<PAGE> 1
- --------------------------------------------------------------------------------
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UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
------------------------
FORM 10-Q
(MARK ONE)
[X] QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF
THE SECURITIES EXCHANGE ACT OF 1934
FOR THE QUARTERLY PERIOD ENDED JUNE 30, 1998
OR
[ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF
THE SECURITIES EXCHANGE ACT OF 1934
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)
<TABLE>
<S> <C>
DELAWARE 52-2013874
(State or other jurisdiction of (I.R.S. Employer
incorporation or organization) Identification No.)
11600 SALLIE MAE DRIVE, RESTON, VIRGINIA 20193
(Address of principal executive offices) (Zip Code)
</TABLE>
Registrant's telephone number, including area code: (703) 810-3000
------------------------
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>
<S> <C>
CLASS OUTSTANDING AT JUNE 30, 1998
----- ----------------------------
Common Stock, $.20 par value 167,475,866 shares
</TABLE>
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- --------------------------------------------------------------------------------
<PAGE> 2
SLM HOLDING CORPORATION
FORM 10-Q
INDEX
JUNE 30, 1998
<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............... 11
PART II OTHER INFORMATION
Item 1. Legal Proceedings................................. 27
Item 2. Changes in Securities............................. 27
Item 3. Defaults Upon Senior Securities................... 27
Item 4. Submission of Matters to a Vote of Security
Holders........................................... 27
Item 5. Other Information................................. 28
Item 6. Exhibits and Reports on Form 8-K.................. 28
SIGNATURES.................................................. 29
</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>
JUNE 30, DECEMBER 31,
1998 1997
----------- ------------
(UNAUDITED)
<S> <C> <C>
ASSETS
Insured student loans purchased........................ $23,054,968 $27,592,714
Student loan participations............................ 2,538,325 1,927,896
----------- -----------
Insured student loans.................................. 25,593,293 29,520,610
Warehousing advances................................... 1,507,864 1,868,654
Academic facilities financings
Bonds--available-for-sale......................... 788,007 860,325
Loans............................................. 490,032 514,691
----------- -----------
Total academic facilities financings................... 1,278,039 1,375,016
Investments
Available-for-sale................................ 4,079,286 4,549,977
Held-to-maturity.................................. 582,118 525,962
----------- -----------
Total investments...................................... 4,661,404 5,075,939
Cash and cash equivalents.............................. 60,365 54,022
Other assets, principally accrued interest
receivable............................................ 2,149,147 2,014,556
----------- -----------
Total assets................................. $35,250,112 $39,908,797
=========== ===========
LIABILITIES
Short-term borrowings.................................. $21,771,401 $23,175,509
Long-term notes........................................ 11,459,866 14,541,316
Other liabilities...................................... 1,174,582 1,303,517
----------- -----------
Total liabilities................................. 34,405,849 39,020,342
----------- -----------
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: 184,041,735 and 183,632,694 shares
issued, respectively.................................. 36,808 36,726
Additional paid-in capital............................. 22,310 28,838
Unrealized gains on investments (net of tax of $200,111
and $203,935, respectively)........................... 371,635 378,736
Retained earnings...................................... 889,917 654,135
----------- -----------
Stockholders' equity before treasury stock............. 1,320,670 1,098,435
Common stock held in treasury at cost: 16,565,869 and
10,221,757 shares, respectively....................... 690,290 423,863
----------- -----------
Total stockholders' equity........................ 630,380 674,572
----------- -----------
Total liabilities and stockholders' equity... $35,250,112 $39,908,797
=========== ===========
</TABLE>
See accompanying notes to consolidated financial statements.
3
<PAGE> 4
SLM HOLDING CORPORATION
CONSOLIDATED STATEMENTS OF INCOME
(DOLLARS AND SHARES IN THOUSANDS, EXCEPT PER SHARE AMOUNTS)
<TABLE>
<CAPTION>
THREE MONTHS ENDED SIX MONTHS ENDED
JUNE 30, JUNE 30,
------------------------- -------------------------
1998 1997 1998 1997
----------- ----------- ----------- -----------
(UNAUDITED) (UNAUDITED) (UNAUDITED) (UNAUDITED)
<S> <C> <C> <C> <C>
Interest income:
Insured student loans purchased........... $502,023 $602,921 $1,032,758 $1,220,530
Student loan participations............... 38,677 30,737 71,248 53,044
-------- -------- ---------- ----------
Insured student loans..................... 540,700 633,658 1,104,006 1,273,574
Warehousing advances...................... 27,718 37,235 58,133 78,203
Academic facilities financings:
Taxable.............................. 11,250 12,289 22,603 24,531
Tax-exempt........................... 10,436 11,365 21,507 23,287
-------- -------- ---------- ----------
Total academic facilities financings...... 21,686 23,654 44,110 47,818
Investments............................... 76,910 168,637 168,192 312,466
-------- -------- ---------- ----------
Total interest income.......................... 667,014 863,184 1,374,441 1,712,061
Interest expense:
Short-term debt........................... 318,810 381,890 666,768 738,764
Long-term debt............................ 176,907 273,833 367,312 566,810
-------- -------- ---------- ----------
Total interest expense......................... 495,717 655,723 1,034,080 1,305,574
-------- -------- ---------- ----------
NET INTEREST INCOME............................ 171,297 207,461 340,361 406,487
Other income:
Gain on sale of student loans............. 56,894 30,638 117,068 64,630
Servicing and securitization revenue...... 62,509 31,230 115,373 57,191
Gains on sales of securities.............. 3,405 4,200 5,799 7,382
Other..................................... 15,835 11,987 30,805 24,792
-------- -------- ---------- ----------
Total other income............................. 138,643 78,055 269,045 153,995
-------- -------- ---------- ----------
Operating expenses:
Salaries and benefits..................... 49,327 51,112 98,126 102,781
Other..................................... 44,405 64,171 86,468 114,061
-------- -------- ---------- ----------
Total operating expenses....................... 93,732 115,283 184,594 216,842
-------- -------- ---------- ----------
Income before federal income taxes and minority
interest in net earnings of subsidiary....... 216,208 170,233 424,812 343,640
-------- -------- ---------- ----------
Federal income taxes:
Current................................... 70,452 51,075 140,217 118,121
Deferred.................................. (1,149) (6) (3,991) (12,482)
-------- -------- ---------- ----------
Total federal income taxes..................... 69,303 51,069 136,226 105,639
Minority interest in net earnings of
subsidiary................................... 2,674 2,673 5,347 5,347
-------- -------- ---------- ----------
NET INCOME..................................... $144,231 $116,491 $ 283,239 $ 232,654
======== ======== ========== ==========
BASIC EARNINGS PER COMMON SHARE................ $ .86 $ .63 $ 1.67 $ 1.25
======== ======== ========== ==========
Average common shares outstanding.............. 168,282 184,219 169,998 185,445
======== ======== ========== ==========
DILUTED EARNINGS PER COMMON SHARE.............. $ .84 $ .63 $ 1.64 $ 1.25
======== ======== ========== ==========
Average common and common equivalent shares
outstanding.................................. 171,108 185,477 172,593 186,609
======== ======== ========== ==========
</TABLE>
See accompanying notes to consolidated financial statements.
4
<PAGE> 5
SLM HOLDING CORPORATION
CONSOLIDATED STATEMENTS OF CHANGES IN STOCKHOLDERS' EQUITY
(DOLLARS IN THOUSANDS, EXCEPT PER SHARE AMOUNTS)
(UNAUDITED)
<TABLE>
<CAPTION>
COMMON STOCK SHARES
--------------------------------------- COMMON ADDITIONAL RETAINED
ISSUED TREASURY OUTSTANDING STOCK PAID-IN CAPITAL EARNINGS
----------- ----------- ----------- ------- --------------- ----------
<S> <C> <C> <C> <C> <C> <C>
BALANCE AT MARCH 31, 1997.............. 231,237,790 (46,507,356) 184,730,434 $46,247 $22,767 $1,068,602
Comprehensive income (see Note 2):
Net Income..................... 116,491
Other comprehensive income, net
of tax:
Unrealized gains (losses)
on investments, net of
tax......................
Comprehensive income...............
Cash dividends ($.13 per share).... (23,172)
Issuance of common shares.......... 315,543 315,543 64 5,219
Repurchase of common shares........ (1,875,111) (1,875,111)
----------- ----------- ----------- ------- ------- ----------
BALANCE AT JUNE 30, 1997............... 231,553,333 (48,382,467) 183,170,866 $46,311 $27,986 $1,161,921
=========== =========== =========== ======= ======= ==========
BALANCE AT MARCH 31, 1998.............. 183,923,227 (13,902,544) 170,020,683 $36,785 $22,030 $ 769,115
Comprehensive income (see Note 2):
Net Income..................... 144,231
Other comprehensive income, net
of tax:
Unrealized gains (losses)
on investments, net of
tax......................
Comprehensive income...............
Cash dividends ($.14 per share).... (23,429)
Issuance of common shares.......... 118,508 118,508 23 2,763
Premiums on equity forward purchase
contracts........................ (2,483)
Repurchase of common shares........ (2,663,325) (2,663,325)
----------- ----------- ----------- ------- ------- ----------
BALANCE AT JUNE 30, 1998............... 184,041,735 (16,565,869) 167,475,866 $36,808 $22,310 $ 889,917
=========== =========== =========== ======= ======= ==========
<CAPTION>
ACCUMULATED
OTHER TOTAL
TREASURY COMPREHENSIVE STOCKHOLDERS'
STOCK INCOME EQUITY
--------- ------------- -------------
<S> <C> <C> <C>
BALANCE AT MARCH 31, 1997.............. $(672,765) $331,023 $ 795,874
---------
Comprehensive income (see Note 2):
Net Income..................... 116,491
Other comprehensive income, net
of tax:
Unrealized gains (losses)
on investments, net of
tax...................... 13,605 13,605
---------
Comprehensive income............... 130,096
Cash dividends ($.13 per share).... (23,172)
Issuance of common shares.......... 5,283
Repurchase of common shares........ (65,495) (65,495)
--------- -------- ---------
BALANCE AT JUNE 30, 1997............... $(738,260) $344,628 $ 842,586
========= ======== =========
BALANCE AT MARCH 31, 1998.............. $(580,199) $373,701 $ 621,432
---------
Comprehensive income (see Note 2):
Net Income..................... 144,231
Other comprehensive income, net
of tax:
Unrealized gains (losses)
on investments, net of
tax...................... (2,066) (2,066)
---------
Comprehensive income............... 142,165
Cash dividends ($.14 per share).... (23,429)
Issuance of common shares.......... 2,786
Premiums on equity forward purchase
contracts........................ (2,483)
Repurchase of common shares........ (110,091) (110,091)
--------- -------- ---------
BALANCE AT JUNE 30, 1998............... $(690,290) $371,635 $ 630,380
========= ======== =========
</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)
(UNAUDITED)
<TABLE>
<CAPTION>
COMMON STOCK SHARES
--------------------------------------- COMMON ADDITIONAL RETAINED
ISSUED TREASURY OUTSTANDING STOCK PAID-IN CAPITAL EARNINGS
----------- ----------- ----------- ------- --------------- ----------
<S> <C> <C> <C> <C> <C> <C>
BALANCE AT DECEMBER 31, 1996........... 229,934,499 (42,017,416) 187,917,083 $45,987 $ 0 $ 975,889
Comprehensive income (see Note 2):
Net Income..................... 232,654
Other comprehensive income, net
of tax:
Unrealized gains (losses)
on investments, net of
tax......................
