Sallie Mae Reports Second-Quarter 2008 Results

SLM Corporation (NYSE:SLM), commonly known as Sallie Mae, today reported second-quarter 2008 performance results that include strong growth in student loan originations by the company’s internal lending brands and solid performance by the company’s core student loan businesses. For the 2008 second quarter, "core earnings” net income totaled $156 million, or $.27 diluted earnings per share. These results include the effect of restructuring-related charges of $53 million ($.08 per diluted share), purchased-paper business losses of $26 million ($.05 per diluted share), and asset-backed financing facilities fees of $109 million ($.15 per diluted share). "Core earnings” net income from the company’s lending business was $175 million in the second-quarter 2008, up from $170 million in the year-ago period. For the 2007 second quarter, "core earnings” net income totaled $189 million, or $.43 diluted earnings per share. "Our funding costs have been extraordinarily high throughout 2008,” said Albert L. Lord, vice chairman and CEO. "Recent spread narrowing is encouraging because our earnings potential in 2008 and beyond is largely dependent on future funding costs.” Student loans originated through Sallie Mae’s internal brands, the most profitable segment of total student loan originations, were $2.7 billion in the second-quarter 2008, up 12 percent from the year-ago quarter’s $2.4 billion. Total student loan originations were $3.3 billion in the 2008 second quarter, compared to $3.6 billion in the year-ago period, the decrease driven by the changing nature of the company’s relationships with external lending partners and a shift from purchasing, to servicing, their loans. The company expects its internal lending brands to represent a growing majority of total student loan originations. The company’s managed student loan portfolio totaled $171.9 billion at June 30, 2008, compared to $153.2 billion one year ago. Funding and liquidity improved during the 2008 second quarter: 1) the company issued more than $7 billion in term asset-backed securitization transactions and spreads declined significantly; 2) the company issued $2.5 billion of senior, unsecured notes for the first time since March 2007; and 3) the U.S. Department of Education received Congressional authority to implement a solution to provide liquidity for federal student loans. 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: www.salliemae.com/about/investors/stockholderinfo/earningsinfo/, click on the Second Quarter 2008 Supplemental Earnings Disclosure. Sallie Mae reported second-quarter 2008 GAAP net income of $266 million, or $.50 diluted earnings per share, compared to net income of $966 million, or $1.03 diluted earnings per share, in the 2007 second quarter. The largest difference between GAAP and "core earnings” second-quarter 2008 earnings per share results is the net impact of derivative accounting which, under SFAS 133, resulted in a $447 million unrealized, mark-to-market, pre-tax gain recognized in GAAP, but not in "core earnings,” results. The GAAP provision for loan losses was $143 million, down from the year-ago quarter’s $148 million. GAAP net interest income was $403 million for the 2008 second quarter, compared to $399 million in the second-quarter 2007. Under GAAP accounting, the provision for loan losses and net interest income are based only on on-balance sheet loans; the comparable "core earnings” figures are 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 24 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 24, 2008, starting at 7:45 a.m. EDT: (877) 356-5689 (USA and Canada) or (706) 679-0623 (International) and use access code 53880816. The conference call will be replayed continuously beginning at 11 a.m. EDT on Thursday, July 24, 2008, and concluding at midnight on Aug. 7, 2008. To access the replay, please dial (800) 642-1687 (USA and Canada) or dial (706) 645-9291 (International) and use access code 53880816. 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, limited liquidity, increased financing costs and changes 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 2008. All information in this release is as of July 23, 2008. 