<PAGE> 1
================================================================================
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 MARCH 31, 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>
<CAPTION>
CLASS OUTSTANDING AT MARCH 31, 1998
----- -----------------------------
<S> <C>
Common Stock, $.20 par value 170,020,683 shares
</TABLE>
================================================================================
<PAGE> 2
SLM HOLDING CORPORATION
FORM 10-Q
INDEX
MARCH 31, 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.................... 9
PART II OTHER INFORMATION
Item 1. Legal Proceedings................................. 23
Item 2. Changes in Securities............................. 23
Item 3. Defaults Upon Senior Securities................... 23
Item 4. Submission of Matters to a Vote of Security
Holders................................................ 23
Item 5. Other Information................................. 23
Item 6. Exhibits and Reports on Form 8-K.................. 23
SIGNATURES.................................................. 24
</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>
MARCH 31, DECEMBER 31,
1998 1997
----------- ------------
(UNAUDITED)
<S> <C> <C>
ASSETS
Insured student loans purchased........................ $25,376,258 $27,592,714
Student loan participations............................ 2,348,813 1,927,896
----------- -----------
Insured student loans.................................. 27,725,071 29,520,610
Warehousing advances................................... 2,016,535 1,868,654
Academic facilities financings
Bonds--available-for-sale......................... 835,956 860,325
Loans............................................. 512,073 514,691
----------- -----------
Total academic facilities financings................... 1,348,029 1,375,016
Investments
Available-for-sale................................ 4,638,431 4,549,977
Held-to-maturity.................................. 690,753 525,962
----------- -----------
Total investments...................................... 5,329,184 5,075,939
Cash and cash equivalents.............................. 67,608 54,022
Other assets, principally accrued interest
receivable............................................ 1,914,359 2,014,556
----------- -----------
Total assets................................. $38,400,786 $39,908,797
=========== ===========
LIABILITIES
Short-term borrowings.................................. $23,296,958 $23,175,509
Long-term notes........................................ 13,013,111 14,541,316
Other liabilities...................................... 1,255,402 1,303,517
----------- -----------
Total liabilities................................. 37,565,471 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: 183,923,227 and 183,632,694 shares
issued, respectively.................................. 36,785 36,726
Additional paid-in capital............................. 22,030 28,838
Unrealized gains on investments (net of tax of $201,224
and $203,935, respectively)........................... 373,701 378,736
Retained earnings...................................... 769,115 654,135
----------- -----------
Stockholders' equity before treasury stock............. 1,201,631 1,098,435
Common stock held in treasury at cost: 13,902,544 and
10,221,757 shares, respectively....................... 580,199 423,863
----------- -----------
Total stockholders' equity........................ 621,432 674,572
----------- -----------
Total liabilities and stockholders' equity... $38,400,786 $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
MARCH 31,
-------------------------
1998 1997
----------- -----------
(UNAUDITED) (UNAUDITED)
<S> <C> <C>
Interest income:
Insured student loans purchased........................ $530,735 $617,609
Student loan participations............................ 32,571 22,307
-------- --------
Insured student loans.................................. 563,306 639,916
Warehousing advances................................... 30,415 40,968
Academic facilities financings:
Taxable........................................... 11,353 12,242
Tax-exempt........................................ 11,071 11,922
-------- --------
Total academic facilities financings................... 22,424 24,164
Investments............................................ 91,282 143,829
-------- --------
Total interest income....................................... 707,427 848,877
Interest expense:
Short-term debt........................................ 347,958 356,874
Long-term debt......................................... 193,392 292,977
-------- --------
Total interest expense...................................... 541,350 649,851
-------- --------
NET INTEREST INCOME......................................... 166,077 199,026
Other income:
Gain on sale of student loans.......................... 60,174 33,992
Servicing and securitization revenue................... 52,864 25,961
Gains on sales of securities........................... 5,381 3,182
Other.................................................. 14,970 12,805
-------- --------
Total other income.......................................... 133,389 75,940
-------- --------
Operating expenses:
Salaries and benefits.................................. 48,799 51,669
Other.................................................. 42,063 49,890
-------- --------
Total operating expenses.................................... 90,862 101,559
-------- --------
Income before federal income taxes and minority interest in
net earnings of subsidiary................................ 208,604 173,407
-------- --------
Federal income taxes:
Current................................................ 69,765 67,046
Deferred............................................... (2,842) (12,476)
-------- --------
Total federal income taxes.................................. 66,923 54,570
Minority interest in net earnings of subsidiary............. 2,673 2,674
-------- --------
NET INCOME.................................................. $139,008 $116,163
======== ========
BASIC EARNINGS PER COMMON SHARE............................. $ .81 $ .62
======== ========
Average common shares outstanding........................... 171,734 186,684
======== ========
DILUTED EARNINGS PER COMMON SHARE........................... $ .80 $ .62
======== ========
Average common and common equivalent shares outstanding..... 174,095 187,753
======== ========
</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)
<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..................... 116,163
Other comprehensive income, net
of tax:
Unrealized gains (losses)
on investments, net of
tax......................
Comprehensive income...............
Cash dividends ($.13 per share).... (23,450)
Issuance of common shares.......... 1,303,291 1,303,291 260 22,767
Premiums on equity forward purchase
contracts........................
Repurchase of common shares........ (4,489,940) (4,489,940)
----------- ----------- ----------- ------- -------- ----------
BALANCE at March 31, 1997.............. 231,237,790 (46,507,356) 184,730,434 $46,247 $ 22,767 $1,068,602
=========== =========== =========== ======= ======== ==========
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..................... 139,008
Other comprehensive income, net
of tax:
Unrealized gains (losses)
on investments, net of
tax......................
