SLM CORPORATION Supplemental Earnings Disclosure December 31, 2003 (Dollars in millions, except earnings per share) Quarters ended -------------------------------------- Dec. 31, Sep. 30, Dec. 31, 2003 2003 2002 --------- --------- --------- (unaudited) (unaudited) (unaudited) Selected financial information and ratios - (GAAP basis) Net income $ 264 $ 480 $ 306 Diluted earnings per common share, after cumulative effect of accounting change* $ .57 $ 1.04 $ .64 Return on assets 1.88% 3.50% 2.42% Student loan spread 1.47% 1.89% 1.96% Non-GAAP information (see explanation below) "Core cash" net income $ 285 $ 228 $ 147 "Core cash" diluted earnings per common share* $ .62 $ .49 $ .31 "Core cash" return on assets 1.15% .94% .69% "Core cash" student loan spread 2.21% 1.92% 1.91% Other operating statistics Average on-balance sheet student loans $ 47,305 $ 44,839 $ 43,816 Average off-balance sheet student loans 39,908 39,803 33,733 -------- -------- -------- Average managed student loans $ 87,213 $ 84,642 $ 77,549 ======== ======== ======== Ending on-balance sheet student loans, net $ 50,047 $ 45,684 $ 42,339 Ending off-balance sheet student loans, net 38,742 40,127 35,785 -------- -------- -------- Ending managed student loans, net $ 88,789 $ 85,811 $ 78,124 ======== ======== ======== Ending managed FFELP student loans, net $ 80,480 $ 78,097 $ 72,310 Ending managed private credit student loans, net 8,309 7,714 5,814 -------- -------- -------- Ending managed student loans, net $ 88,789 $ 85,811 $ 78,124 ======== ======== ======== Years ended December 31, ---------------------- 2003 2002 -------- -------- (unaudited) (unaudited) Selected financial information and ratios - (GAAP basis) Net income $ 1,534 $ 792 Diluted earnings per common share, after cumulative effect of accounting change* $ 3.29 $ 1.64 Return on assets 2.91% 1.60% Student loan spread 1.82% 1.93% Non-GAAP information (see explanation below) "Core cash" net income $ 926 $ 690 "Core cash" diluted earnings per common share* $ 1.97 $ 1.43 "Core cash" return on assets 1.00% .84% "Core cash" student loan spread 2.00% 1.88% Other operating statistics Average on-balance sheet student loans $ 45,127 $ 43,082 Average off-balance sheet student loans 38,205 32,280 -------- -------- Average managed student loans $ 83,332 $ 75,362 ======== ======== * In May 2003, the Company announced a three-for-one stock split of the Company's common stock to be effected in the form of a stock dividend. The additional shares were distributed on June 20, 2003 for all shareholders of record on June 6, 2003. All share and per share amounts presented have been retroactively restated for the stock split. Stockholders' equity has been restated to give retroactive recognition to the stock split for all periods presented, by reclassifying from additional paid-in capital to common stock, the par value of the additional shares issued as a result of the stock split. Non-GAAP "Core Cash" Earnings In accordance with the Rules and Regulations of the SEC, we prepare financial statements in accordance with generally accepted accounting principles ("GAAP"). In addition to evaluating the Company's GAAP-based financial information, management, credit rating agencies, lenders and analysts also evaluate the Company on certain non-GAAP performance measures that we refer to as "core cash" earnings. 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 on the operational and performance indicators that are most closely assessed by management. The Company reports pro forma "core cash" earnings, which is the primary financial performance measure used by management not only in developing the financial plans and tracking results, but also in establishing corporate performance targets and determining incentive compensation. Management also relies on several other non-GAAP performance measures related to "core cash" earnings to evaluate the Company's performance. Our "core cash" earnings measures are not defined terms within GAAP and may not be comparable to similarly titled measures reported by other companies. "Core cash" earnings reflect only current period adjustments to GAAP earnings as described below. Accordingly, the Company's "core cash" earnings presentation does not represent another comprehensive basis of accounting. A more detailed discussion of the differences between GAAP earnings and "core cash" earnings calculations follows. 