<PAGE> 1
UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, DC 20549
FORM 10-Q
(Mark One)
[x] Quarterly Report Pursuant to Section 13 or 15(d) of the
Securities Exchange Act of 1934
(Fee required)
For the Quarterly period ended September 30, 1997 or
------------------
[ ] Transition report pursuant to Section 13 or 15(d) of the
Securities Exchange Act of 1934
(No fee required)
For the transition period from to
-------------- -----------------------
(Amended by Exch Act Rel No. 312905. eff 4/26/93.)
Commission file number 001-13251
-----------------------------------------------------
SLM HOLDING CORPORATION
- -------------------------------------------------------------------------------
(Exact Name of Registrant as Specified in Its Charter)
Delaware 52-2013874
- --------------------------------- ------------------------
(State of Other Jurisdiction of (I.R.S. Employer
Incorporation or Organization) Identification No.)
11600 Sallie Mae Drive Reston, VA 20193
- -------------------------------------------------------------------------------
(Address of Principal Executive Offices) (Zip Code)
(703) 810-3000
- -------------------------------------------------------------------------------
(Registrant's Telephone Number, Including Area Code)
1050 Thomas Jefferson Street, NW Washington, DC 20007
- -------------------------------------------------------------------------------
(Former name, former address and former fiscal year, if changed
since last report.)
Indicate by check mark whether the registrant: (1) has filed all reports
required to be filed by Section 13 or 15(d) of the Securities Exchange Act of
1934 during the preceding 12 months (or for such shorter period that the
registrant was required to file such reports), and (2) has been subject to such
filing requirements for the past 90 days. Yes [x] No [ ]
Indicate the number of shares outstanding of each of the issuer's classes
of common stock, as of the latest practicable date.
<TABLE>
<CAPTION>
CLASS OUTSTANDING AT SEPTEMBER 30, 1997
<S> <C>
Common Stock, $. 20 par value 50,466,913 shares
</TABLE>
<PAGE> 2
SLM HOLDING CORPORATION
FORM 10 - Q
INDEX
September 30, 1997
<TABLE>
<CAPTION>
Page
<S> <C>
PART I. FINANCIAL INFORMATION
Item 1. Financial Statements 3
Item 2. Management's Discussion and Analysis of Financial
Condition and Results of Operations 14
PART II. OTHER INFORMATION
Item 1. Legal Proceedings 32
Item 2. Changes in Securities 32
Item 3. Defaults Upon Senior Securities 32
Item 4. Submission of Matters to a Vote of Security Holders 32
Item 5. Other Information 33
Item 6. Exhibits and Reports on Form 8 - K 33
Signatures 34
</TABLE>
2
<PAGE> 3
PART I - FINANCIAL INFORMATION
ITEM 1. FINANCIAL STATEMENTS
SLM HOLDING CORPORATION
CONSOLIDATED BALANCE SHEETS
(DOLLARS IN THOUSANDS, EXCEPT PER SHARE AMOUNTS)
<TABLE>
<CAPTION>
SEPTEMBER 30, 1997 DECEMBER 31, 1996
------------------ -----------------
(UNAUDITED)
<S> <C> <C>
ASSETS
Insured student loans purchased . . . . . . $28,461,948 $32,307,930
Student loan participations . . . . . . . . 1,938,984 1,445,596
----------- -----------
Insured student loans . . . . . . . . . . . 30,400,932 33,753,526
Warehousing advances . . . . . . . . . . . 2,442,419 2,789,485
Academic facilities financings
Bonds-- available-for-sale . . . . . . . 894,569 934,481
Loans . . . . . . . . . . . . . . . . . . 521,540 538,850
----------- -----------
Total academic facilities financings . . . 1,416,109 1,473,331
Investments
Available-for-sale . . . . . . . . . . . 6,135,153 6,833,695
Held-to-maturity . . . . . . . . . . . . 564,491 601,887
----------- -----------
Total investments . . . . . . . . . . . . . 6,699,644 7,435,582
Cash and cash equivalents . . . . . . . . . 92,117 270,887
Other assets, principally accrued interest
receivable . . . . . . . . . . . . . . . 1,966,958 1,907,079
----------- -----------
Total assets . . . . . . . . . . . . . . . $43,018,179 $47,629,890
=========== ===========
LIABILITIES
Short-term borrowings . . . . . . . . . . . $23,989,205 $22,517,627
Long-term notes . . . . . . . . . . . . . . 16,541,742 22,606,226
Other liabilities . . . . . . . . . . . . . 1,585,563 1,458,207
----------- -----------
Total liabilities . . . . . . . . . . . . . 42,116,510 46,582,060
----------- -----------
COMMITMENTS AND CONTINGENCIES
MINORITY INTEREST IN SUBSIDIARY 213,883 213,883
STOCKHOLDERS' EQUITY
Common stock, par value $.20 per share, 250,000,000
shares authorized: 52,378,319 and 65,695,571
shares issued, respectively . . . . . . . 10,476 13,139
Additional paid-in capital . . . . . . . . 18,361 --
Unrealized gains on investments (net of tax of
$194,675 and $188,050, respectively) . . 361,540 349,235
Retained earnings . . . . . . . . . . . . . 572,020 1,008,737
----------- -----------
Stockholders' equity before treasury stock 962,397 1,371,111
Common stock held in treasury at cost: 1,911,406 and
12,004,976 shares, respectively . . . . . 274,611 537,164
----------- -----------
Total stockholders' equity . . . . . . . . 687,786 833,947
----------- -----------
Total liabilities and stockholders' equity $43,018,179 $47,629,890
=========== ===========
</TABLE>
SEE ACCOMPANYING NOTES TO CONSOLIDATED FINANCIAL STATEMENTS.
3
<PAGE> 4
SLM HOLDING CORPORATION
CONSOLIDATED STATEMENTS OF INCOME
(DOLLARS IN THOUSANDS, EXCEPT PER SHARE AMOUNTS)
<TABLE>
<CAPTION>
THREE MONTHS ENDED
SEPTEMBER 30,
-------------------------------------
1997 1996
------------------ ----------------
(UNAUDITED) (UNAUDITED)
<S> <C> <C>
Interest income:
Insured student loans purchased . . . . . . $574,543 $646,213
Student loan participations . . . . . . . . 32,586 -
-------- --------
Insured student loans . . . . . . . . . . . 607,129 646,213
Warehousing advances . . . . . . . . . . . 36,403 45,755
Academic facilities financings:
Taxable . . . . . . . . . . . . . . . . . 11,810 13,090
Tax-exempt . . . . . . . . . . . . . . . 11,786 13,109
-------- --------
Total academic facilities
financings . . . . . . . . . . . . . . . 23,596 26,199
Investments . . . . . . . . . . . . . . . . 144,674 136,487
-------- --------
Total interest income . . . . . . . . . . . . 811,802 854,654
Interest expense:
Short-term debt . . . . . . . . . . . . . . 364,417 292,638
Long-term debt . . . . . . . . . . . . . . 277,043 353,028
-------- --------
Total interest expense . . . . . . . . . . . 641,460 645,666
-------- --------
NET INTEREST INCOME . . . . . . . . . . . . . 170,342 208,988
Other income:
Gain on sale of student loans . . . . . . . 159,959 12,028
Servicing and securitization revenue . . . 44,449 14,401
Gains on sales of securities . . . . . . . 6,373 1,750
Other . . . . . . . . . . . . . . . . . . . 11,393 7,032
-------- --------
Total other income . . . . . . . . . . . . . 222,174 35,211
-------- --------
Operating expenses:
Salaries and benefits . . . . . . . . . . . 71,902 50,696
Other . . . . . . . . . . . . . . . . . . . 101,043 49,379
-------- --------
Total operating expenses . . . . . . . . . . 172,945 100,075
-------- --------
Income before federal income taxes, minority interest in
net earnings of subsidiary and premiums on
debt extinguished . . . . . . . . . . . . . 219,571 144,124
-------- --------
Federal income taxes:
Current . . . . . . . . . . . . . . . . . . 85,679 43,181
Deferred . . . . . . . . . . . . . . . . . (13,639) (304)
-------- --------
Total federal income taxes . . . . . . . . . 72,040 42,877
Minority interest in net earnings of
subsidiary . . . . . . . . . . . . . . . . 2,674 2,673
-------- --------
Income before premiums on debt extinguished 144,857 98,574
Premiums on debt extinguished, net of tax . . (2,264) --
-------- --------
NET INCOME . . . . . . . . . . . . . . . . . $142,593 $ 98,574
======== ========
Earnings per common share before
premiums on debt extinguished . . . . . . . $ 2.78 $ 1.79
======== ========
EARNINGS PER COMMON SHARE . . . . . . . . . . $ 2.74 $ 1.79
======== ========
</TABLE>
SEE ACCOMPANYING NOTES TO CONSOLIDATED FINANCIAL STATEMENTS.
4
<PAGE> 5
SLM HOLDING CORPORATION
CONSOLIDATED STATEMENTS OF INCOME (CONTINUED)
(DOLLARS IN THOUSANDS, EXCEPT PER SHARE AMOUNTS)
<TABLE>
<CAPTION>
NINE MONTHS ENDED
SEPTEMBER 30,
------------------------------------
1997 1996
----------------- -----------------
(UNAUDITED) (UNAUDITED)
<S> <C> <C>
Interest income:
Insured student loans purchased . . . . . . $1,795,073 $1,969,479
Student loan participations . . . . . . . . 85,630 --
---------- ----------
Insured student loans . . . . . . . . . . . 1,880,703 1,969,479
Warehousing advances . . . . . . . . . . . 114,606 152,675
Academic facilities financings:
Taxable . . . . . . . . . . . . . . . . . 36,341 39,661
Tax-exempt . . . . . . . . . . . . . . . 35,073 35,128
---------- ----------
Total academic facilities
financings . . . . . . . . . . . . . . . 71,414 74,789
Investments . . . . . . . . . . . . . . . . 457,140 406,495
---------- ----------
Total interest income . . . . . . . . . . . . 2,523,863 2,603,438
Interest expense:
Short-term debt . . . . . . . . . . . . . . 1,103,181 813,313
Long-term debt . . . . . . . . . . . . . . 843,853 1,128,897
---------- ----------
Total interest expense . . . . . . . . . . . 1,947,034 1,942,210
---------- ----------
NET INTEREST INCOME . . . . . . . . . . . . . 576,829 661,228
Other income:
Gain on sale of student loans . . . . . . . 224,589 31,431
Servicing and securitization revenue . . . 101,640 30,069
Gains on sales of securities . . . . . . . 13,755 4,804
Other . . . . . . . . . . . . . . . . . . . 36,185 18,560
---------- ----------
Total other income . . . . . . . . . . . . . 376,169 84,864
---------- ----------
Operating expenses:
Salaries and benefits . . . . . . . . . . . 174,683 152,792
Other . . . . . . . . . . . . . . . . . . . 215,104 146,201
---------- ----------
Total operating expenses . . . . . . . . . . 389,787 298,993
---------- ----------
Income before federal income taxes, minority interest in
net earnings of subsidiary, and premiums on
debt extinguished . . . . . . . . . . . . . 563,211 447,099
---------- ----------
Federal income taxes:
Current . . . . . . . . . . . . . . . . . . 203,800 155,867
Deferred . . . . . . . . . . . . . . . . . (26,121) (20,682)
---------- ----------
Total federal income taxes . . . . . . . . . 177,679 135,185
Minority interest in net earnings of subsidiary 8,021 8,020
---------- ----------
Income before premiums on debt extinguished 377,511 303,894
Premiums on debt extinguished, net of tax . (2,264) (4,792)
---------- ----------
NET INCOME . . . . . . . . . . . . . . . . . $ 375,247 $ 299,102
========== ==========
Earnings per common share before
premiums on debt extinguished . . . . . . . $ 7.13 $ 5.40
========== ==========
EARNINGS PER COMMON SHARE . . . . . . . . . . $ 7.09 $ 5.32
========== ==========
</TABLE>
SEE ACCOMPANYING NOTES TO CONSOLIDATED FINANCIAL STATEMENTS.
