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SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, DC 20549
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FORM 10-K
(MARK ONE)
/X/ ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE
SECURITIES
EXCHANGE ACT OF 1934
FOR THE FISCAL YEAR ENDED DECEMBER 31, 1999 OR
/ / TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(D) OF THE
SECURITIES
EXCHANGE ACT OF 1934
FOR THE TRANSITION PERIOD FROM TO
COMMISSION FILE NUMBERS 001-13251
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SLM HOLDING CORPORATION
(Exact Name of Registrant as Specified in Its Charter)
DELAWARE 52-2013874
(State of Other Jurisdiction of (I.R.S. Employer
Incorporation or Organization) Identification No.)
11600 SALLIE MAE DRIVE, RESTON, VIRGINIA 20193
(Address of Principal Executive Offices) (Zip Code)
(703) 810 3000
(Registrant's Telephone Number, Including Area Code)
Securities registered pursuant to Section 12(b) of the Act:
Common Stock, par value $.20 per share.
Securities registered pursuant to Section 12(g) of the Act:
NONE
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Indicate by check mark whether the registrant: (1) has filed all reports
required to be filed by Section 13 or 15(d) of the Securities Exchange Act of
1934 during the preceding 12 months (or for such shorter period that the
registrant was required to file such reports), and (2) has been subject to such
filing requirements for the past 90 days. Yes /X/ No / /
The aggregate market value of voting stock held by non-affiliates of the
registrant as of February 29, 2000 was approximately $4,891,123,597 (based on
closing sale price of $31.3125 per share as reported for the New York Stock
Exchange--Composite Transactions).
On that date, there were 157,170,452 shares of Common Stock outstanding.
DOCUMENTS INCORPORATED BY REFERENCE
Portions of the Proxy Statement relating to the registrant's Annual Meeting
of Shareholders scheduled to be held May 18, 2000 are incorporated by reference
into Part III of this Report.
Indicate by check mark if disclosure of delinquent filers pursuant to Item
405 of Regulation S-K is not contained herein, and will not be contained, to the
best of registrant's knowledge, in definitive proxy or information statements
incorporated by reference in Part III of this Form 10-K or any amendment to this
Form 10-K. /X/
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This Report contains forward-looking statements and information that are
based on management's current expectations as of the date of this document. When
used in this report, the words "anticipate," "believe," "estimate," "intend" and
"expect" and similar expressions are intended to identify forward-looking
statements. These forward-looking statements are subject to risks,
uncertainties, assumptions and other factors that may cause the actual results
to be materially different from those reflected in such forward-looking
statements. These 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 these 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 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 education loans, which may
increase the costs or limit the availability of financings necessary to
initiate, purchase or carry education loans.
PART I.
ITEM 1. BUSINESS
The Company believes that the industry data on the FFELP and the Federal
Direct Student Loan Program (the "FDSLP") contained in this report are based on
reliable sources and represent the best available information for these
purposes, including published and unpublished U.S. Department of Education
("DOE") data and industry publications.
GENERAL
SLM Holding Corporation, a Delaware Corporation (the "Company"), is the
nation's largest private source of funding and servicing support for higher
education loans for students and their parents. The Company provides a wide
range of financial services, processing capabilities and information technology
to meet the needs of educational institutions, lenders, students and guarantee
agencies. It was formed in 1997 in connection with the reorganization (the
"Reorganization") of the Student Loan Marketing Association, a
government-sponsored enterprise (the "GSE"), pursuant to the Student Loan
Marketing Association Reorganization Act of 1996 (the "Privatization Act"). The
Privatization Act required the GSE to propose to shareholders a plan of
reorganization under which their share ownership would convert to an equivalent
share ownership in a state-chartered holding company that would own all of the
stock of the GSE. Pursuant to the Privatization Act, the Reorganization was
approved by the GSE's shareholders on July 31, 1997 and effected on August 7,
1997. The Privatization Act requires the GSE to transfer its business to the
Company and dissolve on or before September 30, 2008. During the period prior to
the dissolution of the GSE (the "Wind-Down Period"), the GSE is subject to
various limitations on its business and activities. See "--Operations During the
Wind-Down Period" and "Regulation--The Privatization Act."
Chartered by an act of Congress in 1972, the GSE's stated mission is to
enhance access to education by providing a national secondary market and
financing for guaranteed student loans. As of December 31, 1999, the Company's
managed portfolio of federally insured student loans totaled approximately
$51.1 billion (including loans owned, loans securitized and loan
participations). The Company also had commitments to purchase $16.5 billion of
additional student loans or participations therein as of December 31, 1999.
While the Company continues to be the leading purchaser of student loans, its
business has expanded over its first quarter of a century, reflecting changes in
both the education sector and the financial markets.
Primarily a wholesale provider of credit and a servicer of student loans,
the Company serves a diverse range of clients, including approximately 4,300
financial and educational institutions and state agencies. Through its four
regional loan servicing centers, the Company processes student loans for
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approximately 5.2 million borrowers and is recognized as the nation's
pre-eminent servicer of student loans. The Company also provides and arranges
infrastructure finance for colleges and universities. See "--Specialized
Financial Services--Academic Facilities Financings and Student Loan Revenue
Bonds."
The Company believes that it has maintained its leadership position in the
education finance industry due to its focus on customer relationships,
value-added products and services, superior loan servicing capabilities and a
sound financial management strategy. In recognition of the increasingly
important role that college and university administrators play in the student
loan process, the Company continues to implement its school-based growth
strategy. The Company's core marketing strategy is to provide schools and their
students with simple, flexible and cost-effective products and services so that
schools will choose to work with the Company. This strategy, combined with
superior servicing and technology capabilities, has helped the Company to build
valuable partnerships with schools, lenders, guarantee agencies and others.
INDUSTRY OVERVIEW
The student loan industry provides affordable financing to students and
their families to fund education. The large majority of student loans are made
to finance post-secondary education under federally sponsored programs, although
many students and parents secure additional education credit through private
student loan programs. The federally sponsored student loans programs are highly
regulated. Under programs sponsored by the federal government, banks and other
lenders that satisfy statutory eligibility requirements can make student loans
at below-market rates due to market rate adjustment payments made by the federal
government and guarantees. The largest student loan program, formerly called the
Guaranteed Student Loan Program and now known as the FFELP, was created in 1965
to ensure low-cost access by families to a full range of post-secondary
educational institutions. In 1972, to encourage further bank participation in
the Guaranteed Student Loan Program, Congress established the GSE as a
for-profit, stockholder-owned national secondary market for student loans. The
FFELP industry currently includes a network of approximately 3,900 originators
and 6,000 educational institutions and is collectively guaranteed and
administered by 36 state-sponsored or non-profit guarantee agencies under
contract with the DOE. In addition to the Company, a number of non-profit
entities, banks and other financial intermediaries operate as secondary markets
for student loans. The Company believes that lender participation in the FFELP
is relatively concentrated, with an estimated 96 percent of outstanding loans
held by the top 100 participants, including approximately 38 percent owned or
managed by the Company as of September 30, 1999.
The Higher Education Act of 1965, as amended (the "Higher Education Act"),
is reauthorized by Congress approximately every six years. The Higher Education
Act was last reauthorized on October 7, 1998 in the form of the Higher Education
Amendments of 1998 (the "Reauthorization Legislation"), legislation that lowered
both the borrower interest rate on Stafford loans and the lender's rate after
special allowance payments. The provisions of the FFELP are also subject to
revision from time to time by Congress. See "Management's Discussion and
Analysis of Financial Condition and Results of Operation--Other Related
Information--Legislative Developments" for descriptions of legislation changing
the index upon which lender yields are calculated and President Clinton's Fiscal
Year 2001 budget proposal as it relates to federally sponsored higher education
programs.
Demand for student loans has risen substantially over the last several
years. Higher education tuition cost and fee increases continue to exceed the
inflation rate. Over half of all full-time college students today depend on some
form of borrowing, compared to just over 35 percent in 1985. In addition,
federal legislation enacted in late 1992 expanded loan limits and borrower
eligibility. All of these factors contributed to annual federally sponsored
student loan volume more than doubling over a 7 year period to $29.6 billion in
the 1998-99 academic year (including FDSLP volume) from $12.6 billion in the
1991-92 academic year. Estimated future increases in tuition costs and college
enrollments are expected to prompt continued growth in the student loan market,
although at a more moderate rate of about 5.5 percent annually, over the next 5
years.
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In 1993, Congress expanded a previously established pilot program into the
FDSLP, which is administered by the DOE. Established as an alternative to the
private sector-based FFELP, the FDSLP accounted for approximately one-third of
all new federally sponsored student loans issued in academic year 1998-99. Under
the FDSLP, the federal government contracts with third parties for loan
administration and collections services while financing its lending activity
through U.S. Treasury borrowings.
PRODUCTS AND SERVICES
LOAN PURCHASES. The Company's student loan purchases have primarily
involved two federally sponsored programs. The Company principally purchases
Stafford loans, PLUS loans and SLS loans originated under the FFELP, all of
which are insured by state-related or non-profit guarantee agencies and are
reinsured by the DOE. The Company also purchases student loans originated under
the Health Education Assistance Loan program ("HEAL") that are insured directly
by the United States Department of Health and Human Services. HEAL loans have
been discontinued and new borrowers are directed to unsubsidized Stafford Loans.
As of December 31, 1999, the Company's managed portfolio of federally insured
student loans totaled $51.1 billion, including $48.9 billion of FFELP loans
(including loans owned and loans securitized) and $2.2 billion of HEAL loans.
The Company purchases student loans primarily from commercial banks. The
Company also purchases student loans from other eligible FFELP lenders,
including savings and loan associations, mutual savings banks, credit unions and
insurance companies, educational institutions and state and private non-profit
loan originating and secondary market agencies.
Most lenders using the secondary market hold loans while borrowers are in
school and sell loans shortly before conversion to repayment status, when
servicing costs increase significantly. Traditionally, the Company has purchased
most of its loans just before their conversion to repayment status, although it
increasingly buys "in-school" loans and loans in repayment. The Company
purchases loans primarily through commitment contracts, but also makes "spot"
purchases.
Approximately 65 percent and 84 percent of the Company's new loan purchases
were made pursuant to purchase commitment contracts in 1999 and 1998,
respectively. The Company enters into commitment contracts with lenders to
purchase loans up to a specified aggregate principal amount over the term of the
contract, which is usually two to three years. Under the commitment contracts,
lenders have the right, and in most cases the obligation, to sell to the Company
the loans they own over a specified period of time at a purchase price that is
based on certain loan characteristics.
In conjunction with commitment contracts, the Company frequently provides
selling institutions with operational support in the form of
PortSS-Registered Trademark-, an automated loan administration system for the
lender's use at its own offices before loan sale, or in the form of loan
origination and interim servicing provided through one of the Company's loan
servicing centers (ExportSS-Registered Trademark-). In 1999 and 1998,
79 percent and 80 percent, respectively, of the Company's purchase commitment
volume came from users of PortSS and ExportSS. The Company also offers
commitment clients the ability to originate loans and then transfer them to the
Company for servicing (TransportSS-SM-). PortSS, ExportSS and TransportSS
provide the Company and the lender assurance that loans will be efficiently
administered by the Company and that borrowers will have access to the Company's
repayment options and benefits.
In a spot purchase, the Company competes with other secondary market
participants to purchase a portfolio of eligible loans from a selling holder
when such holder decides to offer its loans for sale. The Company made
approximately 1 percent and 3 percent of its purchases of educational loans
through spot purchases in 1999 and 1998, respectively. In general, spot purchase
volume is more costly than volume purchased under commitment contracts.
Because of the high premiums for spot purchase volume, in the fourth
quarter, the Company sold $900 million of FFELP loans in several transactions
with four student loan capital providers. These transactions obligated the
purchaser to enter into a life of loan servicing contract with Sallie Mae
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Servicing Corporation, the Company's wholly owned servicing subsidiary ("SMSC")
on a fee for service basis for the loans sold and provide certain incentives in
the form of reduced aggregate fees for the purchaser to provide additional
servicing volume to SMSC.
The Company also offers eligible borrowers a program for consolidation of
eligible insured loans into a single new insured loan with a term of 10 to
30 years. As of December 31, 1999, the Company owned approximately $10 billion
of such consolidation loans, known as SMART
LOAN-Registered Trademark- Accounts. Following enactment of the Emergency
Student Loan Consolidation Act in November 1997, which made significant changes
to the FFELP loan consolidation program, the Company temporarily suspended its
loan consolidation program. As a result of the Reauthorization Legislation, the
Company began in the fourth quarter of 1998 to offer student loan borrowers the
SMART LOAN consolidation program again. The Company also introduced in the
second quarter of 1998 its Flex Repay Account as an alternative to
consolidation. See "Borrower Benefits and Program Technology Support."
PRIVATE CREDIT. In the spring of 1996 the Company introduced the Signature
Education-SM- Loan Program. Under agreements with the Company, lenders
originated approximately $106 million in loan volume in Signature private loans
and $231 million in loan volume in FFELP loans in the academic year 1998-99. The
Company believes that its lender partners under this program will originate
approximately $250 million in loan volume in Signature private loans in academic
year 1999-2000 at more than 1,350 schools. The majority of this volume
represents loans made to borrowers with credit-worthy cosigners. Signature
Student-SM- Loans are available to students at all four-year colleges and
universities to supplement their federal loans. Freshmen and non-credit worthy
students are required to have a cosigner. Students may borrow as much as the
costs of attendance minus other financial aid they are eligible to receive. With
the Signature Select-SM- Loan, participating colleges tailor loan features to
reflect the needs of their individual campuses and provide default coverage in
exchange for additional program flexibility. Signature Loans are insured by the
Company through its HEMAR Insurance Corporation of America (HICA) subsidiary.
Most of the HICA-insured loans purchased by the Company are part of "bundled"
loan programs that include FFELP loans. The Company also purchases loans
originated under various other HICA-insured loan programs, including
particularly the private loan affinity programs MEDLOANS, LAWLOANS, and MBA
LOANS. These three loan programs accounted for $128 million in private loans and
$269 million in FFELP loans during academic year 1998-99. These three loan
programs are expected to account for $100 million in private loans and over
$350 million in FFELP loans during academic year 1999-2000.
Beginning in 1999, SLM Financial, the Company's new wholly owned subsidiary,
substantially expanded the Company's private credit product line, focusing on
career training, lifelong learning and K-12 education. Also in 1999, the Company
began offering Career Training-SM- Loans directly to borrowers and through
partnerships with colleges and universities, technical and trade schools and
other adult learning centers. These loans are available to borrowers enrolled in
career training courses or a distance learning school; attending a two-year or
four-year proprietary school; or attending a four-year college less than
half-time. In addition, the Company made available its K-12 Family Education-SM-
Loan to parents and other family members of children attending private K-12
schools. Under this program, families can borrow up to the entire cost of
tuition and fees, or as little as $1,000 to finance the purchase of a computer,
musical instrument or other, high-cost, education-related items. SLM Financial
also offers mortgage, home equity and other secured and unsecured consumer
loans. All SLM Financial loans are underwritten and priced based upon
standardized consumer credit scoring criteria. As of December 31, 1999, SLM
Financial had originated $245 million of consumer loans of which 60 percent was
education related.
BORROWER BENEFITS AND PROGRAM TECHNOLOGY SUPPORT. To create customer
preferences and compete more effectively in the student loan marketplace, the
Company has developed a comprehensive set of loan programs and services for
borrowers, including numerous loan restructuring and repayment options and
programs that encourage and reward good repayment habits. The Company also
provides
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counseling and information programs (including a worldwide web site) that help
borrowers and reinforce relationships with college and university customers and
lender partners.
Under the Company's Great Rewards-Registered Trademark- Program, certain
FFELP borrowers who make their first 48 scheduled monthly payments on time
receive a two percentage-point interest rate reduction for the remaining term of
the loan. Other programs credit students an amount equal to part of the loan
origination fees they pay and modestly reduce interest costs for use of
automatic debit accounts. The Company also provides financial aid administrators
at colleges and universities with innovative products and services that simplify
the lending process, including electronic funds transfer services and loan
information and management software that enables college application data to be
transferred electronically between program participants.
The Flex Repay Account, the Company's newest graduated repayment option,
allows students who are having difficulty making repayments to extend loan
repayment to make their payments more affordable while minimizing total loan
costs in comparison to loan consolidation.
The Company launched Laureate-Registered Trademark-, a new Internet-based
student loan delivery system, for the 1999-2000 academic year. This system
provides real-time data linkage among schools, borrowers, lenders and
guarantors. With Laureate, a student loan process that previously required
multiple sessions over several days is now expected to be completed in one
on-line session. As of December 31, 1999, 69 schools were using Laureate and had
processed over $300 million in FFELP loans.
ORIGINATIONS. In 1998, the Company began to originate a nominal amount of
FFELP loans through its wholly owned subsidiary, SLM Education Loan Corp. As of
December 31, 1999, the Company originated $28 million of FFELP loans. The
Company expects that its origination activity will increase as more schools
adopt the Laureate student loan delivery system.
JOINT VENTURE WITH THE CHASE MANHATTAN BANK. In the fourth quarter of 1998,
the Company restructured its joint venture with The Chase Manhattan Bank
("Chase"), which, with an estimated market share of eight percent, is the
largest originator of student loans under the FFELP. Under the restructured
arrangement, the Company and Chase Education Holdings, Inc., a wholly owned
subsidiary of Chase, remain equal owners of Education First Finance LLC and
Education First Marketing LLC (collectively, the "Joint Venture"). Education
First Marketing LLC remains responsible for marketing education loans to be made
by Chase to schools and borrowers. Shortly after such loans are fully disbursed
by Chase, the loans are purchased on behalf of Education First Finance LLC by
the Chase/ Sallie Mae Education Loan Trust (the "Trust"), but then, under the
restructured arrangement, are sold to the Company. Under the terms of the
restructuring, the Company will now purchase all loans originated by Chase.
Previously, the Joint Venture funded the student loans through sales of
participations that entitled the Company and Chase to one-half interest in the
student loans originated by Chase. As of December 31, 1998, the Trust owned
approximately $1.8 billion of federally insured education loans and in the
fourth quarter of 1998, the Trust sold $3.2 billion of federally insured
education loans to the Company of which one half represents new purchase volume.
The Trust sold the balance of its existing portfolio to the Company in the first
quarter of 1999. Substantially all loans owned by the Trust have been serviced
on behalf of the Trust by SMSC, on a fee-for-service basis. After the Trust's
existing portfolio is sold to the Company, the Trust's fee payments to SMSC will
be negligible.
ADMINISTRATIVE AND TECHNICAL SUPPORT FOR HIGHER EDUCATION
INSTITUTIONS. Sallie Mae Solutions, a division of Sallie Mae, Inc., provides
full service administrative support and technical services to institutions of
higher education. Sallie Mae Solutions provides these institutions with
registration, bursar, loan management and financial aid functions through
leading edge software, business processing and application services. To further
this intitiative, Sallie Mae Solutions acquired three businesses, Exeter
Software, Greentree Software and EdTech, the former Electronic Marketing
Resource Group in 1999.
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SERVICING
In 1980, the Company began servicing its own portfolios in order to better
control costs and manage risks. In late 1995, in connection with the
commencement of its securitization program, the Company transferred its
servicing operations to SMSC. Through SMSC, the Company is now the nation's
largest servicer of FFELP loans, and management believes that the Company is
recognized as the premier service quality and technology provider in the student
loan industry. The Company believes that its processing capability and service
excellence are integral to its school-based growth strategy. As of December 31,
1999, the Company serviced approximately $45.9 billion of FFELP loans, including
approximately $20.9 billion of loans owned by the GSE, $19.4 billion owned by 14
securitization trusts sponsored by the GSE and $5.6 billion of loans owned by
other parties. As of December 31, 1999, the Company also serviced approximately
$3.5 billion in non-FFELP Loans including approximately $2.1 billion in HEAL
Loans and $1.4 billion in private loans.
The Company currently has four loan servicing centers, located in Florida,
Kansas, Pennsylvania and Texas. This geographic coverage, together with total
systems integration among centers, facilitates operations and customer service.
The DOE and the various guarantee agencies prescribe rules and regulations
that govern the servicing of federally insured student loans. The Company's
origination and servicing systems, internal procedures and highly trained staff
support compliance with these regulations, and are designed to promote asset
integrity and provide superior service to borrowers.
SPECIALIZED FINANCIAL SERVICES
The Company, principally through the GSE, engages in a number of specialty
financial services related to higher education credit, including collateralized
financing of FFELP and other education loan portfolios (warehousing advances),
credit support for student loan revenue bonds, portfolio investments in student
loan revenue and facilities bonds, underwriting of academic facilities bonds and
surety bond support for non-federally insured student loans.
WAREHOUSING ADVANCES. Warehousing advances are secured loans to financial
and educational institutions to fund FFELP and HEAL loans and other forms of
education-related credit. As of December 31, 1999, the Company held
approximately $1 billion of warehouse loans with an average term of 6.5 years.
These loans remain assets of the GSE, but the GSE can extend new warehousing
advances during the Wind-Down Period only pursuant to financing commitments in
place as of August 7, 1997. As of December 31, 1999, the GSE had in place
approximately $2.9 billion of such commitments. The Company does not expect that
its non-GSE affiliates will continue this line of business.
ACADEMIC FACILITIES FINANCINGS AND STUDENT LOAN REVENUE BONDS. Since 1987,
the GSE has provided facilities financing and commitments for future facilities
financing to approximately 250 educational institutions. Certain of these
financings are secured either by a mortgage on the underlying facility or by
other collateral. The GSE also invests in student loan revenue obligations. The
Company anticipates that it will reduce its investment activity in academic
facilities and student loan revenue bond products during the Wind-Down Period.
As of December 31, 1999, these portfolios totaled $1 billion and $100 million,
respectively.
LETTERS OF CREDIT. In the past, the GSE has offered letters of credit to
guarantee issues of state and non-profit agency student loan revenue bonds.
Currently outstanding letters of credit have original terms of up to 17 years
but, in most cases, may be terminated in May 2001. As of December 31, 1999, the
GSE had approximately $4.4 billion of such commitments outstanding. During the
Wind-Down Period, letter of credit activity by the GSE will be limited to
guarantee commitments in place as of August 7, 1997.
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FINANCING/SECURITIZATION
The GSE obtains funds for its operations primarily from the sale of debt
securities in the domestic and overseas capital markets, and through public
offerings and private placements of U.S. dollar-denominated and foreign
currency-denominated debt of varying maturities and interest rate
characteristics. GSE debt securities are currently rated at the highest credit
rating level by Moody's Investors Service and Standard & Poor's.
The GSE uses interest rate and currency exchange agreements (collateralized
where appropriate), U.S. Treasury securities, interest rate futures contracts
and other hedging techniques to reduce its exposure to interest rate and
currency fluctuations arising out of its financing activities and to match the
characteristics of its assets and liabilities. The GSE has also issued preferred
stock to obtain funds, including preferred stock held by the Company. Under the
Privatization Act, the GSE may issue debt with maturity dates through
September 30, 2008 to fund student loan and other permitted asset purchases.
Upon the GSE's dissolution pursuant to the Privatization Act, the GSE must
transfer any remaining GSE obligations into a defeasance trust for the benefit
of the holders of such obligations together with cash or full faith and credit
obligations of the United States, or an agency thereof, in amounts sufficient,
as determined by the Secretary of the Treasury, to pay the principal and
interest on the deposited obligations. If the GSE has insufficient assets to
fully fund such GSE debt, the Company must transfer sufficient assets to the
trust to account for this shortfall. The Privatization Act requires that upon
the dissolution of the GSE on or before September 30, 2008, the GSE shall
repurchase or redeem or make proper provisions for repurchase or redemption of
the GSE's outstanding preferred stock.
Since late 1995, the Company has further diversified its funding sources,
independent of its GSE borrower status, by securitizing a portion of its student
loan assets. Securitization is an off-balance sheet funding mechanism that the
Company effects through the sale of portfolios of student loans by the GSE to
SLM Funding Corporation, a bankruptcy-remote, special-purpose, wholly owned
subsidiary of the GSE, which in turn sells the student loans to an independent
owner trust that issues securities to fund the purchase of the student loans.
The securitization trusts typically issue several classes of debt securities
rated at the highest investment grade level. The GSE has not guaranteed such
debt securities and has no obligation to ensure their repayment. Because the
securities issued by the trusts through securitization are not GSE securities,
the Company has been and in the future expects to be able to fund its student
loans to term through securitization, even for those assets with final
maturities that extend beyond the Wind-Down Period. The DOE has concurred with
the Company's position that a 30 basis point per annum offset fee imposed on
loans held by the GSE does not apply to securitized loans. The Company
anticipates that securitization will remain a primary student loan funding
mechanism for the Company when it begins to conduct student loan purchase
activity through a non-GSE subsidiary.
In addition to the foregoing, the Company obtains funding through a
commercial paper program. In the fourth quarter of 1999, the Company established
a $1 billion commercial paper program. This program is supported by a $600
million 364 day revolving credit agreement and a $400 million five-year
revolving credit agreement. Prior to the establishment of this commercial paper
program, the Company secured credit ratings of A1, P1 and F1+ on its short term
debt and A+, A3 and A+ on its long term debt from Standard & Poor's Rating
Service, Moody's Investors Service, Inc. and Fitch IBCA, Inc., respectively.
The Company intends to further diversify its funding sources, independent of
the GSE, with the development of an asset-backed commercial paper program and a
medium term notes program during 2000.
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OPERATIONS DURING THE WIND-DOWN PERIOD
Privatization enables the Company to commence new business activities
without regard to restrictions in the GSE's charter. The stock of certain GSE
subsidiaries, including SMSC and HICA, was transferred to the Company.
Accordingly, the business activities of these subsidiaries are no longer subject
to restrictions contained in the GSE's charter. In addition, the GSE's employees
were transferred to Sallie Mae, Inc. (the "Management Company").
During the Wind-Down Period, the GSE generally is prohibited from conducting
new business except in connection with student loan purchases through
September 30, 2007 or with other outstanding contractual commitments, and from
issuing new debt obligations that mature beyond September 30, 2008. The GSE has
transferred personnel and certain assets to the Company or other non-GSE
affiliates. Student loans, warehousing advances and other program-related or
financial assets (such as portfolio investments, letters of credit, swap
agreements and forward purchase commitments) have not been transferred and are
generally not expected to be transferred until the Wind-Down Period is close to
completion. Neither the Company nor any of its non-GSE affiliates may make
secondary market purchases of FFELP loans for so long as the GSE is actively
acquiring insured student loans. During the Wind-Down Period, GSE operations
will be managed pursuant to arm's-length service agreements between the GSE and
one or more of its non-GSE affiliates. The Privatization Act also provides
certain restrictions on intercompany relations between the GSE and its
affiliates during the Wind-Down Period.
COMPETITION
The Company is the major financial intermediary for higher education credit,
but is subject to competition on a national basis from several large commercial
banks and non-profit secondary market agencies and on a state or local basis
from smaller banks and state-based secondary markets. In addition, the
availability of securitization for student loan assets has created new
competitive pressures for traditional secondary market purchasers. Based on the
most recent information from the DOE and management estimates, at the end of
fiscal year 1998, the GSE's share (in dollars) of outstanding FFELP loans was
35 percent, while banks and other financial institutions held 42 percent and
state secondary market participants held 23 percent. Although Congress
establishes loan limits and interest rates on student loans, management believes
that market share in the FFELP industry is increasingly a function of school and
student desire for borrower benefits and superior customer service. FFELP
providers have been aggressively competing on the basis of enhanced products and
services in recent years.
Because the GSE historically has been confined by statute to secondary
market activity, it has depended mainly on its network of lender partners and
its school-based strategy for new loan volume. Because the Company is not
subject to the same limitations as the GSE, it intends to heighten its
visibility with consumers to position itself favorably for future new product
offerings.
The Company also faces competition for new and existing loan volume from the
FDSLP. Based on current DOE projections, the Company estimates that total
student loan originations for the academic years 1998-99, 1997-1998, 1996-97,
1995-96, and 1994-95 were $29.6 billion, $29.3 billion, $27.6 billion,
$24.7 billion, and $22.1 billion, respectively, of which FDSLP originations
represented approximately 33 percent, 33 percent, 32 percent 31 percent and
7 percent, respectively. The DOE projects that FDSLP originations will represent
about one third of total student loan originations in the 1999-2000 academic
year.
The DOE offers FFELP borrowers the opportunity to refinance or consolidate
their FFELP loans into FDSLP loans if the borrowers also have a FDSLP loan or
upon certification that the holder of their FFELP loans does not offer an
income-sensitive payment plan acceptable to the borrower. During 1999 and 1998,
approximately $755 million and $432 million, respectively, of the GSE's FFELP
loans
9
were consolidated into the FDSLP. In early 1995, the Company began offering an
income-sensitive payment plan. The FDSLP, however, also provides an
income-contingent option not available under the FFELP program that may be more
attractive to certain borrowers. Under this repayment option, the government
will ultimately forgive student loan debt after 25 years.
REGULATION
As a government-sponsored enterprise, the GSE is organized under federal law
and its operations are restricted by its government charter. Although
privatization permits the Company's private activities to expand through non-GSE
subsidiaries, the GSE's operations continue to be subject to broad federal
regulation during the Wind-Down Period.
THE PRIVATIZATION ACT
The Privatization Act established the basic framework for the Reorganization
and imposes certain restrictions on the operations of the Company and its
subsidiaries during the Wind-Down Period. The Privatization Act amends the GSE's
charter to require certain enhanced regulatory oversight of the GSE to ensure
its financial safety and soundness. See "--GSE Regulation."
REORGANIZATION. The Privatization Act required the GSE to propose to
shareholders a plan of reorganization under which their share ownership in the
GSE would be automatically converted to an equivalent share ownership in a
state-chartered holding company that would own all of the common stock of the
GSE. On July 31, 1997, the GSE's shareholders approved the Reorganization in
fulfillment of this provision. The Privatization Act requires that the GSE be
liquidated on or before September 30, 2008, upon which its federal charter will
be rescinded. During the Wind-Down Period, the Company will remain a passive
entity that supports the operations of the GSE and its other non-GSE
subsidiaries, and any new business activities will be conducted through such
subsidiaries.
The Privatization Act requires all personnel and certain assets to be
transferred to non-GSE subsidiaries of the Company in connection with the
Reorganization, including the transfer of the GSE's interest in certain
subsidiaries. The GSE's student loans and related contracts, warehousing
advances and other program-related or financial assets (such as portfolio
investments, letters of credit, swap agreements and forward purchase
commitments) and any non-material assets that the GSE Board determines to be
necessary for or appropriate to continued GSE operations, may be retained by the
GSE. Employees of the GSE were transferred to the Management Company at the
effective time of the Reorganization. Employees who were employed by non-GSE
subsidiaries of the GSE before the Reorganization continue to be employed by
such subsidiaries.
During the Wind-Down Period, the GSE is restricted in the new business
activities it may undertake. The GSE may continue to purchase student loans only
through September 30, 2007, and warehousing advance, letter of credit and
standby bond purchase activity by the GSE is limited to takedowns on contractual
financing and guarantee commitments in place at the effective time of the
Reorganization. In addition, the Company, and its non-GSE subsidiaries may not
make secondary market purchases of FFELP loans for so long as the GSE is
actively acquiring insured student loans.
In certain circumstances, the GSE will continue to serve as a lender of last
resort and will provide secondary market support for the FFELP upon the request
of the Secretary of Education. If and to the extent that the GSE performs such
functions, however, it will not be required to pay a statutorily imposed 30
basis point offset fee on such loans. The GSE may transfer assets and declare
dividends, from time to time, if it maintains a minimum capital ratio of at
least 2 percent until the year 2000. After that time, charter amendments
effected by the Privatization Act require that the GSE maintain a minimum
capital ratio of at least 2.25 percent. In the event that the GSE does not
maintain the required minimum capital ratio, the Company is required to
supplement the GSE's capital to achieve such minimum capital ratio.
