EX-99.2 3 a2039662zex-99_2.txt EXHIBIT 99.2 Exhibit 99.2 USA EDUCATION, INC. SUPPLEMENTAL EARNINGS DISCLOSURE DECEMBER 31, 2000 (DOLLARS IN MILLIONS, EXCEPT EARNINGS PER SHARE)
Quarters Ended Years Ended ------------------------------------------ December 31, December 31, September 30, December 31, --------------------------- 2000 2000 1999 2000 1999 ------------ ------------- ------------ ----------- ------------- Net income $ 99 $ 92 $ 142 $ 465 $ 501 "Cash basis" net income * $ 122 $ 96 $ 135 $ 474 $ 502 "Core cash basis" net income ** $ 138 $ 128 $ 108 $ 492 $ 405 Diluted earnings per share $ .56 $ .55 $ .87 $ 2.76 $ 3.06 "Cash basis" diluted earnings per share $ .70 $ .57 $ .83 $ 2.81 $ 3.07 "Core cash basis" diluted earnings per share $ .80 $ .77 $ .66 $ 2.93 $ 2.48 Net interest margin 1.35% 1.50% 1.71% 1.52% 1.85% "Cash basis" net interest margin 1.42 1.51 1.69 1.53 1.87 "Core cash basis" net interest margin 1.42 1.51 1.63 1.53 1.68 Return on assets .83% .84% 1.30% 1.06% 1.28% "Cash basis" return on assets .63 .53 .87 .68 .88 "Core cash basis" return on assets .71 .71 .69 .71 .71 Student loan spread 1.76% 1.79% 1.95% 1.82% 2.03% "Cash basis" student loan spread 1.64 1.67 1.86 1.70 2.00 "Core cash basis" student loan spread 1.64 1.67 1.79 1.70 1.78 Average on-balance sheet student loans $37,024 $36,440 $36,113 $34,637 $33,028 Average off-balance sheet student loans 30,438 27,756 17,926 25,711 17,670 ----------- ----------- ----------- ---------- ----------- Average managed student loans $67,462 $64,196 $54,039 $60,348 $50,698 =========== =========== =========== ========== =========== Ending on-balance sheet student loans $37,647 $35,949 $33,809 Ending off-balance sheet student loans 29,868 30,739 19,467 ----------- ----------- ----------- Ending managed student loans $67,515 $66,688 $53,276 =========== =========== ===========
* "Cash basis" net income includes securitizations as financings and excludes goodwill amortization. ** "Core cash basis" net income excludes non-recurring items such as floor income, the integration charge and the liquidation of investment securities and student loans from "cash basis" net income. USA EDUCATION, INC. CONSOLIDATED BALANCE SHEETS (IN THOUSANDS, EXCEPT PER SHARE AMOUNTS)
December 31, September 30, December 31, ASSETS 2000 2000 1999 ------------- -------------- ------------ Student loans $37,647,297 $35,949,209 $33,808,867 Warehousing advances 987,352 860,565 1,042,695 Academic facilities financings 851,168 882,862 1,027,765 Cash and investments 5,940,490 4,618,016 5,774,706 Other assets, principally accrued interest receivable 3,365,481 3,333,362 2,370,751 ------------- ------------- ------------- Total assets $48,791,788 $45,644,014 $44,024,784 ============= ============= ============= LIABILITIES Short-term borrowings $30,463,988 $30,900,143 $37,491,251 Long-term notes 14,910,939 11,522,577 4,496,267 Other liabilities 1,787,642 1,672,131 982,469 ------------- ------------- ------------- Total liabilities 47,162,569 44,094,851 42,969,987 ------------- ------------- ------------- COMMITMENTS* MINORITY INTEREST IN SUBSIDIARY 213,883 213,883 213,883 STOCKHOLDERS' EQUITY Preferred stock, par value $.20 per share, 20,000 shares authorized: 3,300; 3,300; and 3,300 shares, respectively, issued at stated value of $50 per share 165,000 165,000 165,000 Common stock, par value $.20 per share, 250,000 shares authorized: 190,852; 187,593; and 186,070 shares, respectively, issued 38,170 37,519 37,214 Additional paid-in capital 225,211 76,517 62,827 Unrealized gains on investments, net of tax 311,301 298,974 297,735 Retained earnings 1,810,902 1,743,593 1,462,034 ------------- ------------- ------------- Stockholders' equity before treasury stock 2,550,584 2,321,603 2,024,810 Common stock held in treasury at cost: 26,707; 23,533; and 28,493 shares, respectively 1,135,248 986,323 1,183,896 ------------- ------------- ------------- Total stockholders' equity 1,415,336 1,335,280 840,914 ------------- ------------- ------------- Total liabilities and stockholders' equity $48,791,788 $45,644,014 $44,024,784 ============= ============= =============
* Commitments to purchase loans, lines of credit, letters of credit, and academic facilities financing commitments and letters of credit were $16.4 billion, $2.8 billion, $3.5 billion, and $54.5 million, respectively, at December 31, 2000. USA EDUCATION, INC. CONSOLIDATED STATEMENTS OF INCOME (IN THOUSANDS, EXCEPT PER SHARE AMOUNTS)
