Sallie Mae 2006 Annual Report Download - page 52

Limitations of “Core Earnings”
While GAAP provides a uniform, comprehensive basis of accounting, for the reasons described above,
management believes that “Core Earnings” are an important additional tool for providing a more complete
understanding of the Company’s results of operations. Nevertheless, “Core Earnings” are subject to certain
general and specific limitations that investors should carefully consider. For example, as stated above, unlike
financial accounting, 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. Unlike GAAP, “Core Earnings” reflect only current period adjustments to GAAP.
Accordingly, the Company’s “Core Earnings” presentation does not represent a comprehensive basis of
accounting. Investors, therefore, may not compare our Company’s 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, the Company’s board of directors, rating agencies and lenders to assess
performance.
Other limitations arise from the specific adjustments that management makes to GAAP results to derive
“Core Earnings” results. For example, in reversing the unrealized gains and losses that result from
SFAS No. 133, “Accounting for Derivative Instruments and Hedging Activities,” on derivatives that do not
qualify for “hedge treatment,” as well as on derivatives that do qualify but are in part ineffective because they
are not perfect hedges, we focus on the long-term economic effectiveness of those instruments relative to the
underlying hedged item and isolate the effects of interest rate volatility, changing credit spreads and changes
in our stock price on the fair value of such instruments during the period. Under GAAP, the effects of these
factors on the fair value of the derivative instruments (but not on the underlying hedged item) tend to show
more volatility in the short term. While our presentation of our results on a “Core Earnings” basis provides
important information regarding the performance of our Managed portfolio, a limitation of this presentation is
that we are presenting the ongoing spread income on loans that have been sold to a trust managed by us.
While we believe that our “Core Earnings” presentation presents the economic substance of our Managed loan
portfolio, it understates earnings volatility from securitization gains. Our “Core Earnings” results exclude
certain Floor Income, which is real cash income, from our reported results and therefore may understate
earnings in certain periods. Management’s financial planning and valuation of operating results, however, does
not take into account Floor Income because of its inherent uncertainty, except when it is economically hedged
through Floor Income Contracts.
Pre-tax Differences between “Core Earnings” and GAAP by Business Segment
Our “Core Earnings” are the primary financial performance measures used by management to evaluate
performance and to allocate resources. Accordingly, financial information is reported to management on a
“Core Earnings” basis by reportable segment, as these are the measures used regularly by our chief operating
decision maker. Our “Core Earnings” are used in developing our financial plans and tracking results, and also
in establishing corporate performance targets and determining incentive compensation. Management believes
this information provides additional insight into the financial performance of the Company’s core business
activities. “Core Earnings” net income reflects only current period adjustments to GAAP net income, as
described in the more detailed discussion of the differences between “Core Earnings” and GAAP that follows,
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