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SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
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FORM 10-Q
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QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(D) OF
THE SECURITIES EXCHANGE ACT OF 1934
FOR THE QUARTERLY PERIOD ENDED MARCH 31, 1996
THE STUDENT LOAN CORPORATION
(Exact name of registrant as specified in its charter)
DELAWARE 16-1427135
(State or other jurisdiction of (I.R.S. Employer Identification No.)
incorporation or organization)
99 GARNSEY ROAD
PITTSFORD, NEW YORK 14534
(Address of principal executive offices) (Zip Code)
(716) 248-7187
(Registrant's telephone number, including area code)
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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
--- ---
On May 10, 1996, there were 20,000,000 shares of The Student Loan
Corporation's Common Stock outstanding.
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<PAGE>
PART I. FINANCIAL INFORMATION
ITEM 1. FINANCIAL STATEMENTS.
THE STUDENT LOAN CORPORATION
STATEMENTS OF INCOME
(Unaudited)
(Dollars in thousands, except per share amounts)
Three months ended
March 31,
--------------------
1996 1995
-------- --------
REVENUE
Interest income $134,925 $120,841
Interest expense 90,108 80,205
-------- --------
NET INTEREST INCOME 44,817 40,636
Provision for loan losses 618 28
-------- --------
Net interest income after provision for loan losses 44,199 40,608
Fee and other income 13 16
-------- --------
TOTAL REVENUE $ 44,212 $ 40,624
-------- --------
OPERATING EXPENSES
Salaries and employee benefits $ 7,971 $ 7,254
Other expenses 8,343 6,843
-------- --------
TOTAL OPERATING EXPENSES $ 16,314 $ 14,097
-------- --------
INCOME BEFORE INCOME TAXES $ 27,898 $ 26,527
Income taxes 11,387 11,152
-------- --------
NET INCOME $ 16,511 $ 15,375
======== ========
NET INCOME -FLOOR $ 271 $ 59
======== ========
NET INCOME - CORE (excluding floor income) $ 16,240 $ 15,316
======== ========
DIVIDENDS DECLARED $ 1,200 $ 1,200
======== ========
PER COMMON SHARE - (based on 20 million average shares outstanding)
Net income - Core $ 0.81 $ 0.77
Floor income $ 0.02 --
-------- --------
NET INCOME $ 0.83 $ 0.77
======== ========
DIVIDENDS DECLARED $ 0.06 $ 0.06
======== ========
OPERATING RATIOS -
Net interest margin 2.81% 3.05%
Net interest margin - Core 2.78% 3.04%
Operating expense as a percentage of
average insured student loans 1.02% 1.06%
See accompanying notes to financial statements.
2
<PAGE>
THE STUDENT LOAN CORPORATION
BALANCE SHEETS
(Unaudited)
(Dollars in thousands)
March 31, December 31,
1996 1995
---------- ----------
ASSETS
Insured student loans $6,479,823 $6,169,825
Allowance for loan losses 941 548
---------- ----------
Insured student loans, net 6,478,882 6,169,277
Cash 1,468 579
Deferred tax benefits 47,438 49,948
Other assets 180,361 167,593
---------- ----------
TOTAL ASSETS $6,708,149 $6,387,397
========== ==========
LIABILITIES AND STOCKHOLDERS' EQUITY
Short-term borrowings $2,855,995 $2,509,496
Long-term notes 3,400,000 3,400,000
Payable to principal stockholder 24,791 29,066
Other liabilities 109,001 145,784
---------- ----------
Total Liabilities 6,389,787 6,084,346
---------- ----------
Common stock 200 200
Additional paid-in capital 134,109 134,109
Retained Earnings 184,053 168,742
---------- ----------
Total Stockholders' Equity 318,362 303,051
---------- ----------
TOTAL LIABILITIES AND STOCKHOLDERS' EQUITY $6,708,149 $6,387,397
========== ==========
AVERAGE INSURED STUDENT LOANS $6,413,735 $5,669,364
(year-to-date) ========== ==========
See accompanying notes to financial statements.