1) Securitization: Under GAAP, certain securitization transactions are accounted for as sales of assets. "Core cash" earnings present all securitization transactions as long-term non-recourse financings. The upfront "gains" on sale from securitization as well as ongoing "servicing and securitization revenue" presented by GAAP are excluded from "core cash" earnings and replaced by the interest income, provision for loan losses and interest expense as they are earned or incurred on the securitized loans. 2) Floor Income: The Company earns Floor Income on its student loan portfolio in certain declining interest rate environments. The timing and amount (if any) of Floor Income are uncertain and in excess of expected spreads, and, therefore, the Company excludes such income from "core cash" earnings. The Company employs derivatives, primarily Floor Income Contracts and futures, to economically hedge Floor Income. As discussed in more detail below, the derivatives do not qualify as effective accounting hedges and therefore are marked-to-market through the derivative market value adjustment. For "core cash" earnings, we reverse the effects of the SFAS No. 133 accounting and include the amortization of net premiums received on Floor Income Contracts as income. Since we exclude Floor Income, we also exclude net settlements on derivative contracts and gains and losses on sales of securities that were economically hedging Floor Income. 3) Derivative Accounting: The Company employs certain derivatives to match the interest rate characteristics of its managed assets and liabilities. The Company believes that these derivatives are financially prudent and create effective economic hedges, but not all qualify for "hedge treatment" under SFAS No. 133 and, therefore, the stand alone derivative must be marked-to-market through earnings with no offsetting mark-to-market of the hedged item. "Core cash" earnings exclude the periodic unrealized gains and losses caused by the one-sided valuations, and recognize the economic effect of these hedges, which results in any cash paid or received being recognized ratably as an expense or revenue over the hedged item's life. Under SFAS No. 150, equity forward contracts that allow a net settlement option either in cash or the Company's stock are required to be accounted for in accordance with SFAS No. 133 as derivatives. As a result, the Company now accounts for its equity forward contracts as derivatives in accordance with SFAS No. 133 and periodically marks them to market through earnings. In accordance with SFAS No. 150, equity forward contracts that were entered into prior to June 1, 2003 and outstanding at July 1, 2003, were marked-to-market on July 1, and resulted in a gain which was reflected as a "cumulative effect of accounting change." This gain has been excluded from "core cash" results; subsequent changes in fair value after July 1, 2003 are also excluded from "core cash" earnings consistent with the SFAS No. 133 discussion above. A recent interpretation of SFAS No. 133 requires net settlement income/expense on derivatives and realized gains/losses related to derivative dispositions ("realized derivative market value adjustment") that do not qualify as hedges under SFAS No. 133 to be aggregated in the derivative market value adjustment on the income statement. As a result, the derivative market value adjustment includes both the unrealized changes in the fair value of our derivatives as well as the realized changes in the fair value related to derivative net settlements and dispositions. For "core cash" reporting purposes we have reclassified the net settlement income/expense from the derivative market value adjustment to the income statement line items of the economically hedged item. These reclassifications are summarized below in the table titled "'Core Cash' Derivative Reclassifications". 