Sallie Mae 2011 Annual Report Download - page 45

in interest rates can have on Floor Income for that period. Therefore, for purposes of “Core Earnings”, we have
removed the unrealized gains and losses related to these contracts and added back the amortization of the net
premiums received on the Floor Income Contracts. The amortization of the net premiums received on the Floor
Income Contracts for “Core Earnings” is reflected in student loan interest income. Under GAAP accounting, the
premium received on the Floor Income Contracts is recorded as revenue in the “gains (losses) on derivatives and
hedging activities, net” line item by the end of the contracts’ life.
Basis swaps are used to convert floating rate debt from one floating interest rate index to another to better
match the interest rate characteristics of the assets financed by that debt. We primarily use basis swaps to 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 economically hedging these 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.
Years Ended December 31,
(Dollars in millions) 2011 2010 2009
“Core Earnings” derivative adjustments:
Gains (losses) on derivative and hedging activities, net, included in other
income(1) .................................................. $(959) $(361) $(604)
Plus: Realized losses on derivative and hedging activities, net(1) ......... 806 815 322
Unrealized gains (losses) on derivative and hedging activities, net ....... (153) 454 (282)
Amortization of net premiums on Floor Income Contracts in net interest
income for “Core Earnings” ................................... (355) (317) (197)
Other pre-change in derivatives accounting adjustments ............... (32) (54) (23)
Total net impact derivative accounting(2) ........................... $(540) $ 83 $(502)
(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.
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