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SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
---------------------
FORM 8-K/A
CURRENT REPORT
PURSUANT TO SECTION 13 OR 15(d) OF THE
SECURITIES EXCHANGE ACT OF 1934
DATE OF REPORT (DATE OF EARLIEST EVENT REPORTED): AUGUST 7, 1997.
SLM HOLDING CORPORATION
(Exact name of registrant as specified in its charter)
DELAWARE 001-13251 52-2013874
(State or Other Jurisdiction of (Commission File Number) (I.R.S. Employer Identification No.)
Incorporation)
11600 SALLIE MAE DRIVE
RESTON, VA 20193
(Address of Principal Executive Offices)
(703) 810-3000
(Registrant's telephone number, including area code)
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GENERAL
On August 14, 1997, the Registrant filed a Current Report on Form 8-K
reporting, pursuant to Item 2 of Form 8-K, that the Student Loan Marketing
Association, a federally chartered government-sponsored enterprise, was
reorganized into a wholly owned subsidiary of the Registrant. This Amendment
to that Current Report contains, pursuant to Item 7 of Form 8-K, the financial
statements of Student Loan Marketing Association for the periods specified in
17 C.F.R. Section 210-3.05. This Amendment incorporates by reference the
financial statements of Student Loan Marketing Association for the fiscal year
ended December 31, 1996 (including the manually signed accountants' report),
as set forth in the Registrant's registration statement on Form S-4 (File No.
333-21217), as filed with the Commission on July 25, 1997, as amended.
[Remainder of this page intentionally left blank]
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Paragraphs (a), (b) and (c) of Item 7 of the Current Report on Form 8-K
previously filed on August 14, 1997 are hereby amended to read in their
entirety as follows:
ITEM 7: FINANCIAL STATEMENTS AND EXHIBITS.
(a) Financial Statements of business acquired / (b) Pro forma
financial information.
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OVERVIEW
ON AUGUST 7, 1997 PURSUANT TO THE STUDENT LOAN MARKETING ASSOCIATION
REORGANIZATION ACT OF 1996 (THE "PRIVITIZATION ACT") AND AN AGREEMENT AND PLAN
OF REORGANIZATION, DATED AS OF APRIL 7, 1997, THE STUDENT LOAN MARKETING
ASSOCIATION (THE "GSE") WAS REORGANIZED INTO A WHOLLY OWNED SUBSIDIARY OF THE
SLM HOLDING CORPORATION ("SLM HOLDING" OR THE "COMPANY"). SEE "PRIVATIZATION".
UNDER THE TERMS OF THIS REORGANIZATION (THE "REORGANIZATION") THE GSE WILL
TRANSFER CERTAIN ASSETS, INCLUDING STOCK IN CERTAIN SUBSIDIARIES, TO SLM
HOLDING OR ONE OF ITS NON-GSE SUBSIDIARIES. THIS TRANSFER OF THE SUBSIDIARIES
AND ASSETS AND THE RELATED EXCHANGE OF STOCK IS BEING ACCOUNTED FOR AT
HISTORICAL COST SIMILAR TO A POOLING OF INTERESTS AND THEREFORE ALL PRIOR
PERIOD FINANCIAL STATEMENTS AND RELATED DISCLOSURES PRESENTED HAVE BEEN
RESTATED AS IF THE REORGANIZATION TOOK PLACE AT THE BEGINNING OF SUCH PERIODS.
Set forth below is Management's Discussion and Analysis of Financial
Conditions and Results of Operations of SLM Holding for the three months and
six months ended June 30, 1997 and 1996. These discussions include complementary
information and are intended to be read together. All dollar amounts are in
millions, except per share amounts.
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THREE AND SIX MONTHS ENDED JUNE 30, 1997 AND 1996
SELECTED FINANCIAL DATA
CONDENSED STATEMENTS OF INCOME
THREE MONTHS ENDED INCREASE
JUNE 30, (DECREASE)
-------------------------- -------------------------
1997 1996 $ %
--------- --------- ---------- ---------
Net interest income................................... $ 207 $ 219 $ (12) (6)%
Other operating income................................ 78 28 50 180
Operating expenses.................................... 115 100 15 15
Federal income taxes.................................. 51 44 7 15
Minority interest in net earnings of subsidiary 3 3 --- ---
--------- --------- --------- ---------
NET INCOME ........................................... $ 116 $ 100 $ 16 16%
========= ========= ========= =========
EARNINGS PER COMMON SHARE............................. $ 2.20 $ 1.79 $ .41 23%
========= ========= ========= =========
Dividends per common share............................ $ .44 $ .40 $ .04 10%
========= ========= ========= =========
CORE EARNINGS......................................... $ 111 $ 91 $ 20 22%
========= ========= ========= =========
SIX MONTHS ENDED INCREASE
JUNE 30, (DECREASE)
-------------------------- -------------------------
1997 1996 $ %
--------- --------- ---------- ---------
Net interest income................................... $ 406 $ 452 $ (46) (10)%
Other operating income................................ 154 50 104 210
Operating expenses.................................... 217 199 18 9
Federal income taxes.................................. 105 92 13 14
Minority interest in net earnings of subsidiary 5 5 --- ---
--------- --------- --------- ---------
Income before premiums on debt extinguished........... 233 206 27 13
Premiums on debt extinguished, net of tax............. -- (5) 5 (100)
--------- --------- --------- ---------
NET INCOME ........................................... $ 233 $ 201 $ 32 16%
========= ========= ========= =========
EARNINGS PER COMMON SHARE............................. $ 4.36 $ 3.53 $ .83 24%
========= ========= ========= =========
Dividends per common share............................ $ .88 $ .80 $ .08 10%
========= ========= ========= =========
CORE EARNINGS......................................... $ 224 $ 182 $ 42 23%
========= ========= ========= =========
CONDENSED BALANCE SHEETS
INCREASE (DECREASE)
JUNE 30, DECEMBER 31, -------------------------------
1997 1996 $ %
------------- ------------- ------------- ------------
ASSETS
Student loans......................................... $ 31,488 $ 33,754 $ (2,266) (7)%
Warehousing advances.................................. 2,495 2,790 (295) (11)
Academic facilities financings........................ 1,353 1,473 (120) (8)
Cash and investments.................................. 10,593 7,706 2,887 37
Other assets.......................................... 1,970 1,907 63 3
------------- ------------- ------------ ----------
Total assets.......................................... $ 47,899 $ 47,630 $ 269 1%
============= ============= ============ ==========
LIABILITIES AND STOCKHOLDERS' EQUITY
Short-term borrowings................................. $ 25,850 $ 22,518 $ 3,332 15%
Long-term notes....................................... 19,489 22,606 (3,117) (14)
Other liabilities..................................... 1,503 1,458 45 3
------------- ------------- ------------ ----------
Total liabilities..................................... 46,842 46,582 260 1
------------- ------------- ------------ ----------
Minority interest in subsidiary 214 214 --- ---
Stockholders' equity before treasury stock............ 1,581 1,371 210 15
Common stock held in treasury at cost................. 738 537 201 37
------------- ------------- ------------ ----------
Total stockholders' equity............................ 843 834 9 1
------------- ------------- ------------ ----------
Total liabilities and stockholders' equity............ $ 47,899 $ 47,630 $ 269 1%
============= ============= ============ ==========
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This document contains certain forward-looking statements and
information relating to the Company that are based on the beliefs of the
Company's management and assumptions made by and information available to the
Company as of the date of this document. When used in this document, 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 statements reflect the current views of the
Company's management with respect to future events and are subject to certain
risks, uncertainties and assumptions, described in this document. Should one
or more of these risks or uncertainties materialize, or should underlying
assumptions prove incorrect, actual results may vary materially from those
described herein as anticipated, believed, estimated or expected. The Company
does not intend to update these forward-looking statements.
RESULTS OF OPERATIONS
SLM Holding's net income was $116 million ($2.20 per common share) for
the first three months of 1997 compared to $100 million ($1.79 per common share)
for the first three months of 1996. For the six months ended June 30, 1997, net
income was $233 million ($4.36 per common share), compared to $201 million
($3.53 per common share) for the six months ended June 30, 1996.
The net income growth for the three months ended June 30, 1997 over the
year ago period was primarily a result of higher income related to student loan
securitization gains of $14 million, higher investment income of $22 million, a
12 percent growth in average managed student loan assets resulting mainly in
increased servicing and securitization revenue of $13 million and lower
operating expenses (net of nonrecurring expenses) relative to managed student
loans. Earnings per common share was further enhanced by repurchases of 536,000
common shares (1 percent of the shares outstanding) during the three months
ended June 30, 1997, lowering shares outstanding to 52.3 million at June 30,
1997.
The net income increase of $32 million (16 percent) in the first six
months of 1997 was primarily a result of, on an after-tax basis, an increase in
student loan securitization gains of $29 million, the growth in managed student
loan assets resulting mainly in increased servicing and securitization revenue
of $22 million, and increased revenue from amortization of student loan floor
contracts of $6 million. These positive factors were somewhat offset by the
increased interest on loans subject to Omnibus Budget Reconciliation Act
("OBRA") fees of $7 million as discussed below, a decrease in student loan
floor revenues of $10 million, increased operating expenses of $12 million and
a decrease in interest earned on student loans as loans were securitized.
Earnings per common share was further enhanced by repurchases of 1.8 million
shares (3 percent of shares outstanding) during the first six months of 1997.
OBRA imposed legislative fees and risk-sharing on the GSE and other
participants in the Federal Family Education Loan Program ("FFELP") including an
offset fee applicable only to the GSE, consolidation loan rebate fees, and
risk-sharing on defaulted loans applicable to all FFELP participants. The impact
of these fees and reserves for risk-sharing on the Company's on-balance sheet
portfolio of student loans reduced net income by $18 million and $15 million for
the three months ended June 30, 1997 and 1996, respectively, and by $37 million
and $30 million for the first six months of 1997 and 1996, respectively. In
addition to these fees, OBRA also imposed other yield reductions on all FFELP
participants, principally loan origination fees paid to the federal government
and reduced Special Allowance Payment ("SAP," which is described below) during
the period when a borrower is not in an active repayment status. The Company
effectively shares the impact of these costs through the pricing of loan
portfolios it purchases in the secondary market. Management believes the spreads
earned on the Company's portfolio of student loans will continue to be adversely
affected as a result of these changes to the FFELP program for the next several
years as older loans in its portfolio, which were not affected by OBRA, amortize
and are replaced by more recently originated loans which are affected by OBRA.
Core Earnings and Core Student Loan Spread
Important measures of the Company's operating performance are core
earnings and the core student loan spread. Core earnings is defined as the
Company's net income less the after-tax effect of floor revenues and other
one-time charges. Management believes that these measures, which are not
measures under generally accepted accounting principles ("GAAP"), are important
because they depict the Company's earnings before the effects of 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 core student loan operations.
The following table analyzes the earning spreads on student loans for
the three and six months ended June 30, 1997 and 1996. The line captioned
"Adjusted Student Loan Yields" reflects contractual yields adjusted for
premiums paid to purchase loan portfolios and the estimated costs of borrower
benefits. The Company, as the servicer of student loans that the GSE
securitizes, will continue to earn fee revenues over the life of the securitized
student
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loan portfolios. The off-balance sheet information presented in the table that
follows analyzes the on-going fee revenues associated with the securitized
portfolios of student loans.
STUDENT LOAN SPREAD ANALYSIS
THREE MONTHS ENDED SIX MONTHS ENDED
JUNE 30, JUNE 30,
------------------------------ -----------------------------
1997 1996 1997 1996
----------- ------------ ----------- -----------
ON-BALANCE SHEET
Adjusted student loan yields........................... 7.90% 7.98% 7.85% 7.96%
Amortization of floor contracts........................ .10 .07 .11 .05
Floor income........................................... .10 .17 .09 .17
Direct OBRA Costs...................................... (.35) (.29) (.34) (.28)
---------- ----------- ---------- ----------
Student loan income.................................... 7.75 7.93 7.71 7.90
Cost of funds.......................................... (5.51) (5.51) (5.51) (5.47)
---------- ----------- ---------- ----------
Student loan spread.................................... 2.24% 2.42% 2.20% 2.43%
========== =========== ========== ==========
Core student loan spread............................... 2.14% 2.25% 2.11% 2.26%
========== =========== ========== ==========
OFF-BALANCE SHEET
Servicing and securitization revenue................... 1.54% 1.32% 1.59% 1.33%
========== =========== ========== ==========
AVERAGE BALANCES (IN MILLIONS OF DOLLARS)
Student loans, including participations................ $ 32,799 $ 33,025 $ 33,298 $ 33,688
Securitized loans...................................... 8,129 3,385 7,259 2,374
---------- ----------- ---------- ----------
Managed student loans.................................. $ 40,928 $ 36,410 $ 40,557 $ 36,062
========== =========== ========== ==========
The decrease in the core student loan spread in the three and six months
ended June 30, 1997 versus the corresponding periods in the prior year was due
principally to higher OBRA fees and the effect of student loan participations,
which contractually yield a lower rate than the underlying student loans
(discussed below), offset by the revenues from the amortization of upfront
payments received from student loan floor contracts.
Student Loan Floor Revenues
As of June 30, 1997, approximately $32 billion of the Company's managed
student loans were eligible to earn floors ($15 billion with fixed borrower
interest rates and $17 billion with variable borrower interest rates that reset
annually). During 1996, the Company "monetized" the value of the floors related
to $13 billion of such loans by entering into contracts with third parties under
which it agreed to pay the future floor revenues received, in exchange for
upfront payments. These upfront payments are being amortized over the life of
these contracts, which is approximately 2 years. The amortization of these
payments, which is not dependent on future interest rate levels, is included in
core earnings.
In the three months ended June 30, 1997 and 1996, the amortization of
these upfront payments contributed $8 million and $6 million, respectively,
pre-tax to core earnings. In addition, the Company earned floor revenues of $8
million (net of $5 million in payments under the floor revenue contracts) and
$14 million (net of $3 million in payments under the floor revenue contracts) in
the three months ended June 30, 1997 and 1996, respectively, as the average bond
equivalent 91-day Treasury bill rate was 5.22 percent and 5.17 percent in the
three months ended June 30, 1997 and 1996, respectively.
In the first six months of 1997 and 1996, the amortization of these
upfront payments contributed $18 million and $8 million, respectively, pre-tax
to core earnings. Of the remaining $19 billion of loans eligible to earn floors
at June 30, 1997, $4 billion were earning floor revenues based upon current
interest rates. These loans earned floor revenues of $14 million (net of $10
million in payments under the floor revenue contracts) and $29 million (net of
$4 million in payments under the floor revenue contracts) in the six months
ended June 30, 1997 and 1996, respectively, as the average bond equivalent
91-day Treasury bill rate was 5.21 percent in the first six months of 1997
versus 5.13 percent in the first six months of 1996.