5
<PAGE> 6
SLM HOLDING CORPORATION
CONSOLIDATED STATEMENTS OF CHANGES IN STOCKHOLDERS' EQUITY
(DOLLARS IN THOUSANDS, EXCEPT PER SHARE AMOUNTS)
<TABLE>
<CAPTION>
THREE MONTHS ENDED
SEPTEMBER 30,
---------------------------------------
1997 1996
------------------- ------------------
(UNAUDITED) (UNAUDITED)
<S> <C> <C>
COMMON STOCK:
Balance, beginning of period . . . . . . $ 13,231 $ 24,911
Issuance of common shares . . . . . . . 90 8
Retirement of treasury shares . . . . . (2,845) --
---------- ----------
Balance, end of period . . . . . . . . . 10,476 24,919
---------- ----------
ADDITIONAL PAID-IN CAPITAL:
Balance, beginning of period . . . . . . 28,218 555,569
Proceeds in excess of par value from
issuance of common stock . . . . . . 25,831 1,335
Tax benefit related to employee stock
option and purchase plans . . . . . . -- --
Issuance of warrants . . . . . . . . . 12,393 --
Retirement of treasury shares . . . . . (48,081) --
---------- ----------
Balance, end of period . . . . . . . . . 18,361 556,904
---------- ----------
UNREALIZED GAINS ON INVESTMENTS, NET OF
TAX:
Balance, beginning of period . . . . . . 344,628 335,620
Unrealized gains as of January 1, 1994 -- --
Change in unrealized gains . . . . . . 16,912 1,372
---------- ----------
Balance, end of period . . . . . . . . . 361,540 336,992
---------- ----------
RETAINED EARNINGS:
Balance, beginning of period (as restated, see note 2) 1,194,769 2,883,682
Net income . . . . . . . . . . . . . . 142,593 98,574
Retirement of treasury shares . . . . . (742,719) --
Cash dividends:
Common stock ($.44 and $.40, per share,
respectively) . . . . . . . . . . (22,623) (21,985)
---------- ----------
Balance, end of period . . . . . . . . . 572,020 2,960,271
---------- ----------
COMMON STOCK HELD IN TREASURY AT
COST:
Balance, beginning of period . . . . . . 738,260 2,996,491
Repurchase of 2,309,317 and 1,082,281
common shares, respectively . . . . . 329,994 79,495
Retirement of 14,221,473 treasury shares (793,643) --
---------- ----------
Balance, end of period . . . . . . . . . 274,611 3,075,986
---------- ----------
TOTAL STOCKHOLDERS' EQUITY . . . . . . . . $ 687,786 $ 803,100
========== ==========
</TABLE>
SEE ACCOMPANYING NOTES TO CONSOLIDATED FINANCIAL STATEMENTS.
6
<PAGE> 7
SLM HOLDING CORPORATION
CONSOLIDATED STATEMENTS OF CHANGES IN STOCKHOLDERS' EQUITY (CONTINUED)
(DOLLARS IN THOUSANDS, EXCEPT PER SHARE AMOUNTS)
<TABLE>
<CAPTION>
NINE MONTHS ENDED
SEPTEMBER 30,
---------------------------------------
1997 1996
------------------- ------------------
(UNAUDITED) (UNAUDITED)
<S> <C> <C>
COMMON STOCK:
Balance, beginning of period . . . . . . $ 13,139 $ 24,824
Issuance of common shares . . . . . . . 182 95
Retirement of treasury shares . . . . . (2,845) --
--------- ----------
Balance, end of period . . . . . . . . . 10,476 24,919
--------- ----------
ADDITIONAL PAID-IN CAPITAL:
Balance, beginning of period . . . . . . -- 537,818
Proceeds in excess of par value from
issuance of common stock . . . . . . 54,049 19,086
Tax benefit related to employee stock
option and purchase plans . . . . . . -- --
Issuance of warrants . . . . . . . . . 12,393 --
Retirement of treasury shares . . . . . (48,081) --
--------- ----------
Balance, end of period . . . . . . . . . 18,361 556,904
--------- ----------
UNREALIZED GAINS ON INVESTMENTS, NET OF
TAX:
Balance, beginning of period . . . . . . 349,235 370,846
Unrealized gains as of January 1, 1994 -- --
Change in unrealized gains . . . . . . 12,305 (33,854)
--------- ----------
Balance, end of period . . . . . . . . . 361,540 336,992
--------- ----------
RETAINED EARNINGS:
Balance, beginning of period (as restated, see note 2) 1,008,737 2,728,383
Net income . . . . . . . . . . . . . . 375,247 299,102
Retirement of treasury shares . . . . . (742,719) --
Cash dividends:
Common stock ($1.32 and $1.20, per share,
respectively) . . . . . . . . . . (69,245) (67,214)
--------- ----------
Balance, end of period . . . . . . . . . 572,020 2,960,271
--------- ----------
COMMON STOCK HELD IN TREASURY AT
COST:
Balance, beginning of period . . . . . . 537,164 2,794,549
Repurchase of 4,127,903 and 3,721,230
common shares, respectively . . . . . 531,090 281,437
Retirement of 14,221,473 treasury shares (793,643) --
--------- ----------
Balance, end of period . . . . . . . . . 274,611 3,075,986
--------- ----------
TOTAL STOCKHOLDERS' EQUITY . . . . . . . . $ 687,786 $ 803,100
========= ==========
</TABLE>
SEE ACCOMPANYING NOTES TO CONSOLIDATED FINANCIAL STATEMENTS.
7
<PAGE> 8
SLM HOLDING CORPORATION
CONSOLIDATED STATEMENTS OF CASH FLOWS
(DOLLARS IN THOUSANDS)
<TABLE>
<CAPTION>
THREE MONTHS ENDED
SEPTEMBER 30,
-----------------------------------------
1997 1996
------------------- ------------------
(UNAUDITED) (UNAUDITED)
<S> <C> <C>
OPERATING ACTIVITIES
Net income . . . . . . . . . . . . $ 142,593 $ 98,574
Adjustments to reconcile net income to net
cash provided by operating activities:
(Increase) decrease in accrued interest receivable 130,924 90,525
Increase (decrease) in accrued interest payable (66,979) (150,501)
(Increase) in other assets . . . (111,395) (50,930)
Increase (decrease) in other liabilities 139,867 (176,308)
------------ ------------
Total adjustments . . . . . . . . . 92,417 (287,214)
------------ ------------
Net cash provided by operating
activities . . . . . . . . . . 235,010 (188,640)
------------ ------------
INVESTING ACTIVITIES
Insured student loans purchased . . (2,203,282) (1,802,323)
Reduction of insured student loans purchased:
Installment payments . . . . . . 496,168 774,947
Claims and resales . . . . . . . 238,879 305,883
Proceeds from securitization of student loans 2,575,000 1,506,750
Participations purchased . . . . . (80,404) --
Participation repayments . . . . . 60,291 --
Warehousing advances made . . . . . (213,351) (488,109)
Warehousing advance repayments . . 266,110 444,202
Academic facilities financings made (90,383) (82,676)
Academic facilities financings reductions 33,073 123,853
Investments purchased . . . . . . . (3,360,492) (3,836,015)
Proceeds from sale or maturity of investments 5,046,689 3,169,733
------------ ------------
Net cash provided by (used in) investing activities 2,768,298 116,245
------------ ------------
FINANCING ACTIVITIES
Short-term borrowings issued . . . 166,556,935 76,856,513
Short-term borrowings repaid . . . (169,478,105) (72,429,577)
Long-term notes issued . . . . . . 1,137,556 854,598
Long-term notes repaid . . . . . . (3,024,320) (4,935,010)
Common stock issued . . . . . . . . 25,921 1,343
Common stock repurchased . . . . . (329,994) (79,495)
Dividends paid . . . . . . . . . . (22,623) (21,985)
------------ ------------
Net cash provided by (used in) financing activities (5,134,630) 246,387
------------ ------------
Net increase (decrease) in cash and cash equivalents (2,131,322) 173,992
Cash and cash equivalents at beginning of period 2,223,439 311,533
------------ ------------
CASH AND CASH EQUIVALENTS
AT END OF PERIOD . . . . . . . . . $ 92,117 $ 485,525
============ ============
</TABLE>
SEE ACCOMPANYING NOTES TO CONSOLIDATED FINANCIAL STATEMENTS.
8
<PAGE> 9
SLM HOLDING CORPORATION
CONSOLIDATED STATEMENTS OF CASH FLOWS (CONTINUED)
(DOLLARS IN THOUSANDS)
<TABLE>
<CAPTION>
NINE MONTHS ENDED
SEPTEMBER 30,
---------------------------------------
1997 1996
------------------ ------------------
(UNAUDITED) (UNAUDITED)
<S> <C> <C>
OPERATING ACTIVITIES
Net income . . . . . . . . . . . . . . . . . . . . . . $ 375,247 $ 299,102
Adjustments to reconcile net income to net
cash provided by operating activities:
(Increase) decrease in accrued interest receivable 117,836 100,666
Increase (decrease) in accrued interest payable (38,453) (143,941)
(Increase) in other assets . . . . . . . . . . . . . (159,574) (175,076)
Increase in other liabilities . . . . . . . . . . . . 159,183 (114,073)
------------ ------------
Total adjustments . . . . . . . . . . . . . . . . . . . 78,992 (332,424)
------------ ------------
Net cash provided by (used in) operating activities 454,239 (33,322)
------------ ------------
INVESTING ACTIVITIES
Insured student loans purchased . . . . . . . . . . . . (5,756,529) (6,442,279)
Reduction of insured student loans purchased:
Installment payments . . . . . . . . . . . . . . . . 1,627,343 2,442,179
Claims and resales . . . . . . . . . . . . . . . . . 854,518 946,838
Proceeds from securitization of student loans . . . . 7,120,650 4,521,780
Participations purchased . . . . . . . . . . . . . . . (670,840) --
Participation repayments . . . . . . . . . . . . . . . 177,452 --
Warehousing advances made . . . . . . . . . . . . . . . (499,208) (1,222,919)
Warehousing advance repayments . . . . . . . . . . . . 846,274 2,072,288
Academic facilities financings made . . . . . . . . . . (144,103) (384,245)
Academic facilities financings reductions . . . . . . . 205,643 181,219
Investments purchased . . . . . . . . . . . . . . . . . (12,708,312) (12,170,044)
Proceeds from sale or maturity of investments 13,453,113 11,928,323
------------ ------------
Net cash provided by (used in) investing activities 4,506,001 1,873,140
------------ ------------
FINANCING ACTIVITIES
Short-term borrowings issued . . . . . . . . . . . . . 542,486,582 178,617,457
Short-term borrowings repaid . . . . . . . . . . . . . (539,955,481) (174,086,159)
Long-term notes issued . . . . . . . . . . . . . . . . 3,397,681 4,524,847
Long-term notes repaid . . . . . . . . . . . . . . . . (10,521,688) (11,333,888)
Common stock issued . . . . . . . . . . . . . . . . . . 54,231 19,181
Common stock repurchased . . . . . . . . . . . . . . . (531,090) (281,437)
Dividends paid . . . . . . . . . . . . . . . . . . . . (69,245) (67,214)
------------ ------------
Net cash provided by (used in) financing activities . . . (5,139,010) (2,607,213)
------------ ------------
Net increase (decrease) in cash and cash equivalents. . . (178,770) (767,395)
Cash and cash equivalents at beginning of period. . . . . 270,887 1,252,920
------------ ------------
CASH AND CASH EQUIVALENTS
AT END OF PERIOD . . . . . . . . . . . . . . . . . . . $ 92,117 $ 485,525
============ ============
</TABLE>
SEE ACCOMPANYING NOTES TO CONSOLIDATED FINANCIAL STATEMENTS.
9
<PAGE> 10
SLM HOLDING CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(INFORMATION AT SEPTEMBER 30, 1997 AND FOR THE THREE AND NINE MONTHS ENDED
SEPTEMBER 30, 1997 AND 1996 IS UNAUDITED)
(DOLLARS IN THOUSANDS, EXCEPT PER SHARE AMOUNTS)
1. ORGANIZATION AND PRIVATIZATION
On September 30, 1996, President Clinton signed into law the Student Loan
Marketing Association Reorganization Act of 1996, Pub. L. 104-208 (the
"Privatization Act"), authorizing the restructuring of the Student Loan
Marketing Association, a government-sponsored enterprise (the "GSE"), as a
fully private, state-chartered corporation. On August 7, 1997, pursuant to the
Privatization Act and an Agreement and Plan of Reorganization dated April 7,
1997 (the "Reorganization") the GSE was reorganized into a wholly owned
subsidiary of SLM Holding Corporation ("SLM Holding" or the "Company"), a
Delaware corporation. Under the terms of this Reorganization, each outstanding
share of GSE common stock was converted into one share of SLM Holding common
stock. In addition, the GSE will transfer certain assets, including stock in
certain subsidiaries, to SLM Holding or one of its non-GSE subsidiaries. The
Reorganization is being accounted for at historical cost similar to a pooling
of interests and therefore all prior period financial statements and related
disclosures presented have been restated as if the Reorganization took place at
the beginning of such periods. Operations performed outside the GSE after the
Reorganization will be subject to state and local taxes.
The GSE was chartered by Congress to provide liquidity for originators of
student loans made under federally sponsored student loan programs and
otherwise to support the credit needs of students and educational institutions.
The GSE's charter is subject to legislative change from time to time. The GSE
is predominantly engaged in the purchase of student loans insured under
federally sponsored programs. The GSE also makes secured loans (warehousing
advances) to providers of education credit, and provides financing to
educational institutions for their physical plant and equipment (academic
facilities financings).
