SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 8-K
Current Report Pursuant to Section 13 or 15(d)
of The Securities Exchange Act of 1934
of The Securities Exchange Act of 1934
Date
of Report (Date of earliest event reported): July 21, 2009
SLM CORPORATION
(Exact name of registrant as specified in its charter)
| DELAWARE | File No. 001-13251 | 52-2013874 | ||
| (State or other jurisdiction | (Commission File Number) | (IRS Employer | ||
| of incorporation) | Identification No.) |
12061 Bluemont Way, Reston, Virginia 20190
(Address if principal executive offices)(zip code)
(Address if principal executive offices)(zip code)
Registrant’s telephone number, including area code: (703) 810-3000
Not Applicable
(Former name or former address, if changed since last report)
(Former name or former address, if changed since last report)
Check the appropriate box below if the Form 8-K filing is intended to simultaneously satisfy the
filing obligation of the registrant under any of the following provisions:
| o | Written communications pursuant to Rule 425 under the Securities Act (17 CFR 230.425) |
| o | Soliciting material pursuant to Rule 14a-12 under the Exchange Act (17 CFR 240.14a-12) |
| o | Pre-commencement communications pursuant to Rule 14d-2(b) under the Exchange Act (17 CFR 240.14d-2(b)) |
| o | Pre-commencement communications pursuant to Rule 13e-4(c) under the Exchange Act (17 CFR 240.13e-4(c)) |
Item 2.02 Results of Operations and Financial Condition
On
July 21, 2009, SLM Corporation (the “Company”) issued a press release with
respect to its earnings for the fiscal quarter ended June 30,
2009, which is furnished as Exhibit 99.1 to this Current Report on Form 8-K. The Supplemental Financial Information Release
for the Second Quarter 2009 is available on the
Company’s Web site at www.salliemae.com/about/investors/stockholderinfo/earningsinfo.
Presentation slides used during the Company’s investor
conference call, set for July 22, 2009,
at 8:00 a.m. EDT., may be accessed at www.salliemae.com/about/investors/stockholderinfo/webcast no later than the starting time of the conference call.
2
SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934, as amended, the Registrant has duly caused this
report to be signed on its behalf by the undersigned hereunto duly authorized.
| SLM CORPORATION |
||||
| By: | /s/ JOHN F. REMONDI | |||
| Name: | John F. Remondi | |||
| Title: | Vice Chairman and Chief Financial Officer | |||
Dated:
July 21, 2009
3
SLM CORPORATION
Form 8-K
CURRENT REPORT
EXHIBIT INDEX
Form 8-K
CURRENT REPORT
EXHIBIT INDEX
| Exhibit | ||
| No. | Description | |
99.1 |
Press Release dated July 21, 2009 |
4
Exhibit 99.1
FOR IMMEDIATE RELEASE
|
Media Contact: | Investor Contacts: | ||
| Mary Eure | Steve McGarry | |||
| 703/984-6785 | 703/984-6746 | |||
| Martha Holler | Joe Fisher | |||
| 703/984-5178 | 703/984-5755 |
SALLIE MAE REPORTS SECOND-QUARTER 2009 RESULTS
53-Percent Growth in Federal Student Loan Originations
RESTON, Va., July 21, 2009 — SLM Corporation (NYSE: SLM), commonly known as Sallie Mae, reported
net income on a core earnings basis of $170 million, or $.31 per diluted share, for the second
quarter ended June 30, 2009, vs. net income of $156 million, or $.27 per diluted share, in the
year-ago quarter.
Second-Quarter Highlights
This quarter’s results included $325 million ($.44 per diluted share) of gains on debt repurchases,
$362 million provision for private credit losses, and a $105 million ($.13 per diluted
share) reduction of net interest income caused by commercial paper market dislocation.
Excluded from core earnings is $141 million ($.17 per diluted share) of floor income.
In the quarter, the company added significantly to its liquidity by:
| • | Extending its asset-backed commercial paper facility to April 23, 2010 and reducing outstandings from $21.8 billion to $12.5 billion; | ||
| • | Completing $5.1 billion in federal student loan and $2.6 billion in private education loan securitizations; | ||
| • | Repurchasing $1.1 billion in unsecured debt maturing between 2009 and 2014; and | ||
| • | Funding $11 billion through the Straight A conduit program sponsored by the Department of Education (ED). |
Also during the second quarter, the company was awarded a contract with ED for loan servicing.
Loan Volume
With the conclusion of the 2008-2009 academic lending season, the company originated nearly $20
billion in federal student loans, an increase over the 2007-2008 academic year’s $18 billion.
“We met our 2008 commitment to make every federal student loan to every student at every school
last academic year,” said Albert L. Lord, vice chairman & CEO. “We were prepared for a
significant increase in federal loan applications, and our loan origination team delivered
outstanding service. We again expect to handle a sizeable increase this year and look forward to
providing the first-rate loan origination service our students and schools rely on.”
During the quarter, the company originated $3.7 billion in federal student loans, compared to $2.4
billion in the year-ago quarter, a 53-percent increase. The company implemented its new private
education loan product, the SMART Option Student Loan, raised credit quality standards and
originated $387 million in private education loans in the quarter.
Asset Quality
The company charged off $355 million of managed private education loans in the quarter, an increase
from $202 million in this year’s first quarter. Approximately half of the charged-off loans were
non-traditional private education loans, a market segment that the company discontinued 18 months
ago. The related loan loss provision was $362 million, compared to $297 million in the prior
quarter.
While 90-day plus delinquencies rose during the quarter, early stage delinquencies declined. The
loan loss allowance totaled nearly $2 billion at the end of the second-quarter 2009 and covers
expected charge-offs for the next two years.
Other Income and Operating Expenses
Core earnings fee income, which consists primarily of fees earned from guarantor servicing and
collection activity, was $201 million in the second quarter, compared to $221 million in the
year-ago quarter.
Operating expenses were $305 million for the quarter, a decrease from $339 million in the year-ago
quarter.
GAAP
Sallie Mae reports financial results on a GAAP basis and also presents certain core earnings
performance measures. The company’s management, equity investors, credit rating agencies and debt
capital providers use these core earnings measures to monitor the company’s business performance.
Both a description of the core earnings treatment and a full reconciliation to the GAAP income
statement can be found at: http://www.salliemae.com/about/investors/stockholderinfo/earningsinfo/,
click on the Second Quarter 2009 Supplemental Earnings Disclosure.
