corporation, today released second-quarter 2013 financial results that reflect significant improvements to private education loan portfolio performance and earnings-per-share contributions from previously announced asset sales. During the quarter, private education loan 90-day delinquency and charge-off rates dropped to 3.6 percent and 2.7 percent, respectively, their lowest levels since 2008. The company also announced $400 million in common share repurchase authorization. We are pleased with the low delinquency and default results achieved by our customers as the measures confirm the effectiveness of our underwriting standards and servicing solutions, said Jack Remondi, president and CEO. Our lending practices help students and families borrow responsibly, and our customized repayment assistance helps borrowers successfully manage their education loans. Both represent our conviction that we succeed only when our customers succeed. Mr. Remondi continued, Much has been publicized about student debt and borrower burdens. Student lending is a very specialized business that, if undertaken properly, can help borrowers capture the economic benefits of a college degree. Our results clearly show that our products, efforts and solutions help our borrowers successfully manage, and not just postpone, their student loan payments better than anyone, and avoid the damaging effects of default. For the second-quarter 2013, GAAP net income was $543 million ($1.20 diluted earnings per share), compared with $292 million ($0.59 diluted earnings per share) for the year-ago quarter. Core earnings for the quarter were $462 million ($1.02 diluted earnings per share), compared with $243 million ($0.49 diluted earnings per share) for the year-ago quarter. The second-quarter 2013 core diluted earnings per share increase includes a $257 million gain from the sale of residual interests in FFELP loan securitization trusts, a $38 million after-tax gain from the sale of the companys Campus Solutions business, a $42 million decline in the provision for loan losses, and an increase in net interest income before provision for loan losses of $19 million which more than offset higher operating expenses of $27 million and higher restructuring and other reorganization expenses of $21 million. Sallie Mae provides core basis earnings because management makes its financial decisions on such measures. The changes in GAAP net income are driven by the same core earnings items discussed above as well as changes in mark-to-market unrealized gains and losses on derivative contracts and amortization and impairment of goodwill and intangible assets that are recognized in GAAP, but not in core earnings results. Second-quarter 2013 GAAP results included $143 million of gains from derivative accounting treatment that are excluded from core earnings results. In the year-ago period, these amounts were gains of $82 million. Consumer Lending In the consumer lending segment, Sallie Mae originates, finances and services private education loans. Quarterly core earnings were $107 million compared with $85 million in the year-ago quarter. The increase is primarily the result of a $38 million decrease in the provision for private education loan losses. Second-quarter 2013 private education loan portfolio results vs. second-quarter 2012 included: Loan originations of $368 million, up 15 percent. Delinquencies of 90 days or more of 3.6 percent of loans in repayment, down from 4.5 percent. Loans in forbearance of 3.5 percent of loans in repayment and forbearance, down from 4.3 percent. Annualized charge-off rate of 2.7 percent of average loans in repayment, down from 3.1 percent. Provision for private education loan losses of $187 million, down from $225 million. Core net interest margin, before loan loss provision, of 4.12 percent, down from 4.14 percent. The portfolio balance, net of loan loss allowance, totaled $37 billion, a $662 million increase over the year-ago quarter. Business Services Sallie Maes business services segment includes fees from servicing, collections and college savings businesses. Business services core earnings were $166 million in second-quarter 2013, compared with $137 million in the year-ago quarter. The increase is primarily due to the $38 million after-tax gain recognized on the business sale mentioned above. Federally Guaranteed Student Loans (FFELP) This segment represents earnings from Sallie Maes amortizing portfolio of FFELP loans. Core earnings for the segment were $237 million in second-quarter 2013, compared with the year-ago quarters $44 