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- and paying-for-college programs. The company manages nearly $172 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 9 million members and $425 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, 2008 (In millions, except per share amounts)     Quarters ended Six months ended   June 30, 2008   March 31, 2008   June 30, 2007 June 30, 2008   June 30, 2007 (unaudited) (unaudited) (unaudited) (unaudited) (unaudited) SELECTED FINANCIAL INFORMATION AND RATIOS   GAAP Basis Net income (loss) $ 266 $ (104 ) $ 966 $ 162 $ 1,082 Diluted earnings (loss) per common share $ .50 $ (.28 ) $ 1.03 $ .23 $ 1.82 Return on assets .74 % (.29 )% 3.23 % .23 % 1.89 %   "Core Earnings” Basis(1) "Core Earnings” net income $ 156 $ 188 $ 189 $ 344 $ 440 "Core Earnings” diluted earnings per common share $ .27 $ .34 $ .43 $ .62 $ .99 "Core Earnings” return on assets .34 % .41 % .45 % .38 % .54 %   OTHER OPERATING STATISTICS Average on-balance sheet student loans $ 133,748 $ 129,341 $ 108,865 $ 131,544 $ 105,203 Average off-balance sheet student loans   38,175     39,163     43,432     38,670     44,044   Average Managed student loans $ 171,923   $ 168,504   $ 152,297   $ 170,214   $ 149,247     Ending on-balance sheet student loans, net $ 134,289 $ 131,013 $ 110,626 Ending off-balance sheet student loans, net   37,615     38,462     42,577   Ending Managed student loans, net $ 171,904   $ 169,475   $ 153,203     Ending Managed FFELP Stafford and Other Student Loans, net $ 51,622 $ 49,179 $ 42,865 Ending Managed FFELP Consolidation Loans, net 89,213 90,105 85,276 Ending Managed Private Education Loans, net   31,069     30,191     25,062   Ending Managed student loans, net $ 171,904   $ 169,475   $ 153,203     (1) See explanation of "Core Earnings” performance measures under "Reconciliation of ‘Core Earnings’ Net Income to GAAP Net Income.”       SLM CORPORATION   Consolidated Balance Sheets   (In thousands, except per share amounts)     June 30, 2008 March 31, 2008 June 30, 2007 (unaudited) (unaudited) (unaudited) Assets FFELP Stafford and Other Student Loans (net of allowance for losses of $56,882; $52,238; and $11,337, respectively) $ 43,146,711 $ 40,168,284 $ 31,503,088 FFELP Consolidation Loans (net of allowance for losses of $40,811; $41,759; and $12,746, respectively) 73,171,342 73,867,639 68,109,269 Private Education Loans (net of allowance for losses of $970,150; $938,409; and $427,904, respectively) 17,970,556 16,977,146 11,013,668 Other loans (net of allowance for losses of $46,794; $44,575; and $19,989, respectively) 902,684 1,140,468 1,178,052 Cash and investments 7,912,882 5,318,506 4,565,606 Restricted cash and investments 3,701,454 4,170,934 4,300,826 Retained Interest in off-balance sheet securitized loans 2,544,517 2,874,481 3,448,045 Goodwill and acquired intangible assets, net 1,304,941 1,319,723 1,356,620 Other assets   12,907,154   13,335,811     7,327,108 Total assets $ 163,562,241 $ 159,172,992   $ 132,802,282 Liabilities Short-term borrowings $ 37,191,756 $ 38,095,928 $ 9,758,465 Long-term borrowings 117,920,836 112,485,060 114,365,577 Other liabilities   2,905,165   3,377,229     3,320,098 Total liabilities   158,017,757   153,958,217     127,444,140 Commitments and contingencies Minority interest in subsidiaries 9,480 6,608 10,081 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 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 0 shares, respectively, issued at liquidation preference of $1,000 per share 1,150,000 1,150,000 — Common stock, par value $.20 per share, 1,125,000 shares authorized: 534,010; 533,678; and 436,095 shares, respectively, issued 106,802 106,736 87,219 Additional paid-in capital 4,637,731 4,610,278 2,721,554 Accumulated other comprehensive income (loss), net of tax 61,994 (2,394 ) 265,388 Retained earnings   855,527   617,184     2,790,674 Stockholders’ equity before treasury stock 7,377,054 7,046,804 6,429,835 Common stock held in treasury: 66,445; 66,301; and 23,477 shares, respectively   1,842,050   1,838,637     1,081,774 Total stockholders’ equity   5,535,004   5,208,167     5,348,061 Total liabilities and stockholders’ equity $ 163,562,241 $ 159,172,992   $ 132,802,282     SLM CORPORATION   Consolidated Statements of Income   (In thousands, except per share amounts)   