Sallie Mae reported a second-quarter 2009 GAAP net loss of $123 million, or $.32 diluted loss per
share, compared to net income of $266 million, or $.50 diluted earnings per share, in the 2008
second quarter. This loss was primarily driven by a $484 million unrealized, mark-to-market loss on
derivative and hedging activities. Such mark-to-market gains and losses are volatile, temporary and
will generally reverse so that there is no cumulative, unrealized gain or loss at the respective
maturity dates of the derivatives.
The GAAP provision for loan losses was $278 million, compared to the year-ago quarter’s $143
million. Under GAAP accounting, the provision for loan losses is based only on on-balance sheet
loans, while the comparable core earnings figure is based on total managed loans.
Presentation slides for the conference call discussed below may be accessed on
www.salliemae.com/about/investors/stockholderinfo/webcast.
***
The company will host an earnings conference call tomorrow, July 22 at 8 a.m. EDT. Sallie Mae
executives will be on hand to discuss various highlights of the quarter and to answer questions
related to the company’s performance. Individuals interested in participating should call the
following number tomorrow, July 22, 2009, starting at 7:45 a.m. EDT: (877) 356-5689 (USA and
Canada) or (706) 679-0623 (International) and use access code 15501913. The conference call will be
replayed continuously beginning at 11 a.m. EDT on July 22, 2009, and concluding at midnight on Aug.
5, 2009. To access the replay, please dial (800) 642-1687 (USA and Canada) or dial (706) 645-9291
(International) and use access code 15501913. In addition, there will be a live audio Web cast of
the conference call, which may be accessed at www.salliemae.com. A replay will be available 30 to
45 minutes after the live broadcast.
This press release contains “forward-looking statements” based on management’s current expectations
as of the date of this release. These statements are made pursuant to the safe harbor provisions
of the Private Securities Litigation Reform Act of 1995. Because such statements inherently
involve risks and uncertainties, actual results may differ materially from those expressed or
implied by such forward-looking statements. Such risks include, among others, changes in the terms
of student loans and the educational credit marketplace arising from the implementation of
applicable laws and regulations, and from changes in such laws and regulations, adverse results in
legal disputes, changes in the demand for educational financing or in financing preferences of
educational institutions, students and their families, changes in
liquidity, financing costs and in the general interest rate environment. For more information, see the company’s filings with the
Securities and Exchange Commission, including the forward-looking statements contained in the
company’s Supplemental Financial Information Second Quarter 2009. All information in this release
is as of July 21, 2009. 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 the Company’s
expectations.
***
SLM Corporation (NYSE: SLM), commonly known as Sallie Mae, is the nation’s leading provider of
saving, planning and paying for education programs. Through its subsidiaries, the company manages
$188 billion in education loans and serves 10 million student and parent customers. Through its
Upromise affiliates, the company also manages more than $19 billion in 529 college-savings plans,
and is a major, private source of college funding contributions in America with 10 million members
and nearly $500 million in member rewards. Sallie Mae and its subsidiaries offer debt management
services as well as business and technical products to a range of business clients, including
higher education institutions, student loan guarantors and state and federal agencies. More
information is available at www.SallieMae.com. SLM Corporation and its subsidiaries are not
sponsored by or agencies of the United States of America.
###
SLM
CORPORATION
Supplemental Earnings Disclosure
June 30, 2009
(In millions, except per share amounts)
| Quarters ended | Six months ended | |||||||||||||||||||
|
June 30, |
March 31, |
June 30, |
June 30, |
June 30, |
||||||||||||||||
| 2009 | 2009 | 2008 | 2009 | 2008 | ||||||||||||||||
| (unaudited) | (unaudited) | (unaudited) | (unaudited) | (unaudited) | ||||||||||||||||
|
SELECTED FINANCIAL INFORMATION AND RATIOS
|
||||||||||||||||||||
|
GAAP Basis
|
||||||||||||||||||||
|
Net income (loss) attributable to SLM
Corporation(1)
|
$ | (123 | ) | $ | (21 | ) | $ | 266 | $ | (144 | ) | $ | 162 | |||||||
|
Diluted earnings (loss) per common share attributable to SLM
Corporation common
shareholders(1)
|
$ | (.32 | ) | $ | (.10 | ) | $ | .50 | $ | (.42 | ) | $ | .23 | |||||||
|
Return on assets
|
(.30 | )% | (.05 | )% | .74 | % | (.18 | )% | .23 | % | ||||||||||
|
“Core Earnings”
Basis(2)(3)
|
||||||||||||||||||||
|
“Core Earnings” net income attributable to SLM
Corporation(1)(3)
|
$ | 170 | $ | 14 | $ | 156 | $ | 184 | $ | 344 | ||||||||||
|
“Core Earnings” diluted earnings (loss) per common
share attributable to SLM Corporation common
shareholders(1)(3)
|
$ | .31 | $ | (.03 | ) | $ | .27 | $ | .28 | $ | .62 | |||||||||
|
“Core Earnings” return on assets
|
