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 JUNE 30, 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 14534
PITTSFORD, NEW YORK (Zip Code)
(Address of principal executive offices)
(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 August 9, 1996, there were 20,000,000 shares of The Student Loan
Corporation's Common Stock outstanding.
<PAGE>
PART I. FINANCIAL INFORMATION
Item 1. Financial Statements.
<TABLE>
THE STUDENT LOAN CORPORATION
STATEMENTS OF INCOME
(Unaudited)
(Dollars in thousands, except per share amounts)
<CAPTION>
Three months ended Six months ended
June 30, June 30,
1996 1995 1996 1995
<S> <C> <C> <C> <C>
REVENUE
Interest income $134,667 $122,465 $269,592 $243,306
Interest expense 89,473 83,149 179,581 163,354
Net interest income 45,194 39,316 90,011 79,952
Provision for loan losses 622 158 1,240 186
Net interest income after
provision for loan losses 44,572 39,158 88,771 79,766
Fee and other income 13 15 26 31
Total revenue $44,585 $39,173 $88,797 $79,797
OPERATING EXPENSES
Salaries and employee benefits $7,787 $7,266 $15,758 $14,520
Other expenses 8,529 7,800 16,872 14,643
Total operating expenses $16,316 $15,066 $32,630 $29,163
Income before income taxes $28,269 $24,107 $56,167 $50,634
Income taxes 12,203 9,986 23,590 21,138
NET INCOME $16,066 $14,121 $32,577 $29,496
NET INCOME -Floor $253 $58 $524 $117
NET INCOME - Core
(excluding floor income) $15,813 $14,063 $32,053 $29,379
DIVIDENDS DECLARED $1,200 $1,200 $2,400 $2,400
PER COMMON SHARE -
(based on 20 million average
shares outstanding)
Net income - Core $0.79 $0.71 $1.60 $1.47
Floor income $0.01 --- $0.03 $0.01
Net income $0.80 0.71 $1.63 $1.48
Dividends declared $0.06 $0.06 $0.12 $0.12
OPERATING RATIOS -
Net interest margin 2.81% 2.85% 2.81% 2.95%
Net interest margin - Core 2.79% 2.84% 2.78% 2.94%
Operating expense as a percentage of
average insured student loans 1.02% 1.09% 1.02% 1.07%
</TABLE>
See accompanying notes to financial statements.
<PAGE>
THE STUDENT LOAN CORPORATION
BALANCE SHEETS
(Unaudited)
(Dollars in thousands)
June 30, December 31,
1996 1995
ASSETS
Insured student loans $6,458,873 $6,169,825
Allowance for loan losses 1,381 548
Insured student loans, net 6,457,492 6,169,277
Cash 564 579
Deferred tax benefits 44,264 49,948
Other assets 185,932 167,593
Total Assets $6,688,252 $6,387,397
LIABILITIES AND STOCKHOLDERS' EQUITY
Short-term borrowings $3,298,560 $2,509,496
Long-term notes 2,900,000 3,400,000
Payable to principal stockholder 23,598 29,066
Other liabilities 132,866 145,784
Total Liabilities 6,355,024 6,084,346
Common stock 200 200
Additional paid-in capital 134,109 134,109
Retained Earnings 198,919 168,742
Total Stockholders' Equity 333,228 303,051
Total Liabilities and Stockholders' Equity 6,688,252 $6,387,397
AVERAGE INSURED STUDENT LOANS
(year-to-date) $6,439,129 $5,669,364
See asccompanying notes to financial statements.
<PAGE>
THE STUDENT LOAN CORPORATION
STATEMENTS OF CASH FLOWS
(Unaudited)
(Dollars in thousands)
Six months ended
June 30,
1996 1995
Cash flows from operating activities:
Net income $32,577 $29,496
Adjustments to reconcile net income to
net cash from operating activities:
Depreciation and amortization 1,590 1,644
Provision for loan losses 1,240 186
Deferred tax provision 5,684 5,902
Increase in accrued interest receivable (16,527) (21,626)
Decrease(Increase) in other assets (2,059) 1,307
Decrease in other liabilities (18,384) (11,103)
Net cash provided by operating activities 4,121 5,806
Cash flows from investing activities:
Origination of loans (647,568) (652,773)
Net sale (purchase) of loans 25,367 (2,669)
Repayment of loans 331,959 249,389
Capital expenditures on premises and equipment (558) (701)
Net cash used in investing activities (290,800) (406,754)
Cash flows from financing activities:
Net increase in short-term borrowings 289,064 403,164
Dividends paid (2,400) (2,400)
Net cash provided by financing activities 286,664 400,764
Net decrease in cash (15) (184)
Cash - beginning of period 579 373
Cash - end of period 564 189
Supplemental disclosure of cash flow information:
Cash paid during the periods for:
Interest $160,488 $153,230
Income taxes $40,517 $221
See accompanying notes to financial statements.