PRIVATIZATION
Under the terms of the Privatization Act, the GSE may continue to issue debt
in the government agency market to finance student loans and other permissible
asset acquisitions, although the maturity date of such issuances generally may
not extend beyond September 30, 2008, the date by which the GSE must dissolve.
At September 30, 1997 and December 31, 1996, the GSE had $378 million and $372
million, respectively, in carrying value of outstanding debt with maturities
after September 30, 2008. Any debt remaining outstanding on the dissolution
date will be transferred into a defeasance trust.
As required under the Privatization Act, after the Reorganization, SLM
Holding paid $5 million to the District of Columbia Financial Responsibility
and Management Assistance Authority (the "D.C. Financial Control Board") for
use of the name "Sallie Mae." In addition, SLM Holding issued to the D.C.
Financial Control Board warrants to purchase 555,015 shares of SLM Holding
Common Stock at $72.43 per share.
Beginning in fiscal 1997 and until the GSE is dissolved, the GSE also must
reimburse the U.S. Treasury Department up to $800,000 annually (subject to
adjustment based on the Consumer Price Index) for its reasonable costs and
expenses of carrying out its supervisory duties under the Privatization Act.
10
<PAGE> 11
2. SIGNIFICANT ACCOUNTING POLICIES
RECLASSIFICATION
Certain prior year amounts in the Consolidated Statements of Income for the
three and nine months ended September 30, 1996 have been reclassified to
conform with the 1996 year-end presentation.
BASIS OF PRESENTATION
The accompanying unaudited consolidated financial statements of SLM Holding
have been prepared in accordance with generally accepted accounting principles
for interim financial information. Accordingly, they do not include all of the
information and footnotes required by generally accepted accounting principles
for complete consolidated financial statements. In the opinion of management,
all adjustments (consisting of normal recurring accruals) considered necessary
for a fair presentation have been included. The preparation of financial
statements in conformity with generally accepted accounting principles requires
management to make estimates and assumptions that affect the amounts reported
in the financial statements and accompanying notes. Actual results could differ
from those estimates. Operating results for the three and nine months ended
September 30, 1997 are not necessarily indicative of the results for the year
ending December 31, 1997.
Earnings per common share are computed based on net income divided by the
weighted average common and common equivalent shares outstanding for the
period. Average common and common equivalent shares outstanding for the three
and nine months ended September 30, 1997 and the three and nine months ended
September 30, 1996 totaled 52,112,187; 52,910,889; 55,215,411; and 56,256,511,
respectively.
RECENTLY ISSUED ACCOUNTING PRONOUNCEMENTS
During 1997, the Company adopted the requirements of Statement of Financial
Accounting Standards ("FAS") No. 125, "Accounting for Transfers and Servicing
of Financial Assets and Extinguishments of Liabilities," which establishes the
accounting for certain financial asset transfers, including securitization
transactions. The effect of implementing this standard was not material on the
Company's financial statements. Management also believes that this standard
will not have a material effect on the financial statements in the future.
In February 1997, the Financial Accounting Standards Board issued FAS No.
128, "Earnings Per Share," which is required to be adopted for years ending on
or after December 15, 1997. At that time, the Company will be required to
change the method used to compute earnings per share and to restate all prior
periods. Under the new requirements for calculating primary earnings per share,
the dilutive effect of stock options will be excluded. The adoption is expected
to have no material impact on the Company's reported earnings per share.
In June 1997, the Financial Accounting Standards Board FAS No. 130,
"Reporting Comprehensive Income", which is effective for periods after December
15, 1997. FAS 130 establishes standards for reporting and displaying of
comprehensive income in a full set of general purpose financial statements. The
Company is currently evaluating the effect of this pronouncement on its
financial statement presentation and disclosure.
11
<PAGE> 12
3. STUDENT LOANS
The following table summarizes the reserves that the Company has recorded for
estimated losses due to risk-sharing, unpaid guarantee claims on federally
guaranteed student loans and defaults on privately insured loans.
<TABLE>
<CAPTION>
THREE MONTHS ENDED NINE MONTHS ENDED
SEPTEMBER 30, SEPTEMBER 30,
------------------------------------ -----------------------------------
1997 1996 1997 1996
----------------- ----------------- ----------------- ----------------
<S> <C> <C> <C> <C>
BALANCE AT BEGINNING OF PERIOD . . . . . $82,463 $64,265 $84,063 $ 60,337
Additions
Provisions for loan losses . . . . . . 12,767 3,705 18,750 12,872
Recoveries . . . . . . . . . . . . . . 1,091 1,996 5,561 5,735
Deductions
Reductions for sales of student loans (3,146) (803) (7,474) (2,404)
Losses on loans . . . . . . . . . . . . (3,084) (3,352) (10,809) (10,729)
------- ------- ------- --------
BALANCE AT END OF PERIOD . . . . . . . . $90,091 $65,811 $90,091 $ 65,811
======= ======= ======= ========
</TABLE>
4. STUDENT LOAN SECURITIZATION
For the three and nine months ended September 30, 1997 and the three and nine
months ended September 30, 1996, SLM Funding Corporation, a wholly-owned
special purpose finance subsidiary, purchased from the GSE and sold $7.1
billion, $2.6 billion, $4.5 billion and $1.5 billion, respectively, of student
loans to trusts which issued floating rate student loan asset-backed securities
in underwritten public offerings. At September 30, 1997 and December 31, 1996,
securitized student loans outstanding totaled $12.1 billion and $6.3 billion,
respectively.
On July 23, 1997, the U.S. Department of Education (the "DOE") decided that
the 30 basis point annual offset fee which the GSE is required to pay on
student loans which it owns does not apply to student loans that the GSE has
securitized. The DOE had been under a court order since January 10, 1997 to
announce its final position on the application of the offset fee on securitized
loans by July 31, 1997. The GSE initially filed suit in the U.S. District Court
for the District of Columbia in April 1995 challenging the Secretary of
Education's attempt to apply the offset fee to securitized loans. The GSE
prevailed, and the Court of Appeals ruled that the fee applies only to loans
that the GSE owns and remanded the case to the District Court with instructions
to remand the matter to the Secretary of Education. In addition, the Court of
Appeals upheld the constitutionality of the offset fee, which applies annually
with respect to the principal amount of student loans that the GSE holds on
balance sheet and that were acquired on or after August 10, 1993.
Based upon the DOE'S final decision and the favorable Court ruling in this
matter, the contingent gain of approximately $97 million pre-tax that had been
held in reserve pending the final outcome of the case was removed and
recognized in income in the third quarter. All future securitization gains will
be calculated without consideration of the offset fee.
12
<PAGE> 13
5. QUARTERLY FINANCIAL INFORMATION (UNAUDITED)
<TABLE>
<CAPTION>
1997
------------------------------------
FIRST SECOND THIRD
QUARTER QUARTER QUARTER
-------- -------- --------
<S> <C> <C> <C>
Net interest income . . . . . . . . . . . . . . . . $199,026 $207,461 $170,342
Other income . . . . . . . . . . . . . . . . . . . 75,940 78,055 222,174
Operating expenses . . . . . . . . . . . . . . . . 101,559 115,283 172,945
Federal income taxes . . . . . . . . . . . . . . . 54,570 51,069 72,040
Minority interest in net earnings of subsidiary 2,674 2,673 2,674
-------- -------- --------
Income before premiums on debt extinguished . . , , 116,163 116,491 144,857
Premiums on debt extinguished, net of tax . . . . . -- -- (2,264)
-------- -------- --------
Net income . . . . . . . . . . . . . . . . . . . . $116,163 $116,491 $142,593
======== ======== ========
Earnings per common share before premiums on debt
extinguished . . . . . . . . . . . . . . . . . . $ 2.17 $ 2.20 $ 2.78
======== ======== ========
Earnings per common share . . . . . . . . . . . . . $ 2.17 $ 2.20 $ 2.74
======== ======== ========
</TABLE>
<TABLE>
<CAPTION>
1996
---------------------
FIRST SECOND
QUARTER QUARTER
-------- --------
<S> <C> <C>
Net interest income . . . . . . . . . . . . . . . . $232,679 $219,561
Other income . . . . . . . . . . . . . . . . . . . 21,754 27,899
Operating expenses. . . . . . . . . . . . . . . . . 98,773 100,145
Federal income taxes. . . . . . . . . . . . . . . . 47,968 44,340
Minority interest in net earnings of subsidiary . . 2,673 2,674
-------- --------
Income before premiums on debt extinguished . . . . 105,019 100,301
Premiums on debt extinguished, net of tax . . . . . (4,792) --
-------- --------
Net income. . . . . . . . . . . . . . . . . . . . . $100,227 $100,301
======== ========
Earnings per common share before premiums on debt
extinguished. . . . . . . . . . . . . . . . . . . $ 1.82 $ 1.79
======== ========
Earnings per common share . . . . . . . . . . . . . $ 1.74 $ 1.79
======== ========
</TABLE>
<TABLE>
<CAPTION>
1996
---------------------
THIRD FOURTH
QUARTER QUARTER
-------- --------
<S> <C> <C>
Net interest income . . . . . . . . . . . . . . . . $208,988 $205,208
Other income . . . . . . . . . . . . . . . . . . . 35,211 62,052
Operating expenses . . . . . . . . . . . . . . . . 100,075 106,659
Federal income taxes . . . . . . . . . . . . . . . 42,877 48,313
Minority interest in net earnings of subsidiary . . 2,673 2,674
-------- --------
Income before premiums on debt extinguished . . . . 98,574 109,614
Premiums on debt extinguished, net of tax . . . . . -- --
-------- --------
Net income . . . . . . . . . . . . . . . . . . . . $ 98,574 $109,614
======== ========
Earnings per common share before premiums on debt
extinguished . . . . . . . . . . . . . . . . . . $ 1.79 $ 2.01
======== ========
Earnings per common share . . . . . . . . . . . . . $ 1.79 $ 2.01
======== ========
</TABLE>
13
<PAGE> 14
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
RESULTS OF OPERATIONS
OVERVIEW
ON AUGUST 7, 1997 PURSUANT TO THE STUDENT LOAN MARKETING ASSOCIATION
REORGANIZATION ACT OF 1996 (THE "PRIVATIZATION ACT") AND AN AGREEMENT AND PLAN
OF REORGANIZATION (THE "REORGANIZATION"), DATED AS OF APRIL 7, 1997, THE
STUDENT LOAN MARKETING ASSOCIATION (THE "GSE") WAS REORGANIZED INTO A
WHOLLY OWNED SUBSIDIARY OF SLM HOLDING CORPORATION ("SLM HOLDING" OR THE
"COMPANY"). UNDER THE TERMS OF THE REORGANIZATION,THE GSE WILL TRANSFER CERTAIN
ASSETS, INCLUDING STOCK IN CERTAIN SUBSIDIARIES, TO SLM HOLDING OR ONE OF ITS
NON-GSE SUBSIDIARIES. THIS TRANSFER OF THE SUBSIDIARIES AND ASSETS AND THE
RELATED EXCHANGE OF STOCK IS BEING ACCOUNTED FOR AT HISTORICAL COST SIMILAR TO
A POOLING OF INTERESTS AND THEREFORE ALL PRIOR PERIOD FINANCIAL STATEMENTS AND
RELATED DISCLOSURES PRESENTED HAVE BEEN RESTATED AS IF THE REORGANIZATION TOOK
PLACE AT THE BEGINNING OF SUCH PERIODS.
Set forth below is Management's Discussion and Analysis of Financial
Conditions and Results of Operations of SLM Holding for the three and nine
months ended September 30, 1997 and 1996. These discussions include
complementary information and are intended to be read together. All dollar
amounts are in millions, except per share amounts.