.34 | % | .03 | % | .34 | % | .19 | % | .38 | % | ||||||||||
|
OTHER OPERATING STATISTICS
|
||||||||||||||||||||
|
Average on-balance sheet student loans
|
$ | 153,588 | $ | 149,662 | $ | 133,748 | $ | 151,636 | $ | 131,544 | ||||||||||
|
Average off-balance sheet student loans
|
34,902 | 35,577 | 38,175 | 35,237 | 38,670 | |||||||||||||||
|
Average Managed student loans
|
$ | 188,490 | $ | 185,239 | $ | 171,923 | $ | 186,873 | $ | 170,214 | ||||||||||
|
Ending on-balance sheet student loans, net
|
$ | 154,157 | $ | 150,374 | $ | 134,289 | ||||||||||||||
|
Ending off-balance sheet student loans, net
|
33,961 | 34,961 | 37,615 | |||||||||||||||||
|
Ending Managed student loans, net
|
$ | 188,118 | $ | 185,335 | $ | 171,904 | ||||||||||||||
|
Ending Managed FFELP Stafford and Other Student Loans, net
|
$ | 68,374 | $ | 64,690 | $ | 51,622 | ||||||||||||||
|
Ending Managed FFELP Consolidation Loans, net
|
85,272 | 86,228 | 89,213 | |||||||||||||||||
|
Ending Managed Private Education Loans, net
|
34,472 | 34,417 | 31,069 | |||||||||||||||||
|
Ending Managed student loans, net
|
$ | 188,118 | $ | 185,335 | $ | 171,904 | ||||||||||||||
| (1) | On January 1, 2009, the Company adopted the Financial Accounting Standards Board’s Statement of Financial Accounting Standards (“SFAS”) No. 160, “Noncontrolling Interests in Consolidated Financial Statements — an amendment of ARB No. 51,” the provisions of which, among other things, require that minority interests be renamed, “noncontrolling interests,” and that a company present a consolidated net income (loss) measure that includes the amount attributable to such “noncontrolling interests” for all periods presented. | |
| (2) | See explanation of “Core Earnings” performance measures under “Reconciliation of ‘Core Earnings’ Net Income to GAAP Net Income.” | |
| (3) | “Core Earnings” does not include Floor Income unless it is Fixed-Rate Floor Income that is economically hedged. The amount of this Economic Floor Income (net of tax) excluded from “Core Earnings” for the three months ended June 30, 2009, March 31, 2009, and June 30, 2008 and the six months ended June 30, 2009 and 2008 was: |
| Quarters ended | Six months ended | |||||||||||||||||||
|
June 30, |
March 31, |
June 30, |
June 30, |
June 30, |
||||||||||||||||
| 2009 | 2009 | 2008 | 2009 | 2008 | ||||||||||||||||
| (unaudited) | (unaudited) | (unaudited) | (unaudited) | (unaudited) | ||||||||||||||||
|
Total Economic Floor Income earned on Managed loans, not
included in “Core Earnings” (net of tax)
|
$ | 89 | $ | 79 | $ | 22 | $ | 168 | $ | 49 | ||||||||||
|
Total Economic Floor Income earned, not included in “Core
Earnings” (net of tax) per common share attributable to SLM
Corporation common shareholders
|
$ | .17 | $ | .17 | $ | .05 | $ | .36 | $ | .10 | ||||||||||
SLM
CORPORATION
Consolidated Balance Sheets
(In thousands, except per share amounts)
|
June 30, |
March 31, |
June 30, |
||||||||||
| 2009 | 2009 | 2008 | ||||||||||
| (unaudited) | (unaudited) | (unaudited) | ||||||||||
|
Assets
|
||||||||||||
|
FFELP Stafford and Other Student Loans (net of allowance for
losses of $102,857; $101,375; and $56,882, respectively)
|
$ | 44,044,636 | $ | 43,444,179 | $ | 43,146,711 | ||||||
|
FFELP Stafford Loans
Held-for-Sale
|
18,159,232 | 14,399,802 | — | |||||||||
|
FFELP Consolidation Loans (net of allowance for losses of
$50,181; $50,919; and $40,811, respectively)
|
70,102,304 | 70,885,647 | 73,171,342 | |||||||||
|
Private Education Loans (net of allowance for losses of
$1,396,707; $1,384,455; and $1,129,000, respectively)
|
21,850,688 | 21,644,579 | 17,970,556 | |||||||||
|
Other loans (net of allowance for losses of $68,282; $66,011;
and $46,794, respectively)
|
489,180 | 684,913 | 902,684 | |||||||||
|
Cash and investments
|
8,212,439 | 3,748,192 | 7,912,882 | |||||||||
|
Restricted cash and investments
|
5,245,702 | 3,855,546 | 3,701,454 | |||||||||
|
Retained Interest in off-balance sheet securitized loans
|
1,820,614 | 1,950,566 | 2,544,517 | |||||||||
|
Goodwill and acquired intangible assets, net
|
1,233,871 | 1,239,556 | 1,304,941 | |||||||||
|
Other assets
|
10,025,129 | 9,698,331 | 12,907,154 | |||||||||
|
Total assets
|
$ | 181,183,795 | $ | 171,551,311 | $ | 163,562,241 | ||||||
|
Liabilities
|
||||||||||||
|
Short-term borrowings
|
$ | 47,331,576 | $ | 46,331,461 | $ | 37,191,756 | ||||||
|
Long-term borrowings
|
125,880,044 | 116,669,381 | 117,920,836 | |||||||||
|
Other liabilities
|
3,120,636 | 3,586,610 | 2,905,165 | |||||||||
|
Total liabilities
|
176,332,256 | 166,587,452 | 158,017,757 | |||||||||
|
Commitments and contingencies
|
||||||||||||
|
Equity
|
||||||||||||
|
Preferred stock, par value $.20 per share, 20,000 shares
authorized:
|
||||||||||||
|
Series A: 3,300; 3,300; and 3,300 shares,
respectively, issued at stated value of $50 per share
|
165,000 | 165,000 | 165,000 | |||||||||
|
Series B: 4,000; 4,000; and 4,000 shares,
respectively, issued at stated value of $100 per share
|
400,000 | 400,000 | 400,000 | |||||||||
|
Series C: 7.25% mandatory convertible preferred stock:
1,150; 1,150; and 1,150 shares, respectively, issued at
liquidation preference of $1,000 per share
|
1,149,770 | 1,149,770 | 1,150,000 | |||||||||
|
Common stock, par value $.20 per share, 1,125,000 shares
authorized:
|
||||||||||||
|