Comprehensive income...............
Cash dividends ($.25 per share).... (46,622)
Issuance of common shares.......... 1,618,834 1,618,834 324 27,986
Repurchase of common shares........ (6,365,051) (6,365,051)
----------- ----------- ----------- ------- -------- ----------
BALANCE AT JUNE 30, 1997............... 231,553,333 (48,382,467) 183,170,866 $46,311 $ 27,986 $1,161,921
=========== =========== =========== ======= ======== ==========
BALANCE AT DECEMBER 31, 1997........... 183,632,694 (10,221,757) 173,410,937 $36,726 $ 28,838 $ 654,135
Comprehensive income (see Note 2):
Net Income..................... 283,239
Other comprehensive income, net
of tax:
Unrealized gains (losses)
on investments, net of
tax......................
Comprehensive income...............
Cash dividends ($.28 per share).... (47,457)
Issuance of common shares.......... 409,041 409,041 82 10,566
Premiums on equity forward purchase
contracts........................ (17,094)
Repurchase of common shares........ (6,344,112) (6,344,112)
----------- ----------- ----------- ------- -------- ----------
BALANCE AT JUNE 30, 1998............... 184,041,735 (16,565,869) 167,475,866 $36,808 $ 22,310 $ 889,917
=========== =========== =========== ======= ======== ==========
<CAPTION>
ACCUMULATED
OTHER TOTAL
TREASURY COMPREHENSIVE STOCKHOLDERS'
STOCK INCOME EQUITY
--------- ------------- -------------
<S> <C> <C> <C>
BALANCE AT DECEMBER 31, 1996........... $(537,164) $349,235 $ 833,947
---------
Comprehensive income (see Note 2):
Net Income..................... 232,654
Other comprehensive income, net
of tax:
Unrealized gains (losses)
on investments, net of
tax...................... (4,607) (4,607)
---------
Comprehensive income............... 228,047
Cash dividends ($.25 per share).... (46,622)
Issuance of common shares.......... 28,310
Repurchase of common shares........ (201,096) (201,096)
--------- -------- ---------
BALANCE AT JUNE 30, 1997............... $(738,260) $344,628 $ 842,586
========= ======== =========
BALANCE AT DECEMBER 31, 1997........... $(423,863) $378,736 $ 674,572
---------
Comprehensive income (see Note 2):
Net Income..................... 283,239
Other comprehensive income, net
of tax:
Unrealized gains (losses)
on investments, net of
tax...................... (7,101) (7,101)
---------
Comprehensive income............... 276,138
Cash dividends ($.28 per share).... (47,457)
Issuance of common shares.......... 10,648
Premiums on equity forward purchase
contracts........................ (17,094)
Repurchase of common shares........ (266,427) (266,427)
--------- -------- ---------
BALANCE AT JUNE 30, 1998............... $(690,290) $371,635 $ 630,380
========= ======== =========
</TABLE>
See accompanying notes to consolidated financial statements.
6
<PAGE> 7
SLM HOLDING CORPORATION
CONSOLIDATED STATEMENTS OF CASH FLOWS
(DOLLARS IN THOUSANDS)
<TABLE>
<CAPTION>
SIX MONTHS ENDED JUNE 30,
-----------------------------
1998 1997
------------- -------------
(UNAUDITED) (UNAUDITED)
<S> <C> <C>
OPERATING ACTIVITIES
Net income.................................................. $ 283,239 $ 232,654
Adjustments to reconcile net income to net cash provided by
operating activities:
Gains on sales of student loans........................ (117,068) (64,630)
(Increase) decrease in accrued interest receivable..... 15,432 (62,416)
Increase (decrease) in accrued interest payable........ (21,248) 28,526
(Increase) in other assets............................. (76,445) (590)
Increase (decrease) in other liabilities............... (103,863) 19,316
------------- -------------
Total adjustments................................. (303,192) (79,794)
------------- -------------
Net cash (used in) provided by operating activities......... (19,953) 152,860
------------- -------------
INVESTING ACTIVITIES
Insured student loans purchased............................. (3,130,334) (3,613,696)
Reduction of insured student loans purchased:
Installment payments................................... 1,276,266 1,280,539
Claims and resales..................................... 405,839 615,639
Proceeds from securitization of student loans.......... 6,035,218 4,523,104
Participations purchased.................................... (722,356) (590,436)
Participation repayments.................................... 111,927 117,161
Warehousing advances made................................... (468,680) (285,857)
Warehousing advance repayments.............................. 829,470 580,164
Academic facilities financings made......................... (4,220) (53,720)
Academic facilities financings reductions................... 96,961 172,570
Investments purchased....................................... (5,908,311) (9,347,820)
Proceeds from sale or maturity of investments............... 6,310,404 8,406,424
------------- -------------
Net cash provided by investing activities................... 4,832,184 1,804,072
------------- -------------
FINANCING ACTIVITIES
Short-term borrowings issued................................ 225,168,686 376,696,665
Short-term borrowings repaid................................ (226,700,340) (371,244,394)
Long-term notes issued...................................... 3,193,882 2,260,125
Long-term notes repaid...................................... (6,147,786) (7,497,368)
Equity forward contracts and common stock issued............ (6,446) 28,310
Common stock repurchased.................................... (266,427) (201,096)
Dividends paid.............................................. (47,457) (46,622)
------------- -------------
Net cash (used in) provided by financing activities......... (4,805,888) (4,380)
------------- -------------
Net increase in cash and cash equivalents................... 6,343 1,952,552
Cash and cash equivalents at beginning of period............ 54,022 270,887
------------- -------------
CASH AND CASH EQUIVALENTS AT END OF PERIOD.................. $ 60,365 $ 2,223,439
============= =============
CASH DISBURSEMENTS MADE FOR:
Interest............................................... $ 973,665 $ 1,083,837
============= =============
Income Taxes........................................... $ 175,000 $ 109,500
============= =============
</TABLE>
See accompanying notes to consolidated financial statements.
7
<PAGE> 8
SLM HOLDING CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(INFORMATION AT JUNE 30, 1998 AND FOR THE THREE AND SIX MONTHS ENDED JUNE 30,
1998 AND 1997 IS UNAUDITED)
(DOLLARS IN THOUSANDS, EXCEPT PER SHARE AMOUNTS)
1. SIGNIFICANT ACCOUNTING POLICIES
Basis of Presentation
The accompanying unaudited consolidated financial statements of SLM Holding
Corporation (the "Company") 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 six months ended June 30, 1998 are not necessarily indicative of the
results for the year ending December 31, 1998.
2. NEW ACCOUNTING PRONOUNCEMENTS
On January 1, 1998, the Company adopted Statement of Financial Accounting
Standards No. 130 ("SFAS 130"), "Reporting Comprehensive Income". This statement
requires that all items that are required to be recognized under accounting
standards as components of comprehensive income be included in a financial
statement that is displayed with the same prominence as other financial
statements. Under SFAS 130, the Company's unrealized gains or losses on its
available-for-sale securities, which prior to adoption were reported separately
in stockholders' equity, are now included in other comprehensive income. The
adoption of Statement 130 has no impact on the Company's financial condition or
results of operations.
In June 1998, the Financial Accounting Standards Board issued Statement of
Financial Accounting Standards No. 133, "Accounting for Derivative Instruments
and Hedging Activities" ("SFAS 133"). SFAS 133 establishes accounting and
reporting standards requiring that every derivative instrument (including
certain derivative instruments embedded in other contracts) be recorded on the
balance sheet as either an asset or liability measured at its fair value. It
also requires that gains or losses resulting from changes in the values of those
derivatives be recognized currently in earnings unless specific hedge criteria
are met. Gains and losses on derivatives that qualify as hedges can be used to
offset related results on the hedged item in the income statement. The Company
is required to adopt SFAS 133 for fiscal years beginning January 1, 2000 at the
latest. Early adoption of SFAS 133 at the beginning of any fiscal quarter is
permitted, but the effects of SFAS 133 cannot be applied retroactively to
periods prior to adoption. Management has not yet quantified the impact of
adopting SFAS 133 and has not determined the timing and the method of adoption.
Management believes that SFAS 133 could increase volatility in reported earnings
and other comprehensive income.
8
<PAGE> 9
SLM HOLDING CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
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 SIX MONTHS ENDED
JUNE 30, JUNE 30,
------------------- -----------------
1998 1997 1998 1997
-------- -------- ------- -------
<S> <C> <C> <C> <C>
BALANCE AT BEGINNING OF PERIOD.................. $86,889 $87,378 $87,660 $84,063
Additions
Provisions for loan losses................. 5,674 165 10,605 5,983
Recoveries................................. 1,096 1,377 2,030 4,470
Deductions
Reductions for sales of student loans...... (3,288) (2,364) (7,474) (4,328)
Losses on loans............................ (2,999) (4,093) (5,449) (7,725)
------- ------- ------- -------
BALANCE AT END OF PERIOD........................ $87,372 $82,463 $87,372 $82,463
======= ======= ======= =======
</TABLE>
In addition to the reserves for loan losses in the above table, the
Company, through its wholly owned insurance subsidiary, Hemar Insurance
Corporation of America ("HICA"), maintains a provision for future losses on
private student loans that it insures. At June 30, 1998 and 1997, HICA's reserve
was $89 million and $72 million, respectively, for which the Company owned 86
percent of the $1.7 billion and 79 percent of the $1.4 billion, respectively, of
student loans insured by HICA.