million. The increase was primarily the result of a $257 million gain from the sale of residual interests in FFELP loan securitization trusts. At June 30, 2013, the company held $108 billion of FFELP loans compared with $133 billion at June 30, 2012. Approximately $12 billion of the $25 billion decline in FFELP loans is a result of the sales of the residual interests in FFELP loan securitization trusts discussed earlier. Operating Expenses Second-quarter 2013 operating expenses were $258 million compared with $231 million in the year-ago quarter. The increase is primarily the result of increases in our third-party servicing and collections activities, increased private education loan marketing activities, as well as continued investments in technology. In addition, there were $24 million and $3 million of expenses reported in Restructuring and other reorganization expenses in the second quarter of 2013 and 2012, respectively. For 2013, these consisted of $14 million related to severance and $10 million related to the companys previously announced plan to separate its existing organization into two publicly-traded companies. The $3 million in 2012 relates to restructuring expenses. Funding and Liquidity During second-quarter 2013, the company issued $2.5 billion in FFELP asset-backed securities (ABS) and $1.1 billion in private education loan ABS. Total debt repurchases were $70 million in second-quarter 2013 compared with $85 million in second-quarter 2012. In the second quarter, Sallie Mae closed on a new $6.8 billion ABCP borrowing facility, which matures in June 2014, to facilitate the term securitization of FFELP loans. As previously announced, the facility was used in June 2013 to refinance all FFELP loans previously financed through the U.S. Department of Educations conduit program. Subsequent to the second-quarter end, the company closed on a $1.1 billion private education loan asset backed commercial paper facility to fund the call and redemption of a 2009 private education loan asset backed securitization trust. Shareholder Distributions In second-quarter 2013, Sallie Mae paid a common stock dividend of $0.15 per share. Sallie Mae repurchased 9 million shares of common stock for $201 million in the second quarter of 2013, or an aggregate of 19 million shares for $400 million in the first half of 2013, fully utilizing the companys February 2013 share repurchase program authorization. In July 2013, the company authorized $400 million to be utilized in a new common share repurchase program that does not have an expiration date. Guidance The company expects 2013 results to be as follows: Full-year 2013 private education loan originations of at least $4 billion. Fully diluted 2013 core earnings per share of $2.80 inclusive of the contributions from the $0.44 earnings per share of gains related to FFELP loan securitization trust residual sales and $0.08 earnings per share from the gain from the business sale that have occurred through June 30, 2013. *** Sallie Mae reports financial results on a GAAP basis and also provides certain core earnings performance measures. The difference between the companys 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 companys performance and the allocation of corporate resources. In addition, the companys equity investors, credit rating agencies and debt capital providers use these core earnings measures to monitor the companys 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 companys Annual Report on Form 10-K for the year ended Dec. 31, 2012 (filed with the SEC on Feb. 26, 2013). Certain reclassifications have been made to the balances as of and for the three months ended June 30, 2012, to be consistent with classifications adopted for 2013, and had no effect on net income, total assets or total liabilities. *** The company will host an earnings conference call tomorrow, July 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 companys 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 11880664 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 companys website will be available approximately two hours after the calls conclusion. A telephone replay may be accessed approximately two hours after the calls conclusion through Aug. 2, by dialing 855-859-2056 (USA and Canada) or 404-537-3406 (international) with access code 11880664. Presentation slides for the conference call, as well as additional information about the companys 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 managements current expectations as of the date of this release. Statements that