SLM Corporation Posts Strong Second-Quarter Performance; Managed Federal Loan Portfolio Exceeds $100 Billion for First Time

RESTON, Va., July 21 /PRNewswire-FirstCall/ -- SLM Corporation , commonly known as Sallie Mae, today reported second-quarter 2005 earnings and performance results that include $2.8 billion in preferred- channel loan originations, a 20-percent increase from the 2004 second quarter. The company's federal student loan portfolio now exceeds $100 billion.

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Preferred-channel loan originations are loans funded by the company's internal brands and other lender partners. These loans are a key measure of Sallie Mae's market share success and indicate future loan acquisition volume and earnings growth.

"Our loan origination growth -- particularly through our own brands -- showed exceptional strength in the first half of 2005," said Thomas J. (Tim) Fitzpatrick, vice chairman and chief executive officer. "Combined with the strong performance of our fee-based businesses, and the high-quality service we displayed during the recent rush to consolidate, we are well positioned for the remainder of the year."

The company's internal lending brands originated $3.4 billion in the first half of 2005, an increase of 34 percent from the year-ago period. These brands now represent 36 percent of the company's loan originations. At June 30, 2005, the company's managed student loan portfolio increased 23 percent to top $116 billion, compared to $95 billion one year ago.

The July 1 interest rate increase on federal education loans spurred record consolidation volume and processing activity, with most applications submitted during the final two weeks of the quarter. The company disbursed $4.1 billion to consolidate its existing loan volume, and a net $183 million was disbursed to consolidate incremental loan volume. Third quarter consolidation loan disbursements also will reach record levels, given the number of processed, but undisbursed, applications pending as of June 30, 2005. Consolidation loans now comprise more than 54 percent of the company's managed guaranteed student loan portfolio, extending the average asset life. The average life of a new Stafford loan entering repayment is 5.25 years, as compared to 12 years for a new consolidation loan entering repayment.

Sallie Mae reports financial results on a GAAP basis and also presents certain "core cash" performance measures that are non-GAAP financial measures. These "core cash" measures are the primary financial performance measures used by management to develop the company's financial plan, track results, and establish corporate performance targets and incentive compensation. "Core cash" 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 investors to assess performance.

Sallie Mae reported second-quarter 2005 GAAP net income of $297 million, or $.66 per diluted share, compared to $615 million, or $1.29 per diluted share, in the year-ago period. GAAP net income for the first half of 2005 totaled $520 million, compared to $906 million in the same period in 2004. Included in these results are accounting rule changes related to contingently convertible bonds, which reduced earnings per diluted share by $(.02) in the current quarter, $(.07) in the year-ago quarter and $(.04) and $(.11) in the first half of 2005 and 2004, respectively.

"Core cash" net income for the 2005 second quarter was $279 million, up from $237 million in the year-ago quarter. On a diluted share basis, "core cash" net income grew 24 percent to $.62 in second quarter 2005, compared to $.50 per diluted share in the same period last year. For the first half of 2005, "core cash" net income was $535 million, compared to $468 million in the first half of 2004. These results include the effect of the accounting change on contingently convertible bonds, which reduced "core cash" earnings per diluted share by $(.02) in the second quarter 2005, $(.02) in the year-ago quarter and $(.04) and $(.05) in the first half of 2005 and 2004, respectively.

"Core cash" net interest income in the second quarter 2005 was $516 million, compared to the year-ago quarter's $445 million. "Core cash" non- interest income was $216 million for the 2005 second quarter, up 30 percent from $166 million in the year-ago quarter, and includes fees earned from guarantor servicing and debt management activity, collection revenue and other servicing fees. "Core cash" operating expenses were $271 million for the second quarter 2005, compared to $199 million in the same quarter last year.

Both a description of the "core cash" treatment and a full reconciliation to the GAAP income statement can be found in the Supplemental Earnings Disclosure accompanying this press release, which is posted under the Investors page at http://www.salliemae.com/.

Total equity for the company at June 30, 2005, was $3.7 billion, up from $3.1 billion at March 31, 2005. The company's tangible capital at the end of the 2005 second quarter was 2.03 percent of managed assets, compared to 1.63 percent at prior quarter end.

