================================================================================ UNITED STATES SECURITIES AND EXCHANGE COMMISSION WASHINGTON, D. C. 20549 -------------------- FORM 8-K CURRENT REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 Date of Report (Date of earliest event reported): January 17, 2002 -------------------- USA EDUCATION, INC. (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 ================================================================================
ITEM 5. OTHER EVENTS. On January 17, 2002, the Registrant issued a press release announcing its earnings for the fourth quarter ending December 31, 2001. On January 17, 2002, the Registrant also issued copies of its supplemental financial information for the fiscal quarter ending December 31, 2001. Copies of the press release and supplemental financial information issued by the Registrant are attached hereto as Exhibit 99.1 and Exhibit 99.2, respectively, and are incorporated herein by reference. ITEM 7. FINANCIAL STATEMENTS, PROFORMA FINANCIAL INFORMATION AND EXHIBITS. (a) Exhibits. 99.1 Press Release of the Registrant, dated January 17, 2002, announcing the Registrant's fourth quarter earnings. 99.2 Supplemental Financial Information of the Registrant for the fiscal quarter ending December 31, 2001. 2
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. USA EDUCATION, INC. (Registrant) By: /s/ John F. Remondi ------------------------------ John F. Remondi EXECUTIVE VICE PRESIDENT & CHIEF FINANCIAL OFFICER (Principal Financial and Accounting Officer and Duly Authorized Officer) February 19, 2002 3
EXHIBIT INDEX 4
Exhibit Number Description of Document 99.1 Press Release of the Registrant, dated January 17, 2002, announcing the Registrant's fourth quarter earnings. 99.2 Supplemental Financial Information of the Registrant for the fiscal quarter ending December 31, 2001.
Exhibit 99.1 SALLIEMAE N E W S R E L E A S E - -------------------------------------------------------------------------------- FOR IMMEDIATE RELEASE MEDIA CONTACTS: INVESTOR CONTACT: Jim Boyle Jeff Heinz (703) 810-5605 (703) 810-7751 Martha Holler (703) 810-5178 USA EDUCATION, INC. (NYSE: SLM) REPORTS FOURTH-QUARTER `CORE CASH BASIS' EARNINGS PER DILUTED SHARE OF $1.03 COMPANY ACHIEVES MILESTONE OF $10 BILLION IN ANNUAL, PREFERRED-CHANNEL ORIGINATIONS RESTON, VA., JAN. 17, 2002 - USA Education, Inc., commonly known as Sallie Mae (NYSE: SLM), today announced that its fourth-quarter 2001 "core cash basis" earnings were $163 million, an 18-percent increase over the year-ago quarter of $138 million. "Core cash basis" earnings per share, which measure the recurring earnings of the company, were $1.03 per diluted share, a 29-percent increase over $.80 in the year-ago quarter. For the year ended Dec. 31, 2001, "core cash basis" earnings were a record $624 million or $3.75 per diluted share, a 27-percent increase over $492 million or $2.93 per diluted share in 2000. A principal driver of Sallie Mae's continued strong performance is its preferred-channel loan originations activity, which consists of the company's own loans as well as those from its affiliated and partner brands. The volume of these preferred-channel originations totaled $2.4 billion during the fourth quarter of 2001, a 21-percent increase from the $2.0 billion of originations made during the year-ago period. Loan originations are a key measure of the company's market share success, and serve as an indicator of future loan volume. During the 2001 calendar year, the company originated a record $10.1 billion through its preferred channel, compared to $7.3 billion in the year-ago period, a 38-percent increase. This increase in preferred-channel originations includes the growth attributed to the purchases of USA Group and Student Loan Funding Resources in July 2000. "Generating $10 billion in preferred-channel volume is a significant milestone for us," said Albert L. Lord, vice chairman and chief executive officer, Sallie Mae. "This steep ramp-up in volume demonstrates the success of our campus-based sales efforts. Our sales force, now numbering well over 200, has responded to our school customers' needs, as our origination results demonstrate." "Core cash basis" net interest income totaled $341 million for the quarter, a 25-percent increase from $273 million in the year-ago quarter. For the year ended Dec. 31, 2001, "core cash basis" net interest income totaled $1.3 billion, a 22-percent increase from the $1.0 billion generated in 2000. The growth in net interest income is attributed to a 17-percent, year-over-year increase in the average balance of managed student loans and a significant increase in the student loan spread. The "core cash basis" student loan spread equaled 1.81 percent for the year ended 2001 and 1.70 percent for the year ended 2000. (MORE) - -------------------------------------------------------------------------------- SALLIE MAE - 11600 SALLIE MAE DRIVE - RESTON, VIRGINIA 20193 - WWW.SALLIEMAE.COM