14
<PAGE> 15
THREE AND NINE MONTHS ENDED SEPTEMBER 30, 1997 AND 1996
SELECTED FINANCIAL DATA
CONDENSED STATEMENTS OF INCOME
<TABLE>
<CAPTION>
THREE MONTHS ENDED INCREASE
SEPTEMBER 30, (DECREASE)
--------------------------------- -------------------------------
1997 1996 $ %
---------------- --------------- --------------- ---------------
<S> <C> <C> <C> <C>
Net interest income . . . . . . . . . . . . . . . $ 170 $ 209 $ (39) (18)%
Other operating income . . . . . . . . . . . . . 223 36 187 531
Operating expenses . . . . . . . . . . . . . . . 173 100 73 73
Federal income taxes . . . . . . . . . . . . . . 72 43 29 68
Minority interest in net earnings of subsidiary 3 3 -- --
------ ----- ----- ----
Income before premiums on debt extinguished . . . 145 99 46 47
Premiums on debt extinguished, net of tax . . . . (2) - (2) (100)
------ ----- ----- ----
NET INCOME . . . . . . . . . . . . . . . . . . . $ 143 $ 99 $ 44 45%
====== ===== ===== ====
EARNINGS PER COMMON SHARE . . . . . . . . . . . . $ 2.74 $1.79 $ .95 53%
====== ===== ===== ====
Dividends per common share . . . . . . . . . . . $ .44 $ .40 $ .04 10%
====== ===== ===== ====
CORE EARNINGS . . . . . . . . . . . . . . . . . . $ 138 $ 95 $ 43 46%
====== ===== ===== ====
<CAPTION>
NINE MONTHS ENDED INCREASE
SEPTEMBER 30, (DECREASE)
------------------------------- -------------------------------
1997 1996 $ %
-------------- --------------- --------------- --------------
<S> <C> <C> <C> <C>
Net interest income . . . . . . . . . . . . . . . $ 577 $ 661 $ (84) (13)%
Other operating income . . . . . . . . . . . . . 376 85 291 343
Operating expenses . . . . . . . . . . . . . . . 390 299 91 30
Federal income taxes . . . . . . . . . . . . . . 178 135 43 31
Minority interest in net earnings of subsidiary 8 8 --- ---
------ ----- ----- ----
Income before premiums on debt extinguished 377 304 73 24
Premiums on debt extinguished, net of tax (2) (5) 3 (53)
------- ----- ----- ----
NET INCOME . . . . . . . . . . . . . . . . . . . $ 375 $ 299 $ 76 25%
====== ===== ===== ====
EARNINGS PER COMMON SHARE . . . . . . . . . . . . $ 7.09 $5.32 $1.77 33%
====== ===== ===== ====
Dividends per common share . . . . . . . . . . . $ 1.32 $1.20 $ .12 10%
====== ===== ===== ====
CORE EARNINGS . . . . . . . . . . . . . . . . . . $ 362 $ 276 $ 86 31%
====== ===== ===== ====
</TABLE>
CONDENSED BALANCE SHEETS
<TABLE>
<CAPTION>
INCREASE (DECREASE)
SEPTEMBER DECEMBER -------------------------------
30, 1997 31, 1996 $ %
--------- ---------- --------------- --------------
<S> <C> <C> <C> <C>
ASSETS
Student loans . . . . . . . . . . . . . . . . $30,401 $33,754 $ (3,353) (10)%
Warehousing advances . . . . . . . . . . . . 2,442 2,790 (348) (12)
Academic facilities financings . . . . . . . 1,416 1,473 (57) (4)
Cash and investments . . . . . . . . . . . . 6,792 7,706 (914) (12)
Other assets . . . . . . . . . . . . . . . . 1,967 1,907 60 3
------- ------- -------- ----
Total assets . . . . . . . . . . . . . . . . $43,018 $47,630 $ (4,612) (10)%
======= ======= ========= ====
LIABILITIES AND STOCKHOLDERS' EQUITY
Short-term borrowings . . . . . . . . . . . . $23,989 $22,518 $1,471 7%
Long-term notes . . . . . . . . . . . . . . . 16,542 22,606 (6,064) (27)
Other liabilities . . . . . . . . . . . . . . 1,586 1,458 128 9
------- ------- --------- ----
Total liabilities . . . . . . . . . . . . . . 42,117 46,582 (4,465) 10
------- ------- --------- ----
Minority interest in subsidiary . . . . . . . 214 214 --- ---
Stockholders' equity before treasury stock 962 1,371 (409) (30)
Common stock held in treasury at cost . . . . 275 537 (262) (49)
------- ------- --------- ----
Total stockholders' equity . . . . . . . . . 687 834 (147) (18)
------- ------- --------- ----
Total liabilities and stockholders' equity $43,018 $47,630 $ (4,612) (10)%
======= ======= ========= ====
</TABLE>
15
<PAGE> 16
The following Management's Discussion and Analysis contains forward-looking
statements and information that are based on management's current expectations
as of the date of this document. When used herein, the words "anticipate,"
"believe," "estimate" and "expect" and similar expressions, as they relate to
the Company's management, are intended to identify forward-looking statements.
Such forward-looking statements are subject to risks, uncertainties,
assumptions and other factors that may cause the actual results of the Company
to be materially different from those reflected in such forward-looking
statements. Such factors include, among others, changes in the terms of
student loans and the educational credit marketplace arising from the
implementation of applicable laws and regulations and from changes in such laws
and regulations, changes in the demand for educational financing or in
financing preferences of educational institutions, students and their families,
and changes in the general interest rate environment and in the securitization
markets for student loans. The Company does not intend to update these
forward-looking statements prior to its next filing with the Securities and
Exchange Commission.
RESULTS OF OPERATIONS
The Company's net income was $143 million ($2.74 per common share) for the
three months ended September 30, 1997 compared to $99 million ($1.79 per common
share) for the three months ended September 30, 1996. For the nine months ended
September 30, 1997, net income was $375 million ($7.09 per common share),
compared to $299 million ($5.32 per common share) for the nine months ended
September 30, 1996. Included in net income for the three and nine months ended
September 30, 1997 was the reversal of a pre-tax $97 million reserve for offset
fees on Sallie Mae's securitized student loans resulting from the United States
Department of Education's ("DOE") determination that the 30 basis point offset
fee does not apply to securitized student loans. (See Note 4 to the Company's
financial statements.) In the consolidated statements of income, $94 million of
the reserve reversal is included in the gain on sale of student loans and $3
million is included in servicing and securitization revenue.
During the third quarter of 1997, the Company recognized charges of $85
million for expenses and asset writedowns in connection with the reorganization
of the Company to a privatized entity and to the change in business strategies
being implemented by the new management. The charges specifically related to
the following: the write-off of certain intangible assets and hedge losses ($24
million), severance costs as a result of staff reductions ($20 million),
privatization costs ($17 million), the write-down of various non-student loan
assets ($8 million), costs associated with the consolidation of staff located
in the metropolitan Washington, D.C. area ($8 million), increases in reserves
for privately insured student loans ($5 million) and costs associated with the
proxy contest ($3 million). The net effect of the reserve reversal and charges
added $4 million ($0.07 per share) to net income in the third quarter.
The net income growth, exclusive of the reserve reversal and charges discussed
above, for the three months ended September 30, 1997 over the year ago period
was primarily a result of higher student loan securitization gains of $35
million and a 12 percent growth in average managed student loan assets,
resulting mainly in increased servicing and securitization revenue of $18
million. Earnings per common share was further enhanced by repurchases of 2.3
million common shares (4 percent of the shares outstanding) during the three
months ended September 30, 1997, lowering shares outstanding to 50.5 million at
September 30, 1997.
The net income increase of $76 million (25 percent) in the first nine
months of 1997 was primarily a result of, on an after-tax basis, an increase
in student loan securitization gains of $128 million, of which $63 million was
related to the reversal of the reserve for offset fees, the growth in managed
student loan assets resulting mainly in increased servicing and securitization
revenue of $45 million, increased net interest earned on participations of $12
million and increased revenue from the amortization of student loan floor
contracts of $8 million. These positive factors were somewhat offset by the
reorganization charges of $59 million discussed above, a decrease in net
interest earned of $24 million on student loans as loans were securitized,
increased operating expenses of $17 million, the increase in Omnibus Budget
Reconciliation Act ("OBRA") fees of $10 million discussed in detail below and a
decrease in student loan floor revenues of $9 million. Earnings per common
share was further enhanced by repurchases of 4.1 million shares (8 percent of
shares outstanding) during the first nine months of 1997.
16
<PAGE> 17
OBRA imposed legislated fees and risk-sharing on the GSE and other
participants in the Federal Family Education Loan Program ("FFELP"), including
an offset fee applicable only to the GSE, consolidation loan rebate fees and
risk-sharing on defaulted loans applicable to all FFELP participants. The
impact of these fees and reserves for risk-sharing on the Company's on-balance
sheet portfolio of student loans reduced net income by $19 million and $15
million for the three months ended September 30, 1997 and 1996, respectively,
and by $55 million and $45 million for the first nine months of 1997 and 1996,
respectively. In addition to these fees, OBRA also imposed other yield
reductions on all FFELP participants, principally loan origination fees paid to
the federal government and reduced Special Allowance Payments ("SAP," which is
described below) during the period when a borrower is not in an active
repayment status. The Company effectively shares the impact of these costs
through the pricing of loan portfolios it purchases in the secondary market.
Management believes the spreads earned on the Company's portfolio of student
loans will continue to be adversely affected as a result of these changes to
the FFELP program for the next several years as older loans in its portfolio,
which were not affected by OBRA, amortize and are replaced by more recently
originated loans which are affected by OBRA. As of September 30, 1997 and
1996, 68% and 61% of on-balance sheet student loans were subject to OBRA
fees.
CORE EARNINGS AND CORE STUDENT LOAN SPREAD
Important measures of the Company's operating performance are core earnings
and the core student loan spread. Core earnings is defined as the Company's net
income less the after-tax effect of floor revenues and other one-time charges.
Management believes that these measures, which are not measures under generally
accepted accounting principles ("GAAP"), are important because they depict the
Company's earnings before the effects of floor revenues, which are largely
outside of the Company's control. Management believes that core earnings as
defined, while not necessarily comparable to other companies' use of similar
terminology, provide for meaningful period to period comparisons as a basis for
analyzing trends in the Company's core student loan operations.
The following table analyzes the earning spreads on student loans for the
three and nine months ended September 30, 1997 and 1996. The line captioned
"Adjusted Student Loan Yields" reflects contractual yields adjusted for
premiums paid to purchase loan portfolios and the estimated costs of borrower
benefits. The Company, as the servicer of student loans that the GSE
securitizes, will continue to earn fee revenues over the life of the
securitized student loan portfolios. The off-balance sheet information
presented in the table that follows analyzes the on-going fee revenues
associated with the securitized portfolios of student loans.
STUDENT LOAN SPREAD ANALYSIS
<TABLE>
<CAPTION>
THREE MONTHS ENDED NINE MONTHS ENDED
SEPTEMBER 30, SEPTEMBER 30,
-------------------------------- ---------------------------
1997 1996 1997 1996
------------ ------------ ----------- -----------
<S> <C> <C> <C> <C>
ON-BALANCE SHEET
Adjusted student loan yields.............. 7.82% 8.04% 7.84% 7.98%
Amortization of floor contracts........... .10 .07 .11 .06
Floor revenues............................ .09 .07 .09 .14
Direct OBRA Costs......................... (.36) (.28) (.35) (.28)
------- ------- ------- -------
Student loan income....................... 7.65 7.90 7.69 7.90
Cost of funds............................. (5.52) (5.56) (5.52) (5.51)
------- ------- ------- -------
Student loan spread....................... 2.13% 2.34% 2.17% 2.39%
======= ======= ======= =======
Core student loan spread.................. 2.04% 2.27% 2.08% 2.25%
======= ======= ======= =======
OFF-BALANCE SHEET
Servicing and securitization revenue...... 1.70% 1.15% 1.64% 1.24%
======= ======= ======= =======
AVERAGE BALANCES (IN MILLIONS OF DOLLARS)
Student loans, including participations .. $31,467 $32,543 $32,681 $33,304
Securitized loans......................... 10,383 4,984 8,312 3,245
------- ------- ------- -------
Managed student loans .................... $41,850 $37,527 $40,993 $36,549
======= ======= ======= =======
</TABLE>
17
<PAGE> 18
The decrease in the core student loan spread in the three and nine months
ended September 30, 1997 versus the corresponding periods in the prior year was
due principally to higher OBRA fees, the effect of student loan participations,
which contractually yield a lower rate than the underlying student loans
(discussed below), and increased student loan reserves, offset by the increased
revenues from the amortization of upfront payments received from student loan
floor contracts. In addition, the student loan spread was reduced further by
the decrease in student loan floor revenues.
STUDENT LOAN FLOOR REVENUES
As of September 30, 1997, approximately $34 billion of the Company's managed
student loans were eligible to earn floors ($15 billion with fixed borrower
interest rates and $19 billion with variable borrower interest rates that reset
annually). During 1996, the Company entered into contracts with third parties
related to $13 billion of such loans under which it agreed to pay the future
floor revenues received in exchange for upfront payments ("floor revenue
contracts"). These upfront payments are being amortized to student loan income
over the average life of these contracts, which is approximately 2 years. During
the third quarter the average notional amount of these contracts was $8 billion
and $7 billion remained outstanding at September 30, 1997. (See discussion of
floor revenue contracts below).
Based on interest rates during the third quarter, $4 billion of the remaining
$26 billion of loans eligible earned pre-tax floor revenues of $7 million (net
of $5 million in payments under the floor revenue contracts) and $6 million
(net of $2 million in payments under the floor revenue contracts) in the three
months ended September 30, 1997 and 1996, respectively, as the average bond
equivalent 91-day Treasury Bill rate was 5.20 percent and 5.27 percent for
those periods, respectively. For the nine months ended September 30, 1997 and
1996, the Company earned floor revenues of $21 million (net of $15 million in
payments under the floor revenue contracts) and $35 million (net of $6 million
in payments under the floor revenue contracts), respectively, as the average
bond equivalent 91-day Treasury Bill rate was 5.20 percent and 5.17 percent,
respectively.