are not historical facts, including statements about the companys 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 companys Annual Report on Form 10-K for the year ended Dec. 31, 2012 and subsequent filings with the Securities and Exchange Commission; increases in financing costs; limits on liquidity; increases in costs associated with compliance with laws and regulations; changes in accounting standards and the impact of related changes in significant accounting estimates; any adverse outcomes in any significant litigation to which the company is a party; credit risk associated with the companys exposure to third parties, including counterparties to the companys derivative transactions; and changes in the terms of student loans and the educational credit marketplace (including changes resulting from new laws and the implementation of existing laws). The company could also be affected by, among other things: changes in its funding costs and availability; reductions to its credit ratings or the credit ratings of the United States of America; failures of its operating systems or infrastructure, including those of third-party vendors; damage to its reputation; failures to successfully implement cost-cutting and adverse effects of such initiatives on its business; risks associated with restructuring initiatives, including the companys recently announced strategic plan to separate its existing operations into two separate publicly traded companies; changes in the demand for educational financing or in financing preferences of lenders, educational institutions, students and their families; changes in law and regulations with respect to the student lending business and financial institutions generally; increased competition from banks and other consumer lenders; the creditworthiness of its customers; changes in the general interest rate environment, including the rate relationships among relevant money-market instruments and those of its earning assets vs. its funding arrangements; changes in general economic conditions; and changes in the demand for debt management services. The preparation of the companys 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  ( SLM ) is the nations No. 1 financial services company specializing in education. Celebrating 40 years of making a difference, Sallie Mae continues to turn education dreams into reality for American families, today serving over 25 million customers. With products and services that include 529 college savings plans, Upromise rewards, scholarship search and planning tools, education loans, insurance, and online banking, Sallie Mae offers solutions that help families save, plan, and pay for college. Sallie Mae also provides financial services to hundreds of college campuses as well as to federal and state governments. Learn more at SallieMae.com . Commonly known as Sallie Mae, SLM Corporation and its subsidiaries are not sponsored by or agencies of the United States of America.           Selected Financial Information and Ratios (Unaudited)   Quarters Ended Six Months Ended June 30, March 31, June 30, June 30, June 30, (In millions, except per share data) 2013 2013 2012 2013 2012   GAAP Basis Net income attributable to SLM Corporation $ 543 $ 346 $ 292 $ 889 $ 403 Diluted earnings per common share attributable to SLM Corporation $ 1.20 $ .74 $ .59 $ 1.94 $ .79 Weighted average shares used to compute diluted earnings per share 448 458 488 453 499 Return on assets 1.35 % .82 % .64 % 1.08 % .44 %   Core Earnings Basis (1) Core Earnings attributable to SLM Corporation $ 462 $ 283 $ 243 $ 744 $ 527 Core Earnings diluted earnings per common share attributable to SLM Corporation $ 1.02 $ .61 $ .49 $ 1.62 $ 1.03 Weighted average shares used to compute diluted earnings per share 448 458 488 453 499 Core Earnings return on assets 1.15 % .67 % .53 % 0.90 % .58 %   Other Operating Statistics Ending FFELP Loans, net $ 108,491 $ 119,195 $ 132,833 $ 108,491 $ 132,833 Ending Private Education Loans, net   37,116     37,465     36,454     37,116     36,454     Ending total student loans, net $ 145,607   $ 156,660   $ 169,287   $ 145,607   $ 169,287     Average student loans $ 152,135 $ 160,261 $ 172,436 $ 156,175 $ 173,689   (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)   June 30, 2013 June 30, 2013 vs. vs. March 31, 2013 June 30, 2012 Increase Increase Quarters Ended (Decrease) (Decrease) June 30, March 31, June 30, (In millions, except per share data) 2013 2013 2012 $ % $ % Interest income: FFELP Loans $ 703 $ 735 $ 777 $ (32 ) (4 )% $ (74 ) (10 )% Private Education