Comprehensive income...............
Cash dividends ($.14 per share).... (24,028)
Issuance of common shares.......... 290,533 290,533 59 7,803
Premiums on equity forward purchase
contracts........................ (14,611)
Repurchase of common shares........ (3,680,787) (3,680,787)
----------- ----------- ----------- ------- -------- ----------
BALANCE at March 31, 1998.............. 183,923,227 (13,902,544) 170,020,683 $36,785 $ 22,030 $ 769,115
=========== =========== =========== ======= ======== ==========
<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..................... 116,163
Other comprehensive income, net
of tax:
Unrealized gains (losses)
on investments, net of
tax...................... (18,212) (18,212)
---------
Comprehensive income............... 97,951
Cash dividends ($.13 per share).... (23,450)
Issuance of common shares.......... 23,027
Premiums on equity forward purchase
contracts........................ 0
Repurchase of common shares........ (135,601) (135,601)
--------- -------- ---------
BALANCE at March 31, 1997.............. $(672,765) $331,023 $ 795,874
========= ======== =========
BALANCE at December 31, 1997........... $(423,863) $378,736 $ 674,572
Comprehensive income (see Note 2):
Net Income..................... 139,008
Other comprehensive income, net
of tax:
Unrealized gains (losses)
on investments, net of
tax...................... (5,035) (5,035)
---------
Comprehensive income............... 133,973
Cash dividends ($.14 per share).... (24,028)
Issuance of common shares.......... 7,862
Premiums on equity forward purchase
contracts........................ (14,611)
Repurchase of common shares........ (156,336) (156,336)
--------- -------- ---------
BALANCE at March 31, 1998.............. $(580,199) $373,701 $ 621,432
========= ======== =========
</TABLE>
See accompanying notes to consolidated financial statements.
5
<PAGE> 6
SLM HOLDING CORPORATION
CONSOLIDATED STATEMENTS OF CASH FLOWS
(DOLLARS IN THOUSANDS)
<TABLE>
<CAPTION>
THREE MONTHS ENDED MARCH 31,
------------------------------
1998 1997
------------- -------------
(UNAUDITED) (UNAUDITED)
<S> <C> <C>
OPERATING ACTIVITIES
Net income.................................................. $ 139,008 $ 116,163
Adjustments to reconcile net income to net cash provided by
operating activities:
Gains on sales of student loans........................ (60,174) (33,992)
Decrease in accrued interest receivable................ 169,487 98,952
(Decrease) in accrued interest payable................. (93,267) (43,675)
(Increase) decrease in other assets.................... (42,663) 1,857
Increase in other liabilities.......................... 47,863 418,481
------------- -------------
Total adjustments................................. 21,246 441,623
------------- -------------
Net cash provided by operating activities................... 160,254 557,786
------------- -------------
INVESTING ACTIVITIES
Insured student loans purchased............................. (1,620,954) (1,702,526)
Reduction of insured student loans purchased:
Installment payments................................... 639,537 650,354
Claims and resales..................................... 205,142 313,040
Proceeds from securitization of student loans.......... 3,029,017 2,039,023
Participations purchased.................................... (474,756) (412,997)
Participation repayments.................................... 53,839 53,939
Warehousing advances made................................... (310,601) (139,137)
Warehousing advance repayments.............................. 162,720 395,374
Academic facilities financings made......................... (2,500) (14,393)
Academic facilities financings reductions................... 28,049 72,346
Investments purchased....................................... (4,023,105) (4,352,859)
Proceeds from sale or maturity of investments............... 3,760,813 4,107,441
------------- -------------
Net cash provided by investing activities................... 1,447,201 1,009,605
------------- -------------
FINANCING ACTIVITIES
Short-term borrowings issued................................ 155,573,566 192,835,081
Short-term borrowings repaid................................ (156,237,087) (190,830,663)
Long-term notes issued...................................... 3,009,796 1,348,531
Long-term notes repaid...................................... (3,753,031) (4,979,555)
Equity forward contracts and common stock issued............ (6,749) 23,027
Common stock repurchased.................................... (156,336) (135,601)
Dividends paid.............................................. (24,028) (23,450)
------------- -------------
Net cash (used in) financing activities..................... (1,593,869) (1,762,630)
------------- -------------
Net increase (decrease) in cash and cash equivalents........ 13,586 (195,239)
Cash and cash equivalents at beginning of period............ 54,022 270,887
------------- -------------
CASH AND CASH EQUIVALENTS AT END OF PERIOD.................. $ 67,608 $ 75,648
============= =============
CASH DISBURSEMENTS MADE FOR:
Interest............................................... $ 577,269 $ 601,588
============= =============
Income Taxes........................................... $ 35,000 $ 37,000
============= =============
</TABLE>
See accompanying notes to consolidated financial statements.
6
<PAGE> 7
SLM HOLDING CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(INFORMATION AT MARCH 31, 1998 AND FOR THE THREE MONTHS ENDED MARCH 31, 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 months ended March 31, 1998 are not necessarily indicative of the results
for the year ending December 31, 1998.
2. NEW ACCOUNTING PRONOUNCEMENT
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.