Securitization
During the three months ended June 30, 1997 and 1996, the GSE
completed securitization transactions in which a total of $2.5 billion and $1.5
billion, respectively, of student loans were sold to a special purpose finance
subsidiary and
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by the subsidiary to trusts that issued asset-backed securities to fund the
student loans to term. In each of the first six months of 1997 and 1996, the GSE
completed two securitization transactions in which a total of $4.5 billion and
$3.0 billion, respectively, of student loans were sold by the GSE to a special
purpose finance subsidiary and by that subsidiary to trusts that issued
asset-backed securities to fund the student loans to term.
When loans are securitized a gain on sale is recorded that is equal to
the present value of the expected net cash flows from the trust. The Company
recorded pre-tax securitization gains in the three months ended June 30, 1997
and 1996 of $31 million and $9 million, respectively, versus gains recorded in
the six months ended June 30, 1997 and 1996 of $65 million and $19 million,
respectively. The increase in the gains in the first three and six months of
1997 was mainly due to the increase in the size, the higher average borrower
indebtedness and the longer average life of the portfolio of loans securitized.
Gains on future securitizations will continue to vary depending on the
characteristics of the loan portfolios securitized.
On July 23, 1997, the United States Department of Education (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. The U.S. Court of Appeals for the District of Columbia Circuit
had struck down the Secretary of Education's previous interpretation, which
applied the offset fee to loans securitized by the GSE, but upheld the
constitutionality of the offset fee as it applies to student loans held on
the GSE's balance sheet. Based upon the DOE's final decision and the
favorable Court ruling in this matter, the contingent gain of approximately $97
million pre-tax that had not been recognized in income through June 30, 1997
was released and recognized in income in the third quarter. All future
securitization gains will be calculated without consideration of the offset
fee.
NET INTEREST INCOME
To compare nontaxable asset yields to taxable yields on a similar basis,
the amounts in the following table are adjusted for the impact of certain
tax-exempt and tax-advantaged investments based on the marginal corporate tax
rate of 35 percent.
THREE MONTHS ENDED INCREASE
JUNE 30, (DECREASE)
------------------------------ -----------------------------
1997 1996 $ %
----------- ----------- --------- ----------
Interest income
Student loans.......................................... $ 634 $ 651 $ (17) (3)%
Warehousing advances................................... 37 49 (12) (24)
Academic facilities financings......................... 24 25 (1) (6)
Investments............................................ 168 135 33 25
Taxable equivalent adjustment.......................... 10 9 1 12
----------- ----------- -------- --------
Total taxable equivalent interest income................. 873 869 4 ----
Interest expense......................................... 656 641 15 2
----------- ----------- -------- --------
Taxable equivalent net interest income................... $ 217 $ 228 $ (11) (5)%
=========== =========== ======== ========
SIX MONTHS ENDED INCREASE
JUNE 30, (DECREASE)
------------------------------ -----------------------------
1997 1996 $ %
----------- ----------- --------- ----------
Interest income
Student loans.......................................... $ 1,274 $ 1,323 $ (49) (4)%
Warehousing advances................................... 78 107 (29) (27)
Academic facilities financings......................... 48 49 (1) (2)
Investments............................................ 312 270 42 16
Taxable equivalent adjustment.......................... 18 16 2 9
----------- ----------- -------- --------
Total taxable equivalent interest income................. 1,730 1,765 (35) (2)
Interest expense......................................... 1,305 1,296 9 1
----------- ----------- -------- --------
Taxable equivalent net interest income................... $ 425 $ 469 $ (44) (9)%
=========== =========== ========= =========
Taxable equivalent net interest income for the three months ended June
30, 1997 declined by $11 million, from the three months ended June 30, 1996.
This decline was due to the increase in loans subject to OBRA fees, which
reduced taxable equivalent net income and net interest margin by $28 million and
.24 percent, respectively, for the three months ended June 30, 1997 as compared
to reductions of $23 million and .20 percent for the three months ended June 30,
1996. Other factors contributing to the declines were lower student loan floor
revenues, decreased spreads on student loans and a decrease in average student
loan assets as loans were securitized. The decreases were partially offset by
the increase in revenue of $2 million from the amortization of upfront payments
received from student loan floor contracts for the three months ended June 30,
1997 over the same year-ago period and increased earnings from student loan
participations. The decrease in interest income from warehousing advances is due
to the decrease in the average balance of those assets and the increase in
interest income from investments is due principally to the increase in the
average balance of those assets. See "-- Rate/Volume Analysis."
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Taxable equivalent net interest income for the six months ended June
30, 1997 declined by $44 million from the six months ended June 30, 1996. This
decline was due to the increase in loans subject to OBRA fees, which reduced
taxable equivalent net income and net interest margin by $57 million and .24
percent, respectively, for the six months ended June 30, 1997 as compared to
reductions of $47 million and .20 percent for the six months ended June 30,
1996. Other factors contributing to the declines were lower student loan floor
revenues, decreased spreads on student loans and a decrease in average student
loan assets as loans were securitized. The decreases were partially offset by
increased revenue of $10 million from the amortization of upfront payments
received from student loan floor contracts for the six months ended June 30,
1997 over the same year-ago period and increased earnings from student loan
participations. The decrease in interest income from warehousing advances is
due to the decrease in the average balance of those assets and the increase in
interest income from investments is due principally to the increase in the
average balance of those assets. See "-- Rate/Volume Analysis."
Allowance for Student Loans
The provision for student loan losses is the periodic expense of
maintaining an adequate allowance at the amount estimated to be sufficient to
absorb possible future losses, net of recoveries inherent in the existing on-
balance sheet loan portfolio. In evaluating the adequacy of the allowance for
loan losses the Company takes into consideration several factors including
trends in claims rejected for payment by guarantors, default rate trends on
privately insured loans, and the amount of FFELP loans subject to 2 percent
risk-sharing. To recognize these potential losses on student loans, the Company
maintained a reserve of $82 million and $64 million at June 30, 1997 and 1996,
respectively. In the three months ended June 30, 1997, the Company increased
this reserve by $4.2 million to cover loans subject to risk-sharing, offset by a
decrease of $4 million due to improved experience in recovering unpaid
guarantees on defaulted student loans. In the first six months of 1997, the
Company increased this reserve by $6 million, due mainly to an $8 million
increase in loans subject to risk-sharing offset partially by the $4 million
decrease mentioned above. In the three and six months ended June 30, 1996, the
Company increased this reserve by $5 million and $9 million, respectively, due
mainly to the increase in loans subject to risk-sharing. 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. This
evaluation is inherently subjective, however, as it requires material estimates
that may be susceptible to significant changes.
AVERAGE BALANCE SHEETS
The following table reflects the rates earned on earning assets and paid
on liabilities for the three and six months ended June 30, 1997 and 1996.
Managed net interest margin includes net interest income plus gains on
securitization sales and servicing and securitization income divided by average
managed assets.
THREE MONTHS ENDED JUNE 30,
---------------------------------------------------------
1997 1996
------------------------- -------------------------
BALANCE RATE BALANCE RATE
---------- ----- ---------- -----
AVERAGE ASSETS
Student loans.......................................... $ 32,799 7.75% $ 33,025 7.93%
Warehousing advances................................... 2,485 6.01 3,297 5.98
Academic facilities financings......................... 1,415 8.44 1,494 8.48
Investments............................................ 11,138 6.21 9,512 5.81
---------- ---- ---------- ----
Total interest earning assets............................... 47,837 7.32% 47,328 7.39%
==== ====
Non-interest earning assets................................. 1,819 1,860
---------- ----------
Total assets................................................ $ 49,656 $ 49,188
========== ==========
AVERAGE LIABILITIES AND STOCKHOLDERS' EQUITY
Six month floating rate notes............................. $ 2,919 5.46% $ 2,600 5.45%
Other short-term borrowings............................... 24,876 5.52 17,234 5.41
Long-term notes........................................... 19,571 5.61 27,069 5.56
---------- ---- ---------- ----
Total interest bearing liabilities.......................... 47,366 5.55% 46,903 5.50%
==== ====
Non-interest bearing liabilities............................ 1,469 1,492
Stockholders' equity........................................ 821 793
---------- ----------
Total liabilities and stockholders' equity.................. $ 49,656 $ 49,188
========== ==========
Net interest margin......................................... 1.82% 1.94%
==== ====
Managed net interest margin................................. 2.00% 1.97%
==== ====
SIX MONTHS ENDED JUNE 30,
---------------------------------------------------------
1997 1996
---------------------- ----------------------
BALANCE RATE BALANCE RATE
------- ----- ------- -----
AVERAGE ASSETS
Student loans.......................................... $33,298 7.71% $33,688 7.90%
Warehousing advances................................... 2,639 5.98 3,523 6.11
Academic facilities financings......................... 1,443 8.44 1,430 8.50
Investments............................................ 10,606 6.04 9,343 5.91
------- ---- ------- ----
Total interest earning assets............................... 47,986 7.27% 47,984 7.40%
==== ====
Non-interest earning assets................................. 1,930 1,808
------- -------
Total assets................................................ $49,916 $49,792
======= =======
AVERAGE LIABILITIES AND STOCKHOLDERS' EQUITY
Six month floating rate notes............................. $2,952 5.46% $2,605 5.42%
Other short-term borrowings............................... 24,243 5.48 16,759 5.41
Long-term notes........................................... 20,444 5.59 28,136 5.55
------- ---- ------- ----
Total interest bearing liabilities.......................... 47,639 5.53% 47,500 5.49%
==== ====
Non-interest bearing liabilities............................ 1,458 1,474
Stockholders' equity........................................ 819 818
------- -------
Total liabilities and stockholders' equity.................. $49,916 $49,792
======= =======
Net interest margin......................................... 1.78% 1.96%
==== ====
Managed net interest margin................................. 1.99% 2.01%
==== ====
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The decrease in net interest margin for the three and six months ended
June 30, 1997 from the three and six months ended June 30, 1996 is mainly due to
increased OBRA fees and lower floor revenues offset by the increased revenues
from the amortization of upfront payments received from student loan floor
contracts. See "--Rate/Volume Analysis." The decrease in net interest margin for
the six months ended June 30, 1997 is also due to lower student loans as loans
were securitized. The decrease in the managed net interest margin for the three
and six months ended June 30, 1997 from the three and six months ended June 30,
1996 is due to the factors mentioned above for the net interest margin offset by
an increase in the gains from securitization of $21 million and $45 million,
respectively, and the increase in servicing and securitization income of $20
million and $42 million, respectively.
FUNDING COSTS
The Company's borrowings are generally variable rate indexed principally
to the 91-day Treasury bill rate. The following table summarizes the average
balance of debt (by index after giving effect to the impact of interest rate
swaps) for the three and six months ended June 30, 1997 and 1996.
THREE MONTHS ENDED JUNE 30,
-----------------------------------------------------------------
1997 1996
---------------------------- ----------------------------
AVERAGE AVERAGE AVERAGE AVERAGE
INDEX BALANCE RATE BALANCE RATE
- ---------------------------------------------- ------------ ----------- ------------ -----------
Treasury bill, principally 91-day............. $ 33,435 5.50% $ 35,179 5.51%
LIBOR......................................... 6,298 5.49 7,683 5.25
Discount notes................................ 6,200 5.52 2,889 5.33
Fixed......................................... 670 7.02 755 6.76
Zero coupon................................... 134 11.12 120 11.15
Other......................................... 629 5.18 277 4.54
------------ ---------- ------------ ----------
Total......................................... $ 47,366 5.55% $ 46,903 5.50%
============ ========== ============ ==========
SIX MONTHS ENDED JUNE 30,
-----------------------------------------------------------
1997 1996
------------------------ -----------------------
AVERAGE AVERAGE AVERAGE AVERAGE
INDEX BALANCE RATE BALANCE RATE
- ---------------------------------------------- ------- ---------- ------- -------
Treasury bill, principally 91-day............. $33,868 5.50% $35,878 5.46%
LIBOR......................................... 6,363 5.42 8,412 5.38
Discount notes................................ 6,006 5.43 2,075 5.32
Fixed......................................... 673 7.04 760 6.73
Zero coupon................................... 132 11.12 122 11.12
Other......................................... 597 5.10 253 5.29
------- -------- ------- ------
Total......................................... $47,639 5.53% $47,500 5.49%
======= ======== ======= ======
In the above table, for the three months ended June 30, 1997 and 1996,
spreads for Treasury bill-indexed borrowings averaged .22 and .25 percent,
respectively, over the weighted average Treasury bill rates for the same periods
and spreads for London Interbank Offered Rate ("LIBOR")-indexed borrowings
averaged .26 percent and .28 percent, respectively, under the weighted average
LIBOR rates.
In the above table, for the six months ended June 30, 1997 and 1996,
spreads for Treasury bill-indexed borrowings averaged .23 percent and .25
percent, respectively, over the weighted average Treasury bill rates for the
same periods and spreads for LIBOR-indexed borrowings averaged .26 percent and
.28 percent, respectively, under the weighted average LIBOR rates.
RATE/VOLUME ANALYSIS
The Rate/Volume Analysis below shows the relative contribution of
changes in interest rates and asset volumes.
INCREASE
(DECREASE)
TAXABLE ATTRIBUTABLE
EQUIVALENT TO CHANGE IN
INCREASE --------------------
(DECREASE) RATE VOLUME
---------- -------- ------
THREE MONTHS ENDED JUNE 30, 1997 VS. THREE MONTHS
ENDED JUNE 30, 1996
Taxable equivalent interest income.......................... $ 4 $ (6) $ 10
Interest expense............................................ 15 8 7
-------- ------- ------
Taxable equivalent net interest income...................... $ (11) $ (14) $ 3
======== ======= ======
7
11
INCREASE
(DECREASE)
TAXABLE ATTRIBUTABLE
EQUIVALENT TO CHANGE IN
INCREASE ---------------------
(DECREASE) RATE VOLUME
---------- -------- -------
FIRST SIX MONTHS OF 1997 VS. FIRST SIX MONTHS OF 1996
Taxable equivalent interest income.......................... $ (35) $ (28) $ (7)
Interest expense............................................ 9 13 (4)
-------- ------- ------
Taxable equivalent net interest income...................... $ (44) $ (41) $ (3)
======== ======= =======
The $14 million decrease in taxable equivalent net interest income
attributable to the change in rates for the three months ended June 30, 1997,
was principally due to increased OBRA costs of $5 million and the decrease of $6
million in floor revenues (net of payments under the floor contracts).
The $45 million decrease in taxable equivalent net interest income
attributable to the change in rates in the first six months of 1997 was
principally due to the decrease of $15 million in floor revenues (net of
payments under the floor contracts) in the first six months of 1997 versus 1996,
the impact of student loan participations on the student loan spread and
increased OBRA costs of $10 million. Offsetting the decreases in taxable
equivalent net interest income were $10 million of increased revenues from the
amortization of the upfront payments received from student loan floor contracts.