3
<PAGE>
THE STUDENT LOAN CORPORATION
STATEMENTS OF CASH FLOWS
(Unaudited)
(Dollars in thousands)
Three months ended
March 31,
---------------------
1996 1995
--------- ---------
Cash flows from operating activities:
Net income $ 16,511 $ 15,375
Adjustments to reconcile net income to
net cash from operating activities:
Depreciation and amortization 752 753
Provision for loan losses 618 28
Deferred tax provision 2,510 3,215
Increase in accrued interest receivable (13,634) (43,934)
Decrease in other assets 840 2,351
Decrease in other liabilities (41,056) (25,272)
--------- ---------
NET CASH PROVIDED BY OPERATING ACTIVITIES (33,459) (47,484)
--------- ---------
Cash flows from investing activities:
Origination of loans (497,967) (455,868)
Net sale (purchase) of loans 10,268 (2,776)
Repayment of loans 177,099 127,129
Capital expenditures on premises and equipment (351) (431)
--------- ---------
NET CASH USED IN INVESTING ACTIVITIES (310,951) (331,946)
--------- ---------
Cash flows from financing activities:
Net increase in short-term borrowings 346,499 380,463
Dividends paid (1,200) (1,200)
--------- ---------
NET CASH PROVIDED BY FINANCING ACTIVITIES 345,299 379,263
--------- ---------
NET INCREASE (DECREASE) IN CASH 889 (167)
CASH - BEGINNING OF PERIOD 579 373
--------- ---------
CASH - END OF PERIOD $ 1,468 $ 206
========= =========
SUPPLEMENTAL DISCLOSURE OF CASH FLOW INFORMATION:
Cash paid during the periods for:
Interest $ 109,884 $ 91,114
Income taxes $ 31,849 $ 102
See accompanying notes to financial statements.
4
<PAGE>
THE STUDENT LOAN CORPORATION
NOTES TO FINANCIAL STATEMENTS
MARCH 31, 1996
1. SIGNIFICANT ACCOUNTING POLICIES
INTERIM FINANCIAL INFORMATION
The financial information of The Student Loan Corporation (the
"Company") as of March 31, 1996 and for the three-month period ended
March 31, 1996 has not been audited. All adjustments, in the opinion of
management (consisting of normal recurring accruals), necessary to state
the Company's financial position and results of operations in accordance
with generally accepted accounting principles have been reflected in the
accompanying financial information for the periods indicated.
Certain amounts in the prior year's financial statements have been
reclassified to conform with the current year's presentation. Such
reclassification had no effect on the results of operations as
previously reported.
DEFINITIONS
Core net income represents net income excluding floor income,
attributable to the fixed minimum interest rates on certain loans in the
Company's portfolio.
2. COMMITMENTS AND CONTINGENCIES
REGULATORY IMPACTS
Provisions of the Omnibus Budget Reconciliation Act (the "1993
Amendments") included significant changes to the Federal Family
Education Loan ("FFEL") Program. The 1993 Amendments substantially
increase the percentage of all guaranteed student loans to be made
directly by the Federal government ("direct lending") rather than by
lending institutions such as the Company, establishing the Federal
Direct Student Loan ("FDSL") Program under which the Federal government
lends directly to students using U.S. Treasury Funds. In addition, the
1993 Amendments impose additional costs on originators and holders of
FFEL Program loans and on guarantee agencies.
In April 1996, Congress and the Administration came to terms on the 1996
Federal budget. The 1996 budget made no changes affecting the FFEL or
FDSL Programs. Although a cap on direct lending had been one of the
budget proposals under consideration, a cap is not included in the 1996
budget. Under the 1993 Amendments, direct lending is authorized to
account for up to 40% of all guaranteed student loans made nationally
for the 1995-96 school year, 50% for 1996-97 and 1997-98, and at least
60% in 1998-99. The Department of Education is currently recruiting
additional schools for participation in the direct lending program for
1996-97 in an attempt to achieve its 50% goal. Schools volunteer for
participation in Direct Lending and, at the discretion of the Department
of Education, may choose to participate in both the FDSL and the FFEL
Programs.