USA EDUCATION, INC. FOURTH-QUARTER EARNINGS PAGE 2 "Core cash basis" other income totaled $111 million for the quarter, compared to $131 million in the prior quarter and $119 million in the year-ago quarter. The 2001 fourth-quarter figure was down from both the prior and year-ago quarters, principally due to seasonal factors associated with the guarantor services operation, and income related to the USA Group and Student Loan Funding Resources transactions, respectively. "With our recently announced acquisitions of two of the most highly respected student loan default-collection agencies -- Pioneer Credit Recovery and General Revenue Corporation -- we are well-positioned to add significantly to this area of fee-based revenue in 2002," said Thomas J. Fitzpatrick, president and chief operating officer, Sallie Mae. "At the same time, we are making good on our promise to hold the line on operating expenses and, in fact, decreased our total `core cash basis' operating expenses for the fourth quarter to $170 million, compared to $173 million in the previous quarter." Under "core cash basis" results, securitizations are treated as financings, not sales. Accordingly, no gains on sales or subsequent servicing or securitization revenues are recognized. The following items are excluded from "core cash basis" results: the amortization and changes in market value of goodwill and intangible assets; non-recurring items such as floor income, gains and losses on the sales of investment securities and student loans; the one-time integration charge of the USA Group acquisition; and the effects of Statement of Financial Accounting Standards No.133 ("SFAS 133"). Sallie Mae reported fourth-quarter 2001 GAAP net income of $266 million or $1.69 per diluted share, compared to $99 million or $.56 per diluted share in the year-ago period. Under SFAS 133, the company was required to record a non-cash, mark-to-market, after-tax gain of $45 million or $.29 per diluted share, resulting principally from floor contracts the company sells to lock in its long-term spreads on student loans. Excluding the effects of SFAS 133, Sallie Mae reported GAAP net income of $221 million or $1.40 per diluted share for the fourth quarter of 2001. The company will host its regular earnings conference call at noon today. Sallie Mae executives will discuss various highlights of the quarter and answer questions related to the company's performance. Individuals interested in participating should call the following number today, Jan. 17, 2002, starting at 11:45 a.m. EST: (877) 777-1971 (USA and Canada) or (612) 333-4911 (International). The conference call will be replayed continuously beginning Thursday, Jan. 17, at 3:30 p.m. EST and concluding at 11:59 p.m. EST on Thursday, Jan. 24. Please dial (800) 475-6701 (USA and Canada) or dial (320) 365-3844 (International) and use access code 621986. In addition, there will be a live audio webcast of the conference call, which may be accessed at http://www.salliemae.com. A replay will be available 30-45 minutes after the live broadcast. Statements in this release referring to expectations as to future market share, the successful consummation of any business acquisitions and other future developments are forward-looking statements, which involve risks, uncertainties and other factors that may cause the actual results to differ materially from such forward-looking statements. Such factors include, among others, changes in the terms of student loans and the educational credit marketplace arising from the implementation of applicable laws and regulations, and from changes in such laws and regulations, changes in the demand for educational financing or in financing preferences of educational institutions, students and their families, and changes in the general interest rate environment. For more information, see the company's filings with the Securities and Exchange Commission. (MORE) USA EDUCATION, INC. FOURTH-QUARTER EARNINGS - -------------------------------------------------------------------------------- SALLIE MAE - 11600 SALLIE MAE DRIVE - RESTON, VIRGINIA 20193 - WWW.SALLIEMAE.COM
PAGE 3 SALLIE MAE, founded 28 years ago, provides funds for educational loans, primarily federally guaranteed student loans originated under the Federal Family Education Loan Program (FFELP). The company currently owns or manages nearly $72 billion in student loans for more than seven million borrowers, and provides parents, students and educators with comprehensive information on the financial aid process. Through its specialized subsidiaries and divisions, Sallie Mae also provides an array of consumer credit loans, including those for lifelong learning and K-12 education, and business and technical outsourcing services for colleges and universities. More information is available at http://www.salliemae.com. Sallie Mae is a registered service mark of the Student Loan Marketing Association. USA Education, Inc. and its subsidiaries, other than the Student Loan Marketing Association, are not sponsored by or agencies of the United States. ### - -------------------------------------------------------------------------------- SALLIE MAE - 11600 SALLIE MAE DRIVE - RESTON, VIRGINIA 20193 - WWW.SALLIEMAE.COM
USA EDUCATION, INC. SUPPLEMENTAL EARNINGS DISCLOSURE DECEMBER 31, 2001 (DOLLARS IN MILLIONS, EXCEPT EARNINGS PER SHARE) ============================================================================================================================= QUARTERS ENDED YEARS ENDED ----------------------------------------- DECEMBER 31, DECEMBER 31, SEPTEMBER 30, DECEMBER 31, ----------------------------- 2001 2001 2000 2001 2000 ------------ ------------- ------------ ------------- ------------- Net income $ 266 $ (194) $ 99 $ 384 $ 465 "Core cash basis" net income * 163 163 138 624 492 Diluted earnings per share $ 1.69 $ (1.25) $ .56 $ 2.28 $ 2.76 "Core cash basis" diluted earnings per share 1.03 .99 .80 3.75 2.93 Net interest margin 2.18 % 1.65 % 1.35 % 1.82 % 1.52 % "Core cash basis" net interest margin 1.74 1.64 1.42 1.64 1.53 Return on assets 2.11 % (1.58)% .83% .78 % 1.06 % "Core cash basis" return on assets .82 .82 .71 .79 .71 Student loan spread 2.50 % 1.91 % 1.76 % 2.01 % 1.82 % "Core cash basis" student loan spread 1.89 1.79 1.64 1.81 1.70 Average on-balance sheet student loans $ 41,504 $ 40,180 $ 37,024 $ 40,025 $ 34,637 Average off-balance sheet student loans 30,484 31,370 30,438 30,594 25,711 ------------ ------------- ------------ ------------- ------------- Average managed student loans $ 71,988 $ 71,550 $ 67,462 $ 70,619 $ 60,348 ============ ============= ============ ============= ============= Ending on-balance sheet student loans $ 41,001 $ 40,644 $ 37,647 Ending off-balance sheet student loans 30,725 31,185 29,868 ------------ ------------- ------------ Ending managed student loans $ 71,726 $ 71,829 $ 67,515 ============ ============= ============ * "Core cash basis" net income includes securitizations as financings and excludes the amortization and changes in market value of goodwill and intangible assets, and non-recurring items such as floor income, certain integration charges and the liquidation of investment securities and student loans. Effective January 1, 2001, "core cash basis" net income also excludes the effects of SFAS 133. =============================================================================================================================