OPERATING EXPENSES
Operating expenses include general and administrative costs, costs
incurred to service the Company's managed student loan portfolio and operational
costs incurred in the process of acquiring student loan portfolios. Total
operating expenses as a percentage of average managed student loans were 113
basis points and 111 basis points for the three months ended June 30, 1997 and
1996, respectively, and 108 basis points and 111 basis points for the six months
ended June 30, 1997 and 1996, respectively. Operating expenses are summarized in
the following tables:
8
12
THREE MONTHS ENDED JUNE 30,
------------------------------------------------
1997
------------------------------------------------
SERVICING
AND
CORPORATE ACQUISITION TOTAL
--------- ------------ ----------
Salaries and employee benefits................. $ 15 $ 36 $ 51
Occupancy and equipment........................ 5 15 20
Professional fees.............................. 8 5 13
Advertising and promotion...................... 3 -- 3
Office operations.............................. 3 6 9
Other.......................................... 2 4 6
-------- ----------- ----------
Total internal operating expenses.............. 36 66 102
Third party servicing costs.................... -- 13 13
-------- ----------- ----------
Total operating expenses....................... $ 36 $ 79 $ 115
======== =========== ==========
THREE MONTHS ENDED JUNE 30,
------------------------------------------------
1996
------------------------------------------------
SERVICING
AND
CORPORATE ACQUISITION TOTAL
--------- ------------ ----------
Salaries and employee benefits................. $ 17 $ 33 $ 50
Occupancy and equipment........................ 6 15 21
Professional fees.............................. 4 2 6
Advertising and promotion...................... 2 -- 2
Office operations.............................. 3 7 10
Other.......................................... 2 -- 2
-------- ----------- ----------
Total internal operating expenses.............. 34 57 91
Third party servicing costs.................... -- 9 9
-------- ----------- ----------
Total operating expenses....................... $ 34 $ 66 $ 100
======== =========== ==========
THREE MONTHS ENDED
JUNE 30, INCREASE/(DECREASE)
--------------------------- --------------------------
1997 1996 $ %
-------- -------- -------- --------
Servicing costs..................................... $ 64 $ 50 $ 14 26%
Acquisition costs................................... 15 16 (1) (5)
-------- -------- ------- --------
Total servicing and acquisition costs............... $ 79 $ 66 $ 13 19%
======== ======== ======= =======
SIX MONTHS ENDED JUNE 30,
------------------------------------------------
1997
------------------------------------------------
SERVICING
AND
CORPORATE ACQUISITION TOTAL
--------- ------------ ----------
Salaries and employee benefits................. $ 31 $ 72 $ 103
Occupancy and equipment........................ 9 30 39
Professional fees.............................. 12 8 20
Advertising and promotion...................... 5 -- 5
Office operations.............................. 4 13 17
Other.......................................... 6 6 12
-------- ----------- ----------
Total internal operating expenses.............. 67 129 196
Third party servicing costs.................... -- 21 21
-------- ----------- ----------
Total operating expenses....................... $ 67 $ 150 $ 217
======== =========== ==========
Employees at end of the period................. 686 4,003 4,689
======== =========== ==========
SIX MONTHS ENDED JUNE 30,
------------------------------------------------
1996
------------------------------------------------
SERVICING
AND
CORPORATE ACQUISITION TOTAL
--------- ------------ ----------
Salaries and employee benefits................. $ 34 $ 68 $ 102
Occupancy and equipment........................ 13 30 43
Professional fees.............................. 6 4 10
Advertising and promotion...................... 3 -- 3
Office operations.............................. 4 15 19
Other.......................................... 4 -- 4
-------- ----------- ----------
Total internal operating expenses.............. 64 117 181
Third party servicing costs.................... -- 18 18
-------- ----------- ----------
Total operating expenses....................... $ 64 $ 135 $ 199
======== =========== ==========
Employees at end of the period................. 739 3,918 4,657
======== =========== ==========
SIX MONTHS ENDED
JUNE 30, INCREASE/(DECREASE)
--------------------------- ---------------------------
1997 1996 $ %
-------- -------- -------- ---------
Servicing costs..................................... $ 121 $ 102 19 19%
Acquisition costs................................... 29 33 (4) (13)
-------- -------- ------- --------
Total servicing and acquisition costs............... $ 150 $ 135 15 11%
======== ======== ======= =======
The increase of $2 million in corporate operating expenses for the
three months ended June 30, 1997 versus the three months ended June 30, 1996 is
mainly due to an increase in professional fees due to the privatization and
proxy efforts and increased advertising offset by lower salaries due to the
closing of the Company's Education Finance Center, Inc. ("EFCI") subsidiary in
the fourth quarter of 1996. The increase in servicing costs of $14 million is
due to the increase in the number of loans serviced and to a one-time cost of
$5 million in connection with the early transfer of loans from a third party
servicer to Sallie Mae Servicing Corporation ("SMSC"). The increase of $3
million in corporate operating expenses in the first six months of 1997 versus
the first six months of 1996 was mainly due to the increase in professional
fees related to the privatization and proxy efforts and to SEC registration
fees, offset in part by the decrease in occupancy costs and a decrease in
salaries caused principally by the closing of EFCI in the fourth quarter of
1996.
Servicing costs include all operations and systems costs incurred to
service the Company's portfolio of managed student loans, including fees paid to
third party servicers. The 1992 legislated expansion of student eligibility and
increases in loan limits resulted in higher average student loan balances, which
generally command a higher price in the secondary market and contribute to lower
servicing costs as a percentage of the average balance
9
13
of managed student loans. When expressed as a percentage of the managed student
loan portfolio, servicing costs averaged 62 basis points and 56 basis points for
the three months ended June 30, 1997 and 1996, respectively, and 60 basis points
and 57 basis points for the six months ended June 30, 1997 and 1996,
respectively. These increases were due principally to a one-time cost in
connection with the early transfer of loans from a third party servicer to SMSC.
Loan acquisition costs are principally costs incurred under the
ExportSS(R) loan origination and administration service, the costs of converting
newly acquired portfolios onto the Company's servicing platform or those of
third party servicers and costs of loan consolidation activities. Student loans
added to the ExportSS(R) pipeline, which represent loan volume serviced by and
committed for sale to the Company, totaled $443 million during the three months
ended June 30, 1997, up from $343 million in the three months ended June 30,
1996. For the six months ended June 30, 1997, $1.7 billion of student loans
were added to the ExportSS(R) pipeline, down slightly from $1.8 billion added
in the first six months of 1996. The outstanding portfolio of loans serviced
for ExportSS(R) lenders totaled $3.5 billion at June 30, 1997, down 4 percent
from $3.7 billion at June 30, 1996.
FEDERAL AND STATE TAXES
The Company maintains a portfolio of tax-advantaged assets principally
to support education-related financing activities. That portfolio was primarily
responsible for the decrease in the effective federal income tax rate from the
statutory rate of 35 percent to 30 percent for both the three months ended June
30, 1997 and 1996, and to 31 percent and 30 percent in the first six months of
1997 and 1996, respectively. The GSE is exempt from all state, local, and
District of Columbia income, franchise, sales and use, personal property and
other taxes, except for real property taxes. This tax exemption is effective
only at the GSE level. As a result of the Reorganization, the Company's GSE
and non-GSE activities are separated and non-GSE activities are subject to
state and local taxation. State taxes are expected to be immaterial in 1997 as
the majority of the Company's business activities will relate to the GSE. As
increasing business activities occur outside of the GSE, the effects of state
and local taxes are expected to increase accordingly. When fully phased in,
management estimates that the Company's effective tax rate will be increased by
approximately five percentage points. In addition, state and local sales and
property taxes ultimately are expected to increase operating expenses by
approximately two to three percent.
LIQUIDITY AND CAPITAL RESOURCES
In the three months ended June 30, 1997, student loan purchases totaled
$2.1 billion, down 13 percent from the $2.4 billion purchased in the three
months ended June 30, 1996. Included in the $2.1 billion of purchases was
approximately $177 million of student loan participations from the Chase Joint
Venture.
In the first six months of 1997, student loan purchases totaled $4.1
billion, down 11 percent from $4.6 billion in the first six months of 1996.
Included in the $4.1 billion of 1997 student loan purchases was approximately
$590 million of student loan participations from the Company's joint venture
with The Chase Manhattan Bank (the "Chase Joint Venture"). Approximately
two-thirds of non-joint venture purchase volume in both the three and six
months ended June 30, 1997 was derived from the Company's base of commitment
clients, particularly those who used the ExportSS(R) loan origination service.
The GSE secures financing to fund the purchase of insured student loans along
with its other operations by issuing debt securities in the domestic and
overseas capital markets, through public offerings and private placements of
U.S. dollar-denominated and foreign currency-denominated debt of varying
maturities and interest rate characteristics and through securitizations of its
student loan assets (see below, "Securitization"). 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.
10
14
The Privatization Act effectively requires that the GSE maintain a
minimum statutory capital adequacy ratio (the ratio of stockholders' equity to
total assets plus 50 percent of the credit equivalent amount of certain
off-balance sheet items) of at least 2 percent until January 1, 2000 and 2.25
percent thereafter or be subject to certain "safety and soundness" requirements
designed to restore such statutory ratio. Management anticipates being able to
fund the increase in required capital from the GSE's current and retained
earnings. At June 30, 1997, the GSE's statutory capital adequacy ratio was 2.09
percent. In addition, the Privatization Act now requires management, before the
payment of dividends by the GSE, to certify to the Secretary of the Treasury
that, after giving effect to the payment of dividends, the statutory capital
ratio test would have been met at the time the dividend was declared.
The Company uses interest rate and foreign currency swaps
(collateralized where appropriate), purchases of U.S. Treasury securities and
other hedging techniques to reduce the exposure to interest rate and currency
fluctuations that arise from its financing activities and to match the
characteristics of its variable interest rate-earning assets (See "Interest Rate
Risk Management"). During the first six months of 1997, the Company issued $2.3
billion of long-term notes to refund maturing and repurchased obligations. At
June 30, 1997, the Company had $19.5 billion of outstanding long-term debt
issues of which $13.8 billion had stated maturities that could be accelerated
through call provisions. The GSE has, in the past, also issued adjustable rate
cumulative preferred stock, common stock, common stock warrants and puts, and
subordinated debentures convertible to common stock, to diversify its funding
sources.
During the first six months of 1997, the Company repurchased 1.8 million
shares of its common stock, leaving 52.3 million shares outstanding at June 30,
1997. For the past few years the GSE has operated near the statutory minimum
capital ratio of 2.00 percent of risk adjusted assets required under its
charter. Capital in excess of such amounts has been used to repurchase common
shares. During 1997, management anticipates using current earnings to repurchase
7 to 9 percent of the shares outstanding at the beginning of the year.
SECURITIZATION
The GSE uses securitizations of student loans to reduce its on-balance
sheet funding needs. The GSE completed a $2.5 billion securitization
transaction during the three months ended June 30, 1997 bringing the total
amount securitized in the first six months of 1997 to $4.5 billion. Management
believes that securitizations will grow in importance as a source of funding
for the Company.
CASH FLOWS
For the three months ended June 30, 1997, cash and cash equivalents
increased $2.1 billion and the ending balance at June 30, 1997 was $2.2 billion
versus $312 million at June 30, 1996. This increase in cash and cash
equivalents was mainly due to the temporary restriction on the Company's share
repurchase activity in connection with the proxy contest. The additional
capital was temporarily invested in cash equivalent securities. The Company
funded its $2.1 billion purchase of student loans and its net increase in
investments of $700 million in the second quarter through the proceeds from the
$2.5 billion student loan securitization and through the proceeds from the net
issuance of $1.8 billion of debt. These proceeds were also used to pay down
other liabilities of $399 million.
In the first six months of 1997, operating activities provided net cash
inflows of $219 million, an increase of $64 million from the first six months of
1996. This increase was due mainly to the increase in net income of $32 million.
Investing activities provided $1.7 billion in cash in the first six months of
1997, a decrease of $19 million from the cash provided in the first six months
of 1996 as the Company increased investments by $941 million, offset by a
decrease in warehousing advances of $294 million in the six months ended June
30, 1997 versus a decrease of $425 million in investments and a decrease of $893
million in warehousing advances in the first six months of 1996. In addition,
the Company had purchases, net of repayments, claims and resales of student
loans and student loan participations of $2.3 billion in the first six months of
1997 and 1996 and securitized $4.5 billion and $3.0 billion of student loans in
the first six months of 1997 and 1996, respectively. Financing activities used
$4 million in cash in the first six months of 1997 as the Company repurchased
1.8 million shares for $201 million.
11
15
The Company also repaid a net $5.2 billion in long-term notes through the
issuance of net short-term borrowings of $5.5 billion. As student loans are
securitized the need for long-term financing of these assets on balance sheet
decreases.
Interest Rate Risk Management
The Company's principal objective in financing its loan assets is to
minimize its sensitivity to changing interest rates by matching the interest
rate characteristics of borrowings to specific assets in order to lock in
spreads. The Company funds its floating rate loan assets (most of which have
weekly rate resets) with variable rate debt and fixed rate debt converted to
variable rates with interest rate swaps. To achieve a more precise match of
interest rate characteristics between loan assets and their related liabilities,
the Company has effectively converted some of its variable rate debt to a
different variable rate index with interest rate swaps. At June 30, 1997, $19.6
billion of fixed rate debt and $2.9 billion of variable rate debt were matched
with interest rate swaps and foreign currency agreements. Fixed rate debt at
June 30, 1997 also funded fixed rate warehousing advances and academic
facilities financings. Investments were funded on a "pooled" approach, i.e., the
pool of liabilities that funds the investment portfolio has an average rate and
maturity or reset date that corresponds to the average rate and maturity or
reset date of the investments which they fund.
In both its match funding activities for its loan assets and its pool
funding activities for its investments, the Company enters into various
financial instrument contracts in the normal course of business to reduce
interest rate risk and foreign currency exposure on certain of its borrowings.
These financial instrument contracts include interest rate swaps, interest rate
cap and collar agreements, foreign currency swaps, forward currency exchange
agreements, options on currency exchange agreements, options on securities, and
financial futures contracts.
In the table below the Company's variable rate assets and liabilities
are categorized by reset date of the underlying index. Fixed rate assets and
liabilities are categorized based on their maturity dates. An interest rate gap
is the difference between volumes of assets and volumes of liabilities maturing
or repricing during specific future time intervals. Nonperforming loans are
included in the analysis based on their underlying interest rate
characteristics. The following gap analysis reflects rate-sensitive positions at
June 30, 1997 and is not necessarily reflective of positions that existed
throughout the period.