4. STUDENT LOAN SECURITIZATION
For the three months ended June 30, 1998 and 1997, the Company securitized
$3.0 billion and $2.5 billion, respectively, of student loans and recorded
pre-tax gains of $57 million and $31 million, respectively. For the six months
ended June 30, 1998 and 1997, the Company securitized $6.0 billion and $4.5
billion, respectively, of student loans and recorded pre-tax gains of $117
million and $65 million, respectively. The gains in the first six months of 1997
included a $39 million reserve for Offset Fees, that was later reversed in the
third quarter of 1997 as a result of the Company's successful litigation over
whether the Offset Fee applied to securitized student loans. At June 30, 1998
and December 31, 1997, securitized student loans outstanding totaled $19 billion
and $14 billion, respectively.
5. COMMON STOCK
On January 2, 1998, the Company effected a 7-for-2 stock split through a
stock dividend of an additional five shares for every two already outstanding
for shareholders of record on December 12, 1997. All share and per share
amounts, for all periods presented, have been restated to reflect the payment of
that dividend.
Basic earnings per share are calculated using the weighted average number
of shares of common stock outstanding during each period. Diluted earnings per
common share reflect the potential dilutive effect,
9
<PAGE> 10
SLM HOLDING CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
determined by the treasury stock method, of additional common shares that are
issuable upon exercise of outstanding stock options, warrants and equity
forwards as follows:
<TABLE>
<CAPTION>
AVERAGE EARNINGS
NET INCOME SHARES PER SHARE
----------- ----------- ---------
(THOUSANDS) (THOUSANDS)
<S> <C> <C> <C>
THREE MONTHS ENDED JUNE 30, 1998
Basic EPS................................................... $144,231 168,282 $0.86
Dilutive effect of stock options, warrants and equity
forwards.................................................. -- 2,826 (.02)
-------- ------- -----
Diluted EPS................................................. $144,231 171,108 $0.84
======== ======= =====
THREE MONTHS ENDED JUNE 30, 1997
Basic EPS................................................... $116,491 184,219 $0.63
Dilutive effect of stock options............................ -- 1,258 --
-------- ------- -----
Diluted EPS................................................. $116,491 185,477 $0.63
======== ======= =====
</TABLE>
<TABLE>
<CAPTION>
AVERAGE EARNINGS
NET INCOME SHARES PER SHARE
----------- ----------- ---------
(THOUSANDS) (THOUSANDS)
<S> <C> <C> <C>
SIX MONTHS ENDED JUNE 30, 1998
Basic EPS................................................... $283,239 169,998 $1.67
Dilutive effect of stock options, warrants and equity
forwards.................................................. -- 2,595 (.03)
-------- ------- -----
Diluted EPS................................................. $283,239 172,593 $1.64
======== ======= =====
SIX MONTHS ENDED JUNE 30, 1997
Basic EPS................................................... $232,654 185,445 $1.25
Dilutive effect of stock options............................ -- 1,164 --
-------- ------- -----
Diluted EPS................................................. $232,654 186,609 $1.25
======== ======= =====
</TABLE>
10
<PAGE> 11
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS
OVERVIEW
SLM HOLDING CORPORATION ("SLM HOLDING") WAS FORMED ON FEBRUARY 3, 1997 AS A
WHOLLY OWNED SUBSIDIARY OF THE STUDENT LOAN MARKETING ASSOCIATION (THE "GSE").
ON AUGUST 7, 1997, PURSUANT TO THE STUDENT LOAN MARKETING ASSOCIATION
REORGANIZATION ACT OF 1996 (THE "PRIVATIZATION ACT") AND APPROVAL BY
SHAREHOLDERS OF AN AGREEMENT AND PLAN OF REORGANIZATION, THE GSE WAS REORGANIZED
INTO A SUBSIDIARY OF SLM HOLDING (THE "REORGANIZATION"). SLM HOLDING IS A
HOLDING COMPANY THAT OPERATES THROUGH A NUMBER OF SUBSIDIARIES INCLUDING THE
GSE. REFERENCES HEREIN TO THE "COMPANY" REFER TO THE GSE AND ITS SUBSIDIARIES
FOR PERIODS PRIOR TO THE REORGANIZATION AND TO SLM HOLDING AND ITS SUBSIDIARIES
FOR PERIODS AFTER THE REORGANIZATION.
ON JANUARY 2, 1998, SLM HOLDING EFFECTED A 7-FOR-2 STOCK SPLIT THROUGH A
STOCK DIVIDEND OF AN ADDITIONAL FIVE SHARES FOR EVERY TWO OWNED. ALL PRIOR
PERIOD SHARE AND PER SHARE AMOUNTS HAVE BEEN RESTATED TO REFLECT THE STOCK
SPLIT.
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.
Set forth below is Management's Discussion and Analysis of Financial
Condition and Results of Operations of SLM Holding for the three and six months
ended June 30, 1998 and 1997. This section should be read in conjunction with
Management's Discussion and Analysis of Financial Condition and Results of
Operations for the years ended December 31, 1995-97 presented in the Company's
Annual Report on Form 10-K as filed with the Securities and Exchange Commission.
All dollar amounts are in millions, except per share amounts or otherwise noted.
11
<PAGE> 12
THREE AND SIX MONTHS ENDED JUNE 30, 1998 AND 1997
SELECTED FINANCIAL DATA
CONDENSED STATEMENTS OF INCOME
<TABLE>
<CAPTION>
THREE MONTHS SIX MONTHS
ENDED INCREASE ENDED INCREASE
JUNE 30, (DECREASE) JUNE 30, (DECREASE)
------------- ------------- ------------- -------------
1998 1997 $ % 1998 1997 $ %
----- ----- ----- ----- ----- ----- ----- -----
<S> <C> <C> <C> <C> <C> <C> <C> <C>
Net interest income........................ $ 171 $ 207 $ (36) (17)% $ 340 $ 406 $ (66) (16)%
Gains on sales of student loans............ 57 31 26 86 117 65 52 81
Servicing and securitization revenue....... 63 31 32 100 115 57 58 102
Other income............................... 19 16 3 19 37 32 5 14
Operating expenses......................... 94 115 (21) (19) 185 217 (32) (15)
Federal income taxes....................... 69 51 18 36 136 105 31 29
Minority interest in net earnings of
subsidiary............................... 3 3 -- -- 5 5 -- --
----- ----- ----- ----- ----- ----- ----- -----
NET INCOME................................. $ 144 $ 116 $ 28 24% $ 283 $ 233 $ 50 22%
===== ===== ===== ===== ===== ===== ===== =====
BASIC EARNINGS PER COMMON SHARE............ $0.86 $0.63 $0.23 36% $1.67 $1.25 $0.42 33%
===== ===== ===== ===== ===== ===== ===== =====
DILUTED EARNINGS PER COMMON SHARE.......... $0.84 $0.63 $0.21 34% $1.64 $1.25 $0.39 31%
===== ===== ===== ===== ===== ===== ===== =====
Dividends per common share................. $0.14 $0.13 $0.01 11% $0.28 $0.25 $0.03 11%
===== ===== ===== ===== ===== ===== ===== =====
CORE EARNINGS.............................. $ 133 $ 111 $ 22 19% $ 264 $ 223 $ 41 18%
===== ===== ===== ===== ===== ===== ===== =====
</TABLE>
CONDENSED BALANCE SHEETS
<TABLE>
<CAPTION>
INCREASE
(DECREASE)
JUNE 30, DECEMBER 31, -------------
1998 1997 $ %
-------- ------------ ------- ---
<S> <C> <C> <C> <C>
ASSETS
Student loans............................................... $25,593 $29,521 $(3,928) (13)%
Warehousing advances........................................ 1,508 1,869 (361) (19)
Academic facilities financings.............................. 1,278 1,375 (97) (7)
Cash and investments........................................ 4,722 5,130 (408) (7)
Other assets................................................ 2,149 2,014 135 1
------- ------- ------- ---
Total assets....................................... $35,250 $39,909 $(4,659) (12)%
======= ======= ======= ===
LIABILITIES AND STOCKHOLDERS' EQUITY
Short-term borrowings....................................... $21,771 $23,176 $(1,405) (6)%
Long-term notes............................................. 11,460 14,541 (3,081) (21)
Other liabilities........................................... 1,175 1,303 (128) (10)
------- ------- ------- ---
Total liabilities.................................. 34,406 39,020 (4,614) (12)
------- ------- ------- ---
Minority interest in subsidiary............................. 214 214 -- --
Stockholders' equity before treasury stock.................. 1,320 1,099 221 (20)
Common stock held in treasury at cost....................... 690 424 266 63
------- ------- ------- ---
Total stockholders' equity......................... 630 675 (45) (7)
------- ------- ------- ---
Total liabilities and stockholders' equity......... $35,250 $39,909 $(4,659) (12)%
======= ======= ======= ===
</TABLE>
RESULTS OF OPERATIONS
EARNINGS SUMMARY
For the three months ended June 30, 1998, the Company's net income was $144
million ($.84 diluted earnings per common share), versus net income of $116
million ($.63 diluted earnings per common share) in the second quarter of 1997.
The Company recognized $11 million ($.06 diluted earnings per share) of floor
revenues, after-tax, in the three months ended June 30, 1998 versus $5 million
($.03 diluted earnings per share) for the year ago period. For the six months
ended June 30, 1998, the Company earned net income of $283 million ($1.64
diluted earnings per share) up 22 percent from the $233 million ($1.25 diluted
earnings
12
<PAGE> 13
per share) for the six months ended June 30, 1997. Included in net income for
the six months ended June 30, 1998 and 1997 was $20 million ($.11 diluted
earnings per share) and $9 million ($.05 diluted earnings per share),
respectively, of floor revenues, after-tax. For both the quarter and six months
ended June 30, 1998, the growth in net income less the floor revenues resulted
primarily from increased securitization gains and growth in managed student loan
assets.