10
The GSE's debt obligations, including debt obligations that were outstanding
at the time of the Reorganization, continue to be outstanding obligations of the
GSE and will not be transferred to any other entity (except in connection with
the defeasance trust described below). See "--GSE Dissolution After
Reorganization." The Privatization Act provides that the Reorganization does not
modify the attributes accorded to the debt obligations of the GSE by the GSE's
charter. During the Wind-Down Period, the GSE can continue to issue debt in the
government agency market to finance student loans and other permissible asset
purchases. The maturity date of such issuances, however, may not extend beyond
September 30, 2008, the GSE's final dissolution date. This restriction does not
apply to debt issued to finance any lender of last resort or secondary market
purchase activity requested by the Secretary of Education. The Privatization Act
is clear that the Reorganization (and the subsequent transfer of any remaining
GSE debt to the defeasance trust described below) will not modify the legal
status of any GSE debt obligations, whether such obligations existed at the time
of Reorganization or are subsequently issued.
OVERSIGHT AUTHORITY. During the Wind-Down Period, the Secretary of the
Treasury has extended oversight authority to monitor the activities of the GSE
and, in certain cases, the Company and its non-GSE subsidiaries to the extent
that the activities of such entities are reasonably likely to have a material
impact on the financial condition of the GSE. The U.S. Department of the
Treasury has established the Office of Sallie Mae Oversight to perform these
functions. During this period, the Secretary of the Treasury may require that
the GSE submit periodic reports regarding any potentially material financial
risk of its associated persons and its procedures for monitoring and controlling
such risk. The Company is expressly prohibited from transferring ownership of
the GSE or causing the GSE to file bankruptcy without the approval of the
Secretary of the Treasury and the Secretary of Education. The Secretary of
Education and the Secretary of the Treasury have express authority to request
that the Attorney General bring an action, or may bring an action under the
direction and control of the Attorney General, in the United States District
Court for the District of Columbia, for the enforcement of any provision of the
GSE's safety and soundness requirements or the requirements of the Privatization
Act in general.
RESTRICTIONS ON INTERCOMPANY RELATIONS. The Privatization Act restricts
intercompany relations between the GSE and its affiliates during the Wind-Down
Period. Specified corporate formalities must be followed to ensure that the
separate corporate identities of the GSE and its affiliates are maintained.
Specifically, the Privatization Act provides that the GSE must not extend credit
to, nor guarantee any debt obligations of, the Company or its subsidiaries. The
Privatization Act also provides that (i) the funds and assets of the GSE must at
all times be maintained separately from the funds and assets of the Company and
its subsidiaries, (ii) the GSE must maintain books and records that clearly
reflect the assets and liabilities of the GSE, separate from the assets and
liabilities of the Company or its subsidiaries, (iii) the GSE must maintain a
corporate office that is physically separate from any office of the Company and
its subsidiaries, (iv) no director of the GSE who is appointed by the President
may serve as a director of the Company and (v) at least one officer of the GSE
must be an officer solely of the GSE.
Furthermore, the Privatization Act mandates that transactions between the
GSE and the Company, including any loan servicing arrangements, shall be on
terms no less favorable to the GSE than the GSE could obtain from an unrelated
third party, and any amounts collected on behalf of the GSE by the Company
pursuant to a servicing contract or other arrangement between the GSE and the
Company shall be immediately deposited by the Company to an account under the
sole control of the GSE.
LIMITATIONS ON COMPANY ACTIVITIES. During the Wind-Down Period, the Company
must remain a passive entity that holds the stock of its subsidiaries and
provides funding and management support to such subsidiaries. The Privatization
Act contemplates that until the GSE is dissolved, the Company's
11
business activities will be conducted through subsidiaries. However, the
Privatization Act extends to the Company and its subsidiaries the GSE's
"eligible lender" status for loan consolidation and secondary market purchases.
See "Business."
The Company and its non-GSE subsidiaries generally may not begin to make
secondary market purchases of FFELP student loans for so long as the GSE is
actively acquiring insured student loans. Subject to the foregoing, the Company
may elect, at any time, to transfer new student loan purchase activity from the
GSE to one of its non-GSE subsidiaries. In addition, the Company is permitted to
and, in the third quarter of 1998, began to originate FFELP loans. See
"Business--Products and Services--Originations." Under the Higher Education Act,
loans acquired after August 10, 1993 and held by the GSE are subject to a 30
basis point per annum "offset fee." The offset fee does not apply to securitized
loans or to loans held or securitized by the Company or its non-GSE
subsidiaries.
Although the GSE may not finance the activities of the Company's non-GSE
subsidiaries, it may, subject to its minimum capital requirements, dividend
retained earnings and surplus capital to the Company, which in turn may use such
amounts to support its non-GSE subsidiaries. The Privatization Act further
directs that, unless and until distributed as dividends by the GSE, under no
circumstances shall the assets of the GSE be available or used to pay claims or
debts of or incurred by the Company.
In exchange for the payment of $5 million to the District of Columbia
Financial Responsibility and Management Assistance Authority (the "Control
Board"), the Company and its other subsidiaries may continue to use the name
"Sallie Mae," but not the name "Student Loan Marketing Association," as part of
their legal names or as a trademark or service mark. Interim disclosure
requirements in connection with securities offerings and promotional materials
are required to avoid marketplace confusion regarding the separateness of the
GSE and its affiliated entities. During the Wind-Down Period and until one year
after repayment of all outstanding GSE debt, the "Sallie Mae" name may not be
used by any Company unit that issues debt obligations or other securities to any
person or entity other than the Company or its subsidiaries. In addition, the
Privatization Act required the Company to issue certain warrants to purchase the
Company's Common Stock (the "Warrants") to the Control Board. These provisions
of the Privatization Act were part of the terms negotiated with the
Administration and Congress in conjunction with the GSE's privatization. The
Company issued the Warrants on August 7, 1997.
GSE DISSOLUTION AFTER REORGANIZATION. The Privatization Act provides that
the GSE will liquidate and dissolve on September 30, 2008, unless an earlier
dissolution is requested by the GSE and the Secretary of Education makes no
finding that the GSE continues to be needed as a lender of last resort under the
GSE charter or to purchase loans under certain agreements with the Secretary of
Education. In connection with such dissolution, the GSE must transfer any
remaining GSE obligations into a defeasance trust for the benefit of the holders
of such obligations, along with cash or full faith and credit obligations of the
United States, or an agency thereof, in amounts sufficient, as determined by the
Secretary of the Treasury, to pay the principal and interest on the deposited
obligations. As of December 31, 1998, the GSE had $367 million in current
carrying value of debt obligations outstanding with maturities after
September 30, 2008. If the GSE has insufficient assets to fund fully such GSE
debt obligations outstanding at the time of dissolution, the Company must
transfer sufficient assets to the trust to account for this shortfall. The
Privatization Act also requires that on the dissolution date, the GSE shall
repurchase or redeem, or make proper provisions for the repurchase or redemption
of, any outstanding shares of preferred stock, of which the GSE has issued
Series A and B Adjustable Rate Cumulative Preferred Stock. The Series A
Preferred Stock is carried at its liquidation value of $50.00 per share for a
total of $214 million and pays a variable dividend that has been at its minimum
rate of 5 percent per annum for the last several years. The Series B Preferred
Stock is carried at its liquidation value of $500,000 per share for a total of
$100 million and pays a variable dividend that is equal to three-month London
Interbank Offered Rate ("LIBOR") plus one percent per annum divided by 1.377.
Upon dissolution, the GSE charter will terminate, and any assets that the GSE
continues to
12
hold after establishment of the trust or that remain in the trust after full
payment of the remaining obligations of the GSE assumed by the trust will be
transferred to the Company or its affiliates, as determined by the Company's
Board of Directors.
GSE REGULATION
The GSE's structure and the scope of its business activities are set forth
in its charter. The charter, which is subject to review and change by Congress,
sets forth certain restrictions on the GSE's business and financing activities
and charges the federal government with certain oversight responsibilities with
respect to these activities. The GSE's charter grants the GSE certain exemptions
from federal and state laws. The GSE's charter's primary regulatory restrictions
and exemptions, including certain provisions added by the Privatization Act, are
summarized as follows:
1. Seven members of the GSE's 21-member Board of Directors are appointed by the
President of the United States. The other 14 members are elected by the
Company as the holder of the GSE's Common Stock. The Chairman of the Board
is designated by the President of the United States from among the Board's
21 members.
2. Debt obligations issued by the GSE are exempt from state taxation to the
same extent as U.S. government obligations. The GSE is exempt from all
taxation by any state or by any county, municipality or local taxing
authority except with respect to real property taxes. The GSE is not exempt
from federal corporate income taxes.
3. All stock and other securities of the GSE are deemed to be exempt securities
under the laws administered by the SEC to the same extent as obligations of
the United States.
4. The GSE may conduct its business without regard to any qualification or
similar statute in any state of the United States, including the District of
Columbia, the Commonwealth of Puerto Rico and the territories and
possessions of the United States (although the scope of the GSE's business
is generally limited by its federal charter).
5. The issuance of GSE debt obligations must be approved by the Secretary of
the Treasury.
6. The GSE is required to have its financial statements examined annually by
independent certified public accountants and to submit a report of the
examination to the Secretary of the Treasury. The Department of the Treasury
is also authorized to conduct audits of the GSE and to otherwise monitor the
GSE's financial condition. The GSE is required to submit annual reports of
its operations and activities to the President of the United States and
Congress. The GSE must pay up to $800,000 per year to the Department of the
Treasury to cover the costs of its oversight.
7. The GSE is subject to certain "safety and soundness" regulations, including
the requirement that the GSE maintain a 2.00 percent capital adequacy ratio
(increasing to 2.25 percent after January 1, 2000). The GSE may pay
dividends only upon certification that, at the time of a dividend
declaration and after giving effect to the payment of such dividend, the
capital adequacy ratio is satisfied.
8. The Secretary of Education and the Secretary of the Treasury have certain
enforcement powers under the GSE's charter.
9. A 30 basis point annual offset fee, unique to the GSE, is payable to the
Secretary of Education on student loans purchased and held by the GSE on or
after August 10, 1993.
10. In certain circumstances, at the request of the Secretary of Education, the
GSE is required to act as a lender of last resort to make FFELP loans when
other private lenders are not available. Such loans are not subject to the
30 basis point offset fee on loans held by the GSE.
13
OTHER REGULATION
Under the Higher Education Act, the GSE is an "eligible lender" for purposes
only of purchasing and holding loans made by other lenders and making
consolidation and lender of last resort loans. Like other participants in
insured student loan programs, the Company is subject, from time to time, to
review of its student loan operations by the General Accounting Office, the DOE
and certain guarantee agencies. The laws relating to insured student loan
programs are subject to revision from time to time and changes to such laws are
beyond the Company's control. In addition, SMSC, as a servicer of student loans,
is subject to certain DOE regulations regarding financial responsibility and
administrative capability that govern all third party servicers of insured
student loans. Failure to satisfy such standards may result in the loss of the
government guarantee of FFELP loans. HICA, a South Dakota stock insurance
company, is subject to the ongoing regulatory authority of the South Dakota
Division of Insurance and that of comparable governmental agencies in six other
states.
NON-DISCRIMINATION AND LIMITATIONS ON AFFILIATION WITH DEPOSITORY INSTITUTIONS
The Privatization Act also amended the Higher Education Act to provide that
the GSE and any successor entity (including the Company) functioning as a
secondary market for federally insured student loans may not engage, directly or
indirectly, in any pattern or practice that results in a denial of a borrower's
access to insured loans because of the borrower's race, sex, color, religion,
national origin, age, disability status, income, attendance at a particular
institution, length of a borrower's educational program or the borrower's
academic year at an eligible institution.
The Omnibus Appropriations Act of 1998, signed into law by the President on
October 21, 1998, contains several provisions that amend the Federal Deposit
Insurance Act. These provisions provide an exception to the current prohibition
on affiliations between government-sponsored entities and depository
institutions contained in the Federal Deposit Insurance Act. This exception
allows SLM Holding Corporation to become affiliated with a depository
institution upon certain conditions and with the approval of the Secretary of
the Treasury. Among the conditions are: the dissolution of the GSE cannot be
adversely affected by the affiliation; the dissolution of the GSE must occur
within two years after the affiliation is consummated subject to the ability of
the Secretary to extend such deadline for up to two one-year periods; and the
GSE must be separate and distinct from the affiliated depository institution and
cannot extend credit, provide credit enhancement or purchase any obligation of
the depository institution.
ITEM 2. PROPERTIES
The following table lists the principal facilities owned by the Company:
APPROXIMATE
LOCATION FUNCTION SQUARE FEET
- -------- ----------------------- -----------
Reston, VA Operations/Headquarters 395,000
Wilkes Barre, PA Loan Servicing Center 135,000
Killeen, TX Loan Servicing Center 133,000
Lynn Haven, FL Loan Servicing Center 133,000
Lawrence, KS Loan Servicing Center 52,000
The Company leases approximately 7,000 square feet of office space in
Washington, D.C. for its government relations group and 47,000 square feet of
additional space for its loan servicing center in Lawrence, Kansas. The GSE
leases approximately 115,600 square feet of office space in Washington, D.C. for
its former headquarters. The Company has entered into subleases through the term
of these leases, which expire in 2001, and other arrangements to terminate the
GSE's obligations under these leases. With the exception of the Pennsylvania
loan servicing center, none of the Company's facilities is encumbered by a
mortgage. The Company believes that its headquarters and loan servicing centers
are
14
generally adequate to meet its long-term student loan and new business goals.
The Company's principal office is located in owned space at 11600 Sallie Mae
Drive, Reston, Virginia, 20193.
As of December 31, 1999, the Company employed 3,753 employees nationwide.
ITEM 3. LEGAL PROCEEDINGS.
The Company has no material legal proceedings pending.
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY-HOLDERS
Nothing to report.
PART II.
ITEM 5. MARKET FOR REGISTRANT'S COMMON EQUITY AND RELATED STOCKHOLDER MATTERS
The Company's Common Stock is listed and traded on the New York Stock
Exchange under the symbol SLM. The number of holders of record of the Company's
Common Stock as of March 20, 2000 was approximately 680. The following table
sets forth the high and low sales prices for the Company's Common Stock for each
full quarterly period within the two most recent fiscal years. The prices in
this table are adjusted to reflect a 7-for-2 stock split, which was effected on
January 2, 1998 as a stock dividend of five shares for every two shares
outstanding.
COMMON STOCK PRICES
1ST 2ND 3RD 4TH
QUARTER QUARTER QUARTER QUARTER
------------------- ------------------- ------------------- ---------------------
1998......................... High $46 3/4 $49 $51 $48
Low 37 15/16 37 1/8 28 30 3/8
1999......................... High 48 15/16 47 5/16 48 13/16 53 5/8
Low 40 1/8 40 3/8 42 7/8 41 11/16
The Company paid regular quarterly dividends of $.14 per share on the Common
Stock for the first three quarters of 1998, $.15 for the fourth quarter of 1998
and the first three quarters of 1999 and $.16 for the fourth quarter of 1999 and
the first quarter of 2000.
15
ITEM 6. SELECTED FINANCIAL DATA
SELECTED FINANCIAL DATA 1995-1999
(DOLLARS IN MILLIONS, EXCEPT PER SHARE AMOUNTS)
The following table sets forth selected financial and other operating
information of the Company. The selected financial data in the table is derived
from the consolidated financial statements of the Company. The data should be
read in conjunction with the consolidated financial statements, related notes,
and "Management's Discussion and Analysis of Financial Condition and Results of
Operations" included in the Company's Form 10-K to the Securities and Exchange
Commission.
1999 1998 1997 1996 1995
-------- -------- -------- -------- --------
OPERATING DATA:
Net interest income............................ $ 694 $ 651 $ 781 $ 894 $ 908
Net income..................................... 501 501 508 409 356
Basic earnings per share....................... 3.11 2.99 2.80 2.10 1.51
Diluted earnings per share..................... 3.06 2.95 2.78 2.09 1.51
Dividends per share............................ .61 .57 .52 .47 .43
Return on stockholders' equity................. 78% 81% 65% 50% 29%
Net interest margin............................ 1.85 1.93 1.80 1.96 1.85
Return on assets............................... 1.28 1.41 1.12 .86 .69
Dividend payout ratio.......................... 20 19 19 22 29
Average equity/average assets.................. 1.59 1.65 1.64 1.66 2.28
BALANCE SHEET DATA:
Student loans.................................. $33,809 $28,283 $29,443 $33,696 $34,285
Total assets................................... 44,025 37,210 39,832 47,572 49,951
Total borrowings............................... 41,988 35,399 37,717 45,124 47,530
Stockholders' equity........................... 841 654 675 834 867
Book value per share........................... 4.29 3.98 3.89 4.44 4.29
OTHER DATA:
Securitized student loans outstanding.......... $19,354 $17,909 $14,104 $ 6,263 $ 954
Pro-forma results (1):
"Cash basis" net interest income............. $ 1,034 $ 986 $ 969 $ 982 $ 908
"Cash basis" net income...................... 500 449 345 395 356
"Cash basis" diluted earnings per share...... 3.06 2.64 1.89 2.02 1.51
"Cash basis" net interest margin............. 1.87% 1.93% 1.81% 1.98% 1.85%
"Cash basis" return on assets................ .88 .85 .62 .77 .69
- ------------------------
(1) The pro-forma results present the Company's results of operations under the
assumption that the securitization transactions are financings and that the
securitized student loans were not sold. 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" results. Management monitors the
periodic "cash basis" results of the Company's managed student loan
portfolio and believes that they assist in a better understanding of the
Company's student loan business.
16
ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS
MANAGEMENT'S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS
YEARS ENDED DECEMBER 31, 1997-1999
(DOLLARS IN MILLIONS, EXCEPT PER SHARE AMOUNTS)
OVERVIEW
SLM HOLDING CORPORATION ("SLM HOLDING") WAS FORMED ON FEBRUARY 3, 1997, AS A
WHOLLY OWNED SUBSIDIARY OF THE STUDENT LOAN MARKETING ASSOCIATION (THE "GSE").
ON AUGUST 7, 1997, PURSUANT TO THE STUDENT LOAN MARKETING ASSOCIATION
REORGANIZATION ACT OF 1996 (THE "PRIVATIZATION ACT") AND APPROVAL BY
SHAREHOLDERS OF AN AGREEMENT AND PLAN OF REORGANIZATION, THE GSE WAS REORGANIZED
INTO A SUBSIDIARY OF SLM HOLDING (THE "REORGANIZATION"). SLM HOLDING IS A
HOLDING COMPANY THAT OPERATES THROUGH A NUMBER OF SUBSIDIARIES INCLUDING THE
GSE. REFERENCES IN THIS REPORT 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 Company is the largest source of financing and servicing for education
loans in the United States primarily through its participation in the Federal
Family Education Loan Program ("FFELP"), formerly the Guaranteed Student Loan
Program. The Company's products and services include student loan purchases and
commitments to purchase student loans, as well as operational support to
originators of student loans and to post-secondary education institutions and
other education-related financial services. The Company also originates,
purchases and holds unguaranteed private loans.
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 "intends,"
"anticipate," "believe," "estimate" and "expect" and similar expressions, as
they relate to the Company's management, are intended to identify forward-
looking statements. Such forward-looking statements are subject to risks,
uncertainties, assumptions and other factors that may cause the actual results
of the Company to be materially different from those reflected in such
forward-looking statements. Such factors include, among others, changes in the
terms of student loans and the educational credit marketplace arising from the
implementation of applicable laws and regulations and from changes in such laws
and regulations; which may reduce the volume, average term and costs of yields
on student loans under the FFELP or 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 and consumer lending
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 education loans, which may increase the costs or
limit the availability of financings necessary to initiate, purchase or carry
education loans.
17
SELECTED FINANCIAL DATA
CONDENSED STATEMENTS OF INCOME
INCREASE (DECREASE)
--------------------------------------------
YEARS ENDED DECEMBER 31, 1999 VS. 1998 1998 VS. 1997
------------------------------------ ------------------- -------------------
1999 1998 1997 $ % $ %
-------- -------- -------- -------- -------- -------- --------
Net interest income......................... $ 694 $ 651 $ 781 $ 43 7% $(130) (17)%
Less: provision for losses.................. 34 36 46 (2) (6) (10) (21)
----- ----- ----- ----- --- ----- ---
Net interest income after provision for
losses.................................... 660 615 735 45 7 (120) (16)
Gains on student loan securitizations....... 35 117 280 (82) (70) (163) (58)
Servicing and securitization revenue........ 289 281 151 8 3 130 86
Gains on sales of student loans............. 27 -- -- 27 100 -- --
Other income................................ 100 98 88 2 1 10 13
Operating expenses.......................... 359 361 494 (2) (1) (133) (27)
Income taxes................................ 240 238 241 2 1 (3) (1)
Minority interest in net earnings of
subsidiary................................ 11 11 11 -- -- -- --
----- ----- ----- ----- --- ----- ---
Net income.................................. 501 501 508 -- -- (7) (1)
Preferred stock dividends................... 1 -- -- 1 100 -- --
----- ----- ----- ----- --- ----- ---
Net income attributable to common stock..... $ 500 $ 501 $ 508 $ (1) --% $ (7) (1)%
===== ===== ===== ===== === ===== ===
Basic earnings per share.................... $3.11 $2.99 $2.80 $ .12 4% $ .19 7%
===== ===== ===== ===== === ===== ===
Diluted earnings per share.................. $3.06 $2.95 $2.78 $ .11 4% $ .17 6%
===== ===== ===== ===== === ===== ===
Dividends per common share.................. $ .61 $ .57 $ .52 $ .04 7% $ .05 10%
===== ===== ===== ===== === ===== ===
CONDENSED BALANCE SHEETS
INCREASE (DECREASE)
--------------------------------------------
DECEMBER 31, 1999 VS. 1998 1998 VS. 1997
------------------- ------------------- -------------------
1999 1998 $ % $ %
-------- -------- -------- -------- -------- --------
ASSETS
Student loans................................... $33,809 $28,283 $ 5,526 20% $(1,161) (4)%
Warehousing advances............................ 1,043 1,543 (500) (32) (326) (17)
Academic facilities financings.................. 1,028 1,180 (152) (13) (195) (14)
Cash and investments............................ 5,775 4,106 1,669 41 (1,024) (20)
Other assets.................................... 2,370 2,098 272 13 84 4
------- ------- ------- ---- ------- ---
Total assets.................................... $44,025 $37,210 $ 6,815 18% $(2,622) (7)%
======= ======= ======= ==== ======= ===
LIABILITIES AND STOCKHOLDERS' EQUITY
Short-term borrowings........................... $37,491 $26,589 $10,902 41% $ 3,413 15%
Long-term notes................................. 4,496 8,810 (4,314) (49) (5,731) (39)
Other liabilities............................... 983 943 40 4 (283) (23)
------- ------- ------- ---- ------- ---
Total liabilities............................... 42,970 36,342 6,628 18 (2,601) (7)
------- ------- ------- ---- ------- ---
Minority interest in subsidiary................. 214 214 -- -- -- --
Stockholders' equity before treasury stock...... 2,025 1,496 529 35 397 36
Common stock held in treasury at cost........... 1,184 842 342 41 418 99
------- ------- ------- ---- ------- ---
Total stockholders' equity...................... 841 654 187 29 (21) (3)
------- ------- ------- ---- ------- ---
Total liabilities and stockholders' equity...... $44,025 $37,210 $ 6,815 18% $(2,622) (7)%
======= ======= ======= ==== ======= ===
18
RESULTS OF OPERATIONS
EARNINGS SUMMARY
The Company's "cash basis" net income was $500 million for the year ended
December 31, 1999 ($3.06 diluted earnings per share) versus $449 million ($2.64
diluted earnings per share) for the year ended December 31, 1998. (See
"Pro-forma Statements of Income" for a detailed discussion of "cash basis" net
income.) During 1999, the Company purchased $13.7 billion of student loans
including $2.6 billion associated with the Nellie Mae acquisition which
increased the average balance of the managed portfolio of student loans by
$5.9 billion. The higher average balance increased earnings from the additional
student loans by $75 million after-tax and coupled with an $18 million after-tax
gain on the sale of student loans in the fourth quarter of 1999 drove the
increase in "cash basis" net income. These increases in 1999 "cash basis" net
income were partially offset by the lower average Special Allowance Payment
("SAP") rate on student loans and higher funding costs (see "Student Loans-
Student Loan Spread Analysis") which reduced the student loan spread by 15 basis
points or $49 million after-tax.
For the year ended December 31, 1999, the Company's net income calculated in
accordance with generally accepted accounting principles ("GAAP") was
$501 million ($3.06 diluted earnings per share), versus net income of
$501 million ($2.95 diluted earnings per share) in 1998. While reported net
income did not change in 1999 versus 1998, several significant factors impacted
1999 results. Student loan purchases of $13.7 billion increased the average
balance of the on-balance sheet portfolio by $5.4 billion. The increase in
earnings from higher student loan balances of $72 million after-tax was
partially offset by a reduction of 22 basis points or $47 million after-tax in
the student loan spread caused mainly by the lower average SAP, higher average
Treasury bill rates and higher funding costs. Year over year after-tax
securitization gains decreased by $53 million as the Company securitized only
$4.0 billion of student loans during 1999 versus $6.0 billion in 1998. The
adverse conditions in the capital markets that first materialized in the third
quarter of 1998 due to the Russian bond default, persisted for most of 1999
reducing the volume of loans the Company decided to securitize at wider
financing spreads. The reduction in net income from lower securitization gains
was partially offset by an $18 million after-tax gain on the sale of student
loans to third parties in the fourth quarter.
During 1999, the Company repurchased 8.2 million common shares (or
5 percent of its outstanding shares) at a cost of $342 million, which enhanced
earnings-per-share growth.
NET INTEREST INCOME
Net interest income is derived largely from the Company's portfolio of
student loans that remain on-balance sheet. 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 under "Student Loans--Student Loan Spread Analysis."
Taxable equivalent net interest income for the year ended December 31, 1999
versus the year ended December 31, 1998 increased by $39 million while the net
interest margin decreased by .08 percent. The increase in taxable equivalent net
interest income for the year ended December 31, 1999 was principally due to the
$5.4 billion increase in the average balance of student loans over 1998. The
decrease in the net interest margin for the year ended December 31, 1999 was
mainly due to the decrease in the student loan spread (discussed in more detail
below), partially offset by the reduction in the average balance of
lower-yielding investments and warehousing advances
Taxable equivalent net interest income of $686 million in 1998 decreased by
$130 million from 1997. In large part the decline was due to the $10 billion
reduction in the average balance of interest
19
earning assets due to the securitization of student loans and the significant
downsizing of other earning assets that occurred in the latter half of 1997. In
1998, the average balance of student loans on-balance sheet declined by
$4.4 billion while the average balance of the portfolio of securitized student
loans increased by $7.5 billion. As the Company moves student loans off-balance
sheet via its securitization activities, the earnings from those loans are, in
effect, removed from net interest income and become elements of other income,
specifically, gain on sale and servicing and securitization revenue. The average
balance of the Company's investment portfolio and warehousing advances combined
declined by $5.5 billion in 1998 as management reduced these lower yielding
assets to better utilize capital. In total, these reductions in earning assets
reduced taxable equivalent net interest income by $148 million. The effect of
the reduction in interest earning assets was partially offset by an increase of
.13 percent in the net interest margin from 1997 to 1998, which increased
taxable equivalent net interest income by $18 million in 1998 over 1997. This
margin increase was due in large part to the increased percentage of student
loans remaining on-balance sheet relative to other earning assets (78 percent in
1998 vs. 70 percent in 1997).
TAXABLE EQUIVALENT NET INTEREST INCOME
The Taxable Equivalent Net Interest Income analysis set forth below is
designed to facilitate a comparison of nontaxable asset yields to taxable yields
on a similar basis. The amounts in this table and the following table are
adjusted for the impact of certain tax-exempt and tax-advantaged investments
based on the marginal federal corporate tax rate of 35 percent.
INCREASE (DECREASE)
-----------------------------------------
YEARS ENDED DECEMBER 31, 1999 VS. 1998 1998 VS. 1997
------------------------------ ------------------- -------------------
1999 1998 1997 $ % $ %
-------- -------- -------- -------- -------- -------- --------
Interest income
Student loans................................ $2,426 $2,095 $2,485 $ 331 16% $(390) (16)%
Warehousing advances......................... 68 102 151 (34) (33) (49) (33)
Academic facilities financings............... 74 85 98 (11) (13) (13) (13)
Investments.................................. 240 295 573 (55) (19) (278) (49)
Taxable equivalent adjustment................ 32 34 35 (2) (8) (1) (3)
------ ------ ------ ----- --- ----- ---
Total taxable equivalent interest income....... 2,840 2,611 3,342 229 9 (731) (22)
Interest expense............................... 2,115 1,925 2,526 190 10 (601) (24)
------ ------ ------ ----- --- ----- ---
Taxable equivalent net interest income......... $ 725 $ 686 $ 816 $ 39 6% $(130) (16)%
====== ====== ====== ===== === ===== ===
20
AVERAGE BALANCE SHEETS
The following table reflects the rates earned on earning assets and paid on
liabilities for the years ended December 31, 1999, 1998 and 1997.
YEARS ENDED DECEMBER 31,
---------------------------------------------------------------
1999 1998 1997
------------------- ------------------- -------------------
BALANCE RATE BALANCE RATE BALANCE RATE
-------- -------- -------- -------- -------- --------
AVERAGE ASSETS
Student loans..................................... $33,028 7.35% $27,589 7.59% $31,949 7.78%
Warehousing advances.............................. 1,173 5.78 1,718 5.93 2,518 6.00
Academic facilities financings.................... 1,144 8.16 1,318 8.15 1,436 8.57
Investments....................................... 3,932 6.42 4,843 6.34 9,592 6.08
------- ---- ------- ---- ------- ----
Total interest earning assets....................... 39,277 7.23% 35,468 7.36% 45,495 7.35%
==== ==== ====
Non-interest earning assets......................... 2,166 2,012 1,916
------- ------- -------
Total assets........................................ $41,443 $37,480 $47,411
======= ======= =======
AVERAGE LIABILITIES AND STOCKHOLDERS' EQUITY
Six month floating rate notes..................... $ 4,644 5.38% $ 2,898 5.40% $ 2,908 5.48%
Other short-term borrowings....................... 28,560 5.30 21,384 5.34 23,640 5.51
Long-term notes................................... 6,292 5.60 11,194 5.60 18,677 5.70
------- ---- ------- ---- ------- ----
Total interest bearing liabilities.................. 39,496 5.35% 35,476 5.43% 45,225 5.59%
==== ==== ====
Non-interest bearing liabilities.................... 1,287 1,385 1,406
Stockholders' equity................................ 660 619 780
------- ------- -------
Total liabilities and stockholders' equity.......... $41,443 $37,480 $47,411
======= ======= =======
Net interest margin................................. 1.85% 1.93% 1.80%
==== ==== ====
21
RATE/VOLUME ANALYSIS
The Rate/Volume Analysis below shows the relative contribution of changes in
interest rates and asset volumes.
INCREASE
(DECREASE)
TAXABLE ATTRIBUTABLE
EQUIVALENT TO CHANGE IN
INCREASE -------------------
(DECREASE) RATE VOLUME
---------- -------- --------
1999 VS. 1998
Taxable equivalent interest income.................. $ 229 $(66) $ 295
Interest expense.................................... 190 (9) 199
----- ---- -----
Taxable equivalent net interest income.............. $ 39 $(57) $ 96
===== ==== =====
1998 VS. 1997
Taxable equivalent interest income.................. $(731) $(43) $(688)
Interest expense.................................... (601) (61) (540)
----- ---- -----
Taxable equivalent net interest income.............. $(130) $ 18 $(148)
===== ==== =====
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. 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."