12
16
INTEREST RATE SENSITIVITY PERIOD
--------------------------------------------------
3 MONTHS 6 MONTHS
3 MONTHS TO TO
OR LESS 6 MONTHS 1 YEAR
------------- ------------ ------------
ASSETS
Student loans.................................... $ 31,488 $ -- $ --
Warehousing advances............................. 2,476 -- 2
Academic facilities financings................... 83 43 17
Cash and investments............................. 8,040 459 16
Other assets..................................... -- -- --
------------- ------------ ------------
Total assets................................ 42,087 502 35
------------- ------------ ------------
LIABILITIES AND STOCKHOLDERS'
EQUITY
Short-term borrowings............................ 18,274 2,617 4,958
Long-term notes.................................. 6,919 -- --
Other liabilities................................ -- -- --
Minority interest in subsidiary -- -- --
Stockholders' equity............................. -- -- --
------------- ------------ ------------
Total liabilities and
stockholders' equity...................... 25,193 2,617 4,958
------------- ------------ ------------
OFF-BALANCE SHEET FINANCIAL
INSTRUMENTS
Interest rate swaps.............................. 17,328 (2,232) (4,140)
------------- ------------ ------------
Period gap....................................... $ (434) $ 117 $ (783)
============= ============ ============
Cumulative gap................................... $ (434) $ (317) $ (1,100)
============= ============ ============
Ratio of cumulative gap to total
assets......................................... .9% .7% 2.3%
============ ============ ============
Ratio of interest-sensitive assets to
interest-sensitive liabilities................. 167.1% 19.2% .7%
============ ============ ============
INTEREST RATE SENSITIVITY PERIOD
------------------------------------------------
1 TO 2 2 TO 5 OVER 5
YEARS YEARS YEARS
------------ ------------ ------------
ASSETS
Student loans.................................... $ -- $ -- $ --
Warehousing advances............................. 1 -- 16
Academic facilities financings................... 37 291 882
Cash and investments............................. 103 184 1,791
Other assets..................................... -- -- 1,970
------------ ------------ -----------
Total assets................................ 141 475 4,659
------------ ------------ -----------
LIABILITIES AND STOCKHOLDERS'
EQUITY
Short-term borrowings............................ -- -- --
Long-term notes.................................. 3,108 8,830 632
Other liabilities................................ -- -- 1,504
Minority interest in subsidiary -- -- 214
Stockholders' equity............................. -- -- 843
------------ ------------ -----------
Total liabilities and
stockholders' equity...................... 3,108 8,830 3,193
------------ ------------ -----------
OFF-BALANCE SHEET FINANCIAL
INSTRUMENTS
Interest rate swaps.............................. (3,020) (8,694) 758
------------ ------------ -----------
Period gap....................................... $ 53 $ 339 $ 708
============ ============ ===========
Cumulative gap................................... $ (1,047) $ (708) $ --
============ ============ ===========
Ratio of cumulative gap to total
assets......................................... 2.2% 1.5% --%
============ ============ ===========
Ratio of interest-sensitive assets to
interest-sensitive liabilities................. 4.5% 5.4% 425.5%
============ ============ ===========
In low interest rate environments, floor revenues on student loans cause
the margins on these loans to widen beyond the locked-in spreads. See "--
Results of Operations -- Student Loan Floor Revenues." Such loans continue to be
classified in the three months or less category in the table above, reflecting
the fact that as interest rates rise these assets will resume their weekly rate
reset.
The weighted average remaining terms to maturity of the Company's
earning assets and borrowings at June 30, 1997 were 5.5 years and 1.5 years,
respectively. The following table reflects the average terms to maturity for the
Company's earning assets and liabilities at June 30, 1997:
AVERAGE TERMS TO MATURITY
(IN YEARS)
EARNING ASSETS
Student loans.............................. 6.0
Warehousing advances....................... 3.5
Academic facilities financings............. 8.0
Cash and investments....................... 4.0
-------
Total earning assets....................... 5.5
=======
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 4.0 years. As loans are
securitized, the need for long-term on-balance sheet financing will decrease.
MINORITY INTEREST
As part of the GSE's privatization, SLM Holding became the parent
company of, and successor to, the GSE on August 7, 1997. As a result, the GSE's
preferred stock 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.
The GSE's preferred stock dividends are cumulative and payable quarterly
at 4.50 percentage points below the highest yield of certain long-term and
short-term United States Treasury obligations. The dividend rate for any
dividend period will not be less than 5 percent per annum nor greater than 14
percent per annum. For each of the six month periods ended June 30, 1997 and
1996, the preferred stock dividend rate was 5.00 percent and reduced net income
by $5.3 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 if certain conditions
are met.
OTHER RELATED EVENTS AND INFORMATION
Status of Direct Lending
As of June 30, 1997, approximately 1,484 colleges and universities were
participating in the Federal Direct Student Loan Program ("FDSLP") for the
1996-97 academic year. The FDLSP had a legislated market share goal of 50
percent for the 1996-1997 academic year. Based on DOE reports, management
estimates that the FDSLP accounted for approximately 33 percent of total
student loan originations for the 1996-97 academic year. The FDSLP accounted
for approximately 31 percent of total student loan volume in the 1995-96
academic year, up from approximately 7 percent in the 1994-95 academic year.
In recent years as the FDSLP has grown, the volume of loans originated
by banks and other participants under the FFELP has been adversely impacted.
Historically, the GSE has purchased the majority of its student loans as they
near the repayment phase which commences after a borrower leaves school. On
average there is a two to three year lag between the date a loan is originated
and the date it enters repayment. This lag has delayed the adverse affect of
FDSLP originations on the GSE's purchases of student loans. As the volume of
FDSLP loans reaching the repayment phase increases, the GSE's percentage share
of the overall student loan market will decline. In 1994, the DOE began to offer
existing FFELP borrowers the opportunity to refinance FFELP loans into FDSLP
loans. As of June 30, 1997, approximately $592 million of FFELP loans owned by
the GSE have been accepted for refinancing into FDSLP loans. Approximately $409
million have been refinanced into FDSLP loans with the remainder awaiting
disbursement by the federal government.
OBRA provides for a change in the borrower interest rate and the Special
Allowance Payment for certain FFELP loans made on or after July 1, 1998. The
new rates are scheduled to be based on the U.S. Treasury security with a
"comparable maturity" plus 1.0 percent. The Secretary of Education has not
adopted regulations specifying the U.S. Treasury security on which the Special
Allowance Payment rate will be based or details on setting the Special
Allowance Payment rate. Management believes that the "comparable maturity"
security will be the 10-year Treasury Note. Depending on the specifics of the
regulations, these changes could adversely impact the FFELP market and the
Company's business because the availability and costs of funding to support
this new type of instrument are uncertain. Representatives of the student loan
industry are in discussions with members of Congress concerning possible
legislative modification of this OBRA provision.
OBRA also requires the GSE to act as a lender of last resort to make
FFELP loans when other private lenders are not available. Such loans receive a
100 percent guarantee and are not subject to the 30 basis point offset fee on
loans held by the GSE. If the Secretary of Education determines that the GSE is
not adequately implementing this provision, the offset fee paid by the GSE could
be increased from 30 basis points to 100 basis points.
Legislated expansion of student eligibility as well as increases in
student and parent loan limits have increased the volume of national loan
originations. FFELP originations rose nearly 30 percent year-to-year to about
$23 billion for the 1994 federal fiscal year ended September 30, 1994. During
the 1995 federal fiscal year, FFELP originations declined to $21 billion due
to FDSLP originations totaling $5 billion. Although FFELP originations
declined in the 1996 federal fiscal year to $20 billion, management expects,
based on Department of Education reports, FFELP originations to increase to
$21 billion in the 1997 federal fiscal year. In the meantime, however, the
competition for FFELP loans has intensified at both the originating and
secondary market levels due mainly to the reduced volume and to securitization
of student loans, which has developed into a significant funding alternative
for FFELP lenders.
Recently Issued Accounting Pronouncements
In February 1997, the Financial Accounting Standards Board issued
Statement of Financial Accounting Standards ("FAS") No. 128, "Earnings Per
Share", which is required to be adopted on December 15, 1997. At that time,
the Company will be required to change the method used to compute earnings per
share and to restate all prior periods. Under the new requirements for
calculating primary earnings per share, the dilutive effect of stock options
will be excluded. The adoption is expected to have no material impact on
the Company's reported earnings per share.
In June 1997, the Financial Accounting Standards Board issued Statement
of Financial Accounting Standards ("FAS") No. 130, "Reporting Comprehensive
Income", which is effective for periods after December 15, 1997. FAS 130
establishes standards for reporting and display of comprehensive income in a
full set of general purpose financial statements. The Company is currently
evaluating the effect of this pronouncement on its financial statement
presentation and disclosure.
13
17
CONSOLIDATED FINANCIAL STATEMENTS
INDEX
PAGE
----
Consolidated Balance Sheets........................................... 17
Consolidated Statements of Income..................................... 18
Consolidated Statements of Changes in Stockholders' Equity............ 19
Consolidated Statements of Cash Flows................................. 20
Notes to Consolidated Financial Statements............................ 21
14
18
This Page Intentionally Left Blank
15
19
This Page Intentionally Left Blank
16
20
SLM HOLDING CORPORATION
CONSOLIDATED BALANCE SHEETS
(DOLLARS IN THOUSANDS, EXCEPT PER SHARE AMOUNTS)
JUNE 30, 1997 DECEMBER 31, 1996
--------------- -----------------
(UNAUDITED)
ASSETS
Insured student loans purchased............................................. $ 29,568,713 $ 32,307,930
Student loan participations................................................. 1,918,871 1,445,596
--------------- ---------------
Insured student loans....................................................... 31,487,584 33,753,526
Warehousing advances........................................................ 2,495,178 2,789,485
Academic facilities financings
Bonds-- available-for-sale................................................ 827,235 934,481
Loans..................................................................... 526,276 538,850
--------------- ---------------
Total academic facilities financings........................................ 1,353,511 1,473,331
Investments
Available-for-sale........................................................ 7,785,047 6,833,695
Held-to-maturity.......................................................... 584,576 601,887
--------------- ---------------
Total investments........................................................... 8,369,623 7,435,582
Cash and cash equivalents................................................... 2,223,439 270,887
Other assets, principally accrued interest
receivable................................................................ 1,969,583 1,907,079
--------------- ---------------
Total assets................................................................ $ 47,898,918 $ 47,629,890
=============== ===============
LIABILITIES
Short-term borrowings....................................................... $ 25,850,071 $ 22,517,627
Long-term notes............................................................. 19,488,810 22,606,226
Other liabilities........................................................... 1,503,568 1,458,207
--------------- ---------------
Total liabilities........................................................... 46,842,449 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: 66,158,095 and 65,695,571
shares issued, respectively............................................... 13,231 13,139
Additional paid-in capital.................................................. 28,218 --
Unrealized gains on investments (net of tax of
$185,569 and $188,050, respectively)...................................... 344,628 349,235
Retained earnings........................................................... 1,194,769 1,008,737
--------------- ---------------
Stockholders' equity before treasury stock.................................. 1,580,846 1,371,111
Common stock held in treasury at cost: 13,823,562 and
12,004,976 shares, respectively........................................... 738,260 537,164
--------------- ---------------
Total stockholders' equity.................................................. 842,586 833,947
--------------- ---------------
Total liabilities and stockholders' equity.................................. $ 47,898,918 $ 47,629,890
=============== ===============
See accompanying notes to consolidated financial statements.
17
21
SLM HOLDING CORPORAITON
CONSOLIDATED STATEMENTS OF INCOME
(DOLLARS IN THOUSANDS, EXCEPT PER SHARE AMOUNTS)
THREE MONTHS ENDED
JUNE 30,
-------------------------------------
1997 1996
------------------- ---------------
(unaudited) (unaudited)
Interest income:
Insured student loans purchased........................ $ 602,921 $ 651,503
Student loan participations............................ 30,737 -
-------------- ---------------
Insured student loans.................................. 633,658 651,503
Warehousing advances................................... 37,235 49,025
Academic facilities financings:
Taxable.............................................. 12,289 13,160
Tax-exempt........................................... 11,365 11,923
-------------- ---------------
Total academic facilities
financings........................................... 23,654 25,083
Investments............................................ 168,637 135,175
-------------- ---------------
Total interest income.................................... 863,184 860,786
Interest expense:
Short-term debt........................................ 381,890 266,932
Long-term debt......................................... 273,833 374,293
-------------- ---------------
Total interest expense................................... 655,723 641,225
-------------- ---------------
NET INTEREST INCOME...................................... 207,461 219,561
Other income:
Gain on sale of student loans.......................... 30,638 9,474
Servicing and securitization
revenue.............................................. 31,231 11,129
Gains/(losses) on sales of
securities........................................... 4,199 1,194
Other.................................................. 11,987 6,102
-------------- ---------------
Total other income....................................... 78,055 27,899
-------------- ---------------
Operating expenses:
Salaries and benefits.................................. 71,864 71,975
Other.................................................. 43,419 28,170
-------------- ---------------
Total operating expenses................................. 115,283 100,145
-------------- ---------------
Income before federal income taxes, minority interest in
net earnings of subsidiary and premiums on
debt extinguished...................................... 170,233 147,315
-------------- ---------------
Federal income taxes:
Current................................................ 51,075 58,532
Deferred............................................... (6) (14,192)
-------------- ---------------
Total federal income taxes............................... 51,069 44,340
-------------- ---------------
Minority interest in net earnings of subsidiary ......... 2,673 2,674
Income before premiums on debt
extinguished........................................... 116,491 100,301
-------------- ---------------
Premiums on debt extinguished, net of
tax.................................................... -- --
-------------- ---------------
NET INCOME .............................................. $ 116,491 $ 100,301
============== ===============
Earnings per common share before
premiums on debt extinguished.......................... $ 2.20 $ 1.79
============== ===============
EARNINGS PER COMMON SHARE................................ $ 2.20 $ 1.79
============== ===============
SIX MONTHS ENDED
JUNE 30,
----------------------------------
1997 1996
-------------- --------------
(UNAUDITED) (UNAUDITED)
Interest income:
Insured student loans purchased........................ $ 1,220,530 $ 1,323,266
Student loan participations............................ 53,044 --
------------- --------------
Insured student loans.................................. 1,273,574 1,323,266
Warehousing advances................................... 78,203 106,920
Academic facilities financings:
Taxable.............................................. 24,531 26,571
Tax-exempt........................................... 23,287 22,019
------------- --------------
Total academic facilities
financings........................................... 47,818 48,590
Investments............................................ 312,466 270,008
------------- --------------
Total interest income.................................... 1,712,061 1,748,784
Interest expense:
Short-term debt........................................ 738,764 520,676
Long-term debt......................................... 566,810 775,868
------------- --------------
Total interest expense................................... 1,305,574 1,296,544
------------- --------------
NET INTEREST INCOME...................................... 406,487 452,240
Other income:
Gain on sale of student loans.......................... 64,630 19,403
Servicing and securitization
revenue.............................................. 57,191 15,668
Gains/(losses) on sales of
securities........................................... 7,382 3,054
Other.................................................. 24,792 11,528
------------- --------------
Total other income....................................... 153,995 49,653
------------- --------------
Operating expenses:
Salaries and benefits.................................. 102,781 102,096
Other.................................................. 114,061 96,822
------------- --------------
Total operating expenses................................. 216,842 198,918
------------- --------------
Income before federal income taxes, minority interest in
net earnings of subsidiary, and premiums on
debt extinguished...................................... 343,640 302,975
------------- --------------
Federal income taxes:
Current................................................ 118,121 112,686
Deferred............................................... (12,482) (20,378)
------------- --------------
Total federal income taxes............................... 105,639 92,308
Minority interest in net earnings of subsidiary ......... 5,347 5,347
------------- --------------
Income before premiums on debt
extinguished........................................... 232,654 205,320
Premiums on debt extinguished, net of
tax.................................................... -- (4,792)
------------- --------------
NET INCOME .............................................. $ 232,654 $ 200,528
============= ==============
Earnings per common share before
premiums on debt extinguished.......................... $ 4.36 $ 3.62
============= ==============
EARNINGS PER COMMON SHARE................................ $ 4.36 $ 3.53
============= ==============
See accompanying notes to consolidated financial statements.
