================================================================================
SECURITIES AND EXCHANGE COMMISSION
Washington, DC 20549
FORM 10-K
(Mark One)
|X| Annual report pursuant to Section 13 or 15(d) of the Securities
Exchange Act of 1934
For the fiscal year ended December 31, 1997 or
|_| Transition report pursuant to Section 13 or 15(d) of the
Securities Exchange Act of 1934
For the transition period from _________________ to __________________
Commission file numbers 001-13251
SLM HOLDING CORPORATION
------------------------------------------------------
(Exact Name of Registrant as Specified in Its Charter)
Delaware 52-2013874
------------------------------- -------------------
(State of Other Jurisdiction of (I.R.S. Employer
Incorporation or Organization) Identification No.)
11600 Sallie Mae Drive, Reston, Virginia 20193
---------------------------------------- ----------
(Address of Principal Executive Offices) (Zip Code)
(703) 810 3000
----------------------------------------------------
(Registrant's Telephone Number, Including Area Code)
Securities registered pursuant to Section 12(b) of the Act: Common Stock, par
value $.20 per share Securities registered pursuant to Section 12(g) of the Act:
None
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 ___
The aggregate market value of voting stock held by non-affiliates of the
registrant as of February 28, 1998 was approximately $7,052,332,153 (based on
closing sale price of $41 5/16 per share as reported for the New York Stock
Exchange -- Composite Transactions). On that date there were 171,264,359 shares
of Common Stock outstanding.
DOCUMENTS INCORPORATED BY REFERENCE
Portions of the registrant's 1997 Annual Report to Shareholders are
incorporated by reference into Part II of this Report and portions of the Proxy
Statement relating to the registrant's Annual Meeting of Shareholders scheduled
to be held May 21, 1998 are incorporated by reference into Part III of this
Report.
Indicate by check mark if disclosure of delinquent filers pursuant to Item
405 of Regulation S-K is not contained herein, and will not be contained, to the
best of registrant's knowledge, in definitive proxy or information statements
incorporated by reference in Part III of this Form 10-K or any amendment to this
Form 10-K. / /
================================================================================
1
<PAGE>
This Report 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 Registrant'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 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.
PART I.
Item 1. Business
Industry data on the Federal Family Education Loan Program (the "FFELP") and
the Federal Direct Student Loan Program (the "FDSLP") contained in this report
are based on sources that the Company believes to be reliable and to represent
the best available information for these purposes, including published and
unpublished U.S. Department of Education ("DOE") data and industry publications.
GENERAL
SLM Holding Corporation, a Delaware Corporation (the "Company"), provides a
wide range of financial services, processing capabilities and information
technology to meet the needs of educational institutions, lenders, students and
guarantee agencies. The Company was formed in 1997 in connection with the
reorganization (the "Reorganization") of the Student Loan Marketing Association,
a government-sponsored enterprise (the "GSE"), pursuant to the Student Loan
Marketing Association Reorganization Act of 1996 ( the "Privatization Act"). The
Privatization Act required the GSE to propose to shareholders a plan of
reorganization under which their share ownership would convert to an equivalent
share ownership in a state-chartered holding company that would own all of the
stock of the GSE. Pursuant to the Privatization Act, the Reorganization was
approved by the GSE's shareholders on July 31, 1997 and effected on August 7,
1997. The Privatization Act requires the GSE to transfer its business to the
Company and dissolve on or before September 30, 2008. During the period prior to
the dissolution of the GSE (the "Wind-Down Period"), the GSE is subject to
various limitations on its business and activities. See "-- Operations During
the Wind-Down Period" and "Regulation -- The Privatization Act."
Chartered by an act of Congress in 1972, the GSE's stated mission was to
enhance access to post-secondary education by providing a national secondary
market and financing for guaranteed student loans. As of December 31, 1997, the
Company's managed portfolio of student loans totaled approximately $43.6 billion
(including loans owned, loans securitized and loan participations). The Company
also had commitments to purchase $17.5 billion of additional student loans or
participations therein as of December 31, 1997. While the Company continues to
be the leading purchaser of student loans, its business has expanded over its
first quarter of a century, reflecting changes in both the education sector and
the financial markets.
2
<PAGE>
Primarily a wholesale provider of credit and a servicer of student loans,
the Company serves a diverse range of clients including over 900 financial and
educational institutions and state agencies. Through its six regional loan
servicing centers, the Company processes student loans for approximately five
million borrowers and is recognized as the nation's pre-eminent servicer of
student loans. The Company also provides and arranges infrastructure finance for
colleges and universities. See "-- Specialized Financial Services -- Academic
Facilities Financings and Student Loan Revenue Bonds."
The Company believes that it has successfully fulfilled the GSE's original
mandate by fostering a thriving, competitive student loan market and has
maintained its leadership position in the education finance industry due to its
focus on customer relationships, value-added products and services, superior
loan servicing capabilities and a sound financial management strategy. In
recognition of the increasingly important role that college and university
administrators play in the student loan process, the Company has adopted a
school-based growth strategy. The Company's core marketing strategy is to
provide schools and their students with simple, flexible and cost-effective
products and services so that schools will choose to work with the Company. This
strategy, combined with superior servicing and technology capabilities, has
helped the Company to build valuable partnerships with schools, lenders,
guarantee agencies and others.
INDUSTRY OVERVIEW
The student loan industry provides affordable financing to students and
their families to fund post-secondary education. The large majority of student
loans are made under federally sponsored programs, although many students and
parents secure education credit through private student loan programs. The
federally sponsored student loans programs are highly regulated. Under programs
sponsored by the federal government, banks and other lenders that satisfy
statutory eligibility requirements can make student loans at below-market rates
due to subsidies and guarantees. The largest student loan program, formerly
called the Guaranteed Student Loan Program and now known as the FFELP, was
created in 1965 to ensure low-cost access by families to a full range of
post-secondary educational institutions. In 1972, to encourage further bank
participation in the Guaranteed Student Loan Program, Congress established the
GSE as a for-profit, stockholder-owned national secondary market for student
loans. The FFELP industry currently includes a network of approximately 4,813
originators and 6,300 educational institutions and is collectively guaranteed
and administered by 37 state-sponsored or non-profit guarantee agencies under
contract with the DOE. In addition to the Company, a number of non-profit
entities, banks and other financial intermediaries operate as secondary markets
for student loans. The Company believes that lender participation in the FFELP
is relatively concentrated, with an estimated 93 percent of outstanding loans
held by the top 100 participants, including approximately one-third owned or
managed by the Company as of September 30, 1996. The Higher Education Act is
reauthorized by Congress approximately every six years. The next reauthorization
is required in 1998 and the FFELP is subject to change at that time. The
provisions of the FFELP are also subject to revision from time to time by
Congress.
3
<PAGE>
Demand for student loans has risen substantially over the last several
years. Higher education tuition cost and fee increases continue to exceed the
inflation rate. Over half of all full-time college students today depend on some
form of borrowing, compared to just over 35 percent in 1985. In addition,
federal legislation enacted in late 1992 expanded loan limits and borrower
eligibility. All of these factors contributed to an increase of over 50 percent
in annual federally guaranteed student loan volume ($24 billion in FY 1994
(including FDSLP volume) from $15 billion in FY 1992). Estimated future
increases in tuition costs and college enrollments are expected to prompt
further growth in the student loan market.
In 1993, Congress expanded a previously established pilot program into the
FDSLP, which is administered by the DOE. Established as an alternative to the
private sector-based FFELP, the FDSLP accounted for approximately one-third of
all new federally sponsored student loans issued in academic year 1996-97. Under
the FDSLP, the federal government contracts with third parties for loan
administration and collections services while financing its lending activity
through U.S. Treasury borrowings.
PRODUCTS AND SERVICES
Loan Purchases. The Company's student loan purchases primarily involve two
federally sponsored programs. The Company principally purchases Stafford loans,
PLUS loans and SLS loans originated under the FFELP, all of which are insured by
state-related or non-profit guarantee agencies and are reinsured by the DOE. The
Company also purchases student loans originated under the Health Education
Assistance Loan program ("HEAL") that are insured directly by the United States
Department of Health and Human Services. As of December 31, 1997, the Company's
managed portfolio of student loans totaled $43.6 billion, including $39.4
billion of FFELP loans (including loans owned, loans securitized and loan
participations) and $2.7 billion of HEAL loans.
In order to further meet the educational credit needs of students, the
Company in 1996 sponsored the creation of the private Signature Education Loansm
program, with numerous lenders participating nationwide. Under this program, the
Company performs certain origination services on behalf of the participating
lenders. The Company insures these loans through its HEMAR Insurance Corporation
of America ("HICA") subsidiary. Most of the HICA-insured loans purchased by the
Company are part of "bundled" loan programs that include FFELP loans. The
Company also purchases loans originated under various other HICA-insured loan
programs. As of December 31, 1997, the Company owned approximately $1.5 billion
of such privately insured education loans, including HICA-insured Signature
Education Loans/sm/.
The Company purchases student loans primarily from commercial banks. The
Company also purchases student loans from other eligible FFELP lenders,
including savings and loan associations, mutual savings banks, credit unions,
certain pension funds and insurance companies, educational institutions and
state and private non-profit loan originating and secondary market agencies.
4
<PAGE>
Most lenders using the secondary market hold loans while borrowers are in
school and sell loans shortly before conversion to repayment status, when
servicing costs increase significantly. Traditionally, the Company has purchased
most of its loans just before their conversion to repayment status, although the
Company also buys "in-school" loans and loans in repayment. The Company
purchases loans primarily through commitment contracts, but also makes "spot"
purchases. Approximately two-thirds of the Company's new loan purchases were
made pursuant to purchase commitment contracts in 1996 and 1997. The Company
enters into commitment contracts with lenders to purchase loans up to a
specified aggregate principal amount over the term of the contract, which is
usually two to three years. Under the commitment contracts, lenders have the
right, and in most cases the obligation, to sell to the Company the loans they
own over a specified period of time at a purchase price that is based on certain
loan characteristics.
In conjunction with commitment contracts, the Company frequently provides
selling institutions with operational support in the form of PortSS(R), an
automated loan administration system for the lender's use at its own offices
before loan sale, or in the form of loan origination and interim servicing
provided through one of the Company's loan servicing centers (ExportSS(R)). In
1996 and 1997, more than two-thirds of the Company's purchase commitment volume
came from users of PortSS(R) and ExportSS(R). The Company also offers commitment
clients the ability to originate loans and then transfer them to the Company for
servicing (TransportSSsm). PortSS(R), ExportSS(R) and TransportSSsm provide the
Company and the lender assurance that loans will be efficiently administered by
the Company and that borrowers will have access to the Company's repayment
options and benefits. The growth in volume generated by PortSS, ExportSS and
TransportSS demonstrates the importance of the Company's investment in these
systems in past years.
In a spot purchase, the Company competes with other secondary market
participants to purchase a portfolio of eligible loans from a selling holder
when such holder decides to offer its loans for sale. The Company made
approximately one-third of its purchases of educational loans through spot
purchases in 1996 and 1997. In general, spot purchase volume is more costly than
volume purchased under commitment contracts.
In the past, the Company also has offered eligible borrowers a program for
consolidation of eligible insured loans into a single new insured loan with a
term of 10 to 30 years. The Higher Education Act of 1965, as amended (the
"Higher Education Act"), provides that borrowers may consolidate with one of
their loan holders or may consolidate with a separate lender if they cannot
obtain a consolidation loan with an income-sensitive repayment plan that they
deem acceptable from their loan holders. As of December 31, 1997, the Company
owned approximately $9.1 billion of such consolidation loans, known as SMARTsm
Loan Accounts. Following enactment of the Emergency Student Loan Consolidation
Act 1997, which made significant changes to the FFELP loan consolidation
program, 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 borrows 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.
5
<PAGE>
Borrower Benefits and Program Technology Support. To create customer
preferences and compete more effectively in the student loan marketplace, the
Company has developed a comprehensive set of loan programs and services for
borrowers, including numerous loan restructuring and repayment options and
programs that encourage and reward good repayment habits. The Company also
provides counseling and information programs (including a world wide web site)
that help borrowers and reinforce relationships with college and university
customers and lender partners.
Under the Company's Great Rewards(R) program, certain FFELP borrowers who
make their first 48 monthly payments on time receive a two percentage-point
interest rate reduction for the remaining term of the loan. Other programs
credit students an amount equal to part of the loan origination fees they pay
and modestly reduce interest costs for use of automatic debit accounts. The
Company also provides financial aid administrators at colleges and universities
with innovative products and services that simplify the lending process,
including electronic funds transfer services and loan information and management
software that enables college application data to be transferred electronically
between program participants.
Joint Venture with The Chase Manhattan Bank. In the third quarter of 1996,
the Company restructured its business relationship with The Chase Manhattan Bank
("Chase"), which, with an estimated market share of 8.0 percent, is the largest
originator of student loans under the FFELP. Under the restructured arrangement,
the Company and Chase Education Holdings, Inc., a wholly owned subsidiary of
Chase, are equal owners of Education First Finance LLC and Education First
Marketing LLC (collectively, the "Joint Venture"). Education First Marketing LLC
is responsible for marketing education loans to be made by Chase and its
affiliates to schools and borrowers. Shortly after such loans are made by Chase
and its affiliates, the loans are purchased on behalf of Education First Finance
LLC by the Chase/Sallie Mae Education Loan Trust (the "Trust"), which presently
finances these purchases through the sale of loan participations to the Company
and Chase. As of December 31, 1997, the Trust owned approximately $3.9 billion
of federally insured education loans. Substantially all loans owned by the Trust
are serviced on behalf of the Trust by Sallie Mae Servicing Corporation, the
Company's wholly owned servicing subsidiary ("SMSC"), on a fee-for-service
basis.
SERVICING
In 1980, the Company began servicing its own portfolios in order to better
control costs and manage risks. In late 1995, in connection with the
commencement of its securitization program, the Company transferred its
servicing operations to SMSC. Through SMSC, the Company is now the nation's
largest FFELP loan servicer, and management believes that the Company is
recognized as the premier service quality and technology provider in the student
loan industry. The Company believes that its processing capability and service
excellence are integral to its school-based growth strategy. As of December 31,
1997, the Company serviced approximately $49.7 billion of loans, including
approximately $27.3 billion of loans owned by the GSE and $14.1 billion owned by
nine securitization trusts sponsored by the GSE, $4.5 billion of loans currently
owned by ExportSS(R) customers and $3.8 billion owned by the Chase Joint Venture
Trust.
6
<PAGE>
The Company currently has six loan servicing centers, located in the states
of Florida, Kansas, Massachusetts, Pennsylvania, Texas and Washington. This
geographic coverage, together with total systems integration among centers,
facilitates operations and customer service.
The DOE and the various guarantee agencies prescribe rules and regulations
that govern the servicing of federally insured student loans. The Company's
origination and servicing systems, internal procedures and highly trained staff
support compliance with these regulations, are designed to promote asset
integrity and provide superior service to borrowers. The Company uses
state-of-the-art imaging technology to further increase servicing productivity
and capacity.
SPECIALIZED FINANCIAL SERVICES
The Company, principally through the GSE, engages in a number of specialty
financial services related to higher education credit, including collateralized
financing of FFELP and other education loan portfolios (warehousing advances),
credit support for student loan revenue bonds, portfolio investments in student
loan revenue and facilities bonds, underwritings of academic facilities bonds
and surety bond support for non-federally insured student loans.
Warehousing Advances. Warehousing advances are secured loans to financial
and educational institutions to fund FFELP and HEAL loans and other forms of
education-related credit. As of December 31, 1997, the Company held
approximately $1.9 billion of warehouse loans with an average term of 4.5 years.
These loans remain assets of the GSE, but the GSE can extend new warehousing
advances during the Wind-Down Period only pursuant to financing commitments in
place as of August 7, 1997. As of December 31, 1997, the GSE had in place
approximately $3.4 billion of such commitments. The Company does not expect that
its non-GSE affiliates will continue this line of business.
Academic Facilities Financings and Student Loan Revenue Bonds. Since 1987,
the GSE has provided facilities financing and commitments for future facilities
financing to approximately 250 educational institutions. Certain of these
financings are secured either by a mortgage on the underlying facility or by
other collateral. The GSE also invests in student loan revenue obligations. In
late 1995, the GSE established a broker-dealer subsidiary, Education Securities,
Inc. ("ESI"), which manages the GSE's municipal bond portfolio and is developing
an array of specialized underwriting and financial advisory services for the
education sector. The Company anticipates that it will reduce its investment
activity in academic facilities and student loan revenue bond products during
the Wind-Down Period. As of December 31, 1997, these portfolios totaled $1.4
billion and $197 million, respectively.
Letters of Credit. In the past, the GSE has offered letters of credit to
guarantee issues of state and non-profit agency student loan revenue bonds.
Currently outstanding letters of credit have original terms of up to 17 years.
As of December 31, 1997, the GSE had approximately $4.8 billion of such
commitments outstanding. During the Wind-Down Period, letter of credit activity
by the GSE will be limited to guarantee commitments in place as of August 7,
1997.
7
<PAGE>
Private Student Loan Insurance. In 1995, the GSE acquired HICA, a South
Dakota stock insurance company engaged exclusively in insuring lenders against
credit loss on their education-related, non-federally insured loans to students
attending post-secondary educational institutions. Loans owned by the GSE are a
significant portion of HICA's insured loan portfolio. See "-- Products and
Services -- Loan Purchases."
FINANCING/SECURITIZATION
The GSE obtains funds for its operations primarily from the sale of debt
securities in the domestic and overseas capital markets, and through public
offerings and private placements of U.S. dollar-denominated and foreign
currency-denominated debt of varying maturities and interest rate
characteristics. GSE debt securities are currently rated at the highest credit
rating level by Moody's Investors Service and Standard & Poor's. The Company
expects that the credit rating on any debt securities of the Company will be
lower than that of the GSE's debt securities.
The GSE uses interest rate and currency exchange agreements (collateralized
where appropriate), U.S. Treasury securities, interest rate futures contracts
and other hedging techniques to reduce its exposure to interest rate and
currency fluctuations arising out of its financing activities and to match the
characteristics of its assets and liabilities. The GSE has also issued preferred
stock to obtain funds, including preferred stock held by the Company. Under the
Privatization Act, the GSE may issue debt with maturity dates through September
30, 2008 to fund student loan and other permitted asset purchases. Upon the
GSE's dissolution pursuant to the Privatization Act, the GSE must transfer any
remaining GSE obligations into a defeasance trust for the benefit of the holders
of such obligations together 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 on the
deposited obligations. If the GSE has insufficient assets to fully fund such GSE
debt, the Company must transfer sufficient assets to the trust to account for
this shortfall. The Privatization Act requires that upon the dissolution of the
GSE on or before September 30, 2008, the GSE shall repurchase or redeem or make
proper provisions for repurchase or redemption of the GSE's outstanding
preferred stock.
Since late 1995 the Company has further diversified its funding sources,
independent of its GSE borrower status, by securitizing a portion of its student
loan assets. Securitization is an off-balance sheet funding mechanism that the
Company effects through the sale of portfolios of student loans by the GSE to
SLM Funding Corporation, a bankruptcy-remote, special-purpose, wholly owned
subsidiary of the GSE, which in turn sells the student loans to an independent
owner trust that issues securities to fund the purchase of the student loans.
The securitization trusts typically issue several classes of debt securities
rated at the highest investment grade level. The GSE has not guaranteed such
debt securities and has no obligation to ensure their repayment. Because the
securities issued by the trusts through securitization are not GSE securities,
the Company has been and in the future expects to be able to fund its student
loans to term through securitization, even for those assets with final
maturities that extend beyond the Wind-Down Period. The DOE has concurred with
the Company's position that a 30 basis point per annum offset fee imposed on
loans held by the GSE does not apply to securitized loans. See "Legal
Proceedings." The Company anticipates that securitization will remain a primary
student loan funding mechanism for the Company when it begins to conduct student
loan purchase activity through a non-GSE subsidiary. In addition to the
foregoing, the Company obtains funding through a bank line of credit.
8
<PAGE>
OPERATIONS DURING THE WIND-DOWN PERIOD
Privatization enables the Company to commence new business activities
without regard to restrictions in the GSE's charter. The stock of certain GSE
subsidiaries, including SMSC, HICA and ESI, has been transferred to the Company.
Accordingly, the business activities of these subsidiaries are no longer subject
to restrictions contained in the GSE's charter. In addition, the GSE's employees
have been transferred to Sallie Mae, Inc. (the "Management Company").
During the Wind-Down Period, the GSE generally is prohibited from conducting
new business except in connection with student loan purchases through September
30, 2007 or with other outstanding contractual commitments, and from issuing new
debt obligations that mature beyond September 30, 2008. The GSE has transferred
personnel and certain assets to the Company or other non-GSE affiliates. Student
loans, warehousing advances and other program-related or financial assets (such
as portfolio investments, letters of credit, swap agreements and forward
purchase commitments) have not been and are generally not expected to be
transferred. Neither the Company nor any of its non-GSE affiliates may make
secondary market purchases of FFELP loans for so long as the GSE is actively
acquiring insured student loans. During the Wind-Down Period, GSE operations
will be managed pursuant to arm's-length service agreements between the GSE and
one or more of its non-GSE affiliates. The Privatization Act also provides
certain restrictions on intercompany relations between the GSE and its
affiliates during the Wind-Down Period.
COMPETITION
The Company is the major financial intermediary for higher education credit,
but is subject to competition on a national basis from several large commercial
banks and non-profit secondary market agencies and on a state or local basis
from smaller banks and state-based secondary markets. In addition, the
availability of securitization for student loan assets has created new
competitive pressures for traditional secondary market purchasers. Based on the
most recent information from the DOE and management estimates, at the end of
fiscal year 1995, the GSE's share (in dollars) of outstanding FFELP loans was 33
percent, while banks and other financial institutions held 48 percent and state
secondary market participants held 19 percent. Although Congress establishes
loan limits and interest rates on student loans, management believes that market
share in the FFELP industry is increasingly a function of school and student
desire for borrower benefits and superior customer service. FFELP providers have
been aggressively competing on the basis of enhanced products and services in
recent years.
9
<PAGE>
Because the GSE historically has been confined by statute to secondary
market activity, it has depended mainly on its network of lender partners and
its school-based strategy for new loan volume. Because the Company is not
subject to the same limitations as the GSE, it plans to heighten its visibility
with consumers to favorably position itself for future new product offerings.
The Company also faces competition for new and existing loan volume from the
FDSLP. Based on current DOE projections, the Company estimates that total
student loan originations for the academic years 1994-95, 1995-96 and 1996-97
were $22.2 billion, $24.7 billion and $27.4 billion, respectively, of which
FDSLP originations represented approximately 7 percent, 31 percent and 32
percent, respectively. The DOE projects that FDSLP originations will represent
35 percent of total student loan originations in the 1997-98 academic year.
The DOE has also begun to offer FFELP borrowers the opportunity to
refinance or consolidate FFELP loans into FDSLP loans upon certification that
the holder of their FFELP loans does not offer an income-sensitive payment plan
acceptable to the borrower. As of December 31, 1997, approximately $608 million
of the GSE's FFELP loans had been consolidated into the FDSLP. In early 1995,
the Company began offering an income-sensitive payment plan. The FDSLP, however,
also provides an income-contingent option not available under the FFELP program
that may be more attractive to certain borrowers. Under this repayment option,
the government will ultimately forgive student loan debt after 25 years.
Effective November 13, 1997, the Company suspended its loan consolidation
program. See "-- Products and Services -- Loan Purchases." It is not certain
what action, if any, Congress will take with regard to the FDSLP in connection
with the anticipated reauthorization of the Higher Education Act. Based on
public statements by members of Congress and the Administration, however,
management believes that the FFELP and the FDSLP will continue to coexist as
competing programs for the foreseeable future.
REGULATION
As a government-sponsored enterprise, the GSE is organized under federal law
and its operations are restricted by its government charter. Although
privatization permits the Company's private activities to expand through non-GSE
subsidiaries, the GSE's operations continue to be subject to broad federal
regulation, during the Wind-Down Period.
The Privatization Act
The Privatization Act established the basic framework for the Reorganization
and imposes certain restrictions on the operations of the Company and its
subsidiaries during the Wind-Down Period. The Privatization Act amends the GSE's
charter to require certain enhanced regulatory oversight of the GSE to ensure
its financial safety and soundness. See "-- GSE Regulation."
Reorganization. The Privatization Act required the GSE to propose to
shareholders a plan of reorganization under which their share ownership in the
GSE would be automatically converted to an equivalent share ownership in a
state-chartered holding company that would own all of the common stock of the
GSE. On July 31, 1997, the GSE's shareholders approved the Reorganization in
fulfillment of this provision. The Privatization Act requires that the GSE be
liquidated on or before September 30, 2008, upon which its federal charter will
be rescinded. During the Wind-Down Period, the Company will remain a passive
entity that supports the operations of the GSE and its other non-GSE
subsidiaries, and any new business activities will be conducted through such
subsidiaries.
10
<PAGE>
The Privatization Act requires all personnel and certain assets to be
transferred to non-GSE subsidiaries of the Company in connection with the
Reorganization, including the transfer of the GSE's interest in certain
subsidiaries. The GSE's student loans and related contracts, warehousing
advances and other program-related or financial assets (such as portfolio
investments, letters of credit, swap agreements and forward purchase
commitments) and any non-material assets that the GSE Board determines to be
necessary for or appropriate to continued GSE operations, may be retained by the
GSE. Employees of the GSE were transferred to the Management Company at the
effective time of the Reorganization. Employees who were employed by non-GSE
subsidiaries of the GSE before the Reorganization continue to be employed by
such subsidiaries.
During the Wind-Down Period, the GSE is restricted in the new business
activities it may undertake. The GSE may continue to purchase student loans only
through September 30, 2007, and warehousing advance, letter of credit and
standby bond purchase activity by the GSE is limited to takedowns on contractual
financing and guarantee commitments in place at the effective time of the
Reorganization. In addition, the Company, and its non-GSE subsidiaries may not
make secondary market purchases of FFELP loans for so long as the GSE is
actively acquiring insured student loans.
In certain circumstances, the GSE will continue to serve as a lender of last
resort and will provide secondary market support for the FFELP upon the request
of the Secretary of Education. If and to the extent that the GSE performs such
functions, however, it will not be required to pay a statutorily imposed 30
basis point offset fee on such loans. The GSE may transfer assets and declare
dividends, from time to time, if it maintains a minimum capital ratio of at
least 2 percent until the year 2000. After that time, charter amendments
effected by the Privatization Act require that the GSE maintain a minimum
capital ratio of at least 2.25 percent. In the event that the GSE does not
maintain the required minimum capital ratio, the Company is required to
supplement the GSE's capital to achieve such minimum capital ratio.
The GSE's debt obligations, including debt obligations that were outstanding
at the time of the Reorganization, continue to be outstanding obligations of the
GSE and will not be transferred to any other entity (except in connection with
the defeasance trust described below). See "-- GSE Dissolution After
Reorganization." The Privatization Act provides that the Reorganization does not
modify the attributes accorded to the debt obligations of the GSE by the GSE's
charter. During the Wind-Down Period, the GSE can continue to issue debt in the
government agency market to finance student loans and other permissible asset
purchases. The maturity date of such issuances, however, may not extend beyond
September 30, 2008, the GSE's final dissolution date. This restriction does not
apply to debt issued to finance any lender of last resort or secondary market
purchase activity requested by the Secretary of Education. The Privatization Act
is clear that the Reorganization (and the subsequent transfer of any remaining
GSE debt to the defeasance trust described below) will not modify the legal
status of any GSE debt obligations, whether such obligations existed at the time
of Reorganization or are subsequently issued.
11
<PAGE>
Oversight Authority. During the Wind-Down Period, the Secretary of the
Treasury has extended oversight authority to monitor the activities of the GSE
and, in certain cases, the Company and its non-GSE subsidiaries to the extent
that the activities of such entities are reasonably likely to have a material
impact on the financial condition of the GSE. The U.S. Department of the
Treasury has established the Office of Sallie Mae Oversight to perform these
functions. During this period, the Secretary of the Treasury may require that
the GSE submit periodic reports regarding any potentially material financial
risk of its associated persons and its procedures for monitoring and controlling
such risk. The Company is expressly prohibited from transferring ownership of
the GSE or causing the GSE to file bankruptcy without the approval of the
Secretary of the Treasury and the Secretary of Education. Each of the Secretary
of Education and the Secretary of the Treasury has express authority to request
that the Attorney General bring an action, or may bring an action under the
direction and control of the Attorney General, in the United States District
Court for the District of Columbia, for the enforcement of any provision of the
GSE's safety and soundness requirements or the requirements of the Privatization
Act in general.
Restrictions on Intercompany Relations. The Privatization Act restricts
intercompany relations between the GSE and its affiliates during the Wind-Down
Period. Specified corporate formalities must be followed to ensure that the
separate corporate identities of the GSE and its affiliates are maintained.
Specifically, the Privatization Act provides that the GSE must not extend credit
to, nor guarantee any debt obligations of, the Company or its subsidiaries. The
Privatization Act also provides that (i) the funds and assets of the GSE must at
all times be maintained separately from the funds and assets of the Company and
its subsidiaries, (ii) the GSE must maintain books and records that clearly
reflect the assets and liabilities of the GSE, separate from the assets and
liabilities of the Company or its subsidiaries, (iii) the GSE must maintain a
corporate office that is physically separate from any office of the Company and
its subsidiaries, (iv) no director of the GSE who is appointed by the President
may serve as a director of the Company and (v) at least one officer of the GSE
must be an officer solely of the GSE.