YEARS ENDED DECEMBER 31,
------------------------------
1999 1998 1997
-------- -------- --------
ON-BALANCE SHEET
Adjusted student loan yields..................... 7.72% 7.93% 8.10%
Consolidation loan rebate fees................... (.22) (.23) (.20)
Offset fees...................................... (.15) (.11) (.12)
------- ------- -------
Student loan income.............................. 7.35 7.59 7.78
Cost of funds.................................... (5.32) (5.34) (5.53)
------- ------- -------
Student loan spread.............................. 2.03% 2.25% 2.25%
======= ======= =======
OFF-BALANCE SHEET
Servicing and securitization revenue............. 1.65% 1.65% 1.58%
======= ======= =======
AVERAGE BALANCES (IN MILLIONS OF DOLLARS)
Student loans.................................... $33,028 $27,589 $31,949
Securitized loans................................ 17,489 17,006 9,542
------- ------- -------
Managed student loans............................ $50,517 $44,595 $41,491
======= ======= =======
22
The Company's portfolio of student loans originated under the FFELP has a
variety of unique interest rate characteristics. 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 91-day Treasury bills by the government,
plus a fixed spread which is dependent upon when the loan was originated. If the
floating rate exceeds the borrower rate, the Department of Education makes a
payment directly to the Company based upon the SAP formula. If the floating rate
is less than the rate the borrower is obligated to pay, the Company simply earns
interest at the borrower rate. In all cases, the rate a borrower is obligated to
pay sets a minimum rate for determining the yield that the Company earns on the
loan. Borrowers' interest rates are either fixed to term or are reset annually
on July 1 of each year depending on when the loan was originated.
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 intended to mimic the
interest rate characteristics of the student loans. Such borrowings, however,
generally 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 borrower's interest rates, which occurs on July 1 of
each year. Low average Treasury bill rates in 1999 benefited the Company's
on-balance sheet student loan spread, net of payments under Floor Interest
Contracts (discussed below), by $66 million of which $47 million was
attributable to student loans with minimum borrower rates fixed to term and
$19 million was attributable to student loans with minimum borrower rates
adjusting annually. In 1998, low average Treasury bill rates increased the
Company's on-balance sheet student loan spread, net of payments under Floor
Interest Contracts, by $63 million of which $40 million was attributable to
student loans with minimum borrower rates fixed to term and $23 million was
attributable to student loans with minimum borrower rates adjusting annually.
The low interest rate environment in 1997 benefited the student loan spread by
$31 million.
The 22 basis point decrease in the student loan spread in 1999 versus 1998
is due mainly to higher financing spreads, including the impact of offset fees,
which decreased the 1999 student loan spread by 20 basis points and to lower SAP
rates which reduced the student loan spread by 7 basis points. The Company's
restructuring of its joint venture with Chase Manhattan Bank ("the Joint
Venture") in December of 1998, which replaced lower yielding participations with
student loans, increased the 1999 student loan spread by 5 basis points.
During 1999, the Company's on-balance sheet student loan spread declined
from 2.09 percent in the first quarter to 1.95 percent in the fourth quarter.
This decline can mainly be attributed to higher average interest rates and to
the July 1 reset of the borrower's interest rate. Also, the Company expects
further declines in the student loan spread as new loans with lower SAP rates
replace older loans with higher SAP rates. (See "Other Related
Events--Legislative Developments" for a discussion on Higher Education
Amendments of 1998.)
The student loan spread did not change from 1997 to 1998. This was due to
the fact that the lower Treasury bill rates in 1998 which increased student loan
spread by 13 basis points versus 1997 were offset by the higher financing
spreads on the Company's debt, including the impact of offset fees, higher
consolidation loan rebate fees and lower SAP rates which decreased the student
loan spread by a total of 10 basis points.
23
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 December 31, 1999 and 1998, based on the last Treasury Bill
auction of the year (5.46 percent in 1999 and 4.64 percent in 1998).
(Dollars in billions)
DECEMBER 31, 1999 DECEMBER 31, 1998
------------------------------ ------------------------------
ANNUALLY ANNUALLY
FIXED RESET FIXED RESET
BORROWER BORROWER BORROWER BORROWER
RATE RATE TOTAL RATE RATE TOTAL
-------- -------- -------- -------- -------- --------
Student loans eligible to earn at the minimum
borrower rate................................... $13.0 $28.6 $41.6 $12.4 $25.1 $37.5
Less notional amount of floor interest
contracts....................................... (3.4) (3.1) (6.5) (5.0) (14.7) (19.7)
----- ----- ----- ----- ----- -----
Net student loans eligible to earn at the minimum
borrower rate................................... $ 9.6 $25.5 $35.1 $ 7.4 $10.4 $17.8
===== ===== ===== ===== ===== =====
Net student loans earning at the minimum borrower
rate............................................ $ 5.0 $ -- $ 5.0 $ 6.7 $10.3 $17.0
===== ===== ===== ===== ===== =====
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. Under these contracts, referred to as "Floor
Interest Contracts", the Company receives an upfront payment and agrees to pay
the difference between (1) the minimum borrower interest rate less the
applicable SAP rate ("the strike rate") and (2) 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
historically have had terms 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 multi-year terms. The $3.4 billion of outstanding fixed
borrower rate Floor Interest Contracts at December 31, 1999 have expiration
dates through the year 2003, while the $3.1 billion of annually reset borrower
rate contracts expire on July 1, 2000.
For the years ended December 31, 1999, 1998 and 1997, the amortization of
the upfront payments received from the sale of Floor Interest Contracts on the
Company's on-balance sheet student loans with fixed borrower rates was
$20 million, $28 million and $34 million, respectively, and for Floor Interest
Contracts with annually reset borrower rates was $21 million, $24 million and
$7 million, respectively. At December 31, 1999, unamortized payments received
from the sale of Floor Interest Contracts totaled $21 million, $20 million of
which related to contracts on fixed rate loans and $1 million of which related
to contracts on annual reset loans.
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
24
giving effect to the impact of interest rate swaps) for the years ended
December 31, 1999, 1998 and 1997 (dollars in millions).
YEARS ENDED DECEMBER 31,
---------------------------------------------------------------
1999 1998 1997
------------------- ------------------- -------------------
AVERAGE AVERAGE AVERAGE AVERAGE AVERAGE AVERAGE
INDEX BALANCE RATE BALANCE RATE BALANCE RATE
- ----- -------- -------- -------- -------- -------- --------
Treasury bill, principally
91-day.................. $31,043 5.35% $27,306 5.33% $32,240 5.52%
LIBOR..................... 2,597 5.14 4,111 5.49 6,219 5.51
Discount notes............ 3,424 4.90 2,328 5.27 5,267 5.48
Fixed..................... 1,171 5.94 622 6.95 663 7.02
Zero coupon............... 153 11.14 140 11.13 134 11.12
Commercial paper.......... 302 5.69 -- -- -- --
Other..................... 806 5.08 969 5.47 702 5.20
------- ----- ------- ----- ------- -----
Total..................... $39,496 5.35% $35,476 5.43% $45,225 5.59%
======= ===== ======= ===== ======= =====
The following table details the spreads for the Company's Treasury bill
indexed borrowings and London Interbank Offered Rate ("LIBOR") indexed
borrowings:
YEARS ENDED DECEMBER 31,
------------------------------------
INDEXED BORROWINGS 1999 1998 1997
- ------------------ -------- -------- --------
TREASURY BILL
Weighted Average Treasury bill........................ 4.84% 5.04% 5.28%
Borrowing spread...................................... .51 .29 .24
---- ---- ----
Weighted average borrowing rate....................... 5.35% 5.33% 5.52%
==== ==== ====
LIBOR
Weighted average LIBOR................................ 5.34% 5.73% 5.75%
Borrowing spread...................................... (.20) (.24) (.24)
---- ---- ----
Weighted average borrowing rate....................... 5.14% 5.49% 5.51%
==== ==== ====
SECURITIZATION PROGRAM
In 1999, the Company completed three securitization transactions in which a
total of $4.0 billion of student loans were sold to a special purpose finance
subsidiary and by that subsidiary to trusts that issued asset-backed securities
to fund the student loans to term. In 1998, the Company completed two
securitization transactions in which a total of $6.0 billion of student loans
were securitized and in 1997, the Company completed four securitization
transactions in which a total of $9.4 billion of student loans were securitized.
The Company accounts for its securitization transactions in accordance with
Statement of Financial Accounting Standards No. 125 "Accounting for Transfers
and Servicing of Financial Assets and Extinguishments of Liabilities"
("SFAS 125"), which establishes the accounting for certain financial asset
transfers, including securitization transactions. Under SFAS 125, the Company
records a gain on sale based upon the difference between the cost basis of the
assets sold and the fair value of the assets received. At the same time, the
Company records an asset (the "Interest Residual") equal to the present value of
the expected net cash flows from the trust to the Company over the life of the
portfolio securitized. The gain is reduced by write-offs of certain assets
related to the portfolio sold and by transaction costs. In addition, the Company
continues to service the loans in the trusts for a fee, and earns that fee over
the life of the portfolio. When the contract servicing fee is greater than
current market servicing rates, the present value of such excess servicing fees
is recognized as a servicing asset and amortized over the life of the portfolio
serviced.
25
GAINS ON STUDENT LOAN SECURITIZATIONS
In the third and fourth quarters of 1998 and the first quarter of 1999, the
Company decided not to enter into securitization transactions due to the
turbulence in the global financial markets that persisted after the Russian bond
default in August 1998. During this period, Treasury bill rates, to which the
Company's asset backed securities are indexed, fell relative to other market
indices, causing the Company's financing spreads to widen. As a result, although
the Company reentered the securitization market in 1999, it securitized
$2.0 billion less in 1999 versus 1998 and $3.4 billion less of student loans in
1998 versus 1997. For the years ended December 31, 1999, 1998 and 1997, the
Company recorded pre-tax securitization gains of $35 million, $117 million and
$280 million, respectively. The decrease in the gains in 1999 versus 1998 was
mainly due to the reduction in securitization activity and to portfolio
characteristics and higher financing spreads. The decrease in the gains in 1998
versus 1997 was mainly due to the reduction in securitization activity. Included
in the 1997 gains was a reversal of a pre-tax $97 million reserve for offset
fees accrued previously as a result of the successful litigation over whether
the offset fee applied to securitized student loans. The inclusion of
lower-yielding consolidation loans in the portfolios of loans securitized in
1998 and higher cost of funds also contributed to the decrease in the 1998 gains
versus 1997. Gains for the years ended December 31, 1999, 1998 and 1997,
measured as a percentage of the securitized portfolios, were .88 percent,
1.95 percent, and 2.39 percent respectively. Gains on future securitizations
will continue to vary depending on the size and the loan characteristics of the
loan portfolios securitized and the funding costs prevailing in the
securitization debt markets.
SERVICING AND SECURITIZATION REVENUE
The following table summarizes the components of servicing and
securitization revenue:
YEARS ENDED DECEMBER 31,
------------------------------------
1999 1998 1997
-------- -------- --------
Servicing revenue less amortization of servicing
asset............................................... $158 $156 $ 98
Securitization revenue................................ 131 125 53
---- ---- ----
Total servicing and securitization revenue............ $289 $281 $151
==== ==== ====
The increase in servicing revenue is mainly due to the increase in the
average balance of securitized student loans to $17.5 billion in 1999 from
$17.0 billion in 1998 and $9.5 billion in 1997. The increase in securitization
revenue is primarily due to the increase in the average balance of the Interest
Residual to $701 million in 1999 from $616 million in 1998 and $331 million in
1997. Also, the Company's securitized loan portfolio benefits from low average
Treasury bill rates in a manner similar to the on-balance sheet portfolio of
student loans when the student loans earn at the minimum borrower rate. In 1999
and 1998, low average Treasury bill rates enhanced securitization revenue by
$42 million and $31 million, respectively. There was no such revenue in 1997.
The benefit of low Treasury bill rates in 1999 was mainly earned in the first
half of the year as the rise of Treasury bill rates in the second half of the
year combined with the annual reset of the borrower rate on certain student
loans on July 1, reduced these earnings to only $3 million for the second half
of 1999.
GAIN ON SALE OF STUDENT LOANS
During the fourth quarter of 1999, the Company sold $900 million of student
loan assets and recorded a pre-tax gain of $27 million. As part of the
transaction the Company retained servicing rights and entered into long-term
servicing agreements with four companies to service the loans sold. In addition,
the four companies have contractual incentives to deliver $700 million of
additional student loans for servicing by the Company over a two-year period.
26
OTHER INCOME
Other income exclusive of gains on student loan securitizations, servicing
and securitization income and gains on sales of student loans totaled
$100 million in 1999 versus $98 million in 1998 and $88 million in 1997. Other
income mainly includes late fees earned on student loans, gains and losses on
sales of investment securities, revenue the Company receives from servicing
third party portfolios of student loans and commitment fees for letters of
credit. In the second half of 1998 the Company began assessing late fees and
earned $38 million in 1999, versus $7 million in 1998 and none in 1997. Gains on
sales of investment securities in 1999 totaled $16 million versus $11 million in
1998 and $16 million in 1997.
In December 1998, the Company restructured its joint venture with Chase
Manhattan Bank (the "Joint Venture") and, as a result, student loans in the
Joint Venture are no longer co-owned by the Company and Chase and serviced by
the Company for a fee. Instead, the Company now purchases all loans originated
by Chase. The Company also purchased the $5.0 billion of loans that were
co-owned in the Joint Venture at the time of the restructuring. Since the
Company now owns the loans, it no longer receives servicing fees from the Joint
Venture that were previously included in other income. For both of the years
ended December 31, 1998 and 1997, the Company recorded $25 million in servicing
fee income from the Joint Venture.
OPERATING EXPENSES
The following table summarizes the components of operating expenses:
YEARS ENDED DECEMBER 31,
------------------------------------
1999 1998 1997
-------- -------- --------
Servicing and acquisition expenses.................... $239 $273 $319
General and administrative expenses................... 120 88 175
---- ---- ----
Total operating expenses.............................. $359 $361 $494
==== ==== ====
Operating expenses include costs to service the Company's managed student
loan portfolio, operational costs incurred in the process of acquiring student
loan portfolios and general and administrative expenses. Operating expenses for
the years ended December 31, 1999, 1998 and 1997 were $359 million,
$361 million and $494 million respectively. Total operating expenses as a
percentage of average managed student loans were 71 basis points, 81 basis
points and 119 basis points for the years ended December 31, 1999, 1998 and
1997, respectively. While in total, operating expenses decreased slightly,
servicing and acquisition expenses decreased by $34 million as the Company
realized a full year's benefit from the 1998 restructuring of servicing
operations including the closing of two satellite servicing centers, for which
the Company took a charge in 1998 of $12 million or 3 basis points. These
expense reductions were offset by an increase in general and administrative
expenses of $32 million which included $11 million of expenses related to Nellie
Mae, acquired in the third quarter of 1999, $7 million of expenses of the SLM
Financial subsidiary which commenced operations in the first quarter of 1999,
$5 million related to the development of E-commerce initiatives and the ramping
up of SLM Solutions operations which added $4 million, including the expenses of
Exeter Software acquired in the fourth quarter of 1999. Operating expenses in
1997 included one-time costs of $86 million incurred in 1997 for expenses and
asset write-downs in connection with the reorganization of the Company to a
privatized entity and the change in business strategies implemented by the new
management. Together these one-time costs account for 21 of the 119 basis points
in 1997. The decreases in operating expenses in 1998 versus 1997, exclusive of
the one-time charges, can be attributed to the effect of the Company's
restructuring of operations in the second half of 1997 and to management's
commitment to control expenses.
27
STUDENT LOAN PURCHASES
The following table summarizes the components of the Company's student loan
purchase activity:
YEARS ENDED DECEMBER 31,
------------------------------
1999 1998 1997
-------- -------- --------
Controlled channels......................................... $ 7,161 $5,665 $3,830
Other commitment clients.................................... 1,788 1,411 1,611
Spot purchases.............................................. 115 291 1,963
Consolidations.............................................. 920 132 699
Other....................................................... 1,111 918 937
------- ------ ------
Subtotal.................................................... 11,095 8,417 9,040
Nellie Mae acquisition...................................... 2,585 -- --
------- ------ ------
Total....................................................... $13,680 $8,417 $9,040
======= ====== ======
The Company purchased $13.7 billion of student loans in 1999 compared with
$8.4 billion in 1998 and $9.0 billion in 1997. Included in the 1999 purchases
are $2.6 billion of student loans acquired in the Nellie Mae acquisition. The
Company's controlled channels represent all loans originated on the Company in
its subsidiary origination systems. Included in controlled channel purchase
volume for 1999 and 1998 is $1.6 billion and $828 million, respectively,
representing Chase's one half interest in student loans in the Joint Venture at
the time of the restructuring (see "Other Income" for an additional discussion
of the restructuring of the Joint Venture). Spot purchases in 1997 included
$650 million acquired from Household Bank.
The increase in the purchase volume in 1999 versus 1998, exclusive of the
Nellie Mae acquisition and the restructuring of the Company's Joint Venture with
Chase, is principally attributable to the resumption of the Company's
consolidation loan program in October 1998, a program which was suspended from
the fourth quarter of 1997 through the third quarter of 1998 due to legislated
changes in the profitability of consolidation. The decrease in the purchase
volume in 1998 versus 1997 is principally attributable to the following factors:
reduced acquisitions in the spot market, the suspension of the Company's
consolidation loan program offset by a modest increase in the amount of loans
purchased from lenders who have forward purchase commitments with the Company.
In 1999, the Company's controlled channels of loan originations totaled
$5.1 billion versus $4.7 billion in 1998. The pipeline of loans currently
serviced and committed for purchase by the Company was $3.5 billion at
December 31, 1999 versus $5.6 billion at December 31, 1998. Included in the
pipeline at December 31, 1998 was $1.6 billion of student loans that were owned
by Chase and sold to the Company in connection with the restructuring of the
Joint Venture.
The Department of Education offers existing FFELP borrowers the opportunity
to refinance FFELP loans into the Federal Direct Student Loan Program ("FDSLP")
loans. During 1999, 1998 and 1997, approximately $755 million, $432 million and
$288 million, respectively, of the Company's managed student loans were accepted
for refinancing into the FDSLP. Since the inception of this program,
approximately $1.9 billion of FFELP loans managed by Sallie Mae have been
accepted for refinancing into FDSLP loans and approximately $1.8 billion have
been refinanced into FDSLP with the remainder awaiting disbursements by the
federal government.
The FDSLP originated approximately 33 percent, 33 percent and 32 percent of
student loan originations for academic years 1998-99, 1997-98, and 1996-97,
respectively. Based on Department of Education estimates, management believes
that FDSLP originations will continue to be approximately one-third of student
loan originations for the 1999-2000 academic year and thereafter.
28
The following table summarizes the activity in the Company's managed
portfolio of student loans for the years ended December 31, 1999, 1998 and 1997.
YEARS ENDED DECEMBER 31,
------------------------------
1999 1998 1997
-------- -------- --------
Beginning balance........................................... $46,192 $43,547 $39,958
Purchases................................................... 13,680 8,417 9,040
Capitalized interest on securitized loans................... 524 418 208
Repayments, claims, other................................... (5,165) (5,454) (5,316)
Loan sales.................................................. (910) (11) --
Loans consolidated from SLMH................................ (1,158) (725) (343)
------- ------- -------
Ending balance.............................................. $53,163 $46,192 $43,547
======= ======= =======
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 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 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 assumption 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 the foregoing 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 the 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 and publicly reports 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
29
following table presents the "cash basis" statements of income and a
reconciliation to net income as reflected in the Company's consolidated
statements of income.
YEARS ENDED DECEMBER 31,
------------------------------
1999 1998 1997
-------- -------- --------
"CASH BASIS" STATEMENTS OF INCOME:
Student loans............................................... $ 3,749 $ 3,406 $ 3,244
Advances/Facilities/Investments............................. 386 486 824
------- ------- -------
Total interest income....................................... 4,135 3,892 4,068
Interest expense............................................ (3,101) (2,905) (3,099)
------- ------- -------
Net interest income......................................... 1,034 987 969
Less: provision for losses.................................. 51 54 53
------- ------- -------
Net interest income after provision for losses.............. 983 933 916
------- ------- -------
Other Income:
Gains on student loan securitizations..................... -- -- --
Servicing and securitization revenue...................... -- -- --
Gains on sales of student loans........................... 27 -- --
Gains on sales of securities.............................. 16 11 16
Other..................................................... 83 87 71
------- ------- -------
Total other income.......................................... 126 98 87
Total operating expenses.................................... 358 361 494
------- ------- -------
Income before taxes and minority interest in net earnings of
subsidiary................................................ 751 670 509
Income taxes................................................ 240 210 153
Minority interest in net earnings of subsidiary............. 11 11 11
------- ------- -------
"Cash basis" net income..................................... 500 449 345
Preferred stock dividends................................... 1 -- --
------- ------- -------
"Cash basis" net income attributable to common stock........ $ 499 $ 449 $ 345
======= ======= =======
"Cash basis" diluted earnings per share..................... $ 3.06 $ 2.64 $ 1.89
======= ======= =======
YEARS ENDED DECEMBER 31,
------------------------------
1999 1998 1997
-------- -------- --------
RECONCILIATION OF GAAP NET INCOME TO "CASH BASIS" NET
INCOME:
GAAP net income............................................. $ 501 $ 501 $ 508
----- ----- -----
"Cash basis" adjustments:
Gains on student loan securitizations..................... (35) (117) (280)
Servicing and securitization revenue...................... (289) (281) (151)
Net interest income....................................... 340 335 187
Provision for losses...................................... (17) (17) (7)
----- ----- -----
Total "cash basis" adjustments.............................. (1) (80) (251)
Net tax effect (A).......................................... -- 28 88
----- ----- -----
"Cash basis" net income..................................... $ 500 $ 449 $ 345
===== ===== =====
- ------------------------
(A) Such tax effect is based upon the Company's marginal tax rate for the
respective period.
30
"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.
YEARS ENDED DECEMBER 31,
------------------------------------
1999 1998 1997
-------- -------- --------
Adjusted student loan yields................................ 7.64% 7.82% 8.03%
Consolidation loan rebate fees.............................. (.15) (.15) (.15)
Offset fees................................................. (.09) (.07) (.09)
------- ------- -------
Student loan income......................................... 7.40 7.60 7.79
Cost of funds............................................... (5.40) (5.45) (5.61)
------- ------- -------
Student loan spread......................................... 2.00% 2.15% 2.18%
======= ======= =======
AVERAGE BALANCES (IN MILLIONS OF DOLLARS)
Student loans............................................... $50,517 $44,595 $41,491
======= ======= =======
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, intended to
mimic the interest rate characteristics of the student loans. Such borrowings,
however, generally 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. Low average Treasury bill rates in 1999 increased
the Company's "cash basis" student loan spread, net of payments under Floor
Interest Contracts (discussed below), by $108 million for the year ended
December 31, 1999, of which, $57 million is attributable to student loans with
minimum borrower rates fixed to term and $51 million is attributable to student
loans whose minimum borrower rate adjusts annually on July 1. In 1998, low
average Treasury bill rates increased the Company's "cash basis" student loan
spread, net of payments under Floor Interest Contracts, by $94 million of which
$47 million was attributable to student loans with minimum borrower rates fixed
to term and $47 million was attributable to student loans with minimum borrower
rates adjusting annually.
The 15 basis point decrease in the 1999 "cash basis" student loan spread
versus 1998 was mainly due to higher financing spreads relative to the Treasury
bill, including the impact of higher offset fees, which decreased the "cash
basis" student loan spread by 11 basis points and to lower SAP rates which
decreased the "cash basis" student loan spread by 5 basis points. The
restructuring of the Joint Venture with Chase increased the 1999 student loan
spread by 3 basis points over 1998, partially offsetting the student loan spread
decreases discussed above. During 1999, the Company's "cash basis" student loan
spread declined from 2.16 percent in the first quarter to 1.86 percent in the
fourth quarter. This decline can mainly be attributed to higher average interest
rates and to the July 1 reset of the borrower's interest rate. Also, the Company
expects further declines in the student loan spread as new loans with
31
lower SAP rates replace older loans with higher SAP rates. (See "Other Related
Events--Legislative Developments" for a discussion on Higher Education
Amendments of 1998.)
In 1998, "cash basis" financing spreads, relative to the Treasury bill,
increased by .09 percent versus 1997. This was due to wider financing spreads in
both the GSE and securitization debt markets 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 status. The higher funding costs on the Company's asset-backed
securities is partially mitigated by the absence of offset fees on securitized
loans. The net effect of increased funding costs and offset fees in 1998 versus
1997 was 7 basis points or $31 million.
For the years ended December 31, 1999, 1998 and 1997, the amortization of
the upfront payments received from the sale of Floor Interest Contracts with
fixed borrower rates was $20 million, $28 million and $34 million, respectively
and for Floor Interest Contracts with annually reset borrower rates was
$25 million, $28 million and $7 million, respectively. The reduced activity in
Floor Interest Contracts with annually reset borrower rates is directly related
to the rise in Treasury bill rates since the borrower rate reset on July 1. At
December 31, 1999, unamortized payments received from the sale of Floor Interest
Contracts totaled $21 million, $20 million of which related to contracts on
fixed rate loans, and $1 million of which related to contracts on annual reset
loans. The $3.4 billion of outstanding fixed borrower rate Floor Interest
Contracts at December 31, 1999 have expiration dates through the year 2003,
while the $3.1 billion of annually reset borrower rate contracts outstanding at
December 31, 1999 expire on July 1, 2000.
In 1999, net interest income, on a "cash basis," was $1.0 billion compared
with $987 million in 1998 and $969 million in 1997. The increase in taxable
equivalent net interest income for the year ended December 31, 1999 versus the
year-ago period was due to the increase in the average balance of student loans
of $5.9 billion and to the increased percentage of higher yielding student loans
to other earning assets (89 percent in 1999 versus 85 percent in 1998). The
reduction in the student loan spread for 1999 partially offset these increases
in net interest income. The increase in net interest income in 1998 over 1997 is
mainly due to the increase in the average balance of managed student loans, and
the increase in student loans as a percentage of average earning assets. The
reduction in the average balance of the investment portfolio, academic
facilities financings, and warehousing advances in 1998 versus 1997 reduced net
interest income by $338 million.
"CASH BASIS" PROVISION AND ALLOWANCE FOR LOAN LOSSES
The provision for losses represents the periodic expense of maintaining an
allowance sufficient to absorb losses, net of recoveries, inherent in the
managed portfolio of student loans. The Company evaluates the adequacy of the
provision for losses on its federally insured portfolio of student loans
separately from its non-federally insured portfolio. For the federally insured
portfolio, the Company primarily considers trends in student loan claims
rejected for payment by guarantors due to servicing defects as well as overall
default rates on those FFELP student loans subject to the 2 percent
risk-sharing. Once a student loan is charged off as a result of an unpaid claim,
the Company's policy is to continue to pursue the recovery of principal and
interest.
For the non-federally insured portfolio of student loans the Company
primarily considers recent trends in delinquencies, charge-offs and recoveries,
historical trends in loan volume by program, economic conditions and credit and
underwriting policies. A large percentage of the Company's non-federally insured
loans have not matured to a point at which predictable loan loss patterns have
developed. Accordingly, the evaluation of the provision for loan losses is
inherently subjective as it requires material estimates that may be susceptible
to significant changes. Management believes that
32
the provision for loan losses is adequate to cover anticipated losses in the
student loan portfolio. An analysis of the Company's allowance for loan losses
is presented in the following table.
"CASH BASIS" ACTIVITY IN THE ALLOWANCE FOR LOAN LOSSES
YEARS ENDED DECEMBER 31,
------------------------------------
1999 1998 1997
-------- -------- --------
Balance beginning of period................................. $ 237 $ 203 $ 167
Provisions for losses....................................... 51 54 53
Reserves acquired in acquisition............................ 9 -- --
Charge-offs:
Non-Federally insured loans............................... (16) (9) (9)
Federally insured loans................................... (29) (20) (18)
------- ------- -------
Total charge-offs....................................... (45) (29) (27)
Recoveries:
Non-Federally insured loans............................... 3 2 2
Federally insured loans................................... 7 7 8
------- ------- -------
Total recoveries........................................ 10 9 10
Net charge-offs............................................. (35) (20) (17)
------- ------- -------
Reduction for sales of student loans........................ (2) -- --
------- ------- -------
Balance end of period....................................... $ 260 $ 237 $ 203
======= ======= =======
Allocation of the allowance for loan losses:
Non-Federally insured loans................................. $ 148 $ 138 $ 116
Federally insured loans..................................... 112 99 87
------- ------- -------
Total..................................................... $ 260 $ 237 $ 203
======= ======= =======
Net charge-offs as a percentage of average managed student
loans..................................................... .07% .05% .04%
Total allowance as a percentage of average managed student
loans..................................................... .51% .53% .49%
Non-Federally insured allowance as a percentage of the
ending
balance of non-Federally insured loans.................... 6.77% 8.09% 7.79%
Average managed student loans............................... $50,517 $44,595 $41,491
Ending managed student loans................................ $53,163 $46,192 $43,547
The 1999 "cash basis" provision for losses includes $12 million for
potential losses on the non-federally insured student loans and $39 million for
potential losses due to risk-sharing and other claims on FFELP loans. The 1998
"cash basis" provision included $24 million for potential losses on the
non-federally insured portfolio and $20 million for potential losses due to
risk-sharing and other claims on FFELP loans. The 1998 provision also included
$10 million for write-offs for unusual loan prepayments at amounts less than
carrying value in connection with the legislation reauthorizing the Higher
Education Act, which allowed borrowers to consolidate student loans under the
FDSLP at advantageous rates. Applications from borrowers, who applied for
consolidation prior to January 31, 1999, were processed through the third
quarter of 1999. For 1997, the Company added $40 million for potential losses on
the non-federally insured portfolio, and $24 million for potential losses due to
risk sharing. The 1997 provision was reduced by $11 million due to improved
experience in recovering unpaid claims.
33
DELINQUENCIES--NON-FEDERALLY INSURED STUDENT LOANS
The following table shows the loan delinquency trends for the years
presented on the Company's non-federally insured student loan portfolio.
Non-federally insured student loans do not generally enter repayment until the
borrower leaves school. Borrower payments can also be deferred at the discretion
of the Company. In all instances where payments are not being made, interest
accrues and is capitalized as principal. Delinquencies will impact earnings if
the account is charged-off.
YEARS ENDED
DECEMBER 31,
-------------------
1999 1998
-------- --------
Loans in school/deferment................................... $ 614 $ 515
Loans in repayment
Loans current............................................. 1,315 948
Loans delinquent 30-59 days............................... 70 62
Loans delinquent 60-89 days............................... 19 19
Loans delinquent greater than 90 days..................... 57 46
------ ------
Total loans in repayment.................................. 1,461 1,075
------ ------
Ending loan portfolio....................................... $2,075 $1,590
====== ======
"CASH BASIS" FUNDING COSTS
The following table details the spreads for the Company's Treasury bill
indexed borrowings and London Interbank Offered Rate ("LIBOR") indexed
borrowings on a "cash basis":
YEARS ENDED DECEMBER 31,
--------------------------------------
INDEXED BORROWINGS 1999 1998 1997
- ------------------ -------- -------- --------
TREASURY BILL
Weighted Average Treasury bill.............................. 4.82% 5.00% 5.26%
Borrowing spread............................................ .59 .44 .34
---- ---- ----
Weighted average borrowing rate............................. 5.41% 5.44% 5.60%
==== ==== ====
LIBOR
Weighted average LIBOR...................................... 5.39% 5.73% 5.75%
Borrowing spread............................................ (.03) (.24) (.24)
---- ---- ----
Weighted average borrowing rate............................. 5.36% 5.49% 5.51%
==== ==== ====
FEDERAL AND STATE TAXES
The Company maintains a portfolio of tax-advantaged assets principally to
support education-related financing activities. That portfolio was primarily
responsible for the decrease in the effective federal income tax rate from the
statutory rate of 35 percent to 32 percent in 1999, 1998 and 1997. The GSE is
exempt from all state, local, and District of Columbia income, franchise, sales
and use, personal property and other taxes, except for real property taxes.
