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UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
------------------------
FORM 10-Q
(MARK ONE)
/X/ QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(D) OF THE SECURITIES
EXCHANGE ACT OF 1934
FOR THE QUARTERLY PERIOD ENDED MARCH 31, 1999 OR
/ / TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(D) OF THE SECURITIES
EXCHANGE ACT OF 1934
FOR THE TRANSITION PERIOD FROM TO
(Amended by Exch Act Rel No. 312905. eff 4/26/93.)
Commission File Number: 001-13251
------------------------
SLM HOLDING CORPORATION
(Exact name of registrant as specified in its charter)
DELAWARE 52-2013874
(State or other jurisdiction of (I.R.S. Employer
incorporation or organization) Identification No.)
11600 SALLIE MAE DRIVE, RESTON, VIRGINIA 20193
(Address of principal executive offices) (Zip Code)
Registrant's telephone number, including area code: (703) 810-3000
------------------------
Indicate by check mark whether the registrant: (1) has filed all reports
required to be filed by Section 13 or 15(d) of the Securities Exchange Act of
1934 during the preceding 12 months (or for such shorter period that the
registrant was required to file such reports), and (2) has been subject to such
filing requirements for the past 90 days. Yes /X/ No / /
Indicate the number of shares outstanding of each of the issuer's classes of
common stock, as of the latest practicable date:
CLASS OUTSTANDING AT MARCH 31, 1999
- --------------------------------------------- ---------------------------------------------
Common Stock, $.20 par value 162,877,395 shares
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SLM HOLDING CORPORATION
FORM 10-Q
INDEX
MARCH 31, 1999
PAGE
----
PART I FINANCIAL INFORMATION
Item 1. Financial Statements...................................................................... 3
Item 2. Management's Discussion and Analysis of Financial Condition and Results of Operations..... 9
PART II OTHER INFORMATION
Item 1. Legal Proceedings......................................................................... 29
Item 2. Changes in Securities..................................................................... 29
Item 3. Defaults Upon Senior Securities........................................................... 29
Item 4. Submission of Matters to a Vote of Security Holders....................................... 29
Item 5. Other Information......................................................................... 29
Item 6. Exhibits and Reports on Form 8-K.......................................................... 29
Signatures.......................................................................................... 30
2
PART I. FINANCIAL INFORMATION
ITEM 1. FINANCIAL STATEMENTS
SLM HOLDING CORPORATION
CONSOLIDATED BALANCE SHEETS
(DOLLARS IN THOUSANDS, EXCEPT SHARE AND PER SHARE AMOUNTS)
MARCH 31, DECEMBER 31,
1999 1998
------------- -------------
(UNAUDITED)
ASSETS
Student loans.................................................................... $ 30,235,305 $ 28,282,505
Warehousing advances............................................................. 1,540,531 1,542,732
Academic facilities financings
Bonds--available-for-sale...................................................... 713,199 734,994
Loans.......................................................................... 444,313 445,418
------------- -------------
Total academic facilities financings............................................. 1,157,512 1,180,412
Investments
Available-for-sale............................................................. 3,038,857 3,306,972
Held-to-maturity............................................................... 700,603 683,452
------------- -------------
Total investments................................................................ 3,739,460 3,990,424
Cash and cash equivalents........................................................ 154,701 115,912
Other assets, principally accrued interest receivable............................ 2,009,257 2,098,024
------------- -------------
Total assets................................................................... $ 38,836,766 $ 37,210,009
------------- -------------
------------- -------------
LIABILITIES
Short-term borrowings............................................................ $ 31,205,391 $ 26,588,504
Long-term notes.................................................................. 5,556,859 8,810,597
Other liabilities................................................................ 1,200,283 943,399
------------- -------------
Total liabilities.............................................................. 37,962,533 36,342,500
------------- -------------
COMMITMENTS AND CONTINGENCIES
MINORITY INTEREST IN SUBSIDIARY.................................................... 213,883 213,883
STOCKHOLDERS' EQUITY
Common stock, par value $.20 per share, 250,000,000 shares authorized,
184,773,592 and 184,453,866 shares issued, respectively........................ 36,955 36,891
Additional paid-in capital....................................................... 34,100 26,871
Unrealized gains on investments (net of tax of $184,909 and $200,167,
respectively).................................................................. 343,402 371,739
Retained earnings................................................................ 1,149,720 1,060,334
------------- -------------
Stockholders' equity before treasury stock....................................... 1,564,177 1,495,835
Common stock held in treasury at cost: 21,896,197 and 20,327,213 shares,
respectively................................................................... 903,827 842,209
------------- -------------
Total stockholders' equity..................................................... 660,350 653,626
------------- -------------
Total liabilities and stockholders' equity................................... $ 38,836,766 $ 37,210,009
------------- -------------
------------- -------------
See accompanying notes to consolidated financial statements.
3
SLM HOLDING CORPORATION
CONSOLIDATED STATEMENTS OF INCOME
(DOLLARS AND SHARES IN THOUSANDS, EXCEPT PER SHARE AMOUNTS)
THREE MONTHS ENDED
MARCH 31,
------------------------
1999 1998
----------- -----------
(UNAUDITED) (UNAUDITED)
Interest income:
Student loans........................................................................ $ 521,406 $ 568,819
Warehousing advances................................................................. 21,856 30,415
Academic facilities financings:
Taxable............................................................................ 9,893 11,353
Tax-exempt......................................................................... 9,259 11,071
----------- -----------
Total academic facilities financings................................................. 19,152 22,424
Investments.......................................................................... 52,951 91,282
----------- -----------
Total interest income.................................................................. 615,365 712,940
Interest expense:
Short-term debt...................................................................... 354,791 347,958
Long-term debt....................................................................... 102,922 190,405
----------- -----------
Total interest expense................................................................. 457,713 538,363
----------- -----------
Net interest income.................................................................... 157,652 174,577
Less: provision for losses............................................................. 7,636 9,494
----------- -----------
Net interest income after provision for losses......................................... 150,016 165,083
----------- -----------
Other income:
Gains on sales of student loans...................................................... -- 60,174
Servicing and securitization revenue................................................. 85,871 52,864
Gains/(losses) on sales of securities................................................ (17) 2,394
Other................................................................................ 20,785 18,951
----------- -----------
Total other income................................................................... 106,639 134,383
----------- -----------
Operating expenses:
Salaries and benefits................................................................ 44,064 48,799
Other................................................................................ 42,204 42,063
----------- -----------
Total operating expenses............................................................... 86,268 90,862
----------- -----------
Income before income taxes and minority interest in net earnings of subsidiary......... 170,387 208,604
Income taxes:
Current.............................................................................. 116,955 69,765
Deferred............................................................................. (63,050) (2,842)
----------- -----------
Total income taxes..................................................................... 53,905 66,923
Minority interest in net earnings of subsidiary........................................ 2,673 2,673
----------- -----------
Net income............................................................................. $ 113,809 $ 139,008
----------- -----------
----------- -----------
Basic earnings per share............................................................... $ .70 $ .81
----------- -----------
----------- -----------
Average common shares outstanding...................................................... 163,164 171,734
----------- -----------
----------- -----------
Diluted earnings per share............................................................. $ .69 $ .80
----------- -----------
----------- -----------
Average common and common equivalent shares outstanding................................ 165,679 174,095
----------- -----------
----------- -----------
See accompanying notes to consolidated financial statements.
4
SLM HOLDING CORPORATION
CONSOLIDATED STATEMENTS OF CHANGES IN STOCKHOLDERS' EQUITY
(DOLLARS IN THOUSANDS, EXCEPT SHARE AND PER SHARE AMOUNTS)
(UNAUDITED)
COMMON STOCK SHARES
-------------------------------------- COMMON ADDITIONAL RETAINED TREASURY
ISSUED TREASURY OUTSTANDING STOCK PAID-IN CAPITAL EARNINGS STOCK
----------- ----------- ------------ ------- --------------- ---------- ---------
BALANCE AT DECEMBER 31, 1997............ 183,632,694 (10,221,757) 173,410,937 $36,726 $28,838 $ 654,135 $(423,863)
Comprehensive income:
Net Income.......................... 139,008
Other comprehensive income, net of
tax:
Unrealized gains (losses) on
investments, net of tax.........
Comprehensive income..................
Cash dividends ($.14 per share)....... (24,028)
Issuance of common shares............. 290,533 290,533 59 7,803
Premiums on equity forward purchase
contracts........................... (14,611)
Tax benefit related to employee stock
option and purchase plan............
Repurchase of common shares........... (3,680,787) (3,680,787) (156,336)
----------- ----------- ------------ ------- ------- ---------- ---------
BALANCE AT MARCH 31, 1998............... 183,923,227 (13,902,544) 170,020,683 $36,785 $22,030 $ 769,115 $(580,199)
----------- ----------- ------------ ------- ------- ---------- ---------
----------- ----------- ------------ ------- ------- ---------- ---------
BALANCE AT DECEMBER 31, 1998............ 184,453,866 (20,327,213) 164,126,653 $36,891 $26,871 $1,060,334 $(842,209)
Comprehensive income:
Net Income.......................... 113,809
Other comprehensive income, net of
tax:
Unrealized gains (losses) on
investments, net of tax.........
Comprehensive income..................