The net income increases of $28 million (24 percent) for the second quarter
and $50 million (22 percent) for the six months ended June 30, 1998 versus the
corresponding year-ago periods reflect the Company's continued strategy of
funding its managed portfolio of student loans through its securitization
program. The Company securitized $3.0 billion of student loans in the second
quarter of 1998 and recorded a gain of $37 million, after-tax, a $17 million
increase over the gain recorded on the securitization of $2.5 billion of student
loans in the second quarter of 1997. The increase in the second quarter of 1998
gain versus the second quarter of 1997 is mainly due to the securitization of
$.5 billion more loans in the second quarter of 1998 and to the negative effect
of the $14 million, after-tax, reserve for Offset Fees included in the second
quarter of 1997 gain that was reversed in the third quarter of 1997. The Company
securitized $6.0 billion of student loans in the first six months of 1998 ($3.0
billion each quarter) and recorded securitization gains of $76 million,
after-tax, an increase of $34 million over gains recorded on $4.5 billion of
student loans securitized in the six months ended June 30, 1997. The increase in
the gains is mainly due to the securitization of $1.5 billion more loans in the
first six months of 1998 and to the $25 million, after-tax, reserves for Offset
Fees included in the first half of 1997 gains. All Offset Fee reserves recorded
in the first six months of 1997 were reversed in the third quarter of 1997 when
the Company favorably resolved litigation over whether the Offset Fee applied to
securitized student loans. The 1998 securitizations increased the average
balance of securitized student loans from $7.3 billion in the first six months
of 1997 to $15.5 billion in the first six months of 1998, and, as a result,
servicing and securitization revenue increased by approximately $38 million,
after-tax.
The increased income from the Company's securitization program in the first
six months of 1998 was offset by the reduction in net interest income of $43
million, after-tax, which occurred as the on-balance sheet student loan
portfolio was reduced through securitizations and through the reduction of
warehousing advances and investments. After-tax operating expenses in the second
quarter of 1998 were $14 million lower than the second quarter of 1997, and for
the first six months of 1998 after-tax operating expenses were $21 million lower
than the first six months of 1997. These reductions were a direct result of the
Company's restructuring of operations performed in the second half of 1997 and
the continued management focus on cost control. For the three and six months
ended June 30, 1998 servicing costs decreased by $1 million and $2 million,
after-tax, versus the corresponding year-ago periods. Included in the 1998
second quarter servicing expense is a $6 million after-tax charge relating to
the closing of two satellite loan servicing centers. Each of these components of
net income is discussed in further detail in subsequent sections of this
analysis.
During the first six months of 1998, the Company spent $266 million to
repurchase 6.4 million common shares (or 4 percent of its outstanding shares),
which further enhanced earnings per share growth.
NET INTEREST INCOME
Net interest income is derived largely from the Company's on-balance sheet
portfolio of student loans. The Taxable Equivalent Net Interest Income analysis
set forth below is designed to facilitate a comparison of non-taxable asset
yields to taxable yields on a similar basis. Additional information regarding
the return on the Company's student loan portfolio is set forth below under
"Student Loans."
13
<PAGE> 14
TAXABLE EQUIVALENT NET INTEREST INCOME
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 SIX MONTHS
ENDED INCREASE ENDED INCREASE
JUNE 30, (DECREASE) JUNE 30, (DECREASE)
------------- ------------------- --------------- -------------------
1998 1997 $ % 1998 1997 $ %
----- ----- -------- -------- ------ ------ -------- --------
<S> <C> <C> <C> <C> <C> <C> <C> <C>
Interest income
Student loans................. $541 $634 $ (93) (15)% $1,104 $1,274 $(170) (13)%
Warehousing advances.......... 28 37 (9) (26) 58 78 (20) (26)
Academic facilities
financings.................. 22 24 (2) (8) 44 48 (4) (8)
Investments................... 77 169 (92) (54) 168 312 (144) (46)
Taxable equivalent
adjustment.................. 8 9 (1) (9) 19 18 1 1
---- ---- ----- --- ------ ------ ----- ---
Total taxable equivalent interest
income........................... 676 873 (197) (23) 1,393 1,730 (337) (20)
Interest expense................... 496 656 (160) (24) 1,034 1,305 (271) (21)
---- ---- ----- --- ------ ------ ----- ---
Taxable equivalent net interest
income........................... $180 $217 $ (37) (17)% $ 359 $ 425 $ (66) (16)%
==== ==== ===== === ====== ====== ===== ===
</TABLE>
AVERAGE BALANCE SHEETS
The following table reflects the rates earned on earning assets and paid on
liabilities for the three and six months ended June 30, 1998 and 1997.
<TABLE>
<CAPTION>
THREE MONTHS ENDED JUNE 30, SIX MONTHS ENDED JUNE 30,
------------------------------- -------------------------------
1998 1997 1998 1997
-------------- -------------- -------------- --------------
BALANCE RATE BALANCE RATE BALANCE RATE BALANCE RATE
------- ---- ------- ---- ------- ---- ------- ----
<S> <C> <C> <C> <C> <C> <C> <C> <C>
AVERAGE ASSETS
Student loans.............. $27,641 7.85% $32,799 7.75% $28,563 7.79% $33,298 7.71%
Warehousing advances....... 1,840 6.04 2,485 6.01 1,930 6.08 2,639 5.98
Academic facilities
financings............... 1,337 8.19 1,415 8.44 1,366 8.22 1,443 8.44
Investments................ 4,994 6.44 11,138 6.21 5,503 6.40 10,606 6.04
------- ---- ------- ---- ------- ---- ------- ----
Total interest earning assets... 35,812 7.57% 47,837 7.32% 37,362 7.52% 47,986 7.27%
==== ==== ==== ====
Non-interest earning assets..... 1,988 1,819 1,942 1,930
------- ------- ------- -------
Total assets.......... $37,800 $49,656 $39,304 $49,916
======= ======= ======= =======
AVERAGE LIABILITIES AND
STOCKHOLDERS' EQUITY
Six month floating rate
notes.................... $ 2,873 5.55% $ 2,919 5.46% $ 2,974 5.58% $ 2,952 5.46%
Other short-term
borrowings............... 20,416 5.48 24,876 5.52 21,302 5.53 24,243 5.48
Long-term notes............ 12,434 5.71 19,571 5.61 12,942 5.72 20,445 5.59
------- ---- ------- ---- ------- ---- ------- ----
Total interest bearing
liabilities................... 35,723 5.57% 47,366 5.55% 37,218 5.60% 47,640 5.53%
==== ==== ==== ====
Non-interest bearing
liabilities................... 1,487 1,469 1,480 1,457
Stockholders' equity............ 590 821 606 819
------- ------- ------- -------
Total liabilities and
stockholders'
equity.............. $37,800 $49,656 $39,304 $49,916
======= ======= ======= =======
Net interest margin............. 2.02% 1.82% 1.94% 1.78%
==== ==== ==== ====
</TABLE>
14
<PAGE> 15
RATE/VOLUME ANALYSIS
The Rate/Volume Analysis below shows the relative contribution of changes
in interest rates and asset volumes.
<TABLE>
<CAPTION>
INCREASE
(DECREASE)
ATTRIBUTABLE
TAXABLE TO CHANGE IN
EQUIVALENT -------------
(DECREASE) RATE VOLUME
---------- ---- ------
<S> <C> <C> <C>
THREE MONTHS ENDED JUNE 30, 1998 VS. THREE MONTHS ENDED JUNE
30, 1997
Taxable equivalent interest income.......................... $(197) $14 (211)
Interest expense............................................ (160) 3 (163)
----- --- -----
Taxable equivalent net interest income...................... $ (37) $11 $ (48)
===== === =====
</TABLE>
<TABLE>
<CAPTION>
INCREASE
(DECREASE)
ATTRIBUTABLE
TAXABLE TO CHANGE IN
EQUIVALENT -------------
(DECREASE) RATE VOLUME
---------- ---- ------
<S> <C> <C> <C>
SIX MONTHS ENDED JUNE 30, 1998 VS. SIX MONTHS ENDED JUNE 30,
1997
Taxable equivalent interest income.......................... $(337) $32 (369)
Interest expense............................................ (271) 22 (293)
----- --- -----
Taxable equivalent net interest income...................... $ (66) $10 $ (76)
===== === =====
</TABLE>
Taxable equivalent net interest income for the three months ended June 30,
1998 decreased by $37 million while the net interest margin increased by .20
percent, versus the three months ended June 30, 1997. The $11 million increase
in taxable equivalent net interest income attributable to the change in rates
for the three months ended June 30, 1998 was principally due to an increase in
floor income of $10 million, a $7 million reduction in student loan reserves due
to improved experience in recovering unpaid guarantees on defaulted student
loans and the increase in student loans as a percentage of average earning
assets offset by the growth in the portfolio of student loans subject to the
consolidation loan rebate fee and a $4 million reduction in student loan
reserves in the second quarter of 1997.
Taxable equivalent net interest income for the six months ended June 30,
1998 decreased by $66 million while the net interest margin increased by .16
percent, versus the six months ended June 30, 1997. The $10 million increase in
taxable equivalent net interest income attributable to the change in rates in
the first six months of 1998 versus 1997 was due to a $16 million increase in
floor income and a $7 million reduction in student loan reserves due to improved
experience in recovering unpaid guarantees on defaulted student loans versus a
$4 million reduction in student loan reserves in the second quarter of 1997 and
a decrease of $4 million in the amortization of student loan floor revenue
contracts. Other factors contributing to the increase in taxable equivalent net
interest income were lower Offset Fees and reduced risk-sharing costs of $6
million and $5 million, respectively, as loans subject to these costs were sold
through securitizations and the increase in student loans as a percentage of
average earning assets. These increases were partially offset by increased
consolidation loan rebate fees of $5 million, lower student loan yields in the
form of reduced SAP rates, which reduced interest income by $9 million, and
lower yields on long-term, fixed rate academic facilities financings as the
runoff of older financings purchased in higher interest rate environments are
being replaced by financings in the current interest rate environment.
The $76 million decrease in taxable equivalent net interest income for the
six months ended June 30, 1998 attributable to the change in volume resulted
primarily from the $5.3 billion decrease in the average balance of on-balance
sheet purchased student loans as a result of the Company's ongoing
securitization program, and the decrease of $5.1 billion and $709 million in the
average balance of investments and warehousing advances, respectively, as the
Company reduced these assets to free up capital for common share
15
<PAGE> 16
repurchases. The decrease in the interest earned on the on-balance sheet
portfolio of student loans was partially offset by the increase in the average
balance of student loan participations of $530 million.
The increase in the net interest margin is due to the factors mentioned
above regarding the increase in taxable equivalent net interest income
attributable to rates plus the increase in student loans as a percentage of
average earning assets.
STUDENT LOANS
STUDENT LOAN SPREAD ANALYSIS
The following table analyzes the earning spreads on student loans for the
three and six months ended June 30, 1998 and 1997.