However, this tax exemption applies only to the GSE and does not apply to SLM
Holding or its other operating subsidiaries. Under the Privatization Act, the
Company's GSE and non-GSE activities are separated, with non-GSE activities
being subject to taxation at the state and local level. State taxes were
immaterial during the three years ended December 31, 1999 as the majority of the
Company's income was generated through the GSE.
As increasing business activity occurs outside of the GSE, the impact of
state and local taxes will increase accordingly. Ultimately all business
activities will occur outside of the GSE, which could
34
increase the Company's effective income tax rate by as much as five percentage
points. The loss of the GSE tax exemption for sales and use and personal
property taxes could increase operating costs by one percentage point.
LIQUIDITY AND CAPITAL RESOURCES
GENERAL
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 debt issuances by
the GSE, off-balance sheet financings through securitizations, borrowings under
its commercial paper program, cash generated by its subsidiaries' operations and
distributed through dividends to the Company and bank borrowings.
GSE FINANCING ACTIVITIES
The GSE secures financing to fund its on-balance sheet portfolio of student
loans, along with its other operations, by issuing debt securities in the
domestic and overseas capital markets, through public offerings and private
placements of U.S. dollar-denominated and foreign currency-denominated debt of
varying maturities and interest rate characteristics, and through
securitizations of its student loans. The GSE's debt securities are currently
rated at the highest credit rating level by both Moody's Investors Service and
Standard & Poor's. Historically, the agencies' ratings of the GSE have been
largely a factor of its status as a government-sponsored enterprise. Since the
Privatization Act did not modify the attributes of debt issued by the GSE,
management anticipates that the GSE will retain its current credit ratings.
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. The lingering effects of the August 1998 Russian bond default plus
uncertainty over the year 2000 computer issue has caused funding spreads on both
the Company's unsecured debt and its asset-backed securities to remain wider
than in recent years. Management believes that this adverse spread environment
is temporary; accordingly, to mitigate its effect on the Company's cost of
funds, the Company has been meeting the majority of its on-balance sheet funding
needs through the issuance of short-term unsecured GSE debt. 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.
SECURITIZATION ACTIVITIES
In addition to the GSE debt, student loan securitization has been an
important source of funding for the Company's managed student loan portfolio
since 1995. As student loans are securitized, the need for long-term financing
of these on-balance sheet assets decreases. Over the long term, securitization
is expected to provide the principal source of long term funding for the
Company's managed portfolio of student loans. Management believes that
securitizations represent an efficient source of funding.
The Company's asset-backed securities generally have a higher cost of funds
than its traditional on-balance sheet financing because the asset-backed
securities are term match-funded and do not benefit from the GSE's status.
However, the increased funding costs of the asset-backed securities are
mitigated by the absence of the Offset Fees on securitized loans. Securitization
also allows the Company to obtain term financing at a lower cost than otherwise
would be achievable without the GSE's government-sponsored status.
Securitizations to date have been structured to achieve an "AAA"
35
credit rating on over 96 percent of its securities sold (with an "A" credit
rating on the remaining subordinated securities).
As mentioned above, the Russian bond default in August 1998 caused financing
spreads on the Company's 1999 securitization transactions to be wider and thus
more costly than the previous year's transactions. As a result, the Company did
not enter into a securitization transaction from September 1998 through May of
1999. Financial market conditions did improve to a point at which it was
economical to securitize student loans, and in the second quarter of 1999, the
Company reentered the asset-backed securities market by completing a
$1.0 billion securitization. In 1999, the Company completed three securitization
transactions totaling $4.0 billion in student loans. During 1999, demand for
Treasury bill indexed securities remained high causing Treasury bill rates to
remain low relative to other market indices. As a consequence, the Company
issued $3.8 billion in LIBOR based asset-backed securities, the first issuances
indexed to LIBOR in the history of the program. The Company is managing this
off-balance sheet basis risk through on-balance sheet financing activities,
principally through basis swaps.
OTHER FINANCING ACTIVITIES
In order to finance non-GSE activities and in preparation for the eventual
wind-down of the GSE, SLM Holding is developing additional financing vehicles.
While continued use of the securitization market will be the core of SLM
Holding's financing strategy, these efforts will be supplemented by commercial
paper, asset-backed commercial paper, bank lines of credit, underwritten
long-term debt, and a medium-term note program. In the third quarter of 1999,
SLM Holding received credit ratings that will facilitate its access to the
private funding markets: short-term debt ratings of A-1, F1+ and P-1, and
long-term senior unsecured debt ratings of A+, A+ and A3 were issued by
Standard & Poor's, Fitch IBCA, Inc., and Moody's Investors Service,
respectively. Upon receiving its initial credit ratings, the Company initiated
its commercial paper program. To provide liquidity support for the Company's
commercial paper program, the Company secured a backup credit facility that
consisted of a $600 million 364-day and a $400 million 5-year revolving credit
facilities that are available for general corporate purposes. The Facility
replaced an existing $600 million bank line of credit that expired in
October 1999.
On November 10, 1999, the Company sold 3.3 million shares of 6.97%
Cumulative Redeemable Preferred Stock, Series A in a registered public offering.
The sale of the shares of the Series A Preferred Stock settled on November 16,
1999. The proceeds from the sale to the Company, before expenses, were
$165 million and will be used for general corporate purposes. The shares do not
have any maturity date but are subject at the Company's option, beginning
November 10, 2009, to be redeemed at any time, in whole or in part, at the
redemption price of $50 plus accrued and unpaid dividends to the redemption
date. The shares have no preemptive or conversion rights.
During 1999, the Company used the net proceeds from the issuance of debt of
$4.5 billion, the proceeds from student loan securitizations of $4.1 billion,
repayments and claim payments on student loans of $3.2 billion, and the net
proceeds from sales of student loans to purchase student loans of
$11.1 billion, to purchase net investments of $1.3 billion, to repurchase
$342 million of the Company's common stock and to purchase Nellie Mae
Corporation for $332 million in cash and stock.
Operating activities provided net cash inflows of $338 million in 1999, an
increase of $218 million from the net cash inflows of $120 million in 1998.
During 1999, the Company issued $12.2 billion of long-term notes to refund
maturing and repurchased obligations. At December 31, 1999, the Company had
$4.5 billion of outstanding long-term debt issues of which $1.6 billion had
stated maturities that could be accelerated through call provisions. The Company
uses interest rate and foreign currency swaps (collateralized where
appropriate), purchases of U.S. Treasury securities and other hedging techniques
to reduce its exposure to interest
36
rate and currency fluctuations that arise from its financing activities and to
match the variable interest rate characteristics of its earning assets. (See
"Interest Rate Risk Management.")
Until the GSE is dissolved, the Privatization Act places a number of
limitations on the Company. Under the Privatization Act, the GSE must wind down
its operations and dissolve on or before September 30, 2008. Any GSE debt
obligations outstanding at the date of such dissolution are required to be
defeased through creation of a fully collateralized trust, consisting of U.S.
government or agency obligations with cash flows matching the interest and
principal obligations of the defeased debt. The Privatization Act requires that
on the dissolution date of September 30, 2008, the GSE shall repurchase or
redeem, or make proper provisions for repurchase or redemption of any
outstanding preferred stock. The Company has the option of effecting an earlier
dissolution of the GSE if certain conditions are met. Also upon the GSE's
dissolution, all of its remaining assets will transfer to the Company.
The Privatization Act effectively requires that the GSE maintain a minimum
statutory capital adequacy ratio (the ratio of stockholders' equity to total
assets plus 50 percent of the credit equivalent amount of certain off-balance
sheet items) of at least 2.00 percent until January 1, 2000 and 2.25 percent
thereafter or be subject to certain "safety and soundness" requirements designed
to restore such statutory ratio. Management anticipates being able to fund the
increase in required capital from the GSE's current and retained earnings. While
the GSE may not finance the activities of its non-GSE affiliates, it may,
subject to its minimum capital requirements, dividend retained earnings and
surplus capital to SLM Holding, which in turn may contribute such amounts to its
non-GSE subsidiaries. The Privatization Act requires management to certify to
the Secretary of the Treasury that, after giving effect to the payment of
dividends, the statutory capital ratio test would have been met at the time the
dividend was declared. At December 31, 1999, the GSE's statutory capital
adequacy ratio, after the effect of the dividends to be paid in the first
quarter of 2000, was 2.00 percent.
The Privatization Act imposes certain restrictions on intercompany relations
between the GSE and its affiliates during the wind-down period. In particular,
the GSE must not extend credit to, nor guarantee, any debt obligations of SLM
Holding or its non-GSE subsidiaries.
The Privatization Act provides that the GSE may continue to issue new debt
obligations maturing on or before September 30, 2008. The legislation further
provides that the legal status and attributes of the GSE's debt obligations,
including Securities and Exchange Commission ("SEC") registration and state tax
exemptions, will be fully preserved until their respective maturities. Such debt
obligations will remain GSE debt obligations, whether such obligations were
outstanding at the time of, or issued subsequent to, the Reorganization. The
obligations of SLM Holding do not have GSE status.
INTEREST RATE RISK MANAGEMENT
INTEREST RATE GAP ANALYSIS
The Company's principal objective in financing its operations is to minimize
its sensitivity to changing interest rates by matching the interest rate
characteristics of its borrowings to specific assets in order to lock in
spreads. The Company funds its floating rate managed loan assets (most of which
have weekly rate resets) with variable rate debt and fixed rate debt converted
to variable rates with interest rate swaps. The Company also uses interest rate
cap and collar agreements, foreign currency swaps, options on securities, and
financial futures contracts to further reduce interest rate risk and foreign
currency exposure on certain of its borrowings. Investments are funded on a
"pooled" approach, i.e., the pool of liabilities that funds the investment
portfolio has an average rate and maturity or reset date that corresponds to the
average rate and maturity or reset date of the investments which they fund.
In addition to term match funding, 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. However, at
December 31, 1999, there were approximately $2 billion of PLUS
37
student loans outstanding in the trusts, which have interest rates that reset
annually based on the final auction of 52-week Treasury bills before each
July 1. The Company manages this basis risk within the trusts through its
on-balance sheet financing activities. The effect of this basis risk management
is included in the following table as the impact of securitized student loans.
In the table below the Company's variable rate assets and liabilities are
categorized by reset date of the underlying index. Fixed rate assets and
liabilities are categorized based on their maturity dates. An interest rate gap
is the difference between volumes of assets and volumes of liabilities maturing
or repricing during specific future time intervals. The following gap analysis
reflects rate-sensitive positions at December 31, 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................................ $31,599 $ -- $2,210 $ -- $ -- $ --
Warehousing advances......................... 1,028 -- -- -- 1 14
Academic facilities financings............... 2 20 21 100 359 526
Cash and investments......................... 3,871 40 34 19 29 1,782
Other assets................................. 27 32 64 118 271 1,858
------- ----- ------ ------ ----- -------
Total assets............................. 36,527 92 2,329 237 660 4,180
------- ----- ------ ------ ----- -------
LIABILITIES AND STOCKHOLDERS' EQUITY
Short-term borrowings........................ 32,201 368 4,922 -- -- --
Long-term notes.............................. 1,897 -- -- 1,481 551 567
Other liabilities............................ -- -- -- -- -- 983
Minority interest in subsidiary.............. -- -- -- -- -- 214
Stockholders' equity......................... -- -- -- -- -- 841
------- ----- ------ ------ ----- -------
Total liabilities and stockholders'
equity................................. 34,098 368 4,922 1,481 551 2,605
------- ----- ------ ------ ----- -------
OFF-BALANCE SHEET FINANCIAL INSTRUMENTS
Interest rate swaps.......................... (575) 328 (137) 1,450 50 (1,116)
Impact of securitized student loans.......... (2,290) -- 2,290 -- -- --
------- ----- ------ ------ ----- -------
Total off-balance sheet financial
instruments................................ (2,865) 328 2,153 1,450 50 (1,116)
------- ----- ------ ------ ----- -------
Period gap................................... $ (436) $ 52 $ (440) $ 206 $ 159 $ 459
======= ===== ====== ====== ===== =======
Cumulative gap............................... $ (436) $(384) $ (824) $ (618) $(459) $ --
======= ===== ====== ====== ===== =======
Ratio of interest-sensitive assets to
interest-sensitive liabilities............. 107.0% 16.3% 46.0% 8.0% 70.6% 409.5%
======= ===== ====== ====== ===== =======
Ratio of cumulative gap to total assets...... 1.0% .9% 1.9% 1.4% 1.0% --%
======= ===== ====== ====== ===== =======
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 annual effect of a hypothetical increase in 1999
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 an increase in rates and spreads of
this magnitude would reduce net income by approximately $41 million or $.26
diluted earnings per share. The decline in net income would be primarily due to
the reduction on the
38
spread earned on student loans as financing costs would increase while a
significant portion of the Company's student loan portfolio would continue to
earn at the minimum borrower rate.
The fair value of the Company's interest-sensitive assets and its long-term
debt and hedging instruments are also subject to change as a result of potential
changes in market rates and prices. A separate analysis was performed to
determine the effects of a hypothetical 10 percent rise in market interest rates
on the fair value of the Company's financial instruments. The effect of the
10 percent rise in rates on fair values would be a decrease in the fair market
value of student loans of approximately $59 million, and a decrease in the fair
market value of non-student loan assets and liabilities and equity of
approximately $48 million. The decrease in the fair market value of these assets
would be partially offset by an increase in the fair market value of the
Company's long-term debt and hedging instruments by $72 million. The net effect
of a 10 percent raise in rates on fair market values would therefore be
$35 million decrease in net assets. This decrease in the net asset market value
from a rise in rates is mainly caused by the reduction in the student loan
spread as a significant portion of the Company's student loan portfolio would
continue to earn at the minimum borrower interest rate while the related
financing costs would be rising by 10 percent.
These amounts have been determined after considering the impact of a
hypothetical shift in interest rates and the use of this methodology to quantify
the market risk of such instruments with no other changes in the Company's
financial structure. The analysis is limited because it does not take into
account the overall level of economic activity, other operating transactions and
other management actions that could be taken to further mitigate the Company's
exposure to risk.
AVERAGE TERMS TO MATURITY
The following table reflects the average terms to maturity for the Company's
managed earning assets and liabilities at December 31, 1999:
AVERAGE TERMS TO MATURITY (IN YEARS)
ON- OFF-
BALANCE BALANCE
SHEET SHEET MANAGED
-------- -------- --------
EARNING ASSETS
Student loans............................................... 6.5 4.0 5.5
Warehousing advances........................................ 6.5 -- 6.5
Academic facilities financings.............................. 7.0 -- 7.0
Cash and investments........................................ 4.5 -- 4.5
--- --- ---
Total earning assets........................................ 6.5 4.0 5.5
--- --- ---
BORROWINGS
Short-term borrowings....................................... .5 -- .5
Long-term borrowings........................................ 3.5 4.0 4.0
--- --- ---
Total borrowings............................................ 1.0 4.0 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 4.5 years. As student
loans are securitized, the need for long-term on-balance sheet financing will
decrease.
39
COMMON STOCK
On January 2, 1998, the Company effected a 7-for-2 stock split through a
stock dividend of an additional five shares for every two owned. In January
1999, the Board of Directors increased the common share repurchase authority
including equity forward contracts by 10 million shares. The following table
summarizes the Company's common share repurchase and equity-forward activity for
the years ended December 31, 1999 and 1998. (All amounts in the tables are
common shares in millions.)
YEARS ENDED
DECEMBER 31,
-------------------
1999 1998
-------- --------
Common shares repurchased:
Open market............................................... 2.9 5.1
Equity forwards........................................... 5.3 5.0
------ ------
Total shares repurchased.................................... 8.2 10.1
------ ------
Average purchase price per share............................ $41.78 $41.35
====== ======
Equity forward contracts:
Outstanding at beginning of year............................ 20.5 7.0
New contracts............................................... 6.2 18.5
Exercises................................................... (5.3) (5.0)
------ ------
Outstanding at end of year.................................. 21.4 20.5
====== ======
Board of director authority at end of year.................. 3.6 2.7
====== ======
As of December 31, 1999, the expiration dates and range of purchase prices
for outstanding equity forward contracts are as follows:
OUTSTANDING RANGE OF
YEAR OF MATURITY CONTRACTS MARKET PRICES
- ---------------- ----------- ---------------
2000........................................................ 4.0 $41.01 - $46.13
2001........................................................ 8.7 32.11 - 46.68
2002........................................................ 3.5 42.94 - 46.23
2003........................................................ 4.0 41.20 - 47.50
2004........................................................ 1.2 44.50 - 45.62
----
21.4
====
OTHER RELATED EVENTS AND INFORMATION
LEGISLATIVE DEVELOPMENTS
On December 17, 1999, President Clinton signed the Ticket to Work and Work
Incentives Improvement Act. This act includes a provision that changes the index
on which lender returns are set in the Federal Family Education Loan Program
from the current 91-day Treasury bill rate to a three-month commercial paper
rate. The new index will apply to all loans originated after January 1, 2000 and
before July 1, 2003. The rates that students pay on their FFELP loans are
unaffected by the new index. The Company and other FFELP industry participants
supported this legislative change.
40
ADMINISTRATION'S FY 2001 BUDGET PROPOSAL
On February 7, 2000 President Clinton submitted his Fiscal Year 2001 budget
proposal to Congress. The budget proposes significant savings from the student
loan programs, principally from the FFELP. The major proposals for student loans
are the following:
- Reduce special allowance payments 31 basis points from three-month
commercial paper plus 2.34% to three-month commercial paper plus 2.03%;
and
- Eliminate all special allowance on tax exempt loans subject to a 9.5%
interest rate floor.
All these proposals may be considered by Congress as it deliberates on the
FY 2001 budget. While the Company does not expect any of these proposals to
pass, if they were to pass as proposed, the Company's earnings could be
materially adversely affected.
YEAR 2000 ISSUE
The "Year 2000 issue" refers to a wide variety of potential computer program
processing and functionality issues that may arise from the inability of
computer programs to properly process date-sensitive information relating to the
Year 2000, years thereafter and to a lesser degree the Year 1999.
During 1996, the Company commenced a Year 2000 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.
As of the date of this report, we have not experienced any significant year
2000 problems with any internal software or hardware systems or with any of our
significant external business partners.
The Company cannot be sure we will be completely successful in our efforts
to address the year 2000 issue or that problems arising from the year 2000 issue
will not cause a material adverse effect on our operating results or financial
condition. The Company believes, however, that our most reasonably likely
worst-case scenario would relate to problems with the systems of third parties
rather than with our internal systems. We are limited in our efforts to address
the year 2000 issue as it relates to third parties and rely solely on the
assurances of these third parties as to their year 2000 preparedness.
ITEM 7A. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK.
Included within Management's Discussion and Analysis of Financial Condition
and Results of Operations.
ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA
Reference is made to the financial statements listed under the heading "(a)
1. Financial Statements" of Item 15 hereof, which financial statements are
incorporated by reference in response to this Item 8.
ITEM 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND
FINANCIAL DISCLOSURE.
Not applicable.
41
PART III.
ITEM 10. DIRECTORS AND EXECUTIVE OFFICERS OF THE REGISTRANT
The information as to the directors and executive officers of the Company
set forth under the captions "PROPOSAL 2--ELECTION OF DIRECTORS--Information
Concerning Nominees" and "Executive Officers" in the Proxy Statement to be filed
on Schedule 14A relating to the Company's Annual Meeting of Stockholders
scheduled to be held on May 18, 2000 (the "Proxy Statement") is incorporated
into this Report by reference.
ITEM 11. EXECUTIVE COMPENSATION
The information set forth under the caption "Executive Compensation" in the
Proxy Statement is incorporated into this Report by reference.
ITEM 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT.
The information set forth under the caption "COMMON STOCK INFORMATION--Board
and Management Ownership" and "--Principal Holders" in the Proxy Statement is
incorporated into this Report by reference thereto. There are no arrangements
known to the Company, the operation of which may at a subsequent date result in
a change in control of the Company.
ITEM 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS.
The information set forth under the caption "EXECUTIVE COMPENSATION--Certain
Transactions" in the Proxy Statement is incorporated into this Report by
reference.
ITEM 14. EXHIBITS, FINANCIAL STATEMENT SCHEDULES AND REPORTS ON FORM 8-K
(a) 1. Financial Statements
The following consolidated financial statements of SLM Holding Corporation
and the Report of the Independent Auditors thereon are included in Item 8 above:
Report of Independent Auditors.............................. F-2
Consolidated Balance Sheets as of December 31, 1999 and
1998...................................................... F-3
Consolidated Statements of Income for the years ended
December 31, 1999, 1998 and 1997.......................... F-4
Consolidated Statements of Charges in Stockholders' Equity
for the years ended December 31, 1999, 1998 and 1997...... F-5
Consolidated Statements of Cash Flows for the years ended
December 31, 1999, 1998 and 1997.......................... F-6
Notes to Consolidated Financial Statements.................. F-7
2. FINANCIAL STATEMENT SCHEDULES
All schedules are omitted because they are not applicable or the required
information is shown in the consolidated financial statements or notes thereto.
3. EXHIBITS
The exhibits listed in the accompanying index to exhibits are filed or
incorporated by reference as part of this annual report.
The Company will furnish at cost a copy of any exhibit filed with or
incorporated by reference into this Form 10-K. Oral or written requests for
copies of any exhibits should be directed to the Corporate Secretary.
42
(b) Reports on Form 8-K.
The following reports on Form 8-K were filed by the Company during the
quarter ended December 31, 1996 or thereafter:
On November 12, 1999, the Company filed a Form 8-K reporting the sale by
the Company of $3,000,000 shares of its Cumulative Redeemable Preferred
Stock, Series A.
On January 6, 2000, the Company filed a Form 8-K reporting that
President Clinton signed the Ticket to Work and Work Incentives
Improvement Act. This Act included a provision changing the index on
which lender returns are set under the FFELP from the 91-day Treasury
Bill rate to a 3-month commercial paper rate.
(c) Exhibits.
*2 Agreement and Plan of Reorganization by and among the
Student Loan Marketing Association, SLM Holding Corporation,
and Sallie Mae *Merger Company.
**3.1 Amended and Restated Certificate of Incorporation of the
Registrant
**3.2 By-Laws of the Registrant
**4 Warrant Certificate No. W-2, dated as of August 7, 1997
*10.1 Board of Director's Restricted Stock Plan
*10.2 Board of Director's Stock Option Plan
*10.3 Deferred Compensation Plan for Directors
*10.4 Incentive Performance Plan
*10.5 Stock Compensation Plan
*10.6 1993-1998 Stock Option Plan
*10.7 Supplemental Pension Plan
*10.8 Supplemental Employees' Thrift & Savings Plan (Sallie Mae
401(K) Supplemental Savings Plan)
***10.9 Directors Stock Plan
***10.10 Management Incentive Plan
+10.11 Employment Agreements
*21 Subsidiaries of the Registrant
+23 Consent of Arthur Andersen LLP
+27 Financial Data Schedule
- ------------------------
* Incorporated by reference to the correspondingly numbered exhibits to the
Registrant's Registration Statement on Form S-4, as amended (File
No. 333-21217)
** Incorporated by reference to the correspondingly numbered exhibits to the
Registrant's Registration on Form S-1 (File No. 333-38391)
*** Incorporated by reference to the Registrant's Definitive Proxy Statement on
Schedule 14A, as filed with the Securities and Exchange Commission on
April 10, 1998 (File No. 001-13251)
+ Filed with the Securities and Exchange Commission with this Form 10-K
43
SIGNATURES
Pursuant to the requirements of Section 13 or 15(d) of the Securities
Exchange Act of 1934, as amended, the Registrant has duly caused this report to
be signed on its behalf by the undersigned hereunto duly authorized.
Dated: March 27, 2000
SLM HOLDING CORPORATION
By: /s/ ALBERT L. LORD
-----------------------------------------
Name: Albert L. Lord
Title: CHIEF EXECUTIVE OFFICER
Pursuant to the requirement of the Securities Exchange Act of 1934, this
report has been signed below by the following persons on behalf of the
Registrant and in the capacities indicated on the dates indicated.
SIGNATURE TITLE DATE
--------- ----- ----
/s/ ALBERT L. LORD
------------------------------------ Chief Executive Officer (Principal March 27, 2000
Albert L. Lord Executive Officer) and Director
/s/ JOHN F. REMONDI Senior Vice President, Finance
------------------------------------ (Principal Financial and March 27, 2000
John F. Remondi Accounting Officer)
/s/ EDWARD A. FOX
------------------------------------ Chairman of the Board of Directors March 27, 2000
Edward A. Fox
/s/ JAMES E. BRANDON
------------------------------------ Director March 27, 2000
James E. Brandon
/s/ CHARLES L. DALEY
------------------------------------ Director March 27, 2000
Charles L. Daley
/s/ WILLIAM M. DIEFENDERFER, III
------------------------------------ Director March 27, 2000
William M. Diefenderfer, III
/s/ DIANE SUITT GILLELAND
------------------------------------ Director March 27, 2000
Diane Suitt Gilleland
44
SIGNATURE TITLE DATE
--------- ----- ----
/s/ ANN TORRE GRANT
------------------------------------ Director March 27, 2000
Ann Torre Grant
/s/ RONALD F. HUNT
------------------------------------ Director March 27, 2000
Ronald F. Hunt
/s/ BENJAMIN J. LAMBERT, III
------------------------------------ Director March 27, 2000
Benjamin J. Lambert, III
/s/ MARIE V. MCDEMMOND
------------------------------------ Director March 27, 2000
Marie V. McDemmond
/s/ BARRY A. MUNITZ
------------------------------------ Director March 27, 2000
Barry A. Munitz
/s/ A. ALEXANDER PORTER, JR.
------------------------------------ Director March 27, 2000
A. Alexander Porter, Jr.
/s/ WOLFGANG SCHOELLKOPF
------------------------------------ Director March 27, 2000
Wolfgang Schoellkopf
/s/ STEVEN L. SHAPIRO
------------------------------------ Director March 27, 2000
Steven L. Shapiro
/s/ RANDOLPH H. WATERFIELD, JR.
------------------------------------ Director March 27, 2000
Randolph H. Waterfield, Jr.
45
CONSOLIDATED FINANCIAL STATEMENTS
INDEX
PAGE
--------
Report of Independent Public Accountants.................... F-2
Consolidated Balance Sheets................................. F-3
Consolidated Statements of Income........................... F-4
Consolidated Statements of Changes in Stockholders'
Equity.................................................... F-5
Consolidated Statements of Cash Flows....................... F-6
Notes to Consolidated Financial Statements.................. F-7
F-1
REPORT OF INDEPENDENT PUBLIC ACCOUNTANTS
To the Board of Directors and Stockholders of
SLM Holding Corporation:
We have audited the accompanying consolidated balance sheets of SLM Holding
Corporation and subsidiaries as of December 31, 1999 and 1998, and the related
consolidated statements of income, changes in stockholders' equity and cash
flows for each of the three years in the period ended December 31, 1999. These
financial statements are the responsibility of the Company's management. Our
responsibility is to express an opinion on these financial statements based on
our audits.
We conducted our audits in accordance with auditing standards generally
accepted in the United States. Those standards require that we plan and perform
the audit to obtain reasonable assurance about whether the financial statements
are free of material misstatement. An audit includes examining, on a test basis,
evidence supporting the amounts and disclosures in the financial statements. An
audit also includes assessing the accounting principles used and significant
estimates made by management, as well as evaluating the overall financial
statement presentation. We believe that our audits provide a reasonable basis
for our opinion.
In our opinion, the financial statements referred to above present fairly,
in all material respects, the financial position of SLM Holding Corporation and
subsidiaries as of December 31, 1999 and 1998, and the consolidated results of
their operations and their cash flows for each of the three years in the period
ended December 31, 1999 in conformity with accounting principles generally
accepted in the United States.
Arthur Andersen LLP
Vienna, VA
January 13, 2000
F-2
SLM HOLDING CORPORATION
CONSOLIDATED BALANCE SHEETS
(DOLLARS IN THOUSANDS, EXCEPT SHARE AND PER SHARE AMOUNTS)
DECEMBER 31,
-------------------------
1999 1998
----------- -----------
ASSETS
Student loans............................................... $33,808,867 $28,282,505
Warehousing advances........................................ 1,042,695 1,542,732
Academic facilities financings
Bonds--available-for-sale................................. 640,498 734,994
Loans..................................................... 387,267 445,418
----------- -----------
Total academic facilities financings........................ 1,027,765 1,180,412
Investments
Available-for-sale........................................ 4,396,776 3,306,972
Held-to-maturity.......................................... 788,180 683,452
----------- -----------
Total investments........................................... 5,184,956 3,990,424
Cash and cash equivalents................................... 589,750 115,912
Other assets................................................ 2,370,751 2,098,024
----------- -----------
Total assets................................................ $44,024,784 $37,210,009
=========== ===========
LIABILITIES
Short-term borrowings....................................... $37,491,251 $26,588,504
Long-term notes............................................. 4,496,267 8,810,597
Other liabilities........................................... 982,469 943,399
----------- -----------
Total liabilities........................................... 42,969,987 36,342,500
----------- -----------
COMMITMENTS AND CONTINGENCIES
Minority interest in subsidiary............................. 213,883 213,883
Stockholders' equity
Preferred stock, Series A, par value $.20 per share,
20,000,000 shares authorized, 3,300,000 shares issued at
stated value of $50 per share............................. 165,000 --
Common stock, par value $.20 per share, 250,000,000 shares
authorized: 186,069,619 and 184,453,866 shares issued,
respectively.............................................. 37,214 36,891
Additional paid-in capital.................................. 62,827 26,871
Unrealized gains on investments (net of tax of $160,319 and
$200,167, respectively)................................... 297,735 371,739
Retained earnings........................................... 1,462,034 1,060,334
----------- -----------
Stockholders' equity before treasury stock.................. 2,024,810 1,495,835
Common stock held in treasury at cost: 28,493,072 and
20,327,213 shares, respectively........................... 1,183,896 842,209
----------- -----------
Total stockholders' equity.................................. 840,914 653,626
----------- -----------
Total liabilities and stockholders' equity.................. $44,024,784 $37,210,009
=========== ===========
See accompanying notes to consolidated financial statements.