Floor Revenue Contracts
During the three months ended September 30, 1997 and 1996, the amortization
of the upfront payments received under floor revenue contracts where the
underlying student loans earned interest at fixed rates ("fixed rate floors")
contributed $8 million and $6 million, respectively, pre-tax to core earnings.
For the nine months ended September 30, 1997 and 1996, the amortization of the
upfront payments received under fixed rate floor revenue contracts contributed
$26 million and $14 million, respectively, pre-tax to core earnings. The
amortization of these payments is not dependent on future interest rate levels,
and therefore is included in core earnings. In addition, for the nine months
ended September 30, 1997, the Company earned $3 million on floor revenue
contracts with terms tied to student loans whose interest rates reset annually
("variable rate floors"). The floor revenue from these contracts is dependent
on future interest rates, and this amortization is therefore considered floor
revenue and excluded from core net income.
SECURITIZATION
During each of the three month periods ended September 30, 1997 and 1996, the
Company completed one securitization transaction in which a total of $2.5
billion and $1.5 billion, respectively, of student loans were sold to a special
purpose finance subsidiary and by the subsidiary to trusts that issued
asset-backed securities to fund the student loans to term. In each of the first
nine months of 1997 and 1996, the Company completed three securitization
transactions in which a total of $7.0 billion and $4.5 billion, respectively,
of student loans were sold by the Company. When loans are securitized a gain on
sale is recorded that is equal to the present value of the expected net cash
flows from the trust to the Company over the life of the portfolio. The Company
recorded pre-tax securitization gains (exclusive of the $94 million one-time
gain associated with the successful outcome of the offset fee litigation) in
the three months ended September 30, 1997 and 1996 of $66 million and $12
million, respectively. Total gains recorded in the nine months ended September
30, 1997 and 1996 were $131 million and $31 million,
18
<PAGE> 19
respectively. The increase in the gains in the three and nine months ended
September 30, 1997 was mainly due to the increase in the size of the portfolios
securitized. Also, gains as a percentage of the securitized portfolios
increased due mainly to the higher average borrower indebtedness and the longer
average life of the portfolios of loans securitized in 1997 versus 1996. In
addition, the gain for the third quarter of 1997 was calculated without the
negative effect of the 30 basis point offset fee which was included in the
calculation of the 1996 third quarter gain. Gains on future securitizations
will continue to vary depending on the size and the loan characteristics of the
portfolios securitized and the spreads prevailing in the securitization debt
markets.
19
<PAGE> 20
NET INTEREST INCOME
To compare nontaxable asset yields to taxable yields on a similar basis, the
amounts in the following table are adjusted for the impact of certain
tax-exempt and tax-advantaged investments based on the marginal corporate tax
rate of 35 percent.
<TABLE>
<CAPTION>
THREE MONTHS ENDED INCREASE
SEPTEMBER 30, (DECREASE)
--------------------------------- ----------------------------------
1997 1996 $ %
--------------- --------------- ---------------- ---------------
<S> <C> <C> <C> <C>
Interest income
Student loans .......................... $ 607 $ 646 $(39) (6)%
Warehousing advances .................. 36 46 (10) (20)
Academic facilities financings.......... 24 26 (2) (10)
Investments ............................ 145 137 8 6
Taxable equivalent adjustment........... 9 9 - 1
----- ---- --- ---
Total taxable equivalent interest
income ................................. 821 864 (43) (5)
Interest expense ......................... 641 646 (5) (1)
----- ----- ---- ----
Taxable equivalent net interest
income ................................. $ 180 $ 218 $(38) (18)%
===== ===== ==== ====
</TABLE>
<TABLE>
<CAPTION>
NINE MONTHS ENDED INCREASE
SEPTEMBER 30, (DECREASE)
--------------------------------- -----------------------------------
1997 1996 $ %
--------------- --------------- --------------- ----------------
<S> <C> <C> <C> <C>
Interest income
Student loans .......................... $ 1,881 $ 1,969 $ (88) (5)%
Warehousing advances .................. 115 153 (38) (25)
Academic facilities financings 71 75 (4) (5)
Investments ............................ 457 406 51 12
Taxable equivalent adjustment .......... 27 26 1 6
------- ------- ----- ---
Total taxable equivalent interest income.. 2,551 2,629 (78) (3)
Interest expense.......................... 1,947 1,942 5 -
------- ------- ----- ---
Taxable equivalent net interest income.... $ 604 $ 687 $ (83) (12)%
======= ======= ===== ===
</TABLE>
Taxable equivalent net interest income for the three months ended September
30, 1997 declined by $38 million from the three months ended September 30, 1996.
This decline was due to the increase in loans subject to OBRA fees, which
reduced taxable equivalent net interest income by $25 million, the writeoff of
$13 million of deferred hedge losses, lower student loan floor revenues,
decreased spreads on student loans and a decrease in average student loan assets
as loans were securitized. The decreases were partially offset by the $2 million
increase in revenue from the amortization of upfront payments received from
student loan floor contracts for the three months ended September 30, 1997 over
the same year-ago period and increased earnings from student loan
participations. The decrease in interest income from warehousing advances is due
to the decrease in the average balance of those assets and the increase in
interest income from investments is due principally to the increase in the
average balance of those assets. See "-- Rate/Volume Analysis."
Taxable equivalent net interest income for the nine months ended September
30, 1997 declined by $83 million from the nine months ended September 30, 1996.
This decline was due to the increase in loans subject to OBRA fees, which
reduced taxable equivalent net income by $16 million for the nine months ended
September 30, 1997 versus the same period in 1996. Other factors contributing
to the declines were the writeoff of the deferred hedge losses, lower student
loan floor revenues, decreased spreads on student loans and a decrease in
average student loan assets as loans were securitized. The decreases were
partially offset by increased revenue of $12 million from the amortization of
upfront payments received from student loan floor contracts for the nine months
ended September 30, 1997 over the same year-ago period and increased earnings
from student loan participations. The decrease in interest income from
warehousing advances is due to the decrease in the average balance of those
assets and the increase in
20
<PAGE> 21
interest income from investments is due principally to the increase in the
average balance of those assets. See "-- Rate/Volume Analysis."
ALLOWANCE FOR STUDENT LOANS LOSSES
The allowance for student loan losses is the periodic expense of maintaining
an adequate allowance at the amount estimated to be sufficient to absorb
possible future losses, net of recoveries, inherent in the existing on-balance
sheet student loan portfolio. In evaluating the adequacy of the allowance for
loan losses the Company takes into consideration several factors, including
trends in claims rejected for payment by guarantors, default rate trends on
privately insured loans and the amount of FFELP loans subject to 2 percent
risk-sharing. To recognize these potential losses on student loans, the Company
maintained a reserve of $90 million and $66 million at September 30, 1997 and
1996, respectively. In the three and nine months ended September 30, 1997, the
Company increased this reserve by $20 million and $30 million, respectively,
due mainly to the growth and increased default rates in the privately insured
loan portfolio and to the increase in federally insured student loans subject
to risk-sharing. These increases were partially offset by decreases in the
allowance of $7 million and $11 million for the respective periods resulting
from improved experience in recovering unpaid guarantees on defaulted student
loans. Once a student loan is charged off as a result of an unpaid claim, it is
the Company's policy to continue to pursue the recovery of principal and
interest.
Management believes that the allowance for student loan losses is adequate to
cover anticipated losses in the on-balance sheet student loan portfolio. This
evaluation is inherently subjective, however, as it requires material estimates
that may be susceptible to significant changes.
AVERAGE BALANCE SHEETS
The following table reflects the rates earned on earning assets and paid on
liabilities for the three and nine months ended September 30, 1997 and 1996.
Managed net interest margin includes net interest income plus gains on
securitization sales and servicing and securitization income divided by average
managed assets.
<TABLE>
<CAPTION>
THREE MONTHS ENDED SEPTEMBER 30,
--------------------------------------------------------------------
1997 1996
-------------------------------- --------------------------------
BALANCE RATE BALANCE RATE
-------------- -------------- -------------- --------------
<S> <C> <C> <C> <C>
AVERAGE ASSETS
Student loans.......................... $ 31,467 7.65% $ 32,543 7.90%
Warehousing advances................... 2,400 6.02 3,012 6.05
Academic facilities financings......... 1,436 8.27 1,575 8.40
Investments............................ 9,659 6.06 9,456 5.82
-------- ------ -------- ------
Total interest earning assets............... 44,962 7.24% 46,586 7.38%
====== ======
Non-interest earning assets................. 2,107 1,908
-------- --------
Total assets................................ $ 47,069 $ 48,494
======== ========
AVERAGE LIABILITIES AND STOCKHOLDERS' EQUITY
Six month floating rate notes............. $ 2,804 5.43% $ 2,287 5.49%
Other short-term borrowings............... 23,418 5.52 18,940 5.48
Long-term notes........................... 18,552 5.92 25,016 5.61
-------- ------ -------- ------
Total interest bearing liabilities.......... 44,774 5.68% 46,243 5.55%
====== ======
Non-interest bearing liabilities............ 1,483 1,450
Stockholders' equity........................ 812 801
-------- --------
Total liabilities and stockholders' equity.. $ 47,069 $ 48,494
======== ========
Net interest margin......................... 1.58% 1.86%
====== ======
Managed net interest margin................. 2.75% 1.89%
====== ======
</TABLE>
21
<PAGE> 22
<TABLE>
<CAPTION>
NINE MONTHS ENDED SEPTEMBER 30,
------------------------------------------------------------------
1997 1996
----------------------------- -------------------------------
BALANCE RATE BALANCE RATE
-------------- ------------- -------------- -------------
<S> <C> <C> <C> <C>
AVERAGE ASSETS
Student loans . . . . . . . . . . . . . . . $ 32,681 7.69% $ 33,304 7.90%
Warehousing advances . . . . . . . . . . . . 2,558 5.99 3,351 6.09
Academic facilities financings . . . . . . . 1,440 8.38 1,479 8.46
Investments . . . . . . . . . . . . . . . . 10,287 6.05 9,381 5.88
-------- ------ -------- -----
Total interest earning assets . . . . . . . . . . 46,966 7.26% 47,515 7.39%
====== =====
Non-interest earning assets . . . . . . . . . . . 1,991 1,841
-------- --------
Total assets . . . . . . . . . . . . . . . . . . $ 48,957 $ 49,356
======== ========
AVERAGE LIABILITIES AND STOCKHOLDERS' EQUITY
Six month floating rate notes . . . . . . . . . $ 2,902 5.45% $ 2,498 5.44%
Other short-term borrowings . . . . . . . . . . 23,965 5.49 17,491 5.43
Long-term notes . . . . . . . . . . . . . . . . 19,807 5.70 27,089 5.57
-------- ------ -------- -----
Total interest bearing liabilities . . . . . . . 46,674 5.58% 47,078 5.51%
====== =====
Non-interest bearing liabilities . . . . . . . . 1,466 1,466
Stockholders' equity . . . . . . . . . . . . . . 817 812
-------- --------
Total liabilities and stockholders' equity . . . $ 48,957 $ 49,356
======== ========
Net interest margin . . . . . . . . . . . . . . . 1.72% 1.93%
====== =====
Managed net interest margin . . . . . . . . . . . 2.25% 1.97%
====== =====
</TABLE>
The decrease in net interest margin for the three and nine months ended
September 30, 1997 from the three and nine months ended September 30, 1996 is
mainly due to increased OBRA fees, lower average student loan assets as loans
were securitized, the writeoff of deferred hedge losses, increased student loan
reserves and lower floor revenues offset by the increased revenues from the
amortization of upfront payments received from student loan floor contracts.
See "--Rate/Volume Analysis." The decrease in the managed net interest margin
for the three and nine months ended September 30, 1997 from the three and nine
months ended September 30, 1996 is due to the factors mentioned above for the
net interest margin, offset by the reversal of the reserve for offset fees of
$97 million, the increase in the gains from securitization, exclusive of the
reserve reversal for offset fees, of $54 million and $99 million, respectively,
and the increase in servicing and securitization income of $27 million and $68
million, respectively.
FUNDING COSTS
The Company's borrowings are generally variable rate indexed principally to
the 91-day Treasury bill rate. The following table summarizes the average
balance of debt (by index after giving effect to the impact of interest rate
swaps) for the three and nine months ended September 30, 1997 and 1996.
<TABLE>
<CAPTION>
THREE MONTHS ENDED SEPTEMBER 30,
-----------------------------------------------------------------------------------
1997 1996
--------------------------------------- ---------------------------------------
AVERAGE AVERAGE AVERAGE AVERAGE
INDEX BALANCE RATE BALANCE RATE
- ------------------------- ----------------- ----------------- ----------------- -----------------
<S> <C> <C> <C> <C>
Treasury bill, $ 31,722 5.51% $34,627 5.56%
principally 91-day . . .