Cash dividends ($.15 per share)....... (24,423)
Issuance of common shares............. 319,726 319,726 64 10,721
Premiums on equity forward purchase
contracts........................... (5,989)
Tax benefit related to employee stock
option and purchase plan............ 2,497
Repurchase of common shares........... (1,568,984) (1,568,984) (61,618)
----------- ----------- ------------ ------- ------- ---------- ---------
BALANCE AT MARCH 31, 1999............... 184,773,592 (21,896,197) 162,877,395 $36,955 $34,100 $1,149,720 $(903,827)
----------- ----------- ------------ ------- ------- ---------- ---------
----------- ----------- ------------ ------- ------- ---------- ---------
ACCUMULATED
OTHER TOTAL
COMPREHENSIVE STOCKHOLDERS'
INCOME EQUITY
------------- -------------
BALANCE AT DECEMBER 31, 1997............ $378,736 $674,572
Comprehensive income:
Net Income.......................... 139,008
Other comprehensive income, net of
tax:
Unrealized gains (losses) on
investments, net of tax......... (5,035) (5,035)
-------------
Comprehensive income.................. 133,973
Cash dividends ($.14 per share)....... (24,028)
Issuance of common shares............. 7,862
Premiums on equity forward purchase
contracts........................... (14,611)
Tax benefit related to employee stock
option and purchase plan............ --
Repurchase of common shares........... (156,336)
------------- -------------
BALANCE AT MARCH 31, 1998............... $373,701 $621,432
------------- -------------
------------- -------------
BALANCE AT DECEMBER 31, 1998............ $371,739 $653,626
Comprehensive income:
Net Income.......................... 113,809
Other comprehensive income, net of
tax:
Unrealized gains (losses) on
investments, net of tax......... (28,337) (28,337)
-------------
Comprehensive income.................. 85,472
Cash dividends ($.15 per share)....... (24,423)
Issuance of common shares............. 10,785
Premiums on equity forward purchase
contracts........................... (5,989)
Tax benefit related to employee stock
option and purchase plan............ 2,497
Repurchase of common shares........... (61,618)
------------- -------------
BALANCE AT MARCH 31, 1999............... $343,402 $660,350
------------- -------------
------------- -------------
See accompanying notes to consolidated financial statements.
5
SLM HOLDING CORPORATION
CONSOLIDATED STATEMENTS OF CASH FLOWS
(DOLLARS IN THOUSANDS)
THREE MONTHS ENDED MARCH 31,
------------------------------
1999 1998
-------------- --------------
(UNAUDITED) (UNAUDITED)
OPERATING ACTIVITIES
Net income........................................................................ $ 113,809 $ 139,008
Adjustments to reconcile net income to net cash provided by operating activities:
Gains on sales of student loans............................................... -- (60,174)
Provision for losses.......................................................... 7,636 9,494
Decrease in accrued interest receivable....................................... 76,803 169,487
(Decrease) in accrued interest payable........................................ (74,699) (93,267)
Decrease (increase) in other assets........................................... 11,964 (42,663)
Increase in other liabilities................................................. 346,840 42,192
-------------- --------------
Total adjustments........................................................... 368,544 25,069
-------------- --------------
Net cash provided by operating activities......................................... 482,353 164,077
-------------- --------------
Investing activities
Insured student loans purchased................................................... (2,959,699) (2,095,710)
Reduction of insured student loans purchased:
Installment payments.......................................................... 868,675 689,553
Claims and resales............................................................ 130,588 205,142
Proceeds from securitization of student loans................................. -- 3,029,017
Warehousing advances made......................................................... (263,153) (310,601)
Warehousing advance repayments.................................................... 265,354 162,720
Academic facilities financings made............................................... -- (2,500)
Academic facilities financings reductions......................................... 19,564 28,049
Investments purchased............................................................. (3,568,591) (4,023,105)
Proceeds from sale or maturity of investments..................................... 3,779,297 3,760,813
-------------- --------------
Net cash (used in) provided by investing activities............................... (1,727,965) 1,443,378
-------------- --------------
FINANCING ACTIVITIES
Short-term borrowings issued...................................................... 104,190,574 155,573,566
Short-term borrowings repaid...................................................... (102,303,444) (156,237,087)
Long-term notes issued............................................................ 5,117,406 3,009,796
Long-term notes repaid............................................................ (5,641,387) (3,753,031)
Equity forward contracts and common stock issued.................................. 7,293 (6,749)
Common stock repurchased.......................................................... (61,618) (156,336)
Dividends paid.................................................................... (24,423) (24,028)
-------------- --------------
Net cash provided by (used in) financing activities............................... 1,284,401 (1,593,869)
-------------- --------------
Net increase in cash and cash equivalents......................................... 38,789 13,586
Cash and cash equivalents at beginning of period.................................. 115,912 54,022
-------------- --------------
Cash and cash equivalents at end of period........................................ $ 154,701 $ 67,608
-------------- --------------
-------------- --------------
Cash disbursements made for:
Interest...................................................................... $ 477,124 $ 577,269
-------------- --------------
-------------- --------------
Income taxes.................................................................. $ -- $ 35,000
-------------- --------------
-------------- --------------
See accompanying notes to consolidated financial statements.
6
SLM HOLDING CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(INFORMATION AT MARCH 31, 1999 AND FOR THE THREE MONTHS ENDED MARCH 31, 1999 AND
1998 IS UNAUDITED)
(DOLLARS IN THOUSANDS, EXCEPT PER SHARE AMOUNTS)
1. SIGNIFICANT ACCOUNTING POLICIES
BASIS OF PRESENTATION
The accompanying unaudited consolidated financial statements of SLM Holding
Corporation (the "Company") have been prepared in accordance with generally
accepted accounting principles ("GAAP") for interim financial information.
Accordingly, they do not include all of the information and footnotes required
by GAAP 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 GAAP requires management to make
estimates and assumptions that affect the amounts reported in the financial
statements and accompanying notes. Actual results could differ from those
estimates. Operating results for the three months ended March 31, 1999 are not
necessarily indicative of the results for the year ending December 31, 1999.
2. NEW ACCOUNTING PRONOUNCEMENTS
In June 1998, the FASB issued Statement of Financial Accounting Standards
No. 133 ("SFAS 133"), "Accounting for Derivative Instruments and Hedging
Activities," which requires that every derivative instrument, including
derivative instruments embedded in other contracts, be recorded in the balance
sheet as either an asset or liability measured at its fair value. SFAS 133
requires that changes in the derivative instrument's fair value be recognized
currently in earnings unless specific hedge accounting criteria are met. Special
accounting for derivative financial instruments that qualify as fair value
hedges allows a derivative instrument's gains and losses to offset related
results on the hedged item in the income statement and requires that a Company
formally document, designate and assess the effectiveness of transactions that
receive hedge accounting treatment. Derivative financial instruments that
qualify as cashflow hedges are reported as an adjustment to stockholders' equity
as a component of other comprehensive income. SFAS 133 could result in increased
period to period volatility in reported net income. Management is continuing to
assess the potential impact of SFAS 133 on the Company's reported results of
operations and financial position. The Company plans to adopt SFAS 133 on
January 1, 2000.
3. ALLOWANCE FOR LOSSES
The following table summarizes changes in the allowance for losses for the
three months ended March 31, 1999 and 1998, respectively. Certain
reclassifications have been made to the balances as of March 31, 1998 to be
consistent with classifications adopted for March 31, 1999.
THREE MONTHS ENDED
MARCH 31,
----------------------
1999 1998
---------- ----------
BALANCE AT BEGINNING OF PERIOD........................................ $ 293,185 $ 273,412
Additions
Provisions for losses............................................... 7,636 9,494
Recoveries.......................................................... 732 566
Deductions
Reductions for sales of student loans............................... -- (4,186)
Write-offs.......................................................... (3,417) (4,127)
---------- ----------
BALANCE AT END OF PERIOD.............................................. $ 298,136 $ 275,159
---------- ----------
---------- ----------
7
SLM HOLDING CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(INFORMATION AT MARCH 31, 1999 AND FOR THE THREE MONTHS ENDED MARCH 31, 1999 AND
1998 IS UNAUDITED)
(DOLLARS IN THOUSANDS, EXCEPT PER SHARE AMOUNTS) (CONTINUED)
4. STUDENT LOAN SECURITIZATION
During the first quarter of 1999, the Company did not enter into a
securitization transaction. As a result, no securitization gain was recognized
in the first quarter of 1999. For the three months ended March 31, 1998, the
Company securitized $3.0 billion of student loans and recorded a pre-tax gain of
$60 million. At March 31, 1999 and December 31, 1998, securitized student loans
outstanding totaled $17.3 billion and $17.9 billion, respectively.
5. COMMON STOCK
Basic earnings per share are calculated using the weighted average number of
shares of common stock outstanding during each period. Diluted earnings per
share reflect the potential dilutive effect of additional common shares that are
issuable upon exercise of outstanding stock options and warrants, determined by
the treasury stock method, and equity forwards, determined by the reverse
treasury stock method, as follows:
AVERAGE EARNINGS
NET INCOME SHARES PER SHARE
----------- ----------- -----------
(THOUSANDS) (THOUSANDS)
THREE MONTHS ENDED MARCH 31, 1999
Basic earnings per share................................ $ 113,809 163,164 $ .70
Dilutive effect of stock options, warrants and equity
forwards.............................................. -- 2,515 (.01)
----------- ----------- ---
Diluted earnings per share.............................. $ 113,809 165,679 $ .69
----------- ----------- ---
----------- ----------- ---
THREE MONTHS ENDED MARCH 31, 1998
Basic earnings per share................................ $ 139,008 171,734 $ .81
Dilutive effect of stock options, warrants, and equity
forwards.............................................. -- 2,361 (.01)
----------- ----------- ---
Diluted earnings per share.............................. $ 139,008 174,095 $ .80
----------- ----------- ---
----------- ----------- ---
8
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS
OVERVIEW
SLM HOLDING CORPORATION ("SLM HOLDING") WAS FORMED ON FEBRUARY 3, 1997 AS A
WHOLLY OWNED SUBSIDIARY OF THE STUDENT LOAN MARKETING ASSOCIATION (THE "GSE").
ON AUGUST 7, 1997, PURSUANT TO THE STUDENT LOAN MARKETING ASSOCIATION
REORGANIZATION ACT OF 1996 (THE "PRIVATIZATION ACT") AND APPROVAL BY
SHAREHOLDERS OF AN AGREEMENT AND PLAN OF REORGANIZATION, THE GSE WAS REORGANIZED
INTO A SUBSIDIARY OF SLM HOLDING (THE "REORGANIZATION"). SLM HOLDING IS A
HOLDING COMPANY THAT OPERATES THROUGH A NUMBER OF SUBSIDIARIES INCLUDING THE
GSE. REFERENCES HEREIN TO THE "COMPANY" REFER TO THE GSE AND ITS SUBSIDIARIES
FOR PERIODS PRIOR TO THE REORGANIZATION AND TO SLM HOLDING AND ITS SUBSIDIARIES
FOR PERIODS AFTER THE REORGANIZATION.