Quarters Ended ----------------------------------------------- Years Ended December 31, December 31, September 30, December 31, ----------------------------- 2000 2000 1999 2000 1999 ----------- ------------ ----------- ------------- ------------ Interest income: Student loans $782,144 $769,965 $694,160 $2,854,231 $2,426,506 Warehousing advances 15,360 13,194 14,002 56,410 67,828 Academic facilities financings 14,637 15,844 17,836 66,709 74,358 Investments 140,768 99,983 83,628 501,309 239,883 -------- -------- -------- ---------- ---------- Total interest income 952,909 898,986 809,626 3,478,659 2,808,575 Interest expense 794,964 738,653 630,552 2,836,871 2,114,785 -------- -------- -------- ---------- ---------- Net interest income 157,945 160,333 179,074 641,788 693,790 Less: provision for losses 9,354 5,428 7,148 32,119 34,358 -------- -------- -------- ---------- ---------- Net interest income after provision for losses 148,591 154,905 171,926 609,669 659,432 -------- -------- -------- ---------- ---------- Other income: Gains on student loan securitizations 836 22,656 23,740 91,846 35,280 Servicing and securitization revenue 84,952 80,027 60,085 295,646 288,584 Gains/(losses) on sales of student loans (54) 122 27,169 67 27,169 Gains/(losses) on sales of securities (25,262) 25 6,053 18,555 15,832 Other 120,340 103,086 20,163 281,518 83,925 -------- -------- -------- ---------- ---------- Total other income 180,812 205,916 137,210 687,632 450,790 Operating expenses 174,312 167,116 94,372 532,710 358,570 Integration charge - 53,000 - 53,000 - -------- -------- -------- ---------- ---------- Income before income taxes and minority interest in net earnings of subsidiary 155,091 140,705 214,764 711,591 751,652 Income taxes 53,762 45,813 70,137 235,880 240,127 Minority interest in net earnings of subsidiary 2,673 2,674 2,673 10,694 10,694 -------- -------- -------- ---------- ---------- NET INCOME 98,656 92,218 141,954 465,017 500,831 Preferred stock dividends 2,864 2,865 1,438 11,522 1,438 -------- -------- -------- ---------- ---------- Net income attributable to common stock $ 95,792 $ 89,353 $140,516 $453,495 $499,393 ======== ======== ======== ========== ========== BASIC EARNINGS PER SHARE $ .58 $ .56 $ .89 $ 2.84 $ 3.11 ======== ======== ======== ========== ========== Average common shares outstanding 163,927 160,652 158,203 159,482 160,577 ======== ======== ======== ========== ========== DILUTED EARNINGS PER SHARE $ .56 $ .55 $ .87 $ 2.76 $ 3.06 ======== ======== ======== ========== ========== Average common and common equivalent shares outstanding 169,866 163,279 160,908 164,355 163,158 ======== ======== ======== ========== ==========
USA EDUCATION, INC. SUPPLEMENTAL FINANCIAL INFORMATION FOURTH QUARTER 2000 (DOLLARS IN MILLIONS, EXCEPT PER SHARE AMOUNTS) The following supplemental information should be read in connection with USA Education, Inc.'s (formerly SLM Holding Corporation - the "Company") press release of fourth quarter 2000 earnings, dated January 18, 2001. Statements in this Supplemental Financial Information Release which refer to expectations as to future developments are forward-looking statements within the meaning of The Private Securities Litigation Reform Act of 1995. Such forward-looking statements involve risks, uncertainties and other factors that may cause the actual results to differ materially from such forward-looking statements. Such factors include, among others, changes in the terms of student loans and the educational credit marketplace arising from the implementation of applicable laws and regulations and from changes in such laws and regulations; changes in the demand for educational financing or in financing preferences of educational institutions, students and their families; and changes in the general interest rate environment. For more information, see the Company's filings with the Securities and Exchange Commission. PRO-FORMA STATEMENTS OF INCOME Under generally accepted accounting principles ("GAAP"), the Company's securitization transactions have been treated as sales. At the time of sale, in accordance with Statement of Financial Accounting Standards 125 ("SFAS 125"), the Company records a gain equal to the present value of the estimated future net cash flows from the portfolio of loans sold. Interest earned on the interest residual and fees earned for servicing the loan 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. In addition, the pro-forma results of operations also exclude the effect of floor