Sallie Mae 2010 Annual Report Download - page 41

hedge our student loan assets that are primarily indexed to a commercial paper, Prime or Treasury bill index.
In addition, we use basis swaps to convert debt indexed to the Consumer Price Index to three-month LIBOR
debt. The accounting for derivatives requires that when using basis swaps, the change in the cash flows of the
hedge effectively offset both the change in the cash flows of the asset and the change in the cash flows of the
liability. Our basis swaps hedge variable interest rate risk; however, they generally do not meet this
effectiveness test because the index of the swap does not exactly match the index of the hedged assets as
required for hedge accounting treatment. Additionally, some of our FFELP Loans can earn at either a variable
or a fixed interest rate depending on market interest rates and therefore swaps written on the FFELP Loans do
not meet the criteria for hedge accounting treatment. As a result, under GAAP, these swaps are recorded at
fair value with changes in fair value reflected currently in the income statement.
The table below quantifies the adjustments for derivative accounting on our net income for the years
ended December 31, 2010, 2009 and 2008 when compared with the accounting principles employed in all
years prior to the adoption of ASC 815 related to accounting for derivative financial instruments.
(Dollars in millions) 2010 2009 2008
Years Ended
December 31,
“Core Earnings” derivative adjustments:
Gains (losses) on derivative and hedging activities, net, included in other income
(1)
. . . . . $(361) $(604) $(445)
Less: Realized (gains) losses on derivative and hedging activities, net
(1)
. . . . . . . . . . . . . 815 322 (107)
Unrealized gains (losses) on derivative and hedging activities, net . . . . . . . . . . . . . . . . . 454 (282) (552)
Amortization of net premiums on Floor Income Contracts in net interest income . . . . . . (317) (197) (191)
Other pre-change in derivatives accounting adjustments . . . . . . . . . . . . . . . . . . . . . . . . (54) (23) (8)
Total net impact derivative accounting
(2)
. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . $ 83 $(502) $(751)
(1) See “Reclassification of Realized Gains (Losses) on Derivative and Hedging Activities” below for a detailed breakdown of the
components of realized losses on derivative and hedging activities.
(2) Negative amounts are subtracted from “Core Earnings” to arrive at GAAP net income and positive amounts are added to “Core
Earnings” to arrive at GAAP net income.
Reclassification of Realized Gains (Losses) on Derivative and Hedging Activities
The accounting for derivative instruments 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 to be recorded in a separate income statement line item below net
interest income. Under our “Core Earnings” presentation, these gains and (losses) are reclassified to the income
statement line item of the economically hedged item. For our “Core Earnings” net interest margin, this would
primarily include: (a) reclassifying the net settlement amounts related to our Floor Income Contracts to student
loan interest income and (b) reclassifying the net settlement amounts related to certain of our basis swaps to debt
interest expense. 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, 2010, 2009 and 2008.
(Dollars in millions) 2010 2009 2008
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 . . . $(888) $(717) $(488)
Net settlement income (expense) on interest rate swaps reclassified to net interest
income........................................................ 69 412 563
Foreign exchange derivatives gains/(losses) reclassified to other income . . . . . . . . . . . . . — (15) 11
Net realized gains (losses) on terminated derivative contracts reclassified to other
income........................................................ 4 (2) 21
Total reclassifications of realized (gains)losses on derivative and hedging activities . . (815) (322) 107
Add: Unrealized gains (losses) on derivative and hedging activities, net
(1)
. . . . . . . . . . . 454 (282) (552)
Gains (losses) on derivative and hedging activities, net. . . . . . . . . . . . . . . . . . . . . . . . . $(361) $(604) $(445)
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