The following Management's Discussion and Analysis contains forward-looking
statements and information that are based on management's current expectations
as of the date of this document. Discussions that utilize the words
"anticipate," "believe," "estimate," "intend" and "expect" and similar
expressions are intended to identify forward-looking statements. Such
forward-looking statements are subject to risks, uncertainties, assumptions and
other factors that may cause the actual results of the Company to be materially
different from those reflected in such forward-looking statements. Such factors
include, among others, changes in the terms of student loans and the educational
credit marketplace arising from the implementation of applicable laws and
regulations and from changes in such laws and regulations, which may reduce the
volume, average term and costs of yields on student loans under the Federal
Family Education Loan Program ("FFELP"), or may result in loans being originated
or refinanced under non-FFELP programs or may affect the terms upon which banks
and others agree to sell FFELP loans to the Company. The Company could also be
affected by changes in the demand for educational financing or in financing
preferences of lenders, educational institutions, students and their families;
and changes in the general interest rate environment and in the securitization
markets for student loans, which may increase the costs or limit the
availability of financings necessary to initiate, purchase or carry student
loans; and interruptions in the Company's or others' operations resulting from
the inability of computer or other systems to process Year 2000-related
information, which may impact the Company's liquidity and its ability to obtain,
generate or process documents or payments received from or due to others.
Set forth below is Management's Discussion and Analysis of Financial
Condition and Results of Operations of SLM Holding for the three months ended
March 31, 1999 and 1998. This section should be read in conjunction with
Management's Discussion and Analysis of Financial Condition and Results of
Operations for the years ended December 31, 1996-98 presented in the Company's
Annual Report on Form 10-K as filed with the Securities and Exchange Commission.
All dollar amounts are in millions, except per share amounts or as otherwise
noted.
9
SELECTED FINANCIAL DATA
CONDENSED STATEMENTS OF INCOME
THREE MONTHS
ENDED INCREASE
MARCH 31, (DECREASE)
-------------------- --------------------
1999 1998 $ %
--------- --------- --------- ---------
Net interest income........................................... $ 158 $ 175 $ (17) (10)%
Less: provision for losses.................................... 8 10 (2) (20)
--------- --------- --------- ---
Net interest income after provision for losses................ 150 165 (15) (9)
Gains on sales of student loans............................... - 60 (60) (100)
Servicing and securitization revenue.......................... 86 53 33 62
Other income.................................................. 21 22 (1) (3)
Operating expenses............................................ 86 91 (5) (5)
Income taxes.................................................. 54 67 (13) (19)
Minority interest in net earnings of subsidiary............... 3 3 -- --
--------- --------- --------- ---
Net income.................................................... $ 114 $ 139 $ (25) (18)%
--------- --------- --------- ---
--------- --------- --------- ---
Basic earnings per share...................................... $ .70 $ .81 $ (.11) (14)%
--------- --------- --------- ---
--------- --------- --------- ---
Diluted earnings per share.................................... $ .69 $ .80 $ (.11) (14)%
--------- --------- --------- ---
--------- --------- --------- ---
Dividends per share........................................... $ .15 $ .14 $ .01 7%
--------- --------- --------- ---
--------- --------- --------- ---
CONDENSED BALANCE SHEETS
INCREASE
(DECREASE)
MARCH 31, DECEMBER 31, --------------
1999 1998 $ %
--------- ------------ ------ ------
ASSETS
Student loans........................... $30,235 $28,283 $1,952 7%
Warehousing advances.................... 1,541 1,543 (2) --
Academic facilities financings.......... 1,158 1,180 (22) (2)
Cash and investments.................... 3,894 4,106 (212) (5)
Other assets............................ 2,009 2,098 (89) (4)
--------- ------------ ------ ------
Total assets........................ $38,837 $37,210 $1,627 4%
--------- ------------ ------ ------
--------- ------------ ------ ------
LIABILITIES AND STOCKHOLDERS' EQUITY
Short-term borrowings................... $31,206 $26,589 $4,617 17%
Long-term notes......................... 5,557 8,810 (3,253) (37)
Other liabilities....................... 1,200 943 257 27
--------- ------------ ------ ------
Total liabilities................... 37,963 36,342 1,621 4
--------- ------------ ------ ------
Minority interest in subsidiary......... 214 214 -- --
Stockholders' equity before treasury
stock................................. 1,564 1,496 68 (5)
Common stock held in treasury at cost... 904 842 62 7
--------- ------------ ------ ------
Total stockholders' equity.......... 660 654 6 1
--------- ------------ ------ ------
Total liabilities and stockholders'
equity............................ $38,837 $37,210 $1,627 4%
--------- ------------ ------ ------
--------- ------------ ------ ------
10
RESULTS OF OPERATIONS
EARNINGS SUMMARY
For the three months ended March 31, 1999, the Company's net income was $114
million ($.69 diluted earnings per share), versus net income of $139 million
($.80 diluted earnings per share) in the first quarter of 1998.
In the first quarter of 1999, reported net income continued to be adversely
impacted by conditions in the global financial markets that first arose in
August of 1998 as a result of the Russian bond default. Financing spreads
relative to Treasury bill rates remained at levels at which management
considered it unfavorable to enter into a securitization transaction and as a
result, no securitization gains were recorded in the first quarter. In the first
quarter of 1998, the Company entered into a $3.0 billion securitization which
resulted in an after-tax securitization gain of $39 million or $.22 diluted
earnings per share. The Company's first quarter of 1999 earnings benefited from
the $3.3 billion increase in managed student loans from the year ago quarter.
The financial market turbulence also increased the funding spreads on the
Company's on-balance sheet financings, which decreased the spread earned on the
Company's portfolio of student loans versus the first quarter of 1998. The
negative effect of the higher funding spreads was partially offset by lower
average 91-day Treasury bill rates in the first quarter of 1999, as a
significant portion of the Company's portfolio of managed student loans earned
interest at the minimum borrower rate, while their floating rate funding
(exclusive of spreads) continued to decrease. In the first quarter of 1999, the
Company continued to lower operating expenses, which as a percentage of managed
student loans, were .74 percent versus .84 percent in the first quarter of 1998.
During the first quarter of 1999, the Company spent $62 million to
repurchase 1.6 million common shares (or one percent of its outstanding shares),
which enhanced earnings per share growth.
In addition to reporting results of operations in accordance with generally
accepted accounting principles, the Company also presents pro-forma results of
operations, which treat securitization transactions as financings and the
securitized student loans as not sold. Management refers to these pro-forma
results as "cash basis" earnings and believes that they assist in better
understanding the Company's results of operations. The Company's "cash basis"
net income was $119 million in the first quarter of 1999 ($.72 diluted earnings
per share) versus $104 million ($.60 diluted earnings per share) in the first
quarter of 1998. See "Pro-forma Statements of Income."
NET INTEREST INCOME
Net interest income is derived largely from the Company's on-balance sheet
portfolio of student loans. The Taxable Equivalent Net Interest Income analysis
set forth below is designed to facilitate a comparison of non-taxable asset
yields to taxable yields on a similar basis. Additional information regarding
the return on the Company's student loan portfolio is set forth below under
"Student Loans--Student Loan Spread Analysis."
Taxable equivalent net interest income for the three months ended March 31,
1999 decreased by $19 million while the net interest margin decreased by .05
percent versus the three months ended March 31, 1998. The $9 million decrease in
taxable equivalent net interest income attributable to the change in rates for
the three months ended March 31, 1999 was principally due to the decrease in the
student loan spread discussed below. This margin decrease was partially offset
by the increased percentage of higher yielding student loans remaining
on-balance sheet relative to other earning assets (82 percent in the first
quarter of 1999 versus 76 percent in the first quarter of 1998). The average
balance of the Company's investment portfolio, academic facilities financings
and warehousing advances combined declined by $3 billion for the three months
ended March 31, 1999 versus 1998 as management reduced
11
these assets to better utilize capital. In total, these reductions in earning
assets reduced taxable equivalent net interest income by $10 million.
TAXABLE EQUIVALENT NET INTEREST INCOME
The amounts in the following table are adjusted for the impact of certain
tax-exempt and tax-advantaged investments based on the marginal corporate tax
rate of 35 percent.
THREE
MONTHS
ENDED
MARCH 31, (DECREASE)
---------- ----------
1999 1998 $ %
---- ---- ---- ----
Interest income
Student loans......................... $521 $569 $(48) (8)%
Warehousing advances.................. 22 31 (9) (28)
Academic facilities financings........ 19 22 (3) (15)
Investments........................... 53 91 (38) (42)
Taxable equivalent adjustment......... 8 9 (1) (16)
---- ---- ---- ----
Total taxable equivalent interest
income................................ 623 722 (99) (14)
Interest expense........................ 458 538 (80) (15)
---- ---- ---- ----
Taxable equivalent net interest
income................................ $165 $184 $(19) (10)%
---- ---- ---- ----
---- ---- ---- ----
AVERAGE BALANCE SHEETS
The following table reflects the rates earned on earning assets and paid on
liabilities for the three months ended March 31, 1999 and 1998.