4) Other items: "Core cash" earnings exclude the amortization of acquired intangibles, as well as gains and losses on certain sales of securities. SLM CORPORATION Consolidated Balance Sheets (In thousands, except per share amounts) Dec. 31, Sep. 30, Dec. 31, Assets 2003 2003 2002 ----------- ----------- ----------- Federally insured student (unaudited) (unaudited) (unaudited) loans (net of allowance for losses of $23,787, $38,626 and $36,325, respectively) $29,216,914 $30,976,881 $37,172,120 Federally insured student loans in trust (net of allowance for losses of $19,710 and $10,912, respectively) 16,354,805 9,677,258 -- Private credit student loans (net of allowance for losses of $168,212, $185,378 and $194,359, respectively) 4,475,510 5,029,310 5,167,555 Academic facilities financings and other loans 1,030,907 1,093,900 1,202,045 Cash and investments 8,001,351 7,383,960 4,989,803 Retained Interest in securitized receivables 2,475,836 2,749,130 2,145,523 Goodwill and acquired intangible assets, net 592,112 581,208 586,127 Other assets 2,463,216 2,444,911 1,911,832 ----------- ----------- ----------- Total assets $64,610,651 $59,936,558 $53,175,005 =========== =========== =========== Liabilities Short-term borrowings $18,735,385 $22,995,312 $25,618,955 Long-term notes 39,808,174 31,259,011 22,242,115 Other liabilities 3,437,046 3,038,251 3,315,985 ----------- ----------- ----------- Total liabilities 61,980,605 57,292,574 51,177,055 ----------- ----------- ----------- Commitments and contingencies* Stockholders' equity Preferred stock, par value $.20 per share, 20,000 shares authorized: 3,300; 3,300; and 3,300 shares, respectively, issued at stated value of $50 per share 165,000 165,000 165,000 Common stock, par value $.20 per share, 1,125,000 shares authorized: 447,678; 471,278; and 624,552 shares, respectively, issued 94,529 94,256 124,910 Additional paid-in capital 1,553,240 1,442,919 1,102,574 Accumulated other comprehensive income, net of tax 425,621 568,381 592,760 Retained earnings 941,284 755,687 2,718,226 ----------- ----------- ----------- Stockholders' equity before treasury stock 3,179,674 3,026,243 4,703,470 Common stock held in treasury at cost: 24,965; 20,643; and 166,812 shares, respectively 549,628 382,259 2,705,520 ----------- ----------- ----------- Total stockholders' equity 2,630,046 2,643,984 1,997,950 ----------- ----------- ----------- Total liabilities and stockholders' equity $64,610,651 $59,936,558 $53,175,005 =========== =========== =========== * Commitments to purchase loans, lines of credit, letters of credit, and academic facilities financing letters of credit were $37.2 billion, $ .9 billion, $2.0 billion, and $45.5 million, respectively, at December 31, 2003. SLM CORPORATION Consolidated Statements of Income (In thousands, except per share amounts) Quarters ended ------------------------------------ Dec. 31, Sep. 30, Dec. 31, 2003 2003 2002 -------- -------- -------- Interest income: (unaudited) (unaudited) (unaudited) Federally insured student loans $446,164 $435,438 $489,902 Private credit student loans 50,373 83,500 92,247 Academic facilities financings and other loans 18,194 19,050 25,964 Investments 41,191 39,204 (20,815) -------- -------- -------- Total interest income 555,922 577,192 587,298 Interest expense 263,412 243,719 292,217 -------- -------- -------- Net interest income 292,510 333,473 295,081 Less: provision for losses 26,791 41,695 34,066 -------- -------- -------- Net interest income after provision for losses 265,719 291,778 261,015 -------- -------- -------- Other income: Gains on student loan securitizations 84,812 39,454 262,086 Servicing and securitization revenue 131,416 146,174 165,256 Derivative market value adjustment (4,498) 91,041 (157,769) Guarantor servicing fees 27,413 40,323 28,054 Debt management fees 68,772 78,275 48,864 Other 92,087 51,591 52,166 -------- -------- -------- Total other income 400,002 446,858 398,657 Operating expenses 254,434 184,205 180,720 -------- -------- -------- Income before income taxes and cumulative effect of accounting change 411,287 554,431 478,952 Income taxes 146,858 204,514 172,922 -------- -------- -------- Income before cumulative effect of accounting change 264,429 349,917 306,030 Cumulative effect of accounting change -- 129,971 -- -------- -------- -------- Net income 264,429 479,888 306,030 Preferred stock dividends 2,876 2,875 2,876 -------- -------- -------- Net income attributable to common stock $261,553 $477,013 $303,154 ======== ======== ======== Basic earnings per common share: Before cumulative effect of accounting change $ .58 $ .77 $ .66 Cumulative effect of accounting change -- .29 -- -------- -------- -------- Basic earnings