income, certain one-time gains and losses on sales of investment securities and student loans, a one-time integration charge related to the July 2000 acquisition of USA Group and the amortization of goodwill from all acquisitions. The following pro-forma statements of income present the Company's results of operations under these assumptions. As such, no gain on sale or subsequent servicing and securitization revenue is recognized. Instead, the earnings of the student loans in the trusts and related financing costs are reflected over the life of the underlying pool of loans. The effect of floor income, certain one-time gains and losses on sales of investment securities and student loans, the amortization of goodwill from acquisitions and the one-time integration charge are also excluded from net income. Management refers to these pro-forma results as "core cash basis" statements of income. Management monitors the periodic "core cash basis" earnings of the Company's managed student loan portfolio and believes that they assist in a better understanding of the Company's student loan business. The following table presents the "core cash basis" statements of income and reconciliation to GAAP net income as reflected in the Company's consolidated statements of income.
Quarters Ended Years Ended ------------------------------------------- ------------------------- December 31, September 30, December 31, December 31, December 31, 2000 2000 1999 2000 1999 ------------ ------------- ------------ ------------ ----------- "CORE CASH BASIS" STATEMENTS OF INCOME: Insured student loans.................. $ 1,441 $ 1,366 $ 1,030 $ 5,015 $ 3,642 Advances/Facilities/Investments........ 186 139 116 652 386 ----------- ----------- ----------- ---------- ----------- Total interest income.................. 1,627 1,505 1,146 5,667 4,028 Interest expense....................... (1,353) (1,238) (901) (4,628) (3,101) ------------ ----------- ------------ ----------- ------------ Net interest income.................... 274 267 245 1,039 927 Less: provision for losses............. 14 11 11 53 51 ----------- ----------- ----------- ---------- ----------- Net interest income after provision for losses.......................... 260 256 234 986 876 ----------- ----------- ----------- ---------- ----------- Other income: Gains on student loan securitizations - - - - - Servicing and securitization revenue - - - - - Gains on sales of securities...... - - - 1 1 Other............................. 119 103 20 280 83 -------------- ----------- ----------- ---------- ----------- Total other income..................... 119 103 20 281 84 Total operating expenses............... 165 161 93 514 356 ----------- ----------- ----------- ---------- ----------- Income before income taxes and minority interest in net earnings of subsidiary. 214 198 161 753 604 Income taxes........................... 73 67 50 250 188 Minority interest in net earnings of subsidiary................... 3 3 3 11 11 ----------- ----------- ----------- ---------- ----------- "Core cash basis" net income........... 138 128 108 492 405 Preferred stock dividends 3 3 1 12 1 ----------- ----------- ----------- ---------- ----------- "Core cash basis" net income attributable to common stock.... $ 135 $ 125 $ 107 $ 480 $ 404 =========== =========== =========== ========== =========== "Core cash basis" diluted earnings per share .......................... $ .80 $ .77 $ .66 $ 2.93 $ 2.48 =========== =========== =========== ========== ===========
Quarters Ended Years Ended ------------------------------------------- ------------------------- December 31, September 30, December 31, December 31, December 31, 2000 2000 1999 2000 1999 ------------ ------------- ------------ ------------ ----------- RECONCILIATION OF GAAP NET INCOME TO "CORE CASH BASIS" NET INCOME: GAAP net income........................ $ 99 $ 92 $ 142 $ 465 $ 501 ----------- ----------- ----------- ----------- ----------- "Cash basis" adjustments: Gains on student loan securitizations. (1) (22) (24) (92) (35) Servicing and securitization revenue.. (85) (80) (60) (296) (289) Net interest income................. 115 107 75 400 340 Provision for losses................ (4) (6) (5) (21) (17) Other............................... - - - - (1) Goodwill amortization............... 9 6 2 19 3 ----------- ----------- ----------- ----------- ----------- Total "cash basis" adjustments......... 