Quarters ended Six months ended   June 30, 2008   March 31, 2008   June 30, 2007 June 30, 2008   June 30, 2007 (unaudited) (unaudited) (unaudited) (unaudited) (unaudited) Interest income: FFELP Stafford and Other Student Loans $ 497,598 $ 464,476 $ 511,300 $ 962,074 $ 962,062 FFELP Consolidation Loans 769,664 836,656 1,087,254 1,606,320 2,102,100 Private Education Loans 409,323 443,522 329,351 852,845 667,772 Other loans 21,355 23,344 26,453 44,699 54,426 Cash and investments   70,521     123,816     141,524     194,337     255,428   Total interest income 1,768,461 1,891,814 2,095,882 3,660,275 4,041,788 Total interest expense   1,365,918     1,615,445     1,697,229     2,981,363     3,229,319   Net interest income 402,543 276,369 398,653 678,912 812,469 Less: provisions for loan losses   143,015     137,311     148,200     280,326     298,530   Net interest income after provisions for loan losses   259,528     139,058     250,453     398,586     513,939   Other income (loss): Gains on student loan securitizations — — — — 367,300 Servicing and securitization revenue 1,630 107,642 132,987 109,272 384,925 Losses on sales of loans and securities, net (43,583 ) (34,666 ) (10,921 ) (78,249 ) (41,888 ) Gains (losses) on derivative and hedging activities, net 362,043 (272,796 ) 821,566 89,247 464,597 Contingency fee revenue 83,790 85,306 80,237 169,096 167,559 Collections revenue 26,365 57,239 77,092 83,604 142,654 Guarantor servicing fees 23,663 34,653 30,273 58,316 69,514 Other   108,728     93,533     89,004     202,261     185,437   Total other income 562,636 70,911 1,220,238 633,547 1,740,098 Expenses: Restructuring expenses 46,740 20,678 — 67,418 — Operating expenses   353,688     355,648     398,800     709,336     754,974   Total expenses   400,428     376,326     398,800     776,754     754,974   Income (loss) before income taxes and minority interest in net earnings of subsidiaries 421,736 (166,357 ) 1,071,891 255,379 1,499,063 Income tax expense (benefit)   153,074     (62,488 )   104,724     90,586     414,738   Income (loss) before minority interest in net earnings of subsidiaries 268,662 (103,869 ) 967,167 164,793 1,084,325 Minority interest in net earnings of subsidiaries   2,926     (65 )   696     2,861     1,701   Net income (loss) 265,736 (103,804 ) 966,471 161,932 1,082,624 Preferred stock dividends   27,391     29,025     9,156     56,416     18,249   Net income (loss) attributable to common stock $ 238,345   $ (132,829 ) $ 957,315   $ 105,516   $ 1,064,375     Basic earnings (loss) per common share $ .51   $ (.28 ) $ 2.32   $ .23   $ 2.59   Average common shares outstanding   466,649     466,580     411,870     466,615     411,457     Diluted earnings (loss) per common share $ .50   $ (.28 ) $ 1.03   $ .23   $ 1.82   Average common and common equivalent shares outstanding   517,954     466,580     452,406     467,316     454,139     Dividends per common share $ —   $ —   $ —   $ —   $ .25     SLM CORPORATION Segment and "Core Earnings" Consolidated Statements of Income (In thousands)   Quarter ended June 30, 2008   Corporate   Total     Lending APG   andOther "CoreEarnings" Adjust-ments TotalGAAP (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 invest- ments 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 and minority interest in net earnings of sub- sidiaries 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 Minority interest in net earnings of sub- sidiaries — 2,926 — 2,926 — 2,926 Net income (loss) $ 175,419 $ (10,016) $ (9,761) $ 155,642 $ 110,094 $ 265,736   (1) Income taxes are based on a percentage of net income before tax for the individual reportable segment.   