THREE MONTHS ENDED MARCH 31,
------------------------------------------
1999 1998
-------------------- --------------------
BALANCE RATE BALANCE RATE
--------- --------- --------- ---------
Average Assets
Student loans.............................................................. $ 29,443 7.18% $ 29,495 7.82%
Warehousing advances....................................................... 1,566 5.66 2,020 6.11
Academic facilities financings............................................. 1,204 8.13 1,395 8.25
Investments................................................................ 3,711 6.09 6,020 6.37
--------- --- --------- ---
Total interest earning assets................................................ 35,924 7.03% 38,930 7.52%
--- ---
--- ---
Non-interest earning assets.................................................. 2,112 1,884
--------- ---------
Total assets........................................................... $ 38,036 $ 40,814
--------- ---------
--------- ---------
AVERAGE LIABILITIES AND STOCKHOLDERS' EQUITY
Six month floating rate notes.............................................. $ 4,097 5.24% $ 3,076 5.60%
Other short-term borrowings................................................ 24,308 5.04 22,198 5.58
Long-term notes............................................................ 7,759 5.38 13,455 5.74
--------- --- --------- ---
Total interest bearing liabilities........................................... 36,164 5.13% 38,729 5.64%
--- ---
--- ---
Non-interest bearing liabilities............................................. 1,234 1,462
Stockholders' equity......................................................... 638 623
--------- ---------
Total liabilities and stockholders' equity................................. $ 38,036 $ 40,814
--------- ---------
--------- ---------
Net interest margin.......................................................... 1.87% 1.92%
--- ---
--- ---
12
RATE/VOLUME ANALYSIS
The Rate/Volume Analysis below shows the relative contribution of changes in
interest rates and asset volumes.
(DECREASE)
ATTRIBUTABLE
TAXABLE TO CHANGE IN
EQUIVALENT ----------------------
(DECREASE) RATE VOLUME
------------- --------- -----------
THREE MONTHS ENDED MARCH 31, 1999 VS. THREE MONTHS ENDED MARCH
31, 1998
Taxable equivalent interest income............................... $ (99) $ (53) (46)
Interest expense................................................. (80) (44) (36)
--- --- ---
Taxable equivalent net interest income........................... $ (19) $ (9) $ (10)
--- --- ---
--- --- ---
STUDENT LOANS
STUDENT LOAN SPREAD ANALYSIS
The following table analyzes the reported earnings from student loans both
on-balance sheet and those off-balance sheet in securitization trusts. The line
captioned "Adjusted student loan yields" reflects contractual student-loan
yields adjusted for the amortization of premiums paid to purchase loan
portfolios and the estimated costs of borrower benefits as required by GAAP. For
student loans off-balance sheet, the Company will continue to earn servicing fee
revenues over the life of the securitized student loan portfolios. The
off-balance sheet information presented in "Securitization Program--Servicing
and Securitization Revenue" analyzes the on-going servicing revenue and residual
interest earned on the securitized portfolios of student loans. For an analysis
of the Company's student loan spread for the entire portfolio of managed student
loans on a similar basis to the on-balance sheet analysis see " 'Cash Basis'
Student Loan Spread and Net Interest Income."
THREE MONTHS ENDED
MARCH 31,
--------------------
1999 1998
--------- ---------
ON-BALANCE SHEET
Adjusted student loan yields............................................ 7.54% 8.17%
Consolidated loan rebate fees........................................... (.22) (.24)
Offset fees............................................................. (.14) (.11)
--------- ---------
Student loan income..................................................... 7.18 7.82
Cost of funds........................................................... (5.09) (5.57)
--------- ---------
Student loan spread..................................................... 2.09% 2.25%
--------- ---------
--------- ---------
OFF-BALANCE SHEET
Servicing and securitization revenue.................................... 1.98% 1.50%
--------- ---------
--------- ---------
Average Balances
Student loans........................................................... $ 29,443 $ 29,495
Securitized loans....................................................... 17,625 14,295
--------- ---------
Managed student loans................................................... $ 47,068 $ 43,790
--------- ---------
--------- ---------
The Company earns interest at the greater of the borrower's rate or a
floating rate determined by reference to the average of the weekly auctions of
the 91-day Treasury bills by the government, plus a fixed spread, which is
dependent upon when the loan was originated. In all cases, the rate the borrower
pays sets
13
a minimum rate for determining the yield the Company earns on the loan. The
Company generally finances its student loan portfolio with floating rate debt
tied to the average of the 91-day Treasury bill auctions, either directly or
through the use of derivative financial instruments, to mimic the interest rate
characteristics of the student loans. Such borrowings, however, do not have
minimum rates. As a result, in periods of declining interest rates, the
portfolio of managed student loans may be earning at the minimum borrower rate
while the Company's funding costs (exclusive of funding spreads) will generally
decline along with Treasury bill rates. For loans where the borrower's interest
rate is fixed to term, declining interest rates may benefit the spread earned on
student loans for extended periods of time. For loans where the borrower's
interest rate is reset annually, any benefit of a low interest rate environment
will only enhance student loan spreads through the next annual reset of the
borrowers' interest rates, which occurs on July 1 of each year. Assuming the
decline in interest rates on the Company's floating rate debt exactly matched
the decline in Treasury bill rates, then the lower Treasury bill rates in the
first quarter of 1999 increased the Company's on-balance sheet student loan
spread by $21 million net of payments under Floor Interest Contracts (discussed
below), of which $13 million is attributable to student loans with minimum
borrower rates fixed to term and $8 million is attributable to student loans
whose minimum borrower rates adjust annually on July 1. In the first quarter of
1998, the Company earned $12 million from loans earning at the minimum borrower
rate, of which $7 million was attributable to student loans whose minimum
borrower rates were fixed to term and $5 million was attributable to those whose
minimum borrower rates adjust annually on July 1.
The .16 percent decrease in the student loan spread from first quarter of
1998 to 1999 was mainly due to higher funding spreads on the Company's debt
which decreased the student loan spread by $15 million. This decrease was
partially offset by the effect of lower Treasury bill rates discussed above
which increased the first quarter of 1999 student loan spread by $9 million over
the first quarter of 1998 student loan spread.
The following table analyzes the ability of the FFELP student loans in the
Company's managed student loan portfolio to earn at the minimum borrower
interest rate at March 31, 1999 and 1998 based on the last Treasury Bill
auctions of 4.50 percent and 5.19 percent for those periods, respectively
(dollars in billions).
MARCH 31, 1999 MARCH 31, 1998
--------------------------------- ----------------------
FIXED VARIABLE TOTAL FIXED VARIABLE
--------- ----------- --------- --------- -----------
Student loans eligible to earn at the minimum
borrower rate...................................................... $ 12.1 $ 26.5 $ 38.6 $ 13.9 $ 21.4
Less notional amount of floor interest contracts..................... (4.9) (14.7) (19.6) (7.1) (10.6)
--------- ----- --------- --------- -----
Net student loans eligible to earn at the minimum borrower rate...... $ 7.2 $ 11.8 $ 19.0 $ 6.8 $ 10.8
--------- ----- --------- --------- -----
--------- ----- --------- --------- -----
Net student loans earning at the minimum borrower rate............... $ 6.6 $ 11.7 $ 18.3 $ 4.6 $ --
--------- ----- --------- --------- -----
--------- ----- --------- --------- -----
TOTAL
---------
Student loans eligible to earn at the minimum
borrower rate...................................................... $ 35.3
Less notional amount of floor interest contracts..................... (17.7)
---------
Net student loans eligible to earn at the minimum borrower rate...... $ 17.6
---------
---------
Net student loans earning at the minimum borrower rate............... $ 4.6
---------
---------
STUDENT LOAN FLOOR INTEREST CONTRACTS
Periodically the Company and third parties have entered into contracts to
monetize the value of the minimum borrower interest rate feature of its
portfolio of FFELP student loans. These contracts are referred to as "Floor
Interest Contracts" under which the Company receives an upfront payment and
agrees to pay the difference between: (i) the minimum borrower interest rate
less the applicable Special Allowance Payment ("SAP") rate (the "Strike Rate")
and (ii) the average of the 91-day Treasury bill rates over the period of the
contract. If the Strike Rate is less than the average of the Treasury bill
rates, then no payment is required. These upfront payments are being amortized
over the average life of the contracts. Floor Interest Contracts sold on loans
where the borrower rate is reset annually have historically been sold through
the next reset date, a period of one year or less, while Floor Interest
Contracts sold on loans where the borrower rate is fixed to term have been sold
for multi-year periods. The $4.9 billion of outstanding fixed borrower rate
Floor Interest Contracts at March 31, 1999 have expiration dates through the
year 2003, while the $14.7 billion of annually reset borrower rate contracts
expire on June 30, 1999.
14
For the three months ended March 31, 1999 and 1998, the amortization of the
upfront payments received from the sale of Floor Interest Contracts with
annually reset borrower rates was $8 million and $5 million, respectively.
PROVISION FOR LOSSES
The provision for losses in the first quarter of 1999 and 1998 included $4
million and $8 million, respectively, for potential losses on the non-federally
insured portfolio and $4 million and $2 million, respectively, for potential
losses due to risk-sharing. Management believes that the provision for losses is
adequate to cover anticipated losses. However, this evaluation is inherently
subjective as it requires material estimates that may be susceptible to
significant changes.
ON-BALANCE SHEET 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 on-balance sheet debt (by index, after giving effect to the impact of
interest rate swaps) for the three months ended March 31, 1999 and 1998.
THREE MONTHS ENDED MARCH 31,
----------------------------------------------
1999 1998
---------------------- ----------------------
AVERAGE AVERAGE AVERAGE AVERAGE
INDEX BALANCE RATE BALANCE RATE
- ----------------------------------------------------- --------- ----------- --------- -----------
Treasury bill, principally 91-day.................... $ 28,527 5.11% $ 29,137 5.55%
LIBOR................................................ 2,540 4.99 4,994 5.62
Discount notes....................................... 3,190 4.80 2,873 5.52
Fixed................................................ 875 6.10 650 7.18
Zero coupon.......................................... 147 11.14 138 11.13
Other................................................ 885 4.75 937 5.45
--------- ----- --------- -----
Total............................................ $ 36,164 5.13% $ 38,729 5.64%
--------- ----- --------- -----
--------- ----- --------- -----
The following table details the spreads for the Company's Treasury bill
indexed borrowings and London Interbank Offered Rate ("LIBOR") indexed
borrowings:
THREE MONTHS ENDED
MARCH 31,
------------------------
INDEXED BORROWINGS 1999 1998
- ------------------------------------------------------------------------ ----------- -----------
TREASURY BILL
Weighted average Treasury bill.......................................... 4.68% 5.30%
Borrowing spread........................................................ .43 .25
--- ---
Weighted average borrowing rate......................................... 5.11% 5.55%
--- ---
--- ---
LIBOR
Weighted average LIBOR.................................................. 5.23% 5.86%
Borrowing spread........................................................ (.24) (.24)
--- ---
Weighted average borrowing rate......................................... 4.99% 5.62%
--- ---
--- ---
SECURITIZATION PROGRAM
During the first quarter of 1999, the Company did not enter into
securitization transactions as Treasury bill rates, to which the Company's
asset-backed securities are indexed, remained low relative to other market
indices, and as a result financing spreads were still too wide to make such a
transaction
15
favorable. Thus, the Company did not record any securitization gains in the
first quarter of 1999, while an after-tax securitization gain of $39 million or
$.22 diluted earnings per share was recognized in the first quarter of 1998 on
the sale of $3.0 billion of student loans.