LIBOR . . . . . . . . . 6,684 5.58 7,178 5.36
Discount notes . . . . . 4,870 5.53 3,292 5.40
Fixed . . . . . . . . . 654 6.99 682 6.91
Zero coupon. . . . . . . 137 11.12 123 11.15
Other . . . . . . . . . 707 5.21 341 4.21
------------- ------ ------- ------
Total $ 44,774 5.68% $46,243 5.55%
============= ====== ======= ======
</TABLE>
22
<PAGE> 23
<TABLE>
<CAPTION>
NINE MONTHS ENDED SEPTEMBER 30,
---------------------------------------------------------------------
1997 1996
----------------------------- -----------------------------------
AVERAGE AVERAGE AVERAGE AVERAGE
INDEX BALANCE RATE BALANCE RATE
--------------------------- --------- --------------- --------------- ---------------
<S> <C> <C> <C> <C>
Treasury bill, principally $33,145 5.51% $35,458 5.50%
91-day . . . . . . . . .
LIBOR . . . . . . . . . . 6,471 5.48 7,998 5.38
Discount notes . . . . . 5,623 5.46 2,484 5.36
Fixed . . . . . . . . . . 667 7.03 734 6.78
Zero coupon . . . . . . . 134 11.12 122 11.12
Other . . . . . . . . . . 634 5.14 282 4.85
------- ------- ------- -------
Total . . . . . . . . . . $46,674 5.58% $47,078 5.51%
======= ======= ======= =======
</TABLE>
In the above table, for the three months ended September 30, 1997 and 1996,
spreads for Treasury bill-indexed borrowings averaged .22 percent and .24
percent, respectively, over the weighted average Treasury bill rates for the
same periods and spreads for London Interbank Offered Rate ("LIBOR")-indexed
borrowings averaged .25 percent and .27 percent, respectively, under the
weighted average LIBOR rates.
In the above table, for the nine months ended September 30, 1997 and 1996,
spreads for Treasury bill-indexed borrowings averaged .24 percent and .25
percent, respectively, over the weighted average Treasury bill rates for the
same periods and spreads for LIBOR-indexed borrowings averaged .25 percent and
.27 percent, respectively, under the weighted average LIBOR rates.
RATE/VOLUME ANALYSIS
The Rate/Volume Analysis below shows the relative contribution of changes in
interest rates and asset volumes.
<TABLE>
<CAPTION>
INCREASE
(DECREASE)
TAXABLE ATTRIBUTABLE
EQUIVALENT TO CHANGE IN
INCREASE ----------------------------
(DECREASE) RATE VOLUME
-------------- ----------- -----------
<S> <C> <C> <C>
THREE MONTHS ENDED SEPTEMBER 30, 1997 VS. THREE MONTHS
ENDED SEPTEMBER 30, 1996
Taxable equivalent interest income . . . . . . . . . $ (43) $ (15) $ (28)
Interest expense . . . . . . . . . . . . . . . . . . (5) 21 (26)
------ ----- ------
Taxable equivalent net interest income . . . . . . . $ (38) $ (36) $ (2)
===== ===== ======
</TABLE>
<TABLE>
<CAPTION>
INCREASE
(DECREASE)
TAXABLE ATTRIBUTABLE
EQUIVALENT TO CHANGE IN
INCREASE -----------------------------
(DECREASE) RATE VOLUME
-------------- ----------- ------------
<S> <C> <C> <C>
FIRST NINE MONTHS OF 1997 VS. FIRST NINE MONTHS OF 1996
Taxable equivalent interest income . . . . . . . . . . $ (78) $ (43) $ (35)
Interest expense . . . . . . . . . . . . . . . . . . . 5 34 (29)
----- ----- -----
Taxable equivalent net interest income . . . . . . . . $ (83) $ (77) $ (6)
===== ===== =====
</TABLE>
The $36 million decrease in taxable equivalent net interest income
attributable to the change in rates for the three months ended September 30,
1997 was principally due to the $13 million write-off of deferred hedge losses
in the 1997 third quarter, increased student loan reserves, exclusive of the
increase in reserves for risk-sharing, of $9 million and increased OBRA costs
of $6 million.
The $77 million decrease in taxable equivalent net interest income
attributable to the change in rates in the first nine months of 1997 was
principally due to increased OBRA costs of $16 million, a decrease of $16
million in student loan revenue due to yield reductions in the form of lower SAP
rates, the decrease of $14 million in floor revenues (net of payments under the
floor contracts) in the first nine months of 1997 versus 1996, the $13 million
write-off of deferred
23
<PAGE> 24
hedge losses, the impact of student loan participations on the student loan
spread of $11 million, and the increase in student loan reserves, exclusive of
the increase in the reserves for risk-sharing, of $5 million. Offsetting the
decreases in taxable equivalent net interest income were $12 million of
increased revenues from the amortization of the upfront payments received from
student loan floor contracts.
OPERATING EXPENSES
Operating expenses include general and administrative costs, costs incurred
to service the Company's managed student loan portfolio and operational costs
incurred in the process of acquiring student loan portfolios. Total operating
expenses as a percentage of average managed student loans were 164 basis points
and 106 basis points for the three months ended September 30, 1997 and 1996,
respectively, and 127 basis points and 109 basis points for the nine months
ended September 30, 1997 and 1996, respectively. The increases were due
principally to the one-time costs of $64 million incurred in the 1997 third
quarter for expenses and asset writedowns in connection with the reorganization
of the Company to a privatized entity and to the change in business strategies
being implemented by the new management ($49 million to corporate operating
expenses and $15 million to servicing costs). Operating expenses are summarized
in the following tables:
<TABLE>
<CAPTION>
THREE MONTHS ENDED SEPTEMBER 30, 1997
-------------------------------------
SERVICING
AND
CORPORATE ACQUISITION TOTAL
---------------- ------------- --------------
<S> <C> <C> <C>
Salaries and employee benefits . . . . . . $ 31 $ 41 $ 72
Occupancy and equipment . . . . . . . . . 12 27 39
Professional fees . . . . . . . . . . . . 7 6 13
Advertising and promotion . . . . . . . . 2 -- 2
Office operations . . . . . . . . . . . . 2 8 10
Other . . . . . . . . . . . . . . . . . . 25 4 29
----- ---- -----
Total internal operating expenses . . . . 79 86 165
Third party servicing costs . . . . . . . -- 8 8
----- ---- -----
Total operating expenses. . . . . . . . . $ 79 $ 94 $ 173
===== ==== =====
</TABLE>
<TABLE>
<CAPTION>
THREE MONTHS ENDED SEPTEMBER 30, 1996
-------------------------------------
SERVICING
AND
CORPORATE ACQUISITION TOTAL
---------------- ------------- ---------
<S> <C> <C> <C>
Salaries and employee benefits . . . . . . $ 17 $ 34 $ 51
Occupancy and equipment . . . . . . . . . . 6 14 20
Professional fees . . . . . . . . . . . . . 4 2 6
Advertising and promotion . . . . . . . . . 1 -- 1
Office operations . . . . . . . . . . . . . 2 9 11
Other . . . . . . . . . . . . . . . . . . . 2 1 3
----- ---- -----
Total internal operating expenses . . . . . 32 60 92
Third party servicing costs . . . . . . . . -- 8 8
----- ---- -----
Total operating expenses. . . . . . . . . . $ 32 $ 68 $ 100
===== ==== =====
</TABLE>
<TABLE>
<CAPTION>
THREE MONTHS ENDED
SEPTEMBER 30, INCREASE/(DECREASE)
---------------------------------- ---------------------
1997 1996 $ %
------------- -------------- -------- ----------
<S> <C> <C> <C> <C>
Servicing costs . . . . . . . . . . . . . $ 74 $ 51 $ 23 46%
Acquisition costs . . . . . . . . . . . . 20 17 3 17
----- ---- ---- ---
Total servicing and acquisition costs . . $ 94 $ 68 $ 26 39%
===== ==== ==== ===
</TABLE>
24
<PAGE> 25
<TABLE>
<CAPTION>
NINE MONTHS ENDED SEPTEMBER 30, 1997
--------------------------------------------------
SERVICING
AND
CORPORATE ACQUISITION TOTAL
--------------- ------------- ------------
<S> <C> <C> <C>
Salaries and employee benefits. . . . $ 62 $ 113 $ 175
Occupancy and equipment . . . . . . . 21 57 78
Professional fees . . . . . . . . . . 19 14 33
Advertising and promotion . . . . . . 7 -- 7
Office operations . . . . . . . . . . 6 21 27
Other . . . . . . . . . . . . . . . . 32 9 41
------ ------- ------
Total internal operating expenses . . 147 214 361
Third party servicing costs . . . . . -- 29 29
------ ------- ------
Total operating expenses. . . . . . . $ 147 $ 243 $ 390
====== ======= ======
Employees at end of the period. . . . 562 4,177 4,739
====== ======= ======
</TABLE>
<TABLE>
<CAPTION>
NINE MONTHS ENDED SEPTEMBER 30, 1996
--------------------------------------------------
SERVICING
AND
CORPORATE ACQUISITION TOTAL
--------------- ------------- ------------
<S> <C> <C> <C>
Salaries and employee benefits . . . $ 51 $ 102 $ 153
Occupancy and equipment . . . . . . . 19 44 63
Professional fees . . . . . . . . . . 10 6 16
Advertising and promotion . . . . . . 4 -- 4
Office operations . . . . . . . . . . 6 24 30
Other . . . . . . . . . . . . . . . . 7 -- 7
------ ------- ------
Total internal operating expenses . . 97 176 273
Third party servicing costs . . . . . -- 26 26
------ ------- ------
Total operating expenses . . . . . . $ 97 $ 202 $ 299
====== ======= ======
Employees at end of the period. . . . 743 3,941 4,684
====== ======= ======
</TABLE>
<TABLE>
<CAPTION>
NINE MONTHS ENDED
SEPTEMBER 30, INCREASE/(DECREASE)
---------------------------- --------------------------
1997 1996 $ %
------------- ---------- ------------ ------------
<S> <C> <C> <C> <C>
Servicing costs . . . . . . . . . . . $ 195 $152 $ 43 28%
Acquisition costs . . . . . . . . . . 48 50 (2) (3)
----- ---- ----- ----
Total servicing and acquisition costs $ 243 $202 $ 41 20%
===== ==== ==== ===
</TABLE>
In the three months and nine months ended September 30, 1997, corporate
operating expenses increased by $47 million and $50 million, respectively, over
the corresponding year-ago periods. As mentioned above, the increase can be
attributed to the one-time charges of $49 million that relate to the
Reorganization of the Company. Specifically, these charges are related to:
privatization costs ($17 million), severance costs as a result of staff
reductions ($16 million), costs associated with the consolidation of staff
located in the metropolitan Washington D.C. area ($8 million), write-down of
various non-student loan assets ($5 million) and costs associated with the
proxy contest ($3 million). In the three and nine months ended September 30,
1997, servicing expenses increased by $23 million and $43 million,
respectively, over the corresponding year-ago periods. These increases were due
to $15 million in a one-time write-down of servicing assets ($11 million) and
severance costs as a result of staff reductions ($4 million) related to the
third quarter Reorganization of the Company and to an increase in the number of
loans serviced. Also contributing to the increase for the nine months ended
September 30, 1997 over the corresponding year-ago period was a one-time cost
of $8 million in connection with the early transfer of loans from a third party
servicer to Sallie Mae Servicing Corporation ("SMSC"), a wholly owned
subsidiary of the Company.
Servicing costs include all operations and systems costs incurred to service
the Company's portfolio of managed student loans, including fees paid to third
party servicers. The 1992 legislated expansion of student eligibility and
increases in loan limits resulted in higher average student loan balances,
which generally command a higher price in the secondary market and contribute
to lower servicing costs as a percentage of the average balance of managed
student loans. When expressed as a percentage of the managed student loan
portfolio, servicing costs averaged 70 basis points and 54 basis points for the
three
25
<PAGE> 26
months ended September 30, 1997 and 1996, respectively, and 64 basis points and
56 basis points for the nine months ended September 30, 1997 and 1996,
respectively. These increases were due principally to the one-time costs
discussed above, without which servicing costs for the three and nine months
ended September 30, 1997 would have been 54 basis points and 56 basis points,
respectively.
Loan acquisition costs are principally costs incurred under the ExportSS(R)
loan origination and administration service, the costs of converting newly
acquired portfolios onto the Company's servicing platform or that of a third
party servicer and costs of loan consolidation activities. Student loans added
to the ExportSS(R) pipeline, which represent loan volume serviced by and
committed for sale to the Company, totaled $1.3 billion during the three months
ended September 30, 1997, up slightly from $1.2 billion in the three months
ended September 30, 1996. For each of the nine month periods ended September
30, 1997 and 1996, $3.0 billion of student loans were added to the ExportSS(R)
pipeline. The outstanding portfolio of loans serviced for ExportSS(R) lenders
totaled $3.8 billion at September 30, 1997, unchanged from September 30, 1996.