USA EDUCATION, INC. CONSOLIDATED STATEMENTS OF INCOME (IN THOUSANDS, EXCEPT PER SHARE AMOUNTS) QUARTERS ENDED ------------------------------------------ YEARS ENDED DECEMBER 31, DECEMBER 31, SEPTEMBER 30, DECEMBER 31, -------------------------- 2001 2001 2000 2001 2000 ----------- ----------- ----------- ----------- ----------- Interest income: Student loans $ 548,554 $ 591,721 $ 782,144 $ 2,527,818 $ 2,854,231 Warehousing advances 7,469 10,625 15,360 43,401 56,410 Academic facilities financings 12,616 13,003 14,637 53,485 66,709 Investments 60,080 83,942 140,768 372,827 501,309 ----------- ----------- ----------- ----------- ----------- Total interest income 628,719 699,291 952,909 2,997,531 3,478,659 Interest expense 360,133 501,672 794,964 2,124,115 2,836,871 ----------- ----------- ----------- ----------- ----------- Net interest income 268,586 197,619 157,945 873,416 641,788 Less: provision for losses 23,822 15,299 9,354 65,991 32,119 ----------- ----------- ----------- ----------- ----------- Net interest income after provision for losses 244,764 182,320 148,591 807,425 609,669 ----------- ----------- ----------- ----------- ----------- Other income: Gains on student loan securitizations 20,278 27,143 836 75,199 91,846 Servicing and securitization revenue 201,637 118,940 84,952 634,320 295,646 Gains (losses) on sales of securities (74,580) (24,788) (25,316) (178,287) 18,622 Guarantor servicing fees 65,906 75,732 73,810 255,171 128,375 Derivative market value adjustment 98,425 (552,832) - (505,687) - Other 42,988 68,070 46,530 236,901 153,143 ----------- ----------- ----------- ----------- ----------- Total other income 354,654 (287,735) 180,812 517,617 687,632 Operating expenses 185,901 184,113 174,312 707,654 532,710 Integration charge - - - - 53,000 ----------- ----------- ----------- ----------- ----------- Income before income taxes and minority interest in net earnings of subsidiary 413,517 (289,528) 155,091 617,388 711,591 Income taxes 145,522 (98,656) 53,762 223,322 235,880 Minority interest in net earnings of subsidiary 2,050 2,673 2,673 10,070 10,694 ----------- ----------- ----------- ----------- ----------- NET INCOME 265,945 (193,545) 98,656 383,996 465,017 Preferred stock dividends 2,875 2,875 2,864 11,501 11,522 ----------- ----------- ----------- ----------- ----------- Net income attributable to common stock $ 263,070 $ (196,420) $ 95,792 $ 372,495 $ 453,495 =========== =========== =========== =========== =========== BASIC EARNINGS PER SHARE $ 1.69 $ (1.25) $ .58 $ 2.34 $ 2.84 =========== =========== =========== =========== =========== Average common shares outstanding 155,582 157,074 163,927 159,078 159,482 =========== =========== =========== =========== =========== DILUTED EARNINGS PER SHARE $ 1.69 $ (1.25) $ .56 $ 2.28 $ 2.76 =========== =========== =========== =========== =========== Average common and common equivalent shares outstanding 155,582 157,074 169,866 163,400 164,355 =========== =========== =========== =========== ===========
USA EDUCATION, INC. CONSOLIDATED BALANCE SHEETS (IN THOUSANDS, EXCEPT PER SHARE AMOUNTS) DECEMBER 31, SEPTEMBER 30, DECEMBER 31, ASSETS 2001 2001 2000 ----------- ----------- ----------- Student loans $41,000,870 $40,643,809 $37,647,297 Warehousing advances 1,035,906 979,642 987,352 Academic facilities financings 732,241 760,435 851,168 Cash and investments 5,787,153 7,233,358 5,940,490 Other assets 4,317,789 4,243,591 3,365,481 ----------- ----------- ----------- Total assets $52,873,959 $53,860,835 $48,791,788 =========== =========== =========== LIABILITIES Short-term borrowings $31,064,821 $31,749,596 $30,463,988 Long-term notes 17,285,350 17,654,066 14,910,939 Other liabilities 2,851,326 2,717,664 1,787,642 ----------- ----------- ----------- Total liabilities 51,201,497 52,121,326 47,162,569 ----------- ----------- ----------- COMMITMENTS* MINORITY INTEREST IN SUBSIDIARY - 213,883 213,883 STOCKHOLDERS' EQUITY Preferred stock, par value $.20 per share, 20,000 shares authorized: 3,300; 3,300; and 3,300 shares, respectively, issued at stated value of $50 per share 165,000 165,000 165,000 Common stock, par value $.20 per share, 375,000 shares authorized: 202,736; 202,165; and 190,852 shares, respectively, issued 40,547 40,433 38,170 Additional paid-in capital 805,804 769,360 225,211 Unrealized gains on investments, net of tax 670,199 706,028 311,301 Retained earnings 2,068,490 1,836,364 1,810,902 ----------- ----------- ----------- Stockholders' equity before treasury stock 3,750,040 3,517,185 2,550,584 Common stock held in treasury at cost: 47,241; 45,395; and 26,707 shares, respectively 2,077,578 1,991,559 1,135,248 ----------- ----------- ----------- Total stockholders' equity 1,672,462 1,525,626 1,415,336 ----------- ----------- ----------- Total liabilities and stockholders' equity $52,873,959 $53,860,835 $48,791,788 =========== =========== =========== * Commitments to purchase loans, lines of credit, letters of credit, and academic facilities financing letters of credit were $21.6 billion, $2.6 billion, $3.2 billion, and $45.5 million, respectively, at December 31, 2001.