Furthermore, the Privatization Act mandates that transactions between the
GSE and the Company, including any loan servicing arrangements, shall be on
terms no less favorable to the GSE than the GSE could obtain from an unrelated
third party, and any amounts collected on behalf of the GSE by the Company
pursuant to a servicing contract or other arrangement between the GSE and the
Company shall be immediately deposited by the Company to an account under the
sole control of the GSE.
Limitations on Company Activities. During the Wind-Down Period, the Company
must remain a passive entity that holds the stock of its subsidiaries and
provides funding and management support to such subsidiaries. The Privatization
Act contemplates that until the GSE is dissolved, the Company's business
activities will be conducted through subsidiaries. However, the Privatization
Act extends to the Company and its subsidiaries the GSE's "eligible lender"
status for loan consolidation and secondary market purchases. See "Business."
12
<PAGE>
The Company and its non-GSE subsidiaries generally may not begin to make
secondary market purchases of FFELP student loans for so long as the GSE is
actively acquiring insured student loans. Subject to the foregoing, the Company
may elect, at any time, to transfer new student loan purchase activity from the
GSE to one of its non-GSE subsidiaries. Under the Higher Education Act, loans
acquired after August 10, 1993 and held by the GSE are subject to a 30 basis
point per annum "offset fee." The offset fee does not apply to loans held or
securitized by the Company or its non-GSE subsidiaries.
Although the GSE may not finance the activities of the Company's non-GSE
subsidiaries, it may, subject to its minimum capital requirements, dividend
retained earnings and surplus capital to the Company, which in turn may use such
amounts to support its non-GSE subsidiaries. The GSE's charter requires that the
GSE maintain a minimum capital ratio of at least 2 percent until the year 2000,
and charter amendments effected by the Privatization Act require that the GSE
maintain a minimum capital ratio of at least 2.25 percent thereafter. In the
event that the GSE's capital falls below the applicable required level, the
Company is required to supplement the GSE's capital to achieve such required
level. The Privatization Act further directs that, unless and until distributed
as dividends by the GSE, under no circumstances shall the assets of the GSE be
available or used to pay claims or debts of or incurred by the Company.
In exchange for the payment of $5 million to the District of Columbia
Financial Responsibility and Management Assistance Authority (the "Control
Board"), the Company and its other subsidiaries may continue to use the name
"Sallie Mae," but not the name "Student Loan Marketing Association," as part of
their legal names or as a trademark or service mark. Interim disclosure
requirements in connection with securities offerings and promotional materials
are required to avoid marketplace confusion regarding the separateness of the
GSE and its affiliated entities. During the Wind-Down Period and until one year
after repayment of all outstanding GSE debt, the "Sallie Mae" name may not be
used by any Company unit that issues debt obligations or other securities to any
person or entity other than the Company or its subsidiaries. In addition, the
Privatization Act required the Company to issue certain warrants to purchase the
Company's Common Stock (the "Warrants") to the Control Board. These provisions
of the Privatization Act were part of the terms negotiated with the
Administration and Congress in conjunction with the GSE's privatization. The
Company issued the Warrants on August 7, 1997.
GSE Dissolution After Reorganization. The Privatization Act provides that
the GSE will liquidate and dissolve on September 30, 2008, unless an earlier
dissolution is requested by the GSE and the Secretary of Education makes no
finding that the GSE continues to be needed as a lender of last resort under the
GSE charter or to purchase loans under certain agreements with the Secretary of
Education. In connection with such dissolution, the GSE must 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 on the deposited
obligations. As of December 31, 1997, the GSE had $381 million in current
carrying value of debt obligations outstanding with maturities after September
30, 2008. If the GSE has insufficient assets to fully fund such GSE debt
obligations outstanding at the time of dissolution, the Company must transfer
sufficient assets to the trust to account for this shortfall. The Privatization
Act also requires that on the dissolution date, the GSE shall repurchase or
redeem, or make proper provisions for the repurchase or redemption of, any
outstanding shares of preferred stock, of which the GSE has issued Series A and
B Adjustable Rate Cumulative Preferred Stock. The Series A Preferred Stock is
carried at its liquidation value of $50.00 per share for a total of $214 million
and pays a variable dividend that has been at its minimum rate of 5 percent per
annum for the last several years. The Series B Preferred Stock is carried at its
liquidation value of $500,000 per share for a total of $100 million and pays a
variable dividend that is equal to 3-month London Interbank Offered Rate
("LIBOR") plus one percent per annum divided by 1.377. Upon dissolution, the GSE
charter will terminate, and any assets that the GSE continues to hold after
establishment of the trust or that remain in the trust after full payment of the
remaining obligations of the GSE assumed by the trust will be transferred to
the Company or its affiliates, as determined by the Company's Board of
Directors.
13
<PAGE>
GSE Regulation
The GSE's structure and the scope of its business activities are set forth
in its charter. The charter, which is subject to review and change by Congress,
sets forth certain restrictions on the GSE's business and financing activities
and charges the federal government with certain oversight responsibilities with
respect to these activities. The GSE's charter grants the GSE certain exemptions
from federal and state laws. The GSE's charter's primary regulatory restrictions
and exemptions, including certain provisions added by the Privatization Act, are
summarized as follows:
1. Seven members of the GSE's 21-member Board of Directors are
appointed by the President of the United States. The other 14
members are elected by the Company as the holder of the GSE's
Common Stock. The Chairman of the Board is designated by the
President of the United States from among the Board's 21
members.
2. Debt obligations issued by the GSE are exempt from state
taxation to the same extent as United States government
obligations. The GSE is exempt from all taxation by any state
or by any county, municipality or local taxing authority
except with respect to real property taxes. The GSE is not
exempt from federal corporate income taxes.
3. All stock and other securities of the GSE are deemed to be
exempt securities under the laws administered by the SEC to
the same extent as obligations of the United States.
4. The GSE may conduct its business without regard to any
qualification or similar statute in any state of the United
States, including the District of Columbia, the Commonwealth
of Puerto Rico and the territories and possessions of the
United States (although the scope of the GSE's business is
generally limited by its federal charter).
5. The issuance of GSE debt obligations must be approved by the
Secretary of the Treasury.
14
<PAGE>
6. The GSE is required to have its financial statements examined
annually by independent certified public accountants and to
submit a report of the examination to the Secretary of the
Treasury. The Department of the Treasury is also authorized to
conduct audits of the GSE and to otherwise monitor the GSE's
financial condition. The GSE is required to submit annual
reports of its operations and activities to the President of
the United States and Congress. The GSE must pay up to
$800,000 per year to the Department of the Treasury to cover
the costs of its oversight.
7. The GSE is subject to certain "safety and soundness"
regulations, including the requirement that the GSE maintain a
2.00 percent capital adequacy ratio (increasing to 2.25
percent after January 1, 2000). The GSE may pay dividends only
upon certification that, at the time of a dividend declaration
and after giving effect to the payment of such dividend, the
capital adequacy ratio is satisfied.
8. The Secretary of Education and the Secretary of the Treasury
have certain enforcement powers under the GSE's charter.
9. A 30 basis point annual offset fee, unique to the GSE, is
payable to the Secretary of Education on student loans
purchased and held by the GSE on or after August 10, 1993. See
"Legal Proceedings."
10. In certain circumstances, at the request of the Secretary of
Education, the GSE is required to act as a lender of last
resort to make FFELP loans when other private lenders are not
available. Such loans are not subject to the 30 basis point
offset fee on loans held by the GSE.
Other Regulation
Under the Higher Education Act, the GSE is an "eligible lender" for purposes
only of purchasing and holding loans made by other lenders and making
consolidation and lender of last resort loans. Like other participants in
insured student loan programs, the Company is subject, from time to time, to
review of its student loan operations by the General Accounting Office, the DOE
and certain guarantee agencies. The laws relating to insured student loan
programs are subject to revision from time to time and changes to such laws are
beyond the Company's control. In addition, SMSC, as a servicer of student loans,
is subject to certain DOE regulations regarding financial responsibility and
administrative capability that govern all third party servicers of insured
student loans. Failure to satisfy such standards may result in the loss of the
government guarantee of FFELP loans. ESI is a broker-dealer registered with the
SEC and the National Association of Securities Dealers (the "NASD") and is
licensed to do business in 50 states. ESI is subject to regulation by the SEC
and the NASD as a municipal security broker-dealer. HICA, a South Dakota stock
insurance company, is subject to the ongoing regulatory authority of the South
Dakota Division of Insurance and that of comparable governmental agencies in six
other states.
15
<PAGE>
Non-Discrimination and Limitations on Affiliation with Depository Institutions
The Privatization Act also amended the Higher Education Act to provide that
the GSE and any successor entity (including the Company) functioning as a
secondary market for federally insured student loans may not engage, directly or
indirectly, in any pattern or practice that results in a denial of a borrower's
access to insured loans because of the borrower's race, sex, color, religion,
national origin, age, disability status, income, attendance at a particular
institution, length of a borrower's educational program or the borrower's
academic year at an eligible institution.
Pub. L. No. 104-208, the federal budget legislation of which the
Privatization Act was a part, contains amendments to the Federal Deposit
Insurance Act and the Federal Credit Union Act that prohibit all
government-sponsored enterprises from directly or indirectly sponsoring or
providing non-routine financial support to certain credit unions and depository
institutions. Depository institutions are also prohibited from being affiliates
of government-sponsored enterprises. Thus, neither the Company nor any of its
subsidiaries may be affiliated with a depository institution until the GSE is
dissolved. Most originators of insured student loans are depository institutions
that qualify as "eligible lenders" under the Higher Education Act.
As of December 31, 1997, the Company employed 4,608 employees nationwide.
Item 2. Properties
The following table lists the principal facilities owned by the Company:
APPROXIMATE
LOCATION FUNCTION SQUARE FEET
-------- -------- -----------
Reston, VA Operations/Headquarters 395,000
Wilkes Barre, PA Loan Servicing Center 135,000
Killeen, TX Loan Servicing Center 133,000
Lynn Haven, FL Loan Servicing Center 133,000
Lawrence, KS Loan Servicing Center 52,000
The Company leases approximately 36,800 square feet of office space for its loan
servicing center in Waltham, Massachusetts, 39,100 square feet of office space
for its loan servicing center in Spokane, Washington and 47,000 square feet of
additional space for its loan servicing center in Lawrence, Kansas. The GSE
leases approximately 254,000 square feet of office space in Washington, D.C. for
its former headquarters. The Company has entered into and is currently
negotiating subleases through the term of these leases, which expire in 2001,
and other arrangements to terminate the GSE's obligations under these leases.
With the exception of the Pennsylvania loan servicing center, none of the
Company's facilities is encumbered by a mortgage. The Company believes that its
headquarters and loan servicing centers are generally adequate to meet its
long-term student loan and new business goals.
The Company's principal office is located in owned space at 11600 Sallie Mae
Drive, Reston, Virginia, 20193.
16
<PAGE>
Item 3. Legal Proceedings.
The Higher Education Act imposes a 30 basis point per annum "offset fee" to
student loans held by the GSE. The Secretary of Education initially interpreted
the Higher Education Act to apply that fee both to loans held directly by the
GSE and to loans sold by the GSE to securitization trusts. In April 1995, the
Company filed suit in the U.S. District Court for the District of Columbia to
challenge the constitutionality of the 30 basis point fee and the application of
the fee to loans securitized by the Company. On November 16, 1995, the District
Court ruled that the fee is constitutional, but that, contrary to the Secretary
of Education's interpretation, the fee does not apply to securitized loans. Both
the Company and the United States appealed this ruling. On January 10, 1997, the
U.S. Court of Appeals for the District of Columbia Circuit struck down the
Secretary of Education's interpretation, ruling that the fee applies only to
loans that the GSE owns and remanding the case to the District Court with
instructions to remand the matter to the Secretary of Education. In addition,
the Court of Appeals upheld the constitutionality of the offset fee for loans
owned by the GSE. The offset fee applies annually to the principal amount of
student loans that the GSE holds and that were acquired on or after August 10,
1993.
On April 29, 1997, U.S. District Court Judge Stanley Sporkin ordered the DOE
to decide by July 31, 1997 its final position on the application of the offset
fee to loans that the GSE has securitized. On July 23, 1997, the DOE decided
that the 30 basis point annual offset fee that the GSE is required to pay on
student loans that it owns does not apply to student loans that the GSE has
securitized. Based upon this favorable determination, a contingent gain of $97
million pre-tax that had not been recognized in income through June 30, 1997 was
released and recognized in income in the third quarter of 1997. All future
securitization gains will be calculated without consideration of the offset fee.
On December 19, 1996, Orange County, California filed an amended complaint
against the Company in the U.S. Bankruptcy Court for the Central District of
California. The case is currently pending in the U.S. District Court for the
Central District of California. The complaint alleges that the Company made
fraudulent representations and omitted material facts in offering circulars on
various bond offerings purchased by Orange County, which contributed to Orange
County's market losses and subsequent bankruptcy. The complaint seeks to hold
the GSE liable for losses resulting from Orange County's bankruptcy, but does
not specify the amount of damages claimed. The complaint against the Company is
one of numerous cases filed by Orange County that have been coordinated for
discovery purposes. Other defendants include Merrill Lynch, Morgan Stanley, KPMG
Peat Marwick, Standard & Poor's and Fannie Mae. The complaint includes a claim
of fraud under Section 10(b) of the Securities Exchange Act and Rule 10b-5
promulgated thereunder. The complaint also includes counts under the California
Corporations Code and a count of common law fraud. On December 24, 1997, the
Company filed a motion for partial summary judgment dismissing certain of Orange
County's claims. The Company believes that the complaint is without merit and
intends to defend the case vigorously. At this time, management believes the
impact of the lawsuit will not be material to the Company.
In September 1996, the Company obtained a declaratory judgment against the
Secretary of Education in the U.S. District Court for the District of Columbia
to the effect that the Secretary erred in refusing to allow the Company to claim
adjustments to Special Allowance Payments on certain FFELP loans that were
required to be converted retrospectively from a fixed rate to a variable rate.
On September 30, 1997 the U.S. Court of Appeals for the District of Columbia
Circuit affirmed the District Court's decision granting the declaratory
judgment.
17
<PAGE>
Item 4. Submission of Matters to a Vote of Security-Holders
Nothing to report.
Part II.
Item 5. Market for Registrant's Common Equity and Related Stockholder Matters
The Company's Common Stock is listed and traded on the New York Stock
Exchange under the symbol SLM. The number of holders of record of the Company's
Common Stock as of March 3, 1998 was approximately 668. The following table sets
forth the high and low sales prices for the Company's Common Stock for each full
quarterly period within the two most recent fiscal years . The prices in this
table are adjusted to reflect a 7-for-2 stock split, which was effected on
January 2, 1998 as a stock dividend of five shares for every two shares
outstanding.
COMMON STOCK PRICES
1st 2d 3d 4th
Quarter Quarter Quarter Quarter
------- ------- ------- -------
1996 High $24 39/64 $23 55/64 $22 $28 5/64
Low 18 5/64 18 55/64 19 25/32 22 5/64
1997 High 32 41/64 39 23/64 45 55/64 47 11/64
Low 25 27/64 27 1/32 36 9/32 35 9/32
The Company paid regular quarterly dividends of $.1143 per share on the
Common Stock in each of the first three quarters of 1996, $.1257 per share for
the fourth quarter of 1996 and the first three quarters of 1997 and $.14 for the
fourth quarter of 1997 and the first quarter of 1998.
Item 6. Selected Financial Data
Reference is made to the information regarding selected financial data
for the fiscal years 1993 through 1997, under the heading "Selected Financial
Data 1993-1997" on page 68 of the Company's 1997 Annual Report to Shareholders,
which information is included as part of Exhibit 13 and is hereby incorporated
by reference in this Annual Report on Form 10-K.
Item 7. Management's Discussion and Analysis of Financial Condition and Results
of Operation
Reference is made to the information appearing under the heading
"Management's Discussion and Analysis of Financial Condition and Results of
Operations" on pages 23 through 38 of the Company's 1997 Annual Report to
Shareholders, which information is included as part of Exhibit 13 and is hereby
incorporated by reference in this Annual Report on Form 10-K.
18
<PAGE>
Item 7a. Quantitative and Qualitative Disclosures about Market Risk
Reference is made to the information appearing under the heading
"Management's Discussion and Analysis of Financial Condition and Results of
Operations" on pages 34 through 36 of the Company's 1997 Annual Report to
Shareholders, which information is included as part of Exhibit 13 and is hereby
incorporated by reference in this Annual Report on Form 10-K.
Item 8. Financial Statements and Supplementary Data
Consolidated financial statements of the Company at December 31, 1997
and December 31, 1996 and for each of the three years in the period ended
December 31, 1997 are included as part of Exhibit 13 and are incorporated by
reference in this Annual Report on Form 10-K from the Company's 1997 Annual
Report to Shareholders, on pages 39 through 64. The Report of the Independent
Public Accountants on the consolidated balance sheet of the Company and its
subsidiaries for the year ended December 31, 1997 and the related consolidated
statements of income, changes in stockholders' equity and cash flows for the
year then ended is included as part of Exhibit 13 and is hereby incorporated by
reference in this Annual Report on Form 10-K. The Report of the Independent
Public Accountants on the consolidated balance sheet of the Company and its
subsidiaries for the year ended December 31, 1996 and the related consolidated
statements of income, changes in stockholders' equity and cash flows for the two
years in the period ended December 31, 1996 is filed separately as Financial
Statement Schedule Number XX under Item 14 of this Annual Report on Form 10-K.
Item 9. Changes in and Disagreements with Accountants on Accounting and
Financial Disclosure.
Not applicable.
Part III.
Item 10. Directors and Executive Officers of the Registrant
The information as to the directors and executive officers of the
Company set forth under the captions "PROPOSAL 1 -- ELECTION OF DIRECTORS --
Information Concerning Nominees" and "Executive Officers" in the Proxy Statement
to be filed on Schedule 14A relating to the Company's Annual Meeting of
Stockholders scheduled to be held on May 21, 1998 (the "Proxy Statement") is
incorporated into this Report by reference.
Item 11. Executive Compensation
The information set forth under the caption "Executive Compensation" in
the Proxy Statement is incorporated into this Report by reference.
Item 12. Security Ownership of Certain Beneficial Owners and Management.
The information set forth under the caption "COMMON STOCK INFORMATION
- -- Board and Management Ownership" and "-- Principal Holders" in the Proxy
Statement is incorporated into this Report by reference thereto. There are no
arrangements known to the Company, the operation of which may at a subsequent
date result in a change in control of the Company.
19
<PAGE>
Item 13. Certain Relationships and Related Transactions.
The information set forth under the caption "EXECUTIVE COMPENSATION --
Certain Transactions" in the Proxy Statement is incorporated into this Report by
reference.
Item 14. Exhibits, Financial Statement Schedules and Reports on Form 8-K
(a) 1. Financial Statements
The financial statements listed in the accompanying index to financial
statements and financial statement schedules are filed or incorporated by
reference as part of this annual report.
2. Financial Statement Schedules
Schedule
Number Description
- ------ -----------
XX Separate Report
of Predecessor
Accountant
All other schedules are omitted because they are not applicable or the required
information is shown in the consolidated financial statements or notes thereto.
3. Exhibits
The exhibits listed in the accompanying index to exhibits are filed or
incorporated by reference as part of this annual report.
(b) Reports on Form 8-K.
The Company filed the following Current Reports on Form 8-K during the
fourth quarter of 1997:
<TABLE>
<CAPTION>
DATE ITEMS REPORTED FINANCIAL STATEMENTS
- ---- -------------- --------------------
<S> <C> <C>
10/21/97 Amendment to Current The financial statements of the
Report on Form 8-K filed GSE for the periods specified
by the Company on in 17 C.F.R. ss.210-3.05
August 14, 1997 (which reported
the reorganization of the GSE into a wholly
owned subsidiary of the Company pursuant to
the Privatization Act)
10/29/97 Change in the Company's None
Certifying Accountant
</TABLE>
20
<PAGE>
(c) Exhibits.
*2 Agreement and Plan of Reorganization by and among the Student
Loan Marketing Association, SLM Holding Corporation, and
Sallie Mae Merger Company.
**3.1 Amended and Restated Certificate of Incorporation of the
Registrant
**3.2 By-Laws of the Registrant
**4 Warrant Certificate No. W-2, dated as of August 7, 1997
*10.1 Board of Director's Restricted Stock Plan
*10.2 Board of Director's Stock Option Plan
*10.3 Deferred Compensation Plan for Directors
*10.4 Incentive Performance Plan
*10.5 Stock Compensation Plan
*10.6 1993-1998 Stock Option Plan
*10.7 Supplemental Pension Plan
*10.8 Supplemental Employees' Thrift & Savings Plan (Sallie Mae
401(K) Supplemental Savings Plan)
+13 Portions of the Annual Report to Shareholders for fiscal year
ended December 31, 1997 expressly incorporated by reference
herein.
-21 Subsidiaries of the Registrant
+23.1 Consent of Ernst & Young LLP
+23.2 Consent of Arthur Andersen LLP
+27 Financial Data Schedule
- -----------------------------------
* Incorporated by reference to the correspondingly numbered exhibits to the
Registrant's Registration Statement on Form S-4, as amended (File
No. 333-21217)
** Incorporated by reference to the correspondingly numbered exhibits to the
Registrant's Registration on Form S-1 (File No. 333-38391)
+ Filed herewith
21
<PAGE>
SIGNATURES
Pursuant to the requirements of Section 13 or 15 (d) 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.
Dated: March 27, 1998
SLM HOLDING CORPORATION
By: /s/ ALBERT L. LORD
----------------------------
Name: Albert L. Lord
Title: Chief Executive Officer
Pursuant to the requirement of the Securities Exchange Act of 1934,
this report has been signed below by the following persons on behalf of the
Registrant and in the capacities indicated on the dates indicated.
<TABLE>
<CAPTION>
SIGNATURE TITLE DATE
- --------- ----- ----
<S> <C> <C>
/S/ ALBERT L. LORD Chief Executive Officer March 27, 1998
- ------------------ (Principal Executive Officer)
Albert L. Lord
/S/ MARK G. OVEREND Chief Financial Officer March 27, 1998
- ------------------- (Principal Financial and
Mark G. Overend Accounting Officer)
/S/ EDWARD A. FOX Chairman of the Board March 27, 1998
- ----------------- of Directors
Edward A. Fox
/S/ JAMES E. BRANDON Director March 27, 1998
- --------------------
James E. Brandon
/S/ CHARLES L. DALEY Director March 27, 1998
- --------------------
Charles L. Daley
/S/ THOMAS J. FITZPATRICK Director March 27, 1998
- -------------------------
Thomas J. Fitzpatrick
/S/ DIANE SUITT GILLELAND Director March 27, 1998
- -------------------------
Diane Suitt Gilleland
</TABLE>
22
<PAGE>
<TABLE>
<CAPTION>
SIGNATURE TITLE DATE
- --------- ----- ----
<S> <C> <C>
/S/ ANN TORRE GRANT Director March 27, 1998
- -------------------
Ann Torre Grant
/S/ RONALD F. HUNT Director March 27, 1998
- ------------------
Ronald F. Hunt
/S/ BENJAMIN J. LAMBERT, III Director March 27, 1998
- ----------------------------
Benjamin J. Lambert, III
/S/ MARIE V. McDEMMOND Director March 27, 1998
- ----------------------
Marie V. McDemmond
/S/ BARRY A. MUNITZ Director March 27, 1998
- -------------------
Barry A. Munitz
/S/ A. ALEXANDER PORTER Director March 27, 1998
- -----------------------
A. Alexander Porter
/S/ WOLFGANG SCHOELLKOPF Director March 27, 1998
- ------------------------
Wolfgang Schoellkopf
/S/ STEVEN L. SHAPIRO Director March 27, 1998
- ---------------------
Steven L. Shapiro
/S/ RANDOLPH H. WATERFIELD, JR. Director March 27, 1998
- ------------------------------
Randolph H. Waterfield, Jr.
</TABLE>
23
<PAGE>
Schedule XX
The Board of Directors and Stockholders
SLM Holding Corporation
We have audited the accompanying consolidated balance sheets of SLM Holding
Corporation at December 31, 1996, and the related consolidated statements of
income, changes in stockholders' equity and cash flows for each of the two years
in the period ended December 31, 1996. These financial statements are the
responsibility of the Company's management. Our responsibility is to express an
opinion on these financial statements based on our audits.
We conducted our audits in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audit to obtain
reasonable assurance about whether the financial statements are free of material
misstatements. An audit includes examining, on a test basis, evidence supporting
the amounts and disclosures in the financial statements. An audit also includes
assessing the accounting principles used and significant estimates made by
management, as well as evaluating the overall financial statement presentation.
We believe that our audits provide a reasonable basis for our opinion.
In our opinion, the financial statements referred to above present fairly,
in all material respects, the consolidated financial position of SLM Holding
Corporation at December 31, 1996, and the consolidated results of their
operations and their cash flows for each of the two years in the period ended
December 31, 1996, in conformity with generally accepted accounting principles.
As discussed in Note 2, the Company's financial statements for 1995 have
been restated to reflect a change in its method of accounting for student loan
income.
Washington, D.C. /s/ Ernst & Young LLP
January 13, 1997, except as to the
eighteenth and nineteenth paragraphs of Note 2,
which is as of April 7, 1997
S-1
<PAGE>
Appendix A
THE FEDERAL FAMILY EDUCATION LOAN PROGRAM
General
The Federal Family Education Loan Program ("FFELP") (formerly the Guaranteed
Student Loan Program ("GSLP")) under Title IV of the Higher Education Act (the
"Act") provides for loans to be made to students or parents of dependent
students enrolled in eligible institutions to finance a portion of the costs of
attending school. If a borrower defaults on a student loan, becomes totally or
permanently disabled, dies, files for bankruptcy or attends a school that closes
prior to the student earning a degree, or if the applicable education
institution falsely certifies the borrower's eligibility for a federally insured
student loan (collectively "insurance triggers"), the holder of the loan (which
must be an eligible lender) may file a claim with the applicable state or
private nonprofit guarantee agency (each a "Guarantee Agency"). Provided that
the loan has been properly originated and serviced, the Guarantee Agency pays
the holder all or a portion of the unpaid principal balance on the loan as well
as accrued interest ("Guarantee Payments"). Origination and servicing
requirements, as well as procedures to cure deficiencies, are established by the
U.S. Department of Education (the "Department") and the various Guarantee
Agencies.
Under the FFELP, payment of principal and interest with respect to the
student loans is guaranteed against default, death, bankruptcy or disability of
the applicable borrower by the applicable Guarantee Agency. As described herein,
the guarantee agencies are entitled, subject to certain conditions, to be
reimbursed for all or a portion of Guarantee Payments they make by the
Department pursuant to a program of federal reinsurance under the Act. See "--
Guarantee Agencies".
Guarantee Agencies enter into reinsurance agreements with the Secretary of
Education pursuant to which the Secretary agrees to reimburse the Guarantee
Agency for all or a portion of the amount expended by the Guarantee Agency in
discharge of its guarantee obligation with respect to default claims provided
the loans have been properly originated and serviced. Except for claims
resulting from death, disability or bankruptcy of a borrower or where the school
the borrower attended closed or the borrower's eligibility was falsely
certified, in which cases the Secretary pays the full amount of the claim, the
amount of reinsurance depends on the default experience of the Guarantee Agency.
See "-- Federal Insurance and Reinsurance of Guarantee Agencies".
In the event of a shortfall between the amounts of claims paid to holders of
defaulted loans and reinsurance payments from the federal government, Guarantee
Agencies pay the claims from their reserves. These reserves come from four
principal sources: insurance premiums they charge on student loans (currently up
to 1 percent of loan principal), administrative cost allowances from the
Department (payment of which is currently discretionary on the part of the
Department)1, debt collection activities (generally, the Guarantee Agency may
retain 27 percent of its collections on defaulted student loans), and investment
income from reserve funds. Claims which a Guarantee Agency is financially unable
to pay will be paid by the Secretary or transferred to a financially sound
Guarantee Agency, if the Secretary makes the necessary determination that the
guarantor is financially unable to pay.
A-1
<PAGE>
Several types of guaranteed student loans are currently authorized under the
Act: (i) loans to students who pass certain financial need tests ("Subsidized
Stafford Loans"); (ii) loans to students who do not pass the Stafford need tests
or who need additional loans to supplement their Subsidized Stafford Loans
("Unsubsidized Stafford Loans"); (iii) loans to parents of students ("PLUS
Loans") who are dependents and whose need exceed the financing available from
Subsidized Stafford Loans and/or Unsubsidized Stafford Loans; and (iv) loans to
consolidate the borrower's obligations under various federally authorized
student loan programs into a single loan ("Consolidation Loans"). Prior to July
1, 1994 the Act also permitted loans to graduate and professional students and
independent undergraduate students and, under certain circumstances, dependent
undergraduate students who needed additional loans to supplement their
Subsidized Stafford Loans ("Supplemental Loans to Students" or "SLS Loans").