The company will host its regular earnings conference call today at noon. 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 today, July 21, 2005, starting at 11:45 a.m. EDT: 877-356-5689 (USA and Canada) or 706-679-0623 (International). The conference call will be replayed continuously beginning Thursday, July 21, at 3:30 p.m. EDT and concluding at 11:59 p.m. EDT on Thursday, July 28. Please dial 800-642-1687 (USA and Canada) or dial 706-645-9291 (International) and use access code 7593014. In addition, there will be a live audio Web cast of the conference call, which may be accessed at http://www.salliemae.com/. A replay will be available 30-45 minutes after the live broadcast.

Forward Looking Statements:

This press release contains "forward-looking statements" including expectations as to future market share, the success of preferred channel originations and future results. 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, changes in the demand for educational financing or in financing preferences of educational institutions, students and their families, and changes in the general interest rate environment. For more information, see the company's filings with the Securities and Exchange Commission.

SLM Corporation , commonly known as Sallie Mae, is the nation's No. 1 paying-for-college company, managing more than $116 billion in student loans for 8 million borrowers. Sallie Mae was originally created in 1972 as a government-sponsored entity (GSE) and terminated all ties to the federal government in 2004. The company remains the country's largest originator of federally insured student loans. Through its specialized subsidiaries and divisions, Sallie Mae also provides debt management services as well as business and technical products to a range of business clients, including colleges, universities and loan guarantors. More information is available at http://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, 2005 (Dollars in millions, except earnings per share) Quarters ended -------------------------------------- June 30, March 31, June 30, 2005 2005 2004 --------- --------- --------- (unaudited) (unaudited) (unaudited) SELECTED FINANCIAL INFORMATION AND RATIOS - (GAAP Basis) Net income $ 297 $ 223 $ 615 Diluted earnings per common share(1) $ .66 $ .49 $ 1.29 Return on assets 1.55% 1.18% 3.61% NON-GAAP INFORMATION(2) "Core cash" net income $ 279 $ 256 $ 237 "Core cash" diluted earnings per common share(1) $ .62 $ .57 $ .50 "Core cash" return on assets .90% .86% .87% OTHER OPERATING STATISTICS Average on-balance sheet student loans $ 70,580 $ 67,661 $ 54,799 Average off-balance sheet student loans 43,791 41,892 39,318 --------- --------- --------- Average Managed student loans $ 114,371 $ 109,553 $ 94,117 ========= ========= ========= Ending on-balance sheet student loans, net $ 72,831 $ 69,906 $ 51,577 Ending off-balance sheet student loans, net 43,669 41,793 43,324 --------- --------- --------- Ending Managed student loans, net $ 116,500 $ 111,699 $ 94,901 ========= ========= ========= Ending Managed FFELP student loans, net $ 47,121 $ 47,319 $ 48,157 Ending Managed Consolidation Loans, net 55,880 51,862 36,858 Ending Managed Private Education Loans, net 13,499 12,518 9,886 --------- --------- --------- Ending Managed student loans, net $ 116,500 $ 111,699 $ 94,901 ========= ========= ========= Six months ended June 30, ------------------------- 2005 2004 --------- --------- (unaudited) (unaudited) SELECTED FINANCIAL INFORMATION AND RATIOS - (GAAP Basis) Net income $ 520 $ 906 Diluted earnings per common share(1) $ 1.15 $ 1.89 Return on assets 1.37% 2.77% NON-GAAP INFORMATION(2) "Core cash" net income $ 535 $ 468 "Core cash" diluted earnings per common share(1) $ 1.18 $ .98 "Core cash" return on assets .88% .89% OTHER OPERATING STATISTICS Average on-balance sheet student loans $ 69,129 $ 53,846 Average off-balance sheet student loans 42,846 38,552 -------- --------- Average Managed student loans $ 111,975 $ 92,398 ========= =========

(1) In December 2004, the Company adopted the Emerging Issues Task Force ("EITF") Issue No. 04-8, "The Effect of Contingently Convertible Debt on Diluted Earnings per Share," which requires the shares underlying contingently convertible debt instruments ("Co-Cos") to be included in diluted earnings per share computations regardless of whether the market price trigger or the conversion price has been met, using the "if-converted" accounting method. Diluted earnings per common share amounts disclosed prior to December 2004 have been retroactively restated to give effect to the application of EITF No. 04-8 as it relates to the Company's $2 billion in Co-Cos issued in May 2003. The effect of the adoption of EITF No. 04-8 was to decrease diluted earnings per common share by the following amounts:

Quarters ended -------------------------------------- June 30, March 31, June 30, 2005 2005 2004 --------- --------- --------- (unaudited) (unaudited) (unaudited) Impact on GAAP diluted earnings per common share due to the implementation of EITF No.04-8 $ (.02) $ (.02) $ (.07) Impact on "core cash" diluted earnings per common share due to the implementation of EITF No. 04-8 $ (.02) $ (.02) $ (.02) Six months ended June 30, ------------------------- 2005 2004 --------- --------- (unaudited) (unaudited) Impact on GAAP diluted earnings per common share due to the implementation of EITF No.04-8 $ (.04) $ (.11) Impact on "core cash" diluted earnings per common share due to the implementation of EITF No. 04-8 $ (.04) $ (.05)

(2) See explanation of non-GAAP performance measures under "Reconciliation of 'Core Cash' Net Income to GAAP Net Income."

SLM CORPORATION Consolidated Balance Sheets (In thousands, except per share amounts) June 30, March 31, June 30, 2005 2005 2004 ----------- ----------- ----------- (unaudited) (unaudited) (unaudited) Assets Federally insured student loans (net of allowance for losses of $5,313; $6,849; and $42,241, respectively) $ 66,733,409 $ 63,379,249 $ 47,834,457 Private Education Loans (net of allowance for losses of $228,205; $190,880; and $154,918, respectively) 6,097,102 6,527,022 3,742,432 Other loans (net of allowance for losses of $12,764; $11,754; and $10,516, respectively) 962,017 1,094,712 928,209 Cash and investments 3,637,936 3,235,034 15,242,069 Restricted cash and investments 2,422,714 2,224,354 1,915,538 Retained Interest in off-balance sheet securitized loans 2,631,308 2,246,329 2,330,360 Goodwill and acquired intangible assets, net 1,003,427 1,014,986 618,930 Other assets 3,270,831 4,075,267 3,355,426 ------------ ------------ ------------ Total assets $ 86,758,744 $ 83,796,953 $ 75,967,421 ============ ============ ============ Liabilities Short-term borrowings $ 4,679,612 $ 5,516,177 $ 8,063,041 Long-term notes 75,017,121 72,241,082 62,036,763 Other liabilities 3,336,943 2,901,843 2,946,951 ------------ ------------ ------------ Total liabilities 83,033,676 80,659,102 73,046,755 ------------ ------------ ------------ Commitments and contingencies Minority interest in subsidiaries 73,330 72,869 - Stockholders' 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; Series B: 4,000; 0; and 0 shares respectively, issued at stated value of $100 per share 565,000 165,000 165,000 Common stock, par value $.20 per share, 1,125,000 shares authorized: 486,706; 484,917; and 478,722 shares, respectively, issued 97,341 96,984 95,745 Additional paid-in capital 2,035,676 1,969,881 1,747,284 Accumulated other comprehensive income, net of tax 473,121 374,574 355,955 Retained earnings 2,862,730 2,662,316 1,683,563 ------------ ------------ ------------ Stockholders' equity before treasury stock 6,033,868 5,268,755 4,047,547 Common stock held in treasury at cost: 66,532; 62,936; and 39,760 shares, respectively 2,382,130 2,203,773 1,126,881 ------------ ------------ ------------ Total stockholders' equity 3,651,738 3,064,982 2,920,666 ------------ ------------ ------------ Total liabilities and stockholders' equity $ 86,758,744 $ 83,796,953 $ 75,967,421 ============ ============ ============ SLM CORPORATION Consolidated Statements of Income (In thousands, except per share amounts) Quarters ended ------------------------------------- June 30, March 31, June 30, 2005 2005 2004 -------- --------- --------- (unaudited) (unaudited) (unaudited) Interest income: Federally insured student loans $ 792,939 $ 699,154 $ 492,166 Private Education Loans 126,809 129,616 76,613 Other loans 20,046 20,153 18,126 Cash and investments 54,245 62,049 52,534 ------------ ------------ ------------ Total interest income 994,039 910,972 639,439 Interest expense 664,251 564,212 306,832 ------------ ------------ ------------ Net interest income 329,788 346,760 332,607 Less: provisions for losses 78,948 46,523 28,344 ------------ ------------ ------------ Net interest income after provisions for losses 250,840 300,237 304,263 ------------ ------------ ------------ Other income: Gains on student loan securitizations 262,001 49,894 197,840 Servicing and securitization revenue 149,931 142,961 124,037 Gains (losses) on derivative and hedging activities, net (105,940) (34,251) 386,147 Guarantor servicing fees 25,686 32,540 23,249 Debt management fees and collections revenue 124,470 120,635 70,113 Other 55,748 62,319 68,115 ------------ ------------ ------------ Total other income 511,896 374,098 869,501 Operating expenses 287,413 262,291 206,051 ------------ ------------ ------------ Income before income taxes and minority interest in net earnings of subsidiaries 475,323 412,044 967,713 Income taxes 176,573 186,466 352,787 ------------ ------------ ------------ Income before minority interest in net earnings of subsidiaries 298,750 225,578 614,926 Minority interest in net earnings of subsidiaries 2,235 2,194 - ------------ ------------ ------------ Net income 296,515 223,384 614,926 Preferred stock dividends 3,908 2,875 2,864 ------------ ------------ ------------ Net