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
MARCH 31,
-------------------
1998 1997
-------- --------
<S> <C> <C>
BALANCE AT BEGINNING OF PERIOD.............................. $87,660 $84,063
Additions
Provisions for loan losses............................. 4,931 5,818
Recoveries............................................. 934 3,093
Deductions
Reductions for sales of student loans.................. (4,186) (1,964)
Losses on loans........................................ (2,450) (3,632)
------- -------
BALANCE AT END OF PERIOD.................................... $86,889 $87,378
======= =======
</TABLE>
In addition to the reserves for loan losses in the above table, the
Company, through its wholly owned insurance subsidiary, the Hemar Insurance
Corporation of America ("HICA"), maintains a provision for future losses on
private student loans that it insures. At March 31, 1998 and 1997, HICA's
reserve was $85 million and $70 million, respectively, for which the Company
owned 88 percent of the $1.6 billion and 72 percent of the $1.3 billion,
respectively, of student loans insured by HICA .
7
<PAGE> 8
SLM HOLDING CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
4. STUDENT LOAN SECURITIZATION
For the three months ended March 31, 1998 and 1997, the Company securitized
$3.0 billion and $2.0 billion, respectively, of student loans and recorded
pre-tax gains of $60 million and $34 million, respectively. The gain in the
first quarter of 1997 included a $20 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 March 31, 1998 and December 31, 1997, securitized student loans
outstanding totaled $16.6 billion and $14.1 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, 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)
<S> <C> <C> <C>
Three months ended March 31, 1998
Basic EPS................................................... $139,008 171,734 $ .81
Dilutive effect of stock options, warrants and equity
forwards.................................................. -- 2,361 (.01)
-------- ------- -----
Diluted EPS................................................. $139,008 174,095 $ .80
======== ======= =====
Three months ended March 31, 1997
Basic EPS................................................... $116,163 186,684 $ .62
Dilutive effect of stock options............................ -- 1,069 --
-------- ------- -----
Diluted EPS................................................. $116,163 187,753 $ .62
======== ======= =====
</TABLE>
8
<PAGE> 9
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 months ended
March 31, 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.
9
<PAGE> 10
THREE MONTHS ENDED MARCH 31, 1998 AND 1997
SELECTED FINANCIAL DATA
CONDENSED STATEMENTS OF INCOME
<TABLE>
<CAPTION>
THREE MONTHS
ENDED INCREASE
MARCH 31, (DECREASE)
------------- ------------------
1998 1997 $ %
----- ----- -------- --------
<S> <C> <C> <C> <C>
Net interest income......................................... $ 166 $ 199 $ (33) (17)%
Gains on sales of student loans............................. 60 34 26 77
Servicing and securitization revenue........................ 53 26 27 104
Other income................................................ 21 16 5 27
Operating expenses.......................................... 91 102 (11) (11)
Federal income taxes........................................ 67 54 13 23
Minority interest in net earnings of subsidiary............. 3 3 -- --
----- ----- ----- ---
NET INCOME.................................................. $ 139 $ 116 $ 23 20%
===== ===== ===== ===
BASIC EARNINGS PER COMMON SHARE............................. $0.81 $0.62 $0.19 30%
===== ===== ===== ===
DILUTED EARNINGS PER COMMON SHARE........................... $0.80 $0.62 $0.18 29%
===== ===== ===== ===
Dividends per common share.................................. $0.14 $0.13 $0.01 11%
===== ===== ===== ===
CORE EARNINGS............................................... $ 131 $ 112 $ 19 17%
===== ===== ===== ===
</TABLE>
CONDENSED BALANCE SHEETS
<TABLE>
<CAPTION>
INCREASE
(DECREASE)
MARCH 31, DECEMBER 31, -------------------
1998 1997 $ %
--------- ------------ -------- --------
<S> <C> <C> <C> <C>
ASSETS
Student loans........................................... $27,725 $29,521 $(1,796) (6)%
Warehousing advances.................................... 2,017 1,869 148 8
Academic facilities financings.......................... 1,348 1,375 (27) (2)
Cash and investments.................................... 5,397 5,130 267 5
Other assets............................................ 1,914 2,014 (100) (5)
------- ------- ------- ---
Total assets.................................. $38,401 $39,909 $(1,508) (4)%
======= ======= ======= ===
LIABILITIES AND STOCKHOLDERS' EQUITY
Short-term borrowings................................... $23,297 $23,176 $ 121 1%
Long-term notes......................................... 13,013 14,541 (1,528) (11)
Other liabilities....................................... 1,255 1,303 (48) (4)
------- ------- ------- ---
Total liabilities............................. 37,565 39,020 (1,455) (4)
------- ------- ------- ---
Minority interest in subsidiary......................... 214 214 -- --
Stockholders' equity before treasury stock.............. 1,202 1,099 103 (9)
Common stock held in treasury at cost................... 580 424 156 37
------- ------- ------- ---
Total stockholders' equity.................... 622 675 (53) (8)
------- ------- ------- ---
Total liabilities and stockholders' equity.... $38,401 $39,909 $(1,508) (4)%
======= ======= ======= ===
</TABLE>
RESULTS OF OPERATIONS
EARNINGS SUMMARY
For the three months ended March 31, 1998, the Company's net income was
$139 million ($.80 diluted earnings per common share), compared to $116 million
($.62 diluted earnings per common share) for the
10
<PAGE> 11
three months ended March 31, 1997. The increase in first quarter 1998 net income
of $23 million (20 percent) reflects the Company's continued strategy of funding
its managed portfolio of student loans through its securitization program as the
Company securitized $3.0 billion of student loans and recorded a securitization
gain of $39 million, after-tax, an increase of $17 million over the gain
recorded in the first quarter of 1997. The increase is mainly due to the
securitization of $1 billion more loans in 1998 and to the $13 million,
after-tax, reserve for Offset Fees included in the first quarter of 1997 gain.