F-3
SLM HOLDING CORPORATION
CONSOLIDATED STATEMENTS OF INCOME
(DOLLARS AND SHARES IN THOUSANDS, EXCEPT PER SHARE AMOUNTS)
YEARS ENDED DECEMBER 31,
------------------------------------
1999 1998 1997
---------- ---------- ----------
INTEREST INCOME:
Student loans............................................. $2,426,506 $2,094,488 $2,485,138
Warehousing advances...................................... 67,828 101,905 151,086
Academic facilities financings:
Taxable................................................. 39,123 44,224 51,410
Tax-exempt.............................................. 35,235 41,064 46,558
---------- ---------- ----------
Total academic facilities financings...................... 74,358 85,288 97,968
Investments............................................... 239,883 294,602 573,120
---------- ---------- ----------
Total interest income....................................... 2,808,575 2,576,283 3,307,312
INTEREST EXPENSE:
Short-term debt........................................... 1,762,147 1,297,753 1,461,954
Long-term debt............................................ 352,638 627,244 1,064,202
---------- ---------- ----------
Total interest expense...................................... 2,114,785 1,924,997 2,526,156
---------- ---------- ----------
Net interest income......................................... 693,790 651,286 781,156
Less: provision for losses.................................. 34,358 36,597 46,131
---------- ---------- ----------
Net interest income after provision for losses.............. 659,432 614,689 735,025
---------- ---------- ----------
OTHER INCOME:
Gains on student loan securitizations..................... 35,280 117,068 280,221
Servicing and securitization revenue...................... 288,584 280,863 151,221
Gains on sales of student loans........................... 27,169 -- --
Gains on sales of securities.............................. 15,832 10,734 16,051
Other..................................................... 83,925 87,646 70,997
---------- ---------- ----------
Total other income.......................................... 450,790 496,311 518,490
---------- ---------- ----------
OPERATING EXPENSES:
Salaries and benefits..................................... 184,145 189,917 224,554
Other..................................................... 174,425 170,952 269,213
---------- ---------- ----------
Total operating expenses.................................... 358,570 360,869 493,767
---------- ---------- ----------
Income before income taxes and minority interest in net
earnings of subsidiary.................................... 751,652 750,131 759,748
---------- ---------- ----------
Income tax:
Current................................................... 360,494 306,310 217,383
Deferred.................................................. (120,367) (68,337) 23,776
---------- ---------- ----------
Total income taxes.......................................... 240,127 237,973 241,159
Minority interest in net earnings of subsidiary............. 10,694 10,694 10,694
---------- ---------- ----------
Net income.................................................. 500,831 501,464 507,895
Preferred stock dividends................................... 1,438 -- --
---------- ---------- ----------
Net income attributable to common stock..................... $ 499,393 $ 501,464 $ 507,895
========== ========== ==========
Basic earnings per share.................................... $ 3.11 $ 2.99 $ 2.80
========== ========== ==========
Average common shares outstanding........................... 160,577 167,684 181,554
========== ========== ==========
Diluted earnings per share.................................. $ 3.06 $ 2.95 $ 2.78
========== ========== ==========
Average common and common equivalent shares outstanding..... 163,158 170,066 182,941
========== ========== ==========
See accompanying notes to consolidated financial statements.
F-4
SLM HOLDING CORPORATION
CONSOLIDATED STATEMENTS OF CHANGES IN STOCKHOLDERS' EQUITY
(DOLLARS IN THOUSANDS, EXCEPT SHARE AND PER SHARE AMOUNTS)
UNREALIZED
PREFERRED COMMON STOCK SHARES ADDITIONAL GAINS (LOSSES)
STOCK ------------------------------------- PREFERRED COMMON PAID-IN ON
SHARES ISSUED TREASURY OUTSTANDING STOCK STOCK CAPITAL INVESTMENTS
--------- ----------- ----------- ----------- --------- ------- ---------- --------------
BALANCE AT DECEMBER 31, 1996...... 229,934,499 (42,017,416) 187,917,083 $ -- $45,987 $ -- $349,235
Comprehensive income:
Net Income....................
Other comprehensive income,
net of tax
Change in unrealized gains
(losses) on investments, net
of tax...................... 29,501
Comprehensive income............
Cash dividends ($.52 per
share)........................
Issuance of common shares....... 3,473,351 3,473,351 695 59,316
Issuance of warrants............ 12,393
Tax benefit related to employee
stock option and purchase
plan.......................... 22,879
Premiums on equity forward
purchase contracts............ (18,082)
Repurchase of common shares..... (17,979,497) (17,979,497)
Retirement of treasury shares... (49,775,156) 49,775,156 (9,956) (47,668)
--------- ----------- ----------- ----------- -------- ------- -------- --------
BALANCE AT DECEMBER 31, 1997...... 183,632,694 (10,221,757) 173,410,937 $ -- $36,726 $ 28,838 $378,736
Comprehensive income:
Net income....................
Other comprehensive income,
net of tax:
Change in unrealized gains
(losses) on investments,
net of tax................ (6,997)
Comprehensive income............
Cash dividends ($.57 per
share)........................
Issuance of common shares....... 821,172 821,172 165 21,129
Tax benefit related to employee
stock option and purchase
plan.......................... 4,093
Premiums on equity forward
purchase contracts............ (27,189)
Repurchase of common shares..... (10,105,456) (10,105,456)
--------- ----------- ----------- ----------- -------- ------- -------- --------
BALANCE AT DECEMBER 31, 1998...... 184,453,866 (20,327,213) 164,126,653 $ -- $36,891 $ 26,871 $371,739
Comprehensive income:
Net income....................
Other comprehensive income,
net of tax:
Change in unrealized gains
(losses) on investments,
net of tax................ (74,004)
Comprehensive income............
Cash dividends:
Common stock ($.61 per
share)......................
Preferred stock ($.44 per
share)......................
Issuance of common shares....... 1,615,753 1,615,753 323 61,464
Issuance of preferred shares.... 3,300,000 165,000 (3,397)
Tax benefit related to employee
stock option and purchase
plan.......................... 7,510
Premiums on equity forward
purchase contracts............ (29,621)
Repurchase of common shares..... (8,165,859) (8,165,859)
--------- ----------- ----------- ----------- -------- ------- -------- --------
BALANCE AT DECEMBER 31, 1999...... 3,300,000 186,069,619 (28,493,072) 157,576,547 $165,000 $37,214 $ 62,827 $297,735
========= =========== =========== =========== ======== ======= ======== ========
TOTAL
RETAINED TREASURY STOCKHOLDERS'
EARNINGS STOCK EQUITY
---------- ----------- -------------
BALANCE AT DECEMBER 31, 1996...... $ 975,889 $ (537,164) $833,947
Comprehensive income:
Net Income.................... 507,895 507,895
Other comprehensive income,
net of tax
Change in unrealized gains
(losses) on investments, net
of tax...................... 29,501
--------
Comprehensive income............ 537,396
Cash dividends ($.52 per
share)........................ (93,630) (93,630)
Issuance of common shares....... 60,011
Issuance of warrants............ 12,393
Tax benefit related to employee
stock option and purchase
plan.......................... 22,879
Premiums on equity forward
purchase contracts............ (18,082)
Repurchase of common shares..... (680,342) (680,342)
Retirement of treasury shares... (736,019) 793,643 --
---------- ----------- --------
BALANCE AT DECEMBER 31, 1997...... $ 654,135 $ (423,863) $674,572
Comprehensive income:
Net income.................... 501,464 501,464
Other comprehensive income,
net of tax:
Change in unrealized gains
(losses) on investments,
net of tax................ (6,997)
--------
Comprehensive income............ 494,467
Cash dividends ($.57 per
share)........................ (95,265) (95,265)
Issuance of common shares....... 21,294
Tax benefit related to employee
stock option and purchase
plan.......................... 4,093
Premiums on equity forward
purchase contracts............ (27,189)
Repurchase of common shares..... (418,346) (418,346)
---------- ----------- --------
BALANCE AT DECEMBER 31, 1998...... $1,060,334 $ (842,209) $653,626
Comprehensive income:
Net income.................... 500,831 500,831
Other comprehensive income,
net of tax:
Change in unrealized gains
(losses) on investments,
net of tax................ (74,004)
--------
Comprehensive income............ 426,827
Cash dividends:
Common stock ($.61 per
share)...................... (97,693) (97,693)
Preferred stock ($.44 per
share)...................... (1,438) (1,438)
Issuance of common shares....... 61,787
Issuance of preferred shares.... 161,603
Tax benefit related to employee
stock option and purchase
plan.......................... 7,510
Premiums on equity forward
purchase contracts............ (29,621)
Repurchase of common shares..... (341,687) (341,687)
---------- ----------- --------
BALANCE AT DECEMBER 31, 1999...... $1,462,034 $(1,183,896) $840,914
========== =========== ========
See accompanying notes to consolidated financial statements.
F-5
SLM HOLDING CORPORATION
CONSOLIDATED STATEMENTS OF CASH FLOWS
(DOLLARS IN THOUSANDS)
YEARS ENDED DECEMBER 31,
-------------------------------------------
1999 1998 1997
------------ ------------- ------------
Operating activities
Net income................................................ $ 500,831 $ 501,464 $ 507,895
Adjustments to reconcile net income to net cash provided
by operating activities:
Gains on student loan securitizations................... (35,280) (117,068) (280,221)
Gains on sales of student loans......................... (27,169) - -
Gains on sales of securities............................ (15,832) (10,734) (16,051)
Provision for losses.................................... 34,358 36,597 46,131
(Increase) decrease in accrued interest receivable...... (165,048) 84,749 (76,561)
Increase (decrease) in accrued interest payable......... 4,347 (122,053) (40,231)
Decrease (increase) in other assets..................... 20,208 (83,905) 90,642
Increase (decrease) in other liabilities................ 21,809 (169,449) (172,554)
------------ ------------- ------------
Total adjustments......................................... (162,607) (381,863) (448,845)
------------ ------------- ------------
Net cash provided by operating activities................... 338,224 119,601 59,050
------------ ------------- ------------
INVESTING ACTIVITIES
Student loans purchased................................... (11,095,260) (8,417,086) (9,040,097)
Reduction of student loans purchased:
Installment payments...................................... 2,760,492 2,785,731 2,729,071
Claims and resales........................................ 474,105 782,041 1,112,226
Proceeds from securitization of student loans............. 4,085,540 6,035,218 9,621,989
Proceeds from sales of student loans...................... 926,123 -
Warehousing advances made................................. (876,728) (851,837) (695,061)
Warehousing advance repayments............................ 1,016,765 1,177,759 1,615,892
Academic facilities financings made....................... (35,919) (4,302) (148,033)
Academic facilities financings repayments................. 163,635 203,936 256,420
Investments purchased..................................... (12,972,279) (9,853,778) (16,639,867)
Proceeds from sale or maturity of investments............. 11,699,915 10,917,744 19,027,736
Purchase of Nellie Mae, net of cash acquired.............. (317,722) - -
------------ ------------- ------------
Net cash (used in) provided by investing activities......... (4,171,333) 2,775,426 7,840,276
------------ ------------- ------------
FINANCING ACTIVITIES
Short-term borrowings issued.............................. 510,412,470 478,111,748 685,921,616
Short-term borrowings repaid.............................. (508,290,421) (473,466,628) (682,026,471)
Long-term notes issued.................................... 12,234,054 5,527,280 4,691,827
Long-term notes repaid.................................... (9,809,617) (12,490,124) (15,994,000)
Equity forward contracts and stock issued................. 201,279 (1,802) 64,809
Common stock repurchased.................................. (341,687) (418,346) (680,342)
Common dividends paid..................................... (97,693) (95,265) (93,630)
Preferred dividends paid.................................. (1,438) -- --
------------ ------------- ------------
Net cash provided by (used in) financing activities......... 4,306,947 (2,833,137) (8,116,191)
------------ ------------- ------------
Net increase (decrease) in cash and cash equivalents........ 473,838 61,890 (216,865)
Cash and cash equivalents at beginning of year.............. 115,912 54,022 270,887
------------ ------------- ------------
Cash and cash equivalents at end of year.................... $ 589,750 $ 115,912 $ 54,022
============ ============= ============
Cash disbursements made for:
Interest................................................ $ 1,794,629 $ 1,868,975 $ 2,198,630
============ ============= ============
Income taxes............................................ $ 398,500 $ 339,336 $ 143,500
============ ============= ============
See accompanying notes to consolidated financial statements.
F-6
SLM HOLDING CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(DOLLARS IN THOUSANDS, EXCEPT PER SHARE AMOUNTS)
1. ORGANIZATION AND PRIVATIZATION
SLM Holding Corporation ("SLM Holding") was formed on February 3, 1997 as a
wholly owned subsidiary of the Student Loan Marketing Association (the "GSE").
On August 7, 1997, pursuant to the Student Loan Marketing Association
Reorganization Act of 1996 (the "Privatization Act") and approval by
shareholders of an agreement and plan of reorganization, the GSE was reorganized
into a subsidiary of SLM Holding (the "Reorganization"). SLM Holding is a
holding company that operates through a number of subsidiaries including the
GSE. References herein to the "Company" refer to the GSE and its subsidiaries
for periods prior to the Reorganization and to SLM Holding and its subsidiaries
for periods after the Reorganization.
Under the terms of the Reorganization each outstanding share of common
stock, par value $.20 per share, of the GSE was converted into one share of
common stock, par value $.20 per share of SLM Holding. The GSE transferred all
employees to non-GSE subsidiaries on August 7, 1997 and also transferred certain
assets, including stock in certain subsidiaries, to SLM Holding or one of its
non-GSE subsidiaries on December 31, 1997. This transfer of the subsidiaries and
assets and the related exchange of stock was accounted for at historical cost
similar to a pooling of interests and therefore all prior period financial
statements and related disclosures presented have been restated as if the
Reorganization took place at the beginning of such periods.
The GSE was chartered by Congress to provide liquidity for originators of
student loans made under federally sponsored student loan programs and otherwise
to support the credit needs of students and educational institutions. The GSE is
predominantly engaged in the purchase of student loans insured under federally
sponsored programs. The GSE also makes secured loans (warehousing advances) to
providers of education credit, and provides financing to educational
institutions for their physical plant and equipment (academic facilities
financings).
The Privatization Act provides that the GSE may continue to issue new debt
obligations maturing on or before September 30, 2008. The legislation further
provides that the legal status and attributes of the GSE's debt obligations,
including Securities and Exchange Commission ("SEC") registration and state tax
exemptions, will be fully preserved until their respective maturities. Such debt
obligations will remain GSE debt obligations, whether such obligations were
outstanding at the time of, or issued subsequent to, the Reorganization. The
obligations of SLM Holding do not have GSE status. The GSE will wind down its
operations and dissolve on or before September 30, 2008. Any GSE debt
obligations outstanding at the date of such dissolution will be defeased through
creation of a fully collateralized trust, consisting of U.S. government or
agency obligations with cash flows matching the interest and principal
obligations of the defeased debt. The Privatization Act further requires that
the GSE's outstanding adjustable rate cumulative preferred stock be redeemed on
September 30, 2008 or at such earlier time when the GSE is dissolved. Also upon
the GSE's dissolution, all of its remaining assets will transfer to the Company.
The Omnibus Appropriations Act of 1998, signed into law by the President on
October 21, 1998, amends the Federal Deposit Insurance Act by, among other
things, providing an exception to its current prohibition on affiliations
between government-sponsored entities and depository institutions. This
exception allows SLM Holding Corporation to become affiliated with a depository
institution upon satisfaction of certain conditions and with the approval of the
Secretary of the Treasury. Among the conditions are that: the dissolution of the
GSE cannot be adversely affected by the affiliation; the dissolution of the GSE
must occur within two years after the affiliation is consummated subject to the
F-7
SLM HOLDING CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
(DOLLARS IN THOUSANDS, EXCEPT PER SHARE AMOUNTS)
1. ORGANIZATION AND PRIVATIZATION (CONTINUED)
ability of the Secretary to extend such deadline for up to two one-year periods;
and the GSE must be separate and distinct from the affiliated depository
institution and cannot extend credit, provide credit enhancement or purchase any
obligation of the depository institution.
2. SIGNIFICANT ACCOUNTING POLICIES
LOANS
Loans, consisting of federally insured student loans, non-federally insured
student loans, student loan participations, warehousing advances, and academic
facilities financings are carried at their purchase price which, for student
loans, are adjusted for unamortized premiums and unearned purchase discounts.
STUDENT LOAN INCOME
The Company recognizes student loan income as earned, including adjustments
for the amortization of premiums and the accretion of discounts. In
December 1998, the Company and Chase restructured the Joint Venture, whereby the
Company now purchases all loans originated by Chase. Previously, the Joint
Venture funded the Chase-originated loans through sales of student loan
participations that entitled the Company and Chase to one-half interest in the
loans. In 1998 and 1997, interest income earned on student loan participations
was recognized in accordance with the terms of the joint venture agreement with
the Chase Manhattan Bank (the "Joint Venture") which effectively reflects the
underlying interest income earned on the student loans less servicing costs and
the general and administrative expenses of the Joint Venture. The Company's
investment in the Joint Venture is accounted for using the equity method of
accounting.
ALLOWANCE FOR LOSSES
The Company has established an allowance for potential losses on the
existing on-balance sheet portfolio of student loans, academic facilities
financings, investments and derivatives. In evaluating the adequacy of the
allowance for losses, the Company considers several factors including trends in
student loan claims rejected for payment by guarantors, default rates on
non-federally insured student loans, the amount of FFELP loans subject to
2 percent risk-sharing, and the credit exposure on all other investments, and
derivatives. The allowance is based on periodic evaluations of its loan
portfolios considering past experience, changes to federal student loan
programs, current economic conditions and other relevant factors. The allowance
is maintained at a level that management believes is adequate to provide for
estimated credit losses. This evaluation is inherently subjective as it requires
estimates that may be susceptible to significant changes.
CASH AND CASH EQUIVALENTS
Cash and cash equivalents includes term federal funds and bank deposits with
original terms to maturity less than three months.
F-8
SLM HOLDING CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
(DOLLARS IN THOUSANDS, EXCEPT PER SHARE AMOUNTS)
2. SIGNIFICANT ACCOUNTING POLICIES (CONTINUED)
INVESTMENTS
Investments are held to provide liquidity, to hedge certain financing
activities and to serve as a source of short-term income. Investments are
segregated into three categories as required under Statement of Financial
Accounting Standards ("SFAS") No. 115, "Accounting for Certain Investments in
Debt and Equity Securities." Securities that are actively traded are accounted
for at fair market value with unrealized gains and losses included in investment
income. Securities that are intended to be held-to-maturity are accounted for at
amortized cost. Securities that fall outside of the two previous categories are
considered as available-for-sale. Such securities are carried at market value,
with the after-tax unrealized gain or loss, along with after-tax unrealized gain
or loss on instruments which hedge such securities, carried as a separate
component of stockholders' equity. The amortized cost of debt securities in this
category is adjusted for amortization of premiums and accretion of discounts.
GOODWILL
Goodwill is amortized on a straight-line basis over a 10 to 20 year period.
In both 1999 and 1998 goodwill amortization totaled approximately $2 million.
INTEREST EXPENSE
Interest expense is based upon contractual interest rates adjusted for net
payments under derivative financial instruments with off-balance sheet risks,
which include interest rate swap agreements and foreign currency exchange
agreements and the amortization of debt issuance costs and deferred gains and
losses on hedge transactions entered into to reduce interest rate risk.
INTEREST RATE SWAPS
The Company utilizes interest rate swap agreements ("interest rate swaps")
principally for hedging purposes to alter the interest rate characteristics of
its debt in order to manage interest rates. This enables the Company to match
the interest rate characteristics of borrowings to specific assets in order to
mitigate the impact of interest rate fluctuations. The Company does not hold or
issue interest rate swaps for trading purposes.
Amounts paid or received under swaps that are used to alter the interest
rate characteristics of its interest-sensitive liabilities are accrued and
recognized as an adjustment of the interest expense on the related borrowing.
The related net receivable or payable from counterparties is included in other
assets or other liabilities. Gains and losses associated with the termination of
swaps for designated positions are deferred and amortized over the remaining
life of the designated instrument as an adjustment to interest expense.
The Company's credit exposure on swaps is limited to their unrealized gains
in the event of nonperformance by the counterparties. The Company manages the
credit risk associated with these instruments by performing credit reviews of
counterparties and monitoring market conditions to establish counterparty,
sovereign and instrument-type credit lines and, when appropriate, requiring
collateral.
F-9
SLM HOLDING CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
(DOLLARS IN THOUSANDS, EXCEPT PER SHARE AMOUNTS)
2. SIGNIFICANT ACCOUNTING POLICIES (CONTINUED)
FLOOR INTEREST CONTRACTS
The Company enters into Floor Interest Contracts with third parties, under
which the Company receives an up-front payment and agrees to pay the difference
between the minimum borrower interest rate less the applicable Special Allowance
Percentage ("SAP") rate ("the Strike Rate") and the average of 91-day Treasury
bill rates over the period of the contract. If the Strike Rate is less than the
average Treasury bill rate, then no payment is required. These upfront payments
are being amortized to student loan income over the average life of the
contracts, which is approximately 6 months, 10 months and 8 months for the 1999,
1998 and 1997 contracts, respectively.
INCOME TAXES
The Company accounts for income taxes in accordance with SFAS No. 109,
"Accounting for Income Taxes," using the asset and liability method. Under the
asset and liability method, deferred tax assets and liabilities are determined
for temporary differences between the carrying amounts of assets or liabilities
for book purposes versus tax purposes, based on the enacted tax rates which are
expected to be in effect when the underlying items of income and expense are
expected to be realized. The Company and its eligible subsidiaries file a
consolidated U.S. federal income tax return.
EARNINGS PER COMMON SHARE
Net income per share is calculated in accordance with SFAS No. 128,
"Earnings per Share." SFAS 128 requires dual presentation of basic and diluted
earnings per share ("EPS") on the face of the income statement and a
reconciliation of the numerator and denominator used in the basic EPS
calculation to the numerator and denominator used in the diluted EPS
calculation. Basic earnings per common share were computed using the weighted
average of common shares outstanding during the year. Diluted earnings per
common share were computed using the weighted average of common and common
equivalent shares outstanding during the year. Common equivalent shares include
shares issuable upon exercise of incentive stock options, and in 1997 and 1998,
warrants for voting common stock. Equity forward transactions are included in
common equivalent shares if the average market price of the Company's stock is
less than the forward contract's exercise price.
CONSOLIDATION
The consolidated financial statements include the accounts of SLM Holding
and its subsidiaries, after eliminating significant intercompany accounts and
transactions.
USE OF ESTIMATES
The preparation of financial statements in conformity with generally
accepted accounting principles requires management to make estimates and
assumptions that affect the reported amounts of assets and liabilities, reported
amounts of revenues and expenses and other disclosures. Actual results could
differ from those estimates.
F-10
SLM HOLDING CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
(DOLLARS IN THOUSANDS, EXCEPT PER SHARE AMOUNTS)
2. SIGNIFICANT ACCOUNTING POLICIES (CONTINUED)
RECLASSIFICATIONS
Certain reclassifications have been made to the balances as of and for the
years ended December 31, 1998 and 1997, to be consistent with classifications
adopted for 1999.
RECENTLY ISSUED 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 certain
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, as
amended by Statement of Financial Accounting Standards No. 137, "Accounting for
Derivative Instruments and Hedging Activities-Deferral of Effective Date of FASB
Statement No. 133," is effective for the Company's financial statements
beginning January 1, 2001. 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
changes in fair value to offset related fair value changes on the hedged item in
the income statement. Changes in fair value of derivative financial instruments
that qualify as cashflow hedges are reported as an adjustment to stockholders'
equity as a component of other comprehensive income if the hedging relationship
is effective. SFAS 133 requires that a company formally document, designate and
assess the effectiveness of transactions that receive hedge accounting
treatment. 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 will implement the new standard in the first quarter of the year
2001.
3. ACQUISITION
In July 1999, the Company completed the purchase of Nellie Mae Corporation
for $332 million in cash and stock in an acquisition accounted for as a
purchase. Based on a preliminary allocation of the purchase price, the Company
recognized $90 million in goodwill. At the time of the acquisition, Nellie Mae
had an outstanding student loan portfolio of $2.6 billion. In 1998, Nellie Mae
originated more than $375 million in student loans. Nellie Mae's pro-forma
results of operations for the years ended December 31, 1999 and 1998 were
immaterial to the Company's financial position and its results of operations.
The fair value of Nellie Mae's assets and liabilities at the date of acquisition
are presented below (dollars in millions):
Student loans............................................... $ 2,585
Cash and investments........................................ 15
Goodwill.................................................... 90
Other assets................................................ 97
Short-term borrowings....................................... (1,373)
Long-term notes............................................. (1,029)
Other liabilities........................................... (53)
-------
Net assets acquired......................................... $ 332
=======
F-11
SLM HOLDING CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
(DOLLARS IN THOUSANDS, EXCEPT PER SHARE AMOUNTS)
4. STUDENT LOANS
The Company purchases student loans from originating lenders, typically just
before the student leaves school and is required to begin repayment of the loan.
The Company's portfolio consists principally of loans originated under two
federally sponsored programs--the Federal Family Education Loan Program
("FFELP") and the Health Education Assistance Loan Program ("HEAL"). The Company
also originates private loans.
There are three principal categories of FFELP loans: Stafford loans, PLUS
loans, and consolidation loans. Generally, Stafford and PLUS loans have
repayment periods of between five and ten years. Consolidation loans have
repayment periods of twelve to thirty years. FFELP loans obligate the borrower
to pay interest at a stated fixed rate or an annually reset variable rate that
has a cap. The interest rates are either fixed to term or reset annually on
July 1 of each year depending on when the loan was originated. The Company earns
interest at the greater of the borrower's rate or a floating rate. If the
floating rate exceeds the borrower rate, the Department of Education makes a
payment directly to Company based upon the Special Allowance Payment ("SAP")
formula. SAP is paid whenever the average of all of the 91-day Treasury bill
auctions in a calendar quarter, plus a spread of between 2.20 and
3.50 percentage points depending on the loan status and when it was originated,
exceeds the rate of interest which the borrower is obligated to pay. If the
floating rate determined by the SAP formula is less than the rate the borrower
is obligated to pay, the Company simply earns interest at the borrower rate. In
all cases, the rate a borrower is obligated to pay sets a minimum rate for
determining the yield that 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, which are intended to
mimic the interest rate characteristics of the student loans. These borrowings,
however, generally do not have minimum rates like the student loans they
finance, rather they float over all interest rate ranges. As a result, in
periods of declining interest rates the portfolio of managed student loans may
be earning at the minimum rate, which is the rate the borrower is obligated to
pay, while the Company's funding costs continue to 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 declining interest rates will only benefit student loan
spreads through the next annual reset of the borrower's interest rates, which
occurs on July 1 of each year.
The Company is required to pay a 30 basis point "offset fee" on FFELP loans
purchased and held after August 10, 1993 and a 105 basis point consolidation
loan rebate fee on all consolidation loans purchased and held after October 1,
1993 or a 62 basis point consolidation loan rebate fee on all applications
received between October 1, 1998 and January 31, 1999. Also, all loans acquired
after October 1, 1993 are subject to risk sharing on claim payments under which
the loan is guaranteed for 98 percent of the balance plus accrued interest.
Offset fees, consolidation loan rebate fees, risk-sharing and yield reductions
continue to have an increasing adverse effect on the Company as a higher
percentage of loans originated after August 1993 become available to the
Company.
F-12
SLM HOLDING CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
(DOLLARS IN THOUSANDS, EXCEPT PER SHARE AMOUNTS)
4. STUDENT LOANS (CONTINUED)
The estimated average remaining term of student loans in the Company's
portfolio was approximately 6.5 years and 7 years at December 31, 1999 and 1998,
respectively. The following table reflects the distribution of the Company's
student loan portfolio by program.
DECEMBER 31,
-------------------------
1999 1998
----------- -----------
FFELP - Stafford........................... $17,387,612 $14,195,970
FFELP - PLUS/SLS........................... 2,385,646 2,047,635
FFELP - Consolidation loans................ 9,752,831 8,018,638
HEAL....................................... 2,208,078 2,430,520
Non-federally insured...................... 2,074,700 1,589,742
----------- -----------
Total student loans........................ $33,808,867 $28,282,505
=========== ===========
As of both December 31, 1999 and 1998, 84 percent of the Company's
on-balance sheet student loan portfolio was in repayment.
Holders of FFELP loans are insured against the borrower's default, death,
disability or bankruptcy. Insurance on FFELP loans is provided by certain state
or non-profit guarantee agencies, which are reinsured by the federal government.
FFELP loans originated prior to October 1, 1993 are reinsured 100 percent by the
federal government, while FFELP loans originated after October 1, 1993 are
reinsured for 98 percent of their unpaid balance resulting in 2 percent
risk-sharing for holders of these loans. At December 31, 1999 and 1998, the
Company owned $14.4 billion and $9.0 billion of 100 percent reinsured FFELP
loans, and $15.1 billion and $15.3 billion of 98 percent reinsured loans,
respectively. HEAL loans are directly insured by the federal government.
Both FFELP and HEAL loans are subject to regulatory requirements relating to
servicing. In the event of default on a student loan or the borrower's death,
disability or bankruptcy, the Company files a claim with the insurer or
guarantor of the loan, who, provided the loan has been properly originated and
serviced, and in the case of HEAL, litigated, pays the Company the unpaid
principal balance and accrued interest on the loan less risk-sharing, where
applicable.
Claims not immediately honored by the guarantor because of servicing or
origination defects are returned for remedial servicing, during which period
income is not earned. On certain paid claims, guarantors assess a penalty for
minor servicing defects. Costs associated with claims on defaulted student
loans, which include such penalties, reduced interest income on student loans by
$4.7 million, $10.0 million and $10.9 million for the years ended December 31,
1999, 1998 and 1997, respectively.
Non-federally insured loans are primarily education-related student loans to
students attending post-secondary educational institutions. Over 77 percent of
the Company's non-federally insured student loans are insured by the Company's
wholly-owned subsidiary, the Hemar Insurance Corporation of America ("HICA").
Accordingly, the Company bears all risk of loss on these loans.
F-13
SLM HOLDING CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
(DOLLARS IN THOUSANDS, EXCEPT PER SHARE AMOUNTS)
5. ALLOWANCE FOR LOSSES
The following table summarizes changes in the allowance for losses for the
years ended December 31, 1999, 1998 and 1997, respectively.
YEARS ENDED DECEMBER 31,
------------------------------
1999 1998 1997
-------- -------- --------
Balance at beginning of year.................. $293,185 $273,412 $255,380
Additions
Provisions for losses..................... 34,358 36,597 46,131
Recoveries................................ 25,894 25,961 9,206
Deductions
Reductions for student loan sales and
securitizations......................... (8,445) (7,474) (10,556)
Write-offs................................ (41,249) (35,311) (26,749)
-------- -------- --------
Balance at end of year........................ $303,743 $293,185 $273,412
======== ======== ========
6. INVESTMENTS
At December 31, 1999 and 1998, all investments that are classified as
available-for-sale securities under SFAS No. 115 are carried at fair market
value which approximates amortized cost, except for U.S. Treasury securities
which have an amortized cost of $1.03 billion and $957 million, respectively.
The fair market value of U.S. Treasury securities is adjusted for unrealized
gains and losses on $1.2 billion of interest rate swaps (see Note 10), which are
held to reduce interest rate risk related to these securities ($40 million of
unrealized gains at December 31, 1999 and $125 million of unrealized losses at
December 31, 1998). Securities classified as held to maturity are carried at
cost. A summary of investments at December 31, 1999 and 1998 follows:
DECEMBER 31, 1999
-------------------------------------------------
GROSS GROSS
AMORTIZED UNREALIZED UNREALIZED MARKET
COST GAINS LOSSES VALUE
---------- ---------- ---------- ----------
Available-for-sale
U.S. Treasury and other U.S. government agency
obligations.................................. $1,033,500 $446,228 $ (141) $1,479,587
State and political subdivisions of the U.S.
student loan revenue bonds................... 97,901 1,945 (64) 99,782
Asset-backed and other securities
Asset-backed securities...................... 1,143,585 300 (12,992) 1,130,893
Commercial paper............................. 1,682,420 -- -- 1,682,420
Other securities............................. 4,094 -- -- 4,094
---------- -------- -------- ----------
Total investment securities
available-for-sale......................... $3,961,500 $448,473 $(13,197) $4,396,776
========== ======== ======== ==========
Held-to-maturity
Other.......................................... $ 788,180 $ 172 $ (11) $ 788,341
---------- -------- -------- ----------
Total investment securities held-to-maturity..... $ 788,180 $ 172 $ (11) $ 788,341
========== ======== ======== ==========
F-14
SLM HOLDING CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
(DOLLARS IN THOUSANDS, EXCEPT PER SHARE AMOUNTS)
6. INVESTMENTS (CONTINUED)
DECEMBER 31, 1998
-------------------------------------------------
GROSS GROSS
AMORTIZED UNREALIZED UNREALIZED MARKET
COST GAINS LOSSES VALUE
---------- ---------- ---------- ----------
Available-for-sale
U.S. Treasury and other U.S. government agency
obligations................................. $ 956,568 $663,756 $(125,010) $1,495,314
State and political subdivisions of the U.S.
student loan revenue bonds.................. 118,143 5,112 -- 123,255
Asset-backed and other securities
Asset-backed securities..................... 1,462,883 127 (18,434) 1,444,576
Variable corporate bonds.................... 100,000 42 -- 100,042
Commercial paper............................ 134,985 -- -- 134,985
Other securities............................ 8,800 -- -- 8,800
---------- -------- --------- ----------
Total available-for-sale investment
securities................................ $2,781,379 $669,037 $(143,444) $3,306,972
========== ======== ========= ==========
Held-to-maturity
Other......................................... $ 683,452 $ 246 $ -- $ 683,698
---------- -------- --------- ----------
Total investment securities held-to-maturity.... $ 683,452 $ 246 $ -- $ 683,698
========== ======== ========= ==========
The Company sold available-for-sale securities with a carrying value of
$194 million, $3.6 billion and $5.6 billion for the years ended December 31,
1999, 1998 and 1997, respectively.