USA EDUCATION, INC. PRO-FORMA "CORE CASH BASIS" CONSOLIDATED STATEMENTS OF INCOME The following pro-forma statements of income measure only the recurring earnings of the Company. Accordingly, securitization transactions are treated as financings, not sales, and thereby gains on such sales and subsequent servicing and securitization revenues are eliminated from net income. In addition, the effects of floor income, certain gains and losses on sales of investment securities and student loans, certain integration charges, the amortization and changes in market value of goodwill and intangible assets, and the non-cash, derivative market value adjustment in accordance with Statement of Financial Accounting Standards No. 133, "Accounting for Derivative Instruments and Hedging Activities," are also excluded from net income. Management refers to these pro-forma results as "core cash basis" statements of income. Management monitors the periodic "core 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. (IN THOUSANDS, EXCEPT PER SHARE AMOUNTS) QUARTERS ENDED -------------------------------------------- YEARS ENDED DECEMBER 31, DECEMBER 31, SEPTEMBER 30, DECEMBER 31, --------------------------- 2001 2001 2000 2001 2000 ------------- ------------- ------------- ------------ ----------- (UNAUDITED) (UNAUDITED) (UNAUDITED) (UNAUDITED) (UNAUDITED) Interest income: Student loans $ 857,383 $ 1,051,576 $ 1,440,935 $ 4,324,623 $ 5,014,858 Warehousing advances 7,469 10,625 15,360 43,401 56,410 Academic facilities financings 12,616 13,003 14,637 53,485 66,709 Investments 59,604 78,805 155,626 371,633 528,960 ----------- ----------- ----------- ----------- ----------- Total interest income 937,072 1,154,009 1,626,558 4,793,142 5,666,937 Interest expense 595,899 833,832 1,353,453 3,521,985 4,627,783 ----------- ----------- ----------- ----------- ----------- Net interest income 341,173 320,177 273,105 1,271,157 1,039,154 Less: provision for losses 30,320 20,991 13,730 89,145 52,951 ----------- ----------- ----------- ----------- ----------- Net interest income after provision for losses 310,853 299,186 259,375 1,182,012 986,203 ----------- ----------- ----------- ----------- ----------- Other income: Gains (losses) on sales of securities (1,560) 505 52 (1,574) 1,334 Guarantor servicing fees 65,906 75,732 73,810 255,171 128,375 Other 46,332 55,230 45,614 201,581 151,496 ----------- ----------- ----------- ----------- ----------- Total other income 110,678 131,467 119,476 455,178 281,205 Operating expenses 169,933 173,084 164,935 660,555 514,093 ----------- ----------- ----------- ----------- ----------- Income before income taxes and minority interest in net earnings of subsidiary 251,598 257,569 213,916 976,635 753,315 Income taxes 86,479 91,770 73,225 342,553 250,128 Minority interest in net earnings of subsidiary 2,050 2,673 2,674 10,070 10,694 ----------- ----------- ----------- ----------- ----------- NET INCOME 163,069 163,126 138,017 624,012 492,493 Preferred stock dividends 2,875 2,875 2,865 11,501 11,520 ----------- ----------- ----------- ----------- ----------- Net income attributable to common stock $ 160,194 $ 160,251 $ 135,152 $ 612,511 $ 480,973 =========== =========== =========== =========== =========== BASIC EARNINGS PER SHARE $ 1.03 $ 1.02 $ .82 $ 3.85 $ 3.02 =========== =========== =========== =========== =========== Average common shares outstanding 155,582 157,074 163,927 159,078 159,482 =========== =========== =========== =========== =========== DILUTED EARNINGS PER SHARE $ 1.03 $ .99 $ .80 $ 3.75 $ 2.93 =========== =========== =========== =========== =========== Average common and common equivalent shares outstanding 155,582 162,080 169,866 163,400 164,355 =========== =========== =========== =========== ===========
Exhibit 99.2 USA EDUCATION, INC. SUPPLEMENTAL FINANCIAL INFORMATION FOURTH QUARTER 2001 (DOLLARS IN MILLIONS, EXCEPT PER SHARE AMOUNTS) The following supplemental information should be read in connection with USA Education, Inc.'s (the "Company") press release of fourth quarter 2001 earnings, dated January 17, 2002. Statements in this Supplemental Financial Information Release, which refer to expectations as to future developments, are forward-looking statements within the meaning of The Private Securities Litigation Reform Act of 1995. Such forward-looking statements involve risks, uncertainties and other factors that may cause the actual results to differ materially from such forward-looking statements. Such factors include, among others, changes in the terms of student loans and the educational credit marketplace arising from the implementation of applicable laws and regulations and from changes in such laws and regulations; changes in the demand for educational financing or in financing preferences of educational institutions, students and their families; and changes in the general interest rate environment. For more information, see the Company's filings with the Securities and Exchange Commission. PRO-FORMA STATEMENTS OF INCOME Under generally accepted accounting principles ("GAAP"), the Company's securitization transactions have been treated as sales. At the time of sale, the Company records a gain equal to the present value of the estimated future net cash flows from the portfolios of loans sold. Interest earned on the interest residual and fees earned for servicing the loan portfolios are recognized over the life of the securitization transaction as servicing and securitization revenue. 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. Effective for the fiscal year beginning January 1, 2001, the Company adopted Statement of Financial Accounting Standards No. 133 ("SFAS 133"), "Accounting for Derivative Instruments and Hedging Activities," as amended by Statement of Financial Accounting Standards No. 137 ("SFAS 137"), "Accounting for Derivative Instruments and Hedging Activities - Deferral of Effective Date of FASB Statement No. 133." SFAS 133 requires that derivative instruments be recorded in the balance sheet as either an asset or liability measured at its fair value (see "New Accounting Pronouncements"). Most of the derivative contracts into which the Company enters are effective economic hedges for its interest rate management strategy but are not effective hedges under SFAS 133. The majority of these hedges are treated as "trading" for GAAP purposes and therefore the resulting mark-to-market is taken into GAAP earnings. For example, SFAS 133 requires that the Company mark-to-market its written options but none of its embedded options in its student loan assets. Effectively, in this case, SFAS 133 recognizes the liability but not the corresponding asset. 