SLM CORPORATION   Segment and "Core Earnings"   Consolidated Statements of Income   (In thousands)   Quarter ended March 31, 2008           Corporate Total Lending APG andOther "CoreEarnings" Adjust-ments Total GAAP (unaudited) Interest income: FFELP Stafford and Other Student Loans $ 494,382 $ — $ — $ 494,382 $ (29,906) $ 464,476 FFELP  Consolidation  Loans 988,486 — — 988,486 (151,830) 836,656 Private Education Loans 749,321 — — 749,321 (305,799) 443,522 Other loans 23,344 — — 23,344 — 23,344 Cash and investments 141,902 — 6,267 148,169 (24,353) 123,816 Total interest income 2,397,435 — 6,267 2,403,702 (511,888) 1,891,814 Total interest expense 1,824,471 6,840 5,202 1,836,513 (221,068) 1,615,445 Net interest income (loss) 572,964 (6,840) 1,065 567,189 (290,820) 276,369 Less: provisions for loan losses 181,321 — — 181,321 (44,010) 137,311 Net interest income (loss) after provisions for loan losses 391,643 (6,840) 1,065 385,868 (246,810) 139,058 Contingency fee revenue — 85,306 — 85,306 — 85,306 Collections revenue — 56,361 — 56,361 878 57,239 Guarantor servicing fees — — 34,653 34,653 — 34,653 Other income (loss) 44,345 — 50,641 94,986 (201,273) (106,287) Total other income 44,345 141,667 85,294 271,306 (200,395) 70,911 Restructuring expenses 15,550 434 4,694 20,678 — 20,678 Operating expenses 163,636 106,142 69,655 339,433 16,215 355,648 Total expenses 179,186 106,576 74,349 360,111 16,215 376,326 Income (loss) before income taxes and minority interest in net earnings of subsidiaries 256,802 28,251 12,010 297,063 (463,420) (166,357) Income tax expense (benefit)(1) 94,067 10,348 4,399 108,814 (171,302) (62,488) Minority interest in net earnings of subsidiaries — (65) — (65) — (65) Net income (loss) $ 162,735 $ 17,968 $ 7,611 $ 188,314 $ (292,118) $ (103,804)   (1) Income taxes are based on a percentage of net income before tax for the individual reportable segment.   SLM CORPORATION   Segment and "Core Earnings"   Consolidated Statements of Income   (In thousands)   Quarter ended June 30, 2007           Corporate Total Lending APG andOther "CoreEarnings" Adjust-ments TotalGAAP (unaudited) Interest income: FFELP Stafford and Other Student Loans $ 718,624 $ — $ — $ 718,624 $ (207,324) $ 511,300 FFELP  Consolidation  Loans 1,391,015 — — 1,391,015 (303,761) 1,087,254 Private Education Loans 692,499 — — 692,499 (363,148) 329,351 Other loans 26,453 — — 26,453 — 26,453 Cash and invest- ments 182,644 — 7,197 189,841 (48,317) 141,524 Total interest income 3,011,235 — 7,197 3,018,432 (922,550) 2,095,882 Total interest expense 2,371,441 6,612 5,425 2,383,478 (686,249) 1,697,229 Net interest income (loss) 639,794 (6,612) 1,772 634,954 (236,301) 398,653 Less: provisions for loan losses 246,981 — — 246,981 (98,781) 148,200 Net interest income (loss) after provisions for loan losses 392,813 (6,612) 1,772 387,973 (137,520) 250,453 Contingency fee revenue — 80,233 — 80,233 4 80,237 Collections revenue — 77,412 — 77,412 (320) 77,092 Guarantor servicing fees — — 30,273 30,273 — 30,273 Other income 59,458 — 48,141 107,599 925,037 1,032,636 Total other income 59,458 157,645 78,414 295,517 924,721 1,220,238 Operating expenses 181,650 96,307 104,432 382,389 16,411 398,800 Income (loss) before income taxes and minority interest in net earnings of sub- sidiaries 270,621 54,726 (24,246) 301,101 770,790 1,071,891 Income tax expense (benefit) (1) 100,130 20,248 (8,971) 111,407 (6,683) 104,724 Minority interest in net earnings of sub- sidiaries — 696 — 696 — 696 Net income (loss) $ 170,491 $ 33,782 $ (15,275) $ 188,998 $ 777,473 $ 966,471   (1) Income taxes are based on a percentage of net income before tax for the individual reportable segment.   SLM CORPORATION   Segment and "Core Earnings"   Consolidated Statements of Income   (In thousands)   Six months ended June 30, 2008           Corporate Total Lending APG andOther "CoreEarnings" Adjust-ments TotalGAAP (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 invest- ments 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 taxes and minority interest in net earnings of sub- sidiaries 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 Minority interest in net earnings of sub- sidiaries — 2,861 — 2,861 — 2,861 Net income (loss) $ 338,154 $ 7,952 $ (2,150) $ 343,956 $ (182,024) $ 161,932   (1) Income taxes are based on a percentage of net income before tax for the individual reportable segment.   