<TABLE>
<CAPTION>
THREE MONTHS ENDED SIX MONTHS ENDED
JUNE 30, JUNE 30,
------------------- -----------------
1998 1997 1998 1997
-------- -------- ------- -------
<S> <C> <C> <C> <C>
ON-BALANCE SHEET
Adjusted student loan yields............................ 7.90% 7.92% 7.87% 7.88%
Amortization of floor swap payments..................... .10 .10 .10 .11
Floor income............................................ .23 .10 .20 .09
Consolidation loan rebate fees.......................... (.24) (.18) (.24) (.18)
Reserves for risk-sharing costs......................... (.03) (.06) (.03) (.06)
Offset fees............................................. (.11) (.13) (.11) (.13)
------- ------- ------- -------
Student loan income..................................... 7.85 7.75 7.79 7.71
Cost of funds........................................... (5.50) (5.51) (5.54) (5.51)
------- ------- ------- -------
Student loan spread..................................... 2.35% 2.24% 2.25% 2.20%
======= ======= ======= =======
Core student loan spread................................ 2.12% 2.14% 2.05% 2.11%
======= ======= ======= =======
OFF-BALANCE SHEET
Servicing and securitization revenue.................... 1.50% 1.54% 1.50% 1.59%
======= ======= ======= =======
AVERAGE BALANCES
Student loans, including participations................. $27,642 $32,799 $28,563 $33,298
Securitized loans....................................... 16,727 8,129 15,518 7,259
------- ------- ------- -------
Managed student loans................................... $44,369 $40,928 $44,081 $40,557
======= ======= ======= =======
</TABLE>
The decrease in the core student loan spread in the three and six months
ended June 30, 1998 versus the corresponding periods in the prior year was due
principally to the growth in the portfolio of loans subject to the consolidation
loan rebate fee which reduced the core student loan spread by .06 percent in
both periods (See below for discussion of suspension of consolidation loan
program). This decrease in the core spread was offset by a $7 million reduction
in student loan reserves due to improved experience in recovering unpaid
guarantees on defaulted student loans versus a $4 million reduction in student
loan reserves in the second quarter of 1997. Other factors contributing to the
decrease in the core student loan spread were lower student loan yields in the
form of reduced SAP rates and the effect of student loan participations, which
contractually yield a lower rate than the underlying student loans and increased
student loan reserves for non-federally insured student loans. The increase in
the student loan spread for the three and six months ended June 30, 1998 versus
the year ago periods, was due to an increase of $8 million and $14 million,
respectively, in student loan floor revenues.
In November of 1997, following enactment of the Emergency Student Loan
Consolidation Act of 1997, the Company announced that, effective as of November
13, 1997, it had suspended its loan consolidation program (marketed as the SMART
Loan(SM) program). The new legislation made it difficult for the Company to
participate in the FFELP consolidation loan program for profitability reasons.
The Company does, however, strongly endorse the principle of the legislation
that allows FDSLP and FFELP borrowers to
16
<PAGE> 17
consolidate their loans under either program and plans to continue to press for
changes that will enable the Company to once again participate in the FFELP
consolidation loan program. The suspension of the consolidation loan program, if
it remains in effect, will gradually reduce the effect of consolidation loan
rebate fees on the student loan spread as the balance of loans subject to the
fee amortize or are sold in securitizations.
The Department of Education offers existing FFELP borrowers the opportunity
to refinance FFELP loans into Federal Direct Student Loan Program ("FDSLP")
loans. During the first six months of 1998 and 1997, approximately $277 million
and $263 million, respectively, of the Company's managed student loans were
accepted for refinancing into the FDSLP. Since the inception of this program
approximately $1.1 billion of FFELP loans managed by Sallie Mae have been
accepted for refinancing into FDSLP loans and approximately $793 million have
been refinanced into FDSLP with the remainder awaiting disbursements by the
federal government.
The Department of Education recently announced that it reduced interest
rates on Federal Direct Consolidation loans for borrowers whose application for
such loan is processed after July 1, 1998. See "Other Related Events and
Developments -- Legislative Developments".
STUDENT LOAN FLOOR REVENUES
MANAGED STUDENT LOANS ELIGIBLE TO EARN FLOOR REVENUES
The following table reflects those loans in the Company's managed student
loan portfolio with potential to earn floor revenue at June 30, 1998 and 1997
(dollars in billions).
<TABLE>
<CAPTION>
JUNE 30, 1998 JUNE 30, 1997
------------------------- -------------------------
FIXED VARIABLE TOTAL FIXED VARIABLE TOTAL
----- -------- ------ ----- -------- ------
<S> <C> <C> <C> <C> <C> <C>
Student loans with floor revenue potential.... $13.4 $22.3 $ 35.7 $14.7 $17.7 $ 32.4
Less notional amount of floor revenue
contracts................................... (6.3) (18.6) (24.9) (7.7) (4.9) (12.6)
----- ----- ------ ----- ----- ------
Net student loans with floor revenue
potential................................... $ 7.1 $ 3.7 $ 10.8 $ 7.0 $12.8 $ 19.8
===== ===== ====== ===== ===== ======
Net student loans earning floor revenues...... $ 4.9 $ .6 $ 5.5 $ 4.1 $ -- $ 4.1
===== ===== ====== ===== ===== ======
</TABLE>
Based on the average bond equivalent 91-day Treasury bill rates of 5.14
percent and 5.22 percent for the three months ended June 30, 1998 and 1997,
respectively, the Company earned floor revenues of $18 million (net of $5
million in payments under the floor revenue contracts), and $8 million (net of
$5 million in payments under the floor revenue contracts), respectively. The
average bond equivalent 91-day Treasury bill rates was 5.17 percent and 5.21
percent for the six months ended June 30, 1998 and 1997, respectively, and the
Company earned floor revenues of $30 million (net of $9 million in payments
under the floor revenue contracts) and $14 million (net of $10 million in
payments under the floor revenue contracts), respectively.
FLOOR REVENUE CONTRACTS
During 1997 and 1996, the Company entered into contracts with third parties
with notional amounts of $11 billion and $13 billion, respectively, 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 the contracts, which is
approximately eight months for the 1997 contracts and two years for the 1996
contracts. At June 30, 1998, $10.6 billion of the notional amount of the 1997
contracts was outstanding and $5.9 billion of the notional amount of the 1996
contracts was outstanding. In addition, in April 1998, the Company entered into
variable rate floor contracts with notional values of $8 billion that expired on
July 1, 1998.
For the three months ended June 30, 1998 and 1997, the amortization of the
upfront payments received for the sale of fixed rate floor revenue contracts
contributed $7 million and $8 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 the Company's definition of core earnings.
In addition, for the three months ended June 30, 1998 and 1997, the Company
earned $9 million and $2 million, respectively, on variable rate floor revenue
17
<PAGE> 18
contracts. These contracts typically expire on the interest reset date of the
underlying student loans and the related amortization of the upfront payments is
excluded from core earnings. For the six months ended June 30, 1998 and 1997,
the amortization of the upfront payments received for the sale of fixed rate
floor revenue contracts contributed $14 million and $18 million, respectively,
pre-tax to core earnings and during the same period the Company earned $14
million and $3 million, respectively, on variable rate floor revenue contracts.
PROVISION FOR STUDENT LOAN LOSSES
The provision for student loans of $87 million at June 30, 1998 remained
relatively unchanged since December 31, 1997. In the second quarter of 1998 the
reserve was reduced by $7 million due to improved experience in recovering
unpaid guarantees on defaulted student loans versus a reduction of $4 million in
the second quarter of 1997. Also during the first six months of 1998, the
Company added $4 million to provide for losses on non-federally insured student
loans versus $2 million in the corresponding period of the prior year and
increased its reserve for potential losses on its federally insured student loan
portfolio due to risk-sharing by $3 million versus an $8 million increase in the
year-ago period as loans subject to risk-sharing were sold to securitized
trusts. Once a student loan is charged off as a result of an unpaid claim, the
Company's policy is to continue to pursue the recovery of principal and
interest. Management believes that the provision for loan losses is adequate to
cover anticipated losses in the on-balance sheet student loan portfolio.
However, this evaluation is inherently subjective as it requires material
estimates that may be susceptible to significant changes.
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 six months ended June 30, 1998 and 1997.
<TABLE>
<CAPTION>
THREE MONTHS ENDED JUNE 30, SIX MONTHS ENDED JUNE 30,
------------------------------------- -------------------------------------
1998 1997 1998 1997
----------------- ----------------- ----------------- -----------------
AVERAGE AVERAGE AVERAGE AVERAGE AVERAGE AVERAGE AVERAGE AVERAGE
INDEX BALANCE RATE BALANCE RATE BALANCE RATE BALANCE RATE
----- ------- ------- ------- ------- ------- ------- ------- -------
<S> <C> <C> <C> <C> <C> <C> <C> <C>
Treasury bill, principally 91-day........ $27,925 5.49% $33,435 5.50% $28,528 5.52% $33,868 5.50%
LIBOR.................................... 4,915 5.52 6,298 5.49 4,954 5.57 6,363 5.42
Discount notes........................... 1,160 5.46 6,200 5.52 2,012 5.50 6,006 5.43
Fixed.................................... 641 7.11 670 7.02 645 7.15 673 7.04
Zero coupon.............................. 138 11.14 134 11.12 138 11.13 132 11.12
Other.................................... 944 5.56 629 5.18 941 5.51 598 5.10
------- ----- ------- ----- ------- ----- ------- -----
Total............................ $35,723 5.57% $47,366 5.55% $37,218 5.60% $47,640 5.53%
======= ===== ======= ===== ======= ===== ======= =====
</TABLE>
In the above table, for the three months ended June 30, 1998 and 1997,
spreads for all Treasury bill-indexed borrowings averaged .24 percent and .22
percent, respectively, over the weighted average Treasury bill rates for those
periods and spreads for London Interbank Offered Rate ("LIBOR")-indexed
borrowings averaged .24 percent and .26 percent, respectively, under the
weighted average LIBOR rates.
In the above table, for the six months ended June 30, 1998 and 1997,
spreads for all Treasury bill-indexed borrowings averaged .25 percent and .23
percent, respectively, over the weighted average Treasury bill rates for those
periods and spreads for LIBOR-indexed borrowings averaged .24 percent and .26
percent, respectively, under the weighted average LIBOR rates.
OTHER INCOME
The increase in other income of $61 million in the second quarter of 1998
versus 1997 was mainly due to the increase in securitization gains of $26
million and an increase of $32 million in servicing and securitization revenue
as the Company's average balance of securitized student loans in the quarter
increased by $8.6 billion over the second quarter of 1997. For the six months
ended June 30, 1998 securitization gains increased by
18
<PAGE> 19
$52 million and servicing and securitization revenue increased by $58 million
over the corresponding year ago periods as the Company's average balance of
securitized student loans for the six months ended June 30, 1998 increased by
$8.2 billion over the first six months of 1997.
