Sallie Mae 2007 Annual Report Download - page 56

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 makers. 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,
which includes further detail on each specific adjustment required to reconcile our “Core Earnings” segment
presentation to our GAAP earnings.
Lending APG
Corporate
and Other Lending APG
Corporate
and Other Lending APG
Corporate
and Other
2007 2006 2005
Years Ended December 31,
“Core Earnings” adjustments:
Net impact of securitization
accounting .................... $247 $— $ — $532 $— $ — $ (60) $ — $ —
Net impact of derivative accounting . . . 217 — (1,558) 131 — (360) 516 — 121
Net impact of Floor Income ......... (169) — — (209) — — (204) — —
Net impact of acquired intangibles .... (55) (28) (29) (49) (34) (11) (42) (15) (4)
Total “Core Earnings” adjustments to
GAAP ......................... $240 $(28) $(1,587) $ 405 $(34) $(371) $ 210 $(15) $117
1) Securitization Accounting: Under GAAP, certain securitization transactions in our Lending operat-
ing segment are accounted for as sales of assets. Under “Core Earnings” for the Lending operating segment,
we present 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 accordance with GAAP are excluded from “Core Earnings” and are replaced by the
interest income, provisions for loan losses, and interest expense as they are earned or incurred on the
securitization loans. We also exclude transactions with our off-balance sheet trusts from “Core Earnings” as
they are considered intercompany transactions on a “Core Earnings” basis.
55