SERVICING AND SECURITIZATION REVENUE
The following table summarizes the components of servicing and
securitization revenue:
THREE MONTHS ENDED MARCH 31,
----------------------------
1999 1998
------------- -------------
Servicing revenue less amortization of servicing asset.................. $ 40 $ 34
Securitization revenue.................................................. 46 19
--- ---
Total servicing and securitization revenue.............................. $ 86 $ 53
--- ---
--- ---
In the first quarter of 1999, servicing and securitization revenue was 1.98
percent of average securitized loans versus 1.50 percent in the year ago
quarter. The first quarter 1999 increase in servicing revenue versus the year
ago quarter is mainly due to the $3.3 billion increase in the average balance of
securitized student loans to $17.6 billion in 1999, from $14.3 billion in 1998.
The increase in securitization revenue is due to the increase in the average
balance of the interest residual to $719 million in the first quarter of 1999
from $480 million in the first quarter of 1998, and to the decline in Treasury
bill rates, which enhanced securitization revenue by $20 million versus none in
the first quarter of 1998. The Company's securitized loan portfolios benefit
from declining Treasury bill rates in a manner similar to the on-balance sheet
portfolio of student loans.
OTHER INCOME
Exclusive of gains on sales of student loans and servicing and
securitization revenue, other income totaled $21 million and $22 million for the
three months ended March 31, 1999 and 1998, respectively. The decrease in other
income in 1999 versus 1998 can be attributed to lower servicing fees from the
Company's joint venture with the Chase Manhattan Bank (the "Joint Venture") as
the average balance of loans serviced decreased to $2.7 billion in the first
quarter of 1999 versus $4.8 billion in the first quarter of 1998. The decline in
Joint Venture loans serviced is due to the restructuring of the Joint Venture in
the fourth quarter of 1998. Under the terms of the restructuring, the student
loans will no longer be co-owned in the Joint Venture by the Company and Chase
and serviced by the Company for a fee. Instead, the Company will purchase all
loans originated by Chase. The $5.0 billion of loans owned jointly by the
Company and Chase in the Joint Venture at the time of the restructuring are
being sold to the Company from the fourth quarter of 1998 through the second
quarter of 1999. The decrease in other income from reduced servicing fees was
partially offset by $8 million in late fee revenues earned in the first quarter
of 1999 versus none in the year-ago quarter as the Company began assessing late
fees in the second half of 1998.
OPERATING EXPENSES
In the first quarter of 1999, total operating expenses were $86 million
versus $91 million in the corresponding year-ago period or as a percentage of
managed student loans .74 percent and .84 percent, respectively. The decrease in
operating expenses in the first quarter of 1999 versus 1998 reflects lower
servicing costs as a result of the closing of two satellite servicing centers in
the second quarter of 1998 and the continuing servicing center reconfiguration
program.
16
STUDENT LOAN PURCHASES
THREE MONTHS ENDED,
--------------------------------
MARCH 31, 1999 MARCH 31, 1998
--------------- ---------------
ExportSS-Registered Trademark-, origination and servicing
clients.................................................... $ 2,247 $ 1,427
Other commitment clients..................................... 277 350
Spot purchases............................................... 39 27
Consolidations............................................... 151 59
Other........................................................ 246 233
------ ------
Total........................................................ $ 2,960 $ 2,096
------ ------
------ ------
The increase in purchase volume in the first quarter of 1999 versus the
year-ago quarter is mainly attributable to the purchase of $1.0 billion of
student loans that represented Chase's one-half interest in loans originally
originated and funded in the Joint Venture through sales of participations (See
"Other Income" for discussion of the restructuring of the Joint Venture). In the
second quarter of 1999, the Company will acquire the remaining $1.3 billion of
participated Joint Venture loans, one-half of which will represent new ExportSS
volume to the Company.
In the first quarter of 1999, $1.7 billion of student loans were originated
and transferred to the Company's ExportSS system, versus $1.7 billion in the
year ago quarter. The pipeline of loans currently serviced and committed for
purchase by the Company was $5.1 billion at March 31, 1999 versus $4.1 billion
at March 31, 1998. Included in the pipeline at March 31, 1999 were $592 million
of student loans in the Joint Venture that are currently owned by Chase and are
committed for sale to the Company.
The Department of Education offers existing FFELP borrowers the opportunity
to refinance FFELP loans into Federal Direct Student Loan Program ("FDSLP")
loans. During the first quarter of 1999 and 1998, approximately $312 million and
$67 million, respectively, of the Company's managed student loans were accepted
for refinancing into the FDSLP. In the fourth quarter of 1998, the Company
reinstated its loan consolidation program as a result of the Reauthorization
Legislation signed in October 1998. See "Other Related Events and
Information--Legislative Developments."
The following table summarizes the activity in the Company's managed
portfolio of student loans for the three months ended March 31, 1999 and 1998.
THREE MONTHS ENDED
MARCH 31,
--------------------
1999 1998
--------- ---------
BEGINNING BALANCE....................................................... $ 46,192 $ 43,547
Purchases............................................................... 2,960 2,096
Capitalized interest on securitized loans............................... 106 91
Repayments, claims, other............................................... (1,298) (1,437)
Loans consolidated from SLM Holding..................................... (437) (97)
--------- ---------
Ending balance.......................................................... $ 47,523 $ 44,200
--------- ---------
--------- ---------
PRO-FORMA STATEMENTS OF INCOME
Under GAAP, the Company's securitization transactions have been treated as
sales. At the time of sale, in accordance with Statement of Financial Accounting
Standards No. 125 ("SFAS 125"), the Company records a gain equal to the present
value of the estimated future net cash flows from the portfolio of loans sold.
Interest earned on the interest residual and fees earned for servicing the loan
17
portfolios are recognized over the life of the securitization transaction as
servicing and securitization revenue. Under SFAS 125, income recognition is
effectively accelerated through the recognition of a gain at the time of sale
while the ultimate realization of such income remains dependent on the actual
performance, over time, of the loans that were securitized.
Management believes that, in addition to results of operations as reported
in accordance with GAAP, another important performance measure is pro-forma
results of operations under the assumptions that the securitization transactions
are financings and that the securitized student loans were not sold. The
following pro-forma statements of income present the Company's results of
operations under those assumptions. As such, no gain on sale or subsequent
servicing and securitization revenue is recognized. Instead, the earnings of the
student loans in the trusts and related financing costs are reflected over the
life of the underlying pool of loans. Management refers to these pro-forma
results as "cash basis" statements of income. Management monitors the periodic
"cash basis" earnings of the Company's managed student loan portfolio and
believes that they assist in a better understanding of the Company's student
loan business.
The following table presents the "cash basis" statements of income and
reconciliations to GAAP net income as reflected in the Company's consolidated
statements of income.
THREE MONTHS ENDED
MARCH 31,
------------------------
1999 1998
----------- -----------
"CASH BASIS" STATEMENTS OF INCOME:
Insured student loans....................................................................... $ 852 $ 845
Advances/Facilities/Investments............................................................. 95 145
----- -----
Total interest income....................................................................... 947 990
Interest expense............................................................................ (692) (752)
----- -----
Net interest income......................................................................... 255 238
Less: provision for losses.................................................................. 12 13
----- -----
Net interest income after provision for losses.............................................. 243 225
----- -----
OTHER INCOME:
Gains on sales of student loans........................................................... -- --
Servicing and securitization revenue...................................................... -- --
Gains on sales of securities.............................................................. -- 2
Other..................................................................................... 21 19
----- -----
Total other income.......................................................................... 21 21
Total operating expenses.................................................................... 86 91
----- -----
Income before taxes and minority interest in earnings of subsidiary......................... 178 155
"Cash basis" income taxes................................................................... 56 48
Minority interest in earnings of subsidiary................................................. 3 3
----- -----
"Cash basis" net income..................................................................... $ 119 $ 104
----- -----
----- -----
"Cash basis" diluted earnings per share..................................................... $ .72 $ .60
----- -----
----- -----
18
THREE MONTHS ENDED
MARCH 31,
------------------------
1999 1998
----------- -----------
RECONCILIATION OF GAAP NET INCOME TO "CASH BASIS" NET INCOME:
GAAP net income......................................................... $ 114 $ 139
----- -----
"Cash basis" adjustments:
Gains on sales of student loans....................................... -- (60)
Servicing and securitization revenue.................................. (86) (53)
Net interest income................................................... 97 63
Provision for losses.................................................. (4) (3)
----- -----
Total "cash basis" adjustments.......................................... 7 (53)
Net tax effect (A)...................................................... (2) 18
----- -----
"Cash basis" net income................................................. $ 119 $ 104
----- -----
----- -----
(A) Such tax effect is based upon the Company's marginal tax rate for the
respective period.
"CASH BASIS" STUDENT LOAN SPREAD AND NET INTEREST INCOME
The following table analyzes the reported earnings from the Company's
portfolio of managed student loans, which includes those on-balance sheet and
those off-balance sheet in securitization trusts. The line captioned "Adjusted
student loan yields" reflects contractual student-loan yields adjusted for the
amortization of premiums paid to purchase loan portfolios and the estimated
costs of borrower benefits.
