Sallie Mae 2007 Annual Report Download - page 116

Embedded Floor Income recognized as part of the gain on sale, which results in a decrease in payments on the
written Floor contracts that more than offset impairment losses on the Embedded Floor Income in the Residual
Interest; (ii) our unhedged on-balance sheet loans not currently having significant Floor Income due to a
higher interest rate environment, which results in these loans being more variable rate; (iii) a portion of our
fixed rate assets being funded with variable debt and (iv) a portion of our variable assets being funded with
fixed debt. Items (i) and (iv) will generally cause income to increase when interest rates increase from a low
interest rate environment, whereas, items (ii) and (iii) will generally offset this increase. In the 100 and
300 basis point scenario for the year ended December 31, 2007, items (i) and (iv) had a greater impact than
item (ii) resulting in a net gain. Items (ii) and (iii) had a bigger impact in both scenarios than item (i) for the
year ended December 31, 2006 due to the higher interest rate environment that existed.
Under the scenario in the tables above, where the LIBOR index increases 25 basis points while other
indices remain constant, the main driver of the decrease in pre-tax income before unrealized gains (losses) on
derivative and hedging activities is the result of LIBOR-based debt funding commercial paper-indexed assets.
See “RISKS — Interest Rate Risk Management — Asset and Liability Funding Gap” for a further discussion.
In addition to interest rate risk addressed in the preceding tables, the Company is also exposed to risks related
to foreign currency exchange rates. Foreign currency exchange risk is primarily the result of foreign denominated
debt issued by the Company. As it relates to the Company’s corporate unsecured and securitization debt programs
used to fund the Company’s business, the Company’s policy is to use cross currency interest rate swaps to swap
all foreign denominated debt payments (fixed and floating) to U.S. dollar LIBOR using a fixed exchange rate. In
the tables above, there would be an immaterial impact on earnings if exchange rates were to decrease or increase,
due to the terms of the hedging instrument and hedged items matching. The balance sheet interest bearing
liabilities would be affected by a change in exchange rates, however, the change would be materially offset by the
cross currency interest rate swaps in other assets or other liabilities. In addition, the Company has foreign exchange
risk as a result of international operations, however, the exposure is minimal at this time.
Item 8. Financial Statements and Supplementary Data
Reference is made to the financial statements listed under the heading “(a) 1.A. Financial Statements” of
Item 15 hereof, which financial statements are incorporated by reference in response to this Item 8.
Item 9. Changes in and Disagreements with Accountants on Accounting and Financial Disclosure
Nothing to report.
Item 9A. Controls and Procedures
Disclosure Controls and Procedures
Our management, with the participation of our Chief Executive Officer and Chief Financial Officer,
evaluated the effectiveness of our disclosure controls and procedures (as defined in Rules 13a-15(e) and
15d-15(e) under the Securities Exchange Act of 1934, as amended (the “Exchange Act”)) as of December 31,
2007. Based on this evaluation, our Chief Executive Officer and Chief Financial Officer concluded that, as of
December 31, 2007, our disclosure controls and procedures were effective to ensure that information required
to be disclosed by us in the reports that we file or submit under the Exchange Act is (a) recorded, processed,
summarized and reported within the time periods specified in the SEC’s rules and forms and (b) accumulated
and communicated to our management, including our Chief Executive Officer and Chief Financial Officer as
appropriate to allow timely decisions regarding required disclosure.
Changes in Internal Control over Financial Reporting
No change in our internal control over financial reporting (as defined in Rules 13a-15(f) and 15d-15(f)
under the Securities Exchange Act of 1934, as amended) occurred during the fiscal quarter ended December 31,
2007 that has materially affected, or is reasonably likely to materially affect, our internal control over financial
reporting.
Item 9B. Other Information
Nothing to report.
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