34 5 (12) 10 1 Net tax effect (A) ................... (11) (1) 5 (1) - ----------- ----------- ----------- ----------- ----------- "Cash basis" net income................ 122 96 135 474 502 ----------- ----------- ----------- ----------- ----------- "Core cash basis" adjustments: Floor income........................ - - (9) (3) (107) Integration charge.................. - 53 - 53 - Gains/losses on sales of student loans.............................. - - (27) - (27) Gains/losses on sales of securities. 25 - (6) (18) (14) ----------- ----------- ----------- ----------- ----------- Total "core cash basis" adjustments.... 25 53 (42) 32 (148) Net tax effect (A) ................... (9) (21) 15 (14) 51 ----------- ----------- ----------- ----------- ----------- "Core cash basis" net income........... $ 138 $ 128 $ 108 $ 492 $ 405 =========== =========== =========== =========== ===========
(A) Such tax effect is based upon Sallie Mae's marginal tax rate for the respective period. 2 "CORE CASH BASIS" STUDENT LOAN SPREAD AND NET INTEREST INCOME The following table analyzes the reported earnings from the Company's portfolio of managed student loans, which includes loans both on-balance sheet and those off-balance sheet in securitization trusts. The line captioned "Cash basis adjusted student loan yields" reflects contractual student loan yields. "CORE CASH BASIS" STUDENT LOAN SPREAD ANALYSIS
Quarters Ended Years Ended ------------------------------------------- ------------------------- December 31, September 30, December 31, December 31, December 31, 2000 2000 1999 2000 1999 ------------ ------------- ------------ ------------ ----------- "Cash basis" adjusted student loan yields... 9.10% 9.10% 8.25% 8.92% 8.00% Consolidated loan rebate fees............... (.19) (.18) (.16) (.18) (.15) Offset fees................................. (.07) (.08) (.10) (.08) (.09) Borrower benefits........................... (.09) (.10) (.09) (.09) (.08) Premium amortization........................ (.25) (.27) (.27) (.26) (.28) ---------- ----------- ---------- ---------- ------------ Student loan income......................... 8.50 8.47 7.63 8.31 7.40 Cost of funds............................... (6.86) (6.80) (5.77) (6.61) (5.40) ---------- ---------- ---------- ----------- ----------- "Cash basis" student loan spread............ 1.64% 1.67% 1.86% 1.70% 2.00% ========== ========== ========== ========== =========== "Core cash basis" student loan spread....... 1.64% 1.67% 1.79% 1.70% 1.78% ========== ========== ========== ========== =========== AVERAGE BALANCES Managed student loans....................... $67,462 $64,196 $54,039 $60,348 $50,698 ========== ========== ========== ========== ===========
The Company generally earns interest at the greater of the borrower's rate or a floating rate determined by reference to the average of the weekly auctions of the 91-day Treasury bills by the government, plus a fixed spread, which is dependent upon when the loan was originated. In all cases, the rate the borrower pays sets a minimum rate for determining the yield the Company earns on the loan. The Company generally finances its student loan portfolio with floating rate debt tied to the average of the 91-day Treasury bill auctions, either directly or through the use of derivative financial instruments, to mimic the interest rate characteristics of the student loans. Such borrowings in general, however, do not have minimum rates. As a result, in certain declining interest rate environments, the portfolio of managed student loans may be earning the minimum borrower rate, while the Company's funding costs (exclusive of funding spreads) will generally decline along with Treasury bill rates. For loans where the borrower's interest rate is fixed to term, lower interest rates may benefit the spread earned on student loans for extended periods of time. For loans where the borrower's interest rate is reset annually, any benefit of a low interest rate environment will only enhance student loan spreads through the next annual reset of the borrower's interest rate, which occurs on July 1 of each year. Due to the continued rise in Treasury bill rates since the second quarter of 1999, the Company realized $.02 million in revenue from student loans earning at the minimum borrower rate in the fourth quarter of 2000 versus $9 million of such earnings in the year-ago quarter and $.01 million in the prior quarter. The negative impact of the rise in Treasury bill rates on student loans earning at the minimum borrower rate decreased the "cash basis" student loan