Loans 627 623 616 4 1 11 2 Other loans 3 3 4 (1 ) (25 ) Cash and investments   4     4     6           (2 ) (33 )   Total interest income 1,337 1,365 1,403 (28 ) (2 ) (66 ) (5 ) Total interest expense   553     569     656     (16 ) (3 )   (103 ) (16 )   Net interest income 784 796 747 (12 ) (2 ) 37 5 Less: provisions for loan losses   201     241     243     (40 ) (17 )   (42 ) (17 )   Net interest income after provisions for loan losses 583 555 504 28 5 79 16 Other income (loss): Gains on sales of loans and investments 251 55 196 356 251 100 Gains (losses) on derivative and hedging activities, net 18 (31 ) 6 49 158 12 200 Servicing revenue 89 89 88 1 1 Contingency revenue 109 99 87 10 10 22 25 Gains on debt repurchases 19 23 20 (4 ) (17 ) (1 ) (5 ) Other income   24     34     (2 )   (10 ) (29 )   26   1,300     Total other income 510 269 199 241 90 311 156 Expenses: Operating expenses 258 250 231 8 3 27 12 Goodwill and acquired intangible asset impairment and amortization expense 4 4 5 (1 ) (20 ) Restructuring and other reorganization expenses   24     11     3     13   118     21   700     Total expenses   286     265     239     21   8     47   20     Income from continuing operations, before income tax expense 807 559 464 248 44 343 74 Income tax expense   300     211     169     89   42     131   78     Net income from continuing operations 507 348 295 159 46 212 72 Income (loss) from discontinued operations, net of tax expense (benefit)   35     (2 )   (4 )   37   1,850     39   975     Net income 542 346 291 196 57 251 86 Less: net loss attributable to noncontrolling interest   (1 )       (1 )   (1 ) (100 )         Net income attributable to SLM Corporation 543 346 292 197 57 251 86 Preferred stock dividends   5     5     5                 Net income attributable to SLM Corporation common stock $ 538   $ 341   $ 287   $ 197   58 % $ 251   87 %     Basic earnings (loss) per common share attributable to SLM Corporation: Continuing operations $ 1.14 $ .76 $ .60 $ .38 50 % $ .54 90 % Discontinued operations   .08         (.01 )   .08   100     .09   900     Total $ 1.22   $ .76   $ .59   $ .46   61   $ .63   107 %   Diluted earnings (loss) per common share attributable to SLM Corporation: Continuing operations $ 1.12 $ .74 $ .60 $ .38 51 % $ .52 87 % Discontinued operations   .08         (.01 )   .08   100     .09   900     Total $ 1.20   $ .74   $ .59   $ .46   62 % $ .61   103 %   Dividends per common share attributable to SLM Corporation $ .15   $ .15   $ .125   $   0 % $ .025   20 %           Six Months Ended Increase June 30, (Decrease) (In millions, except per share data) 2013 2012 $ % Interest income: FFELP Loans $ 1,439 $ 1,619 $ (180 ) (11 )% Private Education Loans 1,249 1,241 8 1 Other loans 6 9 (3 ) (33 ) Cash and investments   8     8           Total interest income 2,702 2,877 (175 ) (6 ) Total interest expense   1,123     1,322     (199 ) (15 )   Net interest income 1,579 1,555 24 2 Less: provisions for loan losses   442     496     (54 ) (11 )   Net interest income after provisions for loan losses 1,137 1,059 78 7 Other income (loss): Gains on sales of loans and investments 307 307 100 Losses on derivative and hedging activities, net (13 ) (366 ) 353 (96 ) Servicing revenue 178 178 Contingency revenue 208 176 32 18 Gains on debt repurchases 42 58 (16 ) (28 ) Other income   58     38     20   53     Total other income 780 84 696 829 Expenses: Operating expenses 508 482 26 5 Goodwill and acquired intangible asset impairment and amortization expense 7 9 (2 ) (22 ) Restructuring and other reorganization expenses   35     7     28   400     Total expenses 550 498 52 10 Income from continuing operations, before income tax expense 1,367 645 722 112 Income tax expense   512     237     275   116     Net income from continuing operations 855 408 447 110 Income (loss) from discontinued operations, net of tax expense (benefit)   33     (6 )   39   650     Net income 888 402 486 121 Less: net loss attributable to noncontrolling interest   (1 )   (1 )         Net income attributable to SLM Corporation 889 403 486 121 Preferred stock dividends   10     10           Net income attributable to SLM Corporation common stock $ 879   $ 393   $ 486   124 %   Basic earnings (loss) per common share attributable to SLM Corporation: Continuing operations $ 1.90 $ .81 $ 1.09 135 % Discontinued operations   .07     (.01 )   .08   800     Total $ 1.97   $ .80   $ 1.17   146 %   Diluted earnings (loss) per common share attributable to SLM Corporation: Continuing operations $ 1.87 $ .80 $ 1.07 134 % Discontinued operations   .07     (.01 )   .08   800     Total $ 1.94   $ .79   $ 1.15   146 %   Dividends per common share attributable to SLM Corporation $ .30   $ .25   $ .05   20 %         GAAP Balance Sheet (Unaudited)   June 30, March 31, June 30, (In millions, except share and per share data) 2013 2013 2012   Assets FFELP Loans (net of allowance for losses of $133; $147 and $173, respectively) $ 108,491 $ 119,195 $ 132,833 Private Education Loans (net of allowance for losses of $2,149; $2,170 and $2,186, respectively) 37,116 37,465 36,454 Cash and investments 4,265 4,691 4,123 Restricted cash and investments 4,109 4,828 6,717 Goodwill and acquired intangible assets, net 440 444 467 Other assets   7,047     7,463     8,485     Total assets $ 161,468   $ 174,086   $ 189,079       Liabilities Short-term borrowings $ 16,558 $ 17,254 $ 24,493 Long-term borrowings 135,879 147,887 155,476 Other liabilities   3,597     3,791     4,172     Total liabilities   156,034     168,932     184,141       Commitments and contingencies   Equity Preferred stock, par value $0.20 per share, 20 million shares authorized: Series A: 3.3 million; 3.3 million and 3.3 million shares, respectively, issued at stated value of $50 per share 165 165 165 Series B: 4 million; 4 million and 4 million shares, respectively, issued at stated value of $100 per share 400 400 400 Common stock, par value $0.20 per share, 1.125 billion shares authorized: 544 million; 540 million and 533 million shares, respectively, issued 109 108 107 Additional paid-in capital 4,355 4,291 4,196 Accumulated other comprehensive income (loss), net of tax expense (benefit) 9 (4 ) (10 ) Retained earnings   2,195     1,723     1,040     Total SLM Corporation stockholders equity before treasury stock 7,233 6,683 5,898 Less: Common stock held in treasury: 108 million; 95 million and 63 million shares, respectively   (1,804 )   (1,535 )   (967 )   Total SLM Corporation stockholders equity 5,429 5,148 4,931 Noncontrolling interest   5     6     7     Total equity   5,434     5,154     4,938     Total liabilities and equity $ 161,468   $ 174,086   $ 189,079     Consolidated Earnings Summary GAAP basis   Three Months Ended June 30, 2013 Compared with Three Months Ended June 30, 2012   For the three months ended June 30, 2013, net income was $543 million, or $1.20 diluted earnings per common share, compared with net income of $292 million, or $0.59 diluted earnings per common share, for the three months ended June 30, 2012. The increase in net income was primarily due to a $251 million increase in gains on sales of loans and investments, a $39 million after-tax increase in income from discontinued operations, a $42 million decline in the provision for loan losses, and a $37 million increase in net interest income, which more than offset higher operating expenses of $27 million and higher restructuring and other reorganization expenses of $21 million.   The primary contributors to each of the identified drivers of changes in net income for the current quarter compared with the year-ago quarter are as follows:   Net interest income increased by $37 million in the current quarter compared with the prior-year quarter primarily due to a $50 million acceleration of non-cash premium expense recorded in second-quarter 2012 related to the U.S. Department of Educations (ED) consolidation of $5.2 billion of loans under the Special Direct Consolidation Loan initiative (SDCL) that ended June 30, 2012. Partially offsetting this increase was a reduction in net interest income from a $20.9 billion decline in average FFELP Loans outstanding. Provisions for loan losses declined $42 million compared with the year-ago quarter primarily as a result of the overall improvement in Private Education Loans credit quality, delinquency and charge-off trends leading to decreases in expected future charge-offs. Gains on sales of loans and investments increased by $251 million as a result of $257 million in gains from sales of Residual Interests in FFELP Loan securitization trusts that occurred in second-quarter 2013. See Business Segment Earnings SummaryCore Earnings BasisFFELP Loans Segment for further discussion. Contingency revenue increased $22 million primarily from an increase in collection volumes in second-quarter 2013 compared with the prior-year quarter. Other income increased $26 million primarily from an increase in foreign currency translation gains. The foreign currency translation gains relate to a portion of our foreign currency denominated debt that does not receive hedge accounting treatment. These net gains were