FEDERAL AND STATE TAXES
The Company maintains a portfolio of tax-advantaged assets principally to
support education-related financing activities. That portfolio was primarily
responsible for the decrease in the effective federal income tax rate from the
statutory rate of 35 percent to 33 percent and 29 percent for the three months
ended September 30, 1997 and 1996, respectively, and to 32 percent and 30
percent in the first nine months of 1997 and 1996, respectively. The increase
in the effective tax rate for the three months ended September 30, 1997 was due
mainly to certain privatization charges which are not deductible for tax
purposes. The GSE is exempt from all state, local, and District of Columbia
income, franchise, sales and use, personal property and other taxes, except for
real property taxes. This tax exemption is effective only at the GSE level. As
a result of the Reorganization, the Company's GSE and non-GSE activities are
separated and non-GSE activities are subject to state and local taxation. State
taxes are expected to be immaterial in 1997 as the majority of the Company's
business activities will relate to the GSE. As increasing business activities
occur outside of the GSE, the effects of state and local taxes are expected to
increase accordingly. When fully phased in, management estimates that the
Company's effective tax rate will be increased by approximately five percentage
points. In addition, state and local sales and property taxes ultimately are
expected to increase operating expenses by approximately two to three percent.
LIQUIDITY AND CAPITAL RESOURCES
In the three months ended September 30, 1997, student loan purchases totaled
$2.3 billion, up 27 percent from the $1.8 billion purchased in the three months
ended September 30, 1996. Included in the $2.3 billion of purchases was
approximately $80 million of student loan participations from the Company's
joint venture with The Chase Manhattan Bank (the "Chase Joint Venture").
In each of the nine months periods ended September of 1997 and 1996, student
loan purchases totaled $6.4 billion. Included in the $6.4 billion of 1997
student loan purchases was approximately $671 million of student loan
participations from the Chase Joint Venture. Approximately two-thirds of
non-joint venture purchase volume in both the three and nine months ended
September 30, 1997 was derived from the Company's base of commitment clients,
particularly those who used the ExportSS(R) loan origination service. The GSE
secures financing to fund the purchase of insured student loans along with its
other operations by issuing debt securities in the domestic and overseas
capital markets, through public offerings and private placements of U.S.
dollar-denominated and foreign currency-denominated debt of varying maturities
and interest rate characteristics and through securitizations of its student
loan. The GSE's debt securities are currently rated at the highest credit
rating level by Moody's Investors Service and Standard & Poor's. Historically,
the rating agencies' ratings of the GSE have been largely a factor of its
status as a government-sponsored enterprise.
26
<PAGE> 27
The Privatization Act effectively requires that the GSE maintain a minimum
statutory capital adequacy ratio (the ratio of stockholders' equity to total
assets plus 50 percent of the credit equivalent amount of certain off-balance
sheet items) of at least 2 percent until January 1, 2000 and 2.25 percent
thereafter or be subject to certain "safety and soundness" requirements
designed to restore such statutory ratio. Management anticipates being able to
fund the increase in required capital from the GSE's current and retained
earnings. At September 30, 1997, the GSE's statutory capital adequacy ratio was
2.75 percent. In addition, the Privatization Act now requires management,
before the payment of dividends by the GSE, to certify to the Secretary of the
Treasury that, after giving effect to the payment of dividends, the statutory
capital ratio test would have been met at the time the dividend was declared.
The Company uses interest rate and foreign currency swaps (collateralized
where appropriate), purchases of U.S. Treasury securities and other hedging
techniques to reduce the exposure to interest rate and currency fluctuations
that arise from its financing activities and to match the characteristics of
its variable interest rate-earning assets (See "Interest Rate Risk
Management"). During the first nine months of 1997, the Company issued $3.4
billion of long-term notes to refund maturing and repurchased obligations. At
September 30, 1997, the Company had $16.5 billion of outstanding long-term debt
issues of which $11.5 billion had stated maturities that could be accelerated
through call provisions. The GSE has, in the past, also issued adjustable rate
cumulative preferred stock, common stock, common stock warrants and puts, and
subordinated debentures convertible to common stock, to diversify its funding
sources. The Company also obtains funding through a bank line of credit.
During the first nine months of 1997, the Company repurchased 4.1 million
shares of its common stock, leaving 50.5 million shares outstanding at
September 30, 1997. For the past few years the GSE has operated near the
statutory minimum capital ratio of 2.00 percent of risk-adjusted assets
required under its charter. Capital in excess of such amounts has been used to
repurchase common shares. During 1997, management anticipates using current
earnings to repurchase 7 to 9 percent of the shares outstanding at the
beginning of the year. In September 1997, the Company's Board of Directors
authorized management to repurchase up to five million shares of the Company's
common stock as part of its on-going share repurchase plan.
SECURITIZATION
The GSE uses securitizations of student loans to reduce its on-balance sheet
funding needs. The GSE completed a $2.6 billion securitization transaction
during the three months ended September 30, 1997, bringing the total amount
securitized in the first nine months of 1997 to $7.1 billion. Management
believes that securitizations will grow in importance as a source of funding
for the Company.
CASH FLOWS
For the three months ended September 30, 1997, cash and cash equivalents
decreased $2.1 billion, bringing the ending balance at September 30, 1997 to $92
million, compared to $486 million at September 30, 1996. The $2.1 billion
decrease in cash and cash equivalents was mainly due to additional capital
being temporarily invested in cash equivalent securities in the second quarter
of 1997 as a result of the temporary restriction on the Company's share
repurchase activity in connection with the proxy contest. For the three months
ended September 30, 1997, the Company used the proceeds from the $2.6 billion
student loan securitization, the $2.1 billion from the decrease in cash and
cash equivalents and the proceeds from the net decrease in investments of $1.7
billion to fund the net repayment of debt of $4.8 billion, the $2.3 billion
purchase of student loans and the $330 million repurchase of the Company's
common stock.
In the first nine months of 1997, operating activities provided net cash
inflows of $454 million, an increase of $488 million from the net cash outflows
of $33 million in the first nine months of 1996. This increase was mainly due
to the increase in other liabilities of $273 million in the first nine months
of 1997. The Company used the proceeds from student loan securitizations of
$7.1 billion, repayments and claim payments of $2.7 billion, and the net
proceeds from sales of investments of $745 million to purchase
27
<PAGE> 28
student loans and participations of $6.4 billion, to retire debt of $4.6
billion and to repurchase $531 million of the Company's common stock. As
student loans are securitized the need for long-term financing of these assets
on balance sheet decreases.
INTEREST RATE RISK MANAGEMENT
The Company's principal objective in financing its loan assets is to
minimize its sensitivity to changing interest rates by matching the interest
rate characteristics of borrowings to specific assets in order to lock in
spreads. The Company funds its floating rate loan assets (most of which have
weekly rate resets) with variable rate debt and fixed rate debt converted to
variable rates with interest rate swaps. To achieve a more precise match of
interest rate characteristics between loan assets and their related
liabilities, the Company has effectively converted some of its variable rate
debt to a different variable rate index with interest rate swaps. At September
30, 1997, $19.3 billion of fixed rate debt and $2.1 billion of variable rate
debt were matched with interest rate swaps and foreign currency agreements.
Fixed rate debt at September 30, 1997 also funded fixed rate warehousing
advances and academic facilities financings. Investments were funded on a
"pooled" approach, i.e., the pool of liabilities that funds the investment
portfolio has an average rate and maturity or reset date that corresponds to
the average rate and maturity or reset date of the investments which they fund.
In both its match funding activities for its loan assets and its pool
funding activities for its investments, the Company enters into various
financial instrument contracts in the normal course of business to reduce
interest rate risk and foreign currency exposure on certain of its borrowings.
These financial instrument contracts include interest rate swaps, interest rate
cap and collar agreements, foreign currency swaps, forward currency exchange
agreements, options on currency exchange agreements, options on securities, and
financial futures contracts.
In the table below the Company's variable rate assets and liabilities are
categorized by reset date of the underlying index. Fixed rate assets and
liabilities are categorized based on their maturity dates. An interest rate gap
is the difference between volumes of assets and volumes of liabilities maturing
or repricing during specific future time intervals. Nonperforming loans are
included in the analysis based on their underlying interest rate
characteristics. The following gap analysis reflects rate-sensitive positions
at September 30, 1997 and is not necessarily reflective of positions that
existed throughout the period.
<TABLE>
<CAPTION>
INTEREST RATE SENSITIVITY PERIOD
---------------------------------------------------------
3 MONTHS 6 MONTHS
3 MONTHS TO TO
OR LESS 6 MONTHS 1 YEAR
------------------ ----------------- ------------------
<S> <C> <C> <C>
ASSETS
Student loans . . . . . . . . . $ 27,780 $ 92 $ 2,529
Warehousing advances . . . . . 2,399 21 2
Academic facilities financings 114 9 14
Cash and investments . . . . . 4,727 4 37
Other assets . . . . . . . . . -- -- --
-------- ------- -------
Total assets . . . . . . . 35,020 126 2,582
-------- ------- -------
LIABILITIES AND STOCKHOLDERS'
EQUITY
Short-term borrowings . . . . . 15,467 2,507 6,015
Long-term notes . . . . . . . . 5,633 257 --
Other liabilities . . . . . . . -- -- --
Minority interest in subsidiary -- -- --
Stockholders' equity . . . . . -- -- --
-------- ------- -------
Total liabilities and
stockholders' equity . . 21,100 2,764 6,015
-------- ------- -------
OFF-BALANCE SHEET FINANCIAL
INSTRUMENTS
Interest rate swaps . . . . . . 13,983 (2,697) (2,078)
-------- ------- -------
Period gap . . . . . . . . . . $ (63) $ 59 $(1,355)
======== ======= =======
Cumulative gap . . . . . . . . $ (63) $ (4) $(1,359)
======== ======= =======
Ratio of cumulative gap to total
assets . . . . . . . . . . . .1% --% 3.2%
======== ======= =======
Ratio of interest-sensitive assets to
interest-sensitive liabilities 166.0% 4.6% 42.9%
======== ======= =======
</TABLE>
28
<PAGE> 29
<TABLE>
<CAPTION>
INTEREST RATE SENSITIVITY PERIOD
-------------------------------------------------------
1 TO 2 2 TO 5 OVER 5
YEARS YEARS YEARS
----------------- ----------------- -----------------
<S> <C> <C> <C>
ASSETS
Student loans . . . . . . . . . $ -- $ -- $ --
Warehousing advances . . . . . 1 -- 19
Academic facilities financings 41 330 908
Cash and investments . . . . . 34 185 1,805
Other assets . . . . . . . . . -- -- 1,967
------- ------- -------
Total assets . . . . . . . 76 515 4,699
------- ------- -------
LIABILITIES AND STOCKHOLDERS'
EQUITY
Short-term borrowings . . . . . -- -- --
Long-term notes . . . . . . . . 2,970 7,036 646
Other liabilities . . . . . . . -- -- 1,586
Minority interest in subsidiary -- -- 214
Stockholders' equity . . . . . -- -- 687
------- ------- -------
Total liabilities and
stockholders' equity . . 2,970 7,036 3,133
------- ------- -------
OFF-BALANCE SHEET FINANCIAL
INSTRUMENTS
Interest rate swaps . . . . . . (3,042) (6,924) 758
------- -------- -------
Period gap . . . . . . . . . . $ 148 $ 403 $ 808
======= ======= =======
Cumulative gap . . . . . . . . $(1,211) $ (808) $ --
======= ======= =======
Ratio of cumulative gap to total
assets . . . . . . . . . . . 2.8% 1.9% --%
======= ======= =======
Ratio of interest-sensitive assets to
interest-sensitive liabilities 2.6% 7.3% 422.9%
======= ======= =======
</TABLE>
In low interest rate environments, floor revenues on student loans cause the
margins on these loans to widen beyond the locked-in spreads. See "-- Results
of Operations -- Student Loan Floor Revenues." Such loans continue to be
classified in the three months or less category in the table above, reflecting
the fact that as interest rates rise these assets will resume their weekly rate
reset.
The weighted average remaining terms to maturity of the Company's earning
assets and borrowings at September 30, 1997 were 6.0 years and 1.5 years,
respectively. The following table reflects the average terms to maturity for
the Company's earning assets and liabilities at September 30, 1997:
<TABLE>
<CAPTION>
AVERAGE TERMS TO MATURITY
(IN YEARS)
<S> <C>
EARNING ASSETS
Student loans . . . . . . . . . . 6.0
Warehousing advances . . . . . . 3.5
Academic facilities financings . 7.5
Cash and investments . . . . . . 5.0
---
Total earning assets . . . . . . 6.0
===
BORROWINGS
Short-term borrowings . . . . . . .5
Long-term borrowings . . . . . . 3.0
---
Total borrowings . . . . . . . . 1.5
===
</TABLE>
In the above table, Treasury receipts and variable rate asset-backed
securities, although generally liquid in nature, extend the weighted average
remaining term to maturity of cash and investments to 5.0 years. As loans are
securitized, the need for long-term on-balance sheet financing will decrease.