This reserve was reversed in the third quarter of 1997 when the Company
favorably resolved litigation over whether the Offset Fee applied to securitized
student loans. The increase in the average balance of securitized student loans
from $6.4 billion in the first quarter of 1997 to $14.3 billion in the first
quarter of 1998 resulted in increased servicing and securitization revenue of
approximately $17 million, after-tax. The increased income from the Company's
securitization program was offset by the reduction in net interest income of $21
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. In the first quarter of 1998, after-tax
operating expenses were $7 million lower than the first quarter of 1997, which
was a direct result of the Company's restructuring of operations performed in
the second half of 1997. Operating expenses as a percentage of managed student
loans decreased from 103 basis points in the first quarter of 1997 to 84 basis
points in the first quarter of 1998 as servicing cost as a percentage of managed
student loans decreased to 51 basis points from 57 basis points in the first
quarter of 1997. Each of these components of net income is discussed in further
detail in subsequent sections of this analysis.
During the first quarter of 1998, the Company spent $156 million to
repurchase 3.7 million common shares (or 2 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 nontaxable 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."
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
ENDED INCREASE
MARCH 31, (DECREASE)
------------- -------------------
1998 1997 $ %
----- ----- -------- --------
<S> <C> <C> <C> <C>
Interest income
Student loans.......................................... $563 $640 $ (77) (12)%
Warehousing advances................................... 31 41 (10) (26)
Academic facilities financings......................... 22 24 (2) (7)
Investments............................................ 91 144 (53) (37)
Taxable equivalent adjustment.......................... 9 8 1 14
---- ---- ----- ---
Total taxable equivalent interest income.................... 716 857 (141) (16)
Interest expense............................................ 541 650 (109) (17)
---- ---- ----- ---
Taxable equivalent net interest income...................... $175 $207 $ (32) (15)%
==== ==== ===== ===
</TABLE>
11
<PAGE> 12
AVERAGE BALANCE SHEETS
The following table reflects the rates earned on earning assets and paid on
liabilities for the three months ended March 31, 1998 and 1997.
<TABLE>
<CAPTION>
THREE MONTHS ENDED MARCH 31,
-------------------------------
1998 1997
-------------- --------------
BALANCE RATE BALANCE RATE
------- ---- ------- ----
<S> <C> <C> <C> <C>
AVERAGE ASSETS
Student loans.......................................... $29,495 7.75% $33,803 7.68%
Warehousing advances................................... 2,020 6.11 2,794 5.95
Academic facilities financings......................... 1,395 8.25 1,470 8.44
Investments............................................ 6,020 6.37 10,069 5.86
------- ---- ------- ----
Total interest earning assets..................... 38,930 7.47% 48,136 7.22%
==== ====
Non-interest earning assets................................. 1,893 2,043
------- -------
Total assets...................................... $40,823 $50,179
======= =======
AVERAGE LIABILITIES AND STOCKHOLDERS' EQUITY
Six month floating rate notes.......................... $ 3,076 5.60% $ 2,986 5.46%
Other short-term borrowings............................ 22,198 5.58 23,602 5.44
Long-term notes........................................ 13,455 5.83 21,328 5.57
------- ---- ------- ----
Total interest bearing liabilities................ 38,729 5.67% 47,916 5.50%
==== ====
Non-interest bearing liabilities............................ 1,471 1,446
Stockholders' equity........................................ 623 817
------- -------
Total liabilities and stockholders' equity........ $40,823 $50,179
======= =======
Net interest margin......................................... 1.83% 1.75%
==== ====
</TABLE>
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 MARCH 31, 1998 VS. THREE MONTHS ENDED
MARCH 31, 1997
Taxable equivalent interest income.......................... $(141) $19 (160)
Interest expense............................................ (109) 23 (132)
----- --- -----
Taxable equivalent net interest income...................... $ (32) $(4) $ (28)
===== === =====
</TABLE>
Taxable equivalent net interest income for the three months ended March 31,
1998 decreased by $32 million while the net interest margin increased by .08
percent, versus the three months ended March 31, 1997. The $4 million decrease
in taxable equivalent net interest income attributable to the change in rates in
the first quarter of 1998 versus 1997 was due to reduced amortization of student
loan floor contracts of $2 million, lower student loan yields in the form of
reduced SAP rates, which reduced interest income by $2 million, and lower yields
on academic facilities financings as the runoff of older higher yielding
financings are being replaced by lower yielding financings. These decreases were
partially offset by an increase in floor income of $6 million and lower OBRA
fees of $2 million. The $28 million decrease in taxable equivalent net interest
income attributable to the change in volume was due mainly to the decrease in
the average balance of
12
<PAGE> 13
student loans on balance sheet as a result of the Company's ongoing
securitization program, and the decrease of $4 billion and approximately $800
million in the average balance of investments and warehousing advances,
respectively, as the Company reduced these assets to free up capital for common
share 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.
STUDENT LOANS
STUDENT LOAN SPREAD ANALYSIS
The following table analyzes the earning spreads on student loans for the
three months ended March 31, 1998 and 1997.
