Sallie Mae 2007 Annual Report Download - page 59

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, 2007, 2006
and 2005.
2007 2006 2005
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 ......................................... $ (67) $ (50) $(259)
Net settlement income (expense) on interest rate swaps reclassified to
net interest income ...................................... 47 (59) (123)
Net realized gains (losses) on terminated derivative contracts reclassified
to other income ......................................... 2 — (5)
Total reclassifications of realized losses on derivative and hedging
activities.............................................. (18) (109) (387)
Add: Unrealized gains (losses) on derivative and hedging activities,
net
(1)
................................................. (1,343) (230) 634
Gains (losses) on derivative and hedging activities, net .............. $(1,361) $(339) $ 247
(1)
“Unrealized gains (losses) on derivative and hedging activities, net” comprises the following unrealized mark-to-market gains
(losses):
2007 2006 2005
Years Ended December 31,
Floor Income Contracts . . ................................................ $ (209) $ 176 $481
Equity forward contracts . . ................................................ (1,558) (360) 121
Basis swaps .......................................................... 360 (58) 40
Other . . ............................................................ 64 12 (8)
Total unrealized gains (losses) on derivative and hedging activities, net . .................. $(1,343) $(230) $634
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 and on changes in the forward
interest rate curves that impact basis swaps hedging repricing risk between quarterly reset debt and daily reset
assets.
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 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.
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