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. In addition, the effects of SFAS 133 are excluded from the pro-forma results of operations and the economic hedge effects of derivative instruments, as discussed in "New Accounting Pronouncements," are recognized. The pro-forma results of operations also exclude the effect of floor revenue, certain gains and losses on sales of investment securities and student loans, a one-time integration charge related to the July 2000 acquisition of USA Group, Inc. ("USA Group") and the amortization and changes in market value of goodwill and intangible assets. The following pro-forma statements of income present the Company's results of operations under these assumptions. Management refers to these pro-forma results as "core cash basis" statements of income. Management monitors the periodic "core 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 "core cash basis" statements of income and reconciliation to GAAP net income as reflected in the Company's consolidated statements of income. QUARTERS ENDED YEARS ENDED -------------------------------------------- ---------------------------- DECEMBER 31, SEPTEMBER 30, DECEMBER 31, DECEMBER 31, DECEMBER 31, 2001 2001 2000 2001 2000 ------------ ------------ ------------ ------------ ------------ "CORE CASH BASIS" STATEMENTS OF INCOME: Insured student loans ......................... $ 857 $ 1,051 $ 1,441 $ 4,325 $ 5,015 Advances/Facilities/Investments ............... 80 103 186 468 652 ------- ------- ------- ------- ------- Total interest income ......................... 937 1,154 1,627 4,793 5,667 Interest expense .............................. (596) (834) (1,353) (3,522) (4,628) ------- ------- ------- ------- ------- Net interest income ........................... 341 320 274 1,271 1,039 Less: provision for losses .................... 30 21 14 89 53 ------- ------- ------- ------- ------- Net interest income after provision for losses 311 299 260 1,182 986 ------- ------- ------- ------- ------- Other income: Gains (losses) on sales of securities .... (2) -- -- (2) 1 Guarantor servicing fees ................. 66 76 73 255 128 Other .................................... 47 55 46 202 152 ------- ------- ------- ------- ------- Total other income ............................ 111 131 119 455 281 Total operating expenses ...................... 170 173 165 660 514 ------- ------- ------- ------- ------- Income before income taxes and minority interest in net earnings of subsidiary ..... 252 257 214 977 753 Income taxes .................................. 87 92 73 343 250 Minority interest in net earnings of subsidiary ................................. 2 2 3 10 11 ------- ------- ------- ------- ------- "Core cash basis" net income .................. 163 163 138 624 492 Preferred stock dividends ..................... 3 3 3 11 12 ------- ------- ------- ------- ------- "Core cash basis" net income attributable to common stock ............................... $ 160 $ 160 $ 135 $ 613 $ 480 ======= ======= ======= ======= ======= "Core cash basis" diluted earnings per share .. $ 1.03 $ .99 $ .80 $ 3.75 $ 2.93 ======= ======= ======= ======= ======= QUARTERS ENDED YEARS ENDED -------------------------------------------- ---------------------------- DECEMBER 31, SEPTEMBER 30, DECEMBER 31, DECEMBER 31, DECEMBER 31, 2001 2001 2000 2001 2000 ------------ ------------ ------------ ------------ ------------ RECONCILIATION OF GAAP NET INCOME TO "CORE CASH BASIS" NET INCOME: GAAP net income ............................... $ 266 $ (194) $ 99 $ 384 $ 465 ------- ------- ------- ------- ------- "Core cash basis" adjustments: Net interest income on securitized loans .................................. 194 136 115 651 400 Floor income on managed loans .............. (154) (42) -- (335) (3) Provision for losses ....................... (6) (6) (4) (23) (21) Gains on student loan securitizations ...... (20) (27) (1) (75) (92) Servicing and securitization revenue ....... (202) (119) (85) (635) (296) (Gains) losses on sales of securities ...... 62 13 25 140 (18) Goodwill change in market value ............ 18 -- -- 18 -- Goodwill amortization ...................... 16 11 9 48 19 Integration charge ......................... -- -- -- -- 53 Net impact of SFAS 133 ..................... (70) 580 -- 570 -- ------- ------- ------- ------- ------- Total "core cash basis" adjustments ........... (162) 546 59 359 42 Net tax effect (A) ........................... 59 (189) (20) (119) (15) ------- ------- ------- ------- ------- "Core cash basis" net income .................. $ 163 $ 163 $ 138 $ 624 $ 492 ======= ======= ======= ======= ======= (A) Such tax effect is based upon Sallie Mae's marginal tax rate for the respective period. 2
"CORE 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 loans both on-balance sheet and those off-balance sheet in securitization trusts. "CORE CASH BASIS" STUDENT LOAN SPREAD ANALYSIS QUARTERS ENDED YEARS ENDED ------------------------------------------ ---------------------------- DECEMBER 31, SEPTEMBER 30, DECEMBER 31, DECEMBER 31, DECEMBER 31, 2001 2001 2000 2001 2000 ------------ ------------ ------------ ------------ ------------ "Core cash basis" adjusted student loan yields.... 5.40% 6.48% 9.10% 6.77% 8.92% Consolidation loan rebate fees.................... (.22) (.20) (.19) (.20) (.18) Offset fees....................................... (.07) (.07) (.07) (.07) (.08) Borrower benefits................................. (.12) (.12) (.09) (.11) (.09) Premium amortization.............................. (.27) (.26) (.25) (.26) (.26) --------- ---------- --------- --------- --------- Student loan income............................... 4.72 5.83 8.50 6.13 8.31 Cost of funds .................................... (2.83) (4.04) (6.86) (4.32) (6.61) --------- ---------- --------- ---------- --------- "Core cash basis" student loan spread............. 1.89% 1.79% 1.64% 1.81% 1.70% ========= ========== ========= ========= ========= AVERAGE BALANCES Managed student loans............................. $ 71,988 $ 71,550 $ 67,462 $ 70,619 $ 60,348 ========= ========== ========= ========= ========= The Company generally earns interest at the greater of the borrower's rate or a floating rate determined by reference to the average of the applicable floating rates (91-day Treasury bill, commercial paper, 52-week Treasury bill, or the constant maturity Treasury rate) in a calendar quarter, 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, the commercial paper index, the 52-week Treasury bill, or the constant maturity Treasury rate, either directly or through the use of derivative financial instruments, to mimic the interest rate characteristics of the student loans. Such borrowings in general, however, do not have minimum rates. As a result, in certain declining interest rate environments, the portfolio of managed student loans may be earning the minimum borrower rate, while the Company's funding costs (exclusive of funding spreads) will generally decline along with short term interest rates. For loans where the borrower's interest rate is fixed to term, lower 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 borrower's interest rate, which occurs on July 1 of each year. Due to the low Treasury bill and commercial paper rates in the fourth