As of December 31, 1999, stated maturities and maturities if accelerated to
the put or call dates for investments are shown in the following table:
DECEMBER 31, 1999
-------------------------------------------
HELD-TO-MATURITY AVAILABLE-FOR-SALE
---------------- ------------------------
MATURITY TO
STATED STATED PUT OR
YEAR OF MATURITY MATURITY MATURITY CALL DATE
- ---------------- ---------------- ---------- -----------
2000................................... $ 4,619 $1,818,801 $1,827,056
2001................................... 1,161 36,460 34,746
2002................................... 32,811 116,181 132,153
2003................................... 408 61,628 53,848
2004................................... - 26,950 17,310
2005-2009.............................. 226,700 1,815,609 1,813,433
after 2009............................. 522,481 521,147 518,230
-------- ---------- ----------
Total.................................. $788,180 $4,396,776 $4,396,776
======== ========== ==========
F-15
SLM HOLDING CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
(DOLLARS IN THOUSANDS, EXCEPT PER SHARE AMOUNTS)
7. SHORT-TERM BORROWINGS
Short-term borrowings have an original or remaining term to maturity of one
year or less. The following tables summarize outstanding short-term notes at
December 31, 1999, 1998 and 1997, the weighted average interest rates at the end
of each period, and the related average balances, weighted average interest
rates and weighted average effective interest rates, which include the effects
of related off-balance sheet financial instruments (see Note 10) during the
periods.
AT DECEMBER 31, 1999 YEAR ENDED DECEMBER 31, 1999
---------------------- ----------------------------------
WEIGHTED
WEIGHTED WEIGHTED AVERAGE
AVERAGE AVERAGE EFFECTIVE
ENDING INTEREST AVERAGE INTEREST INTEREST
BALANCE RATE BALANCE RATE RATE
----------- -------- ----------- -------- ---------
Six month floating rate notes............ $ 4,849,106 5.81% $ 4,644,440 5.30% 5.38%
Other floating rate notes................ 12,478,317 5.83 10,223,891 5.35 5.42
Discount notes........................... 1,406,163 5.45 4,407,311 4.90 5.00
Fixed rate notes......................... 3,777,793 5.84 3,370,924 5.41 5.20
Commercial paper......................... 394,968 6.47 56,822 5.82 6.10
Securities sold--not yet purchased and
repurchase agreements.................. -- -- 94,575 4.87 4.91
Short-term portion of long-term notes.... 14,584,904 5.84 10,405,996 5.43 5.33
----------- ---- ----------- ---- ----
Total short-term borrowings.............. $37,491,251 5.76% $33,203,959 5.31% 5.31%
=========== ==== =========== ==== ====
Maximum outstanding at any month end..... $39,618,707
===========
AT DECEMBER 31, 1998 YEAR ENDED DECEMBER 31, 1998
---------------------- ----------------------------------
WEIGHTED
WEIGHTED WEIGHTED AVERAGE
AVERAGE AVERAGE EFFECTIVE
ENDING INTEREST AVERAGE INTEREST INTEREST
BALANCE RATE BALANCE RATE RATE
----------- -------- ----------- -------- ---------
Six month floating rate notes............ $ 3,249,352 5.14% $ 2,898,495 5.32% 5.40%
Other floating rate notes................ 7,361,686 5.11 3,663,277 5.39 5.41
Discount notes........................... 4,429,756 5.06 2,556,366 5.22 5.27
Fixed rate notes......................... 4,724,823 5.41 6,531,461 5.64 5.40
Commercial paper......................... -- -- -- -- --
Securities sold--not yet purchased and
repurchase agreements.................. 5,600 5.50 213,871 5.63 5.63
Short-term portion of long-term notes.... 6,817,287 5.05 8,418,547 5.48 5.24
----------- ---- ----------- ---- ----
Total short-term borrowings.............. $26,588,504 5.14% $24,282,017 5.47% 5.34%
=========== ==== =========== ==== ====
Maximum outstanding at any month end..... $27,142,913
===========
F-16
SLM HOLDING CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
(DOLLARS IN THOUSANDS, EXCEPT PER SHARE AMOUNTS)
7. SHORT-TERM BORROWINGS (CONTINUED)
AT DECEMBER 31, 1997 YEAR ENDED DECEMBER 31, 1997
---------------------- ----------------------------------
WEIGHTED
WEIGHTED WEIGHTED AVERAGE
AVERAGE AVERAGE EFFECTIVE
ENDING INTEREST AVERAGE INTEREST INTEREST
BALANCE RATE BALANCE RATE RATE
----------- -------- ----------- -------- ---------
Six month floating rate notes............ $ 3,149,410 5.55% $ 2,907,533 5.39% 5.48%
Other floating rate notes................ 3,545,717 5.63 2,478,985 5.39 5.41
Discount notes........................... 1,641,221 5.67 5,390,829 5.43 5.49
Fixed rate notes......................... 6,789,749 5.78 5,982,389 5.87 5.58
Commercial paper......................... -- -- -- -- --
Securities sold - not yet purchased and
repurchase agreements.................. -- -- 292,001 5.43 5.43
Short-term portion of long-term notes.... 8,049,412 5.74 9,496,177 5.67 5.51
----------- ---- ----------- ---- ----
Total short-term borrowings.............. $23,175,509 5.70% $26,547,914 5.61% 5.51%
=========== ==== =========== ==== ====
Maximum outstanding at any month end..... $29,084,281
===========
At December 31, 1999, the short-term portion of long-term notes included one
instrument totaling $219 million that required the payment of interest and
principal in a foreign currency. To eliminate its exposure to the effect of
currency fluctuations on this contractual obligation, the Company entered into a
foreign currency agreement with an independent party (see Note 10).
To match the interest rate characteristics on short-term notes with the rate
characteristics of its assets, the Company enters into interest rate swaps with
independent parties. Under these agreements, the Company makes periodic
payments, indexed to the related asset rates, in exchange for periodic payments
which generally match the Company's interest obligations on fixed or variable
rate notes (see Note 10).
8. LONG-TERM NOTES
The following tables summarize outstanding long-term notes at December 31,
1999 and 1998, the weighted average interest rates and related notional amount
of derivatives at the end of the periods,
F-17
SLM HOLDING CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
(DOLLARS IN THOUSANDS, EXCEPT PER SHARE AMOUNTS)
8. LONG-TERM NOTES (CONTINUED)
and the related average balances and weighted average effective interest rates,
which include the effects of related off-balance sheet financial instruments
(see Note 10), during the periods.
YEAR ENDED
AT DECEMBER 31, 1999 DECEMBER 31, 1999
-------------------------------------- ----------------------
WEIGHTED
WEIGHTED AVERAGE
AVERAGE NOTIONAL EFFECTIVE
ENDING INTEREST AMOUNT AVERAGE INTEREST
BALANCE RATE OF DERIVATIVES BALANCE RATE
---------- -------- -------------- ---------- ---------
Floating rate notes:
U.S. dollar denominated:
Interest bearing, due 2001-2003.... $1,897,082 5.95% $ 216,427 $2,566,524 5.33%
---------- ----- ---------- ---------- -----
Fixed rate notes:
U.S. dollar denominated:
Interest bearing, due 2001-2018.... 2,437,290 6.00 2,785,701 3,433,009 5.60
Zero coupon, due 2014-2022......... 161,895 11.79 -- 153,224 11.14
Foreign currency:
Interest bearing, due 2000......... -- -- -- 139,200 4.82
---------- ----- ---------- ---------- -----
Total fixed rate notes................. 2,599,185 6.36 2,785,701 3,725,433 5.80
---------- ----- ---------- ---------- -----
Total long-term notes.................. $4,496,267 6.19% $3,002,128 $6,291,957 5.60%
========== ===== ========== ========== =====
YEAR ENDED
AT DECEMBER 31, 1998 DECEMBER 31, 1998
-------------------------------------- -----------------------
WEIGHTED
WEIGHTED AVERAGE
AVERAGE NOTIONAL EFFECTIVE
ENDING INTEREST AMOUNT AVERAGE INTEREST
BALANCE RATE OF DERIVATIVES BALANCE RATE
---------- -------- -------------- ----------- ---------
Floating rate notes:
U.S. dollar denominated:
Interest bearing, due 2000-2003... $3,055,745 5.16% $ 693,119 $ 3,328,326 5.42%
---------- ----- ---------- ----------- -----
Fixed rate notes:
U.S. dollar denominated:
Interest bearing, due 2000-2018... 5,391,029 5.95 7,734,754 7,490,869 5.59
Zero coupon, due 2014-2022........ 144,823 11.79 -- 150,626 10.72
Foreign currency:
Interest bearing, due 2000........ 219,000 5.02 438,000 223,697 5.15
---------- ----- ---------- ----------- -----
Total fixed rate notes................ 5,754,852 6.06 8,172,754 7,865,192 5.68
---------- ----- ---------- ----------- -----
Total long-term notes................. $8,810,597 5.75% $8,865,873 $11,193,518 5.60%
========== ===== ========== =========== =====
F-18
SLM HOLDING CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
(DOLLARS IN THOUSANDS, EXCEPT PER SHARE AMOUNTS)
8. LONG-TERM NOTES (CONTINUED)
At December 31, 1999, the Company had outstanding long-term debt issues with
call features totaling $1.6 billion. As of December 31, 1999, the stated
maturities and maturities if accelerated to the call dates for long-term notes
are shown in the following table:
DECEMBER 31, 1999
------------------------
MATURITY TO
STATED CALL
YEAR OF MATURITY MATURITY DATE
- ---------------- ---------- -----------
2000................................................. $ -- $1,389,489
2001................................................. 3,336,232 1,999,843
2002................................................. 429,600 427,900
2003................................................. 105,100 53,700
2004................................................. 58,200 58,200
2005-2022............................................ 567,135 567,135
---------- ----------
$4,496,267 $4,496,267
========== ==========
In the past, the Company has issued debt with interest and/or principal
payment characteristics tied to foreign currency indices to attempt to minimize
its cost of funds. At December 31, 1998, the Company had outstanding long-term
foreign currency notes which require the payment of principal and interest in
foreign currencies. To eliminate the Company's exposure to the effect of
currency fluctuations on these contractual obligations, the Company has entered
into various foreign currency agreements with independent parties (see
Note 10). At December 31, 1999, no such long-term notes were outstanding.
To match the interest rate characteristics on its long-term notes with the
interest rate characteristics of its assets, the Company enters into interest
rate swaps with independent parties. Under these agreements, the Company makes
periodic payments, indexed to the related asset rates, in exchange for periodic
payments which generally match the Company's interest obligations on fixed or
variable rate borrowings (see Note 10).
9. STUDENT LOAN SECURITIZATION
For the years ended December 31, 1999, 1998 and 1997, SLM Funding
Corporation, a wholly owned special purpose finance subsidiary of the GSE,
purchased from the GSE and sold $4.0 billion, $6.0 billion and $9.4 billion,
respectively, of student loans to trusts which issued floating rate student loan
asset-backed securities in underwritten public offerings. The turbulence in the
global financial markets following the Russian bond default in August 1998
caused financing spreads, relative to Treasury bill rates, to widen to levels
where term financing in the securitization market did not make economic sense to
management. As a result, the Company did not enter into securitization
transactions from the second half of 1998 through the first quarter of 1999. At
December 31, 1999 and 1998, securitized student loans outstanding totaled
$19.4 billion and $17.9 billion, respectively.
The Company accounts for its securitization transactions in accordance with
SFAS No. 125 "Accounting for Transfers and Servicing of Financial Assets and
Extinguishments of Liabilities," which establishes the accounting for certain
financial asset transfers including securitization transactions. Under
SFAS 125, the Company records a gain on sale based upon the difference between
the cost basis
F-19
SLM HOLDING CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
(DOLLARS IN THOUSANDS, EXCEPT PER SHARE AMOUNTS)
9. STUDENT LOAN SECURITIZATION (CONTINUED)
of the assets sold and the fair value of the assets received. At the same time
the Company records an asset ("the Interest Residual") equal to the present
value of the expected net cash flows from the trust to the Company over the life
of the portfolio sold. The net cash flows consists of the net present value of
the excess of the interest earned on the portfolio of student loans sold to the
trust less the interest paid on the asset-backed securities, servicing and
administration fees, the estimated cost of borrower benefit programs, expected
losses from risk-sharing on defaulted loans and other student loan related
costs. In addition, the Company continues to service the loans in the trusts for
a fee and earns that fee over the life of the portfolio. When the contract
servicing fee is greater than current market servicing rates, the present value
of such excess servicing fees is recognized as a servicing asset and included in
the gain on sale. No additional servicing assets were recognized in 1998 and
1999 transactions.
The Interest Residual asset is an available-for-sale security as defined by
SFAS 115 and is, therefore, marked-to-market through equity (net of tax).
Servicing assets are amortized in proportion to, and over the period of,
estimated net servicing income. Impairment of servicing assets is evaluated
periodically using discounted cashflows and comparing them to the net carrying
value of those assets with the rate of loan prepayment being the most
significant estimate involved in the measurement process. At December 31, 1999
and 1998, there was no valuation allowance on the servicing asset. At
December 31, 1999 and 1998, the Interest Residual asset was $724 million and
$727 million and the servicing asset was $34 million and $44 million.
On July 23, 1997, the U.S. Department Education, pursuant to a court order,
decided that the 30 basis point annual offset fee does not apply to student
loans the GSE has securitized. The GSE initially filed suit in the U.S. District
Court for the District of Columbia in April 1995 challenging the Secretary of
Education's attempt to apply the Offset Fee to securitized loans. The GSE
prevailed, and the Court of Appeals ruled that the fee applies only to loans
that the GSE owns. In addition, the Court of Appeals upheld the
constitutionality of the offset fee, which applies annually with respect to the
principal amount of student loans that the Company holds on-balance sheet and
that were acquired on or after August 10, 1993. Based upon the favorable final
ruling in this matter, the reserve of approximately $97 million pre-tax was
reversed and recognized in income in the third quarter of 1997. In the
consolidated statements of income, $94 million of the reserve reversal is
included in the gain on sale of student loans for 1997 and $3 million is
included in servicing and securitization revenue for 1997. Since the third
quarter of 1997, all securitization gains have been calculated without
consideration of the offset fee.
10. DERIVATIVE FINANCIAL INSTRUMENTS
DERIVATIVE FINANCIAL INSTRUMENTS HELD OR ISSUED FOR PURPOSES OTHER THAN TRADING
The Company enters into various financial instruments with off-balance sheet
risk in the normal course of business primarily to reduce interest rate risk and
foreign currency exposure on certain borrowings. These financial instruments
include interest rate swaps, interest rate cap and collar agreements, foreign
currency swaps, forward currency exchange agreements, options on currency
exchange agreements, options on securities and financial futures contracts.
The Company enters into three general types of interest rate swaps under
which it pays the following: 1) a floating rate in exchange for a fixed rate
(standard swaps); 2) a fixed rate in exchange for a floating rate (reverse
swaps); and 3) a floating rate in exchange for another floating rate, based
F-20
SLM HOLDING CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
(DOLLARS IN THOUSANDS, EXCEPT PER SHARE AMOUNTS)
10. DERIVATIVE FINANCIAL INSTRUMENTS (CONTINUED)
upon different market indices (basis/reverse basis swaps). At December 31, 1999,
the Company had outstanding $8.1 billion, $2.7 billion and $13.5 billion of
notional principal amount of standard swaps, reverse swaps and basis/reverse
basis swaps, respectively. Of the Company's $24.3 billion of interest rate swaps
outstanding at December 31, 1999, $21.1 billion was related to debt and
$3.2 billion was related to assets. At December 31, 1998, the Company had
notional principal outstanding of $11.6 billion, $1.2 billion and $17.8 billion
of standard swaps, reverse swaps and basis/reverse basis swaps, respectively. Of
the Company's $30.6 billion of interest rate swaps outstanding at December 31,
1998, $29.4 billion was related to debt and $1.2 billion was related to assets.
The following tables summarize the ending balances of the borrowings that
have been matched with the notional amount of interest rate swaps and foreign
currency agreements at December 31, 1999 and 1998 (dollars in billions).
AT DECEMBER 31, 1999
----------------------------------------------------------------
SWAPS
------------------------ FOREIGN
BASIS/ CURRENCY TOTAL
BORROWINGS STANDARD REVERSE BASIS AGREEMENTS DERIVATIVES
---------- -------- ------------- ---------- -----------
Short-term borrowings
Six month floating rate notes........... $ -- $ -- $ -- $ -- $ --
Other floating rate notes............... 2.1 -- 3.7 -- 3.7
Discount notes.......................... 1.0 .6 .9 -- 1.5
Fixed rate notes........................ 3.3 3.3 2.2 -- 5.5
Short-term portion of long-term notes... 4.0 2.7 4.7 .2 7.6
----- ---- ----- ---- -----
Total short-term borrowings....... 10.4 6.6 11.5 .2 18.3
----- ---- ----- ---- -----
Long-term notes:
Floating rate notes:
U.S. dollar denominated:
Interest bearing.................... .2 -- .2 -- .2
Fixed rate notes:
U.S. dollar denominated:
Interest bearing.................... 1.5 1.5 1.3 -- 2.8
Foreign currency:
Interest bearing...................... -- -- -- -- --
----- ---- ----- ---- -----
Total long-term notes............... 1.7 1.5 1.5 -- 3.0
----- ---- ----- ---- -----
Total notes......................... $12.1 $8.1 $13.0 $ .2 $21.3
===== ==== ===== ==== =====
F-21
SLM HOLDING CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
(DOLLARS IN THOUSANDS, EXCEPT PER SHARE AMOUNTS)
10. DERIVATIVE FINANCIAL INSTRUMENTS (CONTINUED)
AT DECEMBER 31, 1998
----------------------------------------------------------------
SWAPS
------------------------ FOREIGN
BASIS/ CURRENCY TOTAL
BORROWINGS STANDARD REVERSE BASIS AGREEMENTS DERIVATIVES
---------- -------- ------------- ---------- -----------
Short-term borrowings
Six month floating rate notes........... $ -- $ -- $ -- $ -- $ --
Other floating rate notes............... 3.2 -- 6.1 -- 6.1
Discount notes.......................... .9 -- .9 -- .9
Fixed rate notes........................ 4.3 4.2 3.3 -- 7.5
Short-term portion of long-term notes... 3.6 2.8 3.4 -- 6.2
----- ----- ----- ----- -----
Total short-term borrowings....... 12.0 7.0 13.7 -- 20.7
----- ----- ----- ----- -----
Long-term notes:
Floating rate notes:
U.S. dollar denominated:
Interest bearing.................... .4 -- .7 -- .7
Fixed rate notes:
U.S. dollar denominated:
Interest bearing.................... 4.6 4.6 3.2 -- 7.8
Foreign currency:
Interest bearing.................... .2 -- .2 .2 .4
----- ----- ----- ----- -----
Total long-term notes............. 5.2 4.6 4.1 .2 8.9
----- ----- ----- ----- -----
Total notes....................... $17.2 $11.6 $17.8 $ .2 $29.6
===== ===== ===== ===== =====
F-22
SLM HOLDING CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
(DOLLARS IN THOUSANDS, EXCEPT PER SHARE AMOUNTS)
10. DERIVATIVE FINANCIAL INSTRUMENTS (CONTINUED)
The following table summarizes the activity for the Company's interest rate
swaps, foreign currency agreements and futures contracts held or issued for
purposes other than trading for the years ended December 31, 1997, 1998 and 1999
(dollars in millions).
NOTIONAL PRINCIPAL
--------------------------
FOREIGN FUTURES
INTEREST RATE CURRENCY CONTRACT
SWAPS AGREEMENTS AMOUNT
------------- ---------- --------
Balance, December 31, 1996.................................. $ 37,082 $1,188 $ 178
Issuances/Opens........................................... 11,890 7 4,257
Maturities/Expirations.................................... (13,165) (938) (885)
Terminations/Closes....................................... -- -- (2,551)
-------- ------ -------
Balance, December 31, 1997.................................. $ 35,807 $ 257 $ 999
Issuances/Opens........................................... 14,524 -- 2,737
Maturities/Expirations.................................... (18,332) -- --
Terminations/Closes....................................... (1,400) (38) (3,170)
-------- ------ -------
Balance, December 31, 1998.................................. $ 30,599 $ 219 $ 566
Issuances/Opens........................................... 13,634 -- 4,314
Maturities/Expirations.................................... (19,863) -- --
Terminations/Closes....................................... (30) -- (3,850)
-------- ------ -------
Balance, December 31, 1999.................................. $ 24,340 $ 219 $ 1,030
======== ====== =======
INTEREST RATE SWAPS
Net payments related to the debt-related swaps are recorded in interest
expense. For the years ended December 31, 1999, 1998 and 1997, the Company
received net payments on debt-related swaps reducing interest expense by
$26 million, $74 million and $105 million, respectively.
At December 31, 1999, SLMA had interest rate swaps with put features
totaling $1.8 billion. As of December 31, 1999, stated maturities of interest
rate swaps and maturities if accelerated to the put dates, are shown in the
following table (dollars in millions). The maturities of interest rate swaps
generally coincide with the maturities of the associated assets or borrowings.
DECEMBER 31, 1999
------------------------
YEAR OF STATED MATURITY TO
MATURITY/PUT MATURITY PUT DATE
- ---------------------------------------------- ---------- -----------
2000.......................................... $16,007 $16,842
2001.......................................... 5,124 4,289
2002.......................................... 1,712 1,712
2003.......................................... 30 30
2004.......................................... 3 3
2005-2008..................................... 1,464 1,464
------- -------
$24,340 $24,340
======= =======
F-23
SLM HOLDING CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
(DOLLARS IN THOUSANDS, EXCEPT PER SHARE AMOUNTS)
10. DERIVATIVE FINANCIAL INSTRUMENTS (CONTINUED)
FOREIGN CURRENCY AGREEMENTS
At December 31, 1999 and 1998, the Company had borrowings with principal
repayable in foreign currencies of $219 million and $263 million, respectively.
These borrowings were hedged by notional principal of $219 million of foreign
currency swaps in both years. The foreign currency derivative agreements
typically mature concurrently with the maturities of the debt. The following
table summarizes the outstanding amount of these borrowings and their currency
translation values at December 31, 1999 and 1998, using spot rates at the
respective dates (dollars in millions).
DECEMBER 31,
-------------------
1999 1998
-------- --------
Carrying value of outstanding foreign currency debt......... $219 $263
Currency translation value of outstanding foreign currency
debt...................................................... $196 $218
FUTURES CONTRACTS
The Company enters into financial futures contracts to hedge the risk of
future interest rate changes. The contracts provide a better matching of
interest rate reset dates on debt with the Company's assets. They are also used
as anticipatory hedges of debt to be issued to fund the Company's assets, mainly
the portfolio of student loans in the PLUS program. These student loans pay
interest rates that are generally indexed to the one-year Treasury bill, reset
annually on the final auction prior to July 1. The gains and losses on these
hedging transactions are deferred and included in other assets and will be
recognized as an adjustment to interest expense. At December 31, 1999 and 1998,
the Company had futures contracts that hedged approximately $1.0 billion and
$566 million of debt, respectively. Approximately $2.6 million of realized gains
and $4.7 million of realized losses had been deferred at December 31, 1999 and
1998 respectively, related to futures contracts.
FLOOR INTEREST CONTRACTS
During 1999, 1998 and 1997, the Company entered into Floor Interest
Contracts with principal balances of $5 billion, $23 billion and $11 billion,
respectively, in exchange for upfront payments of $6 million, $38 million and
$14 million, respectively. For the years ended December 31, 1999, 1998 and 1997,
the amortization of the upfront payments on fixed and variable Floor Interest
Contracts increased student loan income by $41 million, $52 million and
$41 million, respectively, of which $20 million, $28 million and $34 million,
respectively, related to contracts with fixed borrower rates and $21 million,
$24 million and $7 million, respectively, related to contracts with annually
reset borrower rates. In addition, in 1999 and 1998 the Company sold Floor
Interest Contracts related to off-balance sheet student loans, and the
amortization of the upfront payments on these contracts increased securitization
revenue by $4 million for both years. For the years ended December 31, 1999,
1998 and 1997, payments by the Company to Floor Interest Contract counterparties
under the contracts totaled $60 million, $48 million and $19 million,
respectively.
DERIVATIVE FINANCIAL INSTRUMENTS HELD OR ISSUED FOR TRADING PURPOSES
From time to time the Company maintains trading positions in derivative
financial instruments which are designed to generate additional income based on
market conditions. As of December 31,
F-24
SLM HOLDING CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
(DOLLARS IN THOUSANDS, EXCEPT PER SHARE AMOUNTS)
10. DERIVATIVE FINANCIAL INSTRUMENTS (CONTINUED)
1999, the Company had $101 million in trading positions outstanding. Trading
results for these positions were immaterial to the Company's financial
statements for the years ended December 31, 1999, 1998 and 1997.
11. FAIR VALUES OF FINANCIAL INSTRUMENTS
SFAS No. 107, "Disclosures about Fair Value of Financial Instruments,"
requires estimation of the fair values of financial instruments. The following
is a summary of the assumptions and methods used to estimate those values.
STUDENT LOANS
Fair value was determined by analyzing amounts that the Company has paid
recently to acquire similar loans in the secondary market.
WAREHOUSING ADVANCES AND ACADEMIC FACILITIES FINANCINGS
The fair values of both warehousing advances and academic facilities
financings were determined through standard bond pricing formulas using current
interest rates and credit spreads.
CASH AND INVESTMENTS
For investments with remaining maturities of three months or less, carrying
value approximated fair value. Investments in U.S. Treasury securities were
valued at market quotations. All other investments were valued through standard
bond pricing formulas using current interest rates and credit spreads.
SHORT-TERM BORROWINGS AND LONG-TERM NOTES
For borrowings with remaining maturities of three months or less, carrying
value approximated fair value. Where available the fair value of financial
liabilities was determined from market quotations. If market quotations were
unavailable standard bond pricing formulas were applied using current interest
rates and credit spreads.
OFF-BALANCE SHEET FINANCIAL INSTRUMENTS
The fair values of off-balance sheet financial instruments were estimated at
the amount that would be required to terminate such agreements, taking into
account current interest rates and credit spreads.
F-25
SLM HOLDING CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
(DOLLARS IN THOUSANDS, EXCEPT PER SHARE AMOUNTS)
11. FAIR VALUES OF FINANCIAL INSTRUMENTS (CONTINUED)
The following table summarizes the fair values of the Company's financial
assets and liabilities, including off-balance sheet financial instruments
(dollars in millions):
DECEMBER 31, 1999 DECEMBER 31, 1998
-------------------------------- --------------------------------
FAIR CARRYING FAIR CARRYING
VALUE VALUE DIFFERENCE VALUE VALUE DIFFERENCE
-------- -------- ---------- -------- -------- ----------
EARNING ASSETS
Student loans............................... $34,159 $33,809 $350 $28,913 $28,283 $630
Warehousing advances........................ 1,030 1,043 (13) 1,529 1,543 (14)
Academic facilities financings.............. 1,027 1,028 (1) 1,219 1,180 39
Cash and investments........................ 5,775 5,775 -- 4,107 4,106 1
------- ------- ---- ------- ------- ----
Total earning assets........................ 41,991 41,655 336 35,768 35,112 656
------- ------- ---- ------- ------- ----
INTEREST BEARING LIABILITIES
Short-term borrowings....................... 37,456 37,491 35 26,580 26,589 9
Long-term notes............................. 4,550 4,496 (54) 8,931 8,810 (121)
------- ------- ---- ------- ------- ----
Total interest bearing liabilities.......... 42,006 41,987 (19) 35,511 35,399 (112)
------- ------- ---- ------- ------- ----
OFF-BALANCE SHEET FINANCIAL INSTRUMENTS
Interest rate swaps......................... 6 -- 6 75 -- 75
Forward exchange agreements and foreign
currency swaps............................ (29) -- (29) (56) -- (56)
Floor revenue contracts..................... (8) (22) 14 (179) (60) (119)
Academic facilities financing commitments... -- -- -- -- -- --
Letters of credit........................... -- -- -- -- -- --
---- ----
Excess of fair value over carrying value.... $308 $444
==== ====
At December 31, 1999 and 1998, substantially all interest rate swaps and
foreign currency swaps were hedging liabilities.
12. COMMITMENTS AND CONTINGENCIES
The GSE has committed to purchase student loans during specified periods and
to lend funds under the warehousing advance commitments, academic facilities
financing commitments and letters of credit programs.
Letters of credit support the issuance of state student loan revenue bonds.
They represent unconditional guarantees of the GSE to repay holders of the bonds
in the event of a default. In the event that letters of credit are drawn upon,
such loans are collateralized by the student loans underlying the bonds. Under
the terms of the Privatization Act, any future activity under warehousing
advance commitments, academic facilities financing commitments and letter of
credit activity by the GSE is limited to guarantee commitments which were in
place on August 7, 1997.
F-26
SLM HOLDING CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
(DOLLARS IN THOUSANDS, EXCEPT PER SHARE AMOUNTS)
12. COMMITMENTS AND CONTINGENCIES (CONTINUED)
Commitments outstanding are summarized below:
DECEMBER 31,
-------------------------
1999 1998
----------- -----------
Student loan purchase commitments.................. $16,462,327 $17,103,585
Warehousing advance commitments.................... 2,870,759 3,081,515
Academic facilities financing commitments.......... -- 13,200
Letters of credit.................................. 4,453,631 4,691,974
----------- -----------
$23,786,717 $24,890,274
=========== ===========
The following schedule summarizes expirations of commitments to the earlier
of call date or maturity date outstanding at December 31, 1999:
DECEMBER 31, 1999
----------------------------------------------------
ACADEMIC
STUDENT LOAN WAREHOUSING FACILITIES LETTERS OF
PURCHASES ADVANCES FINANCINGS CREDIT
------------ ----------- ---------- ----------
2000.......................... $ 3,056,840 $1,170,758 $ -- $2,381,079
2001.......................... 3,887,604 -- -- 998,443
2002.......................... 9,517,883 1,700,001 -- 830,118
2003.......................... -- -- -- --
2004.......................... -- -- -- 213,151
2005-2017..................... -- -- -- 30,840
----------- ---------- ---------- ----------
Total....................... $16,462,327 $2,870,759 $ -- $4,453,631
=========== ========== ========== ==========
MINIMUM STATUTORY CAPITAL ADEQUACY RATIO
The Privatization Act effectively requires that the GSE maintain a minimum
statutory capital adequacy ratio (the ratio of stockholders' equity to total
assets plus 50 percent of the credit equivalent amount of certain off-balance
sheet items) of at least 2.00 percent until January 1, 2000 and 2.25 percent
thereafter or be subject to certain "safety and soundness" requirements designed
to restore such statutory ratio. Management anticipates being able to fund the
increase in required capital from the GSE's current and retained earnings. While
the GSE may not finance the activities of its non-GSE affiliates, it may,
subject to its minimum capital requirements, dividend retained earnings and
surplus capital to SLM Holding, which in turn may contribute such amounts to its
non-GSE subsidiaries. The Privatization Act now requires management to certify
to the Secretary of the Treasury that, after giving effect to the payment of
dividends, the statutory capital ratio test would have been met at the time the
dividend was declared. At December 31, 1999, the GSE's statutory capital
adequacy ratio, after the effect of the dividends to be paid in the first
quarter of 2000, was 2.00 percent.