534,842; 534,698; and 534,010 shares, respectively, issued
|
106,969 | 106,940 | 106,802 | |||||||||
|
Additional paid-in capital
|
4,709,053 | 4,694,155 | 4,637,731 | |||||||||
|
Accumulated other comprehensive income (loss), net of tax
expense (benefit)
|
(48,683 | ) | (70,450 | ) | 61,994 | |||||||
|
Retained earnings
|
229,865 | 378,387 | 855,527 | |||||||||
|
Total SLM Corporation stockholders’ equity before treasury
stock
|
6,711,974 | 6,823,802 | 7,377,054 | |||||||||
|
Common stock held in treasury: 67,128; 67,105; and
66,445 shares, respectively
|
1,860,440 | 1,859,955 | 1,842,050 | |||||||||
|
Total SLM Corporation stockholders’ equity
|
4,851,534 | 4,963,847 | 5,535,004 | |||||||||
|
Noncontrolling interest
|
5 | 12 | 9,480 | |||||||||
|
Total equity
|
4,851,539 | 4,963,859 | 5,544,484 | |||||||||
|
Total liabilities and equity
|
$ | 181,183,795 | $ | 171,551,311 | $ | 163,562,241 | ||||||
2
SLM
CORPORATION
Consolidated Statements of Income
(In
thousands, except per share amounts)
| Quarters ended | Six months ended | |||||||||||||||||||
|
June 30, |
March 31, |
June 30, |
June 30, |
June 30, |
||||||||||||||||
| 2009 | 2009 | 2008 | 2009 | 2008 | ||||||||||||||||
| (unaudited) | (unaudited) | (unaudited) | (unaudited) | (unaudited) | ||||||||||||||||
|
Interest income:
|
||||||||||||||||||||
|
FFELP Stafford and Other Student Loans
|
$ | 323,939 | $ | 342,816 | $ | 497,598 | $ | 666,755 | $ | 962,074 | ||||||||||
|
FFELP Consolidation Loans
|
460,690 | 489,362 | 769,664 | 950,052 | 1,606,320 | |||||||||||||||
|
Private Education Loans
|
393,019 | 387,041 | 409,323 | 780,060 | 852,845 | |||||||||||||||
|
Other loans
|
18,468 | 16,420 | 21,355 | 34,888 | 44,699 | |||||||||||||||
|
Cash and investments
|
7,044 | 5,971 | 70,521 | 13,015 | 194,337 | |||||||||||||||
|
Total interest income
|
1,203,160 | 1,241,610 | 1,768,461 | 2,444,770 | 3,660,275 | |||||||||||||||
|
Total interest expense
|
819,459 | 1,026,547 | 1,365,918 | 1,846,006 | 2,981,363 | |||||||||||||||
|
Net interest income
|
383,701 | 215,063 | 402,543 | 598,764 | 678,912 | |||||||||||||||
|
Less: provisions for loan losses
|
278,112 | 250,279 | 143,015 | 528,391 | 280,326 | |||||||||||||||
|
Net interest income (loss) after provisions for loan losses
|
105,589 | (35,216 | ) | 259,528 | 70,373 | 398,586 | ||||||||||||||
|
Other income (loss):
|
||||||||||||||||||||
|
Servicing and securitization revenue (loss)
|
87,488 | (95,305 | ) | 1,630 | (7,817 | ) | 109,272 | |||||||||||||
|
Losses on sales of loans and securities, net
|
— | — | (43,583 | ) | — | (78,249 | ) | |||||||||||||
|
Gains (losses) on derivative and hedging activities, net
|
(561,795 | ) | 104,025 | 362,043 | (457,770 | ) | 89,247 | |||||||||||||
|
Contingency fee revenue
|
73,368 | 74,815 | 83,790 | 148,183 | 169,096 | |||||||||||||||
|
Collections revenue (loss)
|
22,068 | (21,330 | ) | 26,365 | 738 | 83,604 | ||||||||||||||
|
Guarantor servicing fees
|
24,772 | 34,008 | 23,663 | 58,780 | 58,316 | |||||||||||||||
|
Other
|
399,065 | 192,458 | 108,728 | 591,523 | 202,261 | |||||||||||||||
|
Total other income
|
44,966 | 288,671 | 562,636 | 333,637 | 633,547 | |||||||||||||||
|
Expenses:
|
||||||||||||||||||||
|
Restructuring expenses
|
4,430 | 4,773 | 46,740 | 9,203 | 67,418 | |||||||||||||||
|
Operating expenses
|
315,185 | 301,483 | 353,688 | 616,668 | 709,336 | |||||||||||||||
|
Total expenses
|
319,615 | 306,256 | 400,428 | 625,871 | 776,754 | |||||||||||||||
|
Income (loss) before income tax expense (benefit)
|
(169,060 | ) | (52,801 | ) | 421,736 | (221,861 | ) | 255,379 | ||||||||||||
|
Income tax expense (benefit)
|
(46,551 | ) | (31,696 | ) | 153,074 | (78,247 | ) | 90,586 | ||||||||||||
|
Net income (loss)
|
(122,509 | ) | (21,105 | ) | 268,662 | (143,614 | ) | 164,793 | ||||||||||||
|
Less: net income attributable to noncontrolling interest
|
211 | 281 | 2,926 | 492 | 2,861 | |||||||||||||||
|
Net income (loss) attributable to SLM Corporation
|
(122,720 | ) | (21,386 | ) | 265,736 | (144,106 | ) | 161,932 | ||||||||||||
|
Preferred stock dividends
|
25,800 | 26,395 | 27,391 | 52,195 | 56,416 | |||||||||||||||
|
Net income (loss) attributable to SLM Corporation common stock
|
$ | (148,520 | ) | $ | (47,781 | ) | $ | 238,345 | $ | (196,301 | ) | $ | 105,516 | |||||||
|
Basic earnings (loss) per common share attributable to SLM
Corporation common shareholders
|
$ | (.32 | ) | $ | (.10 | ) | $ | .51 | $ | (.42 | ) | $ | .23 | |||||||
|
Average common shares outstanding
|
466,799 | 466,761 | 466,649 | 466,780 | 466,615 | |||||||||||||||
|
Diluted earnings (loss) per common share attributable to SLM
Corporation common shareholders
|
$ | (.32 | ) | $ | (.10 | ) | $ | .50 | $ | (.42 | ) | $ | .23 | |||||||
|
Average common and common equivalent shares outstanding
|
466,799 | 466,761 | 517,954 | 466,780 | 467,316 | |||||||||||||||
|
Dividends per common share attributable to SLM Corporation
common shareholders
|
$ | — | $ | — | $ | — | $ | — | $ | — | ||||||||||
3
SLM
CORPORATION
Segment and “Core Earnings”
Consolidated
Statements of Income
(In
thousands)
| Quarter ended June 30, 2009 | ||||||||||||||||||||||||
|
Asset |
||||||||||||||||||||||||
|
Performance |
Corporate |
Total “Core |
Total |
|||||||||||||||||||||
| Lending | Group | and Other | Earnings” | Adjustments | GAAP | |||||||||||||||||||
