Sallie Mae 2012 Annual Report Download - page 48

Reclassification of Realized Gains (Losses) on Derivative and Hedging Activities
Derivative accounting 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.
Years Ended December 31,
(Dollars in millions) 2012 2011 2010
Reclassification of realized gains (losses) on derivative and hedging activities:
Net settlement expense on Floor Income Contracts reclassified to net interest
income ............................................................ $(858) $(902) $(888)
Net settlement income on interest rate swaps reclassified to net interest income ..... 115 71 69
Foreign exchange derivative gains/(losses) reclassified to other income ........... — — —
Net realized gains (losses) on terminated derivative contracts reclassified to other
income ............................................................ — 25 4
Total reclassifications of realized losses on derivative and hedging activities ....... $(743) $(806) $(815)
Cumulative Impact of Derivative Accounting under GAAP compared to “Core Earnings”
As of December 31, 2012, derivative accounting has reduced GAAP equity by approximately $1.1 billion as
a result of cumulative net unrealized net losses (after tax) recognized under GAAP, but not in “Core Earnings.”
The following table rolls forward the cumulative impact to GAAP equity due to these unrealized net losses
related to derivative accounting.
Years Ended December 31,
(Dollars in millions) 2012 2011 2010
Beginning impact of derivative accounting on GAAP
equity .......................................... $ (977) $(676) $(737)
Net impact of net unrealized gains/(losses) under derivative
accounting(1) .................................... (103) (301) 61
Ending impact of derivative accounting on GAAP equity . . . $(1,080) $(977) $(676)
(1) Net impact of net unrealized gains (losses) under derivative accounting is composed of the following:
Years Ended December 31,
(Dollars in millions) 2012 2011 2010
Total pre-tax net impact of derivative accounting recognized in
net income(a) ....................................... $(194) $(540) $ 83
Tax impact of derivative accounting adjustment recognized in
net income ........................................ 82 208 (27)
Change in unrealized gains on derivatives, net of tax recognized
in Other Comprehensive Income ....................... 9 31 5
Net impact of net unrealized gains (losses) under derivative
accounting ........................................ $(103) $(301) $ 61
(a) See “ ‘Core Earnings’ derivative adjustments” table above.
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