The FFELP is subject to statutory and regulatory revision from time to time.
The most recent significant revisions are contained in the Higher Education
Amendments of 1992 ("the 1992 Amendments"), the Omnibus Budget Reconciliation
Act of 1993 ("the 1993 Act") and the "Higher Education Technical Amendments of
1993" (the "Technical Amendments"). As part of the 1992 Amendments the name of
the Guaranteed Student Loan Program was changed to the FFELP. The 1993 Act
contains significant changes to the FFELP and creates a direct loan program
funded directly by the U.S. Department of Treasury (each loan under such
program, a "Federal Direct Student Loan").
Following enactment of the 1992 Amendments, Subsidized Stafford Loans,
Unsubsidized Stafford Loans, PLUS Loans and Consolidation Loans are officially
referred to as "Federal Stafford Loans," "Federal Unsubsidized Stafford Loans,"
"Federal PLUS Loans" and "Federal Consolidation Loans," respectively.
The description and summaries of the Act, the FFELP, the Guarantee
Agreements and the other statutes and regulations referred to in this report not
purport to be comprehensive, and are qualified in their entirety by reference to
each such statute or regulation. The Act is codified at 20 U.S.C. ss.1071 et
seq., and the regulations promulgated thereunder can be found at 34 C.F.R. Part
682. There can be no assurance that future amendments or modifications will not
materially change any of the terms or provisions of the programs described in
this report of the statutes and regulations implementing these programs.
- --------------
1 The Fiscal Year 1996 Omnibus Appropriations Act provided that for the 1995
1996 federal fiscal years, the Secretary must pay an administrative cost
allowance to guaranty agencies equal to .085 percent of each agency's loan
originations.
A-2
<PAGE>
Legislative and Administrative Matters
The Act was amended by enactment of the 1992 Amendments, the general
provisions of which became effective on July 23, 1992 and which extend the
principal provisions of the FFELP to September 30, 1998 (or in the case of
borrowers who have received loans prior to that date, September 30, 2002, except
that authority to make Consolidation Loans expires on September 30, 1998). The
Technical Amendments became effective on December 20, 1993.
The 1993 Act, effective on August 10, 1993, implements a number of changes
to the federal guaranteed student loan programs, including imposing on lenders
or holders of guaranteed student loans certain fees, providing for 2 percent
lender risk sharing, reducing interest rates and Special Allowance Payments for
certain loans, effectively reducing the interest payable to holders of
Consolidation Loans and affecting the Department's financial assistance to
Guarantee Agencies, including by reducing the percentage of claims the
Department will reimburse Guarantee Agencies and reducing more substantially the
premiums and default collections that Guarantee Agencies are entitled to receive
and/or retain. In addition, such legislation also contemplates replacement of at
least 60 percent of the federal guaranteed student loan programs with direct
lending by the Department by the 1998-99 academic year.
Eligible Lenders, Students and Institutions
Lenders eligible to make and/or hold loans under the FFELP generally include
banks, savings and loan associations, credit unions, pension funds, insurance
companies and, under certain conditions, schools and guarantee agencies. Sallie
Mae is an eligible lender for making Consolidation Loans and as a lender of last
resort and for holding FFELP loans.
A FFELP loan may be made only to qualified borrowers. Generally a qualified
borrower is an individual or parent of an individual who (a) has been accepted
for enrollment or is enrolled and is maintaining satisfactory progress at an
eligible institution, (b) is carrying or will carry at least one-half of the
normal full-time academic workload for the course of study the student is
pursuing, as determined by such institution, (c) has agreed to notify promptly
the holder of the loan of any address change and (d) meets the applicable "need"
requirements for the particular loan program. Each loan is to be evidenced by an
unsecured promissory note signed by the qualified borrower.
Eligible institutions are post-secondary schools which meet the requirements
set forth in the Act. They include institutions of higher education, proprietary
institutions of higher education and post-secondary vocational institutions.
With specified exceptions, institutions are excluded from consideration as
eligible institutions if the institution (i) offers more than 50 percent of its
courses by correspondence; (ii) enrolls 50 percent or more of its students in
correspondence courses; (iii) has a student enrollment in which more than 25
percent of the students are incarcerated; or (iv) has a student enrollment in
which more than 50 percent of the students are admitted without a high school
diploma or its equivalent on the basis of their ability to benefit from the
education provided (as defined by statute and regulation). Further, schools are
specifically excluded from participation if (i) the institution has filed for
bankruptcy or (ii) the institution, the owner or its chief executive officer,
has been convicted or pleaded nolo contendere or guilty to a crime involving the
acquisition, use or expenditure of federal student aid funds, or has been
judicially determined to have committed fraud involving funds under the student
aid program. In order to participate in the program, the eligibility of a school
must be approved by the Department under standards established by regulation.
A-3
<PAGE>
Financial Need Analysis
Student loans may generally be made in amounts, subject to certain limits
and conditions, to cover the student's estimated costs of attendance, including
tuition and fees, books, supplies, room and board, transportation and
miscellaneous personal expenses (as determined by the institution). Each
borrower must undergo a need analysis, which requires the borrower to submit a
need analysis form which is forwarded to the federal central processor. The
central processor evaluates the parents' and student's financial condition under
federal guidelines and calculates the amount that the student and/or the family
is expected to contribute towards the student's cost of education (the "family
contribution"). After receiving information on the family contribution, the
institution then subtracts the family contribution from its cost of attendance
to determine the student's eligibility for grants, Subsidized Stafford Loans and
work assistance. The difference between (a) the sum of the (i) amount of grants,
(ii) the amount earned through work assistance and (iii) the amount of
Subsidized Stafford Loans for which the borrower is eligible and (b) the
student's estimated cost of attendance (the "Unmet Need") may be borrowed
through Unsubsidized Stafford Loans. Parents may finance the family contribution
amount through their own resources or through PLUS Loans.
Special Allowance Payments
The Act provides for quarterly special allowance payments ("Special
Allowance Payments") to be made by the Department to holders of student loans to
the extent necessary to ensure that such holder receives at least a specified
market interest rate of return on such loans. The rates for Special Allowance
Payments are based on formulas that differ according to the type of loan and the
date the loan was originally made or insured. A Special Allowance Payment is
made for each of the 3-month periods ending March 31, June 30, September 30, and
December 31. The Special Allowance Payments equal the average unpaid principal
balance (including interest permitted to be capitalized) of all eligible loans
held by such holder during such period multiplied by the special allowance
percentage. The special allowance percentage shall be computed by (i)
determining the average of the bond equivalent rates of 91-day Treasury bills
auctioned for such 3-month period, (ii) subtracting the applicable borrower
interest rate on such loans from such average, (iii) adding the applicable
Special Allowance Margin (defined below) to the resultant percentage, and (iv)
dividing the resultant percentage by 4.
Date of Disbursement Special Allowance Margin
-------------------- ------------------------
Prior to 10/17/86.... 3.50%
10/17/86-9/30/92..... 3.25%
10/01/92-6/30/95..... 3.10%
7/1/95-6/30/98....... 2.50% (Subsidized and Unsubsidized
Stafford Loans, in school, grace or
deferment) 3.10% (Subsidized and
Unsubsidized Stafford Loans, in repayment
and all other loans)
A-4
<PAGE>
Special Allowance Payments are available on variable rate PLUS Loans and SLS
Loans as described below under "PLUS and SLS Loan Programs" only to cover any
amount by which the variable rate, which is reset annually based on the 52-week
Treasury Bill, would exceed the applicable maximum rate.
As part of the amendments made to the Act by the Omnibus Budget
Reconciliation Act of 1993, the method for calculating borrower interest and
special allowance payment is scheduled to be altered for loans made on or after
July 1, 1998. As of that date, the borrower interest rate on Stafford Loans and
Unsubsidized Stafford Loans will be established annually at the "bond equivalent
rate of the securities with the comparable maturity", as determined by the
Secretary of Education, plus 1.0 percent. This rate will apply for loans both
during the in-school and repayment periods. For PLUS loans, the rate will be the
same, except that 2.10 percent will be added to the rate basis. Special
allowance payments on these loans will be paid at the "bond equivalent rate of
the securities with comparable maturities" plus 1.0 percent and reset at
intervals established by the Secretary of Education. The Secretary of Education
has yet to issue formal guidance on the rate basis or on the method or timing of
special allowance payments for these loans.
Origination Fees
The eligible lender charges borrowers an origination fee, which in turn is
passed on to the federal government, on Subsidized and Unsubsidized Stafford
Loans and PLUS Loans equal to 3 percent of the principal balance of each loan.
The amount of the origination fee may be deducted from each disbursement
pursuant to a loan on a pro rata basis. No origination fee is paid on
Consolidation Loans.
Lenders must refund all origination fees attributable to a disbursement that
was returned to the lender by the school or repaid or not delivered within 120
days of the disbursement. Such origination fees must be refunded by crediting
the borrower's loan balance with the applicable lender.
Stafford Loans
The Act provides for (i) federal insurance or reinsurance of Subsidized
Stafford Loans made by eligible lenders to qualified students, (ii) federal
interest subsidy payments on certain eligible Subsidized Stafford Loans to be
paid by the Department to holders of the loans in lieu of the borrower making
interest payments ("Interest Subsidy Payments"), and (iii) Special Allowance
Payments representing an additional subsidy paid by the Department to the
holders of eligible Subsidized Stafford Loans (collectively referred to herein
as "Federal Assistance").
Subsidized Stafford Loans are loans under the FFELP that may be made, based
on need, only to post-secondary students accepted or enrolled in good standing
at an eligible institution who are carrying at least one-half the normal
full-time course load at that institution. The Act limits the amount a student
can borrow in any academic year and the amount he or she can have outstanding in
the aggregate. The following chart sets forth the historic loan limits.
A-5
<PAGE>
MAXIMUM LOAN AMOUNTS
Federal Stafford Loan Program
<TABLE>
<CAPTION>
All
Students(1) Independent
-------------- Students(3)
------------------------
Base Amount
Subsidized and Additional
Subsidized Unsubsidized Unsubsidized
Subsidized on or after on or after only on or Total
Borrower's Academic Level Pre-1/1/87 1/1/87 7/7/93(2) after 7/1/94 Amount
------------------------- ---------- ------ --------- ------------ ------
<S> <C> <C> <C> <C> <C>
Undergraduate (per year)
1st year................... $ 2,500 $ 2,625 $ 2,625 $ 4,000 $ 6,625
2nd year................... $ 2,500 $ 2,625 $ 3,500 $ 4,000 $ 7,500
3rd year & above........... $ 2,500 $ 4,000 $ 5,500 $ 5,000 $ 10,500
Graduate (per year)........ $ 5,000 $ 7,500 $ 8,500 $ 10,000 $ 18,500
Aggregate Limit
Undergraduate............ $ 12,500 $17,250 $ 23,000 $ 23,000 $ 46,000
Graduate (including
undergraduate)........ $ 25,000 $54,750 $ 65,500 $ 73,000 $138,500
</TABLE>
- ----------
(1) The loan limits are inclusive of both Federal Stafford Loans and Federal
Direct Student Loans.
(2) These amounts represent the combined maximum loan amount per year for
Subsidized and Unsubsidized Stafford Loans. Accordingly, the maximum amount
that a student may borrow under an Unsubsidized Loan is the difference
between the combined maximum loan amount and the amount the student received
in the form of a Subsidized Loan.
(3) Independent undergraduate students, graduate students or professional
students may borrow these additional amounts. In addition, dependent
undergraduate students may also receive these additional loan amounts if the
parents of such students are unable to provide the family contribution
amount and it is unlikely that the student's parents will qualify for a
Federal PLUS Loan.
(4) Some graduate health profession students otherwise eligible to borrow under
HEAL may be entitled to increase unsubsidized loan limits not to exceed HEAL
statutory limits for each course of study per academic year.
The interest rate paid by borrowers on a Subsidized Stafford Loan is
dependent on the date of the loan except for loans made prior to October 1,
1992, whose interest rate depends on any outstanding borrowings of that borrower
as of such date. The rate for variable rate Subsidized Stafford Loans applicable
for any 12-month period beginning on July 1 and ending on June 30, is determined
on the preceding June 1 and is equal to the lesser of (a) the applicable Maximum
Rate or, (b) the sum of (i) the bond equivalent rate of 91-day Treasury bills
auctioned at the final auction held prior to such June 1, and (ii) the
applicable Interest Rate Margin.
Subsidized Stafford Loans
<TABLE>
<CAPTION>
Date of Disbursement Borrower Rate Maximum Rate Interest Rate Margin
--------------------- ------------------ ----------------------- ---------------------------
<S> <C> <C> <C>
09/13/83-06/30/88.... 8% 8.00%
07/01/88-09/30/92.... 8% for 48 months; 8.00% for 48 months, 3.25%
thereafter, 91-Day then 10%
Treasury +
Interest Rate Margin
10/01/92-06/30/94.... 91-Day Treasury + 9.00% 3.10%
Interest Rate Margin
</TABLE>
A-6
<PAGE>
<TABLE>
<CAPTION>
Date of Disbursement Borrower Rate Maximum Rate Interest Rate Margin
--------------------- ------------------ ----------------------- ---------------------------
<S> <C> <C> <C>
07/01/94-06/30/95.... 91-Day Treasury + 8.25% 3.10%
Interest Rate Margin
07/01/95-06/30/98.... 91-Day Treasury + 8.25% 2.50% (in school,
Interest Rate Margin grace, or deferment)
3.10% (in repayment)
After 07/01/98....... The bond equivalent 8.25% 1.0%
rate of the
securities with a
comparable maturity
as established by
the Secretary +
Interest Rate Margin
</TABLE>
The Technical Amendments provide that, for fixed rate loans made on or after
July 23, 1992 and for certain loans made to new borrowers on or after July 1,
1988, the lender must convert the loan to a variable rate loan capped at the
interest rate existing prior to the conversion. This conversion must have been
completed by January 1, 1995.
Holders of Subsidized Stafford Loans are eligible to receive Special
Allowance Payments. The Department is responsible for paying interest on
Subsidized Stafford Loans while the borrower is a qualified student, during a
grace period or during certain deferment periods. The Department makes quarterly
Interest Subsidy Payments to the owner of Subsidized Stafford Loans in the
amount of interest accruing on the unpaid balance thereof prior to the
commencement of repayment or during any deferment periods. The Act provides that
the owner of an eligible Subsidized Stafford Loan shall be deemed to have a
contractual right against the United States to receive Interest Subsidy Payments
(and Special Allowance Payments) in accordance with its provisions. Receipt of
Interest Subsidy Payments and Special Allowance Payments is conditioned on
compliance with the requirements of the Act and continued eligibility of such
loan for federal reinsurance.
Interest Subsidy Payments and Special Allowance Payments are generally
received within 45 days to 60 days after the end of any given calendar quarter
(provided that the applicable claim form is properly filed with the Department),
although there can be no assurance that such payments will in fact be received
from the Department within that period.
Repayment of principal on a Subsidized or Unsubsidized Stafford Loan
typically does not commence while a student remains a qualified student, but
generally begins upon expiration of the applicable grace period, as described
below. Any borrower may voluntarily prepay without premium or penalty any loan
and in connection therewith may waive any grace period or deferment period. In
general, each loan must be scheduled for repayment over a period of not more
than ten years after the commencement of repayment. The Act currently requires
minimum annual payments of $600 including principal and interest, unless the
borrower and the lender agree to lesser payments. As of July 1, 1995, lenders
are required to offer borrowers a choice among standard, graduated and
income-sensitive repayment schedules. These repayment options must be offered to
all new borrowers who enter repayment on or after July 1, 1995. If a borrower
fails to elect a particular repayment schedule or fails to submit the
documentation necessary for the option the borrower chooses, the standard
repayment schedule is used.
A-7
<PAGE>
Repayment of principal on a Subsidized Stafford Loan must generally commence
following a period of (a) not less than 9 months or more than 12 months (with
respect to loans for which the applicable interest rate is 7 percent per annum)
and (b) not more than 6 months (with respect to loans for which the applicable
interest rate is 9 percent per annum or 8 percent per annum and for loans to
first time borrowers on or after July 1, 1988) after the borrower ceases to
pursue at least a half-time course of study (a "Grace Period"). However, during
certain other periods (each a "Deferment Period") and subject to certain
conditions, no principal repayments need be made, including periods when the
student has returned to an eligible educational institution on a full-time (or
in certain cases half time) basis or is pursuing studies pursuant to an approved
graduate fellowship program, or when the student is a member of the Armed Forces
or a volunteer under the Peace Corps Act or the Domestic Volunteer Service Act
of 1973, or when the borrower is temporarily or totally disabled, or periods
during which the borrower may defer principal payments because of temporary
financial hardship. For new borrowers to whom loans are first disbursed on or
after July 1, 1993, payment of principal may be deferred only while the borrower
is at least a half-time student or is in an approved graduate fellowship program
or is enrolled in a rehabilitation program, or when the borrower is seeking but
unable to find full-time employment, or when for any reason the lender
determines that payment of principal will cause the borrower economic hardship;
in the case of unemployment or economic hardship the deferment is subject to a
maximum deferment period of three years. The 1992 Amendments also require
forbearance of loans in certain circumstances and permit forbearance of loans in
certain other circumstances (each such period, a "Forbearance Period").
The Unsubsidized Stafford Loan program created under the 1992 Amendments is
designed for students who do not qualify for Subsidized Stafford Loans and for
independent graduate and professional students whose Unmet Need exceeds what
they can borrow under the Subsidized Stafford Loan Program. The basic
requirements for Unsubsidized Stafford Loans are essentially the same as those
for the Subsidized Stafford Loans, including with respect to provisions
governing the interest rate, the annual loan limits and the Special Allowance
Payments. The terms of the Unsubsidized Stafford Loans, however, differ in some
respects. The federal government does not make Interest Subsidy Payments on
Unsubsidized Stafford Loans. The borrower must either pay interest on a periodic
basis beginning 60 days after the time the loan is disbursed or capitalize the
interest that accrues until repayment begins. Effective July 1, 1994, the
maximum insurance premium was set at 1 percent. Subject to the same loan limits
established for Subsidized Stafford Loans, the student may borrow up to the
amount of such student's Unmet Need. Lenders are authorized to make Unsubsidized
Stafford Loans applicable for periods of enrollment beginning on or after
October 1, 1992.
PLUS and SLS Loan Programs
The Act also provides for the PLUS Program. The Act authorizes PLUS Loans to
be made to parents of eligible dependent students. The 1993 Act eliminated the
SLS Program after July 1, 1994.
A-8
<PAGE>
The PLUS program permits parents of dependent students to borrow an amount
equal to each student's Unmet Need. Under the former SLS program, independent
graduate or professional school students and certain dependent undergraduate
students were permitted to borrow subject to the same loan limitations.
The first payment of principal and interest is due within 60 days of full
disbursement of the loan except for borrowers eligible for deferment who may
defer principal and interest payments while eligible for deferment; deferred
interest is then capitalized periodically or at the end of the deferment period
under specific arrangements with the borrower. The maximum repayment term is 10
years. PLUS and SLS loans carry no in-school interest subsidy.
The interest rate determination for a PLUS or SLS loan is dependent on when
the loan was originally made or disbursed. Some PLUS or SLS loans carry a
variable rate. The rate varies annually for each 12-month period beginning on
July 1 and ending on June 30. The variable rate is determined on the preceding
June 1 and is equal to the lesser of (a) the applicable Maximum Rate or (b) the
sum of (i) the bond equivalent rate of 52-week Treasury bills auctioned at the
final auction held prior to such June 1, and (ii) the applicable Interest Rate
Margin as set forth below.
PLUS/SLS Loans
<TABLE>
<CAPTION>
Date of Disbursement Borrower Rate Maximum Rate Interest Rate Margin
----------------------- ------------------ -------------- --------------------
<S> <C> <C> <C>
Prior to 10/01/81...... 9% 9%
10/01/81-10/31/82...... 14% 14%
11/01/82-06/30/87...... 12% 12%
07/01/87-09/30/92...... 52-Week Treasury + 12% 3.25%
Interest Rate Margin
10/01/92-06/30/94...... 52-Week Treasury + PLUS 10% 3.10%
Interest Rate Margin SLS 11%
After 06/30/94
(SLS repealed 07/01/94 52-Week Treasury + 9% 3.10%
Interest Rate Margin
</TABLE>
A holder of a PLUS or SLS loan is eligible to receive Special Allowance
Payments during any such 12-month period if (a) the sum of (i) the bond
equivalent rate of 52-week Treasury bills auctioned at the final auction held
prior to such June 1, and (ii) the Interest Rate Margin, exceeds (b) the Maximum
Rate.
The Consolidation Loan Program
The Act authorizes a program under which certain borrowers may consolidate
their various student loans into Consolidation Loans which will be insured and
reinsured to the same extent as other loans made under the FFELP. Under this
program, a lender may make a Consolidation Loan only if (a) such lender holds
one of the borrower's outstanding student loans that is selected for
consolidation, or (b) the borrower has unsuccessfully sought a Consolidation
Loan from the holders of the Student Loans selected for consolidation.
A-9
<PAGE>
Consolidation Loans are made in an amount sufficient to pay outstanding
principal and accrued unpaid interest and late charges on all FFELP loans, as
well as loans made pursuant to various other federal student loan programs,
which were selected by the borrower for consolidation. The unpaid principal
balance of a Consolidation Loan made prior to July 1, 1994 bears interest at a
rate not less than 9 percent. The interest rate on a Consolidation Loan made on
or after July 1, 1994 is equal to the weighted average of the interest rates on
the loans selected for consolidation, rounded upward to the nearest whole
percent. The holder of a Consolidation Loan made on or after October 1, 1993
must pay the Secretary a monthly rebate fee calculated on an annual basis equal
to 1.05 percent of the principal plus accrued unpaid interest on any such loan.
The repayment term under a Consolidation Loan varies depending upon the
aggregate amount of the loans being consolidated. In no case may the repayment
term exceed 30 years. A Consolidation Loan is evidenced by an unsecured
promissory note and entitles the borrower to prepay the loan, in whole or in
part, without penalty.
Guarantee Agencies
The Act authorizes Guarantee Agencies to support education financing and
credit needs of students at post-secondary schools. Under various programs
throughout the United States, Guarantee Agencies insure student loans. The
Guarantee Agencies are reinsured by the federal government for 80 percent to 100
percent of claims paid, depending on their claims experience for loans disbursed
prior to October 1, 1993 and for 78 percent to 98 percent of claims paid for
loans disbursed on or after October 1, 1993.
Guarantee Agencies collect a one-time insurance fee of up to 1 percent of
the principal amount of each loan, other than Consolidation Loans, that the
agency guarantees.
The Guarantee Agencies generally guarantee loans for students attending
institutions in their particular state or region or for residents of their
particular state or region attending schools in another state. Certain Guarantee
Agencies have been designated as the Guarantee Agency for more than one state.
Some Guarantee Agencies contract with other entities to administer their
guarantee agency programs.
Federal Insurance and Reinsurance of Guarantee Agencies
A student loan is considered to be in default for purposes of the Act when
the borrower fails to make an installment payment when due, or to comply with
other terms of the loan, and if the failure persists for 180 days in the case of
a loan repayable in monthly installments or for 240 days in the case of a loan
repayable in less frequent installments.
If the loan is guaranteed by a Guarantee Agency, the eligible lender is
reimbursed by the Guarantee Agency for 100 percent (98 percent for loans
disbursed on or after October 1, 1993) of the unpaid principal balance of the
loan plus accrued interest on any loan defaulted so long as the eligible lender
has properly originated and serviced such loan. Under certain circumstances a
loan deemed ineligible for reimbursement may be restored to eligibility.
A-10
<PAGE>
Under the Act, the Department enters into a reinsurance agreement with each
Guarantee Agency, which provides for federal reinsurance of amounts paid to
eligible lenders by the Guarantee Agency. Pursuant to such agreements, the
Department agrees to reimburse a Guarantee Agency for 100 percent of the amounts
expended in connection with a claim resulting from the death, bankruptcy, or
total and permanent disability of a borrower, the death of a student whose
parent is the borrower of a PLUS Loan, or claims by borrowers who received loans
on or after January 1, 1986 and who are unable to complete the programs in which
they are enrolled due to school closure, or borrowers whose borrowing
eligibility was falsely certified by the eligible institution; such claims are
not included in calculating a Guaranty Agency's claims experience for federal
reinsurance purposes, as set forth below. The Department is also required to
repay the unpaid balance of any loan if collection is stayed under the
Bankruptcy Code, and is authorized to acquire the loans of borrowers who are at
high risk of default and who request an alternative repayment option from the
Department.
With respect to FFELP loans in default, the Department is required to pay
the applicable Guarantee Agency a certain percentage ("Reinsurance Rate") of the
amount such agency paid pursuant to default claims filed by the lender on a
reinsured loan. The amount of such Reinsurance Rate is subject to specified
reductions when the total reinsurance claims paid by the Department to a
Guarantee Agency during a fiscal year equals or exceeds 5 percent of the
aggregate original principal amount of FFELP loans guaranteed by such agency
that are in repayment on the last day of the prior fiscal year. Accordingly, the
amount of the reinsurance payment received by the Guarantee Agency may vary. The
Reinsurance Rates are set forth in the following table.
<TABLE>
<CAPTION>
Guarantee Agency's
claims experience Applicable Reinsurance Rate
-------------------- -------------------------------------------------
<S> <C>
0% up to 5%........ 98% (100% for loans disbursed before Oct. 1, 1993)
5% up to 9%........ 88% (90% for loans disbursed before Oct. 1, 1993)
9% and over........ 78% (80% for loans disbursed before Oct. 1, 1993)
</TABLE>
- ----------
The claims experience is not cumulative. Rather, the claims experience for
any given Guarantee Agency is determined solely on the basis of claims for any
one federal fiscal year compared with the original principal amount of loans in
repayment at the beginning of that year.
The 1992 Amendments addressed industry concerns regarding the Department's
commitment to providing support in the event of Guarantee Agency failures.
Pursuant to the 1992 Amendments, Guarantee Agencies are required to maintain
specified reserve fund levels. Such levels are defined as 0.5 percent of the
total attributable amount of all outstanding loans guaranteed by the agency for
the fiscal year of the agency that begins in 1993, 0.7 percent for the agency's
fiscal year beginning in 1994, 0.9 percent for the agency's fiscal year
beginning in 1995, and 1.1 percent for the agency's fiscal year beginning on or
after January 1, 1996. If (i) the Guarantee Agency fails to achieve the minimum
reserve level in any two consecutive years, (ii) the Guarantee Agency's federal
reimbursements are reduced to 80 percent (or 78 percent after October 1, 1993)
or (iii) the Department determines the Guarantee Agency's administrative or
financial condition jeopardizes its continued ability to perform its
responsibilities, the Department must require the Guarantee Agency to submit and
implement a management plan to address the deficiencies. The Department may
terminate the Guarantee Agency's agreements with the Department if the Guarantee
Agency fails to submit the required plan, or fails to improve its administrative
or financial condition substantially, or if the Department determines the
Guarantee Agency is in danger of financial collapse. In such event, the
Department is authorized to undertake specified actions to assure the continued
payment of claims, including making advances to guarantee agencies to cover
immediate cash needs, transferring of guarantees to another Guarantee Agency, or
transfer of guarantees to the Department itself.
A-11
<PAGE>
The Act provides that, subject to compliance with the Act, the full faith
and credit of the United States is pledged to the payment of federal reinsurance
claims. It further provides that Guarantee Agencies are deemed to have a
contractual right against the United States to receive reinsurance in accordance
with its provisions. In addition, the 1992 Amendments provide that if the
Department determines that a Guarantee Agency is unable to meet its insurance
obligations, holders of loans may submit insurance claims directly to the
Department until such time as the obligations are transferred to a new Guarantee
Agency capable of meeting such obligations or until a successor Guarantee Agency
assumes such obligations. There can be no assurance that the Department would
under any given circumstances assume such obligation to assure satisfaction of a
guarantee obligation by exercising its right to terminate a reimbursement
agreement with a Guarantee Agency or by making a determination that such
Guarantee Agency is unable to meet its guarantee obligations.
Lastly, the 1993 Act provides the Secretary of Education with broad
authority to manage the finances and affairs of Guarantee Agencies. In general,
the Act provides that agency reserve funds are federal property and may be taken
by the Secretary if he determines such action is in the best interests of the
loan program. Also, the Secretary has broad authority to terminate a Guarantee
Agency's reinsurance agreement with the Department.
Within each fiscal year, the applicable Reinsurance Rate steps down
incrementally with respect to claims made only after the claims experience
thresholds are reached.
A-12
Exhibit 13
Management's Discussion and Analysis
of Financial Condition and Results of Operations
Years ended December 31, 1995-1997
(Dollars in millions, except per share amounts)
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 share and
per share amounts have been restated to reflect the stock split.
The GSE was established in 1973 as a for-profit, stockholder-owned,
government-sponsored enterprise to support the education credit needs of
students by, among other things, promoting liquidity in the student loan
marketplace through secondary market purchases. On July 31, 1997, at a Special
Meeting of Shareholders convened pursuant to the Privatization Act, the
shareholders approved the Reorganization. The Reorganization was consummated on
August 7, 1997 and each outstanding share of common stock, par value $.20 per
share, of the GSE was converted into one share of common stock, par value $.20
per share, of SLM Holding. Under the terms of the Reorganization, all GSE
employees were transferred to non-GSE subsidiaries on August 7, 1997 and on
December 31, 1997 the GSE transferred certain assets, including stock in certain
subsidiaries, to SLM Holding or one of its non-GSE subsidiaries. The
shareholders also elected 15 nominees of the Committee to Restore Value at
Sallie Mae ("CRV") as the initial Board of Directors of SLM Holding. The new
Board of Directors installed a new management team to implement the business
plan that the CRV had presented to the shareholders.