spread by 6 basis points versus the year-ago quarter. These earnings have been excluded from student loan income to calculate the "core cash basis" student loan spread. The decrease in "core cash basis" student loan spread versus the year-ago quarter is primarily attributable to the increase in the company's portfolio of lower yielding loans which has decreased the average special allowance payment (SAP) in the student loan yield and to the increase in the average balance of consolidation loans as a percentage of total managed loans which has decreased the "core cash basis" student loan spread by 4 and 3 basis points, respectively. In addition, the cost of funds spread has increased 4 basis points versus the year-ago quarter. The "core cash basis" net interest margin for the fourth quarters of 2000 and 1999 and the third quarter of 2000 was 1.42 percent, 1.63 percent and 1.51 percent, respectively. The decrease in fourth quarter of 2000 "core cash basis" net interest margin versus the fourth quarter of 1999 and the decrease over the prior quarter are partially due to the changes in the student loan spread discussed above. The decrease in the "core cash basis" net interest margin in the fourth quarter of 2000 versus the year-ago quarter and prior quarter can also be attributed to the increase in average balance of investments as a percentage of total earning assets. 3 STUDENT LOAN SPREAD AND NET INTEREST INCOME The following table analyzes the reported earnings from student loans on-balance sheet. The line captioned "adjusted student loan yields" reflects contractual student loan yields. STUDENT LOAN SPREAD ANALYSIS
Quarters Ended Years Ended --------------------------------------------- ---------------------------- December 31, September 30, December 31, December 31, December 31, 2000 2000 1999 2000 1999 ------------ ------------- ------------ ------------ ----------- ON-BALANCE SHEET Adjusted student loan yields. 9.09% 9.10% 8.29% 8.91% 8.02% Consolidated loan rebate fees (.28) (.26) (.22) (.27) (.22) Offset fees.................. (.13) (.14) (.15) (.13) (.15) Borrower benefits............ (.07) (.07) (.07) (.07) (.06) Premium amortization......... (.21) (.22) (.22) (.20) (.24) ---------- ---------- ----------- ----------- ----------- Student loan income.......... 8.40 8.41 7.63 8.24 7.35 Cost of funds................ (6.64) (6.62) (5.68) (6.42) (5.32) ---------- ---------- ----------- ----------- ----------- Student loan spread.......... 1.76% 1.79% 1.95% 1.82% 2.03% ========== ========== =========== =========== =========== AVERAGE BALANCES On-balance sheet student loans..................... $37,024 $36,440 $36,113 $34,637 $33,028 Securitized loans............ 30,438 27,756 17,926 25,711 17,670 ----------- ----------- ----------- ------------ ----------- Managed student loans........ $67,462 $64,196 $54,039 $60,348 $50,698 =========== =========== =========== ============ ===========
In periods of declining interest rates, the Company's on-balance sheet portfolio of student loans may be earning the minimum borrower rate, while the Company's funding costs (exclusive of funding spreads) will generally decline along with Treasury bill rates in a manner similar to the Company's managed portfolio of student loans discussed in detail above under "Core Cash Basis Student Loan Spread Analysis." Due to the continued rise in Treasury bill rates since the second quarter of 1999 the Company realized $.02 million in earnings from student loans earning at the minimum borrower rate in the fourth quarter of 2000 versus $8 million of such earnings in the year-ago quarter and $.01 million in the prior quarter. The amortization of up-front payments received on floor revenue contracts on loans with borrower rates that adjust annually is included in the student loan spreads. The negative impact of the rise in Treasury bill rates on student loans earning at the minimum borrower rate decreased the on-balance sheet student loan spread by 8 basis points versus the year-ago quarter. The increase in the on-balance sheet portfolio of lower yielding loans and consolidation loans as a percentage of total loans also decreased the student loan spread by 7 and 6 basis points, respectively, versus the year-ago quarter. 4 AVERAGE BALANCE SHEETS The following tables reflect the rates earned on earning assets and paid on liabilities for the quarters ended December 31, 2000, September 30, 2000 and December 31, 1999 and the years ended December 31, 2000 and 1999.