quarter of 2001 compared to the minimum borrower rates on the reset dates, the Company realized $91 million, which is net of $63 million in hedge transaction losses, of floor revenue in the fourth quarter of 2001. This compares to $.02 million in the year-ago quarter and $28 million in the prior quarter, which is net of $14 million in hedge transaction losses. These earnings have been excluded from student loan income to calculate the "core cash basis" student loan spread and "core cash basis" net income. These losses have been excluded from "core cash basis" gains (losses) on sales of securities. The "core cash basis" student loan spread increased 8 basis points versus the prior quarter due to the Company locking in floor revenue through term hedges and as a result of better funding spreads. In addition, the "core cash basis" student loan spread increased 4 basis points on a short-term basis from the significant decrease in interest rates and its impact on a portion of the student loan portfolio where the yield is based on the prior quarter's Treasury bill rate but is funded with liabilities based on the current quarter's interest rates. Finally, the "core cash basis" student loan spread was reduced by 2 basis points due to the increase in the consolidation loan portfolio, which bears an offset fee payable to the Department of Education. The increase in the "core cash basis" student loan spread versus the year-ago quarter is due to higher yields on the student loan portfolio from the mix (private loans versus federal loans), a higher percentage of federal loans in a repayment status, floor revenue locked in through term hedges and better funding spreads. 3
The "core cash basis" net interest margin for the fourth quarters of 2001 and 2000 and the third quarter of 2001 was 1.74 percent, 1.42 percent and 1.64 percent, respectively. The increase in fourth quarter of 2001 "core cash basis" net interest margin versus the fourth quarter of 2000 is principally due to an increase in the percentage of average managed student loans to average managed earning assets. The increase in fourth quarter of 2001 "core cash basis" net interest margin versus the prior quarter is principally due to the changes in the student loan spread discussed above. STUDENT LOAN SPREAD AND NET INTEREST INCOME The following table analyzes the reported earnings from student loans on-balance sheet. STUDENT LOAN SPREAD ANALYSIS QUARTERS ENDED YEARS ENDED ------------------------------------------- ----------------------------- DECEMBER 31, SEPTEMBER 30, DECEMBER 31, DECEMBER 31, DECEMBER 31, 2001 2001 2000 2001 2000 ------------ ------------ ------------ ------------ ------------ ON-BALANCE SHEET Student loan yields.......... 6.00% 6.57% 9.09% 7.05% 8.91% Consolidation loan rebate fees (.32) (.30) (.28) (.30) (.27) Offset fees.................. (.13) (.13) (.13) (.13) (.13) Borrower benefits............ (.07) (.07) (.07) (.07) (.07) Premium amortization......... (.24) (.23) (.21) (.23) (.20) ----------- ----------- ----------- ----------- ----------- Student loan income.......... 5.24 5.84 8.40 6.32 8.24 Cost of funds................ (2.74) (3.93) (6.64) (4.31) (6.42) ----------- ----------- ----------- ----------- ----------- Student loan spread.......... 2.50% 1.91% 1.76% 2.01% 1.82% =========== =========== =========== =========== =========== AVERAGE BALANCES On-balance sheet student loans..................... $ 41,504 $ 40,180 $ 37,024 $ 40,025 $ 34,637 Securitized loans............ 30,484 31,370 30,438 30,594 25,711 ----------- ----------- ----------- ----------- ----------- Managed student loans........ $ 71,988 $ 71,550 $ 67,462 $ 70,619 $ 60,348 =========== =========== =========== =========== =========== In periods of declining interest rates, the Company's on-balance sheet portfolio of student loans may be earning the minimum borrower rate, while the Company's funding costs (exclusive of funding spreads) will generally decline along with short term interest rates in a manner similar to the Company's managed portfolio of student loans discussed in detail above under `"Core Cash Basis' Student Loan Spread Analysis." Due to the continued decline in short-term interest rates during the fourth quarter of 2001, the Company realized $61 million in floor revenue in the fourth quarter of 2001 versus $.02 million in the year-ago quarter and $20 million in the prior quarter. This decline in interest rates increased the on-balance sheet student loan spread by 58 basis points versus the year-ago quarter and 38 basis points versus the prior quarter. 4
AVERAGE BALANCE SHEETS The following tables reflect the rates earned on assets and paid on liabilities for the quarters ended December 31, 2001, September 30, 2001 and December 31, 2000, and the years ended December 31, 2001 and 2000. QUARTERS ENDED --------------------------------------------------------------- DECEMBER 31, SEPTEMBER 30, DECEMBER 31, 2001 2001 2000 ------------------ ------------------ ------------------- AMOUNT RATE AMOUNT RATE AMOUNT RATE -------- ------ -------- ------ -------- ------ AVERAGE ASSETS Student loans.................... $ 41,504 5.24% $ 40,180 5.84% $ 37,024 8.40% Warehousing advances............. 973 3.05 964 4.37 903 6.77 Academic facilities financings... 732 8.28 757 8.29 877 8.17 Investments...................... 6,775 3.70 6,818 5.01 8,367 6.65 -------- ---- -------- ---- --------- ------ Total interest earning assets.... 49,984 5.04% 48,719 5.74% 47,171 8.06% Non-interest earning assets...... 5,009 ==== 4,428 ==== 3,408 ====== -------- -------- --------- Total assets..................... $ 54,993 $ 53,147 $ 50,579 ======== ======== ========= AVERAGE LIABILITIES AND STOCK- HOLDERS' EQUITY Six-month floating rate notes.... $ 3,293 2.30% $ 4,011 3.82% $ 5,022 6.71% Other short-term borrowings...... 29,260 2.52 29,818 3.88 28,612 6.64 Long-term notes.................. 17,997 3.42 15,529 4.38 13,727 6.75 -------- ---- -------- ---- --------- ------ Total interest bearing liabilities 50,550 2.83% 49,358 4.03% 47,361 6.68% Non-interest bearing liabilities. 2,929 ==== 2,367 ==== 1,842 ====== Stockholders' equity............. 1,514 1,422 1,376 -------- -------- --------- Total liabilities and stockholders' equity......................... $ 54,993 $ 53,147 $ 50,579 ======== ======== ========= Net interest margin.............. 2.18% 1.65% 1.35% ==== ==== ====== YEARS ENDED ------------------------------------------- DECEMBER 31, 2001 DECEMBER 31, 2000 -------------------- ------------------- AMOUNT RATE AMOUNT RATE ------- ------ -------- ------ AVERAGE ASSETS Student loans.................... $ 40,025 6.32% $ 34,637 8.24% Warehousing advances............. 968 4.48 825 6.84 Academic facilities financings... 787 8.30 974 8.50 Investments...................... 7,212 5.25 7,486 6.81 -------- ---- -------- ---- Total interest earning assets.... 48,992 6.15% 43,922 7.98% Non-interest earning assets...... 4,495 ==== 2,711 ==== -------- -------- Total assets..................... $ 53,487 $ 46,633 ======== ======== AVERAGE LIABILITIES AND STOCK- HOLDERS' EQUITY Six-month floating rate notes.... $ 4,112 4.17% $ 4,660 6.49% Other short-term borrowings...... 31,540 4.18 30,670 6.40 Long-term notes.................. 14,047 4.51 8,636 6.61 -------- ---- -------- ---- Total interest bearing liabilities 49,699 4.27% 43,966 6.45% Non-interest bearing liabilities. 2,366 ==== 1,574 ==== Stockholders' equity............. 1,422 1,093 -------- -------- Total liabilities and stockholders' Equity......................... $ 53,487 $ 46,633 ======== ======== Net interest margin.............. 1.82% 1.52% ==== ==== 5