THREE MONTHS ENDED
MARCH 31,
--------------------
1999 1998
--------- ---------
Adjusted student loan yields............................................ 7.56% 8.02%
Consolidated loan rebate fees........................................... (.15) (.16)
Offset fees............................................................. (.09) (.07)
--------- ---------
Student loan income..................................................... 7.32 7.79
Cost of funds........................................................... (5.16) (5.68)
--------- ---------
Student loan spread..................................................... 2.16% 2.11%
--------- ---------
--------- ---------
AVERAGE BALANCES
Managed student loans................................................... $ 47,068 $ 43,790
--------- ---------
--------- ---------
The Company earns interest at the greater of the borrower's rate or a
floating rate determined by reference to the average of the weekly auctions of
the 91-day Treasury bills by the government, plus a fixed spread, which is
dependent upon when the loan was originated. In all cases, the rate the borrower
pays sets a minimum rate for determining the yield the Company earns on the
loan. The Company generally finances its student loan portfolio with floating
rate debt tied to the average of the 91-day Treasury bill auctions, either
directly or through the use of derivative financial instruments, to mimic the
interest rate characteristics of the student loans. Such borrowings, however, do
not have minimum rates. As a result, in periods of declining interest rates, the
portfolio of managed student loans may be earning at the minimum borrower rate
while the Company's funding costs (exclusive of funding spreads) will generally
decline along with Treasury bill rates. For loans where the borrower's interest
rate is fixed to term, declining interest rates may benefit the spread earned on
student loans for extended periods of time. For loans where the borrower's
interest rate is reset annually, any benefit of a low interest rate environment
will only enhance student loan spreads through the next annual reset of the
borrowers interest rates, which occurs on July 1 of each year. Assuming the
decline in interest rates on the Company's floating rate debt exactly matched
the decline in Treasury bill rates, then the effect of lower Treasury bill rates
in the first quarter of
19
1999 on the Company's "cash basis" student loan spread was $41 million net of
payments on Floor Interest Contracts, of which, $17 million is attributable to
student loans with minimum borrower rates fixed to term and $24 million is
attributable to student loans whose minimum borrower rate adjusts annually on
July 1.
The increase in the first quarter of 1999 "cash basis" student loan spread
versus the year ago quarter is mainly due to the lower Treasury bill rates in
1999 which resulted in an increase of $29 million earned from loans earning at
the minimum borrower rate. This was offset by the increase in financing spreads,
relative to the Treasury bill in 1999 versus 1998, resulting in higher financing
costs of $26 million. The increase in financing costs was due to wider
on-balance sheet financing and to the higher percentage of student loan
portfolios being funded by the Company's asset-backed securities. The Company's
asset-backed securities have a higher cost of funds than the Company's GSE debt
because they are term match-funded and do not benefit from the GSE's
government-sponsored status. The higher funding costs on the Company's
asset-backed securities is somewhat mitigated by the absence of offset fees on
securitized loans.
For the three months ended March 31, 1999 and 1998, the amortization of the
upfront payments received from the sale of Floor Interest Contracts with
annually reset borrower rates was $10 million and $5 million, respectively. At
March 31, 1999, the unamortized balance of upfront payments received from the
sale of Floor Interest Contracts totaled $44 million, of which $34 million
related to fixed borrower rate contracts and $10 million related to the annually
reset borrower rate contracts.
In the first quarter of 1999, "cash basis" net interest income was $255
million compared with $238 million in the year-ago quarter. The increase in net
interest income earned in the first quarter of 1999 versus the year ago quarter
was due to the increase in the student loan spread discussed above and to the
increase in the average balance of managed student loans.
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 31.64 percent and 32.08 percent for the three
months ended March 31, 1999 and 1998, respectively. The GSE is exempt from all
state, local and District of Columbia income, franchise, sales and use, personal
property and other taxes, except for real property taxes. However, this tax
exemption applies only to the GSE and does not apply to SLM Holding or its other
operating subsidiaries, that are subject to taxation at the state and local
level. State taxes were immaterial in the three months ended March 31, 1999 and
1998 as the majority of the Company's business activities were conducted in the
GSE.
LIQUIDITY AND CAPITAL RESOURCES
The Company's primary requirements for capital are to fund the Company's
operations, its purchases of student loans and the repayment of its debt
obligations while continuing to meet the GSE's statutory capital adequacy ratio
test. The Company's primary sources of liquidity are through the debt issuances
by the GSE, off-balance sheet financings through securitizations, cash generated
by its subsidiaries' operations and distributed through dividends to the Company
and bank borrowings.
The Company's unsecured financing requirements are driven by three principal
factors: refinancing of existing liabilities as they mature; financing of
student loan portfolio growth and the Company's level of securitization
activity. As discussed under "Securitization Program," turmoil in the global
financial markets has caused financing spreads in the asset-backed market to
widen. Until market conditions improve, management intends to continue to
finance its student loan portfolio through unsecured GSE debt issuances. The
uncertainty in the financial markets has also caused funding spreads on the
Company's unsecured debt to widen. Management believes that the current adverse
spread environment is temporary so to mitigate its effect on the Company's cost
of funds, the Company has been meeting its funding needs
20
through short term financings. Should these market conditions persist over an
extended period of time, the increased cost of the Company's funding could have
a material adverse effect on the Company's earnings.
During the three months ended March 31, 1999, the Company used repayments
and claim payments on student loans of $1.0 billion, net proceeds from the
issuance of debt of $1.4 billion, and net proceeds from sale or maturity of
investments of $211 million to purchase student loans of $3.0 billion and to
repurchase $62 million of the Company's common stock.
Operating activities provided $482 million of cash in the three months ended
March 31, 1999, an increase in cash flow of $318 million from the net cash
inflows of $164 million in the corresponding period in the prior year. This
increase was mainly attributable to the increase in other liabilities caused by
the timing of payments in the first three months of 1999, partially offset by
the increase in the interest residual asset as a result of the securitizations
in 1998.
During the three months ended March 31, 1999, the GSE issued $5.1 billion of
long-term notes to refund maturing obligations. At March 31, 1999, the GSE had
$5.6 billion of outstanding long-term debt issues, of which $2.4 billion had
stated maturities that could be accelerated through call provisions. The GSE
uses interest rate and foreign currency swaps (collateralized where
appropriate), purchases of U.S. Treasury securities and other hedging techniques
to reduce the exposure to interest rate and currency fluctuations that arise
from its financing activities and to match the characteristics of its variable
interest rate earning assets. See "Interest Rate Risk Management."
At March 31, 1999, the GSE's statutory capital adequacy ratio, after the
effect of the dividends to be paid in the second quarter of 1999, was 2.00
percent. The Privatization Act prohibits the GSE from issuing new debt
obligations that mature beyond September 30, 2008 and requires the GSE to
transfer any remaining GSE obligations into a defeasance trust for the benefit
of the holders of such obligations, along with cash or full-faith and credit
obligations of the United States, or an agency thereof, in amounts sufficient,
as determined by the Secretary of the Treasury, to pay the principal and
interest of the deposited obligations on or before that date.
INTEREST RATE RISK MANAGEMENT
INTEREST RATE GAP ANALYSIS
The Company's principal objective in financing its operations is to minimize
its sensitivity to changing interest rates by matching the interest rate
characteristics of its borrowings to specific assets in order to lock in
spreads. The Company's asset-backed securities generally match the interest rate
characteristics of the majority of the student loans in the trusts by being
indexed to the 91-day Treasury bill.
21
In the following table, the Company's variable rate assets and liabilities
are categorized by reset date of the underlying index. Fixed rate assets and
liabilities are categorized based on their maturity dates. An interest rate gap
is the difference between volumes of assets and volumes of liabilities maturing
or repricing during specific future time intervals. The following gap analysis
reflects rate-sensitive positions at March 31, 1999 and is not necessarily
reflective of positions that existed throughout the period.
INTEREST RATE SENSITIVITY PERIOD
----------------------------------------------------------------------
3 MONTHS 6 MONTHS
3 MONTHS TO TO 1 TO 2 2 TO 5 OVER 5
OR LESS 6 MONTHS 1 YEAR YEARS YEARS YEARS
----------- ----------- ----------- --------- --------- ---------
ASSETS
Student loans..................................... $ 30,235 $ -- $ -- $ -- $ -- $ --
Warehousing advances.............................. 1,507 17 -- -- 1 16
Academic facilities financings.................... 26 7 38 51 387 649
Cash and investments.............................. 1,974 21 40 29 37 1,793
Other assets...................................... 30 35 70 136 261 1,477
----------- ----------- ----------- --------- --------- ---------
Total assets.................................... 33,772 80 148 216 686 3,935
----------- ----------- ----------- --------- --------- ---------
LIABILITIES AND STOCKHOLDERS' EQUITY
Short-term borrowings............................. 25,795 2,055 3,356 -- -- --
Long-term notes................................... 2,053 122 -- 2,664 265 453
Other liabilities................................. -- -- -- -- -- 1,200
Minority interest in subsidiary................... -- -- -- -- -- 214
Stockholders' equity.............................. -- -- -- -- -- 660
----------- ----------- ----------- --------- --------- ---------
Total liabilities and stockholders' equity...... 27,848 2,177 3,356 2,664 265 2,527
----------- ----------- ----------- --------- --------- ---------
OFF-BALANCE SHEET FINANCIAL INSTRUMENTS
Interest rate swaps............................... (7,079) 2,172 3,611 2,359 50 (1,113)
----------- ----------- ----------- --------- --------- ---------
Total off-balance sheet financial instruments..... (7,079) 2,172 3,611 2,359 50 (1,113)
----------- ----------- ----------- --------- --------- ---------
Period gap........................................ $ (1,155) $ 75 $ 403 $ (89) $ 471 $ 295
----------- ----------- ----------- --------- --------- ---------
----------- ----------- ----------- --------- --------- ---------
Cumulative gap.................................... $ (1,155) $ (1,080) $ (677) $ (766) $ (295) $ --
----------- ----------- ----------- --------- --------- ---------
----------- ----------- ----------- --------- --------- ---------
Ratio of interest-sensitive assets to interest-
sensitive liabilities........................... 121.2% 2.1% 2.3% 3.0% 160.4% 542.6%
----------- ----------- ----------- --------- --------- ---------
----------- ----------- ----------- --------- --------- ---------
Ratio of cumulative gap to total assets........... 3.0% 2.8% 1.7% 2.0% .8% --%
----------- ----------- ----------- --------- --------- ---------
----------- ----------- ----------- --------- --------- ---------
INTEREST RATE SENSITIVITY ANALYSIS
The effect of short-term movements in interest rates on the Company's
results of operations and financial position has been limited through the
Company's risk management activities. The Company performed a sensitivity
analysis to determine the effect of a hypothetical increase in market interest
rates of 10 percent on the Company's variable rate assets and liabilities and a
hypothetical 10 percent increase in spreads to their underlying index. Based on
this analysis there has not been a material change in market risk from December
31, 1998 as reported in Company's Form 10-K.