income attributable to common stock $ 292,607 $ 220,509 $ 612,062 ============ ============ ============ Basic earnings per common share $ .70 $ .52 $ 1.39 ============ ============ ============ Average common shares outstanding 419,497 420,924 439,901 ============ ============ ============ Diluted earnings per common share $ .66 $ .49 $ 1.29 ============ ============ ============ Average common and common equivalent shares outstanding 461,900 463,014 478,497 ============ ============ ============ Dividends per common share $ .22 $ .19 $ .19 ============ ============ ============ Six months ended June 30, ---------------------- 2005 2004 -------- -------- (unaudited) (unaudited) Interest income: Federally insured student loans $ 1,492,093 $ 961,133 Private Education Loans 256,425 153,202 Other loans 40,199 36,502 Cash and investments 116,294 95,991 ------------ ------------ Total interest income 1,905,011 1,246,828 Interest expense 1,228,463 592,506 ------------ ------------ Net interest income 676,548 654,322 Less: provisions for losses 125,471 68,162 ------------ ------------ Net interest income after provisions for losses 551,077 586,160 ------------ ------------ Other income: Gains on student loan securitizations 311,895 311,794 Servicing and securitization revenue 292,892 260,695 Gains (losses) on derivative and hedging activities, net (140,191) 269,404 Guarantor servicing fees 58,226 58,220 Debt management fees and collections revenue 245,105 150,041 Other 118,067 127,070 ------------ ------------ Total other income 885,994 1,177,224 Operating expenses 549,704 414,928 ------------ ------------ Income before income taxes and minority interest in net earnings of subsidiaries 887,367 1,348,456 Income taxes 363,039 442,065 ------------ ------------ Income before minority interest in net earnings of subsidiaries 524,328 906,391 Minority interest in net earnings of subsidiaries 4,429 - ------------ ------------ Net income 519,899 906,391 Preferred stock dividends 6,783 5,750 ------------ ------------ Net income attributable to common stock $ 513,116 $ 900,641 ============ ============ Basic earnings per common share $ 1.22 $ 2.04 ============ ============ Average common shares outstanding 420,206 441,283 ============ ============ Diluted earnings per common share $ 1.15 $ 1.89 ============ ============ Average common and common equivalent shares outstanding 462,454 480,278 ============ ============ Dividends per common share $ .41 $ .36 ============ ============ SLM CORPORATION Segment and Non-GAAP "Core Cash" Consolidated Statements of Income (In thousands) Quarter ended June 30, 2005 ------------------------------------------------------------ (unaudited) Total Corporate "Core Cash" Total Lending DMO and Other Measures Adjustments GAAP -------- -------- -------- -------- -------- -------- Net interest income $516,015 $ - $ - $516,015 $(186,227) $329,788 Less: provisions for losses 14,225 - - 14,225 64,723 78,948 -------- -------- -------- -------- -------- -------- Net interest income after provisions for losses 501,790 - - 501,790 (250,950) 250,840 Fee income - 82,082 25,686 107,768 - 107,768 Collections revenue - 42,388 - 42,388 - 42,388 Other income 36,137 33 29,243 65,413 296,327 361,740 Operating expenses 123,803 66,185 81,414 271,402 16,011 287,413 Income tax expense (benefit)(1) 153,226 21,578 (9,800) 165,004 11,569 176,573 Minority interest in net earnings of subsidiaries 928 1,199 - 2,127 108 2,235 -------- -------- -------- -------- -------- -------- Net income (loss) $259,970 $35,541 $(16,685) $278,826 $17,689 $296,515 ======== ======== ======== ======== ======== ======== Quarter ended March 31, 2005 ------------------------------------------------------------ (unaudited) Total Corporate "Core Cash" Total Lending DMO and Other Measures Adjustments GAAP -------- -------- -------- -------- -------- -------- Net interest income $493,939 $ - $ - $493,939 $(147,179) $346,760 Less: provisions for losses 54,922 - - 54,922 (8,399) 46,523 -------- -------- -------- -------- -------- -------- Net interest income after provisions for losses 439,017 - - 439,017 (138,780) 300,237 Fee income - 85,242 32,540 117,782 - 117,782 Collections revenue - 35,393 - 35,393 - 35,393 Other income 35,762 33 31,629 67,424 153,499 220,923 Operating expenses 116,477 63,330 69,490 249,297 12,994 262,291 Income tax expense (benefit)(1) 132,571 21,216 (1,969) 151,818 34,648 186,466 Minority interest in net earnings of subsidiaries 821 1,221 - 2,042 152 2,194 -------- -------- -------- -------- -------- -------- Net income (loss) $224,910 $34,901 $(3,352) $256,459 $(33,075) $223,384 ======== ======== ======== ======== ======== ======== Quarter ended June 30, 2004 ------------------------------------------------------------ (unaudited) Total Corporate "Core Cash" Total Lending DMO and Other Measures Adjustments GAAP -------- -------- -------- -------- -------- -------- Net interest income $445,282 $ - $ - $445,282 $(112,675) $332,607 Less: provisions for losses 40,624 - - 40,624 (12,280) 28,344 -------- -------- -------- -------- -------- -------- Net interest income after provisions