LEGISLATIVE DEVELOPMENTS
On December 17, 1999, President Clinton signed the Ticket to Work and Work
Incentives Improvement Act. This act includes a provision that changes the index
on which lender returns are set in the Federal Family Education Loan Program
from the current 91-day Treasury bill rate to a three-
F-27
SLM HOLDING CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
(DOLLARS IN THOUSANDS, EXCEPT PER SHARE AMOUNTS)
12. COMMITMENTS AND CONTINGENCIES (CONTINUED)
month commercial paper rate. The new index will apply to all loans originated
after January 1, 2000 and before July 1, 2003. The rates that students pay on
their FFELP loans are unaffected by the new index. The Company and other FFELP
industry participants supported this legislative change.
ADMINISTRATION'S FY 2001 BUDGET PROPOSAL
On February 7, 2000, President Clinton submitted his Fiscal Year 2001 budget
proposal to Congress. The budget proposes significant savings from the student
loan programs, principally from the FFELP. The major proposals for student loans
are the following:
- Reduce special allowance payments 31 basis points from three-month
commercial paper plus 2.34% to three-month commercial paper plus 2.03%;
and
- Eliminate all special allowance on tax exempt loans subject to a 9.5%
interest rate floor.
All these proposals may be considered by Congress as it deliberates on the
FY 2001 budget. While the Company does not expect any of these proposals to
pass, if they were to pass as proposed, the Company's earnings could be
materially adversely affected.
13. MINORITY INTEREST
Upon the Reorganization on August 7, 1997, each outstanding share of common
stock of the GSE was converted into one share of common stock of SLM Holding.
The outstanding preferred stock of the GSE was not affected by the
Reorganization and is reflected as minority interest in the consolidated
financial statements.
The GSE's preferred stock dividends are cumulative and payable quarterly at
4.50 percentage points below the highest yield of certain long-term and
short-term U.S. Treasury obligations. The dividend rate for any dividend period
will not be less than 5 percent per annum nor greater than 14 percent per annum.
For the years ended December 31, 1999, 1998 and 1997, the GSE's preferred
dividend rate was 5 percent and reduced net income by $10.7 million. The
Privatization Act requires that on the dissolution date of September 30, 2008,
the GSE shall repurchase or redeem, or make proper provisions for repurchase or
redemption of any outstanding preferred stock. The Company has the option of
effecting an earlier dissolution of the GSE if certain conditions are met.
14. PREFERRED STOCK
On November 10, 1999, the Company sold 3.3 million shares of 6.97%
Cumulative Redeemable Preferred Stock, Series A in a registered public offering.
The sale of the shares of the Series A Preferred Stock settled on November 16,
1999. The proceeds from the sale to the Company, before expenses, were
$165 million and will be used for general corporate purposes. The shares do not
have any maturity date but are subject to the Company's option, beginning
November 16, 2009, to redeem the shares at any time, in whole or in part, at the
redemption price of $50 plus accrued and unpaid dividends to the redemption
date. The shares have no preemptive or conversion rights.
Dividends on the shares of the Series A Preferred Stock are not mandatory.
Holders of the Series A Preferred Stock will be entitled to receive cumulative,
quarterly cash dividends at the annual rate of $3.485 per share, when, as, and
if declared by the Board of Directors of the Company. The initial dividend paid
on January 31, 2000 was $.7357 per share for the period November 16, 1999
through January 31, 2000.
F-28
SLM HOLDING CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
(DOLLARS IN THOUSANDS, EXCEPT PER SHARE AMOUNTS)
15. COMMON STOCK
In November 1997, the Company announced that it would effect a 7-for-2 stock
split through a stock dividend of an additional five shares for every two
already outstanding, effective January 2, 1998, for shareholders of record on
December 12, 1997. The stock dividend did not affect the par value of the common
stock and as a result, $26.2 million was reclassified from retained earnings
($26.1 million) and additional paid-in-capital ($.1 million) to common stock to
account for the additional shares issued. In the consolidated statement of
changes in stockholders' equity the effect of the stock dividend has been
presented retroactively to the earliest period presented and the balances of
common stock, additional paid-in-capital and retained earnings as well as all
common stock activity have been restated to reflect the dividend. All share and
per share amounts have been restated to reflect the payment of that dividend.
On August 7, 1997, each outstanding share of GSE common stock, par value
$.20 per share, was converted into one share of SLM Holding common stock, par
value $.20 per share. Prior to the conversion of common stock, the GSE retired
49.8 million shares of treasury stock at an average price of $15.94 per share
resulting in decreases of $10 million to common stock, $48 million to additional
paid-in-capital and $736 million to retained earnings.
The Board of Directors has authorized and reserved 18.9 million common
shares for issuance under various compensation and benefit plans. At
December 31, 1999, under these authorizations, the Company has 15.3 million
shares in reserve and a remaining authority for issuance of 7.2 million shares.
The Company has engaged in repurchases of its common stock since 1986. In
1999 and 1998, the Company supplemented its open market common stock purchases
by entering into equity forward transactions to purchase 6.2 million and
18.5 million shares on a cash or net share settled basis. In January 1999, the
Board of Directors increased the common share repurchase authority including
equity forward contracts by 10 million shares. At December 31, 1999, the total
common shares that could be potentially acquired over the next five years under
outstanding equity forward contracts was 21.4 million shares, and the Company
had remaining authority to enter into additional share repurchases and equity
forward contracts for 3.6 million shares.
F-29
SLM HOLDING CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
(DOLLARS IN THOUSANDS, EXCEPT PER SHARE AMOUNTS)
15. COMMON STOCK (CONTINUED)
The following table summarizes the Company's common share repurchase and
equity-forward activity for the years ended December 31, 1999 and 1998. (All
amounts in the tables are common shares in millions.)
YEARS ENDED
DECEMBER 31,
-------------------
1999 1998
-------- --------
Common shares repurchased:
Open market............................................... 2.9 5.1
Equity forwards........................................... 5.3 5.0
------ ------
Total shares repurchased.................................... 8.2 10.1
------ ------
Average purchase price per share............................ $41.78 $41.35
====== ======
Equity forward contracts:
Outstanding at beginning of year............................ 20.5 7.0
New contracts............................................... 6.2 18.5
Exercises................................................... (5.3) (5.0)
------ ------
Outstanding at end of year.................................. 21.4 20.5
====== ======
Board of director authority at end of year.................. 3.6 2.7
====== ======
As of December 31, 1999, the expiration dates and range of purchase prices
for outstanding equity forward contracts are as follows:
OUTSTANDING RANGE OF
YEAR OF MATURITY CONTRACTS MARKET PRICES
- ---------------- ----------- ---------------
2000........................................................ 4.0 $41.01 - $46.13
2001........................................................ 8.7 32.11 - 46.68
2002........................................................ 3.5 42.94 - 46.23
2003........................................................ 4.0 41.20 - 47.50
2004........................................................ 1.2 44.50 - 45.62
----
21.4
====
Basic earnings per common share are calculated using the weighted average
number of shares of common stock outstanding during each period. Diluted
earnings per common share reflect the potential dilutive effect of additional
common shares that are issuable upon exercise of outstanding stock options
F-30
SLM HOLDING CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
(DOLLARS IN THOUSANDS, EXCEPT PER SHARE AMOUNTS)
15. COMMON STOCK (CONTINUED)
and warrants, determined by the treasury stock method, and equity forwards,
determined by the reverse treasury stock method, as follows:
NET INCOME
ATTRIBUTABLE
TO COMMON AVERAGE EARNINGS
STOCK SHARES PER SHARE
------------ ----------- ---------
(THOUSANDS) (THOUSANDS)
YEAR ENDED DECEMBER 31, 1999
Basic EPS................................................... $499,393 160,577 $3.11
Dilutive effect of stock options, warrants and equity
forwards.................................................. -- 2,581 (.05)
-------- ------- -----
Diluted EPS................................................. $499,393 163,158 $3.06
======== ======= =====
YEAR ENDED DECEMBER 31, 1998
Basic EPS................................................... $501,464 167,684 $2.99
Dilutive effect of stock options, warrants and equity
forwards.................................................. -- 2,382 (.04)
-------- ------- -----
Diluted EPS................................................. $501,464 170,066 $2.95
======== ======= =====
YEAR ENDED DECEMBER 31, 1997
Basic EPS................................................... $507,895 181,554 $2.80
Dilutive effect of stock options, warrants and equity
forwards.................................................. -- 1,387 (.02)
-------- ------- -----
Diluted EPS................................................. $507,895 182,941 $2.78
======== ======= =====
16. STOCK OPTION PLANS
SLM Holding maintains stock option plans for its employees that permit
grants of stock options for the purchase of common stock with exercise prices
equal to or greater than the market value on the date of grant.
After the change in management control in August 1997, the Board of
Directors granted options, which have 10-year terms and vest in one-third
increments, to officers and key employees under the 1993-1998 Stock Option Plan.
Options granted to executive management under this plan vest in one year and
upon the occurrence of (1) one-third on the date that the Company's common stock
closes above $42.86 per share for five business days; (2) one-third on the date
that the Company's common stock closes above $57.14 per share for five business
days; and (3) one-third on the date that the Company's common stock price closes
above $71.43 per share for five business days. Options granted to officers and
key employees in November 1997 vest: (1) one-third, one year from the date of
grant; (2) one-third on the later of one year or the date that the Company's
common stock closes above $57.14 per share for five business days; and
(3) one-third on the later of one year or the date that the Company's common
stock price closes above $71.43 per share for five business days. As of
December 31, 1999, approximately one-third of the options had vested. In the
event that the Company's common stock price does not close above the
predetermined prices, all outstanding options will vest eight years after the
date of grant. Under this plan, the Company was originally authorized to grant
up to 17.8 million shares. Options granted by prior Boards of Directors
generally have 10-year terms and vest one year after the date of grant.
F-31
SLM HOLDING CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
(DOLLARS IN THOUSANDS, EXCEPT PER SHARE AMOUNTS)
16. STOCK OPTION PLANS (CONTINUED)
In May 1998, shareholders approved a Management Incentive Plan, which
replaced the 1993-1998 Stock Option Plan. Under this plan, the Board may confer
certain awards to officers and employees, which may be in the form of stock
options, performance stock, and incentive bonuses. The Board authorized up to
6 million shares of the Company's common stock that could be issued pursuant to
such awards and at December 31, 1999, this plan had remaining authority of
2.3 million shares. In 1999 and 1998, options granted under this plan have ten
year terms and vest in one-third increments identical to those of the options
granted in November 1997 to officers and key employees. In the event that the
Company's common stock price does not close above the predetermined prices, all
outstanding options will vest eight years after the date of grant.
The Company's Board of Directors authorized the grant of options for up to
5.5 million shares of common stock under the Employee Stock Option Plan, of
which there is remaining authority of 1.0 million shares at December 31, 1999.
Stock options were granted under this plan to all non-officer employees of the
Company and have ten year terms with one-half of the options vesting one year
from the date of grant and one-half vesting two years from the date of grant.
The following table summarizes the employee stock option plans for the years
ended December 31, 1999, 1998 and 1997. The weighted average fair value of
options granted during the year is based on an option-pricing model.
YEARS ENDED DECEMBER 31,
---------------------------------------------------------------------
1999 1998 1997
--------------------- --------------------- ---------------------
AVERAGE AVERAGE AVERAGE
OPTIONS PRICE OPTIONS PRICE OPTIONS PRICE
---------- -------- ---------- -------- ---------- --------
Outstanding at beginning of year......... 9,666,906 $39.58 8,365,532 $37.30 3,261,500 $17.37
Granted.................................. 3,643,226 43.25 2,935,893 43.91 13,156,252 40.64
Exercised................................ (1,100,933) 35.69 (598,248) 29.89 (2,864,110) 17.53
Canceled................................. (965,304) 40.85 (1,036,271) 39.04 (5,188,110) 44.16
---------- ------ ---------- ------ ---------- ------
Outstanding at end of year............... 11,243,895 $41.04 9,666,906 $39.58 8,365,532 $37.30
========== ====== ========== ====== ========== ======
Exercisable at end of year............... 3,869,624 $38.87 3,077,332 $35.88 486,465 $18.79
========== ====== ========== ====== ========== ======
Weighted-average fair value of options
granted during the year................ $19.49 $17.63 $17.96
====== ====== ======
The following table summarizes the number, average exercise prices (which
ranged from $10 per share to $50 per share) and average remaining contractual
life of the employee stock options outstanding at December 31, 1999.
AVERAGE REMAINING
EXERCISE PRICES OPTIONS AVERAGE PRICE CONTRACTUAL LIFE
- --------------- ---------- ------------- -----------------
Under $30............................................ 237,656 $20.87 4.8 Yrs.
$30-$45.............................................. 9,879,088 40.70 8.5
Above $45............................................ 1,127,151 48.33 8.8
---------- ------ --------
Total................................................ 11,243,895 $41.04 8.4 Yrs.
========== ====== ========
F-32
SLM HOLDING CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
(DOLLARS IN THOUSANDS, EXCEPT PER SHARE AMOUNTS)
16. STOCK OPTION PLANS (CONTINUED)
In May 1996, shareholders approved the Board of Directors Stock Option Plan,
which authorized the grant of options to acquire up to 700,000 shares of common
stock. Options under this plan are exercisable on the date of grant and have ten
year terms. In May 1998, the shareholders approved a Directors' Stock Plan,
which replaced the Board of Directors Stock Option Plan. Under the Directors'
Stock Plan, the Board authorized the grant of options to acquire up to
3 million shares of common stock, of which there is remaining authority of
1.4 million shares. Options granted under this plan have ten year terms and vest
in one-third increments identical to those of the August 1997 executive
management options except there is no one year minimum vesting requirement. In
the event that the Company's common stock price does not close above the
predetermined prices, all outstanding options will vest eight years after the
date of grant.
The following table summarizes the Board of Directors Stock Option Plans for
the years ended December 31, 1999, 1998 and 1997.
YEARS ENDED DECEMBER 31,
------------------------------------------------------------------
1999 1998 1997
-------------------- -------------------- --------------------
AVERAGE AVERAGE AVERAGE
OPTIONS PRICE OPTIONS PRICE OPTIONS PRICE
--------- -------- --------- -------- --------- --------
Outstanding at beginning of year............ 1,622,366 $38.48 1,657,775 $38.49 220,500 $20.86
Granted..................................... 52,500 43.31 -- -- 1,638,000 38.96
Exercised................................... (29,000) 36.79 (2,000) 30.86 (141,225) 22.34
Canceled.................................... -- -- (33,409) 39.34 (59,500) 24.39
--------- ------ --------- ------ --------- ------
Outstanding at end of year.................. 1,645,866 $38.67 1,622,366 $38.48 1,657,775 $38.49
========= ====== ========= ====== ========= ======
Exercisable at end of year.................. 601,275 $37.26 612,775 $37.07 614,775 $37.05
========= ====== ========= ====== ========= ======
Weighted-average fair value of options
granted during the year................... $18.73 $ -- $17.79
====== ====== ======
At December 31, 1999, the outstanding Board of Directors options had a
weighted-average remaining contractual life of 7.6 years.
SLM Holding accounts for its stock option plans in accordance with
Accounting Principles Board Opinion No. 25, "Accounting for Stock Issued to
Employees," which results in no compensation expense for stock options granted
under the plans. The following table summarizes pro-forma disclosures for the
years ended December 31, 1999, 1998 and 1997, as if SLM Holding had accounted
for employee and Board of Directors stock options granted subsequent to
December 31, 1994 under the fair market value method as set forth in SFAS
No. 123, "Accounting for Stock-Based Compensation." The fair value for these
options was estimated at the date of grant using an option pricing model, with
the following weighted average assumptions for the years ended December 31,
1999, 1998 and 1997, respectively: risk-free interest rate of 6 percent,
5 percent and 6 percent; volatility factor of the expected market price of SLM
Holding's common stock of 34 percent, 32 percent and 31 percent; expected
dividend rate of 2 percent; and the time of the expected life of the option of
ten
F-33
SLM HOLDING CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
(DOLLARS IN THOUSANDS, EXCEPT PER SHARE AMOUNTS)
16. STOCK OPTION PLANS (CONTINUED)
years. Vesting for options with vesting periods tied to the Company's stock
price is assumed to occur annually in one-third increments.
YEARS ENDED DECEMBER 31,
------------------------------
1999 1998 1997
-------- -------- --------
Net income attributable to common stock..................... $499,393 $501,464 $507,895
======== ======== ========
Pro-forma net income attributable to common stock........... $473,386 $469,470 $486,052
======== ======== ========
Basic earnings per share.................................... $ 3.11 $ 2.99 $ 2.80
======== ======== ========
Pro forma basic earnings per share.......................... $ 2.95 $ 2.80 $ 2.68
======== ======== ========
Diluted earnings per share.................................. $ 3.06 $ 2.95 $ 2.78
======== ======== ========
Pro forma diluted earnings per share........................ $ 2.90 $ 2.76 $ 2.66
======== ======== ========
17. BENEFIT PLANS
PENSION PLANS
Effective October 1, 1999, the Company converted its Pension Plan to a cash
balance plan. The present value of accrued benefits for eligible employees under
the Company's regular and supplemental pension plans was converted to an opening
"account balance" and benefits now accrue under a cash balance formula. Under
the cash balance formula, each participant has an account, for record keeping
purposes only, to which credits are allocated each payroll period based on a
percentage of the participant's compensation for the current pay period. The
applicable percentage is determined by the number of years of service the
participant has with the Company. The conversion to a cash balance plan did not
have a material effect on the Company's pension expense or its accrued pension
cost.
F-34
SLM HOLDING CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
(DOLLARS IN THOUSANDS, EXCEPT PER SHARE AMOUNTS)
17. BENEFIT PLANS (CONTINUED)
The following tables provide a reconciliation of the changes in the plan's
benefit obligations and fair value of assets over the two-year period ending
December 31, 1999, and a statement of the funded status as of December 31 of
both years:
DECEMBER 31,
-------------------
1999 1998
-------- --------
CHANGE IN BENEFIT OBLIGATION
Projected benefit obligation at beginning of year....... $ 99,349 $ 92,885
Service cost............................................ 5,033 11,624
Interest cost........................................... 6,651 5,961
Amendments.............................................. (43) --
Actuarial (gain)/loss................................... (6,353) (10,547)
Benefits paid........................................... (996) (574)
-------- --------
Benefit obligation at end of year....................... 103,641 99,349
-------- --------
CHANGE IN PLAN ASSETS
Fair value of plan assets at beginning of year.......... 116,836 101,389
Actual return on plan assets............................ 15,563 14,165
Employer contribution................................... -- 1,856
Benefits paid........................................... (996) (574)
Administrative payments................................. (1,295) --
-------- --------
Fair value of plan assets at end of year................ 130,108 116,836
-------- --------
FUNDED STATUS
Funded status at end of year............................ 26,467 17,487
Unrecognized net actuarial gain......................... (37,156) (29,751)
Unrecognized prior service cost and transition asset.... (2,154) (2,320)
-------- --------
Accrued pension cost.................................... $(12,843) $(14,584)
======== ========
DECEMBER 31,
--------------------
1999 1998
-------- --------
WEIGHTED-AVERAGE ASSUMPTIONS AS OF DECEMBER 31
Discount rate............................................... 7.75% 7.00%
Expected return on plan assets.............................. 10.00% 8.00%
Rate of compensation increase............................... 5.50% 6.00%
F-35
SLM HOLDING CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
(DOLLARS IN THOUSANDS, EXCEPT PER SHARE AMOUNTS)
17. BENEFIT PLANS (CONTINUED)
Net periodic pension cost included the following components:
YEARS ENDED DECEMBER 31,
------------------------------
1999 1998 1997
-------- -------- --------
Service cost--benefits earned during the period............. $ 5,033 $11,624 $ 8,453
Interest cost on project benefit obligations................ 6,651 5,961 5,617
Expected return on plan assets.............................. (11,606) (9,183) (19,203)
Net amortization and deferral............................... (1,805) (1,271) 12,431
------- ------- -------
Net periodic pension cost................................... $(1,727) $ 7,131 $ 7,298
======= ======= =======
The Company maintains a nonqualified pension plan for certain key employees
as designated by the Board of Directors and a nonqualified pension plan for its
Board of Directors. The nonqualified pension plans were the only pension plans
with an accumulated benefit obligation in excess of plan assets. There are no
plan assets in the nonqualified plans due to the nature of the plans. The
accumulated benefit obligations for these plans were $7.1 million at
December 31, 1999 and $10.9 million at December 31, 1998.
401(K) PLANS
The Company's 401(k) Savings Plan ("the Plan") is a defined contribution
plan that is intended to qualify under section 401(k) of the Internal Revenue
Code. The Plan covers substantially all employees who have been employed by the
Company for one or more years and have completed at least a thousand hours of
service. Participating employees may contribute up to 10 percent of base salary
and up to 6 percent of these contributions are matched 100 percent by the
Company.
The Company also maintains a non-qualified Plan to ensure that designated
participants receive the full amount of benefits to which they would have been
entitled under the 401(k) Plan but for limits on compensation and contribution
levels imposed by the Internal Revenue Code.
Total expenses related to the 401(k) plans were $4.9 million, $6.5 million
and $5.2 million in 1999, 1998 and 1997, respectively.
18. INCOME TAXES
Deferred income taxes reflect the net tax effects of temporary differences
between the carrying amounts of assets and liabilities for financial reporting
purposes and the amounts used for income tax
F-36
SLM HOLDING CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
(DOLLARS IN THOUSANDS, EXCEPT PER SHARE AMOUNTS)
18. INCOME TAXES (CONTINUED)
purposes. Significant components of the Company's deferred tax liabilities and
assets as of December 31, 1999 and 1998 are as follows:
DECEMBER 31,
-------------------
1999 1998
-------- --------
DEFERRED TAX LIABILITIES:
Leases................................................ $308,956 $315,763
Unrealized investment gains........................... 186,459 200,167
Other................................................. 38,431 48,778
-------- --------
533,846 564,708
-------- --------
DEFERRED TAX ASSETS:
ExportSS operating costs.............................. 39,865 39,296
Student loan reserves................................. 59,346 35,979
In-substance defeasance transactions.................. 30,251 30,294
Asset valuation allowances............................ 20,901 24,467
Securitization transactions........................... 64,793 2,049
Other................................................. 77,894 75,592
-------- --------
293,050 207,677
-------- --------
Net deferred tax liabilities............................ $240,796 $357,031
======== ========
The GSE is exempt from all state, local and District of Columbia taxes
except for real property taxes. SLM Holding and its other subsidiaries are
subject to state and local taxes that were immaterial in 1999 and 1998. Deferred
tax assets on in-substance defeasance transactions resulted from premiums on the
debt extinguished. These premiums are capitalized and amortized over the life of
the defeasance trust for tax purposes.
Reconciliations of the statutory U.S. federal income tax rates to the
Company's effective tax rate follow:
YEARS ENDED DECEMBER 31,
--------------------------------
1999 1998 1997
-------- -------- --------
Statutory rate.............................................. 35.0% 35.0% 35.0%
Tax exempt interest and dividends received deduction........ (2.8) (3.0) (3.0)
Other, net.................................................. (.3) (.3) (.2)
---- ---- ----
Effective tax rate.......................................... 31.9% 31.7% 31.8%
==== ==== ====
F-37
SLM HOLDING CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
(DOLLARS IN THOUSANDS, EXCEPT PER SHARE AMOUNTS)
19. QUARTERLY FINANCIAL INFORMATION (UNAUDITED)
1999
-----------------------------------------
FIRST SECOND THIRD FOURTH
QUARTER QUARTER QUARTER QUARTER
-------- -------- -------- --------
Net interest income................................. $157,652 $172,706 $184,358 $179,074
Less: provision for losses.......................... 7,636 13,029 6,545 7,148
-------- -------- -------- --------
Net interest income after provision for losses...... 150,016 159,677 177,813 171,926
Other income........................................ 106,639 111,631 95,310 137,210
Operating expenses.................................. 86,268 86,410 91,520 94,372
Income taxes........................................ 53,905 58,561 57,524 70,137
Minority interest in net earnings of subsidiary..... 2,673 2,674 2,674 2,673
-------- -------- -------- --------
Net income.......................................... 113,809 123,663 121,405 141,954
Preferred stock dividends........................... - - - 1,438
-------- -------- -------- --------
Net income attributable to common stock............. $113,809 $123,663 $121,405 $140,516
======== ======== ======== ========
Basic earnings per common share..................... $ .70 $ .77 $ .76 $ .89
======== ======== ======== ========
Diluted earnings per common share................... $ .69 $ .76 $ .75 $ .87
======== ======== ======== ========
1998
-----------------------------------------
FIRST SECOND THIRD FOURTH
QUARTER QUARTER QUARTER QUARTER
-------- -------- -------- --------
Net interest income................................. $174,577 $166,318 $149,876 $160,515
Less: provision for losses.......................... 9,494 2,183 6,685 18,235
-------- -------- -------- --------
Net interest income after provision for losses...... 165,083 164,135 143,191 142,280
Other income........................................ 134,383 145,805 104,322 111,801
Operating expenses.................................. 90,862 93,732 86,540 89,735
Income taxes........................................ 66,923 69,303 50,487 51,260
Minority interest in net earnings of subsidiary..... 2,673 2,674 2,674 2,673
-------- -------- -------- --------
Net income.......................................... $139,008 $144,231 $107,812 $110,413
Preferred stock dividends........................... - - - -
-------- -------- -------- --------
Net income attributable to common stock............. $139,008 $144,231 $107,812 $110,413
======== ======== ======== ========
Basic earnings per common share..................... $ .81 $ .86 $ .65 $ .67
======== ======== ======== ========
Diluted earnings per common share................... $ .80 $ .84 $ .64 $ .66
======== ======== ======== ========
F-38
APPENDIX A
FEDERAL FAMILY EDUCATION LOAN PROGRAM
GENERAL
The Federal Family Education Loan Program, known as FFELP, under Title IV of
the Higher Education Act provides for loans to students who are enrolled in
eligible institutions, or to parents of dependent students, to finance a portion
of their educational costs. Payment of principal and interest on the student
loans is guaranteed by a state or not-for-profit guarantee agency against:
- default of the borrower;
- the death, bankruptcy or disability of the borrower;
- closing of the borrower's school prior to the student earning a degree, a
false certification by the borrower's school or an unpaid school refund;
or
- a determination that the borrower was not eligible for the loan.
Subject to various conditions, a program of federal reinsurance under the
Higher Education Act entitles guarantors to reimbursement from the Department of
Education for between 75% and 100% of the amount of each guarantee payment. In
addition, the holder of student loans is entitled to receive interest subsidy
payments and special allowance payments from the Department on eligible student
loans.
Several types of student loans are currently authorized under the Higher
Education Act:
- Subsidized Stafford Loans to students who demonstrate requisite financial
need;
- Unsubsidized Stafford Loans to students who either do not demonstrate
financial need or require additional loans to supplement their Stafford
Loans;
- Loans called "PLUS Loans" to parents of students who are dependents and
whose estimated costs of attending school exceed other available financial
aid; and
- Consolidation Loans, which consolidate into a single loan a borrower's
obligations under various federally authorized student loan programs.
Before July 1, 1994, the Higher Education Act also authorized loans called
"Supplemental Loans to Students" or "SLS Loans" to graduate and professional
students, independent undergraduate students and, under some circumstances,
dependent undergraduate students, to supplement their Stafford Loans.
This appendix describes or summarizes the material provisions of the Higher
Education Act, the FFELP and the other statutes, regulations and amendments. It,
however, is not complete and is qualified in its entirety by reference to each
actual statute, regulation or document. Both the Higher Education Act and the
related regulations have been the subject of extensive amendments in recent
years. Accordingly, we can not predict whether future amendments or
modifications might materially change any of the programs described in this
appendix or the statutes and regulations that implement them.
LEGISLATIVE AND ADMINISTRATIVE MATTERS
The FFELP is subject to statutory and regulatory revision from time to time.
The most recent revisions are contained in the Higher Education Amendments of
1992, the Omnibus Budget Reconciliation Act of 1993, the Higher Education
Technical Amendments of 1993, the Higher Education Amendments of 1998 and the
Ticket to Work and Work Incentives Improvement Act of 1999.
A-1
The 1993 legislation made significant changes to the FFELP and created a
federal direct loan program funded directly by the U.S. Department of Treasury.
It also implemented a number of changes to the federal guaranteed student loan
programs, including imposing on lenders or holders of guaranteed student loans
certain fees, providing for two percent lender risk sharing, reducing
reimbursement payments to guarantee agencies, reducing interest rates and
special allowance payments for some loans, reducing the interest payable to
holders of Consolidation Loans and affecting the Department's financial
assistance to guarantee agencies, by, for example, reducing the percentage of
claims the Department will reimburse guarantee agencies and reducing more
substantially the premiums and default collections that guarantee agencies are
entitled to receive and retain.
The Act was further amended by enactment of the 1998 legislation, the
general provisions of which became effective October 1, 1998 and which extended
the principal provisions of the FFELP to July 1, 2003. This legislation, as
modified by the 1999 act, lowered 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 January 1, 2000. 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.
The 1999 act changed the financial index on which special allowance payments
are computed from the 91-day Treasury bill rate to the three-month commercial
paper rate (financial) for FFELP loans disbursed on or after January 1, 2000 and
before July 1, 2003. For these FFELP loans, the special allowance payments to
lenders will be based upon the three-month commercial paper (financial) rate
plus 2.34%, or 1.74% for in-school and grace periods. The 1999 act did not
change the rate that the borrower pays on FFELP loans.
The 1998 legislation also maintained 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, which rates are adjusted annually based on
a formula equal to the 91-day Treasury bill rate plus 2.3 percent. 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
will 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 that the 1998 legislation sets on
FFELP Consolidation Loans for borrowers whose applications are received on or
after October 1, 1998 and before July 1, 2003. The 1998 legislation, as modified
by the 1999 act, sets the special allowance payment rate for FFELP Consolidation
Loans at the 91-day Treasury bill rate plus 3.1 percent for loans originated on
or after October 1, 1998 and before January 1, 2000, and at the three-month
commercial paper rate plus 2.64% for loans disbursed on or after January 1, 2000
and before July 1, 2003. The annual fee paid by lenders on FFELP Consolidation
Loans was reduced under the 1998 legislation from 1.05 percent to 0.62 percent
of the principal plus accrued unpaid interest on these Consolidation Loans,
applications for which are received on or after October 1, 1998 and before
February 1, 1999.
ELIGIBLE LENDERS, STUDENTS AND EDUCATIONAL INSTITUTIONS
Lenders eligible to make loans under the FFELP generally include banks,
savings and loan associations, credit unions, pension funds, insurance companies
and, under some conditions, schools and guarantors. A student loan may be made
to, or on behalf of, a "qualified student". A "qualified student" is defined as
an individual who
- is a United States citizen or national or is otherwise eligible under
federal regulations;
A-2
- has been accepted for enrollment or is enrolled and is maintaining
satisfactory academic progress at a participating educational institution;
- is carrying at least one-half of the normal full-time academic workload
for the course of study the student is pursuing, as determined by the
institution;
- has agreed to notify the holder of the loan promptly of any address
change; and
- meets the "need" requirements described in the application for the
particular loan program, in the case of Stafford Loans.