18
22
SLM HOLDING CORPORATION
CONSOLIDATED STATEMENTS OF CHANGES IN STOCKHOLDERS' EQUITY
(DOLLARS IN THOUSANDS, EXCEPT PER SHARE AMOUNTS)
THREE MONTHS ENDED
JUNE 30,
----------------------------------
1997 1996
-------------- --------------
(UNAUDITED) (UNAUDITED)
COMMON STOCK:
Balance, beginning of period................................ $ 13,213 $ 24,897
Issuance of common shares................................. 18 14
Retirement of common shares............................... -- --
-------------- --------------
Balance, end of period...................................... 13,231 24,911
-------------- --------------
ADDITIONAL PAID-IN CAPITAL:
Balance, beginning of period................................ 22,953 552,574
Proceeds in excess of par value from
issuance of common stock................................ 5,265 2,995
Tax benefit related to employee stock
option and purchase plans............................... -- --
Retirement of common shares............................... -- --
-------------- --------------
Balance, end of period...................................... 28,218 555,569
-------------- --------------
UNREALIZED GAINS ON INVESTMENTS, NET OF
TAX:
Balance, beginning of period................................ 331,023 342,518
Unrealized gains as of January 1,
1994.................................................... -- --
Change in unrealized gains................................ 13,605 (6,898)
-------------- --------------
Balance, end of period...................................... 344,628 335,620
-------------- --------------
RETAINED EARNINGS:
Balance, beginning of period (as
restated, see note 2)..................................... 1,101,450 2,805,688
Net income................................................ 116,491 100,301
Retirement of common shares............................... -- --
Cash dividends:
Common stock ($.44 and $.40, per share,
respectively)........................................ (23,172) (22,307)
-------------- --------------
Balance, end of period...................................... 1,194,769 2,883,682
-------------- --------------
COMMON STOCK HELD IN TREASURY AT
COST:
Balance, beginning of period................................ 672,765 2,914,827
Repurchase of 535,746 and 1,097,212
common shares, respectively............................. 65,495 81,664
Retirement of 59,000,000 common
shares.................................................. -- --
-------------- --------------
Balance, end of period...................................... 738,260 2,996,491
-------------- --------------
TOTAL STOCKHOLDERS' EQUITY.................................... $ 842,586 $ 803,291
============== ==============
SIX MONTHS ENDED
JUNE 30,
------------------------------------
1997 1996
---------------- --------------
(UNAUDITED) (UNAUDITED)
COMMON STOCK:
Balance, beginning of period................................ $ 13,139 $ 24,824
Issuance of common shares................................. 92 87
Retirement of common shares............................... -- --
---------------- --------------
Balance, end of period...................................... 13,231 24,911
---------------- --------------
ADDITIONAL PAID-IN CAPITAL:
Balance, beginning of period................................ -- 537,818
Proceeds in excess of par value from
issuance of common stock................................ 28,218 17,751
Tax benefit related to employee stock
option and purchase plans............................... -- --
Retirement of common shares............................... -- --
---------------- --------------
Balance, end of period...................................... 28,218 555,569
---------------- --------------
UNREALIZED GAINS ON INVESTMENTS, NET OF
TAX:
Balance, beginning of period................................ 349,235 370,846
Unrealized gains as of January 1,
1994.................................................... -- --
Change in unrealized gains................................ (4,607) (35,226)
---------------- --------------
Balance, end of period...................................... 344,628 335,620
---------------- --------------
RETAINED EARNINGS:
Balance, beginning of period (as
restated, see note 2)..................................... 1,008,737 2,728,383
Net income................................................ 232,654 200,528
Retirement of common shares............................... -- --
Cash dividends:
Common stock ($.88 and $.80, per share,
respectively)........................................ (46,622) (45,229)
---------------- --------------
Balance, end of period...................................... 1,194,769 2,883,682
---------------- --------------
COMMON STOCK HELD IN TREASURY AT
COST:
Balance, beginning of period................................ 537,164 2,794,549
Repurchase of 1,818,586 and 2,638,949
common shares, respectively............................. 201,096 201,942
Retirement of 59,000,000 common
shares.................................................. -- --
---------------- --------------
Balance, end of period...................................... 738,260 2,996,491
---------------- --------------
TOTAL STOCKHOLDERS' EQUITY.................................... $ 842,586 $ 803,291
================ ==============
See accompanying notes to consolidated financial statements.
19
23
SLM HOLDING CORPORATION
CONSOLIDATED STATEMENTS OF CASH FLOWS
(DOLLARS IN THOUSANDS)
THREE MONTHS ENDED
JUNE 30,
------------------------------------------
1997 1996
------------------ ------------------
(UNAUDITED) (UNAUDITED)
OPERATING ACTIVITIES
Net income........................................... $ 116,491 $ 100,301
Adjustments to reconcile net income to net
cash provided by operating activities:
(Increase) decrease in accrued interest
receivable....................................... (137,615) (91,520)
Increase (decrease) in accrued interest
payable.......................................... 72,201 141,387
(Increase) in other assets........................ (25,059) (49,358)
Increase in other liabilities...................... (399,165) (54,444)
----------------- ------------------
Total adjustments.................................... (489,638) (53,935)
----------------- ------------------
Net cash provided by operating
activities....................................... (373,147) 46,366
----------------- ------------------
INVESTING ACTIVITIES
Insured student loans purchased...................... (1,876,637) (2,373,729)
Reduction of insured student loans purchased:
Installment payments............................... 551,504 727,703
Claims and resales................................. 302,599 358,660
Proceeds from securitization of
student loans.................................... 2,496,450 1,515,030
Participations purchased............................. (177,439) --
Participation repayments............................. 63,222 --
Warehousing advances made............................ (146,720) (274,374)
Warehousing advance repayments....................... 184,790 640,753
Academic facilities financings made.................. (39,327) (219,295)
Academic facilities financings
reductions........................................ 100,224 33,299
Investments purchased................................ (4,994,961) (2,867,710)
Proceeds from sale or maturity of
investments........................................ 4,298,983 2,417,915
----------------- ------------------
Net cash provided by (used
in) investing activities............................. 762,688 (41,748)
----------------- ------------------
FINANCING ACTIVITIES
Short-term borrowings issued......................... 183,474,366 56,006,267
Short-term borrowings repaid......................... (180,026,513) (54,567,527)
Long-term notes issued............................... 911,594 66,581
Long-term notes repaid............................... (2,517,813) (2,391,291)
Common stock issued.................................. 5,283 3,009
Common stock repurchased............................. (65,495) (81,664)
Dividends paid....................................... (23,172) (22,307)
----------------- ------------------
Net cash provided by (used
in) financing activities............................. 1,758,250 (986,932)
----------------- ------------------
Net increase (decrease) in
cash and cash equivalents............................ 2,147,791 (982,314)
Cash and cash equivalents at
beginning of period.................................. 75,648 1,293,847
----------------- ------------------
CASH AND CASH EQUIVALENTS
AT END OF PERIOD..................................... $ 2,223,439 $ 311,533
================= =================
SIX MONTHS ENDED
JUNE 30,
------------------------------------------
1997 1996
------------------ ------------------
(UNAUDITED) (UNAUDITED)
OPERATING ACTIVITIES
Net income........................................... $ 232,654 $ 200,528
Adjustments to reconcile net income to net
cash provided by operating activities:
(Increase) decrease in accrued interest
receivable....................................... (13,088) 10,141
Increase (decrease) in accrued interest
payable.......................................... 28,526 6,560
(Increase) in other assets........................ (48,179) (124,146)
Increase in other liabilities...................... 19,316 62,235
----------------- -----------------
Total adjustments.................................... (13,425) (45,210)
----------------- -----------------
Net cash provided by operating
activities....................................... 219,229 155,318
----------------- -----------------
INVESTING ACTIVITIES
Insured student loans purchased...................... (3,553,247) (4,639,956)
Reduction of insured student loans purchased:
Installment payments............................... 1,131,175 1,667,232
Claims and resales................................. 615,639 640,955
Proceeds from securitization of
student loans.................................... 4,545,650 3,015,030
Participations purchased............................. (590,436) --
Participation repayments............................. 117,161 --
Warehousing advances made............................ (285,857) (734,810)
Warehousing advance repayments....................... 580,164 1,628,086
Academic facilities financings made.................. (53,720) (301,569)
Academic facilities financings
reductions........................................ 172,570 57,366
Investments purchased................................ (9,347,820) (8,334,029)
Proceeds from sale or maturity of
investments........................................ 8,406,424 8,758,590
----------------- -----------------
Net cash provided by (used
in) investing activities............................. 1,737,703 1,756,895
----------------- -----------------
FINANCING ACTIVITIES
Short-term borrowings issued......................... 375,929,647 101,760,944
Short-term borrowings repaid......................... (370,477,376) (101,656,582)
Long-term notes issued............................... 2,260,125 3,670,249
Long-term notes repaid............................... (7,497,368) (6,398,878)
Common stock issued.................................. 28,310 17,838
Common stock repurchased............................. (201,096) (201,942)
Dividends paid....................................... (46,622) (45,229)
----------------- -----------------
Net cash provided by (used
in) financing activities............................. (4,380) (2,853,600)
----------------- -----------------
Net increase (decrease) in
cash and cash equivalents............................ 1,952,552 (941,387)
Cash and cash equivalents at
beginning of period.................................. 270,887 1,252,920
----------------- -----------------
CASH AND CASH EQUIVALENTS
AT END OF PERIOD..................................... $ 2,223,439 $ 311,533
================= =================
See accompanying notes to consolidated financial statements.
20
24
SLM HOLDING CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(INFORMATION AT JUNE 30, 1997 AND FOR THE SIX MONTHS ENDED
JUNE 30, 1997 AND 1996 IS UNAUDITED)
(DOLLARS IN THOUSANDS, EXCEPT PER SHARE AMOUNTS)
1. ORGANIZATION AND PRIVATIZATION
On September 30, 1996, President Clinton signed into law the Student
Loan Marketing Association Reorganization Act of 1996, Pub. L. 104-208 (the
"Privatization Act"), authorizing the restructuring of the Student Loan
Marketing Association, a government-sponsored enterprise (the "GSE"), as a
fully private, state-chartered corporation. On July 31, 1997, at a Special
Meeting of Shareholders convened pursuant to a combined Proxy
Statement/Prospectus registered with the Securities and Exchange Commission,
the GSE's shareholders voted to approve a reorganization (the "Reorganization")
pursuant to which the GSE became a wholly owned subsidiary of SLM Holding
Corporation ("SLM Holding" or the "Company"), a Delaware corporation. 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 the GSE will transfer
certain assets, including stock in certain subsidiaries, to SLM Holding or one
of its non-GSE subsidiaries. This transfer of the subsidiaries and assets and
the related exchange of stock is being accounted for at historical cost similar
to a pooling of interests and therefore all prior period financial statements
and related disclosures presented have been restated as if the Reorganization
took place at the beginning of such periods. Operations performed outside the
GSE after the Reorganization will be subject to state and local taxes.
The GSE is a stockholder-owned corporation chartered by Congress to
provide liquidity for originators of student loans made under federally
sponsored student loan programs and otherwise to support the credit needs of
students and educational institutions. The GSE's charter is subject to
legislative change from time to time. The GSE is predominantly engaged in the
purchase of student loans insured under federally sponsored programs. The GSE
also makes secured loans (warehousing advances) to providers of education
credit, and provides financing to educational institutions for their physical
plant and equipment (academic facilities financings).
Privatization
Under the terms of the Privatization Act, the GSE will be able to
continue to issue debt in the government agency market to finance student loans
and other permissible asset acquisitions, although the maturity date of such
issuances generally may not extend beyond September 30, 2008, the date by which
the GSE must dissolve. At June 30, 1997 and December 31, 1996, the GSE had $379
million and $372 million, respectively, in carrying value of outstanding debt
with maturities after September 30, 2008. Such debt will be transferred into a
defeasance trust on the dissolution date.
After the Reorganization, SLM Holding paid $5 million to the District of
Columbia Financial Responsibility and Management Assistance Authority (the "D.C.
Financial Control Board") for use of the name "Sallie Mae." In addition,
SLM Holding issued to the D.C. Financial Control Board warrants to purchase
555,015 shares of SLM Holding Common Stock at $72.43 per share. The D.C.
Financial Control Board subsequently transferred the warrants on September 2,
1997 for $37 million.
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.
21
25
2. SIGNIFICANT ACCOUNTING POLICIES
Reclassification
Certain prior year amounts in the Consolidated Statements of Income for
the six months and three months ended June 30, 1996 have been reclassified to
conform with the 1996 year-end presentation.
Basis of Presentation
The accompanying unaudited consolidated financial statements of SLM
Holding have been prepared in accordance with generally accepted accounting
principles for interim financial information. Accordingly, they do not include
all of the information and footnotes required by generally accepted accounting
principles for complete consolidated financial statements. In the opinion of
management, all adjustments (consisting of normal recurring accruals) considered
necessary for a fair presentation have been included. The preparation of
financial statements in conformity with generally accepted accounting principles
requires management to make estimates and assumptions that affect the amounts
reported in the financial statements and accompanying notes. Actual results
could differ from those estimates. Operating results for the three and six
months ended June 30, 1997 are not necessarily indicative of the results for the
year ending December 31, 1997.
Earnings per common share are computed based on net income divided by
the weighted average common and common equivalent shares outstanding for the
period. Average common and common equivalent shares outstanding for the three
and six months ended June 30, 1997, three and six months ended June 30, 1996
totaled 52,993,323; 53,316,841; 56,082,844; and 56,782,781, respectively.
Recently Issued Accounting Pronouncements
During 1997, the Company adopted the requirements of FAS No. 125,
"Accounting for Transfers and Servicing of Financial Assets and Extinguishments
of Liabilities," which establishes the accounting for certain financial asset
transfers including securitization transactions. The effect of implementing this
standard was not material on the Company's financial statements. Management also
believes that this standard will not have a material effect on the financial
statements in the future.