for losses 404,658 - - 404,658 (100,395) 304,263 Fee income - 70,113 23,249 93,362 - 93,362 Other income 48,357 - 23,895 72,252 703,887 776,139 Operating expenses 96,709 32,427 70,178 199,314 6,737 206,051 Income tax expense (benefit)(1) 128,561 13,600 (8,310) 133,851 218,936 352,787 -------- -------- -------- -------- -------- -------- Net income (loss) $227,745 $24,086 $(14,724) $237,107 $377,819 $614,926 ======== ======== ======== ======== ======== ======== Six months ended June 30, 2005 ------------------------------------------------------------ (unaudited) Total Corporate "Core Cash" Total Lending DMO and Other Measures Adjustments GAAP -------- -------- -------- -------- -------- -------- Net interest income $1,009,954 $ - $ - $1,009,954 $(333,406) $676,548 Less: provisions for losses 69,147 - - 69,147 56,324 125,471 -------- -------- -------- -------- -------- -------- Net interest income after provisions for losses 940,807 - - 940,807 (389,730) 551,077 Fee income - 167,324 58,226 225,550 - 225,550 Collections revenue - 77,781 - 77,781 - 77,781 Other income 71,899 66 60,872 132,837 449,826 582,663 Operating expenses 240,280 129,515 150,904 520,699 29,005 549,704 Income tax expense (benefit)(1) 285,797 42,794 (11,769) 316,822 46,217 363,039 Minority interest in net earnings of subsidiaries 1,749 2,420 - 4,169 260 4,429 -------- -------- -------- -------- -------- -------- Net income (loss) $484,880 $70,442 $(20,037) $535,285 $(15,386) $519,899 ======== ======== ======== ======== ======== ======== Six months ended June 30, 2004 ------------------------------------------------------------ (unaudited) Total Corporate "Core Cash" Total Lending DMO and Other Measures Adjustments GAAP -------- -------- -------- -------- -------- -------- Net interest income $878,709 $ - $ - $878,709 $(224,387) $654,322 Less: provisions for losses 85,592 - - 85,592 (17,430) 68,162 -------- -------- -------- -------- -------- -------- Net interest income after provisions for losses 793,117 - - 793,117 (206,957) 586,160 Fee income - 150,041 58,220 208,261 - 208,261 Other income 77,256 - 54,332 131,588 837,375 968,963 Operating expenses 200,490 64,265 136,708 401,463 13,465 414,928 Income tax expense (benefit)(1) 241,184 30,872 (8,714) 263,342 178,723 442,065 -------- -------- -------- -------- -------- -------- Net income (loss) $428,699 $54,904 $(15,442) $468,161 $438,230 $906,391 ======== ======== ======== ======== ======== ======== (1) Income taxes are based on a percentage of net income before tax for the individual reportable segment. SLM CORPORATION Reconciliation of "Core Cash" Net Income to GAAP Net Income (In thousands) Quarters ended -------------------------------------- June 30, March 31, June 30, 2005 2005 2004 ----------- ---------- ---------- (unaudited) (unaudited) (unaudited) "Core cash" net income(A) $ 278,826 $ 256,459 $ 237,107 "Core cash" adjustments: Net impact of securitization accounting 107,531 (32,372) 66,388 Net impact of derivative accounting (10,989) 89,612 561,534 Net impact of Floor Income (51,084) (42,433) (24,327) Amortization of acquired intangibles (16,092) (13,082) (6,840) --------- --------- --------- Total "core cash" adjustments before income taxes and minority interest in net earnings of subsidiaries 29,366 1,725 596,755 Net tax effect(B) (11,569) (34,648) (218,936) --------- --------- --------- Total "core cash" adjustments before minority interest in net earnings of subsidiaries 17,797 (32,923) 377,819 Minority interest in net earnings of subsidiaries (108) (152) - --------- --------- --------- Total "core cash" adjustments 17,689 (33,075) 377,819 --------- --------- --------- GAAP net income $ 296,515 $ 223,384 $614,926 ========= ========= ========= GAAP diluted earnings per common share $ .66 $ .49 $ 1.29 ============ ============ ============ (A)"Core cash" diluted earnings per common share $ .62 $ .57 $ .50 ============ ============ ============ Six months ended June 30, ------------------------ 2005 2004 ---------- ---------- (unaudited) (unaudited) "Core cash" net income(C) $ 535,285 $ 468,161 "Core cash" adjustments: Net impact of securitization accounting 75,159 54,717 Net impact of derivative accounting 78,623 661,024 Net impact of Floor Income (93,517) (85,107) Amortization of acquired intangibles (29,174) (13,681) ---------- ---------- Total "core cash" adjustments before income taxes and minority interest in net earnings of subsidiaries 31,091 616,953 Net tax effect(B) (46,217) (178,723) ---------- ---------- Total "core cash" adjustments before minority interest in net earnings of subsidiaries (15,126) 438,230 Minority interest in net earnings of subsidiaries (260) - ---------- ---------- Total "core cash" adjustments (15,386) 438,230 ---------- ---------- GAAP net income $ 519,899 $ 906,391 ========== ========== GAAP diluted earnings per common share $ 1.15 $ 1.89 ============ ============ (C)"Core cash" diluted earnings per common share $ 1.18 $ .98 ============ ============ (B) Such tax effect is based upon the Company's "core cash" 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. Non-GAAP "Core Cash" Measures