SECURITIZATION PROGRAM
During each of the three month periods ended June 30, 1998 and 1997, the
Company completed one securitization transaction in which a total of $3 billion
and $2.5 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 six months of
1998 and 1997, the Company completed two securitization transactions in which a
total of $6.0 billion and $4.5 billion, respectively, of student loans were sold
by the Company. For the three months ended June 30, 1998 and 1997, the Company
recorded securitization gains of $57 million and $31 million, pre-tax, or as a
percentage of the portfolio securitized 1.90 percent and 1.26 percent,
respectively. For the six months ended June 30, 1998 and 1997, the Company
recorded securitization gains of $117 million and $65 million, pre-tax, or as a
percentage of the portfolio securitized 1.95 percent and 1.46 percent,
respectively.
The increase in the gains for the three and six months ended June 30, 1998
versus the corresponding periods in 1997 is mainly due to the $39 million in
reserves for Offset Fees included in the two 1997 gain calculations, of which
$21 million related to the gain recorded in the second quarter of 1997. These
reserves were later reversed in the third quarter of 1997 when the Company
favorably resolved litigation over whether the Offset Fee applied to securitized
loans. Without the effect of the reserve for Offset Fees, the 1997 second
quarter gain would have been 2.10 percent. Exclusive of Offset Fee reserves, the
increase in the gains in the three and six months ended June 30, 1998 versus
1997 was mainly due to the securitization of $1.5 billion more student loans in
1998. The decrease in the 1998 gains as a percentage of the securitized
portfolios versus 1997 is mainly due to the inclusion of lower yielding
consolidation loans in the portfolios of loans securitized in the 1998 and to
higher cost of funds offset by lower relative servicing costs due to the higher
average balance of loans securitized in 1998. Gains on future securitizations
will continue to vary depending on the size and the loan characteristics of the
loan portfolios securitized and the funding costs prevailing in the
securitization debt markets.
SERVICING AND SECURITIZATION INCOME
For each securitization transaction the Company records a gain on sale and
an asset (the "Interest Residual") equal to the present value of the expected
net cash flows from the trust to the Company over the life of the portfolio
sold. Interest earned on the Interest Residual is included in servicing and
securitization revenue and totaled $24 million and $43 million, for the three
and six months ended June 30, 1998, respectively, versus $9 million and $18
million in the corresponding periods in 1997, respectively. Securitization and
servicing revenue also includes fee income earned for servicing the securitized
portfolios. These fees, less the amortization of the servicing asset, totaled
$39 million and $72 million, for the three and six months ended June 30, 1998,
respectively, versus $22 million and $39 million, for the three and six months
ended June 30, 1997, respectively. The increase in servicing and securitization
income is mainly due to the increase in the average balance of the Interest
Residual from $273 million in the first half of 1997 to $538 million in the
first half of 1998, and to the increase in the average balance of securitized
student loans from $7.3 billion in the first six months of 1997 to $15.5 billion
in the corresponding period in 1998.
OPERATING EXPENSES
Operating expenses include costs to service the Company's managed student
loan portfolio and operational costs incurred in the process of acquiring
student loan portfolios and general and administrative expenses. Total operating
expenses as a percentage of average managed student loans were 85 basis points
and 113 basis points for the three months ended June 30, 1998 and 1997,
respectively, and 84 basis points and 108
19
<PAGE> 20
basis points for the six months ended June 30, 1998 and 1997, respectively.
Operating expenses are summarized in the following tables:
<TABLE>
<CAPTION>
THREE MONTHS ENDED JUNE 30,
-------------------------------------------------------------------
1998 1997
-------------------------------- --------------------------------
SERVICING SERVICING
AND AND
CORPORATE ACQUISITION TOTAL CORPORATE ACQUISITION TOTAL
--------- ----------- ------ --------- ----------- ------
<S> <C> <C> <C> <C> <C> <C>
Salaries and employee benefits............ $ 11 $ 38 $ 49 $ 15 $ 36 $ 51
Occupancy and equipment................... 3 20 23 4 15 19
Professional fees......................... 3 3 6 11 5 16
Office operations......................... 1 6 7 3 7 10
Other..................................... 3 -- 3 3 3 6
---- ------ ------ ---- ------ ------
Total internal operating expenses......... 21 67 88 36 66 102
Third party servicing costs............... -- 6 6 -- 13 13
---- ------ ------ ---- ------ ------
Total operating expenses......... $ 21 $ 73 $ 94 $ 36 $ 79 $ 115
==== ====== ====== ==== ====== ======
Employees................................. 509 3,683 4,192 686 4,003 4,689
==== ====== ====== ==== ====== ======
</TABLE>
<TABLE>
<CAPTION>
THREE MONTHS
ENDED
JUNE 30, DECREASE
--------------- --------------
1998 1997 $ %
---- ---- --- ----
<S> <C> <C> <C> <C>
Servicing costs........................................... $62 $64 $(2) (2)%
Acquisition costs......................................... 11 15 (4) (29)
--- --- --- ----
Total servicing and acquisition costs........... $73 $79 $(6) (8)%
=== === === ====
</TABLE>
<TABLE>
<CAPTION>
SIX MONTHS ENDED JUNE 30,
-------------------------------------------------------------------
1998 1997
-------------------------------- --------------------------------
SERVICING SERVICING
AND AND
CORPORATE ACQUISITION TOTAL CORPORATE ACQUISITION TOTAL
--------- ----------- ------ --------- ----------- ------
<S> <C> <C> <C> <C> <C> <C>
Salaries and employee benefits............ $ 23 $ 75 $ 98 $ 31 $ 72 $ 103
Occupancy and equipment................... 6 34 40 9 30 39
Professional fees......................... 6 8 14 17 8 25
Office operations......................... 2 12 14 4 13 17
Other..................................... 6 1 7 6 6 12
---- ------ ------ ---- ------ ------
Total internal operating expenses......... 43 130 173 67 129 196
Third party servicing costs............... -- 11 11 -- 21 21
---- ------ ------ ---- ------ ------
Total operating expenses......... $ 43 $ 141 $ 184 $ 67 $ 150 $ 217
==== ====== ====== ==== ====== ======
Employees................................. 509 3,683 4,192 686 4,003 4,689
==== ====== ====== ==== ====== ======
</TABLE>
<TABLE>
<CAPTION>
SIX MONTHS
ENDED
JUNE 30, DECREASE
--------------- --------------
1998 1997 $ %
---- ---- --- ----
<S> <C> <C> <C> <C>
Servicing costs......................................... $117 $121 $(4) (3)%
Acquisition costs....................................... 24 29 (5) (16)
---- ---- --- ----
Total servicing and acquisition costs......... $141 $150 $(9) (6)%
==== ==== === ====
</TABLE>
In the three and six months ended June 30, 1998, corporate operating
expenses decreased by $15 million and $24 million, respectively, compared to the
corresponding year-ago periods. The decrease in operating expenses is
principally due to the effect of the Company's restructuring of operations in
the second half of 1997, which resulted in reduced salaries and employee
benefits, rent and depreciation. The reduction in
20
<PAGE> 21
operating expenses in the second quarter of 1998 when compared to the second
quarter of 1997 is also due to the absence of privatization and proxy charges
which totaled $7 million for the quarter ended June 30, 1997.
Servicing costs include all operations and systems costs incurred to
service the portfolio of managed student loans, including fees paid to third
party servicers. In the three and six months ended June 30, 1998, servicing
expenses decreased by $2 million and $4 million, respectively, over the
corresponding year-ago periods. When expressed as a percentage of the managed
student loan portfolio, servicing costs averaged 56 basis points and 62 basis
points for the three months ended June 30, 1998 and 1997, respectively, and 53
basis points and 60 basis points for the six months ended June 30, 1998 and
1997, respectively. Included in the second quarter servicing expense is a $9
million charge relating to the closing of two satellite loan servicing centers.
Had these costs not been incurred then servicing costs as a percentage of the
managed student loan portfolio would have been 48 basis points and 49 basis
points for the three and six months ended June 30, 1998, respectively. The
decrease in servicing costs is mainly due to operational efficiencies and to the
termination of business initiatives that did not fit management's business
strategies. In addition to the decrease in servicing costs, higher average
student loan balances contributed to the lower servicing costs when expressed in
this percentage.
Loan acquisition costs are principally costs incurred under the ExportSS(R)
("ExportSS") loan origination and administration service, the costs of
converting newly acquired portfolios onto the Company's servicing platform or
those of third party servicers and costs of loan consolidation activities. The
ExportSS service provides back-office support to clients by performing loan
origination and servicing prior to the sale of portfolios to the Company. The
decrease of $5 million in loan acquisition costs for the six months ended June
30, 1998 versus the year ago period is mainly due to operational efficiencies.
STUDENT LOAN PURCHASES
Sallie Mae purchased $1.8 billion of student loans in the second quarter of
1998 compared with $2.1 billion in the year-ago quarter. For the six months
ended June 30, 1998, the Company purchased $3.9 billion compared with $4.2
billion in the corresponding year-ago period. The decrease in the purchase
volume versus the prior year is attributable to the following factors: reduced
purchases of student loans in the spot market, the suspension of Sallie Mae's
consolidation loan program in the fourth quarter of 1997 due to legislated
changes in the profitability of consolidation loans and a modest decline in the
amount of loans purchased from lenders who have forward purchase commitments
with Sallie Mae. Sallie Mae's portfolio of managed student loans totaled $44.6
billion at June 30, 1998 versus $41.5 billion at June 30, 1997.
During the three and six months ended June 30, 1998, $484 million and $2.2
billion, respectively, of student loans were originated and transferred to the
Company's ExportSS system (of which $397 million and $1.8 billion, respectively,
were committed for sale to the Company) compared to $539 million and $2.0
billion, respectively, for the three and six months ended June 30, 1997. The
outstanding portfolio of loans serviced for ExportSS lenders and committed for
sale to the Company totaled $3.4 billion at June 30, 1998, compared to $3.5
billion at June 30, 1997. See "Other Related Events and Information --
Legislative Developments" for discussion of renegotiations of forward purchase
commitments.