In February 1997, the Financial Accounting Standards Board issued
Statement of Financial Accounting Standards ("FAS") No. 128, "Earnings Per
Share," which is required to be adopted on December 15, 1997. At that time, the
Company will be required to change the method used to compute earnings per share
and to restate all prior periods. Under the new requirements for calculating
primary earnings per share, the dilutive effect of stock options will be
excluded. The adoption is expected to have no material impact on the Company's
reported earnings per share.
In June 1997, the Financial Accounting Standards Board issued Statement
of Financial Accounting Standards ("FAS") No. 130, "Reporting Comprehensive
Income", which is effective for periods after December 15, 1997. FAS 130
establishes standards for reporting and display of comprehensive income in a
full set of general purpose financial statements. The Company is currently
evaluating the effect of this pronouncement on its financial statement
presentation and disclosure.
3. STUDENT LOANS
For the three and six months ended June 30, 1997, the amortization of
the upfront payments on floor revenue contracts increased student loan income by
$10 million and $21 million, respectively, versus $6 million and $8 million for
the three and six months ended June 30, 1996, repectively. For the three and six
months ended June 30, 1997, payments under the contracts totaled $5 million and
$10 million, respectively versus $3 million and $4 million for the three months
and six months ended June 30, 1996, respectively.
22
26
The GSE purchases student loans from originating lenders, typically
just before the student leaves school and is required to begin repayment of the
loan. The estimated average remaining term of student loans in the Company's
portfolio, including student loan participations, was approximately 6.0 years at
June 30, 1997 and December 31, 1996. The following table reflects the
distribution of the Company's loan portfolio by program.
JUNE 30, 1997 DECEMBER 31,1996
-------------- ----------------
FFELP-- Stafford.............................. $ 14,323,238 $ 17,292,273
FFELP-- PLUS/SLS.............................. 2,940,619 3,580,803
FFELP-- Consolidation loans................... 8,359,899 7,658,035
HEAL.......................................... 2,708,339 2,758,860
Privately insured............................. 1,236,618 1,017,959
------------- -------------
Insured student loans purchased............... 29,568,713 32,307,930
Student loan participations................... 1,918,871 1,445,596
------------- -------------
Total student loans........................... $ 31,487,584 $ 33,753,526
============= =============
As of June 30, 1997 and December 31, 1996, 82 percent and 84 percent,
respectively, of the Company's on-balance sheet student loan portfolio was in
repayment.
The Company owned $14.3 billion at June 30, 1997 and $14.5 billion at
December 31, 1996 of FFELP loans that were originated after October 1, 1993 and
are insured for 98 percent of their unpaid balance resulting in 2 percent
risk-sharing for holders of these loans.
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
$3.3 million and $5.7 million, for the three and six months ended June 30, 1997
versus $3.2 million and $6.8 million for the three and six months ended June 30,
1996.
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.
THREE MONTHS ENDED SIX MONTHS ENDED
JUNE 30, JUNE 30,
--------------------------- ----------------------------
1997 1996 1997 1996
---------- ----------- ---------- -----------
BALANCE AT BEGINNING OF PERIOD.................. $ 87,378 $ 61,834 $ 84,063 $ 60,337
Additions
Provisions for loan losses.................... 165 4,875 5,983 9,167
Recoveries.................................... 1,377 2,039 4,470 3,739
Deductions
Reductions for sales on student
loans...................................... (2,364) (744) (4,328) (1,601)
Losses on loans............................... (4,093) (3,739) (7,725) (7,377)
--------- ---------- ---------- ----------
BALANCE AT END OF PERIOD........................ $ 82,463 $ 64,265 $ 82,463 $ 64,265
========= ========== ========== ==========
4. WAREHOUSING ADVANCES
A summary of warehousing advances by industry concentration follows:
JUNE 30, 1997 DECEMBER 31, 1996
------------- -----------------
Commercial banks.................... $ 1,284,049 $ 1,547,193
Public sector agencies.............. 1,150,800 1,126,095
Educational institutions............ 60,329 116,197
Thrift institutions................. -- --
-- --
----------- -----------
$ 2,495,178 $ 2,789,485
=========== ===========
As of June 30, 1997, approximately 98 percent were collateralized by
student loans, 1 percent by U.S. government securities and 1 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.
23
27
A summary of warehousing advance interest rate characteristics follows:
JUNE 30, 1997 DECEMBER 31, 1996
------------- -----------------
Variable rate:
Treasury bill..................... $ 1,798,656 $ 1,723,588
LIBOR............................. 677,496 1,046,086
Fixed rate.......................... 19,026 19,811
------------ ------------
$ 2,495,178 $ 2,789,485
============ ============
The average remaining term to maturity of warehousing advances was 3.5
years as of June 30, 1997 and 1.0 year as of December 31, 1996.
The following table summarizes the maturities of warehousing advances at
June 30, 1997 and December 31, 1996.
YEAR OF MATURITY JUNE 30, 1997 DECEMBER 31, 1996
- ---------------------------- -------------- -----------------
1997................................ $ 119,628 $ 1,221,148
1998................................ 1,190,496 1,232,186
1999................................ 1,000 175,391
2000................................ 624,335 127,863
2001................................ -- --
After 2001.......................... 559,719 32,897
------------ ------------
$ 2,495,178 $ 2,789,485
============ ============
5. ACADEMIC FACILITIES FINANCINGS
The following tables summarize the academic facilities bonds at June 30,
1997 and December 31, 1996.
JUNE 30, 1997
--------------------------------------------------------------------
GROSS GROSS
AMORTIZED UNREALIZED UNREALIZED MARKET
BONDS-- AVAILABLE-FOR-SALE COST GAINS LOSSES VALUE
- --------------------------------------------- ------------ ----------- ---------- ------------
Fixed................................................ $ 758,643 $ 18,053 $ (360) $ 776,336
Variable............................................. 51,193 6 (300) 50,899
------------ ----------- --------- ------------
Total academic facilities bonds........................ $ 809,836 $ 18,059 $ (660) $ 827,235
============ =========== ========= ============
DECEMBER 31, 1996
-------------------------------------------------------------------
GROSS GROSS
AMORTIZED UNREALIZED UNREALIZED MARKET
BONDS-- AVAILABLE-FOR-SALE COST GAINS LOSSES VALUE
- --------------------------------------------- ------------ ----------- ----------- ------------
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
============ ========== ========== ============
The following table summarizes academic facilities loans at June 30,
1997 and December 31, 1996.
LOANS JUNE 30, 1997 DECEMBER 31, 1996
------------- -----------------
Fixed rate.................................................. $ 465,657 $ 474,659
Variable rate............................................... 60,619 64,191
----------- --------------
Total academic facilities loans............................... $ 526,276 $ 538,850
=========== ==============
The average remaining term to maturity of academic facilities financings
was 8.0 years at both June 30, 1997 and December 31, 1996. The stated maturities
and maturities if accelerated to the put or call dates for academic facilities
bonds and loans at June 30, 1997 and December 31, 1996 are shown in the
following table:
24
28
JUNE 30, 1997
---------------------------------------------------------
BONDS LOANS
------------------------------------- -----------------
MATURITY
TO
STATED PUT OR STATED
YEAR OF MATURITY MATURITY CALL DATE MATURITY
- ---------------------------- ----------------- ----------------- -----------------
1997......................................... $ 19,459 $ 48,447 $ 2,048
1998......................................... 46,218 104,666 8,917
1999......................................... 42,663 58,312 47,776
2000......................................... 73,936 101,145 16,270
2001......................................... 108,676 127,130 23,070
2002-2006.................................... 422,708 350,194 102,530
after 2006................................... 113,575 37,341 325,665
-------------- -------------- --------------
$ 827,235 $ 827,235 $ 526,276
============== ============== ==============
DECEMBER 31, 1996
---------------------------------------------------------
BONDS LOANS
------------------------------------- -----------------
MATURITY
TO
STATED PUT OR STATED
YEAR OF MATURITY MATURITY CALL DATE MATURITY
- ---------------------------- ----------------- ----------------- ------------------
1997......................................... $ 44,078 $ 97,657 $ 8,325
1998......................................... 77,409 127,774 14,065
1999......................................... 43,638 57,366 45,115
2000......................................... 78,588 98,515 17,368
2001......................................... 87,197 107,464 22,673
2002-2006.................................... 486,168 410,945 104,872
after 2006................................... 117,403 34,760 326,432
-------------- -------------- --------------
$ 934,481 $ 934,481 $ 538,850
============== ============== ==============
6. INVESTMENTS
A summary of investments at June 30, 1997 and December 31, 1996 follows:
JUNE 30, 1997
------------------------------------
GROSS
AMORTIZED UNREALIZED
COST GAINS
----------------- --------------
AVAILABLE-FOR-SALE
U.S. Treasury and other U.S. government agencies
obligations
U.S. Treasury securities............................... $ 955,529 $ 499,840
State and political subdivisions of the United States
Student loan revenue bonds.............................
184,614 5,455
Asset-backed and other securities
Asset-backed securities................................ 5,112,738 6,313
Variable corporate bonds............................... 521,974 462
Commercial paper....................................... 58,030 --
Federal funds & bank deposits.......................... 425,000 --
Other securities....................................... 15,600 --
--------------- ------------
Total available-for-sale investment securities..............
$ 7,273,485 $ 512,070
=============== ============
HELD-TO-MATURITY
Other.......................................................... $ 584,576 $ 86
=============== ============
JUNE 30, 1997
------------------------------
GROSS
UNREALIZED MARKET
LOSSES VALUE
------------ --------------
AVAILABLE-FOR-SALE
U.S. Treasury and other U.S. government agencies
obligations
U.S. Treasury securities............................... $ (141) $ 1,455,228
State and political subdivisions of the United States
Student loan revenue bonds.............................
(299) 189,770
Asset-backed and other securities
Asset-backed securities................................ (68) 5,118,983
Variable corporate bonds............................... -- 522,436
Commercial paper....................................... -- 58,030
Federal funds & bank deposits.......................... -- 425,000
Other securities....................................... -- 15,600
-------- --------------
Total available-for-sale investment securities..............
$ (508) $ 7,785,047
======== ==============
HELD-TO-MATURITY
Other.......................................................... $ (236) $ 584,426
======== ==============
DECEMBER 31, 1996
-------------------------------------
GROSS
AMORTIZED UNREALIZED
COST GAINS
----------------- ---------------
AVAILABLE-FOR-SALE
U.S. Treasury and other U.S. government agencies
obligations
U.S. Treasury securities $ 809,164 $ 508,758
State and political subdivisions of the United States
Student loan revenue bonds
201,248 5,563
Asset-backed and other securities
Asset-backed securities 4,645,046 4,746
Variable corporate bonds 634,925 489
Commercial paper 24,395 --
----------------- ---------------
Total available-for-sale investment securities
$ 6,314,778 $ 519,556
================= ===============
HELD-TO-MATURITY
Other $ 601,887 $ 125
================= ===============
DECEMBER 31, 1996
-----------------------------------
GROSS
UNREALIZED MARKET
LOSSES VALUE
------------ -----------------
AVAILABLE-FOR-SALE
U.S. Treasury and other U.S. government agencies
obligations
U.S. Treasury securities $ (41) $ 1,317,881
State and political subdivisions of the United States
Student loan revenue bonds
(431) 206,380
Asset-backed and other securities
Asset-backed securities (167) 4,649,625
Variable corporate bonds -- 635,414
Commercial paper -- 24,395
--------- -----------------
Total available-for-sale investment securities
$ (639) $ 6,833,695
========= =================
HELD-TO-MATURITY
Other $ (267) $ 601,745
========= =================
The Company sold available-for-sale securities with a carrying value of
$1.4 billion, $2.6 billion and $4.6 billion for the six months ended June 30,
1997 and 1996 and for the year ended December 31, 1996, respectively. The fair
market value of U.S. Treasury securities is adjusted for unrealized gains and
losses on interest rate swaps, which are held to reduce interest rate risk
related to these securities ($29.2 million and $19.5 million of unrealized
gains at June 30, 1997 and December 31, 1996, respectively).
25
29
As of June 30, 1997 and December 31, 1996, stated maturities and
maturities if accelerated to the put or call dates for investments are shown in
the following table:
JUNE 30, 1997
---------------------------------------------------------------------------
HELD-TO-MATURITY AVAILABLE-FOR-SALE
------------------------- -----------------------------------------------
MATURITY TO
STATED STATED PUT OR
YEAR OF MATURITY MATURITY MATURITY CALL DATE
- ---------------------------- ------------------------- ---------------------- ----------------------
1997........................................ $ 82,171 $ 571,292 $ 571,292
1998........................................ 13,678 342,283 392,614
1999........................................ 10,073 531,107 490,166
2000........................................ 103,564 301,554 311,621
2001........................................ 5,357 950,096 965,088
2002-2006................................... 45,100 2,352,269 2,336,199
After 2006.................................. 324,633 2,736,446 2,718,067
-------------- ---------------- ----------------
$ 584,576 $ 7,785,047 $ 7,785,047
============== ================ ================
DECEMBER 31, 1996
------------------------------------------------------------------------------
HELD-TO-MATURITY AVAILABLE-FOR-SALE
---------------------- ------------------------------------------------
MATURITY TO
STATED STATED PUT OR
YEAR OF MATURITY MATURITY MATURITY CALL DATE
- ---------------------------- ---------------------- ---------------------- --------------------
1997........................................ $ 106,823 $ 216,807 $ 275,955
1998........................................ 12,493 278,153 278,528
1999........................................ 9,229 532,975 488,182
2000........................................ 102,879 142,401 150,981
2001........................................ 4,721 1,059,148 1,073,776
2002-2006................................... 46,058 2,534,058 2,514,787
After 2006.................................. 319,684 2,070,153 2,051,486
-------------- ---------------- ----------------
$ 601,887 $ 6,833,695 $ 6,833,695
============== ================ ================
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
June 30, 1997, and December 31, 1996, 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.