22
AVERAGE TERMS TO MATURITY
The following table reflects the average terms to maturity for the Company's
earning assets and liabilities at March 31, 1999 (in years):
ON- OFF-
BALANCE BALANCE
SHEET SHEET MANAGED
----------- ----------- -------------
EARNING ASSETS
Student loans................................................... 7.0 4.5 6.0
Warehousing advances............................................ 4.0 -- 4.0
Academic facilities financings.................................. 8.0 -- 8.0
Cash and investments............................................ 7.0 -- 7.0
-- -- --
Total earning assets............................................ 7.0 4.5 6.0
-- -- --
BORROWINGS
Short-term borrowings........................................... .5 -- .5
Long-term borrowings............................................ 4.0 4.5 4.5
-- -- --
Total borrowings................................................ 1.0 4.5 2.0
-- -- --
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 7.0 years. As student
loans are securitized, the need for long-term on-balance sheet financing will
decrease.
COMMON STOCK
The Company continued to reduce its investment portfolio and to reduce the
portfolio of other non-student loan earning assets using the released capital to
repurchase the Company's common stock. The Company repurchased 1.6 million
shares of common stock during the first quarter, lowering outstanding shares to
163 million at March 31, 1999. The Company continued to supplement its open
market common stock purchases during the quarter by entering into equity forward
contracts to purchase 1.5 million shares of common stock. At March 31, 1999, the
total common shares that could potentially be acquired over the next five years
under outstanding equity forward contracts was 20.6 million, and the Company has
remaining authority to enter into additional share repurchases and equity
forward contracts for 11.1 million shares.
23
The following table summarizes the Company's common share repurchase and
equity-forward activity for the three months ended March 31, 1999 and 1998. (All
amounts in the tables are common shares in millions.)
THREE MONTHS ENDED
MARCH 31,
------------------------
1999 1998
----------- -----------
Common shares repurchased:
Open market........................................................... .2 3.3
Equity forwards....................................................... 1.4 .4
----------- -----------
Total shares repurchased................................................ 1.6 3.7
----------- -----------
----------- -----------
Average purchase price per share........................................ $ 39.25 $ 42.46
----------- -----------
----------- -----------
Equity forward contracts:
Outstanding at beginning of period...................................... 20.5 7.0
New contracts........................................................... 1.5 7.5
Exercises............................................................... (1.4) (.4)
----------- -----------
Outstanding at end of period............................................ 20.6 14.1
----------- -----------
----------- -----------
Board of director authority remaining at end of period.................. 11.1 15.5
----------- -----------
----------- -----------
As of March 31, 1999, the expiration dates and range of purchase prices for
outstanding equity forward contracts are as follows:
MARCH 31, 1999
--------------------------------
OUTSTANDING RANGE OF MARKET
YEAR OF MATURITY CONTRACTS PRICES
- --------------------------------------------------------------- --------------- ---------------
1999........................................................... 3.9 $39.03-$42.20
2000........................................................... 4.0 41.01- 46.13
2001........................................................... 8.7 32.11- 46.68
2002........................................................... 2.0 46.23
2003........................................................... 2.0 41.20
---
Total.......................................................... 20.6
---
---
OTHER RELATED EVENTS AND INFORMATION
LEGISLATIVE DEVELOPMENTS
On October 7, 1998, the President signed into law the Higher Education
Amendments of 1998, legislation that reauthorizes federal higher education
programs for a six-year period (the "Reauthorization Legislation"). The
Reauthorization Legislation lowers both the borrower interest rate on Stafford
loans to a formula based on the 91-day Treasury bill rate plus 2.3 percent (1.7
percent during in-school and grace periods) and the lender's rate after special
allowance payments to the 91-day Treasury bill rate plus 2.8 percent (2.2
percent during in-school and grace periods) for loans originated on or after
October 1, 1998 and before July 1, 2003. The borrower interest rate on PLUS
loans originated during this period will be equal to the 91-day Treasury bill
rate plus 3.1 percent. Special allowance payments are also based on the 91-day
Treasury bill rate plus 3.1 percent. These rate reductions were first introduced
on an interim basis in temporary student loan legislation enacted into law on
June 9, 1998 and effective for loans originated from July 1, 1998 through
September 30, 1998. As a result of these earlier rate reductions, the Company
renegotiated certain contract provisions with some lenders, including,
principally, price and/or settlement timing provisions, under the student loan
forward purchase commitments it has entered into with some of
24
its lenders and is currently engaged in renegotiating these same contract
provisions with other lenders. However, there can be no assurance that as a
result of such renegotiations the Company will realize the same overall return
under any such renegotiated commitment contracts with respect to student loans
originated after July 1, 1998, as it has under the prior legislation with
respect to the loans whose first disbursements occurred before July 1, 1998.
The Reauthorization Legislation maintains interest rates for borrowers of
Federal Direct Consolidation Loans whose applications for such loans were
received prior to February 1, 1999 at 7.46 percent (6.86 percent during
in-school and grace periods), which rates are adjusted annually based on a
formula equal to the 91-day Treasury bill rate plus 2.3 percent (1.7 percent
during in-school and grace periods). The Reauthorization Legislation states that
the borrower interest rates on Federal Direct Consolidation Loans for borrowers
whose applications are received on or after February 1, 1999 and before July 1,
2003 is to be a fixed rate equal to the lesser of the weighted average of the
interest rates of the loans consolidated, adjusted up to the nearest one eighth
of one percent, and 8.25%. This is the same rate which the Reauthorization
Legislation sets on FFELP consolidation loans for borrowers whose applications
are received on or after October 1, 1998 and before July 31, 2003. The
Reauthorization Legislation sets the special allowance payment rate for FFELP
consolidation loans at the 91-day Treasury bill rate plus 3.1 percent. The
annual fee paid by lenders on FFELP consolidation loans is reduced under the
Reauthorization Legislation from 1.05 percent to .62 percent of the principal
plus accrued unpaid interest on any such consolidation loans, applications for
which are received on or after October 1, 1998 and before February 1, 1999. As a
result of the Reauthorization Legislation, the Company announced in the fourth
quarter of 1998 that it will once again offer student loan borrowers the SMART
LOAN-Registered Trademark- consolidation program, which it suspended in the
fourth quarter of 1997. The availability of the comparatively lower borrower
interest rates (at least prior to subsequent annual rate adjustments) on Federal
Direct Consolidation Loans requested on or before January 31, 1999 may increase
the likelihood that a FFELP student loan managed by the Company will be prepaid
from the proceeds of such loans during such four-month period. The Company
believes, however, that the likelihood of any such prepayment may be mitigated
by the cost savings that borrowers may realize over Federal Direct Consolidation
Loans under certain circumstances by enrolling in the Company's SMART
REWARDS-Registered Trademark- program and Direct Repay Plan during such four
month period. The Company anticipates the prepayment of loans resulting from the
temporary lower borrower interest rates in the FDSLP consolidation program will
be completed in the third quarter of 1999.
As part of legislation reauthorizing various health profession education
programs, the insurance on existing loans originated under the Health Education
Assistance Loan ("HEAL") program was reduced from 100 percent to 98 percent of
the unpaid principal balance plus accrued interest, unless the servicer of the
HEAL loan qualifies as an "exceptional performer," in which case claims would
continue to be paid at the 100 percent level. Management does not expect that
the insurance reduction will have a material impact on the Company's future
financial results or condition.
ADMINISTRATION'S FY 2000 BUDGET PROPOSAL
On February 1, 1999 President Clinton submitted his Fiscal Year 2000 budget
proposal to Congress. The budget proposes significant savings from the student
loan programs, principally from the FFELP. Among the proposals for student loans
are the following:
- Reinstatement of a lower rate for new Federal Direct Consolidation Loans.
This variable rate (the 91-day Treasury bill rate plus 2.3 during
repayment and 1.7% during in-school and grace periods) would apply for
borrowers whose applications are received before September 30, 2000. The
budget proposals would also lower the annual fee paid by lenders on FFELP
consolidation loans made during the same period from 1.05 percent to .62
percent of the principal plus accrued unpaid interest;
25
- Creation of a 90-day period during which interest on a highly delinquent
FFELP loan does not accrue. The Reauthorization Legislation extended the
period before lenders can submit default claims from 180 days to 270 days;
the budget proposes to eliminate interest accrual during this extended
period;
- Reduction by 30 basis points of special allowance payments on FFELP loans
funded with tax exempt securities; and
- Implementation of additional Guarantor reforms, including the acceleration
of recall of Guarantor reserves mandated by the Reauthorization
Legislation, recall of an additional $1.5 billion in reserves, the
reduction of the Guarantor retention rate on payments on defaulted loans
to 18.5 percent, the reduction in the share of the remaining amount that
Guarantors may retain, and an expansion of the use of voluntary flexible
agreements authorized by the Reauthorization Legislation.
Budget resolutions for the FY 2000 budget passed by both houses of Congress
did not include any of these proposals.
YEAR 2000 ISSUE
The "Year 2000 issue" refers to a wide variety of potential computer program
processing and functionality issues that may arise from the inability of
computer programs to properly process date-sensitive information relating to the
Year 2000, years thereafter and to a lesser degree the Year 1999.
