Sallie Mae 2005 Annual Report Download - page 63

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Reclassification of Realized Gains (Losses) on Derivative and Hedging Activities
SFAS No. 133 requires net settlement income/expense on derivatives and realized gains/losses related
to derivative dispositions (collectively referred to as “realized gains (losses) on derivative and hedging
activities”) that do not qualify as hedges under SFAS No. 133 to be recorded in a separate income
statement line item below net interest income. The table below summarizes the realized losses on
derivative and hedging activities, and the associated reclassification on a “core earnings” basis for the years
ended December 31, 2005, 2004 and 2003.
Years ended December 31,
2005 2004 2003
Reclassification of realized gains (losses) on derivative and
hedging activities:
Net settlement expense on Floor Income Contracts
reclassified to net interest income .................... $(259) $ (562) $(603)
Net settlement expense on interest rate swaps reclassified
to net interest income .............................. (123) (88) (22)
Net realized losses on closed Eurodollar futures contracts
and terminated derivative contracts reclassified to other
income........................................... (5) (63 ) (114 )
Total reclassifications of realized losses on derivative and
hedging activities .................................. (387) (713 ) (739 )
Add: Unrealized gains (losses) on derivative and hedging
activities, net(1) .................................... 634 1,562 501
Gains (losses) on derivative and hedging activities, net.... $ 247 $ 849 $(238)
(1) “Unrealized gains (losses) on derivative and hedging activities, net” is comprised of the following
unrealized mark-to-market gains (losses):
Years ended December 31,
2005 2004 2003
Floor Income Contracts ............................ $481 $ 729 $ 607
Equity forward contracts............................ 121 759 (68 )
Basis swaps ....................................... 40 73 (8 )
Other............................................ (8) 1 (30 )
Total unrealized gains (losses) on derivative and hedging
activities, net ................................... $ 634 $ 1,562 $ 501
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, they are marked-to-market through the “gains (losses) on derivative and hedging activities,
net” line on the income statement 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 (net of Eurodollar futures contracts’ realized gains or losses) in income.