Derivative Financial Instruments

3 Months Ended

Mar. 31, 2013

Derivative Financial Instruments

Derivative Financial Instruments

11.  Derivative Financial Instruments

SLFC uses derivative financial instruments in managing the cost of its debt by mitigating its exposures to interest rate and currency risks in conjunction with specific long-term debt issuances and has used them in managing its return on finance receivables held for sale, but is neither a dealer nor a trader in derivative financial instruments. At March 31, 2013, SLFC’s remaining derivative financial instrument (included in other assets) consisted of a cross currency interest rate swap agreement that matures in November 2013.

While SLFC’s cross currency interest rate swap agreement mitigates economic exposure of related debt, it does not currently qualify as a cash flow or fair value hedge under U.S. GAAP.

The fair value of our remaining derivative instrument presented on a gross basis was as follows:

	March 31, 2013						December 31, 2012
(dollars in thousands)	Notional Amount		Derivative Assets		Derivative Liabilities		Notional Amount		Derivative Assets		Derivative Liabilities
Non-Designated Hedging Instruments
Cross currency interest rate	$	416,636	$	14,049	$	-	$	416,636	$	26,699	$	-

The amount of gain (loss) for cash flow hedges recognized in accumulated other comprehensive income or loss, reclassified from accumulated other comprehensive income or loss into other revenues (effective portion) and interest expense (effective portion), and recognized in other revenues (ineffective portion) were as follows:

			From AOCI(L) (a) to						Recognized
			Other		Interest				in Other
(dollars in thousands)	AOCI(L)		Revenues		Expense		Earnings (b)		Revenues
Three Months Ended
March 31, 2013
Cross currency interest rate	$	-	$	-	$	160	$	160	$	-
Three Months Ended
March 31, 2012
Cross currency interest rate	$	15,750	$	19,850	$	155	$	20,005	$	52

(a) Accumulated other comprehensive income (loss).

(b) Represents the total amounts reclassified from accumulated other comprehensive income or loss to other revenues and to interest expense for cash flow hedges as disclosed on our condensed consolidated statement of comprehensive loss.

We elected to discontinue hedge accounting prospectively on one of our cash flow hedges as of May 2012 and terminated this cross currency interest rate swap agreement in August 2012. We continued to report the gain related to the discontinued and terminated cash flow hedge in accumulated other comprehensive loss. During the three months ended March 31, 2013, we reclassified the remaining $0.2 million of deferred net gain on cash flow hedges from accumulated other comprehensive income or loss to earnings.

The amounts recognized in other revenues for non-designated hedging instruments were as follows:

(dollars in thousands)	Non-Designated Hedging Instruments
Three Months Ended March 31, 2013
Cross currency interest rate	$	4,159
Three Months Ended March 31, 2012
Cross currency interest rate	$	(3,440	)

Derivative adjustments included in other revenues consisted of the following:

(dollars in thousands)
Three Months Ended March 31,	2013			2012
Mark to market gains (losses)	$	(16,875	)	$	13,263
Net interest income	3,598			5,686
Credit valuation adjustment gains (losses)	40			(2,539		)
Ineffectiveness gains	-			52
Total	$	(13,237	)	$	16,462

SLFC is exposed to credit risk if counterparties to its swap agreement do not perform. SLFC regularly monitors counterparty credit ratings throughout the term of the agreement. SLFC’s exposure to market risk is limited to changes in the value of its swap agreement offset by changes in the value of the hedged debt.