AT JUNE 30, 1997
--------------------------------------
WEIGHTED
AVERAGE
ENDING INTEREST
BALANCE RATE
------------------- ------------
Six month floating rate notes............................. $ 2,749,528 5.34%
Other floating rate notes................................. 2,800,789 5.36
Discount notes............................................ 4,237,503 5.76
Fixed rate notes.......................................... 6,820,497 5.94
Securities sold -- not yet purchased
and repurchase agreements............................... 74,906 5.95
Short-term portion of long-term
notes................................................... 9,166,848 5.57
------------------- --------
Total short-term notes.................................... $ 25,850,071 5.65%
=================== ========
Maximum outstanding at any month end...................... $ 29,084,281
===================
SIX MONTHS ENDED JUNE 30, 1997
------------------------------------------------------------
WEIGHTED
WEIGHTED AVERAGE
AVERAGE EFFECTIVE
AVERAGE INTEREST INTEREST
BALANCE RATE RATE
------------------- --------- ---------
Six month floating rate notes............................. $ 2,952,202 5.37% 5.46%
Other floating rate notes................................. 2,522,616 5.35 5.37
Discount notes............................................ 6,046,055 5.38 5.43
Fixed rate notes.......................................... 5,033,317 5.98 5.54
Securities sold-- not yet purchased
and repurchase agreements............................... 331,528 5.37 5.37
Short-term portion of long-term
notes................................................... 10,309,073 5.67 5.51
-------------------- -------- --------
Total short-term notes.................................... $ 27,194,791 5.60% 5.48%
==================== ======== ========
AT DECEMBER 31, 1996
--------------------------------------
WEIGHTED
AVERAGE
ENDING INTEREST
BALANCE RATE
------------------- --------------
Six month floating rate notes............................. $ 2,699,477 5.23%
Other floating rate notes................................. 2,188,722 5.25
Discount notes............................................ 2,377,976 6.43
Fixed rate notes.......................................... 3,964,777 6.01
Securities sold-- not yet purchased
and repurchase agreements............................... -- --
Short-term portion of long-term
notes................................................... 11,286,675 5.55
------------------- --------
Total short-term notes.................................... $ 22,517,627 5.66%
=================== ========
Maximum outstanding at any month end...................... $ 25,271,494
===================
YEAR ENDED DECEMBER 31, 1996
-------------------------------------------------------------
WEIGHTED
WEIGHTED AVERAGE
AVERAGE EFFECTIVE
AVERAGE INTEREST INTEREST
BALANCE RATE RATE
------------------- ---------- -----------
Six month floating rate notes............................. $ 2,485,322 5.32% 5.42%
Other floating rate notes................................. 2,088,347 5.43 5.35
Discount notes............................................ 3,072,019 5.31 5.36
Fixed rate notes.......................................... 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................................................... 11,956,008 5.75 5.45
------------------ -------- --------
Total short-term notes.................................... $ 20,978,685 5.61% 5.43%
================== ======== ========
26
30
At June 30, 1997 and December 31, 1996, the short-term portion of
long-term notes included issues totaling $778 million and $771 million,
respectively, which require the payment of interest and principal in foreign
currencies. At December 31, 1996, the short-term portion of long-term notes also
included issues totaling $80 million repayable in U.S. dollars, with principal
repayment obligations tied to foreign currency exchange rates. To eliminate its
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).
8. LONG-TERM NOTES
The following tables summarize outstanding long-term notes at June 30,
1997 and December 31, 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.
AT JUNE 30, 1997
----------------------------------------------------------------
WEIGHTED
AVERAGE NOTIONAL
ENDING INTEREST AMOUNT
BALANCE RATE OF DERIVATIVES
------------------- ---------- -------------------
Floating rate notes:
U.S. dollar denominated:
Interest bearing, due 1998-2003.......................... $ 7,158,424 5.33% $ 1,554,023
------------------- -------- ------------------
Fixed rate notes:
U.S. dollar denominated:
Interest bearing, due 1998-2018.......................... 11,481,801 6.17 18,646,147
Zero coupon, due 1998-2022............................... 339,998 8.28 362,772
Dual currency, due 1998..................................... 251,487 7.63 272,000
Foreign currency:
Interest bearing, due 1999-2000.......................... 257,100 5.57 496,209
------------------- -------- ------------------
Total fixed rate notes........................................ 12,330,386 6.25 19,777,128
------------------- -------- ------------------
Total long-term notes......................................... $ 19,488,810 5.91% $ 21,331,151
=================== ======== ==================
SIX MONTHS ENDED
JUNE 30, 1997
-------------------------------------
WEIGHTED
AVERAGE
EFFECTIVE
AVERAGE INTEREST
BALANCE RATE
-------------------- -----------
Floating rate notes:
U.S. dollar denominated:
Interest bearing, due 1998-2003.......................... $ 7,472,062 5.46%
------------------- --------
Fixed rate notes:
U.S. dollar denominated:
Interest bearing, due 1998-2018.......................... 12,131,991 5.60
Zero coupon, due 1998-2022............................... 333,417 7.64
Dual currency, due 1998..................................... 249,958 6.73
Foreign currency:
Interest bearing, due 1999-2000.......................... 257,100 5.43
------------------- --------
Total fixed rate notes........................................ 12,972,466 5.67
------------------- --------
Total long-term notes......................................... $ 20,444,528 5.59%
=================== ========
AT DECEMBER 31, 1996
-------------------------------------------------------------
WEIGHTED
AVERAGE NOTIONAL
ENDING INTEREST AMOUNT
BALANCE RATE OF DERIVATIVES
-------------------- ------------ --------------------
Floating rate notes:
U.S. dollar denominated:
Interest bearing, due 1998-2003.......................... $ 8,844,825 5.27% $ 2,022,044
------------------- -------- ------------------
Fixed rate notes:
U.S. dollar denominated:
Interest bearing, due 1998-2018.......................... 12,928,983 6.35 21,676,042
Zero coupon, due 1998-2022............................... 326,875 8.25 358,071
Dual currency, due 1998..................................... 248,443 7.63 272,000
Foreign currency:
Interest bearing, due 1999-2000.......................... 257,100 5.34 495,785
Zero coupon, due 1997.................................... -- -- --
------------------- --------- ------------------
Total fixed rate notes........................................ 13,761,401 6.40 22,801,898
------------------- -------- ------------------
Total long-term notes......................................... $ 22,606,226 5.96% $ 24,823,942
=================== ======== ==================
YEAR ENDED
DECEMBER 31, 1996
-------------------------------------
WEIGHTED
AVERAGE
EFFECTIVE
AVERAGE INTEREST
BALANCE RATE
------------------- ------------
Floating rate notes:
U.S. dollar denominated:
Interest bearing, due 1998-2003.......................... $ 12,740,190 5.46%
------------------- --------
Fixed rate notes:
U.S. dollar denominated:
Interest bearing, due 1998-2018.......................... 11,971,640 5.59
Zero coupon, due 1998-2022............................... 304,990 7.68
Dual currency, due 1998..................................... 245,569 6.65
Foreign currency:
Interest bearing, due 1999-2000.......................... 577,592 5.31
Zero coupon, due 1997.................................... 183,647 5.42
------------------- --------
Total fixed rate notes........................................ 13,283,438 5.64
------------------- --------
Total long-term notes......................................... $ 26,023,628 5.55%
=================== ========
27
31
At June 30, 1997 and December 31, 1996, the Company had outstanding
long-term debt issues with call features totaling $13.8 billion and $14.1
billion, respectively. As of June 30, 1997 and December 31, 1996, the stated
maturities and maturities if accelerated to the call dates for long-term notes
are shown in the following table:
JUNE 30, 1997
--------------------------------------------
STATED MATURITY TO
YEAR OF MATURITY MATURITY CALL DATE
---------------------------- --------------------- ---------------------
1997............................................. $ -- $ 10,980,927
1998............................................. 4,010,521 3,824,302
1999............................................. 7,952,279 2,361,092
2000............................................. 4,206,943 1,683,893
2001............................................. 2,366,570 79,200
2002-2022........................................ 952,497 559,396
------------------- -------------------
$ 19,488,810 $ 19,488,810
=================== ===================
DECEMBER 31, 1996
----------------------------------------------
STATED MATURITY TO
YEAR OF MATURITY MATURITY CALL DATE
---------------------------- ---------------------- ---------------------
1997............................................. $ -- $ 12,794,908
1998............................................. 7,466,131 5,510,293
1999............................................. 7,676,221 2,185,610
2000............................................. 4,077,772 1,483,972
2001............................................. 2,465,758 79,200
2002-2022........................................ 920,344 552,243
------------------- -------------------
$ 22,606,226 $ 22,606,226
=================== ===================
9. STUDENT LOAN SECURITIZATION
For the first six months of 1997 and 1996 and for the year ended
December 31, 1996 and in October 1995, SLM Funding Corporation, a wholly-owned
special purpose finance subsidiary, purchased from the GSE and sold $4.5
billion, $3 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 June 30, 1997 and December 31, 1996,
securitized student loans outstanding totaled $10.0 billion and $6.3 billion,
respectively.
On July 23, 1997, the U.S. Department of Education decided that the 30
basis point annual offset fee which the GSE is required to pay on student
loans which it owns does not apply to student loans that the GSE has
securitized. The Department of Education had been under a court order since
January 10, 1997 to announce its final position on the application of the offset
fee on securitized loans by July 31, 1997. The GSE initially filed suit in
the U.S. District Court for the District of Columbia in April 1995 challenging
the Secretary of Education's attempt to apply the offset fee to securitized
loans. The GSE prevailed, and the Court of Appeals ruled that the fee
applies only to loans that the GSE owns and remanded the case to the
District Court with instructions to remand the matter to the Secretary of
Education. In addition, the Court of Appeals upheld the constitutionality of the
offset fee, which applies annually with respect to the principal amount of
student loans that the GSE holds on balance sheet and that were acquired on
or after August 10, 1993.
Based upon the favorable final ruling in this matter, the contingent
gain of approximately $97 million pre-tax that had not been recognized in income
through June 30, 1997 will now be released and recognized in income in the third
quarter. All future securitization gains will be 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 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 June 30, 1997, the
Company had outstanding $19.3 billion, $1.1 billion, and $16.4 billion of
notional principal amount of standard swaps, reverse swaps, and basis/reverse
basis swaps, respectively. Of the Company's $36.8 billion of interest rate swaps
outstanding at June 30, 1997, $35.7 billion was related to debt and $1.1 billion
was related to assets. 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 assets.
28
32
The following tables summarize the ending balances of the borrowings
that have been matched with interest rate swaps and foreign currency agreements
at June 30, 1997 and December 31, 1996 (dollars in billions).
AT JUNE 30, 1997
---------------------------------------------------
SWAPS
-------------------------------
BORROWINGS STANDARD REVERSE
---------- ---------- ----------
SHORT-TERM NOTES
Six month floating rate notes................. $ -- $ -- $ --
Other floating rate notes..................... .3 -- --
Discount notes................................ -- -- --
Fixed rate notes.............................. 6.0 6.0 --
Securities sold-- not yet
purchased and repurchase
agreements.................................. -- -- --
Short-term portion of long-term
notes....................................... 3.6 1.7 --
--------- -------- -----------
Total short-term notes................... 9.9 7.7 --
--------- -------- -----------
LONG-TERM NOTES
Floating rate notes:
U.S. dollar denominated:
Interest bearing......................... 1.0 .3 --
Fixed rate notes:
U.S. dollar denominated:
Interest bearing......................... 10.9 10.9 --
Zero coupon.............................. .2 .2 --
Dual currency............................... .2 .2 --
Foreign currency:
Interest bearing......................... .3 -- --
--------- --------- -----------
Total long-term notes.................. 12.6 11.6 --
--------- -------- -----------
Total notes............................ $ 22.5 $ 19.3 $ --
========= ======== ===========
AT JUNE 30, 1997
---------------------------------------------------------
SWAPS
---------------
FOREIGN
BASIS/ CURRENCY TOTAL
REVERSE BASIS AGREEMENTS DERIVATIVES
------------- ---------- -----------
SHORT-TERM NOTES
Six month floating rate notes................. $ -- $ -- $ --
Other floating rate notes..................... .5 -- .5
Discount notes................................ -- -- --
Fixed rate notes.............................. 3.7 -- 9.7
Securities sold-- not yet
purchased and repurchase
agreements.................................. -- -- --
Short-term portion of long-term
notes....................................... 2.7 .7 5.1
--------- ------- --------
Total short-term notes................... 6.9 .7 15.3
--------- ------- --------
LONG-TERM NOTES
Floating rate notes:
U.S. dollar denominated:
Interest bearing......................... 1.3 -- 1.6
Fixed rate notes:
U.S. dollar denominated:
Interest bearing......................... 7.7 -- 18.6
Zero coupon.............................. .2 -- .4
Dual currency............................... .1 -- .3
Foreign currency:
Interest bearing......................... .2 .3 .5
--------- ------- --------
Total long-term notes.................. 9.5 .3 21.4
--------- ------- --------
Total notes............................ $ 16.4 $ 1.0 $ 36.7
========= ======= ========
AT DECEMBER 31, 1996
------------------------------------------------------
SWAPS
----------------------------------
BORROWINGS STANDARD REVERSE
---------- ----------- ----------
SHORT-TERM NOTES
Six month floating rate notes................. $ .3 $ -- $ --
Other floating rate notes..................... .3 -- --
Discount notes................................ -- -- --
Fixed rate notes.............................. 3.4 3.4 --
Securities sold-- not yet
purchased and repurchase
agreements.................................. -- -- --
Short-term portion of long-term
notes....................................... 4.5 1.8 --
--------- -------- -----------
Total short-term notes................... 8.5 5.2 --
--------- -------- -----------
LONG-TERM NOTES
Floating rate notes:
U.S. dollar denominated:
Interest bearing......................... 1.4 .3 --
Fixed rate notes:
U.S. dollar denominated:
Interest bearing......................... 12.3 12.3 --
Zero coupon.............................. .2 .2 --
Dual currency............................... .2 .2 --
Foreign currency:
Interest bearing......................... .3 -- --
Zero coupon.............................. -- -- --
--------- --------- -----------
Total long-term notes.................. 14.4 13.0 --
--------- -------- -----------
Total notes............................ $ 22.9 $ 18.2 $ --
========= ======== ===========
AT DECEMBER 31, 1996
---------------------------------------------------------
SWAPS
-------------
FOREIGN
BASIS/ CURRENCY TOTAL
REVERSE BASIS AGREEMENTS DERIVATIVES
------------- ----------- -----------
SHORT-TERM NOTES
Six month floating rate notes................. $ .3 $ -- $ .3
Other floating rate notes..................... .6 -- .6
Discount notes................................ -- -- --
Fixed rate notes.............................. 2.2 -- 5.6
Securities sold-- not yet
purchased and repurchase
agreements.................................. -- -- --
Short-term portion of long-term
notes....................................... 3.2 .9 5.9
--------- ------- ---------
Total short-term notes................... 6.3 .9 12.4
--------- ------- ---------
LONG-TERM NOTES
Floating rate notes:
U.S. dollar denominated:
Interest bearing......................... 1.8 -- 2.1
Fixed rate notes:
U.S. dollar denominated:
Interest bearing......................... 9.3 -- 21.6
Zero coupon.............................. .1 -- .3
Dual currency............................... .1 -- .3
Foreign currency:
Interest bearing......................... .2 .3 .5
Zero coupon.............................. -- -- --
--------- ------- ---------
Total long-term notes.................. 11.5 .3 24.8
--------- ------- ---------
Total notes............................ $ 17.8 $ 1.2 $ 37.2
========= ======= =========
29
33
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 year ended December 31, 1996 and the six
months ended June 30, 1997 (dollars in millions).