| (unaudited) | ||||||||||||||||||||||||
|
Interest income:
|
||||||||||||||||||||||||
|
FFELP Stafford and Other Student Loans
|
$ | 309,553 | $ | — | $ | — | $ | 309,553 | $ | 14,386 | $ | 323,939 | ||||||||||||
|
FFELP Consolidation Loans
|
394,288 | — | — | 394,288 | 66,402 | 460,690 | ||||||||||||||||||
|
Private Education Loans
|
558,667 | — | — | 558,667 | (165,648 | ) | 393,019 | |||||||||||||||||
|
Other loans
|
18,468 | — | — | 18,468 | — | 18,468 | ||||||||||||||||||
|
Cash and investments
|
3,683 | — | 4,319 | 8,002 | (958 | ) | 7,044 | |||||||||||||||||
|
Total interest income
|
1,284,659 | — | 4,319 | 1,288,978 | (85,818 | ) | 1,203,160 | |||||||||||||||||
|
Total interest expense
|
823,308 | 5,001 | 3,721 | 832,030 | (12,571 | ) | 819,459 | |||||||||||||||||
|
Net interest income (loss)
|
461,351 | (5,001 | ) | 598 | 456,948 | (73,247 | ) | 383,701 | ||||||||||||||||
|
Less: provisions for loan losses
|
401,790 | — | — | 401,790 | (123,678 | ) | 278,112 | |||||||||||||||||
|
Net interest income (loss) after provisions for loan losses
|
59,561 | (5,001 | ) | 598 | 55,158 | 50,431 | 105,589 | |||||||||||||||||
|
Contingency fee revenue
|
— | 73,368 | — | 73,368 | — | 73,368 | ||||||||||||||||||
|
Collections revenue
|
— | 22,068 | — | 22,068 | — | 22,068 | ||||||||||||||||||
|
Guarantor servicing fees
|
— | — | 24,772 | 24,772 | — | 24,772 | ||||||||||||||||||
|
Other income (loss)
|
359,363 | — | 46,273 | 405,636 | (480,878 | ) | (75,242 | ) | ||||||||||||||||
|
Total other income
|
359,363 | 95,436 | 71,045 | 525,844 | (480,878 | ) | 44,966 | |||||||||||||||||
|
Restructuring expenses
|
4,215 | 368 | (153 | ) | 4,430 | — | 4,430 | |||||||||||||||||
|
Operating expenses
|
140,877 | 79,994 | 84,522 | 305,393 | 9,792 | 315,185 | ||||||||||||||||||
|
Total expenses
|
145,092 | 80,362 | 84,369 | 309,823 | 9,792 | 319,615 | ||||||||||||||||||
|
Income (loss) before income tax expense (benefit)
|
273,832 | 10,073 | (12,726 | ) | 271,179 | (440,239 | ) | (169,060 | ) | |||||||||||||||
|
Income tax expense
(benefit)(1)
|
101,580 | 3,634 | (4,690 | ) | 100,524 | (147,075 | ) | (46,551 | ) | |||||||||||||||
|
Less: net income attributable to noncontrolling interest
|
— | 211 | — | 211 | — | 211 | ||||||||||||||||||
|
Net income (loss) attributable to SLM Corporation
|
$ | 172,252 | $ | 6,228 | $ | (8,036 | ) | $ | 170,444 | $ | (293,164 | ) | $ | (122,720 | ) | |||||||||
|
Economic Floor Income (net of tax) not included in “Core
Earnings”
|
$ | 88,899 | $ | — | $ | — | $ | 88,899 | ||||||||||||||||
| (1) | Income taxes are based on a percentage of net income before tax for the individual reportable segment. |
4
SLM
CORPORATION
Segment and “Core Earnings”
Consolidated
Statements of Income
(In
thousands)
| Quarter ended March 31, 2009 | ||||||||||||||||||||||||
|
Asset |
||||||||||||||||||||||||
|
Performance |
Corporate |
Total “Core |
Total |
|||||||||||||||||||||
| Lending | Group | and Other | Earnings” | Adjustments | GAAP | |||||||||||||||||||
| (unaudited) | ||||||||||||||||||||||||
|
Interest income:
|
||||||||||||||||||||||||
|
FFELP Stafford and Other Student Loans
|
$ | 361,919 | $ | — | $ | — | $ | 361,919 | $ | (19,103 | ) | $ | 342,816 | |||||||||||
|
FFELP Consolidation Loans
|
438,896 | — | — | 438,896 | 50,466 | 489,362 | ||||||||||||||||||
|
Private Education Loans
|
563,282 | — | — | 563,282 | (176,241 | ) | 387,041 | |||||||||||||||||
|
Other loans
|
16,420 | — | — | 16,420 | — | 16,420 | ||||||||||||||||||
|
Cash and investments
|
2,179 | — | 5,128 | 7,307 | (1,336 | ) | 5,971 | |||||||||||||||||
|
Total interest income
|
1,382,696 | — | 5,128 | 1,387,824 | (146,214 | ) | 1,241,610 | |||||||||||||||||
|
Total interest expense
|
949,248 | 5,492 | 4,139 | 958,879 | 67,668 | 1,026,547 | ||||||||||||||||||
|
Net interest income (loss)
|
433,448 | (5,492 | ) | 989 | 428,945 | (213,882 | ) | 215,063 | ||||||||||||||||
|
Less: provisions for loan losses
|
349,086 | — | — | 349,086 | (98,807 | ) | 250,279 | |||||||||||||||||
|
Net interest income (loss) after provisions for loan losses
|
84,362 | (5,492 | ) | 989 | 79,859 | (115,075 | ) | (35,216 | ) | |||||||||||||||
|
Contingency fee revenue
|
— | 74,815 | — | 74,815 | — | 74,815 | ||||||||||||||||||
|
Collections revenue (loss)
|
— | (22,019 | ) | — | (22,019 | ) | 689 | (21,330 | ) | |||||||||||||||
|
Guarantor servicing fees
|
— | — | 34,008 | 34,008 | — | 34,008 | ||||||||||||||||||
|
Other income
|
102,368 | — | 49,781 | 152,149 | 49,029 | 201,178 | ||||||||||||||||||
|
Total other income
|
102,368 | 52,796 | 83,789 | 238,953 | 49,718 | 288,671 | ||||||||||||||||||
|
Restructuring expenses
|
1,062 | 1,655 | 2,056 | 4,773 | — | 4,773 | ||||||||||||||||||
|
Operating expenses
|
131,178 | 88,471 | 71,970 | 291,619 | 9,864 | 301,483 | ||||||||||||||||||
|
Total expenses
|
132,240 | 90,126 | 74,026 | 296,392 | 9,864 | 306,256 | ||||||||||||||||||
|
Income (loss) before income tax expense (benefit)
|
54,490 | (42,822 | ) | 10,752 | 22,420 | (75,221 | ) | (52,801 | ) | |||||||||||||||
|
Income tax expense
(benefit)(1)
|
20,063 | (15,767 | ) | 3,959 | 8,255 | (39,951 | ) | (31,696 | ) | |||||||||||||||
|
Less: net income attributable to noncontrolling interest
|
— | 281 | — | 281 | — | 281 | ||||||||||||||||||
|