The Company is the largest source of financing and servicing for education
loans in the United States primarily through its participation in the Federal
Family Education Loan Program ("FFELP"), formerly the Guaranteed Student Loan
Program, and the Health Education Assistance Loan Program ("HEAL"). The
Company's products and services include student loan purchases and commitments
to purchase student loans as well as operational support to originators of
student loans and to post-secondary education institutions and other
education-related financial services. The Company also purchases privately
insured loans, principally those insured by a wholly owned subsidiary.
Both the FFELP and HEAL programs are highly regulated. There are three
types of FFELP loans: Stafford loans, PLUS loans, and consolidation loans.
Generally, these loans have repayment periods of between five and ten years,
with the exception of consolidation loans, and obligate the borrower to pay
interest at an annually reset variable rate that has a cap or, on older loans, a
stated fixed rate. In each case, pursuant to a government established formula,
the yield to holders of FFELP loans is subsidized on the borrowers' behalf by
the federal government to provide a market rate of return. The federal subsidy
is referred to as the Special Allowance Payment ("SAP"), which is paid to
holders of FFELP loans whenever the average of all of the 91-day Treasury bill
auctions in a calendar quarter, plus a spread of between 2.50 and 3.50
percentage points depending on the loan's origination date and whether the loan
is in repayment status, exceeds the rate of interest which the borrower is
obligated to pay. In low interest rate environments, the rate which the borrower
is obligated to pay may exceed the rate determined by the special allowance
formula. In those instances, no SAP is paid and the interest rate paid on the
loan by the borrower becomes, in effect, a floor on an otherwise variable rate
asset. When this happens, the difference between the interest rate paid by the
borrower and the rate determined by the SAP formula is referred to as "student
loan floor revenue" or "floor revenue".
1
<PAGE>
The Omnibus Budget Reconciliation Act of 1993 changed the FFELP in a number
of ways that lowered the profitability of FFELP loans for all participants and
established the Federal Direct Student Loan Program ("FDSLP") under which the
federal government lends directly to students. FFELP changes include
risk-sharing on defaulted loans, reductions in the special allowance rate, a 105
basis point annual rebate fee on consolidation loans, a 50 basis point
origination fee on Stafford and PLUS loans and a 30 basis point annual offset
fee (the "Offset Fee") unique to the GSE on student loans purchased and held on
or after August 10, 1993.
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.
Selected Financial Data
Condensed Statements of Income
<TABLE>
<CAPTION>
Increase (Decrease)
--------------------------------------
Years ended December 31, 1997 vs. 1996 1996 vs. 1995
1997 1996 1995 $ % $ %
<S> <C> <C> <C> <C> <C> <C> <C>
Net interest income.............................$ 758 $ 866 $ 901 $ (108) (13)% $(35) (4)%
Gains on sales of student loans................. 280 49 - 231 472 49 100
Servicing and securitization revenue............ 151 58 1 93 162 57 100
Other income.................................... 70 40 49 30 75 (9) (18)
Operating expenses.............................. 494 405 439 89 22 (34) (8)
Federal income taxes............................ 243 183 141 60 32 42 30
Minority interest in net earnings of
subsidiary................................... 11 11 11 - - - -
------ ------ ------ ------- --- ---- ---
Income before premiums on debt extinguished..... 511 414 360 97 24 54 15
Premiums on debt extinguished, net of tax....... (3) (5) (5) 2 32 - 2
------ ------ ------ ------- --- ---- ---
NET INCOME......................................$ 508 $ 409 $ 355 $ 99 24% $ 54 15%
====== ====== ====== ======= === ==== ===
BASIC EARNINGS PER COMMON SHARE.................$ 2.80 $ 2.10 $ 1.51 $ .70 33% $.59 39%
====== ====== ====== ======= === ==== ===
DILUTED EARNINGS PER COMMON SHARE...............$ 2.78 $ 2.09 $ 1.51 $ .69 33% $.58 38%
====== ====== ====== ======= === ==== ===
Dividends per common share......................$ .52 $ .47 $ .43 $ .05 11% $.04 9%
====== ====== ====== ======= === ==== ===
CORE EARNINGS...................................$ 487 $ 381 $ 350 $ 106 28% $ 31 9%
====== ====== ====== ======= === ==== ===
</TABLE>
CORE EARNINGS
Core earnings are defined as the Company's net income less the after-tax effect
of floor revenues. Management believes that this measure, which is not
recognized under generally accepted accounting principles ("GAAP"), assists in
understanding the Company's earnings before the effects of student loan floor
revenues which, to the extent they are not hedged by floor revenue contracts,
are largely outside of the Company's control. Management believes that core
earnings as defined, while not necessarily comparable to other companies' use of
similar terminology, provide for meaningful period-to-period comparisons as a
basis for analyzing trends in the Company's core student loan operations.
2
<PAGE>
Condensed Balance Sheets
<TABLE>
Increase (Decrease)
------------------------------------------
December 31, 1997 vs. 1996 1996 vs. 1995
1997 1996 $ % $ %
<S> <C> <C> <C> <C> <C> <C>
ASSETS
Student loans..................................... $29,521 $33,754 $(4,233) (13)% $ (582) (2)%
Warehousing advances.............................. 1,869 2,790 (921) (33) (1,075) (28)
Academic facilities financings.................... 1,375 1,473 (98) (7) 160 12
Cash and investments.............................. 5,130 7,706 (2,576) (33) (1,161) (13)
Other assets...................................... 2,014 1,907 107 6 286 18
------- ------- ------- --- ------- ---
Total assets...................................... $39,909 $47,630 $(7,721) (16)% $(2,372) (5)%
======= ======= ======= === ======= ===
LIABILITIES AND STOCKHOLDERS' EQUITY
Short-term borrowings............................. $23,176 $22,518 $ 658 3% $ 5,071 29%
Long-term notes................................... 14,541 22,606 (8,065) (36) (7,477) (25)
Other liabilities................................. 1,303 1,458 (155) (11) 67 5
------- ------- ------- --- ------- ---
Total liabilities................................. 39,020 46,582 (7,562) (16) (2,339) (5)
------- ------- ------- --- ------- ---
Minority interest in subsidiary................... 214 214 - - - -
Stockholders' equity before treasury stock........ 1,099 1,371 (272) (20) (2,291) (63)
Common stock held in treasury at cost............. 424 537 (113) (21) (2,258) (81)
------- ------- ------- --- ------- ---
Total stockholders' equity........................ 675 834 (159) (19) (33) (4)
------- ------- ------- --- ------- ---
Total liabilities and stockholders' equity........ $39,909 $47,630 $(7,721) (16)% $(2,372) (5)%
======= ======= ======= === ======= ===
</TABLE>
Results of Operations
Earnings Summary
For the year ended December 31, 1997, the Company's net income was $508 million
($2.78 diluted earnings per common share), compared to $409 million ($2.09
diluted earnings per common share) for the year ended December 31, 1996. The
increase in 1997 net income of $99 million (24 percent) reflects the Company's
strategy of funding its managed portfolio of student loans through its
securitization program. In 1997, the Company securitized $9.4 billion of student
loans and recorded securitization gains of $182 million, after-tax, an increase
of $150 million over the gains recorded in 1996. The increase is mainly due to
the securitization of $3.4 billion more loans in 1997 and to higher average
borrower indebtedness and the longer average life of the portfolios securitized
in 1997 versus 1996. The 1997 gain also includes $36 million, after-tax, related
to the reversal of reserves for Offset Fees on securitizations completed prior
to 1997, which were held in reserve until the third quarter of 1997 when the
Company resolved litigation over whether the Offset Fee applied to securitized
student loans (discussed below). The growth in securitization activity in 1997
increased the average balance of securitized student loans, which increased
servicing and securitization revenue by approximately $61 million, after-tax.
The increased income from the Company's securitization program was offset by the
reduction in net interest income of $71 million, after-tax, which occurred as
the on-balance sheet student loan portfolio was reduced through securitizations
and as a result of declining student loan spreads. Operating expenses increased
by $62 million, after-tax, due mainly to one-time or non-recurring charges
associated with the Reorganization, privatization and proxy expenses (discussed
below) and to the increase in the volume of student loans serviced. Operating
expenses (exclusive of the one-time or non-recurring charges) as a percent of
managed student loans decreased from 109 basis points in 1996 to 98 basis points
in 1997. Each of these components of net income is discussed in further detail
in subsequent sections of this analysis.
3
<PAGE>
In the third quarter of 1997, in response to litigation initiated by the
Company, the United States Department of Education determined that the Offset
Fee that the GSE is required to pay on certain student loans does not apply to
securitized student loans. As a result, in the third quarter of 1997 the Company
reversed a pre-tax $97 million reserve ($40 million of which was accrued in the
first half of 1997) for Offset Fees accrued previously on securitized student
loans. In the consolidated statements of income, $94 million of the reserve
reversal is included in the gain on sale of student loans for 1997 and $3
million is included in servicing and securitization revenue. Also, during 1997,
net income was reduced by pre-tax charges of $107 million ($86 million included
in operating expenses) for expenses and asset writedowns in connection with the
Reorganization, the proxy contest, the transfer of student loans from a third
party servicer in financial difficulty and the change in business strategies
implemented by the new management. (See -- "Operating Expenses.")
During 1997, the Company spent $680 million to repurchase 18 million common
shares (or 10 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>
Increase (Decrease)
-------------------------------------
Years ended December 31, 1997 vs. 1996 1996 vs. 1995
1997 1996 1995 $ % $ %
<S> <C> <C> <C> <C> <C> <C> <C>
Interest income
Student loans............................ $2,462 $2,607 $2,708 $(145) (6)% $ (101) (4)%
Warehousing advances..................... 151 194 408 (43) (22) (214) (53)
Academic facilities financings........... 98 100 108 (2) (2) (8) (7)
Investments.............................. 573 548 697 25 4 (149) (21)
Taxable equivalent adjustment............ 35 36 52 (1) (1) (16) (30)
------ ------ ------ ----- --- ------- ---
Total taxable equivalent interest income.... 3,319 3,485 3,973 (166) (5) (488) (12)
Interest expense............................ 2,526 2,583 3,020 (57) (2) (437) (14)
------ ------ ------ ----- --- ------- ---
Taxable equivalent net interest income...... $ 793 $ 902 $ 953 $(109) (12)% $ (51) (5)%
====== ====== ====== ===== === ======= ===
</TABLE>
4
<PAGE>
Average Balance Sheets
The following table reflects the rates earned on earning assets and paid on
liabilities for the years ended December 31, 1997, 1996 and 1995.
<TABLE>
<CAPTION>
Years ended December 31,
----------------------------------------------------------------------
1997 1996 1995
Balance Rate Balance Rate Balance Rate
<S> <C> <C> <C> <C> <C> <C>
AVERAGE ASSETS
Student loans................................... $31,949 7.70% $33,273 7.83% $32,758 8.27%
Warehousing advances............................ 2,518 6.00 3,206 6.04 6,342 6.43
Academic facilities financings.................. 1,436 8.57 1,500 8.43 1,527 8.92
Investments..................................... 9,592 6.08 9,444 5.91 11,154 6.46
------- ---- ------- ---- ------- ----
Total interest earning assets...................... 45,495 7.30% 47,423 7.35% 51,781 7.67%
==== ==== ====
Non-interest earning assets........................ 1,983 1,858 1,673
------- ------- -------
Total assets....................................... $47,478 $49,281 $53,454
======= ======= =======
AVERAGE LIABILITIES AND STOCKHOLDERS' EQUITY
Six month floating rate notes................... $ 2,908 5.48% $ 2,485 5.42% $ 3,609 5.86%
Other short-term borrowings..................... 23,640 5.51 18,493 5.43 11,802 5.88
Long-term notes................................. 18,677 5.70 26,024 5.55 35,373 5.98
------- ---- ------- ---- ------- ----
Total interest bearing liabilities................. 45,225 5.59% 47,002 5.50% 50,784 5.95%
==== ==== ====
Non-interest bearing liabilities................... 1,473 1,464 1,451
Stockholders' equity............................... 780 815 1,219
------- ------- -------
Total liabilities and stockholders' equity......... $47,478 $49,281 $53,454
======= ======= =======
Net interest margin................................ 1.74% 1.90% 1.84%
==== ==== ====
</TABLE>
================================================================================
Rate/Volume Analysis
The Rate/Volume Analysis below shows the relative contribution of changes in
interest rates and asset volumes.
Taxable Increase (decrease)
equivalent attributable to change in
increase
(decrease) Rate Volume
1997 vs. 1996
Taxable equivalent
interest income......... $(166) $ (26) $(140)
Interest expense........... (57) 55 (112)
----- ----- -----
Taxable equivalent net
interest income......... $(109) $ (81) $ (28)
===== ===== =====
1996 vs. 1995
Taxable equivalent
interest income......... $(488) $(235) $(253)
Interest expense........... (437) (223) (214)
----- ----- -----
Taxable equivalent net
interest income......... $ (51) $ (12) $ (39)
===== ===== =====
Taxable equivalent net interest income and net interest margin for the year
ended December 31, 1997 decreased from 1996 by $109 million and .16 percent,
respectively. The $81 million decrease in taxable equivalent net interest income
attributable to the change in rates in 1997 versus 1996 was principally due to a
$21 million increase in consolidation loan rebate fees (See -- "Student Loan
Spread Analysis"), lower student loan yields in the form of reduced SAP rates
which reduced interest income by $12 million and the growth in the balance of
student loan participations which, due to the fact that they earn at a
contractual rate that is net of servicing costs, negatively impacted student
loan spreads by $16 million. Other factors contributing to the decrease were the
writeoff of $13 million of deferred hedge losses in the 1997 third quarter and a
decrease of $12 million in floor revenues, net of payments under the floor
revenue contracts discussed below. These decreases were partially offset by an
increase in income of $12 million from the amortization of upfront payments
received from floor revenue contracts and higher interest spreads on
investments. 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 student loans on-balance sheet as a result of securitizations
partially offset by the increase in the average balance of student loan
participations.
5
<PAGE>
Taxable equivalent net interest income in 1996 decreased from 1995 by $51
million. The $12 million decrease in taxable equivalent net interest income
attributable to the change in rates in 1996 versus 1995 was principally due to
higher reserves for risk-sharing, consolidation loan rebate fees and yield
reductions totalling $40 million, an increase in student loan loss reserves
(exclusive of risk-sharing) of $14 million and increased leverage of $21
million, partially offset by the increase of $29 million in floor revenues, net
of payments to floor contract counterparties. Other items offsetting the
decreases in taxable equivalent net interest income discussed above include $22
million of revenues from the amortization of the up-front payments received from
student loan floor contracts, the $9 million reversal of a previously
established reserve due to the successful outcome of litigation related to SAP
payments on certain loans, and a higher percentage of student loans relative to
average earning assets. The $39 million decrease attributable to volume is
primarily due to the decrease in the balance of warehousing advances and
investments as the Company reduced these assets and utilized the capital
supporting them to purchase shares of its common stock. Since the Company's
borrowings are largely variable rate in nature, the decrease in interest expense
in 1996 was reflective of the level of interest rates in general. In addition,
the absolute level of borrowings decreased as the balance sheet was reduced in
size through the securitization of student loans as well as the reductions in
the investment and warehousing advance portfolios.
The increase in net interest margin in 1996 from 1995 was due principally
to 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 1997, 1996
and 1995. The line captioned "Adjusted Student Loan Yields" reflects contractual
yields adjusted for the amortization of premiums paid to purchase loan
portfolios and the estimated costs of borrower benefits. The Company's servicing
subsidiary, as the servicer of student loans that the Company securitizes, will
continue to earn fee revenues over the life of the securitized student loan
portfolios. The off-balance sheet information presented in the Student Loan
Spread Analysis that follows analyzes the on-going revenues associated with the
securitized portfolios of student loans.
Years ended December 31,
1997 1996 1995
ON-BALANCE SHEET
Adjusted student loan yields 7.85% 7.92% 8.40%
Amortization of floor swap
payments............... .12 .07 -
Floor income.............. .10 .13 .04
Consolidation loan
rebate fees............ (.20) (.12) (.10)
Reserves for risk-
sharing costs.......... (.05) (.05) -
Offset fees............... (.12) (.12) (.07)
------- ------- -------
Student loan income....... 7.70 7.83 8.27
Cost of funds............. (5.53) (5.49) (5.95)
------- ------- -------
Student loan spread....... 2.17% 2.34% 2.32%
======= ======= =======
Core student loan spread.. 2.07% 2.21% 2.28%
======= ======= =======
OFF-BALANCE SHEET
Servicing and securitization
revenue................ 1.58% 1.43% .80%
======= ======= =======
AVERAGE BALANCES
Student loans, including
participations......... $31,949 $33,273 $32,758
Securitized loans......... 9,542 4,020 177
------- ------- -------
Managed student loans..... $41,491 $37,293 $32,935
======= ======= =======
The core student loan spread declined from 2.21 percent in 1996 to 2.07
percent in 1997, a decline of .14 percent. The combined impact of consolidation
loan rebate fees, reserves for risk-sharing losses and Offset Fees reduced core
student loan spreads by .37 percent in 1997 versus .29 percent in 1996. This
reduction was principally due to the growth in the portfolio of loans subject to
the consolidation loan rebate fee. Other factors contributing to the decrease in
the core student loan spread were the relative increase in student loan
participations which contractually yield a lower rate than the underlying
student loans (discussed below) and lower student loan yields in the form of
reduced SAP rates, partially offset by increased revenues from the amortization
of upfront payments received from student loan floor contracts and by lower
additions to loss reserves for student loans.
6
<PAGE>
In November 1997, the Company suspended its loan consolidation program (See
- -- "Legislative Developments - Loan Consolidation Program") and, unless the
Company is able to reinstate its program, consolidation loan rebate fees will
decline over time as the portfolio of consolidation loans are repaid. However,
on-balance sheet student loan spreads will continue to be negatively impacted as
the balance of newly acquired loans, which are subject to the reduced SAP rates,
risk-sharing and Offset Fees, replaces the runoff of older student loans not
subject to these fees and yield reductions. The Company endeavors to pass
through the impact of these costs through the pricing of loan portfolios it
purchases in the secondary market.
The decrease in the core student loan spread in 1996 relative to 1995 was
due principally to higher consolidation loan rebate fees, reserves for
risk-sharing losses and Offset Fees, the effect of student loan participations
which contractually yield a lower rate than the underlying student loans, and
increased student loan loss reserves, offset by the revenues from the
amortization of upfront payments received from student loan floor contracts and
a one-time gain from the reversal of a previously established loss reserve due
to the successful outcome of litigation related to SAP payments on certain
loans.
In the third quarter of 1996, the GSE restructured its business
relationship with the Chase Manhattan Bank ("Chase") whereby the GSE and Chase
formed a joint venture (the "Joint Venture") that markets education loans made
by Chase. Chase sells the loans to a trust which holds them on behalf of the
Joint Venture. These loan purchases are financed through sales of student loan
participations to the GSE and Chase. The loan participations earn interest at a
contractual rate which is based on the yield of the underlying student loans
less amounts to cover servicing and other operating expenses. Such expenses
reduced the Company's student loan spread by .08 percent in 1997 and .03 percent
in 1996. At December 31, 1997 and 1996, the Joint Venture owned $3.9 billion and
$2.9 billion, respectively, of federally insured education loans with
substantially all of the loans serviced by the Company's servicing subsidiary.
The Company accounts for its investment in the Joint Venture using the equity
method.
STUDENT LOAN FLOOR REVENUES
The yield to holders of FFELP loans is subsidized on the borrower's behalf by
the federal government to provide a market rate of return through the payment of
SAP. The SAP is paid to holders of FFELP loans whenever the average of all of
the 91-day Treasury bill auctions in a calendar quarter plus a spread of 2.50
percent, 3.10 percent, 3.25 percent or 3.50 percent, depending on the loan's
status and origination date, exceeds the rate of interest that the borrower
pays. The interest rate paid by the borrower is either at a fixed rate or a rate
that resets annually. Thus, the yield to holders of student loans varies with
the 91-day Treasury bill rate except in low interest rate environments, when the
interest rate which the borrower is obligated to pay exceeds the variable rate
determined by the SAP formula. When this happens the borrower's interest rate,
which is the minimum interest rate earned on FFELP loans, becomes, in effect, a
floor rate. The floor enables the Company to earn wider spreads on these student
loans since the Company's variable cost of funds, which is indexed to the 91-day
Treasury bill rate, reflects lower market rates. The floor generally becomes a
factor when the Treasury bill rate is less than 5.90 percent. For loans which
have fixed borrower interest rates, the floor remains a factor until Treasury
bill rates rise to a level at which the yield determined by the SAP formula
exceeds the borrower's interest rate ("fixed rate floors"). For loans with
annually reset borrower rates, the floor is a factor until either Treasury bill
rates rise or the borrower's interest rate is reset which occurs on July 1 of
each year ("variable rate floors"). Under the FFELP program, the majority of
loans disbursed after July 1992 have variable borrower interest rates that reset
annually.
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 December 31, 1997 and 1996
(dollars in billions).
<TABLE>
<CAPTION>
December 31, 1997 December 31, 1996
Fixed Variable Total Fixed Variable Total
<S> <C> <C> <C> <C> <C> <C>
Student loans with floor revenue potential............ $14.2 $ 20.5 $ 34.7 $16.1 $15.1 $ 31.2
Less notional amount of floor revenue contracts....... (7.2) (10.6) (17.8) (8.6) (4.9) (13.5)
----- ------ ------- ------ ----- ------
Net student loans with floor revenue potential........ $ 7.0 $ 9.9 $ 16.9 $ 7.5 $10.2 $ 17.7
===== ====== ====== ===== ===== ======
Net student loans earning floor revenues at year end.. $ 4.6 $ -- $ 4.6 $ 2.8 $ 6.6 $ 9.4
===== ====== ====== ===== ===== ======
</TABLE>
7
<PAGE>
Based on the average bond equivalent 91-day Treasury bill rates of 5.21
percent, 5.16 percent and 5.68 percent for the years ended December 31, 1997,
1996 and 1995, respectively, the Company earned floor revenues of $32 million
(net of $19 million in payments under the floor revenue contracts), $43 million
(net of $12 million in payments under the floor revenue contracts), and $14
million, respectively.
FLOOR REVENUE CONTRACTS
During 1996 and 1997, the Company entered into contracts with third parties with
notional amounts of $13 billion and $11 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 six months for the 1997 contracts and two years for the 1996
contracts. At December 31, 1997, $11 billion of the notional amount of the 1997
contracts was outstanding and $7 billion of the notional amount of the 1996
contracts was outstanding.
For the years ended December 31, 1997 and 1996, the amortization of the
upfront payments received for the sale of fixed rate floor revenue contracts
contributed $34 million and $22 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 years ended December 31, 1997 and 1996, the Company earned
$7 million and $1 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 up-front payments is
excluded from core earnings.
PROVISION FOR STUDENT LOAN LOSSES
The provision for student loan losses is the periodic expense of maintaining an
allowance sufficient to absorb losses, net of recoveries, inherent in the
existing on-balance sheet loan portfolio. In evaluating the adequacy of the
allowance for loan losses, the Company takes into consideration several factors
including trends in claims rejected for payment by guarantors, default rates on
non-federally insured student loans, principally those insured by a wholly owned
subsidiary of the Company and the amount of FFELP loans subject to 2 percent
risk-sharing. In 1997, the Company added $17 million to this reserve to provide
for losses on non-federally insured student loans versus $14 million in 1996.
The Company also added a net of $5 million for potential losses on its federally
insured student loan portfolio based on the additions for potential losses due
to risk-sharing partially offset by decreases due to improved experience in
recovering unpaid guarantees on defaulted student loans versus $15 million in
1996. The provision for loan losses, net of recoveries, did not change
materially in 1995. Once a student loan is charged off as a result of an unpaid
claim, it is the Company's policy to continue to pursue the recovery of
principal and interest.
Management believes that the allowance for 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
years ended December 31, 1997, 1996 and 1995.
<TABLE>
<CAPTION>
Years ended December 31,
----------------------------------------------------------------------------
1997 1996 1995
Average Average Average Average Average Average
Index Balance Rate Balance Rate Balance Rate
<S> <C> <C> <C> <C> <C> <C>
Treasury bill, principally 91-day.............. $32,240 5.52% $35,375 5.48% $34,039 5.93%
LIBOR.......................................... 6,219 5.51 7,797 5.38 14,290 5.87
Discount notes................................. 5,267 5.48 2,694 5.35 1,209 5.85
Fixed.......................................... 663 7.02 720 6.81 811 6.68
Zero coupon.................................... 134 11.12 123 11.12 123 11.06
Other.......................................... 702 5.20 293 4.87 312 6.11
------- ----- ------- ----- ------- -----
Total.......................................... $45,225 5.59% $47,002 5.50% $50,784 5.95%
======= ===== ======= ===== ======= =====
</TABLE>
8
<PAGE>
In the above table, for the years ended December 31, 1997, 1996 and 1995,
spreads for Treasury bill indexed borrowings averaged .24 percent, .25 percent
and .26 percent, respectively, over the weighted average Treasury bill rates for
those years and spreads for London Interbank Offered Rate ("LIBOR") indexed
borrowings averaged .24 percent, .26 percent and .31 percent, respectively,
under the weighted average LIBOR rates.
Other Income
In addition to the $97 million reserve reversal related to the applicability of
the Offset Fee to securitized student loans, the increase in other income of
$354 million over 1996 was mainly due to higher levels of securitization during
1997, and an increase of $93 million in servicing and securitization revenue as
the Company's average balance of securitized student loans increased by $5.5
billion over 1996.
Securitization Program
During each of the years ended December 31, 1997 and 1996, the Company completed
four securitization transactions, in which a total of $9.4 billion and $6.0
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. The Company accounts for its securitization
transactions in accordance with Statement of Financial Accounting Standards No.
125 "Accounting for Transfers and Servicing of Financial Assets and
Extinguishments of Liabilities" ("SFAS 125"), which establishes the accounting
for certain financial asset transfers including securitization transactions.
Under SFAS 125, the Company records a gain on sale equal to the present value of
the expected net cash flows from the trust to the Company over the life of the
portfolio sold. The resultant asset (the "Interest Residual") consists of the
net present value of the excess of the interest earned on the portfolio of
student loans sold to the trust less the interest paid on the asset-backed
securities, servicing and administration fees, the estimated cost of borrower
benefit programs, expected losses from risk-sharing on defaulted loans and other
student loan related costs. In addition, the Company continues to service the
loans in the trusts for a fee and earns that fee over the life of the portfolio.
When the contract servicing fee is greater than current market servicing rates,
the present value of such excess servicing fees is recognized as a servicing
asset and included in the gain on sale.
GAINS ON SALES OF STUDENT LOANS
In 1997, the Company recorded securitization gains of $280 million pre-tax, an
increase of $231 million over the gains recorded in 1996. The increase is mainly
due to the securitization of $3.4 billion more student loans in 1997 than in
1996. In the third quarter of 1997, the Company resolved litigation over whether
the Offset Fee applied to securitized student loans. As a result, in the third
quarter of 1997 the Company reversed a pre-tax $97 million reserve (of which $57
million was accrued prior to 1997 and $40 million was accrued in the first half
of 1997) for Offset Fees accrued previously on securitized student loans. If the
Company had recorded gains at the time of each securitization transaction
without reserving for the Offset Fee, then the 1997 gains would have been
pre-tax $226 million versus $95 million in 1996, or, as a percentage of the
securitized portfolios, 2.39 percent in 1997 versus 1.58 percent in 1996. The
increase in gains as a percentage of the securitized portfolio was due mainly to
higher average borrower indebtedness and the longer average life of the
portfolios of loans securitized in 1997 versus 1996. Gains on securitizations
were immaterial in 1995. 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
Interest earned on the Interest Residual is included in servicing and
securitization revenue and totaled $53 million and $23 million, for the years
ended December 31, 1997 and 1996, 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
$98 million and $35 million, for the years ended December 31, 1997 and 1996,
respectively. The increase in servicing and securitization income is mainly due
to the increase in the average balance of the Interest Residual from $144
million in 1996 to $329 million in 1997, and to the increase in the average
balance of securitized student loans from $4.0 billion in 1996 to $9.5 billion
in 1997. Servicing and securitization income in 1997 also includes $3 million
related to the Offset Fee reserve reversal in the third quarter of 1997.
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 119 basis points,
109 basis points and 133 basis points for the years ended December 31, 1997,
1996 and 1995 respectively. Operating expenses in 1997 included one-time
expenses of $86 million ($61 million to corporate operating expenses and $25
million to servicing costs) incurred in 1997 in connection with the Company's
Reorganization, the proxy contest, the transfer of loans from a third party
servicer in financial difficulty and the change in business strategies
implemented by the new management. Together these one-time costs account for 21
of the 119 basis points in 1997. Operating expenses are summarized in the tables
on the following page.