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 32.1 percent and 30 percent for the three months
ended June 30, 1998 and 1997, respectively, and to 32.1 percent and 30.7 percent
in the six months ended June 30, 1998 and 1997, respectively. 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. However, this
tax exemption applies only to the GSE and does not apply to SLM Holding or its
other operating subsidiaries, that are subject to taxation at the state and
local level. State taxes were immaterial in the three and six months ended June
30, 1998 and 1997 as the majority of the Company's business activities were
conducted in the GSE.
21
<PAGE> 22
LIQUIDITY AND CAPITAL RESOURCES
The Company's primary requirements for capital are to fund the Company's
operations, its purchases of student loans and the repayment of its debt
obligations while continuing to meet the GSE's statutory capital adequacy ratio
test. The Company's primary sources of liquidity are through the debt issuances
by the GSE, off-balance sheet financings through securitizations, cash generated
by its subsidiaries' operations and distributed through dividends to the Company
and bank borrowings.
During the six months ended June 30, 1998, the Company used the proceeds
from student loan securitizations of $6 billion, repayments and claim payments
on student loans of $1.8 billion, and proceeds from sale or maturity of
investments of $402 million to purchase student loans and participations of $3.9
billion, to reduce total debt by $4.5 billion and to repurchase $266 million of
the Company's common stock.
Operating activities used $20 million of cash in the six months ended June
30, 1998, a decrease in cash flow of $173 million from the net cash inflows of
$153 million in the corresponding period in the prior year. This decrease was
mainly attributable to the decrease in other liabilities of $104 million in the
first six months of 1998 and to the increase in the Interest Residual asset as a
result of the securitizations in 1998.
During the six months ended June 30, 1998, the GSE issued $3.2 billion of
long-term notes to refund maturing and repurchased obligations. At June 30,
1998, the GSE had $11.5 billion of outstanding long-term debt issues, of which
$5.9 billion had stated maturities that could be accelerated through call
provisions. The GSE 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.").
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. The Privatization Act also requires management
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. At June 30, 1998, the GSE's statutory
capital adequacy ratio, after the effect of the dividends to be paid in the
third quarter of 1998, was 2.00 percent. The Privatization Act prohibits the GSE
from issuing new debt obligations that mature beyond September 30, 2008 and
requires the GSE to transfer any remaining GSE obligations into a defeasance
trust for the benefit of the holders of such obligations, along with cash or
full-faith and credit obligations of the United States, or an agency thereof, in
amounts sufficient, as determined by the Secretary of the Treasury, to pay the
principal and interest of the deposited obligations.
INTEREST RATE RISK MANAGEMENT
INTEREST RATE GAP ANALYSIS
The Company's principal objective in financing its operations is to
minimize its sensitivity to changing interest rates by matching the interest
rate characteristics of its borrowings to specific assets in order to lock in
spreads. The Company's ABS securities generally match the interest rate
characteristics of the majority of the student loans in the trusts by being
indexed to the 91-day Treasury bill. However, at June 30, 1998, there were
approximately $2 billion of PLUS student loans outstanding in the trusts which
have interest rates that reset annually based on the final auction of 52-week
Treasury bill before each July 1. The Company manages this basis risk within the
trusts through its on-balance sheet financing activities. The effect of this
basis risk management is included in the following table as the impact of
securitization. At June 30, 1998, the reset date of on-balance sheet funding of
the PLUS student loan portfolio that is indexed to the 52-week Treasury bill
coincides with the reset date of the on-balance sheet student loans that are
indexed to the 91-day Treasury bill; therefore at June 30, 1998 there was no
impact from the mismatch of funding due to securitization on the interest rate
gap.
22
<PAGE> 23
In the following table, 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. The following gap analysis
reflects rate-sensitive positions at June 30, 1998 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 1 TO 2 2 TO 5 OVER 5
OR LESS 6 MONTHS 1 YEAR YEARS YEARS YEARS
-------- -------- -------- ------- ------- ------
<S> <C> <C> <C> <C> <C> <C>
ASSETS
Student loans.......................... $25,593 $ -- $ -- $ -- $ -- $ --
Warehousing advances................... 1,489 -- 1 -- 1 17
Academic facilities financings......... 84 9 41 52 406 686
Cash and investments................... 2,783 30 24 30 84 1,771
Other assets........................... 15 17 35 106 223 1,753
------- ------- ------- ------- ------- ------
Total assets................. 29,964 56 101 188 714 4,227
------- ------- ------- ------- ------- ------
LIABILITIES AND STOCKHOLDERS' EQUITY
Short-term borrowings.................. 16,254 1,459 4,058 -- -- --
Long-term notes........................ 3,411 -- -- 4,922 2,614 513
Other liabilities...................... -- -- -- -- -- 1,175
Minority interest in subsidiary........ -- -- -- -- -- 214
Stockholders' equity................... -- -- -- -- -- 630
------- ------- ------- ------- ------- ------
Total liabilities and
stockholders' equity....... 19,665 1,459 4,058 4,922 2,614 2,532
------- ------- ------- ------- ------- ------
OFF-BALANCE SHEET FINANCIAL INSTRUMENTS
Interest rate swaps.................... 11,879 (1,529) (4,044) (4,880) (2,494) 1,068
Impact of securitized student loans.... -- -- -- -- -- --
------- ------- ------- ------- ------- ------
Total off-balance sheet
financial instruments...... 11,879 (1,529) (4,044) (4,880) (2,494) 1,068
------- ------- ------- ------- ------- ------
Period gap............................. $(1,580) $ 126 $ 87 $ 146 $ 594 $ 627
======= ======= ======= ======= ======= ======
Cumulative gap......................... $(1,580) $(1,454) $(1,367) $(1,221) $ (627) $ --
======= ======= ======= ======= ======= ======
Ratio of interest-sensitive assets to
interest-sensitive liabilities....... 152.3% 2.7% 1.6% 1.7% 18.8% 482.3%
======= ======= ======= ======= ======= ======
Ratio of cumulative gap to total
assets............................... 4.5% 4.1% 3.9% 3.5% 1.8% --%
======= ======= ======= ======= ======= ======
</TABLE>
INTEREST RATE SENSITIVITY ANALYSIS
The effect of short-term movements in interest rates on the Company's
results of operations and financial position has been limited through the
Company's risk management activities. The Company performed a sensitivity
analysis to determine the effect of a hypothetical increase in market interest
rates of 10 percent and based on this analysis there has not been a material
change in market risk from December 31, 1997 as reported in Company's Form 10-K.
23
<PAGE> 24
AVERAGE TERMS TO MATURITY
The following table reflects the average terms to maturity for the
Company's earning assets and liabilities at June 30, 1998 (in years):
<TABLE>
<S> <C>
EARNING ASSETS
Student loans............................................... 7.0
Warehousing advances........................................ 4.0
Academic facilities financings.............................. 7.5
Cash and investments........................................ 6.5
---
Total earning assets.............................. 7.0
---
BORROWINGS
Short-term borrowings....................................... .5
Long-term borrowings........................................ 3.0
---
Total borrowings.................................. 1.0
---
</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 6.5 years. As student
loans are securitized, the need for long-term on-balance sheet financing will
decrease.
COMMON STOCK
On January 2, 1998, the Company effected a 7-for-2 stock split through a
stock dividend of an additional five shares for every two shares owned.
During the six months ended June 30, 1998, the Company repurchased 6.4
million shares of its common stock leaving 167 million shares outstanding at
June 30, 1998. For the past few years, the GSE has operated near the statutory
minimum capital ratio of 2.0 percent of risk-adjusted assets required under its
charter. Capital in excess of such amounts has been used to repurchase common
shares. As of June 30, 1998, the Company had remaining authority to repurchase
up to an additional 8.7 million shares which covers both purchases of common
shares in the open market or effective purchases through equity forward
contracts. In the first six months of 1998, the Company continued to supplement
its open market common stock purchases by entering into equity forward
transactions to purchase 12.5 million shares on a net cash or share settled
basis. These forwards settle at various times over the next three and one-half
years at an average price of $43 per share. As of June 30, 1998, the Company had
outstanding equity forward contracts to purchase 18.2 million shares of common
stock at prices ranging from $37 per share to $47 per share.
OTHER RELATED EVENTS AND INFORMATION
LEGISLATIVE DEVELOPMENTS
The Higher Education Act provided that the interest rate for student loans
made on or after July 1, 1998 will be based upon the U.S. Treasury security with
comparable maturity plus 1.0 percent for Stafford and Unsubsidized Stafford
loans and 2.1 percent for PLUS loans. The Secretary of Education has not adopted
regulations specifying the U.S. Treasury security on which these interest rates
will be based or how often the special interest rate will reset. Depending on
the specifics of the regulations, these changes could adversely impact the FFELP
market and the Company's business, because of the uncertain availability and
costs of funding to support this new type of instrument. On June 9, 1998, the
President signed into law temporary student loan legislation that changes the
borrower interest rate on Stafford loans to a formula based on the 91-day
Treasury bill rate plus 2.3 percent (1.7 percent during in-school, grace and
deferment periods) and the lender's rate after special allowance payments to the
91-day Treasury bill rate plus 2.8 percent (2.2 percent during in-school, grace
and deferment periods) for loans originated from July 1, 1998 through September
30, 1998. The borrower interest rate on PLUS loans originated during this period
will be equal to the 91-day Treasury bill rate plus 3.1 percent. Special
allowance payments are also based on the 91-day Treasury bill rate plus 3.1
percent. As a result of the rate reduction provided for in the temporary student
loan legislation, the
24
<PAGE> 25
Company has begun the process of renegotiating certain contract provisions
including, principally, price and/or settlement timing, under the student loan
forward purchase commitments it has entered into with various lenders. However,
there can be no assurance that as a result of such renegotiations the Company
will realize the same overall return under any such renegotiated commitment
contracts with respect to student loans originated from July 1, 1998 through
September 30, 1998, as it had under the prior legislation with respect to the
loans whose first disbursements occurred before July 1, 1998.
On July 9, 1998, the Senate passed S. 1882, the Higher Education Act of
1998, by a vote of 96 to 1. This bill reauthorizes federal higher education
programs for a five-year period. The House passed its version of the Higher
Education Act reauthorization, H.R.6, by a vote of 414 to 4 on May 6, 1998. Both
bills would change the borrower and lender interest rates on Stafford and PLUS
loans originated after September 30, 1998 to the same formula provided for in
the temporary student loan legislation. Spokespersons from both the House and
Senate education panels said that lawmakers expect to begin promptly meetings to
reconcile the differences between the two chambers' versions of the
reauthorization bills. Notwithstanding the margins by which the House and Senate
bills passed, there can be no assurance that the changes provided for in such
bills will be enacted into law or will not be materially changed before they are
enacted into law. Without the passage of new legislation, the interest rate
structure previously scheduled to become effective July 1, 1998 will govern
loans originated after September 30, 1998.