The 1993 Amendments included cost saving provisions to the FFEL Program
which were also unaffected by the 1996 budget agreement. These
provisions reduced interest rates paid by the Federal Government to
holders of loans during in-school, grace and deferment periods from
5
<PAGE>
3.10% to 2.50% over the base rate for loans disbursed on or after July
1, 1995. In addition, lenders are required to pay a 0.5% origination fee
on loans disbursed on or after October 1, 1993 and holders of Federal
Consolidation Loans disbursed on or after October 1, 1993 are required
to pay the Federal government an annual fee of 1.05% of outstanding
balances of such loans. Also, holders of defaulted loans disbursed on or
after October 1, 1993 that are submitted for claim are required to
absorb a loss, calculated as 2% of the sum of the outstanding loan
balance and unpaid accrued interest. Guarantors are subject to similar
risk sharing provisions.
The Company estimates that the cost-saving measures described in the
preceding paragraph reduce the marginal profitability of the Company's
guaranteed student loans by approximately 20% to 25% from levels
immediately preceding the effective dates of the measures. This estimate
is based on various assumptions regarding loan characteristics, length
of in-school periods, frequency of loan consolidations and other
considerations. The Company does not expect that these provisions will
have a material adverse effect on the Company's results of operations or
financial condition.
3. RELATED PARTY TRANSACTIONS
Citibank (New York State) (CNYS), a subsidiary of Citicorp, owns 80% of
the outstanding common stock of the Company. A number of significant
transactions, including cash management, data processing, income tax
payments, employee benefits and facilities management, are carried out
between the Company on the one hand and Citicorp and its other
subsidiaries on the other hand. At March 31, 1996, the Company had
outstanding short-term borrowings of $2.4 billion and long-term
borrowings of $2.8 billion with CNYS. For the first quarter of 1996, the
Company incurred $74.9 million in interest expenses payable to CNYS and
its affiliates. Management believes that the terms of these transactions
are, in the aggregate, no less favorable to the Company than those which
could be obtained from unaffiliated parties.
4. INTEREST RATE SWAP AGREEMENTS
The Company, from time to time, enters into interest rate swap
agreements with related and third parties to manage interest rate
exposure on certain interest bearing liabilities brought about by
incongruities between borrowing and lending rates. Entering into basis
swap agreements to pay interest based on the interest rate
characteristics of the Company's assets and to receive interest based on
the characteristics of the Company's liabilities effectively limits the
risk of the potential interest rate variability. The counterparty for
all interest rate swap agreements outstanding at March 31, 1996 was
either CNYS, the majority stockholder, or one of its affiliates.
Interest rate swap agreements with a carrying value of $0.4 million,
representing accrued interest payable, were determined to have an
estimated fair value of $3.3 million at March 31, 1996. The fair value,
based on approximate values obtained from dealers in these financial
instruments, represents the estimated amounts which would be payable
upon termination of the agreements. The aggregate notional principal
amounts outstanding at March 31, 1996 totaled $2.0 billion.
5. IMPACT OF RECENTLY ISSUED ACCOUNTING STANDARDS
Effective January 1, 1996, the Company adopted the provisions of
Statement of Financial Accounting Standards (SFAS) No. 121, "Accounting
for the Impairment of Long-Lived Assets and for Long-Lived Assets to Be
Disposed Of". The new standard is similar to the Company's existing
accounting policies. Therefore, the standard will not have a significant
impact on the Company's results of operations or financial condition.
6
<PAGE>
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS.
FINANCIAL CONDITION
During the three months ended March 31, 1996, the insured student loan portfolio
of The Student Loan Corporation (the "Company") grew by $309.6 million (5%) from
the balance at December 31, 1995. This growth was the result of loan
disbursements totaling $498.0 million in the first quarter of 1996, partially
offset by $177.1 million in loan reductions (attributable to repayments and
claims paid by guarantors), and loan sales, net of loan purchases, of $10.3
million. This compares to loan disbursements of $455.9 million, net loan
purchases of $2.8 million and loan reductions of $127.1 million in the first
three months of 1995.
The $42.1 million (9%) growth in first quarter 1996 disbursements compared to
the same period in 1995 was attributable primarily to an increase in new loan
consolidation loans ($52 million compared to $14 million for the first quarters
of 1996 and 1995, respectively) made under agreements with the Department of
Education and several of its subcontractors. The Company does not expect the
opportunity for significant new originations under these agreements to continue.