partially offset by losses on derivative and hedging activities related to the derivatives used to economically hedge these debt investments. Second-quarter 2013 operating expenses were $258 million compared with $231 million in the year-ago quarter. The increase in operating expenses is primarily the result of increases in our third-party servicing and collections activities, increased Private Education Loan marketing, as well as continued investments in technology. Restructuring and other reorganization expenses were $24 million compared with $3 million in the year-ago quarter. For 2013, these consisted of $14 million related to severance and $10 million related to the Companys previously announced plan to separate its existing organization into two publicly-traded companies. The $3 million in 2012 relates to restructuring expenses. Income from discontinued operations increased $39 million primarily as a result of the sale of our Campus Solutions business in the second quarter of 2013 which resulted in a $38 million after-tax gain. See Business Segment Earnings SummaryCore Earnings BasisBusiness Services Segment for additional discussion.   In addition, we repurchased 9 million shares of our common stock for $201 million during the second-quarter 2013 as part of a common share repurchase program. Primarily as a result of ongoing common share repurchases, our average outstanding diluted shares decreased by 40 million shares from the year-ago quarter.   Six Months Ended June 30, 2013 Compared with Six Months Ended June 30, 2012   For the six months ended June 30, 2013, net income was $889 million, or $1.94 diluted earnings per common share, compared with net income of $403 million, or $0.79 diluted earnings per common share, for the six months ended June 30, 2012. The increase in net income was primarily due to a $353 million decrease in net losses on derivative and hedging activities, a $307 million increase in net gains on sales of loans and investments, a $39 million after-tax increase in income from discontinued operations and a $54 million decrease in provisions for loan losses, which were partially offset by higher operating expenses of $26 million and higher restructuring and other reorganization expenses of $28 million.   The primary contributors to each of the identified drivers of changes in net income for the current six-month period compared with the year-ago six-month period are as follows:   Net interest income increased by $24 million primarily due to a $50 million acceleration of non-cash premium expense recorded in the first half of 2012 related to EDs consolidation of $5.2 billion of loans under the SDCL initiative that ended June 30, 2012. Partially offsetting this increase was an $18.1 billion decline in average FFELP Loans outstanding. Provisions for loan losses declined $54 million compared with the year-ago period primarily as a result of the overall improvement in Private Education Loans credit quality, delinquency and charge-off trends leading to decreases in expected future charge-offs. Gains on sales of loans and investments increased by $307 million as a result of $312 million in gains on the sales of the Residual Interests in FFELP Loan securitization trusts. See Business Segment Earnings SummaryCore Earnings BasisFFELP Loans Segment for further discussion. Losses on derivative and hedging activities, net, resulted in a net loss of $13 million in the current six-month period compared with a net loss of $366 million in the year-ago period. The primary factors affecting the change were interest rate and foreign currency fluctuations, which primarily affected the valuations of our Floor Income Contracts, basis swaps and foreign currency hedges during each period. Valuations of derivative instruments vary based upon many factors including changes in interest rates, credit risk, foreign currency fluctuations and other market factors. As a result, net gains and losses on derivative and hedging activities may continue to vary significantly in future periods. Contingency revenue increased $32 million primarily from an increase in collection volumes in the first half of 2013 compared with the prior-year period. First-half 2013 operating expenses were $508 million compared with $482 million in the first half of 2012. The increase in operating expenses is primarily the result of increases in our third-party servicing and collections activities, increased Private Education Loan marketing, as well as continued investments in technology. Restructuring and other reorganization expenses were $35 million compared with $7 million in the year-ago period. For 2013, these consisted of $23 million related to severance and $12 million related to the Companys previously announced plan to separate its existing organization into two publicly-traded companies. The $7 million in 2012 relates to restructuring expenses. Income from discontinued operations increased $39 million primarily as a result of the sale of our Campus Solutions business in the second quarter of 2013. See Business Segment Earnings SummaryCore Earnings BasisBusiness Services Segment for additional discussion.   