Sallie Mae 2006 Annual Report Download - page 55

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, 2006, 2005
and 2004.
2006 2005 2004
Years Ended December 31,
Reclassification of realized gains (losses) on derivative and hedging
activities:
Net settlement expense on Floor Income Contracts reclassified to net
interest income .......................................... $ (50) $(259) $ (562)
Net settlement expense on interest rate swaps reclassified to net interest
income ................................................ (59) (123) (88)
Net realized losses on terminated derivative contracts reclassified to
other income ........................................... — (5) (63)
Total reclassifications of realized losses on derivative and hedging
activities .............................................. (109) (387) (713)
Add: Unrealized gains (losses) on derivative and hedging activities,
net
(1)
................................................. (230) 634 1,562
Gains (losses) on derivative and hedging activities, net .............. $(339) $ 247 $ 849
(1)
“Unrealized gains (losses) on derivative and hedging activities, net” is comprised of the following unrealized mark-to-market
gains (losses):
2006 2005 2004
Years Ended December 31,
Floor Income Contracts . . . ................................................ $176 $481 $ 729
Equity forward contracts . . ................................................ (360) 121 759
Basis swaps .......................................................... (58) 40 73
Other . . . ............................................................ 12 (8) 1
Total unrealized gains (losses) on derivative and hedging activities, net . . .................. $(230) $634 $1,562
Unrealized gains and losses on Floor Income Contracts are primarily caused by changes in interest rates.
In general, an increase in interest rates results in an unrealized gain and vice versa. Unrealized gains and
losses on Equity Forward Contracts fluctuate with changes in the Company’s stock price. Unrealized gains and
losses on basis swaps result from changes in the spread between indices, primarily as it relates to Consumer
Price Index (“CPI”) swaps economically hedging debt issuances indexed to CPI.
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 in income.
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