NET INTEREST MARGIN AND INCOME The net interest margin for the fourth quarters of 2001 and 2000 and the third quarter of 2001 was 2.18 percent, 1.35 percent and 1.65 percent, respectively. The increase in the net interest margin for the fourth quarter of 2001 versus the fourth quarter of 2000 is principally due to the increase in the percentage of average student loans to total average earning assets. The increase is also due to the impact of floor earnings discussed previously in "Student Loan Spread Analysis." The net interest margin for the fourth quarter 2001 increased by 53 basis points over the prior quarter. This was primarily due to the increase in floor revenue quarter over quarter. SECURITIZATION PROGRAM During the fourth quarter of 2001, the Company securitized $1.5 billion and recorded a pre-tax securitization gain of $20 million, which was 1.32 percent of the portfolio securitized. In the fourth quarter of 2000, the Company securitized $70 million and recorded a pre-tax securitization gain of $1 million or 1.19 percent of the portfolio securitized. In the third quarter of 2001, the Company securitized $1.5 billion and recorded a pre-tax securitization gain of $27 million, which was 1.74 percent of the portfolio securitized. The decrease in the gain percentage in the current quarter versus the prior quarter is partially due to the shorter average life of the loans securitized in the fourth quarter. In addition, the fourth quarter securitization contained a higher percentage of unsubsidized interim loans. Servicing and securitization revenue, the ongoing revenue from securitized loan pools, includes both the revenue the Company receives for servicing loans in the securitization trusts and the income earned on the interest residual asset. Servicing and securitization revenue totaled $202 million in the fourth quarter of 2001 versus $85 million in the corresponding year-ago quarter, and $119 million in the prior quarter. In the fourth quarter of 2001, servicing and securitization revenue was 2.62 percent of average securitized loans versus 1.11 percent in the year-ago quarter and 1.50 percent in the third quarter of 2001. The increase in servicing and securitization revenue as a percentage of the average balance of securitized student loans in the fourth quarter of 2001 versus the fourth quarter of 2000 is principally due to the impact of the decline in Treasury bill rates during the fourth quarter of 2001, which increased the earnings from those student loans in the trusts that were earning the minimum borrower rate in a manner similar to on-balance sheet student loans. The increase in servicing and securitization revenue as a percentage of the average balance of securitized student loans in the fourth quarter of 2001 versus the third quarter of 2001 is due to the increase in floor revenue discussed previously in `"Core Cash Basis' Student Loan Spread Analysis." OTHER INCOME "Core cash basis" other income excludes gains on student loan securitizations, servicing and securitization revenue, the effect of SFAS 133, and certain gains and losses on sales of investment securities and student loans. Such income was $111 million for the fourth quarter 2001 versus $119 million in the year-ago quarter and $131 million for the third quarter 2001. "Core cash basis" other income mainly includes guarantor servicing fees, late fees earned on student loans, fees received from servicing third party portfolios of student loans, and commitment fees for letters of credit. In the fourth quarter 2001, the Company recognized an $18 million loss on impairment of assets generated from the scheduled sale of its Sallie Mae Solutions product line. This loss has been excluded from "core cash basis" other income. The decrease in fourth quarter 2001 "core cash basis" other income versus the year-ago quarter and the prior quarter is principally due to revenue related to the USA Group and SLFR acquisitions and to the seasonal nature of the guarantor servicing operations, respectively. OPERATING EXPENSES In the fourth quarter of 2001, "core cash basis" operating expenses were $170 million versus $165 million in the corresponding year-ago period and $173 million in the third quarter of 2001. The decrease in operating expenses for the fourth quarter of 2001 versus the prior quarter is primarily due to decreased servicing volume and decreased operational activities for originations due to the seasonal nature of the business. 6
MINORITY INTEREST IN SUBSIDIARY On December 10, 2001, the Student Loan Marketing Association, a subsidiary of USA Education, Inc., redeemed its preferred stock and issued common stock to USA Education, Inc., thereby eliminating the minority interest in subsidiary from the Company's "Consolidated Balance Sheets." CAPITAL The Company repurchased 1.8 million shares during the fourth quarter of 2001 through open market purchases and equity forward settlements and issued a net 0.5 million shares as a result of benefit plans. At December 31, 2001, the total common shares that could potentially be acquired over the next three years under outstanding equity forward contracts was 11.2 million at an average price of $71.63 per share. The Company had a remaining authority to enter into additional share repurchases and equity forward contracts for 2.3 million shares. STUDENT LOAN PURCHASES QUARTERS ENDED YEARS ENDED ---------------------------------------- -------------------------- DECEMBER 31, SEPTEMBER 30, DECEMBER 31, DECEMBER 31, DECEMBER 31, 2001 2001 2000 2001 2000 ------------ ------------ ------------ ------------ ------------- Preferred channel .............................. $ 1,674 $ 2,277 $ 1,294 $ 9,524 $ 6,595 Other commitment clients ....................... 173 269 179 949 1,405 Spot purchases ................................. 192 137 396 678 885 Acquisitions ................................... - - - - 4,524 Consolidations ................................. 422 268 238 1,172 824 Other .......................................... 339 290 325 1,209 1,149 ------- ------- ------- ------- ------- Subtotal ....................................... 2,800 3,241 2,432 13,532 15,382 Managed loans acquired ......................... 