Sallie Mae 2007 Annual Report Download - page 64

therefore not recognized in the student loan spread. Under this presentation, these gains and losses are
reclassified to the income statement line item of the economically hedged item. For our “Core
Earnings” basis student loan spread, this would primarily include: (a) reclassifying the net settlement
amounts related to our written Floor Income Contracts to student loan interest income and (b) reclassi-
fying the net settlement amounts related to certain of our basis swaps to debt interest expense;
• excludes unhedged Floor Income earned on the Managed student loan portfolio; and
• includes the amortization of upfront payments on Floor Income Contracts in student loan income that
we believe are economically hedging the Floor Income.
The student loan spread is highly susceptible to liquidity, funding and interest rate risk. These risks are
discussed separately at “LIQUIDITY AND CAPITAL RESOURCES” and in the “RISK FACTORS” discussion
at the front of the document.
As discussed above, these differences result in the “Core Earnings” basis student loan spread not being a
GAAP-basis presentation. Management relies on this measure to manage our Lending business segment.
Specifically, management uses the “Core Earnings” basis student loan spread to evaluate the overall economic
effect that certain factors have on our student loans either on- or off-balance sheet. These factors include the
overall mix of student loans in our portfolio, acquisition costs, borrower benefits program costs, Floor Income
and funding and hedging costs. Management believes that it is important to evaluate all of these factors on a
“Core Earnings” basis to gain additional information about the economic effect of these factors on our student
loans under management. Management believes that this additional information assists us in making strategic
decisions about the Company’s business model for the Lending business segment, including among other
factors, how we acquire or originate student loans, how we fund acquisitions and originations, what borrower
benefits we offer and what type of loans we purchase or originate. While management believes that the “Core
Earnings” basis student loan spread is an important tool for evaluating the Company’s performance for the
reasons described above, it is subject to certain general and specific limitations that investors should carefully
consider. See “BUSINESS SEGMENTS — Limitations of ‘Core Earnings.’” One specific limitation is that the
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