Quarters Ended --------------------------------------------------------------- December 31, September 30, December 31, 2000 2000 1999 ------------------ ------------------ ------------------- Amount Rate Amount Rate Amount Rate -------- ------ -------- ------ ------- ------ AVERAGE ASSETS Student loans.................... $37,024 8.40% $36,440 8.41% $36,113 7.63% Warehousing advances............. 903 6.77 737 7.12 896 6.20 Academic facilities financings... 877 8.17 963 8.19 1,087 8.17 Investments...................... 8,367 6.65 5,792 6.92 5,344 6.45 -------- ---- -------- ---- --------- ------ Total interest earning assets.... 47,171 8.06% 43,932 8.18% 43,440 7.47% Non-interest earning assets...... 3,408 ==== 2,926 ==== 2,426 ====== -------- -------- --------- Total assets..................... $50,579 $46,858 $45,866 ======== ======== ========= AVERAGE LIABILITIES AND STOCK- HOLDERS' EQUITY Six-month floating rate notes.... $ 5,022 6.71% $ 4,310 6.58% $ 5,014 5.78% Other short-term borrowings...... 28,612 6.64 30,731 6.68 33,760 5.68 Long-term notes.................. 13,727 6.75 9,038 6.67 4,938 5.98 -------- ---- -------- ---- --------- ------ Total interest bearing liabilities 47,361 6.68% 44,079 6.67% 43,712 5.72% Non-interest bearing liabilities. 1,842 ==== 1,604 ==== 1,434 ====== Stockholders' equity............. 1,376 1,175 720 -------- -------- --------- Total liabilities and stockholders' equity......................... $50,579 $46,858 $45,866 ======== ======== ========= Net interest margin.............. 1.35% 1.50% 1.71% ==== ==== ======
Years Ended ------------------------------------------- December 31, 2000 December 31, 1999 ------------------- ------------------- Amount Rate Amount Rate -------- ------ -------- ------ AVERAGE ASSETS Student loans.................... $34,637 8.24% $33,028 7.35% Warehousing advances............. 825 6.84 1,173 5.78 Academic facilities financings... 974 8.50 1,144 8.16 Investments...................... 7,486 6.81 3,932 6.42 -------- ---- --------- ------- Total interest earning assets.... 43,922 7.98% 39,277 7.23% Non-interest earning assets...... 2,711 ==== 2,166 ======= -------- --------- Total assets..................... $46,633 $41,443 ======== ========= AVERAGE LIABILITIES AND STOCK- HOLDERS' EQUITY Six-month floating rate notes.... $ 4,660 6.49% $ 4,644 5.38% Other short-term borrowings...... 30,670 6.40 28,560 5.30 Long-term notes.................. 8,636 6.61 6,292 5.60 -------- ---- --------- ------- Total interest bearing liabilities 43,966 6.45% 39,496 5.35% Non-interest bearing liabilities. 1,574 ==== 1,287 ======= Stockholders' equity............. 1,093 660 -------- --------- Total liabilities and stockholders' equity......................... $46,633 $41,443 ======== ========= Net interest margin.............. 1.52% 1.85% ==== =======
5 NET INTEREST MARGIN AND INCOME The net interest margin for the fourth quarters of 2000 and 1999 and the third quarter of 2000 was 1.35 percent, 1.71 percent and 1.50 percent, respectively. The decrease in the net interest margin for the fourth quarter of 2000 versus the fourth quarter of 1999 and the decrease over the prior quarter are partially due to the changes in the student loan spread discussed previously. The decrease is also due to the increase in the average balance of investments as a percentage of the total average balance of earning assets. The decrease in net interest income versus the year-ago quarter is due to the decrease in floor revenue discussed in the student loan spread analysis previously and to the increase in the average balance of investments as a percentage of the total average balance of earning assets. SECURITIZATION PROGRAM During the fourth quarter of 2000, the Company securitized $70 million through the recycling provisions of the USA Group securitizations and recorded a pre-tax securitization gain of $1 million or 1.19 percent of the portfolio securitized. In the fourth quarter of 1999, the Company securitized $2 billion and recorded a pre-tax securitization gain of $24 million or 1.19 percent of the portfolio securitized. In the third quarter of 2000, the Company securitized $2 billion and recorded a pre-tax securitization gain of $22 million or 1.08 percent of the portfolio securitized. Servicing and securitization revenue, the ongoing revenue from securitized loan pools, includes both the revenue the Company receives for servicing loans in the securitization trusts and income earned on the interest residual asset. Servicing and securitization revenue totaled $85 million in the fourth quarter of 2000 versus $60 million in the corresponding year-ago quarter, and $80 million in the prior quarter. In the fourth quarter of 2000, servicing and securitization revenue was 1.11 percent of average securitized loans versus 1.33 percent in the year-ago quarter and 1.15 percent in the third quarter of 2000. The decrease in servicing and securitization revenue as a percentage of the average balance of securitized student loans in the fourth quarter of 2000 versus the fourth quarter of 1999 is partially due to the impact of the rise in Treasury bill rates since the second quarter of 1999, which increased the earnings from those student loans in the trusts that were earning the minimum borrower rate in a manner similar to on-balance sheet student loans. The lower contractual rates on the acquired USA Group securitizations reduced servicing revenue as a percentage of average securitized loans by 7 basis points versus the year-ago quarter. In addition, USA Group securitizations were acquired with a lower interest residual. The inclusion of the lower spread in securitization revenue has decreased the servicing and securitization revenue as a percentage of total average securitized loans by 11 basis points. The increase in servicing and securitization revenue in the fourth quarter of 2000 versus the prior quarter is mainly due to the higher average balance of the interest residual asset offsetting the impact of higher Treasury bill rates. OTHER INCOME Other income, exclusive of gains on student loan securitizations, servicing and securitization revenue, gains on sales of student loans and certain one-time gains and losses on sales of investment securities totaled $120 million for the fourth quarter 2000 versus $20 million in the year-ago quarter and $103 million for the third quarter 2000. Other income mainly includes guarantee servicing revenue, late fees earned on student loans, revenue received from servicing third party portfolios of student loans, and commitment fees for letters of credit. Guarantee servicing fees arise primarily from four categories of services that correspond to the student loan life cycle. They include loan originations, the maintenance of the guarantee on the loan, default prevention, and collection revenues. Included in the fourth quarter of 2000 other income are $9 million, $11 million, $16 million and $47 million, respectively, representing these four categories. For the fourth quarter of 2000, an additional $11 million of third party servicing and other fees for USA Group Inc., are included in other income. The Company entered into Cap and Floor contracts that are an effective economic hedge of a segment of our student loan portfolio. These positions do not meet the hedge effectiveness requirements under GAAP and as a result were marked to market and a $25 million pre-tax loss was recorded on the GAAP financial statements in the fourth quarter of 2000. 6 OPERATING EXPENSES In the fourth quarter of 2000, total operating expenses were $174 million versus $94 million in the corresponding year-ago period and $167 million in the third quarter of 2000, exclusive of the one-time integration charge of $53 million, or as a percentage of managed student loans were 1.03 percent, .70 percent and 1.04 percent, respectively. General and administrative expenses totaled $63 million for the fourth quarter of 2000 versus $37 million in the year-ago quarter and $67 million in the third quarter of 2000, exclusive of the one-time integration charge. The increase in operating expenses in the fourth quarter of 2000 versus the fourth quarter of 1999 is mainly due to the addition of operating expenses connected with the acquisitions of Student Loan Funding Resources, Inc. ("SLFR") and USA Group, Inc., which closed in July 2000. In connection with the acquisition of USA Group, the Company took an integration charge of $53 million in the third quarter of 2000. Included in this amount are severance costs, costs to close facilities and move functional responsibilities as well as costs to align system capabilities and move the data center. CAPITAL The Company repurchased 3.0 million shares during the fourth quarter of 2000 through open market repurchases and equity forward settlements and issued a net 3.0 million as a result of benefit plans. At December 31, 2000, the total common shares that could potentially be acquired over the next five years under outstanding equity forward contracts was 18.2 million, and the Company had a remaining authority to enter into additional share repurchases and equity forward contracts for 4.8 million shares. STUDENT LOAN PURCHASES