In addition, we repurchased 19 million shares of our common stock for $400 million during the first half of 2013 as part of a common share repurchase program. Primarily as a result of ongoing common share repurchases, our average outstanding diluted shares decreased by 46 million shares from the year-ago period.   Core Earnings Definition and Limitations   We prepare financial statements in accordance with GAAP. However, we also evaluate our business segments on a basis that differs from GAAP. We refer to this different basis of presentation as Core Earnings. We provide this Core Earnings basis of presentation on a consolidated basis for each business segment because this is what we review internally when making management decisions regarding our performance and how we allocate resources. We also refer to this information in our presentations with credit rating agencies, lenders and investors. Because our Core Earnings basis of presentation corresponds to our segment financial presentations, we are required by GAAP to provide Core Earnings disclosure in the notes to our consolidated financial statements for our business segments.   Core Earnings are not a substitute for reported results under GAAP. We use Core Earnings to manage each business segment because Core Earnings reflect adjustments to GAAP financial results for two items, discussed below, that create significant volatility mostly due to timing factors generally beyond the control of management. Accordingly, we believe that Core Earnings provide management with a useful basis from which to better evaluate results from ongoing operations against the business plan or against results from prior periods. Consequently, we disclose this information as we believe it provides investors with additional information regarding the operational and performance indicators that are most closely assessed by management. The two items for which we adjust our Core Earnings presentations are (1) our use of derivative instruments to hedge our economic risks that do not qualify for hedge accounting treatment or do qualify for hedge accounting treatment but result in ineffectiveness and (2) the accounting for goodwill and acquired intangible assets.   While GAAP provides a uniform, comprehensive basis of accounting, for the reasons described above, our Core Earnings basis of presentation does not. Core Earnings are subject to certain general and specific limitations that investors should carefully consider. For example, there is no comprehensive, authoritative guidance for management reporting. Our Core Earnings are not defined terms within GAAP and may not be comparable to similarly titled measures reported by other companies. Accordingly, our Core Earnings presentation does not represent a comprehensive basis of accounting. Investors, therefore, may not be able to compare our performance with that of other financial services companies based upon Core Earnings. Core Earnings results are only meant to supplement GAAP results by providing additional information regarding the operational and performance indicators that are most closely used by management, our board of directors, rating agencies, lenders and investors to assess performance.   Specific adjustments that management makes to GAAP results to derive our Core Earnings basis of presentation are described in detail in the section titled Core Earnings Definition and Limitations Differences between Core Earnings and GAAP below.                       