Eligible schools include institutions of higher education and proprietary
institutions meeting the standards provided in the Higher Education Act. For a
school to participate in the program, the Department of Education must approve
its eligibility under standards established by regulation.
FINANCIAL NEED ANALYSIS
Subject to program limits and conditions, student loans generally are made
in amounts sufficient to cover the student's estimated costs of attending
school, including tuition and fees, books, supplies, room and board,
transportation and miscellaneous personal expenses as determined by the
institution. Each Stafford Loan and Unsubsidized Stafford Loan applicant and
parents in the case of a dependent child must undergo a financial need analysis.
This requires the applicant and parents in the case of a dependent child to
submit a financial need analysis form to a federal processor. The federal
processor evaluates the parents' and student's financial condition under federal
guidelines and calculates the amount that the student and/or the family is
expected to contribute towards the student's cost of education. After receiving
information on the family contribution, the institution then subtracts the
family contribution from the student's costs to attend the institution to
determine the student's eligibility for grants, loans and work assistance. A
student's "unmet need" is the difference between the amount of grants and
Stafford Loans for which the borrower is eligible and the student's estimated
cost of attendance. Students may borrower this unmet need through Unsubsidized
Stafford Loans subject to annual and aggregate loan limits prescribed in the
Higher Education Act. Parents may finance the family contribution amount with
their own resources or with PLUS Loans.
SPECIAL ALLOWANCE PAYMENTS
The Higher Education Act provides for quarterly special allowance payments
to be made by the Department of Education to holders of student loans to the
extent necessary to ensure that they receive at least specified market interest
rates of return. The rates for special allowance payments depend on formulas
that vary according to the type of loan, the date the loan was made and the type
of funds, tax-exempt or taxable, used to finance the loan. The Department makes
a special allowance payment for each of calendar quarter.
The special allowance payment equals the average unpaid principal balance,
including interest which has been capitalized, of all eligible loans held by a
holder during the quarterly period multiplied by the special allowance
percentage.
For student loans disbursed before January 1, 2000, the special allowance
percentage is computed by:
(1) determining the average of the bond equivalent rates of 91-day
Treasury bills auctioned for that quarter;
(2) subtracting the applicable borrower interest rate on the loan;
(3) adding the applicable special allowance margin described in the
table below; and
(4) dividing the resultant percentage by 4.
A-3
If the result is negative, the special allowance payment is zero.
DATE OF FIRST DISBURSEMENT SPECIAL ALLOWANCE MARGIN
- ------------------------------------------ --------------------------------------------------------
Before 10/17/86........................... 3.50%
From 10/17/86 through 09/30/92............ 3.25%
From 10/01/92 through 06/30/95............ 3.10%
From 07/01/95 through 06/30/98............ 2.50% for Stafford Loans and Unsubsidized Stafford Loans
that are In-School, Grace or Deferment
3.10% for Stafford Loans and Unsubsidized Stafford Loans
that are in repayment and all other loans
From 07/01/98 through 12/31/99............ 2.20% for Stafford Loans and Unsubsidized Stafford Loans
that are In-School, Grace or Deferment
2.80% for Stafford Loans and Unsubsidized Stafford Loans
that are in repayment
3.10% for all other loans
For student loans disbursed on or after January 1, 2000, the special
allowance percentage is computed by:
(1) determining the average of the bond equivalent rates of 3-month commercial
paper (financial) rates quoted for that quarter;
(2) subtracting the applicable borrower interest rate on the loan;
(3) adding the applicable special allowance margin described in the table below;
and
(4) dividing the resultant percentage by 4.
If the result is negative, the special allowance payment is zero.
DATE OF FIRST DISBURSEMENT SPECIAL ALLOWANCE MARGIN
- ------------------------------------------ --------------------------------------------------------
From 01/01/00 through 06/30/03 1.74% for Subsidized Stafford Loans and Unsubsidized
Stafford Loans that are In-School, Grace or Deferment
2.34% for Subsidized Stafford Loans and Unsubsidized
Stafford Loans that are in repayment
2.64% for all other loans
Special allowance payments are available on variable rate PLUS Loans and SLS
Loans made on or after July 1, 1987 and before July 1, 1994 and on any PLUS
Loans made on or after July 1, 1998, only if the variable rate, which is reset
annually based on the 1-year Treasury bill for loans made before July 1, 1998 or
based on the 91-day Treasury bill for loans made on or after July 1, 1998,
exceeds the applicable maximum borrower rate. The maximum borrower rate is
between 9% and 12%.
STAFFORD LOANS
For Stafford Loans, the Higher Education Act provides for:
- federal insurance or reinsurance of Stafford Loans made by eligible
lenders to qualified students;
- federal interest subsidy payments on eligible Stafford Loans paid by the
Department of Education to holders of the loans in lieu of the borrowers'
making interest payments; and
- special allowance payments representing an additional subsidy paid by the
Department to the holders of eligible Stafford Loans.
A-4
We refer to all three types of assistance as "federal assistance".
INTEREST. The borrower's interest rate on a Stafford Loan can be fixed or
variable. Stafford Loan interest rates are summarized in the chart below.
MAXIMUM
TRIGGER DATE BORROWER RATE BORROWER RATE INTEREST RATE MARGIN
- ------------ --------------------------------- --------------- ---------------------------------
Before 01/01/81.......... 7% 7% N/A
From 01/01/81 through 9% 9% N/A
09/12/83...............
From 09/13/83 through 8% 8% N/A
06/30/88...............
From 07/01/88 through 8% for 48 months; 8% for 48 3.25% for loans made
09/30/92............... thereafter, 91-day Treasury + months, before
Interest Rate Margin then 10% 7/23/92 and for loans
made on
or after 7/23/92 and
before
10/1/92 to new student
loan
borrowers;
3.10% for loans made
after
7/23/92 and before 7/1/94
to
borrowers with
outstanding
From 10/01/92 through 91-day Treasury + Interest Rate 9% FFELP loans
06/30/94............... Margin 3.10%
From 07/01/94 through 91-day Treasury + Interest Rate 8.25% 3.10%
06/30/95............... Margin
From 07/01/95 through 91-day Treasury + Interest Rate 8.25% 2.50% (In-School, Grace
06/30/98............... Margin or
Deferment); 3.10% (in
repayment)
From 07/01/98............ 91-day Treasury + Interest Rate 8.25% 1.70% (In-School, Grace
Margin or
Deferment); 2.30% (in
repayment)
The trigger date for Stafford Loans made before October 1, 1992 is the first
day of the enrollment period for which the borrower's first Stafford Loan is
made. The trigger date for Stafford Loans made on or after October 1, 1992 is
the date of the disbursement of the borrower's first Stafford Loan. All Stafford
Loans made on or after July 1, 1994 have a variable interest rate regardless of
the applicable rate on any prior loans.
The rate for variable rate Stafford Loans applicable for any 12-month period
beginning on July 1 and ending on June 30 is determined on the preceding June 1
and is equal to the LESSER of:
- the applicable maximum borrower rate
A-5
AND
- the sum of
- the bond equivalent rate of 91-day Treasury bills auctioned at the final
auction held before that June 1,
AND
- the applicable interest rate margin.
In 1992, the Higher Education Act was amended to provide that, for fixed
rate Stafford Loans made on or after July 23, 1992 and loans made to new
borrowers on or after July 1, 1988, the lender must convert the interest rate on
those loans by January 1, 1995 to an annual variable interest rate adjusted each
July 1 equal to:
- for fixed rate Stafford Loans made between July 1, 1988 and July 23, 1992,
and for fixed rate Stafford Loans made to new FFELP borrowers on or after
July 23, 1992 and before October 1, 1992, the 91-day Treasury bill rate at
the final auction before the preceding June 1 PLUS 3.25%; and
- for fixed rate Stafford Loans made on or after July 23, 1992 to borrowers
with outstanding FFELP Loans, the 91-day Treasury bill rate at the final
auction before the preceding June 1 PLUS 3.10%,
in each case capped at the applicable interest rate for the loan that existed
before the conversion. The variable interest rate conversion requirement does
not apply to loans made before July 23, 1992 during the first 48 months of
repayment.
INTEREST SUBSIDY PAYMENTS. The Department of Education is responsible for
paying interest on Stafford Loans:
- while the borrower is a qualified student,
- during the grace period, and
- during prescribed deferral periods.
The Department of Education makes quarterly interest subsidy payments to the
owner of a Stafford Loan in an amount equal to the interest that accrues on the
unpaid balance of that loan before repayment begins or during any deferral
periods. The Higher Education Act provides that the owner of an eligible
Stafford Loan has a contractual right against the United States to receive
interest subsidy payments and special allowance payments in accordance with the
provisions of the Higher Education Act. However, receipt of interest subsidy
payments and special allowance payments is conditioned on compliance with the
requirements of the Higher Education Act, including the following:
- satisfaction of need-based criteria,
- the delivery of sufficient information by the borrower and the lender to
the Department to confirm the foregoing, and
- continued eligibility of the loan for federal reinsurance.
If the loan is not held by an eligible lender in accordance with the
requirements of the Higher Education Act and the applicable federal guarantee
agreements, the loan may lose its eligibility.
Lenders, generally, receive interest subsidy payments and special allowance
payments within 45 days to 60 days after the servicer submits the applicable
forms for any given calendar quarter to the
A-6
Department of Education. However, there can be no assurance that payments will,
in fact, be received from the Department within that period.
LOAN LIMITS. The Higher Education Act generally requires that eligible
lenders disburse student loans in at least two equal disbursements. The Act
limits the amount a student can borrow in any academic year. The following chart
shows the current and historic loan limits.
INDEPENDENT STUDENTS
ALL STUDENTS ---------------------------
BORROWER'S ACADEMIC LEVEL BASE AMOUNT ADDITIONAL MAXIMUM
BASE AMOUNT SUBSIDIZED SUBSIDIZED SUBSIDIZED AND UNSUBSIDIZED ANNUAL
AND UNSUBSIDIZED ON SUBSIDIZED ON OR AFTER UNSUBSIDIZED ON OR ONLY ON OR AFTER TOTAL
OR AFTER 10/1/93 PRE-1/1/87 1/1/87 AFTER 10/1/93 7/1/94 AMOUNT
- -------------------------------- ---------- ----------- ------------------ ---------------- --------
Undergraduate (per year):
1st year...................... $ 2,500 $ 2,625 $ 2,625 $ 4,000 $ 6,625
2nd year...................... $ 2,500 $ 2,625 $ 3,500 $ 4,000 $ 7,500
3rd year and above............ $ 2,500 $ 4,000 $ 5,500 $ 5,000 $ 10,000
Graduate (per year)............. $ 5,000 $ 7,500 $ 8,500 $10,000 $ 18,500
Aggregate Limit:
Undergraduate................. $12,500 $17,250 $23,000 $23,000 $ 46,000
Graduate (including
undergraduate).............. $25,000 $54,750 $65,500 $73,000 $138,500
For the purposes of the table above:
- The loan limits include both Stafford Loans and federal direct student
loans.
- The amounts in the middle column represent the combined maximum loan
amount per year for Stafford Loans and Unsubsidized Stafford Loans.
Accordingly, the maximum amount that a student may borrow under an
Unsubsidized Stafford Loan is the difference between the combined maximum
loan amount and the amount the student received in the form of a Stafford
Loan.
- Independent undergraduate students, graduate students or professional
students may borrow the additional amounts shown in the next to last
column. Moreover, dependent undergraduate students may also receive these
additional loan amounts if their parents are unable to provide the family
contribution amount and it is unlikely that the student's parents will
qualify for a PLUS Loan.
The annual loan limits are sometimes reduced when the student is enrolled in
a program of less than one academic year or has less than a full academic year
remaining in his program. The Department of Education has discretion to raise
these limits to accommodate highly specialized or exceptionally expensive
courses of study.
REPAYMENT. In general, repayment of principal on a Stafford Loan does not
begin while the borrower remains a qualified student, but only after the
applicable grace period, as described below. Any borrower may prepay a loan
voluntarily without penalty, and may waive any grace period or deferral period
related to his loan. In general, each loan must be scheduled for repayment over
a period of not more than ten years after repayment begins. New borrowers on or
after October 7, 1998 who accumulate outstanding loans under the FFELP totaling
more than $30,000 are entitled to extend repayment for up to 25 years, subject
to scheduled minimum repayment amounts. The Higher Education Act currently
requires minimum annual payments of $600 or, if greater, the amount of accrued
interest for that year, unless the borrower and the lender agree to lower
payments. The Act and related regulations require lenders to offer the choice of
a standard, graduated, income-sensitive or extended repayment schedule, if
applicable, to all borrowers entering repayment.
A-7
GRACE PERIODS, DEFERRAL PERIODS AND FORBEARANCE PERIODS. After the borrower
stops pursuing at least a half-time course of study, he generally must begin to
repay principal of a Stafford Loan following a grace period of usually six
months. In addition, no principal repayments need be made, subject to some
conditions, during deferral periods.
For new borrowers whose loans are first disbursed on or after July 1, 1993,
repayment of principal may be deferred, subject to a maximum deferment of three
years, only:
- while the borrower is at least a half-time student or is enrolled in an
approved graduate fellowship program or rehabilitation program; or
- when the borrower is seeking, but unable to find, full-time employment; or
- when for any reason the lender determines that payment of principal will
cause the borrower economic hardship.
In 1992, the Higher Education Act was amended to permit, and in some cases
require, "forbearance" periods from loan collection in some circumstances.
UNSUBSIDIZED STAFFORD LOANS
The Unsubsidized Stafford Loan program is designed for students who do not
qualify for the maximum Stafford Loan due to parental and/or student income and
assets in excess of prescribed amounts or who need funds in excess of the
maximum permitted under Stafford Loans in order to finance their education.
The basic terms of Unsubsidized Stafford Loans are generally the same as
those of Stafford Loans, including interest rate provisions, annual loan limits
and special allowance payments. The terms of the Unsubsidized Stafford Loans
differ, however, in some respects from the terms of Stafford Loans. The federal
government does not make interest subsidy payments on Unsubsidized Stafford
Loans. The borrower must begin making interest payments on a monthly or
quarterly basis or the interest will be capitalized. Subject to the same loan
limits as those established for Stafford Loans, a student may borrow up to the
amount of his unmet need.
PLUS AND SLS LOAN PROGRAMS
The Higher Education Act authorizes PLUS Loans to be made to parents of
eligible dependent students and previously authorized SLS Loans to be made to
specific categories of students. Since July 1, 1993, only parents who have no
adverse credit history or who are able to secure an endorser without an adverse
credit history are eligible for PLUS Loans. The basic provisions applicable to
PLUS Loans and SLS Loans are similar to those of Stafford Loans for federal
insurance and reinsurance. However, PLUS and SLS Loans differ from Stafford
Loans, particularly because interest subsidy payments are not available under
the PLUS and SLS programs and, in some instances, special allowance payments are
more restricted.
LOAN LIMITS. PLUS Loans and SLS Loans disbursed before July 1, 1993 were
limited to $4,000 per academic year with a maximum aggregate amount of $20,000.
Limits for SLS Loans disbursed on or after July 1, 1993 depend upon the class
year of the student and the length of the academic year. The annual loan limits
for SLS Loans first disbursed on or after July 1, 1993 range from $4,000 for
first and second year undergraduate borrowers to $10,000 for graduate borrowers,
with a maximum aggregate amount of $23,000 for undergraduate borrowers and
$73,000 for graduate and professional borrowers.
After July 1, 1994, the SLS Loan program was merged with the Unsubsidized
Stafford Loan program, with the borrowing limits reflecting the combined
eligibility under both programs. The annual and aggregate amounts of PLUS Loans
first disbursed on or after July 1, 1993 are limited only to the
A-8
difference between the cost of the student's education and other financial aid
received, including scholarship, grants and other student loans.
INTEREST. The interest rate for a PLUS Loan or an SLS Loan depends both on
the date of disbursement and the period of enrollment. The interest rates for
PLUS Loans and SLS Loans are summarized in the following chart.
MAXIMUM INTEREST RATE
TRIGGER DATE BORROWER RATE BORROWER RATE MARGIN
- ------------ --------------------------------------- ------------- -------------
Before 10/01/81................... 9% 9% N/A
From 10/01/81 through 10/30/82.... 14% 14% N/A
From 11/01/82 through 06/30/87.... 12% 12% N/A
From 07/01/87 through 09/30/92.... 1-year Treasury + Interest Rate Margin 12% 3.25%
From 10/01/92 through 06/30/94.... 1-year Treasury + Interest Rate Margin PLUS 10%,
SLS 11% 3.10%
SLS repealed 07/01/94.............
From 07/01/94 through 06/30/98.... 1-year Treasury + Interest Rate Margin 9% 3.10%
After 6/30/98..................... 91-day Treasury + Interest Rate Margin 9% 3.10%
For PLUS Loans and SLS Loans made before October 1, 1992, the trigger date
is the first day of the enrollment period for which the loan was made. For PLUS
Loans and SLS Loans made on or after October 1, 1992, the trigger date is the
date of the disbursement of the loan.
For PLUS Loans or SLS Loans that carry a variable rate, the rate is set
annually for 12-month periods, from July 1 through June 30, on the preceding
June 1 and is equal to the lesser of:
- the applicable maximum borrower rate
AND
- the sum of:
- the bond equivalent rate of 1-year Treasury bills or 3-month Treasury
bills, as applicable, auctioned at the final auction held before that
June 1,
AND
- the applicable interest rate margin.
A holder of a PLUS Loan or SLS Loan is eligible to receive special allowance
payments during any quarter if:
- the borrower rate is set at the maximum borrower rate and
- the sum of the average of the bond equivalent rates of 3-month Treasury
bills auctioned during that quarter and the applicable interest rate
margin exceeds the maximum borrower rate.
REPAYMENT, DEFERMENTS. In 1992, the Higher Education Act was amended to
grant to each borrower under an SLS Loan the option to defer repaying principal
until he begins to repay his Stafford Loans. Otherwise, borrowers must begin to
repay principal of their PLUS Loans and SLS Loans no later than 60 days after
the date of disbursement, subject to the deferral and forbearance provisions.
The deferral provisions which apply to PLUS Loans and SLS Loans are more limited
than
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those applicable to Stafford Loans. However, borrowers may defer and capitalize
repayment of interest during some periods of educational enrollment and periods
of unemployment or hardship, as specified under the Act. Further, while interest
subsidy payments are not available while repayment is being deferred, interest
may be capitalized during the deferral period if the borrower does not pay the
interest. Maximum loan repayment periods and minimum payment amounts for PLUS
Loans and SLS Loans are the same as those for Stafford Loans.
CONSOLIDATION LOAN PROGRAM
The Higher Education Act also authorizes a program under which borrowers may
consolidate one or more of their student loans into a single Consolidation Loan
that is insured and reinsured on a basis similar to Stafford Loans.
Consolidation Loans may be made in an amount sufficient to pay outstanding
principal, unpaid interest, late charges and collection costs on all federally
insured or reinsured student loans incurred under the FFELP that the borrower
selects for consolidation, as well as loans made under various other student
loan programs and student loans made by different lenders. Under this program, a
lender may make a Consolidation Loan to an eligible borrower who requests it so
long as the lender holds an outstanding loan of the borrower or the borrower
certifies that he has been unable to obtain a Consolidation Loan from the
holders of his outstanding student loans. In 1998, the Act was amended to allow
a lender to make a Consolidation Loan to a borrower whose loans are held by
multiple lenders even if the lender making the Consolidation Loan does not hold
any of the borrower's outstanding loans. A borrower who is unable to obtain a
Consolidation Loan from an eligible lender or a Consolidation Loan with an
income-sensitive repayment plan acceptable to the borrower may obtain a
Consolidation Loan under the direct loan program.
Consolidation Loans that were made on or after July 1, 1994 have no minimum
loan amount, although Consolidation Loans for less than $7,500 must be repaid in
ten years. Applications for Consolidation Loans received on or after January 1,
1993 but before July 1, 1994 were available only to borrowers who had aggregate
outstanding student loan balances of at least $7,500. For applications received
before January 1, 1993, Consolidation Loans were available only to borrowers who
had aggregate outstanding student loan balances of at least $5,000.
To obtain a Consolidation Loan, the borrower must be either in repayment
status or in a grace period before repayment begins. In addition, for
applications received before January 1, 1993, the borrower must not have been
delinquent by more than 90 days on any student loan payment; and for
applications received on or after January 1, 1993, delinquent or defaulted
borrowers are eligible to obtain Consolidation Loans only if they re-enter
repayment through loan consolidation.
In connection with applications received on or after January 1, 1993,
borrowers may, within 180 days after the origination of a Consolidation Loan,
add additional loans made before the origination of that Consolidation Loan; and
in 1998, the Act was amended to permit student loans made within the 180-day
period after the date of consolidation to be added to that Consolidation Loan.
If the borrower obtains student loans after the Consolidation Loan is
originated, except as provided above he may consolidate the new loans and the
existing Consolidation Loan into a new Consolidation Loan. After a Consolidation
Loan is consolidated with any add-on Consolidation Loans, the interest rate and
term of the Consolidation Loan may be recomputed within the parameters permitted
by the Act. For applications received on or after January 1, 1993, married
couples who agree to be jointly and severally liable will be treated as one
borrower for purposes of loan consolidation eligibility. For applications
received on or after November 13, 1997, borrowers may include federal direct
loans in Consolidation Loans.
Consolidation Loans bear interest at a rate equal to the greater of the
weighted average of the interest rates on the unpaid principal balances of the
consolidated loans and 9% for loans originated before July 1, 1994. For
Consolidation Loans made on or after July 1, 1994 and for which applications
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were received before November 13, 1997, the weighted average interest rate are
rounded up to the nearest whole percent. Consolidation Loans made on or after
July 1, 1994 for which applications were received on or after November 13, 1997
through September 30, 1998 bear interest at the annual variable rate applicable
to Stafford Loans subject to a cap of 8.25%. Consolidation Loans for which the
application is received on or after October 1, 1998 bear interest at a rate
equal to the weighted average interest rate of the loans being consolidated
rounded up to the nearest one-eighth of one percent, subject to a cap of 8.25%.
Interest on Consolidation Loans accrues and, for applications received
before January 1, 1993, is paid without interest subsidy by the Department. For
Consolidation Loans for which applications were received on or after January 1,
1993, all interest of the borrower is paid during all deferral periods. However,
Consolidation Loans for which applications were received on or after August 10,
1993 will only be subsidized if all of the underlying loans being consolidated
were subsidized Stafford Loans. Nevertheless, in the case of Consolidation Loans
made on or after November 13, 1997, the portion of a Consolidation Loan that is
comprised of subsidized Stafford Loans will retain its subsidy benefits during
deferral periods. Borrowers may elect to accelerate principal payments without
penalty.
No insurance premium may be charged to a borrower or a lender in connection
with a Consolidation Loan. However, a fee may be charged to the lender by a
guarantor to cover the costs of increased or extended liability for a
Consolidation Loan, and lenders must pay a monthly rebate fee to the Department
at an annualized rate of 1.05% on principal of and interest on Consolidation
Loans for loans disbursed on or after October 1, 1993, and at an annualized rate
of 0.62% for Consolidation Loan applications received between October 1, 1998
and January 31, 1999. The rate for special allowance payments for Consolidation
Loans is determined in the same manner as for Stafford Loans.
A borrower must begin to repay his Consolidation Loan within 60 days after
his prior consolidated loans have been discharged. For applications received on
or after January 1, 1993, repayment schedule options must include the
establishment of graduated or income-sensitive repayment plans, subject to
limits applicable to the sum of the Consolidation Loan and the amount of the
borrower's other eligible student loans outstanding. The lender may, at its
option, include graduated and income-sensitive repayment plans in connection
with student loans for which the applications were received before that date.
Generally, depending on the total loans outstanding, repayment may be scheduled
over periods no less than ten and not more than 25 years. For applications
received on or after January 1, 1993, the maximum maturity schedule is 30 years
for Consolidation Loans of $60,000 or more.
All eligible student loans of a borrower paid in full through consolidation
are discharged in the consolidation process when the new Consolidation Loan is
made.
GUARANTORS UNDER THE FFELP
FEDERAL REIMBURSEMENT AGREEMENTS
Under the FFELP, guarantors guarantee loans made by eligible lending
institutions. Student loans made before October 1, 1993 are guaranteed by
guarantors as to 100% of principal and accrued interest against default, death,
disability or bankruptcy. Student loans made on or after October 1, 1993 are
guaranteed as to 100% of principal and accrued interest against death,
disability or bankruptcy and 98% of principal and accrued interest against
default. The guarantor is reimbursed by the Secretary of Education for amounts
paid to lenders pursuant to agreements for reimbursement.
Under some circumstances, the Secretary can terminate federal reimbursement
contracts or take other actions short of termination to protect the federal
interest. See " --Department of Education Oversight" below.
Under the Higher Education Act and the federal reimbursement contracts, the
Secretary of Education currently agrees to reimburse a guarantor for the amounts
it expends in the discharge of its
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guarantee obligation--that is, the unpaid principal balance and accrued interest
on the guaranteed loans--as a result of borrower default. The Secretary
currently agrees to reimburse each guarantor for:
- up to 100% of the amounts it expends for guaranteed loans made before
October 1, 1993;
- up to 98% of the amounts it expends for guaranteed loans made on or after
October 1, 1993 but before October 1, 1998; and
- up to 95% of the amounts it expends for guaranteed loans made on or after
October 1, 1998.
The Secretary of Education also agrees to repay 100% of the unpaid principal
balance and accrued interest on guaranteed loans that the guarantor expends in
discharging its guarantee obligation as a result of the bankruptcy, death or
total and permanent disability of a borrower, or in the case of a PLUS Loan, the
death of the student on whose behalf the loan was borrowed or, in some
circumstances, as a result of school closure, or if a school fails to make a
refund of loan proceeds which the school owed to the student's lender.
Under present practice, after the Secretary reimburses a guarantor for a
default claim paid on a guaranteed loan, the guarantor continues to seek
repayment from the borrower. However, the Secretary may require that the
defaulted guaranteed loans be assigned to the Department of Education. In that
case, no further collections activity would be undertaken by the guarantor, and
no recoveries could be paid to the guarantor.
A guarantor may enter into an addendum to its interest subsidy agreement
under which the guarantor would refer defaulted guaranteed loans to the
Secretary. Those loans would then be reported to the IRS to "offset" any tax
refunds which may be due the defaulted borrowers.
ELIGIBILITY FOR FEDERAL REIMBURSEMENT
To be eligible for federal reimbursement payments, guaranteed loans must be
made by an eligible lender under the applicable guarantor's guarantee program
and meet the requirements of the regulations issued under the Higher Education
Act, including borrower eligibility, loan amount, disbursement, interest rate,
repayment period and guarantee fee provisions.
Generally, these procedures require that the lender process the applicant's
completed loan application, determine whether the applicant is an eligible
borrower attending an eligible institution, explain to the borrower his
responsibilities under the loan, ensure that the promissory note evidencing the
loan is executed by the borrower and disburse the loan proceeds as required.
After the loan is made, the lender must establish repayment terms with the
borrower, properly administer deferrals and forbearances and credit the borrower
for payments made. If a borrower becomes delinquent in repaying a loan, a lender
must perform collection procedures that vary depending upon the length of time a
loan is delinquent. The collection procedures consist primarily of telephone
calls, demand letters, skiptracing procedures and requesting assistance from the
applicable guarantor.
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A lender may submit a default claim to the guarantor after the related
student loan has been delinquent for at least 270 days in most cases. However,
if the first day of delinquency occurred before October 7, 1998, the default
claim may be submitted after 180 days of delinquency. The lender must submit a
default claim package that includes all information and documentation required
under the FFELP regulations and the guarantor's policies and procedures. Under
current procedures, assuming that the default claim package complies with the
guarantor's loan procedures manual and regulations, the guarantor will pay the
lender for a default claim within 90 days after the lender has filed its claim,
which generally is expected to be 390 days following the date a loan became
delinquent. The guarantor will pay the lender interest accrued on the loan for
up to 450 days after delinquency. The guarantor must file a reimbursement claim
with the Secretary within 45 days after the guarantor has paid the lender for
the default claim.
OTHER FEDERAL AGREEMENTS
In addition to guarantees, qualified Stafford Loans and some Consolidation
Loans acquired under the FFELP benefit from federal subsidies. Each guarantor
and the Secretary of Education have entered into an interest subsidy agreement,
which entitles the holders of eligible loans guaranteed by the guarantor to
receive interest subsidy payments from the Secretary on behalf of some students
while the student is in school, during the grace period after the student leaves
school, and during prescribed deferment periods, in each case subject to the
holders' compliance with all the requirements of the Higher Education Act. See
"--Stafford Loans--Interest Subsidy Payments" above for a more detailed
description of the interest subsidy payments.
REHABILITATION OF DEFAULTED LOANS
The Secretary of Education is authorized to enter into agreements with the
guarantor under which the guarantor may sell defaulted loans that are eligible
for rehabilitation to an eligible lender. For a loan to be eligible for
rehabilitation, the guarantor must have received consecutive payments for
12 months of amounts owed on the loan. Upon rehabilitation, a loan is eligible
for all the benefits under the Higher Education Act that it would have been
eligible for had no default occurred. However, no student loan may be
rehabilitated more than once.
CHANGES TO FEDERAL AGREEMENTS
United States Courts of Appeals have held that the federal government,
through subsequent legislation, has the right unilaterally to amend the federal
reimbursement contracts between the Secretary of Education and the guarantors.
Amendments to the Higher Education Act since 1986 have had the following
effects:
- some rights of guarantors under their contracts with the Secretary
relating to the repayment of advances from the Secretary were abrogated;
- the Secretary was authorized to withhold reimbursement payments otherwise
due to guarantors until specified amounts of their reserves had been
eliminated;
- new reserve level requirements were added for guarantors; and
- the Secretary's authority to terminate federal reimbursement contracts and
to seize guarantors' reserves was expanded.
Future legislation could further adversely affect the rights of guarantors
under a federal reimbursement contract.
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DEPARTMENT OF EDUCATION OVERSIGHT
The Secretary of Education has oversight powers over guarantors. If the
Department of Education determines that a guarantor is unable to meet its
insurance obligations, the holders of loans guaranteed by that guarantor may
submit claims directly to the Department and the Department is required to pay
the full guarantee payments due, in accordance with guarantee claim processing
standards no more stringent than those applied by the terminated guarantor.
However, the Department's obligation to pay guarantee claims directly in this
fashion is contingent upon its making the determination referred to above.
1998 LEGISLATION
The Higher Education Amendments of 1998, enacted October 7, 1998, made
various changes to the Higher Education Act that affected guarantors, including
the following:
- Each guarantor had to establish a federal student loan reserve fund, or
"federal fund", and an operating fund before December 7, 1998, that would
be funded, invested and used as prescribed by the 1998 legislation.
- Each guarantor's sources of revenue were modified.
- Guarantors' additional reserves were recalled.
- The Secretary of Education and each guarantor may enter into voluntary
flexible agreements in lieu of existing agreements.
The 1998 legislation directs the Secretary of Education to demand that each
guarantor participating in the FFELP pay its share of the following amounts held
in its federal fund:
- in fiscal year 2002, an aggregate of $85 million;
- in fiscal year 2006, an aggregate of $82.5 million; and
- in fiscal year 2007, an aggregate of $82.5 million.
The share demanded from each guarantor is determined in accordance with
formulas included in Section 422(i) of the Higher Education Act. If a guarantor
charges the maximum permitted 1% insurance premium, however, the recall may not
result in the depletion of its reserve funds below an amount equal to the amount
of lender claim paid during the 90 days before the date of return.
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