<TABLE>
<CAPTION>
THREE MONTHS ENDED
MARCH 31,
-------------------
1998 1997
-------- --------
<S> <C> <C>
ON-BALANCE SHEET
Adjusted student loan yields................................ 7.85% 7.83%
Amortization of floor swap payments......................... 0.11 0.12
Floor income................................................ 0.17 0.07
Consolidation loan rebate fees.............................. (0.24) (0.16)
Reserves for risk-sharing costs............................. (0.03) (0.05)
Offset fees................................................. (0.11) (0.13)
------- -------
Student loan income......................................... 7.75 7.68
Cost of funds............................................... (5.57) (5.51)
------- -------
Student loan spread......................................... 2.18% 2.17%
======= =======
Core student loan spread.................................... 2.01% 2.10%
======= =======
OFF-BALANCE SHEET
Servicing and securitization revenue........................ 1.50% 1.65%
======= =======
AVERAGE BALANCES
Student loans, including participations..................... $29,495 $33,803
Securitized loans........................................... 14,295 6,378
------- -------
Managed student loans....................................... $43,790 $40,181
======= =======
</TABLE>
The decline in the core student loan spread from 2.10 percent in the three
months ended March 31, 1997 to 2.01 percent in the three months ended March 31,
1998 was principally due to the growth in the portfolio of loans subject to the
consolidation loan rebate fee which reduced the core student loan spread by .08
percent (see below for discussion of suspension of consolidation loan program).
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 additions to loss
reserves for student loans partially offset by reduced Offset Fees and reserves
for risk-sharing as the balance of student loans subject to these fees was
reduced through securitizations.
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 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.
13
<PAGE> 14
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 quarter of 1998 and 1997, approximately $168 million and
$135 million, respectively, of the Company's managed student loans were accepted
for refinancing into the FDSLP. Since the inception of this program
approximately $951 million of FFELP loans managed by Sallie Mae have been
accepted for refinancing into FDSLP loans. Approximately $674 million have been
refinanced into FDSLP with the remainder awaiting disbursements by the federal
government.
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 March 31, 1998 and 1997
(dollars in billions).
<TABLE>
<CAPTION>
MARCH 31, 1998 MARCH 31, 1997
------------------------- -------------------------
FIXED VARIABLE TOTAL FIXED VARIABLE TOTAL
----- -------- ------ ----- -------- ------
<S> <C> <C> <C> <C> <C> <C>
Student loans with floor revenue potential... $13.9 $ 21.3 $ 35.2 $14.9 $16.9 $ 31.8
Less notional amount of floor revenue
contracts.................................. (7.1) (10.6) (17.7) (8.6) (4.9) (13.5)
----- ------ ------ ----- ----- ------
Net student loans with floor revenue
potential.................................. $ 6.8 $ 10.7 $ 17.5 $ 6.3 $12.0 $ 18.3
===== ====== ====== ===== ===== ======
Net student loans earning floor revenues..... $ 4.6 $ -- $ 4.6 $ 3.0 $ -- $ 3.0
===== ====== ====== ===== ===== ======
</TABLE>
Based on the average bond equivalent 91-day Treasury bill rates of 5.20 percent
for the three months ended March 31, 1998 and 1997, the Company earned floor
revenues of $12 million (net of $4 million in payments under the floor revenue
contracts), and $6 million (net of $5 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 March 31, 1998, $10.6 billion of the notional amount of the 1997
contracts was outstanding and $7.1 billion of the notional amount of the 1996
contracts was outstanding.
For the three months ended March 31, 1998 and 1997, the amortization of the
upfront payments received for the sale of fixed rate floor revenue contracts
contributed $8 million and $10 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 March 31, 1998 and 1997, the Company
earned $5 million and $2 million, respectively, on variable rate floor revenue
contracts. These contracts typically expire on the interest reset date of the
underlying student loans and the related amortization of upfront payments is
excluded from core earnings.
PROVISION FOR STUDENT LOAN LOSSES
In the three months ended March 31, 1998, the Company added $5 million to
its provision for student loan losses versus $6 million in the three months
ended March 31, 1997. The addition to the reserve consisted of $3.5 million to
provide for losses on non-federally insured student loans versus $1.6 million in
the corresponding period of the prior year and $1.4 million for potential losses
on its federally insured student loan portfolio due to risk-sharing versus $4.2
million in the year-ago period. 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 allowance 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.
14
<PAGE> 15
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 months ended March 31, 1998 and 1997.
<TABLE>
<CAPTION>
THREE MONTHS ENDED MARCH 31,
-------------------------------------
1998 1997
----------------- -----------------
AVERAGE AVERAGE AVERAGE AVERAGE
INDEX BALANCE RATE BALANCE RATE
----- ------- ------- ------- -------
<S> <C> <C> <C> <C>
Treasury bill, principally 91-day........................ $29,137 5.55% $34,307 5.50%
LIBOR.................................................... 4,994 5.62 6,429 5.34
Discount notes........................................... 2,873 5.52 5,810 5.32
Fixed.................................................... 650 7.18 675 7.08
Zero coupon.............................................. 138 11.13 130 11.12
Other.................................................... 937 5.45 565 5.02
------- ----- ------- -----
Total.......................................... $38,729 5.67% $47,916 5.50%
======= ===== ======= =====
</TABLE>
In the above table, for the three months ended March 31, 1998 and 1997,
spreads for all Treasury bill-indexed borrowings averaged .25 percent and .24
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 .27 percent, respectively, under the
weighted average LIBOR rates.
OTHER INCOME
The increase in other income of $57 million in the first quarter of 1998
versus 1997 was mainly due to the increase in securitization gains of $26
million and an increase of $27 million in servicing and securitization revenue
as the Company's average balance of securitized student loans increased by $7.9
billion over 1997.