Net income (loss) attributable to SLM Corporation
|
$ | 34,427 | $ | (27,336 | ) | $ | 6,793 | $ | 13,884 | $ | (35,270 | ) | $ | (21,386 | ) | |||||||||
|
Economic Floor Income (net of tax) not included in “Core
Earnings”
|
$ | 79,388 | $ | — | $ | — | $ | 79,388 | ||||||||||||||||
| (1) | Income taxes are based on a percentage of net income before tax for the individual reportable segment. |
5
SLM
CORPORATION
Segment and “Core Earnings”
Consolidated
Statements of Income
(In
thousands)
| Quarter ended June 30, 2008 | ||||||||||||||||||||||||
|
Asset |
||||||||||||||||||||||||
|
Performance |
Corporate |
Total “Core |
Total |
|||||||||||||||||||||
| Lending | Group | and Other | Earnings” | Adjustments | GAAP | |||||||||||||||||||
| (unaudited) | ||||||||||||||||||||||||
|
Interest income:
|
||||||||||||||||||||||||
|
FFELP Stafford and Other Student Loans
|
$ | 524,022 | $ | — | $ | — | $ | 524,022 | $ | (26,424 | ) | $ | 497,598 | |||||||||||
|
FFELP Consolidation Loans
|
907,669 | — | — | 907,669 | (138,005 | ) | 769,664 | |||||||||||||||||
|
Private Education Loans
|
665,452 | — | — | 665,452 | (256,129 | ) | 409,323 | |||||||||||||||||
|
Other loans
|
21,355 | — | — | 21,355 | — | 21,355 | ||||||||||||||||||
|
Cash and investments
|
80,445 | — | 4,902 | 85,347 | (14,826 | ) | 70,521 | |||||||||||||||||
|
Total interest income
|
2,198,943 | — | 4,902 | 2,203,845 | (435,384 | ) | 1,768,461 | |||||||||||||||||
|
Total interest expense
|
1,604,872 | 6,933 | 5,074 | 1,616,879 | (250,961 | ) | 1,365,918 | |||||||||||||||||
|
Net interest income (loss)
|
594,071 | (6,933 | ) | (172 | ) | 586,966 | (184,423 | ) | 402,543 | |||||||||||||||
|
Less: provisions for loan losses
|
192,181 | — | — | 192,181 | (49,166 | ) | 143,015 | |||||||||||||||||
|
Net interest income (loss) after provisions for loan losses
|
401,890 | (6,933 | ) | (172 | ) | 394,785 | (135,257 | ) | 259,528 | |||||||||||||||
|
Contingency fee revenue
|
— | 83,790 | — | 83,790 | — | 83,790 | ||||||||||||||||||
|
Collections revenue
|
— | 27,517 | — | 27,517 | (1,152 | ) | 26,365 | |||||||||||||||||
|
Guarantor servicing fees
|
— | — | 23,663 | 23,663 | — | 23,663 | ||||||||||||||||||
|
Other income
|
61,898 | — | 45,587 | 107,485 | 321,333 | 428,818 | ||||||||||||||||||
|
Total other income
|
61,898 | 111,307 | 69,250 | 242,455 | 320,181 | 562,636 | ||||||||||||||||||
|
Restructuring expenses
|
30,947 | 5,174 | 10,619 | 46,740 | — | 46,740 | ||||||||||||||||||
|
Operating expenses
|
154,505 | 110,340 | 73,871 | 338,716 | 14,972 | 353,688 | ||||||||||||||||||
|
Total expenses
|
185,452 | 115,514 | 84,490 | 385,456 | 14,972 | 400,428 | ||||||||||||||||||
|
Income (loss) before income taxes expense (benefit)
|
278,336 | (11,140 | ) | (15,412 | ) | 251,784 | 169,952 | 421,736 | ||||||||||||||||
|
Income tax expense
(benefit)(1)
|
102,917 | (4,050 | ) | (5,651 | ) | 93,216 | 59,858 | 153,074 | ||||||||||||||||
|
Less: net income attributable to noncontrolling interest
|
— | 2,926 | — | 2,926 | — | 2,926 | ||||||||||||||||||
|
Net income (loss) attributable to SLM Corporation
|
$ | 175,419 | $ | (10,016 | ) | $ | (9,761 | ) | $ | 155,642 | $ | 110,094 | $ | 265,736 | ||||||||||
|
Economic Floor Income (net of tax) not included in “Core
Earnings”
|
$ | 22,198 | $ | — | $ | — | $ | 22,198 | ||||||||||||||||
| (1) | Income taxes are based on a percentage of net income before tax for the individual reportable segment. |
6
SLM
CORPORATION
Segment and “Core Earnings”
Consolidated
Statements of Income
(In
thousands)
| Six months ended June 30, 2009 | ||||||||||||||||||||||||
|
Asset |
||||||||||||||||||||||||
|
Performance |
Corporate |
Total “Core |
Total |
|||||||||||||||||||||
| Lending | Group | and Other | Earnings” | Adjustments | GAAP | |||||||||||||||||||
| (unaudited) | ||||||||||||||||||||||||
|
Interest income:
|
||||||||||||||||||||||||
|
FFELP Stafford and Other Student Loans
|
$ | 671,472 | $ | — | $ | — | $ | 671,472 | $ | (4,717 | ) | $ | 666,755 | |||||||||||
|
FFELP Consolidation Loans
|
833,184 | — | — | 833,184 | 116,868 | 950,052 | ||||||||||||||||||
|
Private Education Loans
|
1,121,949 | — | — | 1,121,949 | (341,889 | ) | 780,060 | |||||||||||||||||
|
Other loans
|
34,888 | — | — | 34,888 | — | 34,888 | ||||||||||||||||||
|
Cash and investments
|
5,862 | — | 9,447 | 15,309 | (2,294 | ) | 13,015 | |||||||||||||||||
|
Total interest income
|
2,667,355 | — | 9,447 | 2,676,802 | (232,032 | ) | 2,444,770 | |||||||||||||||||
|
Total interest expense
|
1,772,556 | 10,493 | 7,860 | 1,790,909 | 55,097 | 1,846,006 | ||||||||||||||||||
|
Net interest income (loss)
|
894,799 | (10,493 | ) | 1,587 | 885,893 | (287,129 | ) | 598,764 | ||||||||||||||||
|
Less: provisions for loan losses
|
750,876 | — | — | 750,876 | (222,485 | ) | 528,391 | |||||||||||||||||
|
Net interest income (loss) after provisions for loan losses
|
143,923 | (10,493 | ) | 1,587 | 135,017 | (64,644 | ) | 70,373 | ||||||||||||||||
|
Contingency fee revenue
|
— | 148,183 | — | 148,183 | — | 148,183 | ||||||||||||||||||
|
Collections revenue
|
— | 49 | — | 49 | 689 | 738 | ||||||||||||||||||
|
Guarantor servicing fees
|
— | — | 58,780 | 58,780 | — | 58,780 | ||||||||||||||||||
|
Other income
|
461,731 | — | 96,054 | 557,785 | (431,849 | ) | 125,936 | |||||||||||||||||
|
Total other income
|