On July 1, 1998, the Department of Education published a notice in the
Federal Register in which it announced that it reduced borrower interest rates
on Federal Direct Consolidation Loans for borrowers whose applications for such
loans are processed after July 1, 1998 from 8.25 percent to 7.46 percent (6.86
percent during in-school, grace and deferment periods), which rates are adjusted
annually based on a formula equal to the 91-day Treasury bill rate plus 2.3
percent (1.7 percent during in-school, grace and deferment periods). The
availability of the reduced borrower interest rates on Federal Direct
Consolidation Loans may increase the likelihood that a FFELP student loan
managed by the Company will be prepaid from the proceeds of such loans. The
volume of FFELP student loans managed by the Company that may be prepaid in this
fashion, and the effect, if any, on the Company's earnings, cannot be determined
at this time and will be affected by, among other things, operational
limitations on the ability of the Department of Education to process a
significant increase in Federal Direct Consolidation Loan volume and the period
during which reduced rates are available. Depending upon the significance of
these factors and others, the Department's actions could have a material adverse
effect on the Company's earnings. The Congress is expected to address the rate
on Federal Direct Consolidation Loans as part of the reauthorization of the
Higher Education Act scheduled for this session of Congress. There can be no
assurance that the Congress will address the rate on consolidation loans, either
as to pending or future applications, or that any legislation adopted will
provide for the same rate on both FFELP and Federal Direct Consolidation Loans
or that any legislated consolidation loan rate will not prompt borrowers to
refinance FFELP loans managed by the Company at a level greater than the current
level of such refinancings. See "Student Loans--Student Loan Spread Analysis."
The Company believes such action compromises the "level playing field" between
the FFELP and the FDSLP that the Congress and the Administration have promoted
and could destabilize the student loan markets. The Company together with other
industry representatives expressed these views in a joint letter to the
Secretary of Education.
YEAR 2000 ISSUE
The "Year 2000 issue" refers to a wide variety of potential computer
program processing and functionality issues that may arise from the inability of
computer programs to properly process date-sensitive information relating to the
Year 2000, years thereafter and to a lesser degree the Year 1999. During 1996,
the Company commenced a Year 2000 compliance project to assess and remediate its
internal software and hardware systems to avoid or mitigate Year 2000 problems
and to evaluate potential Year 2000 problems that may arise from entities with
which the Company interacts. The Company is assessing its internal software and
hardware, and is in the process of replacing or modifying those systems. The
Company expects to have virtually all of the systems and application
modifications in place and tested by the end of 1998, allowing time in 1999 for
any system refinements that may be needed.
25
<PAGE> 26
The Company has surveyed its third party service providers and business
partners and is currently reviewing these surveys to determine the level of
compliance and the potential impact of noncompliance. There can be no assurance
that the computer systems of other companies or counterparties on which the
Company relies will be compliant on a timely basis, or that a failure to resolve
Year 2000 issues by another party, or a remediation or conversion that is
incompatible with the Company's computer systems, will not have a material
adverse effect on the Company.
The Company has developed high level contingency plans for its mission
critical applications and will refine these plans in 1999.
Costs to modify computer systems have been, and will continue to be,
expensed as incurred and are not expected to have a material impact on the
Company's future financial results or condition. The Company spent approximately
$2 million in 1997 and expects to spend between $7 million and $10 million in
1998 on this project (of which approximately $3 million was spent in the first
six months of 1998). However, there can be no guarantee that these estimates
will be achieved, and actual results could differ materially from these
estimates. Specific factors that might cause such material differences include,
but are not limited to, the availability and cost of personnel trained in this
area, the ability to locate and correct all relevant computer codes and similar
uncertainties.
26
<PAGE> 27
PART II. OTHER INFORMATION
ITEM 1. LEGAL PROCEEDINGS.
A hearing has been scheduled in August 1998 for court approval of Orange
County's settlement agreement with Merrill, Lynch, Pierce Fenner & Smith, which
calls for, among other things, dismissal with prejudice of all claims against
the Student Loan Marketing Association and certain other government sponsored
enterprises.
ITEM 2. CHANGES IN SECURITIES.
Nothing to report.
ITEM 3. DEFAULTS UPON SENIOR SECURITIES.
Nothing to report.
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS.
At the Company's Annual Meeting of Shareholders held on May 21, 1998 the
following proposals were approved by the margins indicated.
<TABLE>
<CAPTION>
NUMBER OF SHARES
----------------------------
VOTES FOR VOTES WITHHELD
----------- --------------
<S> <C> <C>
1. To elect 15 directors to serve on the Board of Directors
for one-year terms or until their successors are elected
and qualified.
James E. Brandon, Esq.................................. 143,890,248 320,097
Charles L. Daley....................................... 143,890,248 320,097
Thomas J. Fitzpatrick.................................. 143,890,248 320,097
Edward A. Fox.......................................... 143,890,248 320,097
Diane Suitt Gilleland.................................. 143,890,248 320,097
Ann Torre Grant........................................ 143,889,498 320,097
Ronald F. Hunt, Esq.................................... 143,890,248 320,097
Benjamin J. Lambert, III............................... 143,890,248 320,097
Albert L. Lord......................................... 143,889,870 320,097
Marie V. McDemmond..................................... 143,889,037 320,097
Barry A. Munitz........................................ 143,889,037 320,097
A. Alexander Porter, Jr................................ 143,890,248 320,097
Wolfgang Schoellkopf................................... 143,890,248 320,097
Steven L. Shapiro...................................... 143,890,248 320,097
Randolph H. Waterfield, Jr............................. 143,890,248 320,097
</TABLE>
27
<PAGE> 28
<TABLE>
<CAPTION>
NUMBER OF SHARES
--------------------------------------------------------------
VOTES FOR VOTES AGAINST ABSTAIN BROKER NON-VOTES
---------------- -------------- ------- ----------------
<S> <C> <C> <C> <C>
2. To approve the Company's Directors
Stock Plan to implement a stock-based
compensation structure for
directors............................. 104,462,920 28,814,095 377,092 10,556,002
3. To approve the Company's Management
Incentive Plan, which superseded the
Company's Stock Compensation Plan and
is intended to enable the Company to
attract, retain, and motivate its
management and other key employees,
and to further align the interests of
such employees with those of the
Company's shareholders by providing
for or increasing the proprietary
interest of such employees in the
Company............................... 103,392,386 29,666,207 427,714 10,723,802
4. To approve an amendment to the
Company's 1993-1998 Stock Option Plan
to raise the annual limit on annual
option grants under such plan......... 134,277,882 9,495,059 968,167 69,001
5. To ratify grants of certain options
to non-executive officers, which were
made in connection with the
cancellation of previously granted
options............................... 108,935,341 34,837,643 427,325 9,800
6. To ratify the appointment of Arthur
Andersen LLP as independent auditors
for 1998.............................. 143,726,427 232,860 250,822 0
</TABLE>
ITEM 5. OTHER INFORMATION.
Effective July 1, 1998, Anthony P. Dolanski joined the Company's executive
management team as Executive Vice President, Systems and Finance. Mr. Dolanski
was a partner with the accounting firm, KPMG Peat Marwick LLP, since 1968, most
recently as the senior partner for the high technology assurance practice and
risk management for financial services clients.
Effective August 5, 1998, Thomas J. Fitzpatrick joined the Company's
executive management team as Executive Vice President, Private Credit. Mr.
Fitzpatrick was the founder, president and chief executive officer of Equity
One, Inc. Mr. Fitzpatrick is also a member of the Board of Directors of the
Company.
ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K.
(a) Exhibits
27 Financial Data Schedule
(b) Reports on Form 8-K
No reports on Form 8-K were filed with the Securities and Exchange
Commission during the Quarter ended June 30, 1998.
28
<PAGE> 29
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)
/s/ MARK G. OVEREND
--------------------------------------
MARK G. OVEREND
Senior Vice President &
Chief Financial Officer
(Principal Financial and Accounting
Officer and Duly Authorized Officer)
Date: August 12, 1998
29
<TABLE> <S> <C>
<ARTICLE> 9
<MULTIPLIER> 1,000
<S> <C>
<PERIOD-TYPE> 6-MOS
<FISCAL-YEAR-END> DEC-31-1998
<PERIOD-START> JAN-01-1998
<PERIOD-END> JUN-30-1998
<CASH> 60,365
<INT-BEARING-DEPOSITS> 0
<FED-FUNDS-SOLD> 0
<TRADING-ASSETS> 0
<INVESTMENTS-HELD-FOR-SALE> 4,867,293
<INVESTMENTS-CARRYING> 582,118
<INVESTMENTS-MARKET> 582,241
<LOANS> 27,591,189
<ALLOWANCE> 87,372
<TOTAL-ASSETS> 35,250,112
<DEPOSITS> 0
<SHORT-TERM> 21,771,401
<LIABILITIES-OTHER> 1,388,465
<LONG-TERM> 11,459,866
0
0
<COMMON> 36,808
<OTHER-SE> 593,572
<TOTAL-LIABILITIES-AND-EQUITY> 35,250,112
<INTEREST-LOAN> 1,182,876
<INTEREST-INVEST> 191,565
<INTEREST-OTHER> 0
<INTEREST-TOTAL> 1,374,441
<INTEREST-DEPOSIT> 0
<INTEREST-EXPENSE> 1,034,080
<INTEREST-INCOME-NET> 340,361
<LOAN-LOSSES> 5,674
<SECURITIES-GAINS> 5,799
<EXPENSE-OTHER> 184,594
<INCOME-PRETAX> 424,812
<INCOME-PRE-EXTRAORDINARY> 283,239
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> 283,239
<EPS-PRIMARY> 1.67
<EPS-DILUTED> 1.64
<YIELD-ACTUAL> 1.94
<LOANS-NON> 0
<LOANS-PAST> 700,000
<LOANS-TROUBLED> 0
<LOANS-PROBLEM> 0
<ALLOWANCE-OPEN> 87,660
<CHARGE-OFFS> 12,923
<RECOVERIES> 2,030
<ALLOWANCE-CLOSE> 87,372
<ALLOWANCE-DOMESTIC> 87,372
<ALLOWANCE-FOREIGN> 0
<ALLOWANCE-UNALLOCATED> 0
</TABLE>