234 257 268 894 5,912 ------- ------- ------- ------- ------- Total managed loans acquired ................... $ 3,034 $ 3,498 $ 2,700 $14,426 $21,294 ======= ======= ======= ======= ======= The Company purchased and acquired $3.0 billion of student loans in the fourth quarter of 2001 compared with $2.7 billion in the year-ago quarter and $3.5 billion in the previous quarter. In the fourth quarter of 2001, the Company's preferred-channel originations totaled $2.4 billion versus $2.0 billion in the year-ago quarter and $3.3 billion in the prior quarter. The pipeline of loans currently serviced and committed for purchase by the Company was $5.6 billion at December 31, 2001 versus $4.5 billion at December 31, 2000 and $4.8 billion at September 30, 2001. LEVERAGED LEASES The Company has investments in leveraged leases totaling $296 million, of which $282 million represent general obligations of major U.S. commercial airlines. The airline industry has been in a state of uncertainty since the events of September 11, 2001. All payment obligations remain current and the Company has not been notified of any counterparty's intention to default on any payment obligations. In the event of default, any potential loss would be partially mitigated by recoveries on the sale of the aircraft collateral and elimination of expected tax liabilities reflected in the balance sheet of $259 million. Any potential loss would be increased by incremental tax obligations related to forgiveness of debt obligations. NEW ACCOUNTING PRONOUNCEMENTS Effective January 1, 2001, the Company adopted SFAS 133, which requires that changes in derivative instruments' fair value be recognized currently in earnings unless specific hedge accounting criteria are met. In addition to the designation of the derivative as a hedge, the primary requirement for hedge accounting is demonstration that the hedge is an effective offset to either changes in cash flows or fair value. Under the Higher Education Act, student loans have terms that create an embedded floor derivative. These assets have an interest rate indexed to the 91-day Treasury bill, commercial paper, 52-week Treasury bill or the constant maturity Treasury rate, but limited by a minimum interest rate. The Company finances its loan portfolio by entering into debt transactions at either a fixed rate or variable rate tied to 91-day Treasury bill, commercial paper, 52-week 7
Treasury bill or constant maturity Treasury rates. In order to manage the cash inflow characteristics of these assets with the cash outflow characteristics of the Company's debt, the Company has entered into primarily two types of derivative transactions. First, the Company will often sell floor contracts for all or a portion of the estimated student loan life. SFAS 133 does not recognize these floor contracts as an effective hedge unless the terms of the sold floor match the terms of the embedded floor in the student loan asset. In cases where the Company sells a floor for a term shorter than the average life of the student loan, the floor must be marked-to-market with any changes in value reflected in the income statement while the embedded floor in the student loan asset is ignored. Second, to the extent that the Company has variable LIBOR-based debt, the Company will enter into basis swaps to better match the cash flows of the assets and liabilities. In this situation, SFAS 133 requires that the change in the value of the hedge effectively offset both the change in the value of the asset and the change in the value of the liability. Because of the existence of a minimum rate in the assets, this effectiveness test cannot be met and these swaps are recorded at market value with subsequent changes in value reflected in the income statement. Due to the implementation of SFAS 133, the Company recognized $70 million of net, pre-tax gains in the fourth quarter 2001 versus $580 million of net, pre-tax losses in the third quarter 2001. These fourth quarter 2001 gains include $98 million net, mark-to-market gains on derivative positions, of which $126 million is attributable to floor revenue contracts with an $18.5 billion notional amount, and $3 million is attributable to Eurodollar futures contracts that did not meet the hedge effectiveness criteria under SFAS 133. These gains were partially offset by pre-tax losses of $24 million attributable to interest rate swaps, $2 million attributable to cap contracts and a $5 million pre-tax loss on ineffectiveness of fair value hedges. These pre-tax losses were partially offset by a pre-tax gain of $10 million attributable to transition amortization. For "core cash basis" purposes, a $34 million net loss representing the amortization of premiums on floor and cap hedges and a $4 million net loss on Eurodollar futures contracts were also recognized. The entire $70 million of net, pre-tax gains have been excluded from "core cash basis" results. Under the Statement of Financial Accounting Standards No. 115 ("SFAS 115"), "Accounting for Certain Investments in Debt and Equity Securities," the Company does mark-to-market its interest residual asset for its securitization trusts. This mark-to-market includes a valuation adjustment for the floor option embedded in the student loan asset. In the fourth quarter 2001, the Company recognized an unrealized, after-tax loss on this asset of $38 million. This gain is booked directly to other comprehensive income in the equity section of the balance sheet. In June 2001, the Financial Accounting Standards Board issued Statement of Financial Accounting Standards No. 141 ("SFAS 141"), "Business Combinations," and Statement of Financial Accounting Standards No. 142 ("SFAS 142"), "Goodwill and Other Intangible Assets." SFAS 141 requires companies to use the purchase method of accounting for all business combinations initiated after June 30, 2001, and broadens the criteria for recording identifiable intangible assets separate from goodwill. SFAS 142 requires companies to cease systematically amortizing goodwill (and other intangible assets with indefinite lives) to results of operations, but rather perform an assessment for impairment by applying a fair-value-based test on an annual basis (or an interim basis if circumstances indicate a possible impairment). Future impairment losses are to be recorded as an operating expense, except at the transition date, when any impairment write-off of existing goodwill is to be recorded as a "cumulative effect of change in accounting principle." In accordance with SFAS 142, any goodwill and indefinite-life intangibles resulting from acquisitions completed after June 30, 2001 will not be amortized. Effective January 1, 2002, the Company will cease the amortization of goodwill and indefinite-life intangibles existing at June 30, 2001 in accordance with SFAS 142. Beginning in the first quarter of 2002, the Company will be required to test its goodwill for impairment, which could have an adverse effect on the Company's futures results of operations if an impairment occurs. The Company is in the process of evaluating the financial statement impact of the adoption of SFAS 142. 8