SLM CORPORATION 15 th Annual Credit Suisse Financial Services Forum FEBRUARY 11, 2014
Forward-Looking Statements; Non-GAAP Financial Measures The following information is current as of February 10, 2014 (unless otherwise noted) and should be read in connection with SLM Corporation s Annual Report on Form 10-K for the year ended December 31, 2012 (the 2012 Form 10-K ), and subsequent reports filed with the Securities and Exchange Commission (the SEC ). Definitions for capitalized terms in this presentation not defined herein can be found in the 2012 Form 10-K (filed with the SEC on February 26, 2013). This Presentation contains forward-looking statements and information based on management s current expectations as of the date of this presentation. 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, 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 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 adverse effects of such initiatives on its business; risks associated with restructuring initiatives, including the company s 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 moneymarket 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 The Company 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. The Company s core earnings are not defined terms within GAAP and may not be comparable to similarly titled measures reported by other companies. For additional information, see Core Earnings Definition and Limitations in the Company s third quarter earnings release for a further discussion and a complete reconciliation between GAAP net income and core earnings. For additional information on our proposed separation described herein, please see our Form 8-K filed with the SEC on December 20, 2013, New Corporation s Form 10, as amended, filed with the SEC on February 7, 2014 and our fourth quarter earnings release filed with the SEC on Form 8-K on January 16, 2014. 2
SLM Corporation #1 saving, planning and paying for education company with 40-years of leadership in the education lending market #1 servicer and collector of student loans in the U.S. for Federal and Private Education Loans 25 million unique customers $142 billion student loan portfolio, 74% of which is insured or guaranteed Fully independent private sector company with scale and a broad franchise, traded on the NASDAQ (ticker: SLM) 3
2013 Highlights High quality loan originations of $3.8 billion - Average winning FICO of 745 and 90% were cosigned Charge-off rate declined to 2.8%, lowest level since 2007 - Low risk portfolio 1 declined to 1.5% Returned $864 million to shareholders - $600 million through share repurchases and $264 million through dividends Generated Core Earnings of $1.3 billion 2 Strategic business separation announced May 1 Low Risk = Smart Option, Legacy Traditional Cosigned, and Law/MBA/MED/CT/Other 2 For a GAAP to Core Earnings reconciliation, see slide 17 4
Separate Into Two Distinct Businesses Strategic Focus Key Businesses NewCo Leading education loan management company FFELP Loan Portfolio Non-Bank Private Education Loan Portfolio Existing Secured & Unsecured Debt Largest Education Loan Servicer Private Loan Servicing Collection Guarantor Servicing SLM BankCo Leading private education loan origination franchise retains Sallie Mae brand Largest Private Education Loan Originator Private Loan Servicing Other Consumer Assets (Future) Deposits Upromise Insurance Student Loan Portfolio 1 $103 billion of FFELP Loans $31 billion of Private Loans $6.5 billion of Private Loans 1 As of December 31, 2013 5
Strategic Separation of Businesses Provide greater visibility into the financial and operating performance of each business Attract a more focused shareholder base to the specific operating and return characteristics of each business Create optimal structure for complex and increasingly different regulatory environment 6
NewCo - Generates Significant Cash Flows $ in billions, as of 12/31/13 NewCo Net Assets Net Assets Secured FFELP Net Assets $4.6 Secured Private Net Assets 6.7 Net Unencumbered Assets 10.9 Total Assets Net of Secured Debt $22.2 Unsecured Debt $18.3 Projected Life of Loan Cash Flows* FFELP Cash Flows Secured Residual $7.1 Floor 1.9 Servicing 4.2 Total Secured $13.2 Unencumbered $1.3 Total FFELP Cash Flows $14.5 Private Credit Cash Flows Secured Residual $12.5 Servicing 1.4 Total Secured $13.9 Unencumbered $6.9 Total Private Cash Flows $20.8 Combined Cash Flows $35.3 *Floor cash flows projected using 1/13/14 yield curve. These projections are based on internal estimates and assumptions and are subject to ongoing review and modification. These projections may prove to be incorrect. 7
