Sallie Mae 2009 Annual Report Download - page 119

In the preceding tables, under the scenario where interest rates increase 100 and 300 basis points, the
change in pre-tax net income before the unrealized gains (losses) on derivative and hedging activities is
primarily due to the impact of (i) our unhedged on-balance sheet loans being in a fixed-rate mode due to the
Embedded Floor Income, while being funded with variable debt in low interest rate environments; and (ii) a
portion of our variable assets being funded with fixed debt. Item (i) will generally cause income to decrease
when interest rates increase from a low interest rate environment, whereas item (ii) will generally offset this
decrease. In the 100 and 300 basis point scenarios for the year ended December 31, 2009, the decrease in
income resulted from item (i) above due to the impact of the low interest rate environment on Floor Income.
This was offset by item (ii) above, which had a greater impact in the 300 basis point scenario. In the year
ended December 31, 2008, item (i) above was partially offset by item (ii), resulting in a decrease to pretax
income in the 100 basis point scenario. In the 300 basis point scenario, item (ii) more than offset item
(i), resulting in an increase to pre-tax income.
Under the scenario in the tables above labeled “Asset and Funding Index Mismatches,” 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 “LIQUIDITY AND CAPITAL RESOUR-
CES — Interest Rate Risk Management — Asset and Liability Funding Gap” for a further discussion.
Increasing the spread between indices will also impact the unrealized gains (losses) on derivatives and hedging
activities as it relates to basis swaps. Basis swaps used to convert LIBOR-based debt to indices that we believe
are economic hedges of the indices of the assets being funded resulted in an unrealized loss of $(102) million
for both years ended December 31, 2009 and 2008. Offsetting this unrealized loss are basis swaps that
economically hedge our off-balance sheet Private Education Loan securitization trusts. Unrealized gains for
these basis swaps totaled $208 million for the year ended December 31, 2009, and $197 million for the year
ended December 31, 2008. The net impact of both of these items was an unrealized gain for all periods
presented.
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
currency 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 currency 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 the current economic environment, volatility in the spread between spot and forward
foreign exchange rates has resulted in material mark-to-market impacts to current-period earnings which have
not been factored into the above analysis. The earnings impact is noncash, and at maturity of the instruments
the cumulative mark-to-market impact will be zero.
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,
118