SECURITIZATION PROGRAM
During each of the three month periods ended March 31, 1998 and 1997, the
Company completed one securitization transaction in which a total of $3.0
billion and $2.0 billion of student loans, respectively, 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 these
transactions, the Company recorded securitization gains of $60 million and $34
million, pre-tax, or as a percentage of the portfolio securitized 1.97 percent
and 1.70 percent for the three months ended March 31, 1998 and 1997,
respectively. The increase in the first quarter of 1998 gain when compared to
the first quarter of 1997 is mainly due to the negative effect of a $20 million
reserve for Offset Fees that was included in the first quarter of 1997 gain
calculation. This reserve was later reversed in the third quarter of 1997 when
the Company favorably resolved litigation over whether the Offset Fee applied to
securitized student loans. Without the reserve for Offset Fees, the 1997 first
quarter gain would have been 2.63 percent. The higher percentage gain before the
reserve for Offset Fees in the first quarter of 1997 versus the first quarter of
1998 is mainly due to a higher cost of funds and to the inclusion of lower
yielding consolidation loans in the portfolio of loans securitized in the first
quarter of 1998, offset by lower relative servicing costs. The increase in the
dollar amount of first quarter 1998 gain versus 1997 is also due to the
securitization of $1.0 billion more student loans. 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 $19 million and $8 million, for the three
months ended March 31, 1998 and 1997,
15
<PAGE> 16
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 $34 million and $18 million, for
the three months ended March 31, 1998 and 1997, respectively. The increase in
servicing and securitization income is mainly due to the increase in the average
balance of the Interest Residual from $252 million in the first quarter of 1997
to $480 million in the corresponding period in 1998, and to the increase in the
average balance of securitized student loans from $6.4 billion in the first
quarter of 1997 to $14.3 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 declined from 103
basis points for the three months ended March 31, 1997 to 84 basis points for
the three months ended March 31, 1998. Operating expenses are summarized in the
following tables:
<TABLE>
<CAPTION>
THREE MONTHS ENDED MARCH 31
-------------------------------------------------------------------
1998 1997
-------------------------------- --------------------------------
SERVICING SERVICING
AND AND
CORPORATE ACQUISITION TOTAL CORPORATE ACQUISITION TOTAL
--------- ----------- ------ --------- ----------- ------
<S> <C> <C> <C> <C> <C> <C>
Salaries and employee benefits............ $ 13 $ 36 $ 49 $ 16 $ 36 $ 52
Occupancy and equipment................... 3 15 18 4 15 19
Professional fees......................... 2 5 7 6 3 9
Office operations......................... 1 6 7 1 7 8
Other..................................... 4 1 5 4 2 6
---- ------ ------ ---- ------ ------
Total internal operating expenses......... 23 63 86 31 63 94
Third party servicing costs............... -- 5 5 -- 8 8
---- ------ ------ ---- ------ ------
Total operating expenses......... $ 23 $ 68 $ 91 $ 31 $ 71 $ 102
==== ====== ====== ==== ====== ======
Employees................................. 537 3,871 4,408 662 4,071 4,733
==== ====== ====== ==== ====== ======
</TABLE>
<TABLE>
<CAPTION>
THREE MONTHS
ENDED
MARCH 31, DECREASE
--------------- -----------------------
1998 1997 $ %
---- ---- -------- --------
<S> <C> <C> <C> <C>
Servicing costs............................................ $55 $57 $(2) (4)%
Acquisition costs.......................................... 13 14 (1) (1)
--- --- --- ---
Total servicing and acquisition costs............ $68 $71 $(3) (3)%
=== === === ===
</TABLE>
In the three months ended March 31, 1998, corporate operating expenses
decreased by $8 million over the corresponding year-ago period. The decrease in
operating expenses is principally due 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 operating expenses in
the first quarter of 1998 when compared to 1997 is also due to the absence of
privatization and proxy charges which totaled $4 million in the corresponding
period in 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. Servicing expenses decreased by $2 million over the
corresponding year-ago period at a time when the average number of borrowers
serviced remained relatively flat. This decrease was mainly due to operational
efficiencies and to the termination of business initiatives that did not fit the
new management's business strategies. When expressed as a percentage of the
managed student loan portfolio, servicing costs averaged 51 basis points and 57
basis points for the three months ended March 31, 1998 and 1997, respectively.
In addition to the decrease in servicing costs, higher average student loan
balances contributed to the lower servicing costs when expressed in this
percentage.
16
<PAGE> 17
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. During
the three months ended March 31, 1998, $1.7 billion of student loans were
originated and transferred to the Company's ExportSS system ($1.4 billion of
which were committed for sale to the Company) compared to $1.5 billion in the
corresponding period of the prior year. The outstanding portfolio of loans
serviced for ExportSS lenders and committed for sale to the Company totaled $4.1
billion at March 31, 1998, compared to $4.2 billion at December 31, 1997 and
$4.0 billion for the year ago quarter.
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 31.3 percent in the three
months ended March 31, 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 months ended March 31, 1998 and
1997 as the majority of the Company's business activities were conducted in the
GSE.
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 three months ended March 31, 1998, the Company used the proceeds
from student loan securitizations of $3 billion and repayments and claim
payments on student loans of $899 million to purchase student loans and
participations of $2.1 billion, to reduce total debt by $1.4 billion, to
repurchase $156 million of the Company's common stock and to purchase a net $262
million of investments.
Operating activities provided net cash inflows of $160 million in the three
months ended March 31, 1998, a decrease of $398 million from the net cash
inflows of $558 million in the corresponding period in the prior year. This
decrease was mainly attributable to the increase in other liabilities of $48
million in the first three months of 1998 versus an increase of $418 million in
1997 caused by a first quarter 1997 student loan participation purchase of
approximately $400 million for which payment was made in the second quarter of
1997.
During the three months ended March 31, 1998, the GSE issued $3.0 billion
of long-term notes to refund maturing and repurchased obligations. At March 31,
1998, the GSE had $13.0 billion of outstanding long-term debt issues, of which
$7.1 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.")