Quarters Ended Years Ended -------------------------------------------- ---------------------------- December 31, September 30, December 31, December 31, December 31, 2000 2000 1999 2000 1999 ------------ ------------- ------------ ------------ ----------- Controlled channels........ $1,294 $ 1,693 $ 987 $ 6,595 $ 7,161 Other commitment clients... 179 415 124 1,405 1,788 Spot purchases............. 396 279 50 885 115 Acquisitions............... - 4,524 - 4,524 2,585 Consolidations............. 238 219 171 824 920 Other...................... 324 262 336 1,148 1,111 ------- -------- -------- -------- --------- Total...................... 2,431 7,392 1,668 15,381 13,680 Managed loans acquired - 5,165 - 5,165 - ------- -------- -------- -------- --------- Total managed loans acquired $2,431 $12,557 $1,668 $20,546 $13,680 ======= ======== ======== ======== =========
The Company purchased $2.4 billion of student loans in the fourth quarter of 2000 compared with $1.7 billion in the year-ago quarter and $12.6 billion in the previous quarter. Included in the prior quarter purchases are $1.4 billion of student loans acquired from USA Group, Inc., $3.1 billion of student loans acquired from SLFR and $5.2 billion of managed loans acquired from USA Group, Inc. In the fourth quarter of 2000, the Company's controlled channels of loan originations totaled $2.0 billion versus $1.2 billion in the year-ago quarter and $2.4 billion in the prior quarter. The pipeline of loans currently serviced and committed for purchase by the Company was $3.9 billion at December 31, 2000 versus $3.5 billion at December 31, 1999 and $3.2 billion at September 30, 2000. NEW ACCOUNTING PRONOUNCEMENTS In June 1998, the Financial Accounting Standards Board 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 on 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 Certain Derivative Instruments and Certain Hedging Activities," is effective for the Company's financial statements beginning January 1, 200l. SFAS 133, as amended, requires that changes in the derivative instrument's fair value be recognized currently in earnings unless specific 7 hedge accounting criteria are met. In addition to designation as a hedge, the primary requirement for hedge accounting is demonstration that the hedge is an effective offset to either changes in cash flows or fair value (effectiveness test). Under the Higher Education Act, student loans have terms that create an embedded floor derivative. These assets have an interest rate indexed to the 91-day Treasury bill rate but limited by a minimum interest rate. The Company finances its loan portfolio by entering into debt transactions at either a fixed rate or variable rate tied to the 91-day Treasury bill or LIBOR. In order to manage the cash inflow characteristics of these assets with the cash outflow characteristics of the Company's debt, the Company has entered into primarily two types of derivative transactions. The Company will often sell floor contracts for all or a portion of the estimated student loan life. SFAS 133 does not recognize written floors as an effective hedge unless the terms of the written floor match the terms of the embedded floor in the student loan asset. In cases where the Company sells a floor for a term shorter than the average life of the student loan, the floor must be marked to market with any changes in value reflected in the income statement. Secondarily, to the extent that the Company has variable LIBOR based debt, the Company will enter into basis swaps to better match the cash flows of the assets and liabilities. In this situation, SFAS 133 requires that the change in the value of the hedge effectively offset both the change in the value of the asset and the change in the value of the liability. Because of the existence of a minimum rate in the assets, this effectiveness test cannot be met and these swaps will be recorded at market value with subsequent changes in value reflected in the income statement. The Company utilizes Eurodollar Contracts as hedges of anticipated transactions. These met the SFAS 133 effectiveness test and will be considered cash flow hedges. As such, they will be marked to market, as currently accounted for under GAAP, and the changes in value will be reflected in other comprehensive income (OCI). Once the anticipatory transaction has occurred, the resulting gain or loss will be amortized out of OCI over the life of the hedged instrument. Under SFAS 133, the fixed versus floating interest rate swaps that meet the hedge effectiveness requirements will be considered fair value hedges. As such, both of these derivatives and their corresponding hedged asset or liability will be marked to market in the income statement. 8