29
<PAGE> 30
MINORITY INTEREST
Upon the Reorganization on August 7, 1997, each outstanding share of common
stock of the GSE was converted into one share of common stock of SLM Holding.
The GSE's preferred stock was not affected by the Reorganization and remains
outstanding. The outstanding preferred stock is reflected as a minority
interest in the consolidated financial statements. The financial statements
for prior periods have been restated to reflect this change.
The GSE's preferred stock dividends are cumulative and payable quarterly at
4.50 percentage points below the highest yield of certain long-term and
short-term United States Treasury obligations. The dividend rate for any
dividend period will not be less than 5 percent per annum nor greater than 14
percent per annum. For each of the three month periods ended September 30, 1997
and 1996, the preferred dividend rate was 5.00 percent and reduced net income
by $2.7 million and for each of the nine month periods ended September 30, 1997
and 1996, the preferred stock dividend rate was also 5.00 percent and reduced
net income by $8.0 million. The Privatization Act requires that on the
dissolution date of September 30, 2008, the GSE shall repurchase or redeem, or
make proper provisions for repurchase or redemption of any outstanding
preferred stock. The Company has the option of effecting an earlier dissolution
of the GSE if certain conditions are met.
OTHER RELATED EVENTS AND INFORMATION
STATUS OF DIRECT LENDING
As of September 30, 1997, approximately 1,529 colleges and universities were
participating in the Federal Direct Student Loan Program ("FDSLP") for the
1996-97 academic year. The FDLSP had a legislated market share goal of 50
percent for the 1996-1997 academic year. Based on DOE reports, management
estimates that the FDSLP accounted for approximately 32 percent of total
student loan originations for the 1996-97 academic year. The FDSLP accounted
for approximately 30 percent of total student loan volume in the 1995-96
academic year, up from approximately 7 percent in the 1994-95 academic year.
In recent years as the FDSLP has grown, the volume of loans originated by
banks and other participants under the FFELP has been adversely impacted.
Historically, the GSE has purchased the majority of its student loans as they
near the repayment phase which commences after a borrower leaves school. On
average there is a two to three year lag between the date a loan is originated
and the date it enters repayment. This lag has delayed the adverse affect of
FDSLP originations on the GSE's purchases of student loans. Management expects
that as the volume of FDSLP loans reaching the repayment phase increases, the
GSE's percentage share of the overall student loan market will decline. In
1994, the DOE began to offer existing FFELP borrowers the opportunity to
refinance FFELP loans into FDSLP loans. As of September 30, 1997, approximately
$697 million of FFELP loans owned by the GSE have been accepted for refinancing
into FDSLP loans. Approximately $485 million have been refinanced into FDSLP
loans with the remainder awaiting disbursement by the federal government.
OBRA provides for a change in the borrower interest rate and the Special
Allowance Payment for certain FFELP loans made on or after July 1, 1998. The
new rates are scheduled to be based on the U.S. Treasury security with a
"comparable maturity" plus 1.0 percent. The Secretary of Education has not yet
proposed regulations specifying the U.S. Treasury security on which the SAP
rate will be based or details on setting the SAP rate. Management believes
that the "comparable maturity" security will be the 10-year Treasury Note.
Depending on the specifics of the regulations, these changes could adversely
impact the FFELP market and the Company's business because the availability and
costs of funding to support this new type of instrument are uncertain.
Representatives of the student loan industry are in discussions with members of
Congress concerning possible legislative modification of this OBRA provision.
30
<PAGE> 31
OBRA also requires the GSE to act as a lender of last resort to make FFELP
loans when other private lenders are not available. Such loans receive a 100
percent guarantee and are not subject to the 30 basis point offset fee on loans
held by the GSE. If the Secretary of Education determines that the GSE is not
adequately implementing this provision, the offset fee paid by the GSE could be
increased from 30 basis points to 100 basis points.
Legislated expansion of student eligibility as well as increases in student
and parent loan limits have increased the volume of national loan originations.
FFELP originations rose nearly 30 percent year-to-year to about $21 billion for
the 1994 federal fiscal year ended September 30, 1994. During the 1995 federal
fiscal year, FFELP originations declined to $19 billion due to FDSLP
originations totaling $5 billion. Although FFELP originations declined in the
1996 federal fiscal year to $18 billion, management expects, based on DOE
reports, that FFELP originations will increase to $19 billion in the 1997
federal fiscal year. In the meantime, however, the competition for FFELP loans
has intensified at both the originating and secondary market levels due mainly
to the reduced volume and to securitization of student loans, which has
developed into a significant funding alternative for FFELP lenders.
RECENTLY ISSUED ACCOUNTING PRONOUNCEMENTS
In February 1997, the Financial Accounting Standards Board issued Statement
of Financial Accounting Standards ("FAS") No. 128, "Earnings Per Share", which
is required to be adopted for years ending on or after December 15, 1997. At
that time, the Company will be required to change the method used to compute
earnings per share and to restate all prior periods. Under the new requirements
for calculating primary earnings per share, the dilutive effect of stock
options will be excluded. The adoption is expected to have no material impact
on the Company's reported earnings per share.
In June 1997, the Financial Accounting Standards Board FAS No. 130,
"Reporting Comprehensive Income", which is effective for periods after December
15, 1997. FAS 130 establishes standards for reporting and displaying of
comprehensive income in a full set of general purpose financial statements. The
Company is currently evaluating the effect of this pronouncement on its
financial statement presentation and disclosure.
31
<PAGE> 32
PART II--OTHER INFORMATION
ITEM 1. LEGAL PROCEEDINGS.
On April 29, 1997, U.S. District Court Judge Stanley Sporkin ordered
the Department of Education ("DOE") to decide by July 31, 1997 its final
position on the application of the offset fee to loans that the Student Loan
marketing Association ("GSE") has securitized. On July 23, 1997, the DOE
decided that the 30 basis point annual offset fee that the GSE is required to
pay on student loans that it owns does not apply to student loans that the GSE
has securitized. Based upon this favorable determination in this matter, the
contingent gain of approximately $97 million pre-tax that had been held in
reserve pending the final outcome of the case was released and recognized in
income in the third quarter of 1997. All future securitization gains will be
calculated without consideration of the offset fee. See "Management's
Discussion and Analysis of Financial Condition and Results of Operations - -
Three and Nine Months Ended September 30, 1997 and 1996 - - Results of
Operations -- Securitization".
ITEM 2. CHANGES IN SECURITIES.
Pursuant to the Privatization Act, as of the effective date of the
Reorganization, the Company issued to the D.C. Financial Control Board warrants
to purchase 555,015 shares of SLM Holding Common Stock at $72.43 per share,
subject to certain antidilution adjustments. The warrants expire on September
30, 2008. The Company did not receive any proceeds for issuance of the
warrants. The warrants were required to be issued pursuant to the federal
legislation and in addition were issued, and upon exercise shares of the
Company's Common Stock will be issued, in reliance upon the exemption provided
under Section 4(2) of the Securities Act of 1933, as amended (the "Securities
Act"). The Company has agreed to file a registration statement under the
Securities Act registering resale of shares issued upon exercise of the
warrants.
ITEM 3. DEFAULTS UPON SENIOR SECURITIES.
Nothing to report.
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS.
(a) On July 31, 1997, a Special Meeting of Shareholders (the "Special
Meeting") of the Student Loan Marketing Association, a federally-chartered
government sponsored enterprise, was held at which the GSE's shareholders (1)
approved and adopted an Agreement and Plan of Reorganization providing for the
reorganization (the "Reorganization") of the GSE into a subsidiary of the
Registrant (the "Reorganization Proposal") and (2) selected a slate of 15
nominees to be appointed as the initial board of directors of the Registrant
(the "Board Slate Proposal"). On August 1, 1997 the slate selected by the GSE's
shareholders was appointed as the initial board of directors of the Registrant
and on August 7, 1997, the Reorganization was consummated.
(b) The names of the directors selected by the GSE's shareholders and
appointed as members of the initial board of directors of the Registrant are as
follows:
Edward A. Fox, Chairman Benjamin J. Lambert, III
Albert L. Lord, Vice Chairman Marie V. McDemmond
James E. Brandon Barry A. Munitz
Charles L. Daley A. Alexander Porter, Jr.
Thomas J. Fitzpatrick Wolfgang Schoellkopf
Diane S. Gilleland Steven L. Shapiro
Ann Torre Grant Randolph H. Waterfield, Jr.
Ronald F. Hunt
32
<PAGE> 33
(c) Set forth below is a summary of the votes cast for and against, as
well as the number of abstentions(1), as to each of the
Reorganization Proposal and the Board Slate Proposal (there was no
separate tabulation with respect to each nominee for office as
shareholders selected a slate of directors to be appointed):
<TABLE>
<S> <C>
Reorganization Proposal
-----------------------
For 43,711,713
Against 53,777
Abstain 80,356
</TABLE>
<TABLE>
<S> <C>
Board Slate Proposal
--------------------
Majority Director Slate 18,106,316
CRV Director Slate 25,478,872
Abstain 260,658
</TABLE>
(d) There was no settlement between the Registrant and any other
participant terminating any solicitation subject to Rule 14a-11.
ITEM 5. OTHER INFORMATION.
Nothing to report.
ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K
(a) Exhibits
27 Financial Data Schedule
(b) Reports on Form 8-K
The following reports on From 8-K were filed with the Securities and
Exchange Commission during the Quarter ended September 30, 1997:
<TABLE>
<CAPTION>
DATE ITEMS REPORTED FINANCIAL STATEMENTS FILED
- ---- -------------- --------------------------
<S> <C> <C>
8/14/97 Reporting the reorganization of the Student None (financial statements for the GSE for
Loan Marketing Association, a federally- the periods specified in 17 C.F.R. Section
chartered government sponsored enterprise 210-3.05 were filed by amendment on
(the "GSE"), into a wholly-owned subsidiary 10/21/97)
of the Registrant.
</TABLE>
- -------------------------
(1) Broker non-votes can not be calculated as both proposals were non-routine
matters.
33
<PAGE> 34
SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934,
as amended, the Registrant has duly caused this report to be signed on its
behalf by the undersigned hereunto duly authorized.
SLM HOLDING CORPORATION
-----------------------
(Registrant)
November 14, 1997 /s/ Mark G. Overend
- ------------------------------------- ------------------------------------
Date Mark G. Overend
Vice President & Chief
Financial Officer
(Principal Financial and Accounting
Officer and Duly Authorized Officer)
34
<TABLE> <S> <C>
<ARTICLE> 9
<S> <C>
<PERIOD-TYPE> 9-MOS
<FISCAL-YEAR-END> DEC-31-1997
<PERIOD-END> SEP-30-1997
<CASH> 62,817
<INT-BEARING-DEPOSITS> 0
<FED-FUNDS-SOLD> 29,300
<TRADING-ASSETS> 0
<INVESTMENTS-HELD-FOR-SALE> 7,029,722
<INVESTMENTS-CARRYING> 564,491
<INVESTMENTS-MARKET> 564,507
<LOANS> 33,364,891
<ALLOWANCE> 90,091
<TOTAL-ASSETS> 43,018,179
<DEPOSITS> 0
<SHORT-TERM> 23,989,205
<LIABILITIES-OTHER> 1,799,446
<LONG-TERM> 16,541,742
0
0
<COMMON> 10,476
<OTHER-SE> 677,310
<TOTAL-LIABILITIES-AND-EQUITY> 43,018,179
<INTEREST-LOAN> 2,027,817
<INTEREST-INVEST> 496,046
<INTEREST-OTHER> 0
<INTEREST-TOTAL> 2,523,863
<INTEREST-DEPOSIT> 0
<INTEREST-EXPENSE> 1,947,034
<INTEREST-INCOME-NET> 576,829
<LOAN-LOSSES> 18,750
<SECURITIES-GAINS> 13,755
<EXPENSE-OTHER> 389,787
<INCOME-PRETAX> 563,211
<INCOME-PRE-EXTRAORDINARY> 377,511
<EXTRAORDINARY> (2,264)
<CHANGES> 0
<NET-INCOME> 375,247
<EPS-PRIMARY> 7.09
<EPS-DILUTED> 7.09
<YIELD-ACTUAL> 1.72
<LOANS-NON> 0
<LOANS-PAST> 950,000
<LOANS-TROUBLED> 0
<LOANS-PROBLEM> 0
<ALLOWANCE-OPEN> 84,063
<CHARGE-OFFS> 18,283
<RECOVERIES> 5,561
<ALLOWANCE-CLOSE> 90,091
<ALLOWANCE-DOMESTIC> 90,091
<ALLOWANCE-FOREIGN> 0
<ALLOWANCE-UNALLOCATED> 0
</TABLE>