Quarter Ended June 30, 2013 (Dollars in millions) Consumer Lending Business Services FFELP Loans Other Elimina- tions (1) Total Core Earnings Adjustments Total GAAP Reclassi- fications Additions/ (Subtractions) Total Adjustments (2) Interest income: Student loans $ 627 $ $ 581 $ $ $ 1,208 $ 198 $ (76 ) $ 122 $ 1,330 Other loans 3 3 3 Cash and investments   1   1     2   1     (1 )   4               4     Total interest income 628 1 583 4 (1 ) 1,215 198 (76 ) 122 1,337 Total interest expense   206       325   10     (1 )   540     13         13   553     Net interest income (loss) 422 1 258 (6 ) 675 185 (76 ) 109 784 Less: provisions for loan losses   187       14           201               201     Net interest income (loss) after provisions for loan losses 235 1 244 (6 ) 474 185 (76 ) 109 583 Other income (loss): Gains on sales of loans and investments 257 (6 ) 251 251 Servicing revenue 10 200 16 (137 ) 89 89 Contingency revenue 109 109 109 Gains on debt repurchases 19 19 19 Other income     8               8     (185 )   219 (4)   34   42     Total other income (loss) 10 317 273 13 (137 ) 476 (185 ) 219 34 510 Expenses: Direct operating expenses 76 113 144 3 (137 ) 199 199 Overhead expenses           59         59               59     Operating expenses 76 113 144 62 (137 ) 258 258 Goodwill and acquired intangible asset impairment and amortization 4 4 4 Restructuring and other reorganization expenses   2   1       21         24               24     Total expenses   78   114     144   83     (137 )   282         4     4   286     Income (loss) from continuing operations, before income tax expense (benefit) 167 204 373 (76 ) 668 139 139 807 Income tax expense (benefit) (3)   60   74     136   (28 )       242         58     58   300     Net income (loss) from continuing operations $ 107 $ 130 $ 237 $ (48 ) $ $ 426 $ $ 81 $ 81 $ 507 Income from discontinued operations, net of tax expense     35               35               35     Net income (loss) $ 107 $ 165 $ 237 $ (48 ) $ $ 461 $ $ 81 $ 81 $ 542 Less: net loss attributable to noncontrolling interest     (1 )             (1 )             (1 )   Net income (loss) attributable to SLM Corporation $ 107 $ 166   $ 237 $ (48 ) $   $ 462   $   $ 81   $ 81 $ 543     (1)   The eliminations in servicing revenue and direct operating expense represent the elimination of intercompany servicing revenue where the Business Services segment performs the loan servicing function for the FFELP Loans segment.   (2) Core Earnings adjustments to GAAP:         Quarter Ended June 30, 2013 Net Impact of Net Impact of Derivative Goodwill and (Dollars in millions) Accounting Acquired Intangibles Total Net interest income after provisions for loan losses $ 109 $ $ 109 Total other income 34 34 Goodwill and acquired intangible asset impairment and amortization     4     4   Core Earnings adjustments to GAAP $ 143 $ (4 ) 139   Income tax expense   58   Net income $ 81   (3)   Income taxes are based on a percentage of net income before tax for the individual reportable segment.   (4) Represents the $203 million of unrealized gains on derivative and hedging activities, net as well as the $16 million of other derivative accounting adjustments.   ...   Quarter Ended March 31, 2013 (Dollars in millions) Consumer Lending   Business Services   FFELP Loans   Other   Elimina- tions (1)   Total Core Earnings   Adjustments   Total GAAP Reclassi- fications   Additions/ (Subtractions)   Total Adjustments (2) Interest income: Student loans $ 623 $ $ 599 $ $ $ 1,222 $ 212 $ (76 ) $ 136 $ 1,358 Other loans 3 3 3 Cash and investments   1     1     2   1     (1 )   4                 4     Total interest income 624 1 601 4 (1 ) 1,229 212 (76 ) 136 1,365 Total interest expense   203         340   11     (1 )   553     18     (2 ) (4)   16     569     Net interest income (loss) 421 1 261 (7 ) 676 194 (74 ) 120 796 Less: provisions for loan losses   225         16           241                 241     Net interest income (loss) after provisions for loan losses 196 1 245 (7 ) 435 194 (74 ) 120 555 Other income (loss): Gains on sales of loans and investments 55 55 55 Servicing revenue 10 205 23 (149 ) 89 89 Contingency revenue 99 99 99 Gains on debt repurchases 29 29 (6 ) (6 ) 23 Other income       7               7     (188 )   184 (5)   (4 )   3     Total other income (loss) 10 311 78 29 (149 ) 279 (194 ) 184 (10 ) 269 Expenses: Direct operating expenses 68 110 157 1 (149 ) 187 187 Overhead expenses             63         63                 63     Operating expenses 68 110 157 64 (149 ) 250 250 Goodwill and acquired intangible asset impairment and amortization 4 4 4 Restructuring and other reorganization expenses             11         11                 11     Total expenses 68 110 157 75 (149 ) 261 4 4 265 Income (loss) before income tax expense (benefit) 138 202 166 (53 ) 453 106 106 559 Income tax expense (benefit) (3)   50     76     62   (20 )       168         43     43     211     Income (loss) from continuing operations $ 88 $ 126 $ 104 $ (33 ) $ $ 285 $ $

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