17
<PAGE> 18
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 March 31, 1998, the GSE's statutory
capital adequacy ratio, after the effect of the dividends to be paid in the
second 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 Sates, 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 March 31, 1998, there were
approximately $2 billion of PLUS/SLS student loans outstanding in the trusts
which have interest rates which reset annually based on the final auction of
52-week Treasury bill before each June 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.
In the table below, the Company's variable rate assets and liabilities are
categorized by reset date of the underlying index. Fixed rate assets and
liabilities are categorized based on their maturity dates. An interest rate gap
is the difference between volumes of assets and volumes of liabilities maturing
or repricing during
18
<PAGE> 19
specific future time intervals. The following gap analysis reflects
rate-sensitive positions at March 31, 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................................ $25,495 $ 2,230 $ -- $ -- $ -- $ --
Warehousing advances......................... 1,979 18 1 -- 1 18
Academic facilities financings............... 111 7 48 36 398 748
Cash and investments......................... 3,430 22 29 30 97 1,789
Other assets................................. 1 2 3 31 163 1,714
------- ------- ------- ------- ------- ------
Total assets........................ 31,016 2,279 81 97 659 4,269
------- ------- ------- ------- ------- ------
LIABILITIES AND STOCKHOLDERS' EQUITY
Short-term borrowings........................ 13,177 5,441 4,679 -- -- --
Long-term notes.............................. 2,900 711 -- 5,748 3,192 462
Other liabilities............................ -- -- -- -- -- 1,255
Minority interest in subsidiary.............. -- -- -- -- -- 214
Stockholders' equity......................... -- -- -- -- -- 622
------- ------- ------- ------- ------- ------
Total liabilities and stockholders'
equity............................ 16,077 6,152 4,679 5,748 3,192 2,553
------- ------- ------- ------- ------- ------
OFF-BALANCE SHEET FINANCIAL INSTRUMENTS
Interest rate swaps.......................... 14,356 (1,867) (4,747) (5,696) (3,099) 1,053
Impact of securitized student loans.......... 1,998 (1,998) -- -- -- --
------- ------- ------- ------- ------- ------
Total off-balance sheet financial
instruments....................... 16,354 (3,865) (4,747) (5,696) (3,099) 1,053
------- ------- ------- ------- ------- ------
Period gap................................... $(1,415) $ (8) $ 149 $ 45 $ 566 $ 663
======= ======= ======= ======= ======= ======
Cumulative gap............................... $(1,415) $(1,423) $(1,274) $(1,229) $ (663) $ --
======= ======= ======= ======= ======= ======
Ratio of interest-sensitive assets to
interest-sensitive liabilities............. 192.9% 37.0% 1.7% 1.1% 15.5% 553.0%
======= ======= ======= ======= ======= ======
Ratio of cumulative gap to total assets...... 3.7% 3.7% 3.3% 3.2% 1.7% --%
======= ======= ======= ======= ======= ======
</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. Based on this analysis an increase in rates of this
magnitude would reduce net income for the three months ended March 31, 1998 by
approximately $5 million or $.03 diluted earnings per share. The decline in net
income would primarily be due to the reduction in floor revenues earned net of
payments to floor revenue counterparties.
The fair value of the Company's interest sensitive assets and its long-term
debt and hedging instruments are also subject to change as a result of potential
changes in market rates and prices. A separate analysis was performed to
determine the effects of a 10 percent rise in market interest rates on the fair
value of the Company's financial instruments. The net effect of a 10 percent
rise in rates on fair values would be a decrease in the fair market value of
student loans, net of related funding, by approximately $50 million. The
decrease in student loan fair market value would be partially offset by an
increase in the fair market value of the Company's long-term debt and hedging
instruments by $4 million. The decrease in student loan market value would be
mainly due to the reduction in value of the floor revenue feature of the
underlying student loans. The net effect of a 10 percent rise in rates on the
non-student loan assets and liabilities and equity would be immaterial.
19
<PAGE> 20
These amounts have been determined after considering the impact of a
hypothetical shift in interest rates and the use of this methodology to quantify
the market risk of such instruments with no other changes in the Company's
financial structure. The analysis is limited because it does not take into
account the overall level of economic activity, other operating transactions and
other management actions that could be taken to further mitigate the Company's
exposure to risk.
AVERAGE TERMS TO MATURITY
The following table reflects the average terms to maturity for the
Company's earning assets and liabilities at March 31, 1998 (in years):
<TABLE>
<S> <C>
EARNING ASSETS
Student loans............................................... 7.0
Warehousing advances........................................ 4.0
Academic facilities financings.............................. 7.5
Cash and investments........................................ 6.0
---
Total earning assets.............................. 6.5
---
BORROWINGS
Short-term borrowings....................................... .5
Long-term borrowings........................................ 3.0
---
Total borrowings.................................. 1.5
---
</TABLE>
In the above table, Treasury receipts and variable rate asset-backed
securities, although generally liquid in nature, extend the weighted average
remaining term to maturity of cash and investments to 6.0 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 three months ended March 31, 1998, the Company repurchased 3.7
million shares of its common stock leaving 170 million shares outstanding at
March 31, 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 March 31, 1998, the Company had remaining authority to repurchase
up to an additional 15.5 million shares which covers both purchases of common
shares in the open market or effective purchases through equity forward
contracts. In the first quarter of 1998, the Company continued to supplement its
open market common stock purchases by entering into equity forward transactions
to purchase 7.5 million shares on a net cash or share settled basis. These
forwards settle at various times over the next three years at prices ranging
from $41 per share to $46 per share. As of March 31, 1998, the Company had
outstanding equity forward contracts to purchase 14.1 million shares of common
stock at prices ranging from $37 per share to $46 per share.
