Sallie Mae 2007 Annual Report Download - page 204

20. Segment Reporting (Continued)
Summary of “Core Earnings” Adjustments to GAAP
The adjustments required to reconcile from the Company’s “Core Earnings” results to its GAAP results
of operations relate to differing treatments for securitization transactions, derivatives, Floor Income related to
the Company’s student loans, and certain other items that management does not consider in evaluating the
Company’s operating results. The following table reflects aggregate adjustments associated with these areas
for the years ended December 31, 2007, 2006, and 2005.
2007 2006 2005
Years Ended December 31,
(Dollars in millions)
“Core Earnings” adjustments to GAAP:
Net impact of securitization accounting
(1)
..................... $ 247 $532 $ (60)
Net impact of derivative accounting
(2)
........................ (1,341) (229) 637
Net impact of Floor Income
(3)
.............................. (169) (209) (204)
Net impact of acquired intangibles
(4)
......................... (112) (94) (61)
Net tax effect
(5)
......................................... (81) (96) (61)
Total “Core Earnings” adjustments to GAAP ..................... $(1,456) $ (96) $ 251
(1)
Securitization accounting: Under GAAP, certain securitization transactions in the Company’s Lending operating segment are
accounted for as sales of assets. Under the Company’s “Core Earnings” presentation for the Lending operating segment, the
Company presents all securitization transactions on a “Core Earnings” basis as long-term non-recourse financings. The upfront
“gains” on sale from securitization transactions as well as ongoing “servicing and securitization revenue” presented in accor-
dance with GAAP are excluded from the “Core Earnings” net income and replaced by the interest income, provisions for loan
losses, and interest expense as they are earned or incurred on the securitization loans. The Company also excludes transactions
with its off-balance sheet trusts from “Core Earnings” net income as they are considered intercompany transactions on a “Core
Earnings” basis.
(2)
Derivative accounting: “Core Earnings” net income excludes periodic unrealized gains and losses arising primarily in the
Company’s Lending operating segment, and to a lesser degree in its Corporate and Other reportable segment, that are caused pri-
marily by the one-sided mark-to-market derivative valuations prescribed by SFAS No. 133 on derivatives that do not qualify for
“hedge treatment” under GAAP. Under the Company’s “Core Earnings” presentation, the Company recognizes the economic
effect of these hedges, which generally results in any cash paid or received being recognized ratably as an expense or revenue
over the hedged item’s life. “Core Earnings” net income also excludes the gain or loss on equity forward contracts that under
SFAS No. 133, are required to be accounted for as derivatives and are marked-to-market through GAAP net income.
(3)
Floor Income: The timing and amount (if any) of Floor Income earned in the Company’s Lending operating segment is uncer-
tain and in excess of expected spreads. Therefore, the Company excludes such income from “Core Earnings” net income when it
is not economically hedged. The Company employs derivatives, primarily Floor Income Contracts and futures, to economically
hedge Floor Income. As discussed above in “Derivative Accounting,” these derivatives do not qualify as effective accounting
hedges and therefore under GAAP are marked-to-market through the “gains (losses) on derivative and hedging activities, net”
line in the consolidated statements of income with no offsetting gain or loss recorded for the economically hedged items. For
“Core Earnings” net income, the Company reverses the fair value adjustments on the Floor Income Contracts and futures eco-
nomically hedging Floor Income and includes the amortization of net premiums received (net of Eurodollar futures contracts’
realized gains or losses) in income.
(4)
Acquired Intangibles: The Company excludes goodwill and intangible impairment and amortization of acquired intangibles.
(5)
Net Tax Effect: Such tax effect is based upon the Company’s “Core Earnings” effective tax rate for the year. The net tax effect
results primarily from the exclusion of the permanent income tax impact of the equity forward contracts.
F-83
SLM CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Dollars in thousands, except per share amounts, unless otherwise stated)