461,731 | 148,232 | 154,834 | 764,797 | (431,160 | ) | 333,637 | |||||||||||||||||
|
Restructuring expenses
|
5,277 | 2,023 | 1,903 | 9,203 | — | 9,203 | ||||||||||||||||||
|
Operating expenses
|
272,055 | 168,465 | 156,492 | 597,012 | 19,656 | 616,668 | ||||||||||||||||||
|
Total expenses
|
277,332 | 170,488 | 158,395 | 606,215 | 19,656 | 625,871 | ||||||||||||||||||
|
Income (loss) before income tax expense (benefit)
|
328,322 | (32,749 | ) | (1,974 | ) | 293,599 | (515,460 | ) | (221,861 | ) | ||||||||||||||
|
Income tax expense
(benefit)(1)
|
121,643 | (12,133 | ) | (731 | ) | 108,779 | (187,026 | ) | (78,247 | ) | ||||||||||||||
|
Less: net income attributable to noncontrolling interest
|
— | 492 | — | 492 | — | 492 | ||||||||||||||||||
|
Net income (loss) attributable to SLM Corporation
|
$ | 206,679 | $ | (21,108 | ) | $ | (1,243 | ) | $ | 184,328 | $ | (328,434 | ) | $ | (144,106 | ) | ||||||||
|
Economic Floor Income (net of tax) not included in “Core
Earnings”
|
$ | 168,287 | $ | — | $ | — | $ | 168,287 | ||||||||||||||||
| (1) | Income taxes are based on a percentage of net income before tax for the individual reportable segment. |
7
Segment and “Core Earnings”
Consolidated
Statements of Income
(In
thousands)
| Six months ended June 30, 2008 | ||||||||||||||||||||||||
|
Asset |
||||||||||||||||||||||||
|
Performance |
Corporate |
Total “Core |
Total |
|||||||||||||||||||||
| Lending | Group | and Other | Earnings” | Adjustments | GAAP | |||||||||||||||||||
| (unaudited) | ||||||||||||||||||||||||
|
Interest income:
|
||||||||||||||||||||||||
|
FFELP Stafford and Other Student Loans
|
$ | 1,018,404 | $ | — | $ | — | $ | 1,018,404 | $ | (56,330 | ) | $ | 962,074 | |||||||||||
|
FFELP Consolidation Loans
|
1,896,155 | — | — | 1,896,155 | (289,835 | ) | 1,606,320 | |||||||||||||||||
|
Private Education Loans
|
1,414,773 | — | — | 1,414,773 | (561,928 | ) | 852,845 | |||||||||||||||||
|
Other loans
|
44,699 | — | — | 44,699 | — | 44,699 | ||||||||||||||||||
|
Cash and investments
|
222,347 | — | 11,169 | 233,516 | (39,179 | ) | 194,337 | |||||||||||||||||
|
Total interest income
|
4,596,378 | — | 11,169 | 4,607,547 | (947,272 | ) | 3,660,275 | |||||||||||||||||
|
Total interest expense
|
3,429,343 | 13,773 | 10,276 | 3,453,392 | (472,029 | ) | 2,981,363 | |||||||||||||||||
|
Net interest income (loss)
|
1,167,035 | (13,773 | ) | 893 | 1,154,155 | (475,243 | ) | 678,912 | ||||||||||||||||
|
Less: provisions for loan losses
|
373,502 | — | — | 373,502 | (93,176 | ) | 280,326 | |||||||||||||||||
|
Net interest income (loss) after provisions for loan losses
|
793,533 | (13,773 | ) | 893 | 780,653 | (382,067 | ) | 398,586 | ||||||||||||||||
|
Contingency fee revenue
|
— | 169,096 | — | 169,096 | — | 169,096 | ||||||||||||||||||
|
Collections revenue
|
— | 83,878 | — | 83,878 | (274 | ) | 83,604 | |||||||||||||||||
|
Guarantor servicing fees
|
— | — | 58,316 | 58,316 | — | 58,316 | ||||||||||||||||||
|
Other income
|
106,243 | — | 96,228 | 202,471 | 120,060 | 322,531 | ||||||||||||||||||
|
Total other income
|
106,243 | 252,974 | 154,544 | 513,761 | 119,786 | 633,547 | ||||||||||||||||||
|
Restructuring expenses
|
46,497 | 5,608 | 15,313 | 67,418 | — | 67,418 | ||||||||||||||||||
|
Operating expenses
|
318,141 | 216,482 | 143,526 | 678,149 | 31,187 | 709,336 | ||||||||||||||||||
|
Total expenses
|
364,638 | 222,090 | 158,839 | 745,567 | 31,187 | 776,754 | ||||||||||||||||||
|
Income (loss) before income tax expense (benefit)
|
535,138 | 17,111 | (3,402 | ) | 548,847 | (293,468 | ) | 255,379 | ||||||||||||||||
|
Income tax expense
(benefit)(1)
|
196,984 | 6,298 | (1,252 | ) | 202,030 | (111,444 | ) | 90,586 | ||||||||||||||||
|
Less: net income attributable to noncontrolling interest
|
— | 2,861 | — | 2,861 | — | 2,861 | ||||||||||||||||||
|
Net income (loss) attributable to SLM Corporation
|
$ | 338,154 | $ | 7,952 | $ | (2,150 | ) | $ | 343,956 | $ | (182,024 | ) | $ | 161,932 | ||||||||||
|
Economic Floor Income (net of tax) not included in “Core
Earnings”
|
$ | 48,974 | $ | — | $ | — | $ | 48,974 | ||||||||||||||||
| (1) | Income taxes are based on a percentage of net income before tax for the individual reportable segment. |
8
SLM
CORPORATION
Reconciliation of “Core Earnings” Net Income to
GAAP Net Income
(In
thousands, except per share amounts)
| Quarters ended | Six months ended | |||||||||||||||||||
|
June 30, |
March 31, |
June 30, |
June 30, |
June 30, |
||||||||||||||||
| 2009 | 2009 | 2008 | 2009 | 2008 | ||||||||||||||||
| (unaudited) | (unaudited) | (unaudited) | (unaudited) | (unaudited) | ||||||||||||||||
|
“Core Earnings” net income attributable to SLM
Corporation(A)(B)
|
$ | 170,444 | $ | 13,884 | $ | 155,642 | $ | 184,328 | $ | 343,956 | ||||||||||
|
“Core Earnings” adjustments:
|
||||||||||||||||||||
|
Net impact of securitization accounting
|
(25,861 | ) | (198,590 | ) | (246,506 | ) | (224,451 | ) | (325,652 | ) | ||||||||||
|
Net impact of derivative accounting
|
(494,581 | ) | 54,010 | 450,609 | (440,571 | ) | 87,241 | |||||||||||||
|
Net impact of Floor Income
|
90,022 | 79,023 | (18,809 | ) | 169,045 | (24,386 | ) | |||||||||||||
|
Net impact of acquired intangibles
|
(9,819 | ) | (9,664 | ) | (15,342 | ) | (19,483 | ) | (30,671 | ) | ||||||||||
|
Total “Core Earnings” adjustments before income tax
effect
|