NewCo - Loan Servicing and Collections Direct Loans Outstanding $614 billion as of 9/30/2013 SLM, 19% Inventory of Federally Defaulted Loans $77 billion as of 9/30/2013 SLM, 17% 0.90% 0.80% Average Quarterly $ Default Score ED Servicing Contract-to-Date 0.70% Total Market, 81% Source: Department of Education, U.S. Department of Education FY 2013 Agency Financial Report Total Market, 83% Source: Department of Education, U.S. Department of Education, GA Monthly Report September 2013 0.60% 0.50% Sallie Mae Competitor 1 Competitor 2 Competitor 3 Source: Department of Education, Sallie Mae Estimates Consistently ranked #1 collector by the Department of Education If all agencies performed at Sallie Mae s recovery rate over $1 billion of additional recoveries would have been realized Federal loan servicing business and collection business requires little capital and generates high returns on equity 8
NewCo Opportunity for Growth FFELP and Private Education Loan Portfolio Acquisitions Department of Education Contracts Federal Government Collections (non-department of Education) FFELP Guarantor Contingency Fee Income 9
SLM BankCo Opportunity for Growth Enrollment at Four-Year Degree Granting Institutions (in millions) Estimated Total Cost of Education 2012/2013 AY (in billions) Cost of College (Based on a Four-Year Term) 15.3 12.9 13.3 13.5 13.7 13.9 14.3 12.1 2008 2009 2010 2011 Est. 2012 Est. 2013 Est. 2016 Est. 2021 Source: U.S. Department of Education, National Center for Education Statistics, Projections of Education Statistics to 2021 (NCES 2013-008, January 2013) Sources: Department of Education, College Board, McKinsey & Company, MeasureOne, National Student Clearinghouse, Company Analysis Source: Trends in College Pricing. 2013 The College Board,. www.collegeboard.org, U.S. Department of Education 2013 Predictable long-term market growth Demand will continue to grow as the gap widens between total educational costs and Federal student loan limits 10
Consumer Lending Segment High Quality Portfolio Low Risk = Smart Option, Legacy Traditional Cosigned, and Law/MBA/MED/CT/Other Moderate Risk = Legacy Traditional Non-Cosigned Elevated Risk = Non-Traditional 11
SLM BankCo Strengths Dominant player in education loan industry High quality loan originations Sustainable growth model with high current and expected returns 12
Managing Federal Loan Payments Since 7/1/2006, nearly 85% of Federal Loan volume has been issued through DL or under ECASLA Borrowers have multiple repayment options currently in place to manage federal loans, including income-based repayment, graduated repayment, consolidation, deferment and forbearance. In 2013, 1.9 million federal Direct Loan borrowers were in repayment plans that limit their payments to a specified percentage of income. 70% of student loan borrowers have debt balances less than $25,000 and 4% have balances above $100,000 *Excluding borrowers in grace, deferment or in school 13
Average Borrower Indebtedness Distribution of Outstanding Education Debt Balances Over $100,000, 4% $50,000 - $100,000, 9% Less than $25,000, 70% $25,000 - $50,000, 18% Source: College Board, Trends in Student Aid, 2013, FRBNY Consumer Credit Panel. Equifax (www.newyorkfed.org/regional/brown_presentation_gwu_2013q2.pdf) 14
Leader in Helping Customers Achieve Successful Repayment Helping customers successfully repay their loans and avoid the negative consequences of default is our top priority. Counselors work with customers to build a repayment plan based on each customer s financial profile and goals. In the past academic year we assisted 2.1 million past-due customers to return their education loan accounts to good standing, preventing $41 billion in federal and private education loan defaults. Helped more Direct Loan borrowers avoid default than any other servicer. If all servicers performed at Sallie Mae s most recent default prevention rate, 250,000 fewer borrowers would enter default. 15
SLM Corporation Dominant player in the education finance industry High quality federally guaranteed and private education loan assets Generating significant and predictable cash flows Private education loan portfolio business continues to demonstrate high quality growth Strategic separation to enhance shareholder value 16
Differences between Core Earnings and GAAP ($ in millions) Quarters Ended Years Ended December 31, 2013 December 13, 2012 December 31, 2013 December 13, 2012 "Core Earnings" adjustments to GAAP: Net impact of derivative accounting $ 8 $ 129 $ 243 $ (194) Net impact of goodwill and acquired intangible assets (3) (14) (13) (27) Net tax effect (5) (24) (96) 99 Net effect from discontinued operations (5) - (6) (1) Total "Core Earnings" adjustments to GAAP $ (5) $ 91 $ 128 $ (123) 17