per common share, after cumulative effect of accounting change $ .58 $ 1.06 $ .66 ======== ======== ======== Average common shares outstanding 448,770 450,725 458,330 ======== ======== ======== Diluted earnings per common share: Before cumulative effect of accounting change $ .57 $ .76 $ .64 Cumulative effect of accounting change -- .28 -- -------- -------- -------- Diluted earnings per common share, after cumulative effect of accounting change $ .57 $ 1.04 $ .64 ======== ======== ======== Average common and common equivalent shares outstanding 458,022 460,647 471,223 ======== ======== ======== Dividends per common share .17 .17 .08 ======== ======== ======== Years ended December 31, ------------------------ 2003 2002 ---------- --------- Interest income: (unaudited) (unaudited) Federally insured student loans $1,810,278 $2,111,463 Private credit student loans 310,567 338,591 Academic facilities financings and other loans 76,740 96,025 Investments 150,690 87,889 ---------- ---------- Total interest income 2,348,275 2,633,968 Interest expense 1,021,906 1,209,501 ---------- ---------- Net interest income 1,326,369 1,424,467 Less: provision for losses 147,480 116,624 ---------- ---------- Net interest income after provision for losses 1,178,889 1,307,843 ---------- ---------- Other income: Gains on student loan securitizations 744,289 337,924 Servicing and securitization revenue 666,409 838,609 Derivative market value adjustment (237,815) (1,082,100) Guarantor servicing fees 128,189 106,172 Debt management fees 258,544 185,881 Other 252,335 218,842 ---------- ---------- Total other income 1,811,951 605,328 Operating expenses 807,871 689,772 ---------- ---------- Income before income taxes and cumulative effect of accounting change 2,182,969 1,223,399 Income taxes 779,380 431,403 ---------- ---------- Income before cumulative effect of accounting change 1,403,589 791,996 Cumulative effect of accounting change 129,971 -- ---------- ---------- Net income 1,533,560 791,996 Preferred stock dividends 11,501 11,501 ---------- ---------- Net income attributable to common stock $1,522,059 $ 780,495 ========== ========== Basic earnings per common share: Before cumulative effect of accounting change $ 3.08 $ 1.69 Cumulative effect of accounting change .29 -- ---------- ---------- Basic earnings per common share, after cumulative effect of accounting change $ 3.37 $ 1.69 ========== ========== Average common shares outstanding 452,037 462,294 ========== ========== Diluted earnings per common share: Before cumulative effect of accounting change $ 3.01 $ 1.64 Cumulative effect of accounting change .28 -- ---------- ---------- Diluted earnings per common share, after cumulative effect of accounting change $ 3.29 $ 1.64 ========== ========== Average common and common equivalent shares outstanding 463,335 474,520 ========== ========== Dividends per common share .59 .28 ========== ========== SLM CORPORATION Pro-Forma "Core Cash" Consolidated Statements of Income (In thousands, except per share amounts) Quarters ended --------------------------------------- Dec. 31, Sep. 30, Dec. 31, 2003 2003 2002 ----------- ----------- ----------- (unaudited) (unaudited) (unaudited) Managed interest income: Managed federally insured student loans $746,240 $632,398 $674,455 Managed private credit student loans 98,792 118,799 99,893 Academic facilities financings and other loans 18,194 19,050 25,964 Investments 46,100 43,973 (20,731) --------- --------- --------- Total managed interest income 909,326 814,220 779,581 Managed interest expense 427,145 410,112 463,050 --------- --------- --------- Net managed interest income 482,181 404,108 316,531 Less: provision for losses 26,565 42,817 34,065 --------- --------- --------- Net managed interest income after provision for losses 455,616 361,291 282,466 --------- --------- --------- Other income: Guarantor servicing fees 27,413 40,323 28,054 Debt management fees 68,772 78,275 48,864 Other 96,179 49,253 46,806 --------- --------- --------- Total other income 192,364 167,851 123,724 Operating expenses 247,712 177,229 171,302 --------- --------- --------- Income before income taxes 400,268 351,913 234,888 Income taxes 115,618 123,533 88,179 --------- --------- --------- "Core cash" net income 284,650 228,380 146,709 Preferred stock dividends 2,876 2,875 2,876 --------- --------- --------- "Core cash" net income attributable to common stock $281,774 $225,505 $143,833 ========= ========= ========= "Core cash" basic earnings per common share $ .63 $ .50 $ .31 ========= ========= ========= Average common shares outstanding 448,770 450,725 458,330 ========= ========= ========= "Core cash" diluted earnings per common share $ .62 $ .49 $ .31 ========= ========= ========= Average common and common equivalent shares outstanding 458,022 460,647 471,223 ========= ========= ========= Years ended December 31, ------------------------ 2003 2002 ----------- ----------- (unaudited) (unaudited) Managed interest income: Managed federally insured student loans $2,666,416 $2,864,215 Managed private credit student loans 426,456 346,237 Academic facilities financings and other loans 76,740 96,025 Investments 163,208 87,577 ---------- ---------- Total managed interest income 3,332,820 3,394,054 Managed interest expense 1,680,873 2,035,274 ---------- ---------- Net managed interest income 1,651,947 1,358,780 Less: provision for losses 130,138 130,869 ---------- ---------- Net managed interest income after provision for losses 1,521,809 1,227,911 ---------- ---------- Other income: Guarantor servicing fees 128,189 106,172 Debt management fees 258,544 185,881 Other 257,322 210,739 ---------- ---------- Total other income 644,055 502,792 Operating expenses 780,961 663,487 ---------- ---------- Income before income taxes 1,384,903 1,067,216 Income taxes 459,021 376,893 ---------- ---------- "Core cash" net income 925,882 690,323 Preferred stock dividends 11,501 11,501 ---------- ---------- "Core cash" net income attributable to common stock $ 914,381 $ 678,822 ========== ========== "Core cash" basic earnings per common share $ 2.02 $ 1.47 ========== ========== Average common shares outstanding 452,037 462,294 ========== ========== "Core cash" diluted earnings per common share $ 1.97 $ 1.43 ========== ========== Average common and common equivalent shares outstanding 463,335 474,520 ========== ========== SLM CORPORATION Pro-Forma "Core Cash" Reconciliation of GAAP Net Income to "Core Cash" Net Income (In thousands) Quarters ended --------------------------------------- Dec. 31, Sep. 30, Dec. 31, 2003 2003 2002 ----------- ----------- ----------- (unaudited) (unaudited) (unaudited) GAAP net income $264,429 $479,888 $306,030 "Core cash" adjustments: Net impact of securitization accounting 143,901 62,576 (255,364) Net impact of derivative accounting (166,663) (250,374) (51,207) Net impact of Floor Income 2,625 (18,638) 58,061 Amortization of acquired intangibles and other 9,118 3,918 4,446 -------- --------- -------- Total "core cash" adjustments before income taxes and cumulative effect of accounting change (11,019) (202,518) (244,064) Net tax effect (A) 31,240 80,981 84,743 -------- -------- -------- Total "core cash" adjustments before cumulative effect of accounting change 20,221 (121,537) (159,321) Cumulative effect of accounting change -- (129,971) -- -------- -------- -------- Total "core cash" adjustments 20,221 (251,508) (159,321) -------- -------- -------- "Core cash" net income $284,650 $228,380 $146,709 ======== ======== ======== Years ended December 31, ------------------------ 2003 2002 ----------- ----------- (unaudited) (unaudited) GAAP net income $1,533,560 $791,996 "Core cash" adjustments: Net impact of securitization accounting (306,789) (282,226) Net impact of derivative accounting (502,339) 199,994 Net impact of Floor Income (22,897) (92,280) Amortization of acquired intangibles and other 33,959 18,329 -------- -------- Total "core cash" adjustments before income taxes and cumulative effect of accounting change (798,066) (156,183) Net tax effect (A) 320,359 54,510 -------- -------- Total "core cash" adjustments before cumulative effect of accounting change (477,707) (101,673) Cumulative effect of accounting change (129,971) -- -------- -------- Total "core cash" adjustments (607,678) (101,673) -------- -------- "Core cash" net income $925,882 $690,323 ======== ======== (A) Such tax effect is generally based upon the Company's marginal tax rate for the respective period. The net tax effect excludes the impact of disallowed losses on equity forward contracts and income tax expense attributed to the Residual Interests in the securitized loans.