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 ("GAAP"). In addition to evaluating the Company's GAAP-based financial information, management also evaluates the Company's operating performance on both a segment and consolidated basis under certain non-GAAP performance measures that we refer to as "core cash" measures. While "core cash" measures are not a substitute for reported results under GAAP, we rely on "core cash" measures in operating our business because we believe they provide additional information regarding the operational and performance indicators that are most closely assessed by management.

Our "core cash" measures are the primary financial performance measures used by management to develop the Company's financial plans, track results, and establish corporate performance targets and incentive compensation. While "core cash" measures are not a substitute for reported results under GAAP, the Company relies on "core cash" measures in operating its business because it permits management to make meaningful period-to-period comparisons of the performance of the business by evaluating the Company's on- and off-balance sheet loans on a "Managed Basis" and adjusts for certain elements of GAAP accounting that management believes diverge from managed economic results and, accordingly, are less useful to management in evaluating and executing on the Company's operating performance. For example, as described in more detail below, under GAAP certain securitizations are required to be accounted for as sales of assets even though from an economic standpoint they are effectively long-term non-recourse financings. In addition, also as described in more detail below, management believes that the derivative instruments employed by the Company are effective economic hedges and, as such, are a critical element of our interest rate risk management strategy, although certain of those derivatives do not qualify for "hedge treatment" as defined by the Financial Accounting Standard Board's (the "FASB's") Statement of Financial Accounting Standards ("SFAS") No. 133, "Accounting for Derivative Instruments and Hedging Activities." Accordingly, certain derivative instruments must be marked-to- market in the income statement with no consideration for the corresponding change in fair value of the hedged item. The Company's "core cash" presentation allows management to isolate these one-sided adjustments and the ineffectiveness that results from effective SFAS No. 133 hedges so as to allow management to evaluate the economics of the derivative transactions and the underlying assets. A more detailed discussion of the differences between GAAP and "core cash" measures is set forth below.