In addition, a timing change, which occurred in the fourth quarter of 1995,
resulted in many second disbursements moving from December 1995 to January 1996.
These and other increases in disbursements were partially offset by the impact
of the Federal Direct Student Loan ("FDSL") Program, maintained by the
Department of Education, which is estimated to account for between 30-40% of new
loan volume nationally in the 1995-96 academic year, up from approximately 5% in
1994-95. See "Regulatory Impacts" below.
Other assets increased $12.8 million (8%) from the December 31, 1995 level,
principally as a result of additional interest receivable attributable to the
growth in the student loan portfolio, higher interest rates, and timing of
interest receipts. Other liabilities, principally comprised of accrued interest
and income taxes payable, decreased by $36.8 million (25%) from December 31,
1995, primarily due to timing differences for intercompany income tax and
interest payments.
The Company paid a quarterly dividend of $0.06 per common share on March 1,
1996. The Board of Directors declared a quarterly dividend on the Company's
common stock of $0.06 per share, to be paid on June 3, 1996 to stockholders of
record on May 15, 1996.
RESULTS OF OPERATIONS
Quarter Ended March 31, 1996
Core net income (excludes floor income) was $16.2 million ($0.81 per share) for
the first quarter of 1996, an increase of $0.9 million (6%) from the level of
$15.3 million ($0.77 per share) achieved for the same period last year. The
improvement was primarily attributable to higher interest income generated by
growth of $1.0 billion (18%) in the Company's student loan portfolio from first
quarter 1995 levels, partially offset by lower net interest margins and an
increase of $2.2 million (16%) in operating expenses.
Total net income for the first quarter of 1996 was $16.5 million, or $0.83 per
share. The increase of $1.1 million (7%) over net income of $15.4 million, or
$0.77 per share, for the same period last year was attributable to revenue
generated through growth in the student loan portfolio. The Company earned floor
income of $0.3 million, or nearly $.02 per share, for the first quarter of 1996,
compared to $0.1 million for the same period last year.
7
<PAGE>
Core net interest margin was 2.78% for the first quarter of 1996. While this was
lower than the 3.04% margin in the first quarter of 1995, it was higher than the
fourth quarter of 1995 (2.69%). Each of these differences is primarily
attributable to two factors: first, the relationship between the various
short-term interest rates used to finance the Company's loan portfolio and the
Treasury bill rates on which the revenue from these loans is based and second,
the decrease in in-school revenue rates effective on loans disbursed on or after
July 1, 1995. Additionally, the interest rates on the majority of the Company's
new loan originations reset annually each July 1. Since July 1, 1995, short-term
interest rates have dropped, creating higher net interest margins on these
loans. While this relationship could continue until July 1, 1996, these loans
will reset at that time and the margins on these loans will "normalize" in the
second half of 1996. As a result, net interest margins could decline in the
third and fourth quarters of 1996.
First quarter 1996 net income was further improved through additional
efficiencies in operating expenses. While first quarter 1996 operating expenses
were up $2.2 million from the same period last year, operating expenses as a
percentage of average insured student loans decreased to 1.02%, an improvement
of nearly 0.04% compared to first quarter 1995. The decline would have been
larger, but during the quarter the Company announced it would be closing its
customer servicing facility in Sacramento, CA and consolidating all operations
in Pittsford, NY. This resulted in a one-time recognition of expenses related to
the consolidation of approximately $1.2 million, $0.7 million net of income
taxes, but is expected to reduce operating expenses following the closing of the
Sacramento facility on July 1, 1996.
Provision for loan losses increased $0.6 million for the first quarter of 1996
compared to the same period last year due to larger amounts of loans disbursed
on or after October 1, 1993, rolling into repayment and being subject to the 2%
risk-sharing provisions of the 1993 Amendments. See "Regulatory Impacts" below.