OTHER RELATED EVENTS AND INFORMATION
LEGISLATIVE DEVELOPMENTS
The Higher Education Act provides 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 February 25, 1998,
the U.S. Treasury Department released a report on "The Financial Viability of
the Government Guaranteed Student Loan Program." The report
20
<PAGE> 21
concludes that the new interest rate scheduled to take effect for student loans
on July 1, 1998 would reduce lenders' net return to below acceptable levels and
would create inefficiencies. The Treasury report also suggests that the current
T-bill based formula provides lenders with a pre-tax rate of return that exceeds
a "reasonable range of target rates." Management believes that the report's
costs and profitability assumptions underlying the rate of return analysis are
flawed. Concurrent with the release of the report, the Clinton Administration
called for a reinstatement of the 91-day T-bill index and an 80 basis point
reduction in the interest rate for both in school and repayment loans.
Management believes the administration's proposal, as with the currently
scheduled rate change, would result in uneconomic returns for lenders. Such a
reduction would have a material adverse impact on the Company and its earnings.
Management expects Congress to consider this issue in the Spring of 1998. House
and Senate committees have passed bills that would lower student loan rates by
80 basis points, and the interest rate earned by lenders by 30 basis points with
the government subsidizing the difference. It is uncertain whether Congress will
enact any changes to the law and whether such changes would be in line with
either the Administration's proposal or the House and Senate bills.
If the rate change scheduled for student loans made on or after July 1,
1998, or any legislative "fix" that results in uneconomic returns for private
lenders, becomes effective, the Company believes that many lenders may
discontinue funding FFELP loans. The Higher Education Act provides that the GSE
under certain circumstances shall act as a lender of last resort to make FFELP
loans when eligible borrowers are otherwise unable to obtain such loans. If the
Secretary of Education determines that the GSE has substantially failed to
fulfill its lender of last resort obligations, the offset fee paid by the GSE
could be increased from 30 basis points to 100 basis points. In 1994, the DOE
and the GSE entered into an agreement pursuant to which the GSE agreed to fund
up to $200 million of such loans (the "1994 Agreement"). In a letter to the
Company dated April 23, 1998, the DOE stated that it "reserved the right" to
require the GSE to increase its funding commitment for lender of last resort
loans beyond the GSE's existing $200 million commitment should "circumstances
change and to take whatever action against the GSE is appropriate if it fails to
comply with a formal request to make lender of last resort loans in excess of
$200 million." There can be no assurance that the Company would be successful in
limiting its funding of lender of last resort loans to fund to the terms of the
1994 Agreement. The Company believes that under the foregoing circumstances it
would incur a loss on lender of last resort loans. Depending upon the magnitude
and the terms of the loans, any such result could materially adversely affect
the Company's earnings. The Company believes that, depending on loan terms, the
amount of the funding request and other structural considerations, the
imposition of such an increased funding requirement could be beyond the scope of
the Higher Education Act's lender of last resort provisions and that the Company
would have legal defenses to any such imposition.
ADMINISTRATION'S FY 1999 BUDGET PROPOSAL
On February 3, 1998, President Clinton submitted his Fiscal Year 1999
budget proposal to Congress. As in past years, the President has included a
number of provisions designed to reduce the costs of the FFELP program and to
provide savings necessary to offset the costs of reducing borrower paid loan
origination fees, which he proposed to eliminate completely for Subsidized
Stafford loans by July 1, 2003. The President proposed to provide FFELP
borrowers extended repayment options that are available in the FDSLP, and to
allow for a multi-year promissory note for both the FFELP and FDSLP to
streamline the application process for serial borrowers. Of specific interest to
lenders are proposals to reset the interest rate for special allowance payments
on new loans on an annual basis, versus the current weekly reset, require
lenders to limit interest capitalization on Unsubsidized Stafford Loans to the
beginning of repayment (versus current policy which permits capitalization to
occur as frequently as quarterly while the borrower is in school) and to require
FFELP lenders that offer benefits involving the partial or complete payment of
borrower origination fees to offer those benefits to all borrowers they serve.
Special allowance payments made on loans funded via tax-exempt obligations would
also be reduced. In the Higher Education Act reauthorization proposals submitted
subsequent to submission of the budget, the Administration proposed to reduce
the interest rate on Stafford loans while the borrower is in school to the
10-year Treasury Note rate without any spread to that rate. The President called
again for a total restructuring of the guaranty agencies, including recalling
more than $1 billion in remaining guarantor reserve funds. The President's plan
for guaranty agencies calls for converting
21
<PAGE> 22
them to a "fee for service" model, reducing amounts they currently retain on
amounts collected from defaulted borrowers from 27 percent to 18.5 percent and
replacing payments for pre-claims assistance with a performance-based formula.
All these proposals may be considered by the Congress as it deliberates on this
budget and addresses the reauthorization of the Higher Education Act.
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 does not believe that the costs of its internal program will be material
to any single year.
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.
22
<PAGE> 23
PART II. OTHER INFORMATION
ITEM 1. LEGAL PROCEEDINGS.
Nothing to report.
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.
Nothing to report.
ITEM 5. OTHER INFORMATION.
Nothing to report.
ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K
(a) Exhibits
27 Financial Data Schedule
(b) Reports on Form 8-K
No reports on Form 8-K were filed with the Securities and Exchange
Commission during the Quarter ended March 31, 1998.
23
<PAGE> 24
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: May 14, 1998
24
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<S> <C>
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<FISCAL-YEAR-END> DEC-31-1998
<PERIOD-START> JAN-01-1998
<PERIOD-END> MAR-31-1998
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0
0
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