THE COMPANY'S STATE OF READINESS
During 1996, the Company commenced a Year 2000 readiness project to assess
and remediate its internal software and hardware systems to avoid or mitigate
Year 2000 problems and to evaluate Year 2000 problems that may arise from
entities with which the Company interacts. In 1997, a comprehensive project
structure was implemented and a Year 2000 project team was formed. The Year 2000
project team briefs senior executives of the Company and the Company's board of
directors on the progress of the Year 2000 effort. The Company's Year 2000
readiness project encompasses the Company's information technology (IT) systems,
as well as its non-IT systems, such as systems embedded in its office equipment
and facilities. The Company has completed the assessment of its internal
software and hardware. On December 31, 1998, the Company achieved Year 2000
readiness for all Sallie Mae internal applications that were scheduled to be
completed by 1998. With the completion of this critical milestone, the
corporation is directing its attention to 1999 project objectives. These
objectives include the completion of 1999 inventory. The 1999 inventory includes
those vendor supplied applications whose readiness date did not align with the
Company's December 31, 1998 readiness date, new software/hardware purchased in
1999 and new internally developed products, such as Laureate. These vendor
products will be upgraded upon the vendor distribution of any Year 2000 ready
release in 1999, or, if no such release is issued, replaced with a Year 2000
ready alternative. Additional objectives include Year 2000 readiness testing
with our external business partners and the development of Year 2000 contingency
and business continuity plans.
The Company's Year 2000 readiness project is divided into five phases:
Awareness, Assessment, Remediation, Testing and Implementation. The Awareness
phase, which is 100 percent complete, involved the dissemination of Year 2000
information throughout the Company and the education of all levels of management
about Year 2000 issues and their potential impact on the Company's operation.
The Assessment phase, which is also 100 percent complete, involved a
comprehensive inventory of and the determination of the requirements for fixes,
upgrades and replacements for all hardware, application software, embedded
systems (e.g., the microcontrollers in the Company's elevators) and desktop
applications. The Remediation phase, the Year 2000 project phase where hardware,
systems and applications are fixed, upgraded or replaced to be Year 2000 ready,
is 100 percent complete for applications scheduled to complete in 1998. Testing,
the phase in which Year 2000 remediation is validated, is also 100 percent
26
complete for all applications scheduled to complete in 1998. As part of this
testing effort, the Company staged a Year 2000 disaster recovery exercise in
August 1998. Finally, production installations have been completed for all of
the Company's core applications.
While the phases described above have been completed, during 1999 the
Company intends to continue to disseminate information throughout the
corporation regarding Year 2000 issues; to monitor its inventory and update as
required; and to remediate and test all applications in the 1999 inventory.
The following describes the Company's state of readiness with respect to the
IT systems that support the Company's core business-loan delivery and
acquisition and loan servicing:
- CLASS-SM-, the Company's Consolidated Loan Administration and Servicing
System, is the system that services the Company's managed student loans
and the student loan portfolios of our ExportSS-Registered Trademark- and
TransportSS-SM-clients. In July 1998, remediation of CLASS was completed
and it was installed into production. A second, full round of
comprehensive functional testing and integration testing of all internal
application interfaces with CLASS was completed in December 1998. Testing
of external interfaces is scheduled to be completed in 1999.
- SALLIENET, the Company's translation and communication system used to
electronically exchange data with our customers, completed remediation in
September 1998 and was installed into production in October 1998.
SallieNet successfully completed integration testing with CLASS in
December 1998.
- PORTSS-REGISTERED TRADEMARK- III, the Company's PC-based system used by
lenders to originate loans, was developed in 1997 to be Year 2000 ready.
Minor remediation was completed on PortSS III in mid-October 1998.
Integration testing is complete and a Year 2000 ready version of the
software has been distributed to our customers.
- LINESS-SM-, the Company's PC-based product used by colleges and
universities to process financial aid loan application information, was
developed in 1993 to be Year 2000 ready. The LineSS disbursement component
used to transmit disbursement roster information from Sallie Mae's CLASS
system to the college or university, was developed in 1995 to be Year 2000
ready. LineSS utilizes the industry approved CommonLine-SM- formats for
all communications. Minor remediation on LineSS was completed in
mid-October 1998. Integration testing is complete and a Year 2000 ready
version of the software has been distributed to our customers.
- IMDOC-REGISTERED TRADEMARK-, the Company's document imaging system, has
completed remediation and functional testing and successfully completed
integration testing with CLASS in December 1998.
In addition, certain significant financial and administrative systems,
including the Company's payroll and human resources, debt accounting, investment
management and financial accounting and control systems have all completed
remediation and have successfully completed integration testing with other
internal systems.
The Company's non-IT systems principally support the Company's facilities
and telecommunications. As of October 1998, all of the Company's headquarters
core facilities systems, including elevators, internal security and fire alarms,
were determined to be Year 2000 ready in accordance with the procedures
established by the Company to make such a determination. The Company completed
Year 2000 readiness testing of its Lucent telecommunications components in
December 1998. In addition, the Company is working closely with all of its
utility providers to make a reasonable assessment of the Company's potential
exposure to any failure on their part to resolve their Year 2000 issues.
Although the Company's Reston, Virginia headquarters building is equipped with
five emergency powered generators designed to back up building power without
refueling for a period of two weeks, there can be no assurance that such back-up
systems will adequately insulate the Company from any business interruptions
caused by any widespread power outages or power outages in any service area
where its loan servicing centers are located.
27
The Company has surveyed its third party service providers and business
partners and is currently reviewing these surveys. In addition to requesting
readiness information, the Company has tested all third-party developed software
that the vendor claimed was Year 2000 ready, to confirm compliance or determine
the potential impact of noncompliance. In addition, the Company plans to work
with select third party service providers and business partners to ascertain
their current Year 2000 compliance status and to coordinate testing efforts
throughout 1999. The Company's testing strategy is in final stages of approval.
Testing with key business partners is scheduled to begin in May 1999. There can
be no assurance that the computer systems of other companies or counterparties
on which the Company relies will be Year 2000 ready on a timely basis, or that a
failure to resolve Year 2000 issues by another party, or remediation or
conversion that is incompatible with the Company's computer systems, will not
have a material adverse effect on the Company.
THE RISKS OF THE COMPANY'S YEAR 2000 ISSUES
Generally, the failure by the Company or any of its significant third-party
service providers or business partners to resolve a material Year 2000 issue
could result in the interruption in, or a failure of, certain normal business
activities or operations such as servicing loans or processing payments. Such
failures could materially and adversely affect the Company's liquidity and/or
results of operations. For example, the Company submits claims for payment,
including special allowance payments and interest subsidy payments, directly to
the U.S. Department of Education (the "DOE"). To the extent that the DOE is
unable to timely process the payments because of its failure to remediate its
Year 2000 problem, the Company's liquidity could be adversely affected, possibly
to a material extent. In addition, the Company submits claims to various state
or private nonprofit guarantee agencies for payment of all or a portion of the
unpaid principal balance on loans plus accrued interest if a borrower defaults
on a student loan and in certain other circumstances such as the death,
permanent or total disability of or the filing for bankruptcy by the borrower.
The Company has surveyed each of the guarantee agencies and continues to make
follow-up telephone inquiries to determine the level of their Year 2000
compliance and the potential impact of noncompliance. To the extent that any of
the larger guarantee agencies are unable to timely process the payments because
of its failure to remediate its Year 2000 problem, the Company's liquidity could
be adversely affected, possibly to a material extent.
THE COSTS TO ADDRESS THE COMPANY'S YEAR 2000 ISSUES
Costs to modify computer systems have been, and will continue to be,
expensed as incurred and are not expected to have a material impact on the
Company's future financial results or condition. The Company spent approximately
$2 million in 1997, $8 million in 1998 and expects to spend approximately $2
million in 1999 on this project. In addition, Year 2000 readiness has been
addressed and accounted for as part of the costs of routine systems development
and modification. Moreover, there can be no guarantee that these estimates will
be achieved, and actual results could differ materially from these estimates.
Specific factors that might cause such material differences include, but are not
limited to, the availability and cost of personnel trained in this area, the
ability to locate and correct all relevant computer codes and similar
uncertainties.
THE COMPANY'S CONTINGENCY PLANS
The Company has developed high level contingency plans for its core
applications and will refine these plans in 1999. In addition, the Company
intends to commit resources in 1999 to evaluate and prepare contingency plans
for systems and operations viewed as vulnerable to Year 2000-related
interruptions. The business process and system inventories have been identified.
Contingency plans are required for all mission critical processes and systems.
The target completion dates for these plans is July 1999. There can be no
assurance that the Company's remediation efforts and contingency plans will be
sufficient to avoid unforeseen business disruptions or other problems resulting
from the Year 2000 issue.
28
PART II. OTHER INFORMATION
ITEM 1. LEGAL PROCEEDINGS.
Nothing to report.
ITEM 2. CHANGES IN SECURITIES.
Nothing to report.
ITEM 3. DEFAULTS UPON SENIOR SECURITIES.
Nothing to report.
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS.
Nothing to report.
ITEM 5. OTHER INFORMATION.
Nothing to report.
ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K.
(a) Exhibits
27 Financial Data Schedule
(b) Reports on Form 8-K
No reports on Form 8-K were filed with the Securities and Exchange
Commission during the Quarter ended March 31, 1999.
29
SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934, as
amended, the Registrant has duly caused this report to be signed on its behalf
by the undersigned hereunto duly authorized.
SLM HOLDING CORPORATION
(Registrant)
/s/ MARK G. OVEREND
--------------------------------------
Mark G. Overend
Senior Vice President &
Chief Financial Officer
(Principal Financial and Accounting
Officer and Duly Authorized Officer)
Date: May 14, 1999
30
9
1,000
3-MOS
MAR-31-1999
JAN-01-1999
MAR-31-1999
154,702
0
0
0
3,752,056
700,602
700,767
32,220,149
298,136
38,836,766
0
31,205,391
1,414,166
5,556,859
0
0
36,955
623,395
38,836,766
552,354
63,011
0
615,365
0
457,713
157,652
7,636
(17)
86,268
170,387
113,809
0
0
113,809
0.70
0.69
1.87
0
600,000
0
0
293,185
3,417
732
298,136
298,136
0
0