9
<PAGE>
<TABLE>
<CAPTION>
Years ended December 31,
----------------------------------------------------------------------------------------------
1997 1996 1995
Servicing Servicing Servicing
and and and
Corporate Acquisition Total Corporate Acquisition Total Corporate Acquisition Total
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C>
Salaries and employee
benefits................... $ 75 $150 $225 $ 68 $138 $206 $ 75 $137 $212
Occupancy and equipment...... 28 72 100 24 60 84 25 49 74
Professional fees............ 23 20 43 15 8 23 34 11 45
Advertising and printing..... 7 - 7 7 - 7 6 - 6
Office operations............ 8 28 36 8 32 40 9 35 44
Other........................ 34 12 46 9 2 11 12 2 14
---- ----- ----- ---- ----- ----- ---- ----- -----
Total internal operating
expenses................... 175 282 457 131 240 371 161 234 395
Third party servicing costs... - 37 37 - 35 35 - 44 44
---- ----- ----- ---- ----- ----- ---- ----- -----
Total operating expenses...... $175 $319 $494 $131 $275 $406 $161 $278 $439
==== ===== ===== ==== ===== ===== ==== ===== =====
Employees at end of the year.. 563 4,045 4,608 761 4,031 4,792 856 3,885 4,741
==== ===== ===== ==== ===== ===== ==== ===== =====
</TABLE>
<TABLE>
<CAPTION>
Years ended December 31, Increase/(Decrease)
-------------------------------- -----------------------------------------
1997 1996 1995 1997 vs. 1996 1996 vs. 1995
$ % $ %
<S> <C> <C> <C> <C> <C> <C> <C>
Servicing costs........................ $252 $211 $205 $41 20% $ 6 3%
Acquisition costs...................... 67 64 73 3 4 (9) (13)
---- ---- ---- --- -- --- ---
Total servicing and acquisition costs.. $319 $275 $278 $44 16% $(3) (1)%
==== ==== ==== === == === ===
</TABLE>
================================================================================
In 1997, corporate operating expenses increased by $44 million over the
corresponding year. As mentioned above, the increase can be attributed to the
one-time, non-recurring expenses of $61 million that relate to the
Reorganization of the GSE. Specifically, these expenses were related to
privatization costs ($12 million expense related to the warrants issued to the
D.C. government, $5 million for the use of the Sallie Mae name and $3 million in
fees and related costs for the Company's initial SEC registration), severance
costs as a result of staff reductions ($16 million), costs associated with the
consolidation of staff located in the metropolitan Washington D.C. area ($11
million), the write-down of various non-student loan assets ($5 million) and
costs associated with the proxy solicitations relating to the Reorganization ($9
million). The decrease in corporate operating expenses exclusive of the
one-time, non-recurring expenses was due to lower professional fees and the
beneficial impact in the fourth quarter from the staff reductions, lower
depreciation from the asset writedowns and the consolidation of facilities.
For the year ended December 31, 1997, servicing costs increased by $41
million. Approximately $25 million of this increase was due to the one-time,
non-recurring expenses of $11 million for the write-down of assets, $4 million
for severance costs relating to the third quarter staff reductions and $10
million in connection with the transfer of loans from a third party servicer in
financial difficulty to Sallie Mae Servicing Corporation ("SMSC"), a wholly
owned subsidiary of the Company. The increase also reflects increased costs
associated with the increase in the volume of loans serviced.
The decrease of $30 million in corporate operating expenses in 1996 versus
1995 was due principally to the divestiture of a majority interest in CyberMark,
a wholly owned subsidiary, completed during the second quarter of 1996 which
reduced 1996 operating expenses by $20 million. Reductions in corporate staffing
and professional fees reduced operating expenses by an additional $10 million.
Servicing costs include all operations and systems costs incurred to
service the portfolio of managed student loans, including fees paid to third
party servicers. The 1992 legislated expansion of student eligibility and
increases in loan limits resulted in higher average student loan balances, which
generally command a higher price in the secondary market and contribute to lower
servicing costs as a percentage of the average balance of managed student loans.
When expressed as a percentage of the managed student loan portfolio, servicing
costs averaged 61 basis points, 57 basis points and 62 basis points for the
years ended December 31, 1997, 1996 and 1995 respectively. The increase in 1997
was due principally to the one-time costs discussed above, which increased
servicing costs by 6 basis points for the year ended December 31, 1997.
10
<PAGE>
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
1997, $4.7 billion of student loans were originated and transferred to the
Company's ExportSS system, of which $1.5 billion was related to the Joint
Venture's portfolio including $760 million committed for sale to the Company,
compared to $4.2 billion in the prior year. The outstanding portfolio of loans
serviced for ExportSS lenders totaled $4.2 billion at December 31, 1997, up 3
percent from $4.0 billion at December 31, 1996.
Federal and State Taxes
The Company maintains a portfolio of tax-advantaged assets principally to
support education-related financing activities. That portfolio was primarily
responsible for the decrease in the effective federal income tax rate from the
statutory rate of 35 percent to 32 percent in 1997, 30 percent in 1996, and 27
percent in 1995. The increase in the effective tax rate for 1997 was mainly due
to $12 million of warrants issued in connection with the privatization and other
privatization costs, which are not deductible for tax purposes. The GSE is
exempt from all state, local, and District of Columbia income, franchise, sales
and use, personal property and other taxes, except for real property taxes.
However, this tax exemption applies only to the GSE and does not apply to SLM
Holding or its other operating subsidiaries. Under the Privatization Act, the
Company's GSE and non-GSE activities are separated, with non-GSE activities
being subject to taxation at the state and local level. State taxes were
immaterial in 1997 as the majority of the Company's business activities were
conducted in the GSE.
As increasing business activity occurs outside of the GSE,
the impact of state and local taxes will increase accordingly. Management
expects that ultimately all business activities will occur outside of the GSE
which could increase the Company's effective income tax rate by as much as four
percent. The loss of the GSE tax exemption for sales and use and personal
property taxes could increase operating costs by one percent.
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.
The GSE secures financing to fund its on-balance sheet portfolio of student
loans along with its other operations by issuing debt securities in the domestic
and overseas capital markets, through public offerings and private placements of
U.S. dollar-denominated and foreign currency-denominated debt of varying
maturities and interest rate characteristics and through securitizations of its
student loans. The GSE's debt securities are currently rated at the highest
credit rating level by Moody's Investors Service and Standard & Poor's.
Historically, the rating agencies' ratings of the GSE have been largely a factor
of its status as a government-sponsored enterprise. Since the Privatization Act
did not modify the attributes of debt issued by the GSE, management anticipates
that the GSE will retain its current credit ratings. In addition to the GSE
debt, student loan securitization has been an increasing source of funding for
the Company's managed student loan portfolio since 1995. As student loans are
securitized the need for long-term financing of these assets on balance sheet
decreases. Management believes that the financing and capital requirements of
the Company can be adequately accommodated through the foregoing sources.
During 1997, the Company used the proceeds from student loan
securitizations of $9.6 billion, repayments and claim payments on student loans
of $3.8 billion, and the net proceeds from sales of investments of $2.4 billion
to purchase student loans and participations of $9.0 billion, to reduce total
debt by $7.4 billion and to repurchase $680 million of the Company's common
stock.
Operating activities provided net cash inflows of $55 million
in 1997, a decrease of $147 million from the net cash inflows of $202 million in
1996. This decrease was mainly attributable to the decrease in other liabilities
of $130 million in 1997 versus an increase of $188 million in 1996 caused by
1996 student loan purchases of approximately $200 million for which payment was
made in 1997.
During 1997, the GSE issued $4.7 billion of long-term notes to refund
maturing and repurchased obligations. At December 31, 1997, the GSE had $14.5
billion of outstanding long-term debt issues of which $9.6 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.")
11
<PAGE>
On August 8, 1997, SLM Holding secured a $600 million bank line of credit
which is being used to meet working capital needs. Over the long term,
securitization is expected to provide the principal source of long-term funding
for the Company's managed portfolio of student loans. There will also be a need
for short-term financing for student loans prior to securitization. Such
financings will likely require the Company to obtain a bond rating and such
ratings will not be known until specific debt is issued. It is expected that
these ratings will be below the GSE's current credit rating levels. At December
31, 1997, SLM Holding had $281 million outstanding under this line.
Until the GSE is dissolved, the Privatization Act places a number of
limitations on the Company. Under the Privatization Act, the GSE must wind down
its operations and dissolve on or before September 30, 2008. Any GSE debt
obligations outstanding at the date of such dissolution will be defeased through
creation of a fully collateralized trust, consisting of U.S. government or
agency obligations with cash flows matching the interest and principal
obligations of the defeased debt. The Privatization Act requires that on the
dissolution date of September 30, 2008, the GSE shall repurchase or redeem, or
make proper provisions for repurchase or redemption of any outstanding preferred
stock. The Company has the option of effecting an earlier dissolution of the GSE
if certain conditions are met. Also upon the GSE's dissolution, all of its
remaining assets will transfer to the Company.
The Privatization Act effectively requires that the GSE maintain a minimum
statutory capital adequacy ratio (the ratio of stockholders' equity to total
assets plus 50 percent of the credit equivalent amount of certain off-balance
sheet items) of at least 2 percent until January 1, 2000 and 2.25 percent
thereafter or be subject to certain "safety and soundness" requirements designed
to restore such statutory ratio. Management anticipates being able to fund the
increase in required capital from the GSE's current and retained earnings. While
the GSE may not finance the activities of its non-GSE affiliates, it may,
subject to its minimum capital requirements, dividend retained earnings and
surplus capital to SLM Holding, which in turn may contribute such amounts to its
non-GSE subsidiaries. The Privatization Act 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 December 31, 1997, the GSE's statutory capital
adequacy ratio, after the effect of the dividends to be paid in the first
quarter of 1998, was 2.00 percent.
The Privatization Act imposes certain restrictions on intercompany
relations between the GSE and its affiliates during the wind-down period. In
particular, the GSE must not extend credit to nor guarantee any debt obligations
of SLM Holding or its non-GSE subsidiaries.
The Privatization Act provides that the GSE may continue to issue new debt
obligations maturing on or before September 30, 2008. The legislation further
provides that the legal status and attributes of the GSE's debt obligations,
including Securities and Exchange Commission ("SEC") registration and state tax
exemptions, will be fully preserved until their respective maturities. Such debt
obligations will remain GSE debt obligations, whether such obligations were
outstanding at the time of, or issued subsequent to, the Reorganization. The
obligations of SLM Holding do not have GSE status.
Securitization
Since 1995, the Company has diversified its funding sources independent of its
GSE borrower status by securitizing a portion of its student loan assets.
Securitized student loans are funded off-balance sheet to term through the
public issuance of student loan asset-backed securities ("ABS securities"),
which reduces the Company's on-balance sheet funding needs. During 1997, the GSE
completed four transactions in which it sold a total of $9.4 billion of student
loans to trusts which issued $9.6 billion of securities backed by the loans.
Management believes that securitization represents an efficient source of
funding. The GSE's ABS securities generally have a higher cost of funds than its
traditional on-balance sheet financing because the ABS securities are term
match-funded and do not benefit from the GSE's government-sponsored enterprise
status. However, the increased funding costs of the ABS securities are mitigated
by the absence of the Offset Fees on securitized loans. Securitization also
allows the Company to obtain financing at a lower cost than otherwise would be
achievable without the GSE's government-sponsored status. Securitizations to
date have been structured to achieve a "AAA" credit rating on over 96 percent of
its securities sold (with an "A" credit rating on the remaining subordinated
securities).
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 funds its floating rate managed loan assets (most of which
have weekly rate resets) with variable rate debt and fixed rate debt converted
to variable rates with interest rate swaps. The Company also uses interest rate
cap and collar agreements, foreign currency swaps, options on securities, and
financial futures contracts to further reduce interest rate risk and foreign
currency exposure on certain of its borrowings. Investments are funded on a
"pooled" approach, i.e., the pool of liabilities that funds the investment
portfolio has an average rate and maturity or reset date that corresponds to the
average rate and maturity or reset date of the investments which they fund.
12
<PAGE>
In addition to term match funding, 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 December
31, 1997, 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 specific future time intervals. The following gap analysis
reflects rate-sensitive positions at December 31, 1997 and is not necessarily
reflective of positions that existed throughout the period.
<TABLE>
<CAPTION>
Interest Rate Sensitivity Period
----------------------------------------------------------------------
3 months 6 months
3 months to to 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...................................... $27,216 $ 2,305 $ - $ - $ - $ -
Warehousing advances............................... 1,847 2 - 1 - 19
Academic facilities financings..................... 82 39 19 60 345 830
Cash and investments............................... 3,106 26 48 28 84 1,838
Other assets....................................... 4 5 10 29 192 1,774
------- ------- ------- ------- ------ ------
Total assets.................................... 32,255 2,377 77 118 621 4,461
------- ------- ------- ------- ------ ------
LIABILITIES AND STOCKHOLDERS' EQUITY
Short-term borrowings.............................. 15,170 2,370 5,636 - - -
Long-term notes.................................... 4,221 499 - 4,339 4,900 582
Other liabilities.................................. - - - - - 1,303
Minority interest in subsidiary.................... - - - - - 214
Stockholders' equity............................... - - - - - 675
------- ------- ------- ------- ------ ------
Total liabilities and stockholders' equity...... 19,391 2,869 5,636 4,339 4,900 2,774
------- ------- ------- ------- ------ ------
OFF-BALANCE SHEET FINANCIAL INSTRUMENTS
Interest rate swaps................................ 12,232 1,400 (5,556) (4,289) (4,779) 992
Impact of securitized student loans................ 1,831 (1,831) - - - -
------- ------- ------- ------- ------ ------
Total off-balance sheet financial instruments...... 14,063 (431) (5,556) (4,289) (4,779) 992
------- ------- ------- ------- ------ ------
Period gap......................................... $(1,199) $ (61) $ (3) $ 68 $ 500 $ 695
======= ======= ======= ======= ====== ======
Cumulative gap..................................... $(1,199) $(1,260) $(1,263) $(1,195) $ (695) -
======= ======= ======= ======= ====== ======
Ratio of interest-sensitive assets to interest-
sensitive liabilities............................ 166.3% 82.7% 1.2% 2.1% 8.8% 461.7%
======= ======= ======= ======= ====== ======
Ratio of cumulative gap to total assets............ 3.0% 3.2% 3.2% 3.0% 1.7% -%
======= ======= ======= ======= ====== ======
</TABLE>
13
<PAGE>
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 by approximately $22 million or $.12 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 10 percent rise in market interest rates on the fair
value of the Company's financial instruments. The effect of the 10 percent rise
in rates on fair values would be a decrease in the fair market value of student
loans of approximately $50 million. The decrease in student loan fair market
value would be partially offset by a net increase in the fair market value of
the Company's non-student loan assets, long-term debt and hedging instruments of
$5 million. The decrease in student loan market value is mainly due to the
reduction in value of the floor revenue feature of the underlying student loans.
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 December 31, 1997 (in years):
EARNING ASSETS
Student loans.......................................... 6.0
Warehousing advances................................... 4.5
Academic facilities financings......................... 7.5
Cash and investments................................... 6.0
---
Total earning assets................................... 6.0
---
BORROWINGS
Short-term borrowings.................................. .5
Long-term borrowings................................... 3.0
---
Total borrowings....................................... 1.5
---
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 owned. This increased the
number of common shares outstanding at December 31, 1997 from 49.5 million to
173.4 million.
During 1997, the Company repurchased 18.0 million shares of its common
stock adjusted for the 7-for-2 stock split leaving 173.4 million shares
outstanding at December 31, 1997. 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 December 31, 1997, the Company had remaining
authority to repurchase up to an additional 6.3 million shares. In January 1998,
the Board of Directors increased this authority by 20 million shares, bringing
the total remaining authority to 26.3 million shares which covers both purchases
of common shares in the open market or effective purchases through equity
forward contracts. Commencing in the fourth quarter of 1997, the Company
supplemented its open market common stock purchases by entering into equity
forward transactions to purchase 7 million shares on a cash or net share settled
basis. The forwards settle at various times over the next two years at prices
ranging from $38 per share to $42 per share.
14
<PAGE>
Other Related Events and Information
Legislative Developments
The Higher Education Act provides that the special allowance for student loans
made on or after July 1, 1998 will be based on 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 allowance 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 concludes that the new special allowance formula 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 special allowance 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 March of 1998.
It is uncertain whether Congress will enact any changes to the law and whether
such changes would be in line with the Administration's proposal.
Loan Consolidation Program
On November 13, 1997, President Clinton signed into law the Emergency Student
Loan Consolidation Act of 1997, which made significant changes to the FFELP loan
consolidation program. These changes include: (1) providing that FDSLP loans are
eligible to be included in a FFELP consolidation loan; (2) changing the borrower
interest rate on new consolidation loans (previously a fixed rate based on the
weighted average of the loans consolidated, rounded up to the nearest whole
percent) to the annually variable rate applicable to Stafford loans (the bond
equivalent rate at the last auction in May of 91-day Treasury bills, plus 3.10
percent, capped at 8.25 percent); (3) providing that the portion of a
consolidated loan that is comprised of subsidized loans retains its subsidy
benefits during periods of deferment; and (4) establishing prohibitions against
various forms of discrimination in the making of consolidation loans. All of
these provisions, with the exception of item 4, expire on September 30, 1998.
The emergency legislation did not alter the 105 basis points annual fee payable
by the holder of a consolidation loan or the 50 basis points origination fee
charged to lenders when a consolidation loan is issued.
Following enactment of this legislation, the Company announced that,
effective as of November 13, 1997, it had suspended its loan consolidation
program (marketed as the SMART LoanSM 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.
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 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 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 Congress
as it deliberates on this budget and addresses the reauthorization of the Higher
Education Act.
15
<PAGE>
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.
16
<PAGE>
Consolidated Balance Sheets
(Dollars in thousands, except per share amounts)
<TABLE>
<CAPTION>
December 31,
1997 1996
<S> <C> <C>
ASSETS
Insured student loans purchased............................................................ $27,592,714 $32,307,930
Student loan participations................................................................ 1,927,896 1,445,596
----------- -----------
Insured student loans...................................................................... 29,520,610 33,753,526
Warehousing advances....................................................................... 1,868,654 2,789,485
Academic facilities financings
Bonds - available-for-sale.............................................................. 860,325 934,481
Loans................................................................................... 514,691 538,850
----------- -----------
Total academic facilities financings....................................................... 1,375,016 1,473,331
Investments
Available-for-sale...................................................................... 4,549,977 6,833,695
Held-to-maturity........................................................................ 525,962 601,887
----------- -----------
Total investments.......................................................................... 5,075,939 7,435,582
Cash and cash equivalents.................................................................. 54,022 270,887
Other assets, principally accrued interest receivable...................................... 2,014,556 1,907,079
----------- -----------
Total assets............................................................................... $39,908,797 $47,629,890
=========== ===========
LIABILITIES
Short-term borrowings...................................................................... $23,175,509 $22,517,627
Long-term notes............................................................................ 14,541,316 22,606,226
Other liabilities.......................................................................... 1,303,517 1,458,207
----------- -----------
Total liabilities.......................................................................... 39,020,342 46,582,060
----------- -----------
COMMITMENTS AND CONTINGENCIES
MINORITY INTEREST IN SUBSIDIARY............................................................ 213,883 213,883
STOCKHOLDERS' EQUITY
Common stock, par value $.20 per share, 250,000,000 shares
authorized: 183,632,694 and 229,934,499 shares issued, respectively..................... 36,726 45,987
Additional paid-in capital................................................................. 28,838 -
Unrealized gains on investments (net of tax of $203,935 and $188,050, respectively)........ 378,736 349,235
Retained earnings.......................................................................... 654,135 975,889
----------- -----------
Stockholders' equity before treasury stock................................................. 1,098,435 1,371,111
Common stock held in treasury at cost: 10,221,757 and 42,017,416 shares, respectively...... 423,863 537,164
----------- -----------
Total stockholders' equity................................................................. 674,572 833,947
----------- -----------
Total liabilities and stockholders' equity................................................. $39,908,797 $47,629,890
=========== ===========
</TABLE>
The accompanying notes are an integral part of these consolidated financial
statements.
17
<PAGE>
Consolidated Statements of Income
(Dollars in thousands, except per share amounts)
<TABLE>
<CAPTION>
Years ended December 31,
1997 1996 1995
<S> <C> <C> <C>
Interest income:
Insured student loans purchased....................................... $2,344,089 $2,586,035 $2,708,079
Student loan participations........................................... 117,571 20,625 -
---------- ---------- ----------
Insured student loans................................................. 2,461,660 2,606,660 2,708,079
Warehousing advances.................................................. 151,086 193,654 407,866
Academic facilities financings:
Taxable............................................................. 51,410 52,163 54,862
Tax-exempt.......................................................... 46,558 48,262 52,859
---------- ---------- ----------
Total academic facilities financings.................................. 97,968 100,425 107,721
Investments........................................................... 573,120 548,582 697,724
---------- ---------- ----------
Total interest income.................................................... 3,283,834 3,449,321 3,921,390
Interest expense:
Short-term debt....................................................... 1,461,954 1,138,272 905,933
Long-term debt........................................................ 1,064,202 1,444,613 2,114,716
---------- ---------- ----------
Total interest expense................................................... 2,526,156 2,582,885 3,020,649
---------- ---------- ----------
NET INTEREST INCOME...................................................... 757,678 866,436 900,741
Other income:
Gain on sale of student loans......................................... 280,221 48,981 -
Servicing and securitization revenue.................................. 151,221 57,736 1,423
Gains/(losses) on sales of securities................................. 21,086 11,898 24,032
Other................................................................. 48,344 28,301 24,958
---------- ---------- ----------
Total other income....................................................... 500,872 146,916 50,413
---------- ---------- ----------
Operating expenses:
Salaries and benefits................................................. 224,554 206,347 211,787
Other................................................................. 269,213 199,305 226,914
---------- ---------- ----------
Total operating expenses................................................. 493,767 405,652 438,701
---------- ---------- ----------
Income before federal income taxes and premiums on debt
extinguished and minority interest in net earnings of subsidiary...... 764,783 607,700 512,453
---------- ---------- ----------
<PAGE>
Income tax expense (benefit):
Current............................................................... 219,145 207,437 141,803
Deferred.............................................................. 23,776 (23,939) (540)
---------- ---------- ----------
Total income taxes....................................................... 242,921 183,498 141,263
Minority interest in net earnings of subsidiary.......................... 10,694 10,694 10,694
---------- ---------- ----------
Income before premiums on debt extinguished.............................. 511,168 413,508 360,496
Premiums on debt extinguished, net of tax................................ (3,273) (4,792) (4,911)
---------- ---------- ----------
NET INCOME............................................................... $ 507,895 $ 408,716 $ 355,585
========= ========= =========
Basic earnings per common share before premiums on debt extinguished..... $ 2.82 $ 2.13 $ 1.53
========= ========= =========
BASIC EARNINGS PER COMMON SHARE.......................................... $ 2.80 $ 2.10 $ 1.51
========= ========= =========
Diluted earnings per common share before premiums on debt extinguished... $ 2.80 $ 2.12 $ 1.53
========= ========= =========
DILUTED EARNINGS PER COMMON SHARE........................................ $ 2.78 $ 2.09 $ 1.51
========= ========= =========
</TABLE>
The accompanying notes are an integral part of these consolidated financial
statements.
18
<PAGE>
Consolidated Statements of
Changes in Stockholders' Equity
(Dollars in thousands, except per share amounts)
<TABLE>
<CAPTION>
Years ended December 31,
1997 1996 1995
<S> <C> <C> <C>
COMMON STOCK:
Balance, beginning of year (as restated, See Note 14)..................... $ 45,987 $ 86,885 $ 86,691
Issuance of common shares............................................... 695 402 194
Retirement of treasury shares........................................... (9,956) (41,300) -
---------- ----------- ----------
Balance, end of year...................................................... 36,726 45,987 86,885
---------- ----------- ----------
ADDITIONAL PAID-IN CAPITAL:
Balance, beginning of year (as restated, See Note 14)..................... - 475,757 462,589
Proceeds in excess of par value from issuance of common stock........... 59,729 22,633 11,534
Issuance of warrants.................................................... 12,393 - -
Tax benefit related to employee stock option and purchase plans......... 22,879 7,393 1,634
Premiums on equity forward purchase contracts........................... (18,082) - -
Retirement of treasury shares........................................... (48,081) (505,783) -
---------- ----------- ----------
Balance, end of year...................................................... 28,838 - 475,757
---------- ----------- ----------
UNREALIZED GAINS ON INVESTMENTS, NET OF TAX:
Balance, beginning of year................................................ 349,235 370,846 299,558
Change in unrealized gains.............................................. 29,501 (21,611) 71,288
---------- ----------- ----------
Balance, end of year...................................................... 378,736 349,235 370,846
---------- ----------- ----------
RETAINED EARNINGS:
Balance, beginning of year (as restated, see Notes 2 and 14).............. 975,889 2,728,383 2,473,048
Net income.............................................................. 507,895 408,716 355,585
Retirement of treasury shares........................................... (736,019) (2,070,216) -
Cash dividends:
Common stock ($.52, $.47, and $.43 per share, respectively)........... (93,630) (90,994) (100,250)
---------- ----------- ----------
Balance, end of year...................................................... 654,135 975,889 2,728,383
---------- ----------- ----------
COMMON STOCK HELD IN TREASURY AT COST:
Balance, beginning of year................................................ 537,164 2,794,549 1,934,377
Repurchase of 17,979,497; 16,063,082 and
56,331,454 common shares, respectively................................ 680,342 359,914 860,172
Retirement of 49,775,156 and 206,500,000 treasury shares, respectively.. (793,643) (2,617,299) -
---------- ----------- ----------
Balance, end of year...................................................... 423,863 537,164 2,794,549
---------- ----------- ----------
TOTAL STOCKHOLDERS' EQUITY................................................... $ 674,572 $ 833,947 $ 867,322
========== =========== ==========
</TABLE>
The accompanying notes are an integral part of these consolidated financial
statements.
19
<PAGE>
Consolidated Statements of Cash Flows
(Dollars in thousands)
<TABLE>
<CAPTION>
Years ended December 31,
1997 1996 1995
<S> <C> <C> <C>
OPERATING ACTIVITIES
Net income.................................................... $ 507,895 $ 408,716 $ 355,585
Adjustments to reconcile net income to net cash
provided by operating activities:
Gains on sales of student loans............................. (280,221) (48,981) -
(Increase) in accrued interest receivable................... (76,561) (11,286) (179,505)
Increase (decrease) in accrued interest payable............. (40,231) (109,214) 112,133
(Increase) decrease in other assets......................... 74,591 (225,591) (128,799)
Increase (decrease) in other liabilities.................... (130,344) 188,142 15,804
------------- ------------- -------------
Total adjustments............................................. (452,766) (206,930) (180,367)
------------- ------------- -------------
Net cash provided by operating activities........................ 55,129 201,786 175,218
------------- ------------- -------------
INVESTING ACTIVITIES
Insured student loans purchased............................... (8,311,364) (8,370,836) (9,379,663)
Reduction of insured student loans purchased:
Installment payments........................................ 2,486,559 3,094,937 3,452,985
Claims and resales.......................................... 1,112,226 1,277,400 1,161,163
Proceeds from securitization of student loans............... 9,621,989 6,026,780 1,000,000
Participations purchased...................................... (728,733) (1,498,868) -
Participation repayments...................................... 246,433 53,272 -
Warehousing advances made..................................... (695,061) (1,391,590) (2,250,077)
Warehousing advance repayments................................ 1,615,892 2,467,198 5,416,890
Academic facilities financings made........................... (148,033) (465,596) (122,813)
Academic facilities financings reductions..................... 256,420 302,557 379,283
Investments purchased......................................... (16,639,867) (15,966,490) (43,716,393)
Proceeds from sale or maturity of investments................. 19,027,736 16,113,659 46,627,289
------------- ------------- -------------
Net cash provided by investing activities........................ 7,844,197 1,642,423 2,568,664
------------- ------------- -------------
FINANCING ACTIVITIES
Short-term borrowings issued.................................. 685,921,616 268,027,948 163,805,115
Short-term borrowings repaid.................................. (682,026,471) (262,994,320) (166,764,320)
Long-term notes issued........................................ 4,691,827 8,304,988 12,350,217
Long-term notes repaid........................................ (15,994,000) (15,744,378) (12,196,436)
Common stock issued........................................... 64,809 30,428 13,362
Common stock repurchased...................................... (680,342) (359,914) (860,172)
Dividends paid................................................ (93,630) (90,994) (100,250)
------------- ------------- -------------
Net cash (used in) financing activities.......................... (8,116,191) (2,826,242) (3,752,484)
------------- ------------- -------------
(Decrease) in cash and cash equivalents.......................... (216,865) (982,033) (1,008,602)
Cash and cash equivalents at beginning of year................... 270,887 1,252,920 2,261,522
------------- ------------- -------------
CASH AND CASH EQUIVALENTS AT END OF YEAR......................... $ 54,022 $ 270,887 $ 1,252,920
============= ============= =============
CASH DISBURSEMENTS MADE FOR:
Interest...................................................... $ 2,198,630 $ 2,460,870 $ 2,772,815
============= ============= =============
Income taxes.................................................. $ 143,500 $ 202,200 $ 122,000
============= ============= =============
</TABLE>
The accompanying notes are an integral part of these consolidated financial
statements.
