Sallie Mae 2012 Annual Report Download - page 98

At December 31, 2011
Interest Rates:
Change from
Increase of
100 Basis
Points
Change from
Increase of
300 Basis
Points
(Dollars in millions) Fair Value $ % $ %
Effect on Fair Values
Assets
FFELP Loans ............................. $134,196 $ (665) — % $(1,335) (1)%
Private Education Loans ..................... 33,968 — — — —
Other earning assets ........................ 9,871 — — (1) —
Other assets ............................... 8,943 (639) (7) (1,420) (16)%
Total assets gain/(loss) ...................... $186,978 $(1,304) (1)% $(2,756) (1)%
Liabilities
Interest-bearing liabilities .................... $171,152 $ (730) — % $(2,002) (1)%
Other liabilities ............................ 4,128 (617) (15) (801) (19)
Total liabilities (gain)/loss ................... $175,280 $(1,347) (1)% $(2,803) (2)%
A primary objective in our funding is to minimize our sensitivity to changing interest rates by generally
funding our floating rate student loan portfolio with floating rate debt. However, due to the ability of some
FFELP loans to earn Floor Income, we can have a fixed versus floating mismatch in funding if the student loan
earns at the fixed borrower rate and the funding remains floating. In addition, we can have a mismatch in the
index (including the frequency of reset) of floating rate debt versus floating rate assets.
During the years ended December 31, 2012 and 2011, certain FFELP Loans were earning Floor Income and
we locked in a portion of that Floor Income through the use of Floor Income contracts. The result of these
hedging transactions was to convert a portion of the fixed rate nature of student loans to variable rate, and to fix
the relative spread between the student loan asset rate and the variable rate liability.
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 loans being in a fixed-rate mode due to 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
rate liabilities and equity. 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.
Under the scenario in the tables above labeled “Impact on Annual Earnings If: Funding Indices Increase by
25 Basis Points,” the main driver of the decrease in pre-tax income before unrealized gains (losses) on derivative
and hedging activities in the December 31, 2012 analysis is the result of one-month LIBOR-indexed FFELP
Loans (loans formerly indexed to commercial paper) being funded with three-month LIBOR and other non-
discrete indexed liabilities. In the December 31, 2011 analysis, it is the result of LIBOR-based debt funding
commercial paper-indexed assets. See “Asset and Liability Funding Gap” of this Item 7A for a further
discussion. Increasing the spread between indices will also impact the unrealized gains (losses) on derivative and
hedging activities as it relates to basis swaps that hedge the mismatch between the asset and funding indices.
In addition to interest rate risk addressed in the preceding tables, we are 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 us. When we issue foreign denominated corporate unsecured and securitization debt,
our 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
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