SLM CORPORATION   Segment and "Core Earnings"   Consolidated Statements of Income   (In thousands)           Six months ended June 30, 2007 Corporate Total and "Core Adjust- Total Lending APG Other Earnings" ments GAAP (unaudited) Interest income: FFELP Stafford and Other Student Loans $1,413,977 $— $— $1,413,977 $(451,915) $962,062 FFELP Consolidation Loans 2,722,250 — — 2,722,250 (620,150) 2,102,100 Private Education Loans 1,350,083 — — 1,350,083 (682,311) 667,772 Other loans 54,426 — — 54,426 — 54,426 Cash and invest- ments 344,321 — 9,332 353,653 (98,225) 255,428 Total interest income 5,885,057 — 9,332 5,894,389 (1,852,601) 4,041,788 Total interest expense 4,591,577 13,299 10,993 4,615,869 (1,386,550) 3,229,319 Net interest income (loss) 1,293,480 (13,299) (1,661) 1,278,520 (466,051) 812,469 Less: provisions for loan losses 444,911 — 606 445,517 (146,987) 298,530 Net interest income (loss) after provisions for loan losses 848,569 (13,299) (2,267) 833,003 (319,064) 513,939 Contingency fee revenue — 167,559 — 167,559 — 167,559 Collections revenue — 142,734 — 142,734 (80) 142,654 Guarantor servicing fees — — 69,514 69,514 — 69,514 Other income 103,876 — 99,458 203,334 1,157,037 1,360,371 Total other income 103,876 310,293 168,972 583,141 1,156,957 1,740,098 Operating ex- penses 353,213 189,555 171,937 714,705 40,269 754,974 Income (loss) before income taxes and minority interest in net earnings of subsid- iaries 599,232 107,439 (5,232) 701,439 797,624 1,499,063 Income tax expense (bene-fit)(1) 221,716 39,752 (1,936) 259,532 155,206 414,738 Minority interest in net earnings of subsid- iaries — 1,701 — 1,701 — 1,701 Net income (loss) $ 377,516 $ 65,986 $ (3,296) $ 440,206 $ 642,418 $ 1,082,624     (1) Income taxes are based on a percentage of net income before tax for the individual reportable segment.     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, 2008   March 31, 2008   June 30, 2007 June 30, 2008   June 30, 2007 (unaudited) (unaudited) (unaudited) (unaudited) (unaudited) "Core Earnings” net income(A) $ 155,642 $ 188,314 $ 188,998 $ 343,956 $ 440,206 "Core Earnings” adjustments: Net impact of securitization accounting (246,506 ) (79,146 ) (15,071 ) (325,652 ) 406,414 Net impact of derivative accounting 450,609 (363,368 ) 841,564 87,241 509,840 Net impact of Floor Income (18,809 ) (5,577 ) (39,246 ) (24,386 ) (78,267 ) Net impact of acquired intangibles   (15,342 )   (15,329 )   (16,457 )   (30,671 )   (40,363 ) Total "Core Earnings” adjustments before income taxes and minority interest in net earnings of subsidiaries 169,952 (463,420 ) 770,790 (293,468 ) 797,624 Net tax effect(B)   (59,858 )   171,302     6,683     111,444     (155,206 ) Total "Core Earnings” adjustments   110,094     (292,118 )   777,473     (182,024 )   642,418   GAAP net income (loss) $ 265,736   $ (103,804 ) $ 966,471   $ 161,932   $ 1,082,624   GAAP diluted earnings (loss) per common share $ .50   $ (.28 ) $ 1.03   $ .23   $ 1.82   (A) "Core Earnings” diluted earnings per common share $ .27   $ .34   $ .43   $ .62   $ .99     (B) Such tax effect is based upon the Company’s "Core Earnings” effective tax rate. For the quarter and six months ended June 30, 2007, the "Core Earnings” effective tax rate is different than GAAP primarily from the exclusion of the permanent income tax impact of the equity forward contracts. The Company settled all of its equity forward contracts in January 2008. "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 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, changing credit spreads and changes in our stock price 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 presentation of our results on a "Core Earnings” basis provides important information regarding the performance of our Managed loan portfolio, a limitation of this presentation is that we present the ongoing spread income on loans that have been sold to a trust we manage. 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 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 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, tracking results, and establishing corporate performance targets. 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. 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, and occurred in our Corporate and Other reportable segment related to equity forward contracts for the year-ago quarters. 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. "Core Earnings” also exclude 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 earnings. The Company settled all of its equity forward contracts in January 2008. 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 exclude such income from "Core Earnings” 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 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.