20
<PAGE>
Notes to Consolidated Financial Statements
(Dollars in thousands, except per share amounts)
1. Organization and Privatization
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.
Under the terms of the Reorganization each outstanding share of common
stock, par value $.20 per share, of the GSE was converted into one share of
common stock, par value $.20 per share of SLM Holding. The GSE transferred all
employees to non-GSE subsidiaries on August 7, 1997 and also transferred certain
assets, including stock in certain subsidiaries, to SLM Holding or one of its
non-GSE subsidiaries on December 31, 1997. This transfer of the subsidiaries and
assets and the related exchange of stock was accounted for at historical cost
similar to a pooling of interests and therefore all prior period financial
statements and related disclosures presented have been restated as if the
Reorganization took place at the beginning of such periods.
The GSE was chartered by Congress to provide liquidity for originators of
student loans made under federally sponsored student loan programs and otherwise
to support the credit needs of students and educational institutions. The GSE is
predominantly engaged in the purchase of student loans insured under federally
sponsored programs. The GSE also makes secured loans (warehousing advances) to
providers of education credit, and provides financing to educational
institutions for their physical plant and equipment (academic facilities
financings).
Privatization
The Privatization Act provides that the GSE may continue to issue new debt
obligations maturing on or before September 30, 2008. The legislation further
provides that the legal status and attributes of the GSE's debt obligations,
including Securities and Exchange Commission ("SEC") registration and state tax
exemptions, will be fully preserved until their respective maturities. Such debt
obligations will remain GSE debt obligations, whether such obligations were
outstanding at the time of, or issued subsequent to, the Reorganization. The
obligations of SLM Holding do not have GSE status. Beginning in fiscal 1997, and
until the GSE is dissolved, the GSE also must reimburse the U.S. Treasury
Department up to $800,000 annually (subject to adjustment based on the Consumer
Price Index) for its reasonable costs and expenses of carrying out its
supervisory duties under the Privatization Act.
As required by the Privatization Act the GSE paid $5 million to the
District of Columbia Financial Responsibility and Management Assistance
Authority (the "D.C. Financial Control Board") for the use of the name "Sallie
Mae," and SLM Holding issued to the D.C. Financial Control Board warrants to
purchase 1,942,553 shares of SLM Holding Common Stock at a price of $20.69 per
share after consideration of the Company's 7-for-2 stock split.
The GSE will wind down its operations and dissolve on or before September
30, 2008. Any GSE debt obligations outstanding at the date of such dissolution
will be defeased through creation of a fully collateralized trust, consisting of
U.S. government or agency obligations with cash flows matching the interest and
principal obligations of the defeased debt. The Privatization Act further
requires that the GSE's outstanding adjustable rate cumulative preferred stock
be redeemed on September 30, 2008 or at such earlier time when the GSE is
dissolved. Also upon the GSE's dissolution, all of its remaining assets will
transfer to the Company.
2. Significant Accounting Policies
Loans
Loans, consisting of insured student loans purchased (student loans), student
loan participations, warehousing advances, and academic facilities financings
are carried at their unpaid principal balances which, for student loans, are
adjusted for unamortized premiums and unearned purchase discounts.
Student Loan Income
The Company recognizes student loan income as earned, including adjustments for
the amortization of premiums and the accretion of discounts. Interest income
earned on student loan participations is recognized in accordance with the terms
of the joint venture agreement with the Chase Manhattan Bank (the "Joint
Venture")which effectively reflects the underlying interest income earned on the
student loans less servicing costs and the general and administrative expenses
of the joint venture. The Company's investment in the Joint Venture is accounted
for using the equity method of accounting.
21
<PAGE>
Student Loan Loss Reserves
The Company has established reserves for potential losses on its student loan
portfolio that can result from defective servicing, and risk-sharing on claim
payments for federally insured loans and credit losses on privately insured
loans. The reserve is based on periodic evaluations of its loan portfolios
considering past experience, changes to federal student loan programs, current
economic conditions and other relevant factors. The reserve is maintained at a
level that management believes is adequate to absorb estimated potential credit
losses. This evaluation is inherently subjective as it requires material
estimates that may be susceptible to significant changes.
Cash and Cash Equivalents
Cash and cash equivalents include term federal funds and bank deposits with
terms to maturity less than three months.
Investments
Investments are held to provide liquidity, to hedge certain financing activities
and to serve as a source of short-term income. Investments are segregated into
three categories as required under Statement of Financial Accounting Standards
("SFAS") No. 115, "Accounting for Certain Investments in Debt and Equity
Securities." Securities that are actively traded are accounted for at fair
market value with unrealized gains and losses included in investment income.
Securities that are intended to be held-to-maturity are accounted for at
amortized cost. Securities that fall outside of the two previous categories are
considered as available-for-sale. Such securities are carried at market value,
with the after-tax unrealized gain or loss, along with after-tax unrealized gain
or loss on instruments which hedge such securities, carried as a separate
component of stockholders' equity. The amortized cost of debt securities in this
category is adjusted for amortization of premiums and accretion of discounts.
Interest Expense
Interest expense is based upon contractual interest rates adjusted for net
payments under derivative financial instruments with off-balance sheet risks,
which include interest rate and foreign currency exchange agreements and the
amortization of debt issuance costs and deferred gains and losses on hedge
transactions entered into to reduce interest rate risk.
Interest Rate Swaps
The Company utilizes interest rate swap agreements ("interest rate swaps")
principally for hedging purposes to alter the interest rate characteristics of
its debt in order to manage interest rate risk. This enables the Company to
match the interest rate characteristics of borrowings to specific assets in
order to lock in spreads. The Company does not hold or issue interest rate swaps
for trading purposes.
Amounts paid or received under swaps that are used to alter the interest
rate characteristics of its interest-sensitive liabilities are accrued and
recognized as an adjustment of the interest expense on the related borrowing.
The related net receivable or payable from counterparties is included in other
assets or other liabilities. Gains and losses associated with the termination of
swaps for designated positions are deferred and amortized over the remaining
life of the designated instrument as an adjustment to interest expense.
The Company's credit exposure on swaps is limited to their unrealized gains
in the event of nonperformance by the counterparties. The Company manages the
credit risk associated with these instruments by performing credit reviews of
counterparties and monitoring market conditions to establish counterparty,
sovereign and instrument-type credit lines and, when appropriate, requiring
collateral.
Floor Revenue Contracts
The Company enters into contracts with third parties, 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 six months
for the 1997 contracts and two years for the 1996 contracts.
Foreign Currency Derivatives
The Company enters into various foreign currency swaps, forward currency
exchange agreements and options on forward currency exchange agreements to hedge
its foreign currency linked debt agreements. These contracts mature concurrently
with the maturities of the debt and are subject to the same credit standards as
interest rate swaps. Foreign currency derivatives and the related foreign
currency borrowings are translated at the market rates of exchange as of the
balance sheet date. Gains and losses on foreign currency transactions that are
designated hedges are deferred and included in the basis of the designated
instrument.
<PAGE>
Income Taxes
Deferred income taxes reflect the net effect of temporary differences between
the carrying amounts of assets and liabilities for financial reporting purposes
and the amounts used for income tax purposes.
Earnings per Common Share
In 1997, the Company adopted SFAS No. 128, "Earnings per Share". SFAS No. 128
simplifies the standards for computing EPS previously found in Accounting
Principles Board Opinion ("APB") No. 15, "Earnings per Share," and makes the
standards comparable to recently adopted international EPS guidelines. SFAS No.
128 replaces the presentation of "primary" EPS with the presentation of "basic"
EPS. It also requires dual presentation of basic and diluted EPS on the face of
the income statement and a reconciliation of the numerator and denominator used
in the basic EPS calculation to the numerator and denominator used in the
diluted EPS calculation.
22
<PAGE>
Basic earnings per common share were computed using the weighted average of
common shares outstanding during the year. Diluted earnings per common share
were computed using the weighted average of common and common equivalent shares
outstanding during the year. Common equivalent shares include shares issuable
upon exercise of incentive stock options and in 1997, warrants for voting common
stock. Equity forward transactions are included in common equivalent shares if
the average market price of the Company's stock is less than the forward
contract's exercise price.
Consolidation
The consolidated financial statements include the accounts of SLM Holding and
its subsidiaries, after eliminating significant intercompany accounts and
transactions.
Use of Estimates
The preparation of financial statements in conformity with generally accepted
accounting principles requires management to make estimates and assumptions that
affect the reported amounts of assets and liabilities, reported amounts of
revenues and expenses and other disclosures. Actual results could differ from
those estimates.
Reclassifications
Certain reclassifications have been made to the balances as of and for the years
ended December 31, 1996 and 1995, to be consistent with classifications adopted
for 1997.
Restatement of Previously Issued Financial Statements
Student loan servicing costs are generally incurred in a fixed amount per
borrower and thus increase in proportion to principal balances outstanding as
loans are repaid. Prior to 1995, to achieve a level yield to maturity, interest
income was deferred during the early years of the loans, then recognized during
the later years to offset the aforementioned proportional servicing cost
increases. Changes in the estimates of future loan servicing costs were
reflected in student loan income over the estimated remaining terms of the
loans. In the fourth quarter of 1995, the GSE discontinued its accounting method
of deferring income on student loans which resulted in an increase in 1995 net
income and income before premiums on debt extinguished of $21 million ($.09 per
diluted common share).
After discussions with the Securities and Exchange Commission, management
determined that the GSE's method for recognizing student loan income as earned
should be used for all periods presented. Accordingly, the previously reported
financial statements of the GSE for the year ended December 31, 1995 have been
restated. For 1995, the cumulative effect of the change in accounting method of
$130 million ($.55 per diluted common share) has been eliminated, thereby,
decreasing net income and increasing the beginning balance of retained earnings
by $130 million.
Recently Issued Accounting Pronouncements
During the first quarter of 1998 the Company will adopt SFAS No. 130, "Reporting
Comprehensive Income," which addresses the manner in which certain adjustments
to stockholders' equity (principally unrealized gains and losses on
available-for-sale securities) are displayed in the financial statements, with
no effect on reported earnings, assets or capital. During 1997 the Financial
Accounting Standards Board issued SFAS No. 131, "Disclosures about Segments of
an Enterprise and Related Information," which revises the requirements for
disclosing segment data. The Company is reviewing the new requirements for
presentation of segment data under the standard and is determining those
operating segments, if any, that require separate disclosure. Both Statements
are effective for fiscal years beginning after December 15, 1997. Adoption of
these standards will not impact the Company's consolidated financial position,
results of operations or cash flows, and any effect, while not yet determined by
the Company, will be limited to the presentation of its disclosures.
3. Student Loans
The Company purchases student loans from originating lenders, typically just
before the student leaves school and is required to begin repayment of the loan.
The Company's portfolio consists principally of loans originated under two
federally sponsored programs - the Federal Family Education Loan Program
("FFELP") and the Health Education Assistance Loan Program ("HEAL"). The Company
also purchases privately insured loans from time to time, principally those
insured by a wholly owned subsidiary.
There are three principal categories of FFELP loans: Stafford loans, PLUS
loans, and consolidation loans. Generally, these loans have repayment periods of
between five and ten years, with the exception of consolidation loans, and
obligate the borrower to pay interest at a stated fixed rate or an annually
reset variable rate that has a cap. However, the yield to holders is subsidized
on the borrowers' behalf by the federal government to provide a market rate of
return. The formula through which the subsidy is determined is referred to as
the special allowance formula. Special allowance is paid whenever the average of
all of the 91-day Treasury bill auctions in a calendar quarter, plus a spread of
between 2.50 and 3.50 percentage points depending on the loan status and when it
was originated, exceeds the rate of interest which the borrower is obligated to
pay.
<PAGE>
In low interest rate environments, if the rate which the borrower is
obligated to pay exceeds the rate determined by the special allowance formula,
then the borrower's rate becomes a floor on an otherwise variable rate asset.
When this happens, the differences between the interest paid by the borrower and
the rate determined by the special allowance formula is referred to as "floor
revenue." During 1997 and 1996, the Company entered into contracts ("floor
revenue contracts") with third parties under which it agreed to pay the future
floor revenues received on student loans with a principal balance of $11 billion
and $13.5 billion, respectively, in exchange for upfront payments of $14 million
and $128 million, respectively. These upfront payments are being amortized to
student loan income over the average life of the contracts, which is
approximately six months for the 1997 contracts, and two years for the 1996
contracts. For the years ended December 31, 1997 and 1996, the amortization of
the upfront payments on fixed and variable floor revenue contracts increased
student loan income by $41 million and $23 million, respectively. For the years
ended December 31, 1997 and 1996, payments under the contracts totaled $19
million and $12 million, respectively.
23
<PAGE>
Offset fees, consolidation loan rebate fees, risk-sharing and yield
reductions continue to have increasing adverse effect on the Company as a higher
percentage of loans originated after August 1993 and subject to these costs
become available to the Company. In addition, the Federal Direct Student Loan
Program ("FDSLP") originated approximately 32 percent, 31 percent and 7 percent
of student loan originations for academic years 1996-97, 1995-96 and 1994-95,
respectively. Based on Department of Education estimates, management believes
that FDSLP originations will increase to approximately 35 percent of student
loan originations for the 1997-98 academic year and continue at that level
thereafter.
The estimated average remaining term of student loans in the Company's
portfolio, including student loan participations, was approximately 6 years at
December 31, 1997 and 1996. The following table reflects the distribution of the
Company's student loan portfolio by program.
December 31,
1997 1996
FFELP--Stafford............... $12,005,935 $17,292,273
FFELP--PLUS/SLS............... 2,349,310 3,580,803
FFELP--Consolidation loans.... 9,111,299 7,658,035
HEAL.......................... 2,628,719 2,758,860
Privately insured............. 1,497,451 1,017,959
----------- -----------
Insured student loans
purchased.................. 27,592,714 32,307,930
Student loan participations... 1,927,896 1,445,596
----------- -----------
Total student loans........... $29,520,610 $33,753,526
=========== ===========
As of December 31, 1997 and 1996, 86 percent and 84 percent, respectively,
of the Company's on-balance sheet student loan portfolio was in repayment.
Holders of FFELP loans are insured against the borrower's default, death,
disability or bankruptcy. Insurance on FFELP loans is provided by certain state
or non-profit guarantee agencies, which are reinsured by the federal government.
FFELP loans originated prior to October 1, 1993 are reinsured 100 percent by the
federal government, while FFELP loans originated after October 1, 1993 are
reinsured for 98 percent of their unpaid balance resulting in 2 percent
risk-sharing for holders of these loans. At December 31, 1997 and 1996, the
Company owned $12.4 billion and $15.5 billion of 100 percent reinsured FFELP
loans, and $13.0 billion and $14.5 billion of 98 percent reinsured loans,
respectively. HEAL loans are directly insured by the federal government. Both
FFELP and HEAL loans are subject to regulatory requirements relating to
servicing. In the event of default on a student loan or the borrower's death,
disability or bankruptcy, the Company files a claim with the insurer or
guarantor of the loan, who, provided the loan has been properly originated and
serviced, and in the case of HEAL litigated, pays the Company the unpaid
principal balance and accrued interest on the loan less risk-sharing, where
applicable.
Claims not immediately honored by the guarantor because of servicing or
origination defects are returned for remedial servicing, during which period
income is not recognized. On certain paid claims, guarantors assess a penalty
for minor servicing defects. Costs associated with claims on defaulted student
loans, which include such penalties, reduced interest income on student loans by
$10.9 million, $12.8 million and $15.8 million for the years ended December 31,
1997, 1996 and 1995, respectively.
The following table summarizes the reserves that the Company has recorded
for estimated losses due to risk-sharing, unpaid guarantee claims and defaults
on privately insured loans, which are netted against student loans on the
balance sheet.
Years ended December 31,
1997 1996 1995
BALANCE AT BEGINNING
OF PERIOD.................... $ 84,063 $ 60,337 $ 64,928
Additions
Provisions for loan losses... 21,717 29,749 800
Recoveries................... 7,551 7,235 6,096
Deductions
Reductions for sales on
student loans.............. (10,556) (3,188) -
Losses on loans.............. (15,115) (10,070) (11,487)
-------- -------- --------
BALANCE AT END
OF PERIOD.................... $ 87,660 $ 84,063 $ 60,337
======== ======== ========
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.
24
<PAGE>
At December 31, 1997 and 1996, HICA's reserve was $79 million and $63 million,
respectively, for which the Company owned 89 percent of the $1.5 billion and 73
percent of the $1.2 billion, respectively, of student loans insured by HICA.
4. Warehousing Advances
Warehousing advances are secured loans made, generally, to finance student loans
and other education-related loans at certain financial and educational
institutions and public sector agencies. Such advances are collateralized by
student loans, obligations of the U.S. government or instrumentalities thereof,
or by other collateral, such as residential first mortgages and mortgage-backed
securities. As of December 31, 1997, approximately 96 percent were
collateralized by student loans, 2 percent by U.S. government securities, and 2
percent by other collateral. As of December 31, 1996, approximately 97 percent
were collateralized by student loans, 1 percent by U.S. government securities
and 2 percent by other collateral. A summary of warehousing advances by industry
concentration follows:
December 31,
1997 1996
Commercial banks................ $ 679,113 $1,547,193
Public sector agencies.......... 1,083,168 1,126,095
Educational institutions........ 106,373 116,197
---------- ----------
$1,868,654 $2,789,485
========== ==========
Warehousing advances have specific maturities and generally bear rates of
interest which vary with the 91-day Treasury bill rate, or the London Interbank
Offered Rate ("LIBOR"), or which are fixed for the term of the advance. A
summary of warehousing advance interest rate characteristics follows:
December 31,
1997 1996
Variable rate:
Treasury bill................ $1,167,912 $1,723,588
LIBOR........................ 678,868 1,046,086
Fixed rate...................... 21,874 19,811
---------- ----------
$1,868,654 $2,789,485
========== ==========
The average remaining term to maturity of warehousing advances was 4.5
years as of December 31, 1997 with maturities as follows: 1998-$395,143;
1999-$1,000; 2000-$859,835; 2001-$0; 2002-$2,200 and after 2002-$610,476.
5. Academic Facilities Financings
Academic facilities financings are comprised of bonds issued by and loans to
educational institutions to finance their physical plant and equipment. The
academic facilities bonds are classified as available-for-sale securities under
SFAS No. 115 and are carried at fair market value.
The following tables summarize the academic facilities bonds at December
31, 1997 and 1996.
<TABLE>
<CAPTION>
December 31, 1997
---------------------------------------------------------
Gross Gross
Amortized Unrealized Unrealized Market
Cost Gains Losses Value
<S> <C> <C> <C> <C>
BONDS -- AVAILABLE-FOR-SALE
Fixed........................................................ $790,163 $28,863 $ (46) $818,980
Variable..................................................... 41,721 7 (383) 41,345
-------- ------- ------- --------
Total academic facilities bonds................................. $831,884 $28,870 $ (429) $860,325
======== ======= ======= ========
</TABLE>
<TABLE>
<CAPTION>
December 31, 1996
---------------------------------------------------------
Gross Gross
Amortized Unrealized Unrealized Market
Cost Gains Losses Value
<S> <C> <C> <C> <C>
BONDS -- AVAILABLE-FOR-SALE
Fixed........................................................ $831,711 $19,794 $ (978) $850,527
Variable..................................................... 84,401 10 (457) 83,954
-------- ------- ------- --------
Total academic facilities bonds................................. $916,112 $19,804 $(1,435) $934,481
======== ======= ======= ========
</TABLE>
25
<PAGE>
The following table summarizes academic facilities loans at December 31,
1997 and 1996.
December 31,
1997 1996
LOANS
Fixed........................... $456,788 $474,659
Variable........................ 57,903 64,191
-------- --------
Total academic facilities loans.... $514,691 $538,850
======== ========
The average remaining term to maturity of academic facilities financings
was 7.5 years at December 31, 1997. The stated maturities and maturities if
accelerated to the put or call dates for academic facilities bonds and loans at
December 31, 1997 are shown in the following table:
December 31, 1997
----------------------------------
Bonds Loans
Maturity
Stated to Put or Stated
Year of Maturity Maturity Call Date Maturity
1998................... $ 44,163 $103,071 $ 8,942
1999................... 40,577 53,899 45,272
2000................... 64,088 106,246 15,719
2001................... 123,745 143,981 20,827
2002................... 140,194 124,525 29,551
2003-2007.............. 365,221 310,799 82,168
after 2007............. 82,337 17,804 312,212
-------- -------- --------
$860,325 $860,325 $514,691
======== ======== ========
6. Investments
At December 31, 1997 and 1996, all investments with the exception of other
investments are classified as available-for-sale securities under SFAS No. 115
and carried at fair market values which approximate amortized costs, except for
U.S. Treasury securities which have an amortized cost of $887 million. The fair
market value of U.S. Treasury securities is adjusted for unrealized gains and
losses on $1.1 billion of interest rate swaps (See Note 10), which are held to
reduce interest rate risk related to these securities ($45.7 million of
unrealized losses at December 31, 1997 and $19.5 million of unrealized gains at
December 31, 1996). A summary of investments at December 31, 1997 and 1996
follows:
26
<PAGE>
<TABLE>
<CAPTION>
December 31, 1997
--------------------------------------------------------
Gross Gross
Amortized Unrealized Unrealized Market
Cost Gains Losses Value
<S> <C> <C> <C> <C>
AVAILABLE-FOR-SALE
U.S. Treasury and other U.S. government agencies obligations
U.S. Treasury securities.................................... $ 886,918 $583,119 $(46,163) $1,423,874
State and political subdivisions of the U.S.
Student loan revenue bonds.................................. 189,467 7,364 - 196,831
Asset-backed and other securities
Asset-backed securities..................................... 2,613,914 2,686 (32) 2,616,568
Variable corporate bonds.................................... 250,589 168 - 250,757
Commercial paper............................................ 52,947 - - 52,947
Other securities............................................ 9,000 - - 9,000
---------- -------- -------- ----------
Total available-for-sale investment securities................ $4,002,835 $593,337 $(46,195) $4,549,977
========== ======== ======== ==========
HELD-TO-MATURITY
Other......................................................... $ 525,962 $ 144 $ (110) $ 525,996
========== ======== ======== ==========
</TABLE>
<TABLE>
<CAPTION>
December 31, 1996
---------------------------------------------------------
Gross Gross
Amortized Unrealized Unrealized Market
Cost Gains Losses Value
<S> <C> <C> <C> <C>
AVAILABLE-FOR-SALE
U.S. Treasury and other U.S. government agencies obligations
U.S. Treasury securities.................................... $ 809,164 $508,758 $ (41) $1,317,881
State and political subdivisions of the U.S.
Student loan revenue bonds................................. 201,248 5,563 (431) 206,380
Asset-backed and other securities
Asset-backed securities.................................... 4,645,046 4,746 (167) 4,649,625
Variable corporate bonds................................... 634,925 489 - 635,414
Commercial paper........................................... 24,395 - - 24,395
---------- -------- -------- -----------
Total available-for-sale investment securities............... $6,314,778 $519,556 $ (639) $6,833,695
========== ======== ======== ===========
HELD-TO-MATURITY
Other....................................................... $ 601,887 $ 125 $ (267) $ 601,745
========== ======== ======== ===========
</TABLE>
================================================================================
The Company sold available-for-sale securities with a carrying value of
$5.6 billion, $4.6 billion and $6.6 billion for the years ended December 31,
1997, 1996 and 1995, respectively.
27
<PAGE>
As of December 31, 1997, stated maturities and maturities if accelerated to
the put or call dates for investments are shown in the following table:
December 31, 1997
------------------------------------------
Held-to-Maturity Available-for-Sale
Stated Stated Maturity to
Year of Maturity Maturity Maturity Put or Call Date
1998................ $ 28,780 $ 328,702 $ 330,456
1999................ 10,293 134,205 141,618
2000................ 96,780 55,846 65,563
2001................ 1,184 66,169 80,061
2002................ 630 239,191 261,819
2003-2007........... 48,133 1,727,797 1,741,536
after 2007.......... 340,162 1,998,067 1,928,924
-------- ---------- ----------
$525,962 $4,549,977 $4,549,977
======== ========== ==========
================================================================================
7. Short-Term Borrowings
Short-term borrowings have an original or remaining term to maturity of one year
or less. The following tables summarize outstanding short-term notes at December
31, 1997, 1996 and 1995, the weighted average interest rates at the end of each
period, and the related average balances, weighted average interest rates and
weighted average effective interest rates, which include the effects of related
off-balance sheet financial instruments (see Note 10) during the periods.
<TABLE>
<CAPTION>
At December 31, 1997 Year ended December 31, 1997
------------------------------- -----------------------------------------------
Weighted Weighted Weighted
Ending Average Average Average Average Effective
Balance Interest Rate Balance Interest Rate Interest Rate
<S> <C> <C> <C> <C> <C>
Six month floating rate notes........... $ 3,149,410 5.55% $ 2,907,533 5.39% 5.48%
Other floating rate notes............... 3,545,717 5.63 2,478,985 5.39 5.41
Discount notes.......................... 1,641,221 5.67 5,390,829 5.43 5.49
Fixed rate notes........................ 6,789,749 5.78 5,982,389 5.87 5.58
Securities sold - not yet purchased
and repurchase agreements............ - - 292,001 5.43 5.43
Short-term portion of long-term notes... 8,049,412 5.74 9,496,177 5.67 5.51
----------- ---- --------- ---- ----
Total short-term borrowings............. $23,175,509 5.70% $26,547,914 5.61% 5.51%
=========== ==== =========== ==== ====
Maximum outstanding at any month end.... $29,084,281
===========
</TABLE>
<PAGE>
<TABLE>
<CAPTION>
At December 31, 1996 Year ended December 31, 1996
------------------------------ ------------------------------------------------
Weighted Weighted Weighted
Ending Average Average Average Average Effective
Balance Interest Rate Balance Interest Rate Interest Rate
<S> <C> <C> <C> <C> <C>
Six month floating rate notes........... $ 2,699,477 5.23% $ 2,485,322 5.32% 5.42%
Other floating rate notes............... 2,188,722 5.25 2,088,347 5.43 5.35
Discount notes.......................... 2,377,976 6.43 3,072,019 5.31 5.36
Fixed rate notes........................ 3,964,777 6.01 1,211,197 6.07 5.53
Securities sold - not yet purchased
and repurchase agreements............ - - 165,792 4.93 4.93
Short-term portion of long-term notes... 11,286,675 5.55 11,956,008 5.75 5.45
----------- ---- ----------- ---- ----
Total short-term borrowings............. $22,517,627 5.66% $20,978,685 5.61% 5.43%
=========== ==== =========== ==== ====
Maximum outstanding at any month end.... $25,271,494
===========
</TABLE>
28
<PAGE>
<TABLE>
<CAPTION>
At December 31, 1995 Year ended December 31, 1995
------------------------------ -------------------------------------------------
Weighted Weighted Weighted
Ending Average Average Average Average Effective
Balance Interest Rate Balance Interest Rate Interest Rate
<S> <C> <C> <C> <C> <C>
Six month floating rate notes........... $ 2,699,595 5.64% $ 3,608,930 5.78% 5.86%
Other floating rate notes............... 1,942,360 5.82 1,221,480 5.60 5.78
Discount notes.......................... 1,074,257 5.58 1,427,363 5.81 5.86
Fixed rate notes........................ 350,000 6.97 903,670 7.99 5.82
Securities sold - not yet purchased
and repurchase agreements............ 131,112 6.38 311,797 6.10 6.10
Short-term portion of long-term notes... 11,249,676 5.79 7,937,658 5.83 5.90
----------- ---- ----------- ---- ----
Total short-term borrowings............. $17,447,000 5.79% $15,410,898 5.93% 5.88%
=========== ==== =========== ==== ====
Maximum outstanding at any month end.... $18,046,974
===========
</TABLE>
================================================================================
At December 31, 1996, the short-term portion of long-term notes included
issues totaling $80 million repayable in U.S. dollars, with principal repayment
obligations tied to foreign currency exchange rates, and issues totaling $771
million which require the payment of interest and principal in foreign
currencies. These notes were repaid in 1997. To eliminate its exposure to the
effect of currency fluctuations on these contractual obligations, the Company
had entered into various foreign currency agreements with independent parties
(see Note 10).
To match the interest rate characteristics on short-term notes with the
rate characteristics of its assets, the Company enters into interest rate swaps
with independent parties. Under these agreements, the Company makes periodic
payments, indexed to the related asset rates, in exchange for periodic payments
which generally match the Company's interest obligations on fixed or variable
rate notes (see Note 10).
================================================================================
<PAGE>
8. Long-Term Notes
The following tables summarize outstanding long-term notes at December 31, 1997
and 1996, the weighted average interest rates and related notional amount of
derivatives at the end of the periods, and the related average balances and
weighted average effective interest rates, which include the effects of related
off-balance sheet financial instruments (see Note 10), during the periods.