REGULATORY IMPACTS
Provisions of the Omnibus Budget Reconciliation Act (the "1993 Amendments")
included significant changes to the Federal Family Education Loan ("FFEL")
Program. The 1993 Amendments substantially increase the percentage of all
guaranteed student loans to be made directly by the Federal government ("direct
lending") rather than by lending institutions such as the Company, establishing
the FDSL Program under which the Federal government lends directly to students
using U.S. Treasury Funds. In addition, the 1993 Amendments impose additional
costs on originators and holders of FFEL Program loans and on guarantee
agencies.
In April 1996, Congress and the Administration came to terms on the 1996 Federal
budget. The 1996 budget made no changes affecting the FFEL or FDSL Programs.
Although a cap on direct lending had been one of the budget proposals under
consideration, a cap is not included in the 1996 budget. Under the 1993
Amendments direct lending is authorized to account for up to 40% of all
guaranteed student loans made nationally for the 1995-96 school year, 50% for
1996-97 and 1997-98, and at least 60% in 1998-99. The Department of Education is
currently recruiting additional schools for participation in the direct lending
program for 1996-97 in an attempt to achieve its 50% goal. Schools volunteer for
participation in direct lending and, at the discretion of the Department of
Education, may choose to participate in both the FDSL and the FFEL Programs.
The 1993 Amendments included cost saving provisions to the FFEL Program which
were also unaffected by the 1996 budget agreement. These provisions reduced
interest rates paid by the Federal Government to holders of loans during
in-school, grace and deferment periods from 3.10% to 2.50% over the base rate
for loans disbursed on or after July 1, 1995. In addition, lenders are required
to pay a 0.5% origination fee on loans disbursed on or after October 1, 1993 and
holders of Federal Consolidation Loans disbursed on or after October 1, 1993 are
required to pay the Federal government an annual fee
8
<PAGE>
of 1.05% of outstanding balances of such loans. Also, holders of defaulted
loans, disbursed on or after October 1, 1993 that are submitted for claim are
required to absorb a loss, calculated as 2% of the sum of the outstanding loan
balance and unpaid accrued interest. Guarantors are subject to similar risk
sharing provisions.
The Company estimates that the cost-saving measures described in the preceding
paragraph reduce the marginal profitability of the Company's guaranteed student
loans by approximately 20% to 25% from levels immediately preceding the
effective dates of the measures. This estimate is based on various assumptions
regarding loan characteristics, length of in-school periods, frequency of loan
consolidations and other considerations. The Company does not expect that these
provisions will have a material adverse effect on the Company's results of
operations or financial condition.
9
<PAGE>
PART II. OTHER INFORMATION
ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K.
(b) Reports on Form 8-K: none.
10
<PAGE>
SIGNATURE
Pursuant to the requirements of the Securities Exchange Act of
1934, the registrant has duly caused this report to be signed on its behalf by
the undersigned, thereunto duly authorized.
Date: May 10, 1996
THE STUDENT LOAN CORPORATION
By /s/Michael S. Piemonte
----------------------
Michael S. Piemonte
Vice President, Treasurer and
Chief Financial Officer
11
<TABLE> <S> <C>
<ARTICLE> 9
<LEGEND>
THIS SCHEDULE CONTAINS SUMMARY FINANCIAL INFORMATION EXTRACTED
FROM THE CURRENT REPORT ON FORM 10-Q FOR THE PERIOD ENDED MARCH 31,
1996 AND IS QUALIFIED IN ITS ENTIRETY BY REFERENCE TO SUCH FINANCIAL
STATEMENTS AND ACCOMPANYING DISCLOSURES.
</LEGEND>
<MULTIPLIER> 1,000
<CURRENCY> U.S.Dollars
<S> <C>
<PERIOD-TYPE> 3-MOS
<FISCAL-YEAR-END> DEC-31-1996
<PERIOD-START> JAN-01-1996
<PERIOD-END> MAR-31-1996
<EXCHANGE-RATE> 1
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<LOANS> 6,479,823
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0
0
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<INCOME-PRETAX> 27,898
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<EXTRAORDINARY> 0
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<EPS-PRIMARY> 0.83
<EPS-DILUTED> 0.83
<YIELD-ACTUAL> 0 <F1>
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<FN>
<F1> Not applicable.
</FN>
</TABLE>