While the GAAP provides a uniform, comprehensive basis of accounting, for the reasons described above, management believes that "core cash" measures are an important additional tool for providing a more complete understanding of the Company's results of operations. Nevertheless, "core cash" measures are subject to certain general and specific limitations that investors should carefully consider. For example, unlike financial accounting, there is no comprehensive, authoritative guidance for management reporting. Our "core cash" measures are not defined terms within GAAP and may not be comparable to similarly titled measures reported by other companies. "Core cash" measures reflect only current period adjustments to GAAP as described below. Accordingly, unlike GAAP, the Company's "core cash" presentation does not represent a comprehensive basis of accounting. Further, the management reporting process measures the performance of the operating segments based on the management structure of the Company and is not necessarily comparable with similar information for any other financial institution. Investors, therefore, may not compare our Company's performance with that of other financial services companies based upon "core cash" measures. "Core cash" 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 cash" results. For example, in reversing unrealized gains and losses that result from SFAS No. 133 on derivatives that do not qualify for hedge accounting 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 change in our stock prices 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 results on a Managed Basis provides important information regarding the performance of our Managed portfolio, a limitation on this presentation is that we are presenting the ongoing spread income on loans that have been legally sold to a trust managed by us. While we believe that our Managed Basis presentation presents the economic substance of our Managed Loan portfolio, it understates earnings volatility from securitization gains. Our "core cash" results exclude certain Floor Income, which is real cash income, from our reported results and therefore may in certain periods understate earnings. Management's financial planning and evaluation 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.

A more detailed discussion of the differences between GAAP and "core cash" measures follows.

1) Securitization: Under GAAP, certain securitization transactions are accounted for as sales of assets. Under "core cash," we present all securitization transactions 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 cash" measures and replaced by the interest income, provision 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 which would be considered intercompany on a Managed Basis. 2) Derivative Accounting: "Core cash" measures exclude the periodic unrealized gains and losses caused primarily by the one-sided mark-to- market derivative valuations prescribed by SFAS No. 133 on derivatives that do not qualify for "hedge accounting treatment" under GAAP and 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. We also exclude the gain or loss on our equity forward contracts that are required to be accounted for in accordance with SFAS No. 133 as derivatives and are marked-to-market through earnings. 3) Floor Income: The timing and amount (if any) of Floor Income earned is uncertain and in excess of expected spreads and, therefore , we exclude such income from our "core cash" measures when it is not 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, are marked-to-market through the "gains (losses) on derivatives and hedging activities, net" line on the income statement with no offsetting gain or loss recorded for the economically hedged items. For "core cash" measures, 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 (net of Eurodollar futures contracts' realized gains or losses) in income. 4) Other items: We exclude amortization of acquired intangibles.