<TABLE>
<CAPTION>
At December 31, 1997 Year ended December 31, 1997
------------------------------------------- -------------------------------
Weighted Notional Weighted
Ending Average Amount of Average Average Effective
Balance Interest Rate Derivatives Balance Interest Rate
<S> <C> <C> <C> <C> <C>
Floating rate notes:
U.S. dollar denominated:
Interest bearing, due 1999-2003......... $ 4,829,849 5.60% $ 1,296,822 $ 6,788,026 5.48%
----------- ---- ----------- ----------- ----
Fixed rate notes:
U.S. dollar denominated:
Interest bearing, due 1999-2018......... 9,289,872 6.09 14,506,256 11,184,059 5.64
Zero coupon, due 1999-2022.............. 164,495 10.79 25,994 278,944 8.13
Dual currency, due 1998................... - - - 168,836 6.74
Foreign currency:
Interest bearing, due 1999-2000......... 257,100 5.72 496,210 257,100 5.45
----------- ---- ----------- ----------- ----
Total fixed rate notes....................... 9,711,467 6.16 15,028,460 11,888,939 5.82
----------- ---- ----------- ----------- ----
Total long-term notes........................ $14,541,316 5.97% $16,325,282 $18,676,965 5.70%
=========== ==== =========== =========== ====
</TABLE>
29
<PAGE>
<TABLE>
<CAPTION>
At December 31, 1996 Year ended December 31, 1996
-------------------------------------- --------------------------------------------------
Weighted Notional Weighted
Ending Average Amount of Average Average Effective
Balance Interest Rate Derivatives Balance Interest Rate
<S> <C> <C> <C> <C> <C>
Floating rate notes:
U.S. dollar denominated:
Interest bearing, due 1998-2003........ $ 8,844,825 5.27% $ 2,022,044 $12,740,190 5.46%
----------- ---- ----------- ----------- ----
Fixed rate notes:
U.S. dollar denominated:
Interest bearing, due 1998-2018........ 12,928,983 6.35 21,676,042 11,971,640 5.59
Zero coupon, due 1998-2022............. 326,875 8.25 358,071 304,990 7.68
Dual currency, due 1998.................. 248,443 7.63 272,000 245,569 6.65
Foreign currency:
Interest bearing, due 1999-2000........ 257,100 5.34 495,785 577,592 5.31
Zero coupon, due 1997.................. - - - 183,647 5.42
----------- ---- ----------- ----------- ----
Total fixed rate notes...................... 13,761,401 6.40 22,801,898 13,283,438 5.64
----------- ---- ----------- ----------- ----
Total long-term notes....................... $22,606,226 5.96% $24,823,942 $26,023,628 5.55%
=========== ==== =========== =========== ====
</TABLE>
================================================================================
At December 31, 1997, the Company had outstanding long-term debt issues
with call features totaling $9.6 billion. As of December 31, 1997, the stated
maturities and maturities if accelerated to the call dates for long-term notes
are shown in the following table:
December 31, 1997
---------------------------
Stated Maturity to
Year of Maturity Maturity Call Date
1998........................ $ - $ 9,456,253
1999........................ 7,793,364 2,761,592
2000........................ 3,666,987 1,683,810
2001........................ 2,252,404 79,200
2002........................ 216,020 44,320
2003-2022................... 612,541 516,141
----------- -----------
$14,541,316 $14,541,316
=========== ===========
For the years ended December 31, 1997, 1996 and 1995, the Company
repurchased certain long-term notes prior to their scheduled maturity to lower
future years' interest expense. The following table summarizes these
transactions (dollars in millions):
Years ended December 31,
1997 1996 1995
Maturity value............... $47 $90 $62
=== === ===
Carrying value............... $ 6 $ 8 $ 8
=== === ===
Premiums..................... $ 5 $ 7 $ 8
=== === ===
The Company issues debt with interest and/or principal payment
characteristics tied to foreign currency indices to attempt to minimize its cost
of funds. At December 31, 1997 and 1996, the Company had outstanding long-term
foreign currency notes which require the payment of principal and interest in
foreign currencies, and at December 31, 1996, the Company had dual currency
notes which require the payment of interest in foreign currencies. To eliminate
the Company's exposure to the effect of currency fluctuations on these
contractual obligations, the Company has entered into various foreign currency
agreements with independent parties (see Note 10).
To match the interest rate characteristics on its long-term notes with the
interest rate characteristics of its assets, the Company enters into interest
rate swaps with independent parties. Under these agreements, the Company makes
periodic payments, indexed to the related asset rates, in exchange for periodic
payments which generally match the Company's interest obligations on fixed or
variable rate borrowings (see Note 10).
30
<PAGE>
9. Student Loan Securitization
For the years ended December 31, 1997 and 1996 and in October 1995, SLM Funding
Corporation, a wholly owned special purpose finance subsidiary of the GSE,
purchased from the GSE and sold $9.4 billion, $6 billion and $1 billion,
respectively, of student loans to trusts which issued floating rate student loan
asset-backed securities in underwritten public offerings. At December 31, 1997
and 1996, securitized student loans outstanding totaled $14.1 billion and $6.3
billion, respectively.
The Company accounts for its securitization transactions in accordance with
SFAS No. 125 "Accounting for Transfers and Servicing of Financial Assets and
Extinguishments of Liabilities," which establishes the accounting for certain
financial asset transfers including securitization transactions. Under SFAS No.
125, the Company records a gain on sale equal to the present value of the
expected net cash flows from the trust to the Company over the life of the
portfolio sold. The resultant asset (the "Interest Residual") consists of the
net present value of the excess of the interest earned on the portfolio of
student loans sold to the trust less the interest paid on the asset-backed
securities, servicing and administration fees, the estimated cost of borrower
benefit programs, expected losses from risk-sharing on defaulted loans and other
student loan related costs. In addition, the Company continues to service the
loans in the trusts for a fee and earns that fee over the life of the portfolio.
When the contract servicing fee is greater than current market servicing rates,
the present value of such excess servicing fees is recognized as a servicing
asset and included in the gain on sale.
For each securitization the Company records the Interest Residual asset and
a servicing asset which represent the Company's retained interest in assets sold
to the trust. These assets are determined by allocating the previous carrying
amount of the student loans securitized among the loans sold, the retained
Interest Residual asset and the servicing asset retained based on their relative
fair market values at the time of sale. The Interest Residual asset is an
available-for-sale security as defined by SFAS No. 115 and is therefore
marked-to-market through equity (net of tax). Servicing assets are amortized in
proportion to, and over the period of, estimated net servicing income.
Impairment of servicing assets is evaluated periodically using discounted
cash-flows and comparing them to the net carrying value of those assets with the
rate of loan prepayment being the most significant estimate involved in the
measurement process. At December 31, 1997 there was no valuation allowance on
the servicing asset. At December 31, 1997 the Interest Residual asset was $451
million and the servicing asset was $55 million.
On July 23, 1997, the U.S. Department of Education pursuant to a court
order decided that the 30 basis point annual Offset Fee does not apply to
student loans the GSE has securitized. The GSE initially filed suit in the U.S.
District Court for the District of Columbia in April 1995 challenging the
Secretary of Education's attempt to apply the Offset Fee to securitized loans.
The GSE prevailed, and the Court of Appeals ruled that the fee applies only to
loans that the GSE owns. In addition, the Court of Appeals upheld the
constitutionality of the Offset Fee, which applies annually with respect to the
principal amount of student loans that the Company holds on-balance sheet and
that were acquired on or after August 10, 1993. Based upon the favorable final
ruling in this matter, the reserve of approximately $97 million pre-tax was
reversed and recognized in income in the third quarter. In the consolidated
statements of income, $94 million of the reserve reversal is included in the
gain on sale of student loans for 1997 and $3 million is included in servicing
and securitization revenue. Since the third quarter, all securitization gains
are calculated without consideration of the Offset Fee.
10. Derivative Financial Instruments
Derivative Financial Instruments Held or Issued for Purposes Other than Trading
The Company enters into various financial instruments with off-balance sheet
risk in the normal course of business primarily to reduce interest rate risk and
foreign currency exposure on certain borrowings. These financial instruments
include interest rate swaps, interest rate cap and collar agreements, foreign
currency swaps, forward currency exchange agreements, options on currency
exchange agreements, options on securities and financial futures contracts.
The Company enters into three general types of interest rate swaps under
which it pays the following: 1) a floating rate in exchange for a fixed rate
(standard swaps); 2) a fixed rate in exchange for a floating rate (reverse
swaps); and 3) a floating rate in exchange for another floating rate, based upon
different market indices (basis/reverse basis swaps). At December 31, 1997, the
Company had notional principal outstanding of $18.2 billion, $1.1 billion and
$16.5 billion of standard swaps, reverse swaps and basis/reverse basis swaps,
respectively. Of the Company's $35.8 billion of interest rate swaps outstanding
at December 31, 1997, $34.7 billion was related to debt and $1.1 billion was
related to investments. At December 31, 1996, the Company had outstanding $18.2
billion, $1.1 billion and $17.8 billion of notional principal amount of standard
swaps, reverse swaps and basis/reverse basis swaps, respectively. Of the
Company's $37.1 billion of interest rate swaps outstanding at December 31, 1996,
$36 billion was related to debt and $1.1 billion was related to investments.
31
<PAGE>
The following tables summarize the ending balances of the borrowings that
have been matched with interest rate swaps and foreign currency agreements at
December 31, 1997 and 1996 (dollars in billions).
<TABLE>
<CAPTION>
At December 31, 1997
--------------------------------------------------------------------------------
Swaps
Basis/ Foreign
Reverse Currency Total
Borrowings Standard Reverse Basis Agreements Derivatives
<S> <C> <C> <C> <C> <C> <C>
SHORT-TERM BORROWINGS
Six month floating rate notes............. $ - $ - $ - $ - $ - $ -
Other floating rate notes................. .4 - - .8 - .8
Discount notes............................ .5 - - .5 - .5
Fixed rate notes.......................... 6.0 6.0 - 4.7 - 10.7
Securities sold - not yet purchased and
repurchase agreements.................. - - - - - -
Short-term portion of long-term notes..... 4.0 3.2 - 3.5 - 6.7
----- ----- --- ----- --- -----
Total short-term borrowings............ 10.9 9.2 - 9.5 - 18.7
----- ----- --- ----- --- -----
LONG-TERM NOTES
Floating rate notes:
U.S. dollar denominated:
Interest bearing..................... .8 .3 - 1.0 - 1.3
Fixed rate notes:
U.S. dollar denominated:
Interest bearing..................... 8.7 8.7 - 5.8 - 14.5
Zero coupon.......................... - - - - - -
Dual currency............................. - - - - - -
Foreign currency:
Interest bearing....................... .3 - - .2 .3 .5
----- ----- --- ----- --- -----
Total long-term notes................ 9.8 9.0 - 7.0 .3 16.3
----- ----- --- ----- --- -----
Total notes.......................... $20.7 $18.2 $ - $16.5 $.3 $35.0
===== ===== === ===== === =====
</TABLE>
32
<PAGE>
<TABLE>
<CAPTION>
At December 31, 1996
--------------------------------------------------------------------------------
Swaps
Basis/ Foreign
Reverse Currency Total
Borrowings Standard Reverse Basis Agreements Derivatives
SHORT-TERM BORROWINGS
<S> <C> <C> <C> <C> <C> <C>
Six month floating rate notes............. $ .3 $ - $ - $ .3 $ - $ .3
Other floating rate notes................. .3 - - .6 - .6
Discount notes............................ - - - - - -
Fixed rate notes.......................... 3.4 3.4 - 2.2 - 5.6
Securities sold - not yet purchased and
repurchase agreements.................. - - - - - -
Short-term portion of long-term notes..... 4.5 1.8 - 3.2 .9 5.9
----- ------ --- ----- ---- -----
Total short-term borrowings............ 8.5 5.2 - 6.3 .9 12.4
----- ------ --- ----- ---- -----
LONG-TERM NOTES
Floating rate notes:
U.S. dollar denominated:
Interest bearing..................... 1.4 .3 - 1.8 - 2.1
Fixed rate notes:
U.S. dollar denominated:
Interest bearing..................... 12.3 12.3 - 9.3 - 21.6
Zero coupon.......................... .2 .2 - .1 - .3
Dual currency.......................... .2 .2 - .1 - .3
Foreign currency:
Interest bearing..................... .3 - - .2 .3 .5
Zero coupon.......................... - - - - - -
----- ----- --- ----- ---- -----
Total long-term notes.............. 14.4 13.0 - 11.5 .3 24.8
----- ----- --- ----- ---- -----
Total notes........................ $22.9 $18.2 $ - $17.8 $1.2 $37.2
===== ===== === ===== ==== =====
</TABLE>
The following table summarizes the activity for the Company's interest rate
swaps, foreign currency agreements and futures contracts held or issued for
purposes other than trading for the years ended December 31, 1995, 1996 and 1997
(dollars in millions).
<TABLE>
<CAPTION>
Notional Principal
---------------------------------
Interest Foreign Currency Futures Contract
Rate Swaps Agreements Amounts
<S> <C> <C> <C>
Balance, December 31, 1994........................................ $ 29,038 $ 1,398 $ 556
Issuances/Opens................................................ 19,549 466 2,370
Maturities/Expirations......................................... (10,634) (380) (535)
Terminations/Closes............................................ (1,773) - (2,211)
------- -------- ---------
Balance, December 31, 1995........................................ 36,180 1,484 180
Issuances/Opens................................................ 14,571 14 2,631
Maturities/Expirations......................................... (13,369) (310) (708)
Terminations/Closes............................................ (300) - (1,925)
------- -------- ---------
Balance, December 31, 1996........................................ 37,082 1,188 178
Issuances/Opens................................................ 11,890 7 4,257
Maturities/Expirations......................................... (13,165) (938) (885)
Terminations/Closes............................................ - - (2,551)
-------- -------- ---------
Balance, December 31, 1997........................................ $ 35,807 $ 257 $ 999
======== ======== =========
</TABLE>
33
<PAGE>
Interest Rate Swaps
Net payments related to the debt-related swaps are recorded in interest expense.
For the years ended December 31, 1997, 1996 and 1995, the Company received net
payments on debt-related swaps reducing interest expense by $105 million, $165
million and $94 million, respectively.
As of December 31, 1997, stated maturities of interest rate swaps and
maturities if accelerated to the put dates, are shown in the following table
(dollars in millions). The maturities of interest rate swaps generally coincide
with the maturities of the associated assets or borrowings.
December 31, 1997
---------------------------
Stated Maturity to
Year of Maturity Maturity Put Date
1998........................... $13,941 $19,514
1999........................... 11,181 9,029
2000........................... 6,290 4,760
2001........................... 3,020 1,350
2002........................... 187 12
2003-2008...................... 1,188 1,142
------- -------
$35,807 $35,807
======= =======
Foreign Currency Agreements
At December 31, 1997 and 1996, the Company had borrowings with principal
repayable in foreign currencies of $257 million and $1.0 billion, respectively.
These borrowings were hedged by notional principal of $257 million and $1.0
billion of foreign currency swaps. The $1.0 billion in foreign currency
borrowings at December 31, 1996 was also hedged by $80 million of forward
currency exchange agreements and $80 million of currency exchange options. The
foreign currency derivative agreements typically mature concurrently with the
maturities of the debt. The following table summarizes the outstanding amount of
these borrowings and their currency translation values at December 31, 1997 and
1996, using spot rates at the respective dates (dollars in millions).
December 31,
1997 1996
Carrying value of outstanding
foreign currency debt................. $257 $1,108
Currency translation value of
outstanding foreign currency debt..... $191 $1,002
Futures Contracts
The Company enters into financial futures contracts to hedge the risk of future
interest rate changes. The contracts provide a better matching of interest rate
reset dates on debt with the Company's assets. They are also used as
anticipatory hedges of debt to be issued to fund the Company's assets, mainly
the portfolio of student loans in the PLUS program. These student loans pay
interest that are indexed to the one-year Treasury bill, reset annually on the
final auction prior to June 1. The gains and losses on these hedging
transactions are deferred and included in other assets and will be recognized as
an adjustment to interest expense. At December 31, 1997 and 1996, the Company
had futures contracts that hedged approximately $999 million and $178 million of
debt, respectively. Approximately $4.3 million and $7 million of realized losses
had been deferred at December 31, 1997 and 1996, respectively, related to
futures contracts.
Derivative Financial Instruments Held or
Issued for Trading Purposes
From time to time the Company maintains a small number of active trading
positions in derivative financial instruments which are designed to generate
additional income based on market conditions. Trading results for these
positions were immaterial to the Company's financial statements for the years
ended December 31, 1997 and 1996. During December 1995, the Company entered into
a derivative contract of $1.5 billion notional amount whose value is determined
by both the market value and the yield of certain AAA rated variable rate
asset-backed securities. The mark-to-market gain on this contract, which is
included in gains/(losses) on sales of securities in the consolidated statements
of income, was $3 million and $4 million for the years ended December 31, 1997
and 1996, respectively and immaterial for the year ended December 31, 1995. This
contract matured on January 15, 1998.
11. Fair Values of Financial Instruments
SFAS No. 107, "Disclosures About Fair Value of Financial Instruments," requires
estimation of the fair values of financial instruments. The following is a
summary of the assumptions and methods used to estimate those values.
Student Loans
Fair value was determined by analyzing amounts which the Company has paid
recently to acquire similar loans in the secondary market.
Warehousing Advances and
Academic Facilities Financings
The fair values of both warehousing advances and academic facilities financings
were determined through standard bond pricing formulas using current interest
rates and credit spreads.
34
<PAGE>
Cash and Investments
For investments with remaining maturities of three months or less, carrying
value approximated fair value. Investments in U.S. Treasury securities were
valued at market quotations. All other investments were valued through standard
bond pricing formulas using current interest rates and credit spreads.
Short-term Borrowings and Long-term Notes
For borrowings with remaining maturities of three months or less, carrying value
approximated fair value. Where available the fair value of financial liabilities
was determined from market quotations. If market quotations were unavailable
standard bond pricing formulas were applied using current interest rates and
credit spreads.
Off-balance Sheet Financial Instruments
The fair values of off-balance sheet financial instruments, including interest
rate swaps, interest rate cap and collar agreements, foreign currency swaps,
forward exchange agreements and financial futures contracts, were estimated at
the amount that would be required to terminate such agreements, taking into
account current interest rates and credit spreads.
The following table summarizes the fair values of the Company's financial
assets and liabilities, including off-balance sheet financial instruments
(dollars in millions):
<TABLE>
December 31, 1997 December 31, 1996
---------------------------------- ----------------------------------
Fair Carrying Fair Carrying
Value Value Difference Value Value Difference
<S> <C> <C> <C> <C> <C> <C>
EARNING ASSETS
Student loans.................................. $29,850 $29,521 $329 $34,005 $33,754 $251
Warehousing advances........................... 1,864 1,869 (5) 2,793 2,790 3
Academic facilities financings................. 1,405 1,375 30 1,473 1,473 -
Cash and investments........................... 5,130 5,130 - 7,706 7,706 -
------- ------- ---- ------- ------- -----
Total earning assets........................... 38,249 37,895 354 45,977 45,723 254
------- ------- ---- ------- ------- -----
INTEREST BEARING LIABILITIES
Short-term borrowings.......................... 23,161 23,176 15 22,457 22,518 61
Long-term notes................................ 14,553 14,541 (12) 22,519 22,606 87
------- ------- ---- ------- ------- -----
Total interest bearing liabilities............. 37,714 37,717 3 44,976 45,124 148
------- ------- ---- ------- ------- -----
OFF-BALANCE SHEET FINANCIAL INSTRUMENTS
Interest rate swaps............................ 59 - 59 (21) - (21)
Forward exchange agreements and
foreign currency swaps...................... (99) - (99) (161) - (161)
Floor revenue contracts........................ (59) (78) 19 (75) (106) 31
Academic facilities financing commitments...... - - - - - -
Letters of credit.............................. - - - - - -
---- -----
Excess of fair value over carrying value....... $336 $251
==== =====
</TABLE>
35
<PAGE>
At December 31, 1997 and 1996, substantially all interest rate swaps,
foreign exchange agreements and foreign currency swaps were hedging liabilities.
12. Commitments and Contingencies
The GSE has committed to purchase student loans during specified periods and to
lend funds under the warehousing advance commitments, academic facilities
financing commitments and letters of credit programs. Letters of credit support
the issuance of state student loan revenue bonds. They represent unconditional
guarantees of the GSE to repay holders of the bonds in the event of a default.
In the event that letters of credit are drawn upon, such loans are
collateralized by the student loans underlying the bonds. Under the terms of the
Privatization Act, any future activity under warehousing advance commitments,
academic facilities financing commitments and letter of credit activity by the
GSE is limited to guarantee commitments which were in place on August 7, 1997.
Commitments outstanding are summarized below:
December 31,
1997 1996
Student loan purchase
commitments................... $17,494,734 $15,845,821
Warehousing advance
commitments................... 3,370,419 2,367,288
Academic facilities financing
commitments................... 19,577 9,930
Letters of credit................ 4,829,089 3,743,892
----------- -----------
$25,713,819 $21,966,931
=========== ===========
================================================================================
The following schedules summarize expirations of commitments outstanding at
December 31, 1997:
<TABLE>
<CAPTION>
December 31, 1997
------------------------------------------------------------------
Student Loan Warehousing Academic Facilities Letters of
Purchases Advances Financings Credit
<S> <C> <C> <C> <C>
1998..................................................... $ 2,058,029 $ 101,000 $ 8,797 $ 30,346
1999..................................................... 5,351,451 30,000 10,780 167,428
2000..................................................... 2,263,405 132,887 - 185,754
2001..................................................... - - - 168,247
2002..................................................... 7,821,849 1,700,001 - 503,959
2003-2017................................................ - 1,406,531 - 3,773,355
----------- ---------- ------- ----------
Total................................................. $17,494,734 $3,370,419 $19,577 $4,829,089
=========== ========== ======= ==========
</TABLE>
================================================================================
Minimum Statutory Capital Adequacy Ratio
The Privatization Act effectively requires that the GSE maintain a minimum
statutory capital adequacy ratio (the ratio of stockholders' equity to total
assets plus 50 percent of the credit equivalent amount of certain off-balance
sheet items) of at least 2 percent until January 1, 2000 and 2.25 percent
thereafter or be subject to certain "safety and soundness" requirements designed
to restore such statutory ratio. Management anticipates being able to fund the
increase in required capital from the GSE's current and retained earnings. While
the GSE may not finance the activities of its non-GSE affiliates, it may,
subject to its minimum capital requirements, dividend retained earnings and
surplus capital to SLM Holding, which in turn may contribute such amounts to its
non-GSE subsidiaries. The Privatization Act now 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 December 31, 1997, the GSE's statutory capital
adequacy ratio, after the effect of the dividends to be paid in the first
quarter of 1998, was 2.00 percent.
Legislative Developments
The Higher Education Act provides that the special allowance for student loans
made on or after July 1, 1998 will be based on 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 allowance 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. Department Treasury released a report on "The
Financial Viability of the Government Guaranteed Student Loan Program." The
report concludes that the new special allowance formula scheduled to take effect
for student loans on July 1, 1998 would reduce lenders' net return to below
acceptable levels and creates 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 special allowance 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 March of 1998.
It is uncertain whether Congress will enact any changes to the law and whether
such changes would be in line with the Administration's proposal.
36
<PAGE>
Litigation
On June 11, 1996, Orange County, California filed an amended complaint against
the Company in the U.S. Bankruptcy Court for the Central District of California.
The case is currently pending in the U.S. District Court for the Central
District of California. The complaint alleges that the Company made fraudulent
representations and omitted material facts in offering circulars on various bond
offerings purchased by Orange County, which contributed to Orange County's
market losses and subsequent bankruptcy. The complaint seeks to hold the Company
responsible for losses resulting from Orange County's bankruptcy, but does not
specify the amount of damages claimed. The complaint against the Company is one
of numerous cases that have been coordinated for discovery purposes. Other
defendants include Merrill Lynch, Morgan Stanley, KPMG Peat Marwick, Standard &
Poor's and Fannie Mae. The complaint includes a claim of fraud under Section
10(b) of the Securities Exchange Act of 1934, as amended, and Rule 10b-5
promulgated thereunder. In addition, the complaint includes counts under the
California Corporations Code, as well as a count for common law fraud. On
December 24, 1997, the Company filed a motion for partial summary judgement
dismissing certain of Orange County's claims. The Company believes that the
complaint is without merit and intends to defend the case vigorously. At this
time, Management believes the impact of the lawsuit will not be material to the
Company.
13. Minority Interest
Upon the Reorganization on August 7, 1997, each outstanding share of common
stock of the GSE was converted into one share of common stock of SLM Holding.
The outstanding preferred stock of the GSE was not affected by the
Reorganization and is reflected as minority interest in the consolidated
financial statements.
The GSE's preferred stock dividends are cumulative and payable quarterly at
4.50 percentage points below the highest yield of certain long-term and
short-term U.S. Treasury obligations. The dividend rate for any dividend period
will not be less than 5 percent per annum nor greater than 14 percent per annum.
For the years ended December 31, 1997, 1996 and 1995, the GSE's preferred
dividend rate was 5.00 percent and reduced net income by $10.7 million. The
Privatization Act requires that on the dissolution date of September 30, 2008,
the GSE shall repurchase or redeem, or make proper provisions for repurchase or
redemption of any outstanding preferred stock. The Company has the option of
effecting an earlier dissolution of the GSE if certain conditions are met.
14. Common Stock
In November 1997, the Company announced that it would effect a 7-for-2 stock
split through a stock dividend of an additional five shares for every two
already outstanding, effective January 2, 1998, for shareholders of record on
December 12, 1997. The stock dividend did not affect the par value of the common
stock and as a result $26.2 million was reclassified to common stock from
retained earnings ($26.1 million) and additional paid-in-capital ($.1 million)
to account for the additional shares issued. In the consolidated statement of
changes in stockholders' equity the effect of the stock dividend has been
presented retroactively to the earliest period presented and the balances of
common stock, additional paid-in-capital and retained earnings as well as all
common stock activity have been restated to reflect the dividend. All share and
per share amounts have been restated to reflect the payment of that dividend.
On the Reorganization date, each outstanding share of GSE common stock, par
value $.20 per share, was converted into one share of SLM Holding common stock,
par value $.20 per share. Prior to the conversion of common stock, the GSE
retired 49.8 million shares of treasury stock at an average price of $15.94 per
share resulting in decreases of $10 million to common stock, $48 million to
additional paid-in-capital and $736 million to retained earnings. In December
1996, the Company retired 206.5 million shares of common stock held as treasury
stock at an average price of $12.67. This retirement decreased the balance in
treasury stock by $2.6 billion with corresponding decreases of $41 million in
common stock, $506 million in additional paid-in capital and $2.1 billion to
retained earnings.
The Board of Directors has authorized and reserved 36.2 million common
shares for issuance under various compensation and benefit plans. Under these
authorizations, the Company has 30.9 million shares in reserve and a remaining
authority for issuance of 20.9 million shares.
The Company has engaged in repurchases of its common stock since 1986.
Commencing in the fourth quarter of 1997, the Company supplemented its open
market common stock purchases by entering into equity forward transactions to
purchase 7 million shares on a cash or net share settled basis. The forwards
settle at various times over the next two years at prices ranging from $38 per
share to $42 per share. As of December 31, 1997, the Company held as treasury
stock 10.2 million common shares purchased at an average price of $41.47.
37
<PAGE>
Basic earnings per common share are computed based on net income divided by
the weighted average common shares outstanding for the period. Average common
shares outstanding for the years ended December 31, 1997, 1996 and 1995 totaled
181,554,368; 194,465,537 and 235,467,631, respectively. Diluted earnings per
common share are computed based on net income divided by the weighted average
common and common equivalent shares outstanding for the period. Average common
and common equivalent shares outstanding for the years ended December 31, 1997,
1996 and 1995 totaled 182,941,173; 195,339,477 and 236,078,112, respectively.
The major difference between the basic and the dilutive earnings per share
calculations are the dilutive effect of applying the treasury stock method of
accounting to 996,149; 873,940 and 610,481 of in-the-money stock options for the
years ended December 31, 1997, 1996 and 1995, respectively, and 390,656 of
in-the-money warrants for the year ended December 31, 1997.
15. Stock Option Plans
SLM Holding maintains stock option plans for its employees which permit grants
of stock options for the purchase of common stock with exercise prices equal to
or greater than the market value on the date of grant.
After the change in management control in August 1997, the Board of
Directors granted options to officers and key employees under the 1993-1998
Stock Option Plan, all of which have 10 year terms and vest in one-third
increments. Options granted to executive management under this plan in August
1997 vest in one year and (1) one-third on the date that the Company's common
stock closes above $42.86 per share for five business days; (2) one-third on the
date that the Company's common stock closes above $57.14 per share for five
business days; and (3) one-third on the date that the Company's common stock
price closes above $71.43 per share for five business days. Options granted to
officers and key employees in November 1997 vest: (1) one-third, one year from
the date of grant; (2) one-third on the later of one year or the date that the
Company's common stock closes above $57.14 per share for five business days; and
(3) one-third on the later of one year or the date that the Company's common
stock price closes above $71.43 per share for five business days. In the event
that the Company's common stock price does not close above the predetermined
prices, all outstanding options will vest eight years after the date of grant.
Under this plan, the Company was originally authorized to grant up to 17.8
million shares, of which there is a remaining authority of 8.9 million shares.
Options granted by prior Boards of Directors generally have 10 year terms and
vest one year after the date of the grant.