NOTIONAL PRINCIPAL
---------------------------------------
FOREIGN FUTURES
INTEREST RATE CURRENCY CONTRACT
SWAPS AGREEMENTS AMOUNTS
------------------ ------------- -------------
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......................................... 4,840 7 1,958
Maturities/Expirations.................................. (5,094) (160) (510)
Terminations/Closes..................................... -- -- (625)
-------------- ----------- -----------
Balance, June 30, 1997.................... $ 36,828 $ 1,035 $ 1,001
============== =========== ===========
Interest Rate Swaps
Net payments related to the debt-related swaps are recorded in interest
expense. For the six months ended June 30, 1997 and 1996 and for the year ended
December 31, 1996, the Company received net payments on all debt-related swaps
reducing interest expense by $66 million, $89 million and $165 million,
respectively.
As of June 30, 1997 and December 31, 1996, 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.
JUNE 30, 1997 DECEMBER 31, 1996
----------------------------------------- ----------------------------------------
STATED MATURITY TO STATED MATURITY TO
YEAR OF MATURITY MATURITY PUT DATE MATURITY PUT DATE
- ---------------------------- ------------------- ------------------- ------------------- ------------------
1997.................................... $ 4,671 $ 10,949 $ 7,599 $ 15,161
1998.................................... 9,986 10,550 7,102 7,001
1999.................................... 10,816 8,100 10,541 7,925
2000.................................... 6,781 4,760 7,225 4,560
2001.................................... 3,135 1,350 3,235 1,350
2002-2008............................... 1,439 1,119 1,380 1,085
------------- ------------- ------------- -------------
$ 36,828 $ 36,828 $ 37,082 $ 37,082
============= ============= ============= =============
Foreign Currency Agreements
At June 30, 1997 and December 31, 1996, the Company had borrowings with
principal repayable in foreign currencies of $1.0 billion. Such debt issuances
were hedged by forward currency exchange agreements, foreign currency swaps,
and options on currency exchange agreements. Such agreements typically mature
concurrently with the maturities of the debt. At December 31, 1996, the Company
also had borrowings repayable in U.S. dollars, with principal repayment
obligations tied to foreign currency exchange rates of $80 million. At both
June 30, 1997 and December 31, 1996, the Company had outstanding $1.0 billion
of notional principal in foreign currency swaps. The following table
summarizes the outstanding amount of these borrowings and their currency
translation values at June 30, 1997 and December 31, 1996, using spot rates at
the respective dates (dollars in millions).
JUNE 30, 1997 DECEMBER 31, 1996
------------- -----------------
Carrying value of outstanding foreign currency debt............................... $ 1,035 $ 1,108
Currency translation value of outstanding foreign currency
debt............................................................................ 949 1,002
Futures Contracts
At June 30, 1997 and December 31, 1996, the Company sold the futures
contracts that hedged approximately $1 billion and $178 million, respectively,
of anticipated funding of the PLUS program.
30
34
Derivate 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 six
months ended June 30, 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 $2 million for the six months ended
June 30, 1997 and 1996, respectively.
11. FAIR VALUES OF FINANCIAL INSTRUMENTS
The following table summarizes the fair values of the Company's
financial assets and liabilities, including off-balance sheet financial
instruments (dollars in millions):
JUNE 30, 1997
----------------------------------------------------
FAIR CARRYING
VALUE VALUE DIFFERENCE
--------------- ------------- ---------------
EARNING ASSETS
Student loans.............................. $ 31,779 $ 31,488 $ 291
Warehousing advances....................... 2,488 2,495 (7)
Academic facilities
financings............................... 1,358 1,353 5
Cash and investments....................... 10,593 10,593 --
------------- ------------ ----------
Total earning assets....................... 46,218 45,929 289
------------- ------------ ----------
INTEREST BEARING
LIABILITIES
Short-term borrowings...................... 25,827 25,850 23
Long-term notes............................ 19,385 19,489 104
------------- ------------ ----------
Total interest bearing
liabilities.............................. 45,212 45,339 127
------------- ------------ ----------
OFF-BALANCE SHEET
FINANCIAL INSTRUMENTS
Interest rate swaps........................ (41) -- (41)
Forward exchange agreements
and foreign currency
swaps.................................... (141) -- (141)
Warehousing advance
commitments.............................. -- -- --
Academic facilities financing
commitments.............................. -- -- --
Letters of credit.......................... -- -- --
----------
Excess of fair value over
carrying value........................... $ 234
==========
DECEMBER 31, 1996
--------------------------------------------------
FAIR CARRYING
VALUE VALUE DIFFERENCE
-------------- -------------- -------------
EARNING ASSETS
Student loans.............................. $ 34,005 $ 33,754 $ 251
Warehousing advances....................... 2,793 2,790 3
Academic facilities
financings............................... 1,473 1,473 --
Cash and investments....................... 7,706 7,706 --
------------- ------------ ----------
Total earning assets....................... 45,977 45,723 254
------------- ------------ ----------
INTEREST BEARING
LIABILITIES
Short-term borrowings...................... 22,457 22,518 61
Long-term notes............................ 22,519 22,606 87
------------- ------------ ----------
Total interest bearing
liabilities.............................. 44,976 45,124 148
------------- ------------ ----------
OFF-BALANCE SHEET
FINANCIAL INSTRUMENTS
Interest rate swaps........................ (21) -- (21)
Forward exchange agreements
and foreign currency
swaps.................................... (161) -- (161)
Warehousing advance
commitments.............................. -- -- --
Academic facilities financing
commitments.............................. -- -- --
Letters of credit.......................... -- -- --
----------
Excess of fair value over
carrying value........................... $ 220
==========
At June 30, 1997 and December 31, 1996, substantially all interest rate
swaps, foreign exchange agreements and foreign currency swaps were hedging
liabilities.
12. COMMITMENTS AND CONTINGENCIES
Commitments outstanding are summarized below:
JUNE 30, 1997 DECEMBER 31, 1996
------------------- -----------------
Student loan purchase commitments............................ $ 19,548,570 $ 15,845,821
Warehousing advance commitments.............................. 3,403,288 2,367,288
Academic facilities financing commitments.................... 21,600 9,930
Letters of credit............................................ 4,624,695 3,743,892
------------------- ---------
$ 27,598,153 $ 21,966,931
=================== =============
31
35
The following schedules summarize expirations of commitments outstanding
at June 30, 1997 and December 31, 1996:
JUNE 30, 1997
------------------------------------------------------------------------------------------
ACADEMIC
STUDENT LOAN WAREHOUSING FACILITIES LETTERS OF
PURCHASES ADVANCES FINANCINGS CREDIT
-------------------- -------------------- ------------------ ------------------
1997............. $ 1,141,198 $ 6,500 $ 250 $ --
1998............. 2,284,320 194,745 9,650 30,346
1999............. 6,656,026 40,000 11,700 167,428
2000............. 1,423,172 52,387 -- 266,313
2001............. -- -- 0 271,306
2002-2017........ 8,043,854 3,109,656 0 3,889,302
------------------ ---------------- -------------- -----------------
Total........ $ 19,548,570 $ 3,403,288 $ 21,600 $ 4,624,695
================== ================ ============== =================
DECEMBER 31, 1996
------------------------------------------------------------------------------------------
ACADEMIC
STUDENT LOAN WAREHOUSING FACILITIES LETTERS OF
PURCHASES ADVANCES FINANCINGS CREDIT
-------------------- -------------------- ------------------ -------------------
1997............. $ 3,299,173 $ 348,072 $ 1,230 $ 367,829
1998............. 1,793,359 172,647 -- 1,122,724
1999............. 4,367,745 103,609 8,700 861,630
2000............. 272,743 34,859 -- 826,690
2001............. -- -- -- 207,620
2002-2017........ 6,112,801 1,708,101 -- 357,399
------------------ ---------------- ----------- -----------------
Total........ $ 15,845,821 $ 2,367,288 $ 9,930 $ 3,743,892
================== ================ =========== =================
13. FEDERAL 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 June 30,
1997 and December 31, 1996 under the liability method are as follows:
JUNE 30, 1997 DECEMBER 31, 1996
------------------ -----------------
Deferred tax liabilities:
Leases.............................................. $ 347,987 $ 351,093
Unrealized investment gains......................... 185,569 188,050
Other............................................... 36,441 32,669
----------------- ----------
569,997 571,812
----------------- ----------
Deferred tax assets:
ExportSS operating costs............................ 66,459 68,874
Student loan reserves............................... 50,173 47,004
In-substance defeasance transactions................ 30,627 30,788
Asset valuation allowances.......................... 24,490 24,842
Securitization transactions......................... 19,473 13,076
Other............................................... 34,440 31,211
----------------- ----------
225,662 215,795
----------------- ----------
Net deferred tax liabilities.......................... $ 344,335 $ 356,017
================= ==========
Reconciliations of the statutory United States federal income tax rates
to the Company's effective tax rate follow:
THREE MONTHS SIX MONTHS
ENDED ENDED
JUNE 30, JUNE 30,
----------------------------- --------------------------
1997 1996 1997 1996
------------- ------------- ------------- -----------
Statutory rate............................................... 35.0% 35.0% 35.0% 35.0%
Tax exempt interest and dividends received
deduction.................................................. (3.7) (3.8) (3.3) (3.5)
Other, net................................................... (1.2) (1.2) (1.0) (1.2)
------- ------- ------- -------
Effective tax rate........................................... 30.1% 30.0% 30.7% 30.3%
======= ======= ======= =======
Federal income taxes paid were $73 million and $110 million,
respectively, for the three and six months ended June 30, 1997 and $70 million
and $109 million, respectively, for the three and six months ended June 30,
1996.
32
36
14. QUARTERLY FINANCIAL INFORMATION (UNAUDITED)
1997
---------------------------------
FIRST SECOND
QUARTER QUARTER
--------------- ---------------
Net interest income......................................................... $ 199,026 $ 207,461
Other income................................................................ 75,940 78,055
Operating expenses.......................................................... 101,559 115,283
Federal income taxes........................................................ 54,570 51,069
Minority interest in net earnings of subsidiary ............................ 2,674 2,673
--------------- ---------------
Income before premiums on debt extinguished................................. 116,163 116,491
Premiums on debt extinguished, net of tax................................... -- --
--------------- ---------------
Net income.................................................................. $ 116,163 $ 116,491
=============== ===============
Earnings per common share before premiums on debt
extinguished.............................................................. $ 2.17 $ 2.20
=============== ===============
Earnings per common share................................................... $ 2.17 $ 2.20
=============== ===============
1996
----------------------------------
FIRST SECOND
QUARTER QUARTER
--------------- ---------------
Net interest income......................................................... $ 232,679 $ 219,561
Other income................................................................ 21,754 27,899
Operating expenses.......................................................... 98,773 100,145
Federal income taxes........................................................ 47,968 44,340
Minority interest in net earnings of subsidiary ............................ 2,673 2,674
--------------- ---------------
Income before premiums on debt extinguished................................. 105,019 100,301
Premiums on debt extinguished, net of tax................................... (4,792) --
--------------- ---------------
Net income.................................................................. $ 100,227 $ 100,301
=============== ===============
Earnings per common share before premiums on debt
extinguished.............................................................. $ 1.82 $ 1.79
=============== ===============
Earnings per common share................................................... $ 1.74 $ 1.79
=============== ===============
1996
--------------------------------
THIRD FOURTH
QUARTER QUARTER
--------------- ---------------
Net interest income......................................................... $ 208,988 $ 205,208
Other income................................................................ 35,211 62,052
Operating expenses.......................................................... 100,075 106,659
Federal income taxes........................................................ 42,877 48,313
Minority interest in net earnings of subsidiary ............................ 2,673 2,674
--------------- ---------------
Income before premiums on debt extinguished................................. 98,574 109,614
Premiums on debt extinguished, net of tax................................... -- --
--------------- ---------------
Net income.................................................................. $ 98,574 $ 109,614
=============== ===============
Earnings per common share before premiums on debt
extinguished.............................................................. $ 1.79 $ 2.01
=============== ===============
Earnings per common share................................................... $ 1.79 $ 2.01
=============== ===============
15. COLLEGE CONSTRUCTION LOAN INSURANCE ASSOCIATION
In 1987, the Company assisted in creating the College Construction Loan
Insurance Association ("Connie Lee"), a private, for-profit, stockholder-owned
corporation, authorized by Congress to insure and reinsure educational
facilities obligations. At both June 30, 1997 and December 31, 1996, the
carrying value of the Company's investment in Connie Lee was approximately $44
million, and as of June 30, 1997 and December 31, 1996, through its ownership of
preferred and common stock and through agreements with other shareholders, the
Company effectively controlled 42 percent and 36 percent, respectively, of
Connie Lee's outstanding voting stock. In February 1997, Connie Lee converted to
a private, shareholder-controlled corporation pursuant to statutory provisions
under Pub. L. No. 104-208 that required Connie Lee to repurchase shares of its
stock owned by the U.S. government at a purchase price determined by an
independent appraisal. On February 28, 1997 the Company loaned Connie Lee $18
million to repurchase the shares. On May 27, 1997 the term of this loan was
extended to June 29, 1997 and on June 26, 1997, the loan was further extended to
December 29, 1997.
33
37
ITEM 7: FINANCIAL STATEMENTS AND EXHIBITS (CONTINUED)
(c) Exhibits
Exhibit No. Description
----------- -----------
2 Agreement and Plan of Reorganization
by and among Student Loan Marketing
Association ("Sallie Mae"), SLM
Holding Corporation ("Registrant")
and Sallie Mae Merger Company
("MergerCo").
23.1 Consent of Ernst & Young LLP
38
SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934,
as amended, the Registrant has duly caused this report to be signed on its
behalf by the undersigned hereunto duly authorized.
Dated: October 21, 1997
SLM HOLDING CORPORATION
By: /s/ Mark G. Overend
--------------------
Name: Mark G. Overend
Title: Vice President and Chief Financial Officer
4
39
EXHIBIT INDEX
Sequentially Numbered
Exhibit No. Description Page
- ----------- ----------- ---------------------
2** Agreement and Plan of Reorganization
by and among Student Loan Marketing
Association ("Sallie Mae"), SLM
Holding Corporation (the "Registrant")
and Sallie Mae Merger Company
("MergerCo").
23.1* Consent of Ernst & Young LLP
- ---------------
* Filed herewith
** Previously filed
1
EXHIBIT 23.1
Consent of Independent Auditors
We consent to the incorporation by reference of our report dated January 13,
1997 (except as to the third and fourth paragraphs of Note 2, as to which the
date is April 7, 1997), with respect to the consolidated financial statements
included in the Registration Statement (Form S-4 No. 333-21217) for the year
ended December 31, 1996, in the Current Report on Form 8-K/A dated October 21,
1997 filed with the Securities and Exchange Commission.
/s/ Ernst & Young LLP
Washington, D.C.
October 21, 1997