(440,239 | ) | (75,221 | ) | 169,952 | (515,460 | ) | (293,468 | ) | |||||||||||
|
Net tax effect
|
147,075 | 39,951 | (59,858 | ) | 187,026 | 111,444 | ||||||||||||||
|
Total “Core Earnings” adjustments
|
(293,164 | ) | (35,270 | ) | 110,094 | (328,434 | ) | (182,024 | ) | |||||||||||
|
GAAP net income (loss) attributable to SLM Corporation
|
$ | (122,720 | ) | $ | (21,386 | ) | $ | 265,736 | $ | (144,106 | ) | $ | 161,932 | |||||||
|
GAAP diluted earnings (loss) per common share attributable to
SLM Corporation common shareholders
|
$ | (.32 | ) | $ | (.10 | ) | $ | .50 | $ | (.42 | ) | $ | .23 | |||||||
|
(A) “Core
Earnings” diluted earnings (loss) per common share
attributable to SLM Corporation common shareholders
|
$ | .31 | $ | (.03 | ) | $ | .27 | $ | .28 | $ | .62 | |||||||||
|
(B) Total
Economic Floor Income earned on Managed loans, not included in
“Core Earnings” (net of tax) (dollars in millions)
|
$ | 89 | $ | 79 | $ | 22 | $ | 168 | $ | 49 | ||||||||||
|
Total Economic Floor Income
earned, not included in “Core Earnings” (net of tax)
per common share attributable to SLM Corporation common
shareholders
|
$ | .17 | $ | .17 | $ | .05 | $ | .36 | $ | .10 | ||||||||||
“Core
Earnings”
In accordance with the rules and regulations of the Securities
and Exchange Commission (“SEC”), we prepare financial
statements in accordance with generally accepted accounting
principles in the United States of America (“GAAP”).
In addition to evaluating the Company’s GAAP-based
financial information, management evaluates the Company’s
business segments on a basis that, as allowed under the
Financial Accounting Standards Board’s Statement of
Financial Accounting Standards (“SFAS”) No. 131,
“Disclosures about Segments of an Enterprise and Related
Information,” differs from GAAP. We refer to
management’s basis of evaluating our segment results as
“Core Earnings” presentations for each business
segment and we refer to this information in our presentations
with credit rating agencies and lenders. While “Core
Earnings” are not a substitute for reported results under
GAAP, we rely on “Core Earnings” to manage each
operating segment because we believe these measures provide
additional information regarding the operational and performance
indicators that are most closely assessed by management.
Our “Core Earnings” are not defined terms within GAAP
and may not be comparable to similarly titled measures reported
by other companies. “Core Earnings” net income
reflects only current period adjustments to GAAP net income as
described below. Unlike financial accounting, there is no
comprehensive, authoritative
9
guidance for management reporting and as a result, our
management reporting is not necessarily comparable with similar
information for any other financial institution. Our operating
segments are defined by products and services or by types of
customers, and reflect the manner in which financial information
is currently evaluated by management. Intersegment revenues and
expenses are netted within the appropriate financial statement
line items consistent with the income statement presentation
provided to management. Changes in management structure or
allocation methodologies and procedures may result in changes in
reported segment financial information.
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 and changing
credit spreads 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
Fixed-Rate Floor Income that is economically hedged through
Floor Income Contracts.
Pre-Tax
Differences between “Core Earnings” and GAAP
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 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.
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| 1) | Securitization Accounting: Under GAAP, certain securitization transactions in our Lending operating 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 interest income, provisions for loan losses, and interest expense as 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. | |
| 2) | Derivative Accounting: “Core Earnings” exclude periodic unrealized gains and losses that are caused primarily 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. These unrealized gains and losses occur in our Lending operating segment. In our “Core Earnings” presentation, we recognize 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. | |
| 3) | Floor Income: The timing and amount (if any) of Floor Income earned in our Lending operating segment is uncertain and in excess of expected spreads. Therefore, we only include such income in “Core Earnings” when it is Fixed-Rate Floor Income that is economically hedged. We employ 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, they are marked-to-market through the “gains (losses) on derivative and hedging activities, net” line in the consolidated statement of income with no offsetting gain or loss recorded for the economically hedged items. For “Core Earnings,” we reverse the fair value adjustments on the Floor Income Contracts and futures economically hedging Floor Income and include the amortization of net premiums received in income. | |
| 4) | Acquired Intangibles: Our “Core Earnings” exclude goodwill and intangible impairment and the amortization of acquired intangibles. |
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