In August 1997, the Company's Board of Directors also authorized the grant
of options for up to 3.5 million shares of common stock under a new Employee
Stock Option Plan. Stock options were granted under this plan to all non-officer
employees of the Company and have ten year terms with one-half of the options
vesting one year from the date of grant and one-half vesting two years from the
date of grant.
In January 1998, the Board of Directors approved a Management Incentive
Plan, which will replace the 1993-1998 Stock Option Plan which expires in March
1998. Under this plan, the Board may confer certain awards to officers and
employees which may be in the form of stock options, performance stock, and
incentive bonuses. The Board authorized up to 6 million shares of the Company's
common stock could be issued pursuant to such awards. This plan is subject to
shareholder approval at the Company's 1998 Annual Meeting of Shareholders.
The following table summarizes the employee stock option plans for the
years ended December 31, 1997, 1996 and 1995. The weighted average fair value of
options granted during the year is based on the Extended Binomial Option Pricing
Model, a variation of the Black-Sholes option pricing model.
<TABLE>
<CAPTION>
Years ended December 31,
----------------------------------------------------------------------------------
1997 1996 1995
Average Average Average
Options Price Options Price Options Price
<S> <C> <C> <C> <C> <C> <C>
Outstanding at beginning of year.......... 3,261,500 $17.37 3,832,413 $13.94 3,259,393 $15.57
Granted................................... 13,156,252 40.64 1,139,408 20.88 1,812,300 10.61
Exercised................................. (2,864,110) 17.53 (1,698,771) 11.97 (781,130) 12.22
Canceled.................................. (5,188,110) 44.16 (11,550) 20.86 (458,150) 15.29
---------- ------ ---------- ------ --------- ------
Outstanding at end of year................ 8,365,532 $37.30 3,261,500 $17.37 3,832,413 $13.94
========== ------ ========== ------ ========= ------
Exercisable at end of year................ 486,465 $18.79 2,133,642 $15.51 2,243,763 $16.31
========== ------ ========== ------ ========= ------
Weighted-average fair value of
options granted during the year........ $17.96 $ 7.39 $ 2.91
------ ------ ------
</TABLE>
38
<PAGE>
The following table summarizes the number, average exercise prices (which ranged
from $10 per share to $41 per share) and average remaining contractual life of
the employee stock options outstanding at December 31, 1997.
Average
Average Remaining
Exercise Prices Options Price Contractual Life
Under $16.......... 116,200 $12.07 6.5 yrs.
$16-$32............ 1,059,772 27.29 8.0
Above $32.......... 7,189,560 39.18 10.0
--------- ------ ---------
Total.............. 8,365,532 $37.30 9.5 yrs.
========= ------ ---------
In May 1996, shareholders approved the Board of Directors Stock Option
Plan, which authorized the grant of options to acquire up to 700,000 shares of
common stock. Options under this plan are exercisable on the date of grant and
have ten year terms. The Board approved a Directors' Stock Plan, which, if
approved by shareholders, will replace the Board of Directors Stock Option Plan.
Under the Directors' Stock Plan, the Board authorized the grant of options to
acquire up to 3 million shares of common stock. Options granted under this plan
have ten year terms and vest in one-third increments identical to those of the
August 1997 executive management options except there is no one year minimum
vesting requirement. In the event that the Company's common stock price does not
close above the predetermined prices, all outstanding options will vest eight
years after the date of grant. This plan is subject to shareholder approval at
the Company's 1998 Annual Meeting of Shareholders.
================================================================================
The following table summarizes the Board of Directors' Stock Options for
the years ended December 31, 1997 and 1996.
<TABLE>
<CAPTION>
Years ended December 31,
-----------------------------------------------------
1997 1996
Average Average
Options Price Options Price
<S> <C> <C> <C> <C>
Outstanding at beginning of year.................................. 220,500 $20.86 - $ -
Granted........................................................... 1,638,000 38.96 220,500 20.86
Exercised......................................................... (141,225) 22.34 - -
Canceled.......................................................... (59,500) 24.39 - -
--------- ------ ------- ------
Outstanding at end of year........................................ 1,657,775 $38.49 220,500 $20.86
========= ------ ======= ------
Exercisable at end of year........................................ 614,775 $37.05 220,500 $20.86
========= ------ ======= ------
Weighted-average fair value of
options granted during the year................................ $17.79 $ 7.38
------ ------
</TABLE>
================================================================================
<PAGE>
At December 31, 1997, the outstanding Board of Directors options had a
weighted-average remaining contractual life of 9.5 years.
SLM Holding accounts for its stock option plans in accordance with
Accounting Principles Board Opinion No. 25, "Accounting for Stock Issued to
Employees," which results in no compensation expense for stock options granted
under the plans. The following table summarizes pro forma disclosures for the
years ended December 31, 1997, 1996 and 1995, as if SLM Holding had accounted
for employee and Board of Directors stock options granted subsequent to December
31, 1994 under the fair market value method as set forth in SFAS No. 123,
"Accounting for Stock-Based Compensation." The fair value for these options was
estimated at the date of grant using the Extended Binomial Options Pricing
Model, a variation of the Black-Sholes option pricing model, with the following
weighted average assumptions for the years ended December 31, 1997, 1996 and
1995, respectively: risk-free interest rate of 6 percent, 6 percent and 8
percent; volatility factor of the expected market price of SLM Holding's common
stock of 31 percent, 29 percent and 29 percent; dividend growth rate of 8
percent; and the time of exercise-expiration date. Vesting for options with
vesting periods tied to the Company's stock price is assumed to occur annually
in one-third increments.
39
<PAGE>
Years ended December 31,
1997 1996 1995
Net income................ $507,895 $408,716 $355,585
======== ======== ========
Pro forma net income...... $486,052 $402,420 $352,806
======== ======== ========
Basic earnings per common
share.................. $ 2.80 $ 2.10 $ 1.51
======== ======== ========
Pro forma basic earnings
per common share ...... $ 2.68 $ 2.07 $ 1.50
======== ======== ========
Diluted earnings per
common share........... $ 2.78 $ 2.09 $ 1.51
======== ======== ========
Pro forma diluted earnings
per common share....... $ 2.66 $ 2.06 $ 1.49
======== ======== ========
16. Benefit Plans
Pension Plans
The Company has a qualified noncontributory defined benefit pension plan (the
"Plan") covering substantially all employees who meet certain service
requirements. The Plan's benefits are based on years of service and the
employee's compensation. Effective April 1, 1995, the Company modified the Plan
to compute plan benefits on 5-year highest average base salary, a maximum
service accrual period of 30 years, and normal retirement age of 62. Prior to
these modifications, Plan benefits were computed based on 3-year highest average
base salary, a maximum service accrual period of 26.67 years, and a normal
retirement age of 60. The Plan is funded annually based on the maximum amount
that can be deducted for federal income tax purposes. The assets of the Plan are
primarily invested in equities and fixed income securities.
The following table sets forth the Plan's actuarially determined funded
status and amounts recognized in the Company's consolidated financial
statements.
December 31,
1997 1996
Accumulated Benefits:
Actuarial present value of accumulated benefit obligations:
Vested............................. $ 49,247 $ 39,949
Nonvested........................... 5,206 5,099
-------- ---------
Total............................ $ 54,453 $ 45,048
======== =========
Pension Asset (Liability):
Actuarial present value of
projected benefit obligation
for service rendered to date..... $(92,885) $ (75,106)
Plan assets at fair value.......... 101,389 75,587
-------- ---------
Plan assets greater than
projected benefit obligation .... 8,504 481
Unrecognized prior service cost.... (3,600) (4,023)
Unrecognized transition obligation.. 1,072 1,286
Unrecognized gain................ (15,461) (7,149)
-------- ---------
Accrued pension cost........... $ (9,485) $ (9,405)
======== =========
In determining the projected benefit obligation, the weighted-average
assumed discount rate used was 7.0 percent in 1997, 7.5 percent in 1996 and 7.0
percent in 1995, while the assumed average rate of compensation increase was 6.0
percent in 1997, 1996 and 1995. The expected long-term rate of return on Plan
assets used in determining net periodic pension cost was 8.0 percent in 1997,
1996 and 1995.
Net periodic pension cost included the following components:
Years ended December 31,
1997 1996 1995
Service cost -- benefits
earned during the period $ 8,453 $ 8,369 $ 8,867
Interest cost on projected
benefit obligations.... 5,617 5,055 3,659
Actual return on plan assets (19,203) (13,009) (11,736)
Net amortization
and deferral........... 12,431 8,429 8,327
-------- -------- --------
Net periodic pension cost... $ 7,298 $ 8,844 $ 9,117
======== ======== ========
40
<PAGE>
The Company also maintains a non-qualified pension plan for certain key
employees as designated by the Board of Directors and a nonqualified pension
plan for its Board of Directors. Total pension expense for these plans in 1997,
1996 and 1995 was $11.8 million, $11.9 million and $11.2 million, respectively.
401(k) Plans
The Company's 401(k) Plan ("the Plan") is a defined contribution plan that is
intended to qualify under section 401(k) of the Internal Revenue Code. The Plan
covers substantially all employees who have been employed by the Company for one
or more years and have completed at least a thousand hours of service.
Participating employees may contribute up to 6 percent of base salary and these
contributions are matched 100 percent by the Company.
The Company also maintains a non-qualified Plan to ensure that designated
participants receive the full amount of benefits to which they would have been
entitled under the 401(k) Plan but for limits on compensation and contribution
levels imposed by the Internal Revenue Code.
Total expenses related to the 401(k) Plan were $5.2 million, $5.0 million
and $4.9 million in 1997, 1996 and 1995, respectively.
17. Income Taxes
Deferred income taxes reflect the net tax effects of temporary differences
between the carrying amounts of assets and liabilities for financial reporting
purposes and the amounts used for income tax purposes. Significant components of
the Company's deferred tax liabilities and assets as of December 31, 1997 and
1996 under the liability method are as follows:
December 31,
1997 1996
Deferred tax liabilities:
Leases........................ $352,046 $351,093
Unrealized investment gains... 203,935 188,050
Securitization transactions... 39,735 -
Other......................... 34,500 32,669
-------- --------
630,216 571,812
-------- --------
Deferred tax assets:
ExportSS operating costs...... 46,643 68,874
Student loan reserves......... 51,188 47,004
In-substance defeasance
transactions................ 30,520 30,788
Asset valuation allowances.... 24,490 24,842
Securitization transactions... - 13,076
Other......................... 49,904 31,211
-------- --------
202,745 215,795
-------- --------
Net deferred tax liabilities..... $427,471 $356,017
======== ========
The GSE is exempt from all state, local and District of Columbia taxes
except for real property taxes. SLM Holding and its other subsidiaries are
subject to state and local taxes which were immaterial in 1997 and 1996.
Deferred tax assets on in-substance defeasance transactions resulted from
premiums on the debt extinguished. These premiums are capitalized and amortized
over the life of the defeasance trust for tax purposes.
<PAGE>
Reconciliations of the statutory United States federal income tax rates to
the Company's effective tax rate follow:
Years ended December 31,
1997 1996 1995
Statutory rate.............. 35.0% 35.0% 35.0%
Tax exempt interest and
dividends received
deduction................ (3.0) (3.8) (6.4)
Other, net.................. (.3) (1.1) (1.2)
---- ---- ----
Effective tax rate.......... 31.7% 30.1% 27.4%
==== ==== ====
41
<PAGE>
18. Quarterly Financial Information (unaudited)
<TABLE>
<CAPTION>
1997
---------------------------------------------------
First Second Third Fourth
Quarter Quarter Quarter Quarter
<S> <C> <C> <C> <C>
Net interest income................................................... $199,026 $207,461 $170,342 $180,849
Other income.......................................................... 75,940 78,055 222,174 124,703
Operating expenses.................................................... 101,559 115,283 172,945 103,980
Federal income taxes.................................................. 54,570 51,069 72,040 65,242
Minority interest in net earnings of subsidiary....................... 2,674 2,673 2,674 2,673
-------- -------- -------- --------
Income before premiums on debt extinguished........................... 116,163 116,491 144,857 133,657
Premiums on debt extinguished, net of tax............................. - - (2,264) (1,009)
-------- -------- -------- --------
Net income............................................................ $116,163 $116,491 $142,593 $132,648
======== ======== ======== =====-==
Basic earnings per common share....................................... $ .62 $ .63 $ .79 $ .76
======== ======== ======== =====-==
Diluted earnings per common share..................................... $ .62 $ .63 $ .78 $ .75
======== ======== ======== =====-==
</TABLE>
<TABLE>
<CAPTION>
1996
---------------------------------------------------
First Second Third Fourth
Quarter Quarter Quarter Quarter
<S> <C> <C> <C> <C>
Net interest income................................................... $232,679 $219,561 $208,988 $205,208
Other income.......................................................... 21,754 27,899 35,211 62,052
Operating expenses.................................................... 98,773 100,145 100,075 106,659
Federal income taxes.................................................. 47,968 44,340 42,877 48,313
Minority interest in net earnings of subsidiary....................... 2,673 2,674 2,673 2,674
-------- -------- -------- --------
Income before premiums on debt extinguished........................... 105,019 100,301 98,574 109,614
Premiums on debt extinguished, net of tax............................. (4,792) - - -
-------- -------- -------- --------
Net income............................................................ $100,227 $100,301 $ 98,574 $109,614
======== ======== ======== =====-==
Basic earnings per common share....................................... $ .50 $ .51 $ .51 $ .58
======== ======== ======== =====-==
Diluted earnings per common share..................................... $ .50 $ .51 $ .51 $ .57
======== ======== ======== =====-==
</TABLE>
================================================================================
19. College Construction Loan Insurance Association
On November 12, 1997, in connection with a merger agreement between AMBAC
Assurance Corporation ("AMBAC") and College Construction Loan Insurance
Association ("Connie Lee"), the Company agreed to sell its investment in Connie
Lee for $44 million which approximated the carrying value of the Company's
investment in Connie Lee. At the time of the merger, the Company, through its
ownership of preferred and common stock and through agreements with other
shareholders, effectively controlled 42 percent of Connie Lee's outstanding
voting stock. The merger was approved at a special shareholders' meeting with
the total purchase price being approximately $106 million in cash. In connection
with this transaction, on December 18, 1997 AMBAC repaid the $18 million lent to
Connie Lee by the GSE.
42
<PAGE>
Report of Independent Public Accountants
To the Board of Directors and Stockholders of SLM Holding Corporation:
We have audited the accompanying consolidated balance sheet of SLM Holding
Corporation and subsidiaries as of December 31, 1997 and the related
consolidated statements of income, changes in stockholders' equity and cash
flows for the year then ended. These financial statements are the responsibility
of the Company's management. Our responsibility is to express an opinion on
these financial statements based on our audit. The financial statements of SLM
Holding Corporation as of December 31, 1996 and 1995, were audited by other
auditors whose report dated January 13, 1997, included an explanatory paragraph
with respect to a change in the method of accounting for student loan income,
discussed in Note 2 to the previously issued financial statements, and expressed
an unqualified opinion.
We conducted our audit in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audit to obtain
reasonable assurance about whether the financial statements are free of material
misstatement. An audit includes examining on a test basis, evidence supporting
the amounts and disclosures in the financial statements. An audit also includes
assessing the accounting principles used and significant estimates made by
management, as well as evaluating the overall financial statement presentation.
We believe that our audit provides a reasonable basis for our opinion.
In our opinion, the financial statements referred to above present fairly,
in all material respects, the financial position of SLM Holding Corporation and
subsidiaries as of December 31, 1997 and the consolidated results of their
operations and their cash flows for the year then ended in conformity with
generally accepted accounting principles.
/s/ Arthur Andersen LLP
Washington, DC
January 13, 1998
43
<PAGE>
Average Balance Sheets and
Related Income/Expense 1993-1997
Dollars in millions
<TABLE>
<CAPTION>
1997 1996
---------------------------------- ---------------------------------
*Income/ *Income/
Balance Expense Rate Balance Expense Rate
<S> <C> <C> <C> <C> <C> <C>
ASSETS
Student loans, net............................ $31,949 $2,461.7 7.70% $33,273 $2,606.7 7.83%
Warehousing advances.......................... 2,518 151.1 6.00 3,206 193.8 6.04
Academic facilities financings................ 1,436 123.0 8.57 1,500 126.4 8.43
Investments................................... 9,592 583.6 6.08 9,444 558.5 5.91
------- -------- ---- ------- -------- ----
Total interest earning assets................. 45,495 3,319.4 7.30% 47,423 3,485.4 7.35%
-------- ==== -------- ====
Non-interest earning assets................... 1,983 1,858
------- -------
Total assets.................................. $47,478 $49,281
======= =======
LIABILITIES AND STOCKHOLDERS' EQUITY
Short-term borrowings......................... $26,548 1,462.0 5.51% $20,978 1,138.3 5.43%
Long-term notes............................... 18,677 1,064.2 5.70 26,024 1,444.6 5.55
------- -------- ---- ------- -------- ----
Total interest bearing liabilities............ 45,225 2,526.2 5.59% 47,002 2,582.9 5.50%
-------- ==== -------- ====
Non-interest bearing liabilities.............. 1,473 1,464
Stockholders' equity.......................... 780 815
------- -------
Total liabilities and stockholders' equity.... $47,478 $49,281
======= =======
Tax equivalent net interest income and
margin..................................... $ 793.2 1.74% $ 902.5 1.90%
======== ==== ======== ====
Average 91-day Treasury bill rate............. 5.21% 5.16%
==== ====
</TABLE>
* To compare nontaxable asset yields to taxable yields on a similar basis,
income in the above table includes the impact of certain tax-exempt and
tax-advantaged investments based on the marginal corporate tax rate of 35%,
which represents tax equivalent income.
As part of the GSE's privatization, SLM Holding became the parent company of the
GSE on August 7, 1997. As a result, the GSE's preferred stock (totaling $214
million) is now reflected as a minority interest in the consolidated financial
statements. The financial statements for prior periods have been restated to
reflect this change.
44
<PAGE>
<TABLE>
<CAPTION>
1995 1994
--------------------------------- ----------------------------------
*Income/ *Income/
Balance Expense Rate Balance Expense Rate
<S> <C> <C> <C> <C> <C> <C>
ASSETS
Student loans, net............................ $32,758 $2,708.1 8.27% $28,642 $2,189.0 7.64%
Warehousing advances.......................... 6,342 408.0 6.43 6,981 336.8 4.82
Academic facilities financings................ 1,527 136.2 8.92 1,489 128.3 8.62
Investments................................... 11,154 720.6 6.46 11,283 524.2 4.65
------- -------- ---- ------- ------- ----
Total interest earning assets................. 51,781 3,972.9 7.67% 48,395 3,178.3 6.57%
-------- ==== ------- ====
Non-interest earning assets................... 1,673 1,240
------- -------
Total assets.................................. $53,454 $49,635
======= =======
LIABILITIES AND STOCKHOLDERS' EQUITY
Short-term borrowings......................... $15,411 905.9 5.88% $16,577 737.8 4.45%
Long-term notes............................... 35,373 2,114.7 5.98 30,397 1,404.7 4.62
------- -------- ---- ------- -------- ----
Total interest bearing liabilities............ 50,784 3,020.6 5.95% 46,974 2,142.5 4.56%
-------- ==== -------- ====
Non-interest bearing liabilities.............. 1,451 1,191
Stockholders' equity.......................... 1,219 1,470
------- -------
Total liabilities and stockholders' equity.... $53,454 $49,635
======= =======
Tax equivalent net interest income and
margin..................................... $ 952.3 1.84% $1,035.8 2.14%
======== ==== ======== ====
Average 91-day Treasury bill rate............. 5.68% 4.38%
==== ====
</TABLE>
<TABLE>
<CAPTION>
1993
-----------------------------------
*Income/
Balance Expense Rate
<S> <C> <C> <C>
ASSETS
Student loans, net............................ $25,385 $1,899.2 7.48%
Warehousing advances.......................... 7,669 306.7 4.00
Academic facilities financings................ 1,258 90.5 7.20
Investments................................... 10,359 406.6 3.93
------- ------- ----
Total interest earning assets................. 44,671 2,703.0 6.05%
------- ----
Non-interest earning assets................... 1,183
-------
Total assets.................................. $45,854
=======
LIABILITIES AND STOCKHOLDERS' EQUITY
Short-term borrowings......................... $13,272 $ 449.0 3.38%
Long-term notes............................... 30,374 1,031.7 3.40
------- -------- ----
Total interest bearing liabilities............ 43,646 1,480.7 3.39%
-------- ====
Non-interest bearing liabilities.............. 1,061
Stockholders' equity.......................... 1,147
-------
Total liabilities and stockholders' equity.... $45,854
=======
Tax equivalent net interest income and
margin..................................... $1,222.3 2.74%
======== ====
Average 91-day Treasury bill rate............. 3.08%
====
</TABLE>
45
<PAGE>
Selected Financial Data 1993-1997
Dollars in millions, except per share amounts)
The following table sets forth selected financial and other operating
information of SLM Holding. The selected financial data in the table is derived
from the consolidated financial statements of SLM Holding. The data should be
read in conjunction with the consolidated financial statements, related notes,
and "Management's Discussion and Analysis of Financial Condition and Results of
Operations" included elsewhere herein.
<TABLE>
<CAPTION>
1997(2) 1996(2) 1995(1)(2) 1994(1)(2) 1993(1)(2)
<S> <C> <C> <C> <C> <C>
OPERATING DATA:
Net interest income............................... $ 758 $ 866 $ 901 $ 982 $ 1,169
Net income........................................ 508 409 356 410 432
Basic earnings per common share(3)................ 2.80 2.10 1.51 1.47 1.42
Diluted earnings per common share(3).............. 2.78 2.09 1.51 1.47 1.42
Dividends per common share........................ 0.52 0.47 0.43 0.41 0.36
Return on common shareholders' equity............. 65.14% 50.13% 29.17% 27.85% 37.68%
Net interest margin............................... 1.74 1.90 1.84 2.14 2.74
Return on assets.................................. 1.12 .86 .69 .85 .97
Dividend payout ratio............................. 18.73 22.40 28.64 27.66 25.10
Average equity/average assets..................... 1.64 1.65 2.28 2.96 2.50
BALANCE SHEET DATA:
Student loans purchased........................... $27,593 $32,308 $34,336 $30,571 $26,978
Student loan participations....................... 1,928 1,446 - - -
Warehousing advances.............................. 1,869 2,789 3,865 7,032 7,034
Academic facilities financings.................... 1,375 1,473 1,312 1,548 1,359
Total assets...................................... 39,909 47,630 50,002 53,161 46,682
Long-term notes................................... 14,541 22,606 30,083 34,319 30,925
Total borrowings.................................. 37,717 45,124 47,530 50,335 44,544
Stockholders' equity.............................. 675(4) 834(4) 867(4) 1,388(4) 1,179(4)
Book value per common share(3).................... 3.89 4.44 4.29 5.39 4.01
OTHER DATA:
Securitized student loans outstanding............. $14,104 $ 6,263 $ 954 $ - $ -
Core earnings(5).................................. 487 381 350 345 388
Premiums on debt extinguished..................... 5 7 8 14 211
</TABLE>
(1) Previously reported results for the years ended December 31, 1995, 1994, and
1993 have been restated to retroactively reflect the recognition of student
loan income as earned (see Note 2 to the Consolidated Financial Statements).
This restatement resulted in the elimination of the previously reported 1995
cumulative effect of the change in accounting method of $130 million (.55
per common share) and an increase to previously reported net income of $17
million (.06 per common share), and $13 million (.04 per common share), for
the years ended December 31, 1994 and 1993, respectively.
(2) As part of the GSE's privatization, SLM Holding became the parent company of
the GSE on August 7, 1997. As a result, the GSE's preferred stock (totaling
$214 million) is now reflected as a minority interest in the consolidated
financial statements. The financial statements for prior periods have been
restated to reflect this change.
(3) In November 1997, the Company announced that it would effect a 7-for-2 stock
split through a stock dividend of an additional five shares for every two
already outstanding effective January 2, 1998 for shareholders of record on
December 12, 1997. All share and per share amounts, for all periods
presented, reflect payment of that dividend.
(4) At December 31, 1997, 1996, 1995, and 1994, stockholders' equity reflects
the addition to stockholders' equity of $379 million, $349 million, $371
million, and $300 million, respectively, net of tax, of unrealized gains on
certain investments recognized pursuant to FAS No. 115, "Accounting for
Certain Investments in Debt and Equity Securities."
(5) Core earnings is defined as the Company's net income less the after-tax
effect of floor revenues and other one time charges. Management believes
that these measures, which are not measures under generally accepted
accounting principles (GAAP), are important because they depict the
Company's earnings before the effects of one time events such as floor
revenues which are largely outside of the Company's control. Management
believes that core earnings as defined while not necessarily comparable to
other companies' use of similar terminology, provide for meaningful period
to period comparisons as a basis for analyzing trends in the Company's
student loan operations.
46
Exhibit 23.1
Consent of Independent Auditors
We consent to the incorporation by reference in the following Registration
Statements of SLM Holding Corporation and in the related Prospectuses of our
report dated January 13, 1997, except as to the eighteenth and nineteenth
paragraphs of Note 2, which is as of April 7, 1997, with respect to the
consolidated financial statements of SLM Holding Corporation incorporated by
reference in the Annual Report (Form 10-K) for the year ended December 31, 1997:
Registration Statement Number Description
----------------------------- -----------
333-44425 Form S-8, pertaining to the SLM
Holding Corporation Employee Stock
Option Plan and SLM Holding
Corporation Directors Stock Plan.
333-33577 Form S-8, pertaining to SLM Holding
Corporation's - Sallie Mae
Employees' Thrift & Savings Plan.
333-33575 Form S-8 and Post-Effective
Amendment No. 8 on Form S-8 to Form
S-4, pertaining to SLM Holding
Corporation's - Sallie Mae 1993 -
1998 Stock Option Plan; Sallie Mae
Board of Directors' Stock Option
Plan; Sallie Mae Incentive
Performance Plan; Sallie Mae Board
of Directors' Restricted Stock
Plan; Sallie Mae Employees' Stock
Purchase Plan; Sallie Mae Directors
Deferred Compensation Plan; and
Sallie Mae Stock Compensation Plan.
Washington, D.C. /s/ Ernst & Young LLP
March 27, 1998
Exhibit 23.2
CONSENT OF INDEPENDENT PUBLIC ACCOUNTANTS
As independent public accountants, we hereby consent to the incorporation by
reference in this Form 10-K and into SLM Holding Corporation's previously filed
Registration Statement No. 333-33577, Registration Statement No. 333-33575, and
Registration Statement No. 333-44425, of our report dated January 13, 1998
included in the SLM Holding Corporation's 1997 Annual Report to Shareholders. It
should be noted that we have not audited any financial statements of the company
subsequent to December 31, 1997 or performed any audit procedures subsequent to
the date of our report.
/s/ Arthur Andersen LLP
Washington, D.C.
March 30, 1998
<TABLE> <S> <C>
<ARTICLE> 9
<CIK> 0001032033
<NAME> SLM HOLDING CORPORATION
<MULTIPLIER> 1
<CURRENCY> U.S. Dollars
<S> <C>
<PERIOD-TYPE> 12-MOS
<FISCAL-YEAR-END> DEC-31-1997
<PERIOD-START> JAN-01-1997
<PERIOD-END> DEC-31-1997
<EXCHANGE-RATE> 1.000
<CASH> 54,022
<INT-BEARING-DEPOSITS> 0
<FED-FUNDS-SOLD> 0
<TRADING-ASSETS> 0
<INVESTMENTS-HELD-FOR-SALE> 5,410,302
<INVESTMENTS-CARRYING> 525,996
<INVESTMENTS-MARKET> 0
<LOANS> 31,903,955
<ALLOWANCE> 87,660
<TOTAL-ASSETS> 39,908,797
<DEPOSITS> 0
<SHORT-TERM> 23,175,509
<LIABILITIES-OTHER> 1,517,400
<LONG-TERM> 14,541,316
0
0
<COMMON> 36,726
<OTHER-SE> 637,846
<TOTAL-LIABILITIES-AND-EQUITY> 39,908,797
<INTEREST-LOAN> 2,655,946
<INTEREST-INVEST> 627,888
<INTEREST-OTHER> 0
<INTEREST-TOTAL> 3,283,834
<INTEREST-DEPOSIT> 0
<INTEREST-EXPENSE> 2,526,156
<INTEREST-INCOME-NET> 757,678
<LOAN-LOSSES> 21,717
<SECURITIES-GAINS> 21,086
<EXPENSE-OTHER> 493,767
<INCOME-PRETAX> 764,783
<INCOME-PRE-EXTRAORDINARY> 511,168
<EXTRAORDINARY> (3,273)
<CHANGES> 0
<NET-INCOME> 507,895
<EPS-PRIMARY> 2.80
<EPS-DILUTED> 2.78
<YIELD-ACTUAL> 1.74
<LOANS-NON> 0
<LOANS-PAST> 900,000
<LOANS-TROUBLED> 0
<LOANS-PROBLEM> 0
<ALLOWANCE-OPEN> 84,063
<CHARGE-OFFS> 25,671
<RECOVERIES> 7,551
<ALLOWANCE-CLOSE> 87,660
<ALLOWANCE-DOMESTIC> 87,660
<ALLOWANCE-FOREIGN> 0
<ALLOWANCE-UNALLOCATED> 0
</TABLE>