<PAGE>
THE STUDENT LOAN CORPORATION
NOTES TO FINANCIAL STATEMENTS
JUNE 30, 1996
1. SIGNIFICANT ACCOUNTING POLICIES
INTERIM FINANCIAL INFORMATION
The financial information of The Student Loan Corporation (the
"Company") as of June 30, 1996 and for the three-month and six-month
periods ended June 30, 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 in the form of interest rate reductions, origination
fees, and risk sharing costs.
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. Any increase in direct lending
effectively reduces the number of potential new loans available for
origination by lenders such as the Company under the FFEL Program.
The Company estimates that the interest rate reductions, origination
fees, and risk sharing costs imposed by the 1993 Amendments have
reduced 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
<PAGE>
considerations. (See the Regulatory Impacts section of Item 2,
"Management's Discussion and Analysis", for further information).
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 June 30, 1996, the Company had
outstanding short-term borrowings of $3.3 billion and long-term
borrowings of $2.9 billion with CNYS. For the six month period ending
June 30, 1996, the Company incurred $149.1 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 counter party
for all interest rate swap agreements outstanding at June 30, 1996 was
either CNYS, the majority stockholder, or one of its affiliates.
Interest rate swap agreements with a carrying value of $10.7 million,
representing accrued interest payable, were determined to have an
estimated fair value of $12.0 million at June 30, 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 June 30, 1996 totaled $1.9 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.
During the second quarter of 1996, the Financial Accounting Standards
Board issued SFAS No. 125, "Accounting for Transfers and Servicing of
Financial Assets and Extinguishments of Liabilities". The new standard
provides more consistent standards for distinguishing transfers of
financial assets that are sales from those that are secured borrowings,
and provides guidance on the recognition and measurement of asset
servicing contracts. The new standard is to be applied prospectively to
transactions which occur after December 31, 1996. The Company is
currently in the process of assessing the effects of the new accounting
standard and does not expect the new standard to have a significant
impact on the Company's results of operations or financial condition.
<PAGE>
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS.
FINANCIAL CONDITION
During the six months ended June 30, 1996, the insured student loan portfolio of
The Student Loan Corporation (the "Company") grew by $288.2 million (5%) from
the balance at December 31, 1995. This growth was the result of loan
disbursements totaling $647.6 million in the first six months of 1996, partially
offset by $332.0 million in loan reductions (attributable to repayments and
claims paid by guarantors), loan sales net of loan purchases of $25.4 million
and other adjustments of $2.0 million. This compares to loan disbursements of
$652.8 million, net loan purchases of $2.7 million and loan reductions of $249.4
million in the first six months of 1995.
The Company's new loan disbursements of $647.6 million made in the first half of
1996 were $5.2 million (1%) less than those made in the same period of 1995.
This decrease is attributable primarily to an increase in loans made nationally
under the Federal Direct Student Loan ("FDSL") Program, maintained by the
Department of Education. The Company estimates that the FDSL Program accounted
for approximately 35% of new loan volume nationally in the 1995-96 academic
year, up from approximately 8% in 1996-97. New loan volume for the FDSL
Program's share of all guaranteed student loans is legislated to increase to 50%
for 1996-97 and 1997-98 and at least 60% in subsequent years. This increase in
FDSL Program lending could lead to additional declines in the Company's
disbursements in future periods. See "Regulatory Impacts" below. The Company's
disbursements decreased despite an increase in new loan consolidation loans
($53.2 million compared to $34.8 million for the first six months 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 consolidation originations under these agreements to continue.
During the first six months of 1996, the Company made $163.9 million in interest
payments principally to CNYS or one of its affiliates, compared to the $153.2
million paid in the same period in 1995. The difference is due to increases in
both the size of the borrowings and interest rates, as well as timing of
interest payments. The Company paid $40.5 million in income taxes during the
first six months of 1996, compared to $0.2 million for the same period last
year. This difference is primarily due to a timing change in intercompany
payments, as the Company makes most income tax payments through an intercompany
arrangement.
Other assets increased $18.3 million (10.9%) 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 $12.9 million (9%) 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 June 3, 1996.
The Board of Directors declared a quarterly dividend on the Company's common
stock of $0.06 per share, to be paid on September 3, 1996 to stockholders of
record on August 16, 1996.
At June 30, 1996, $0.5 billion of long-term debt became due within one year and
was reclassified to short-term. No changes in terms or overall size of credit
limits were made in the first two quarters of 1996.
<PAGE>
RESULTS OF OPERATIONS
Quarter Ended June 30, 1996
Core net income (excluding floor income) was $15.8 million ($0.79 per share) for
the second quarter of 1996, an increase of $1.7 million (12%) from the level of
$14.1 million ($0.71 per share) achieved for the same period last year. The
improvement was primarily attributable to higher interest income generated by
growth of $0.9 billion (16%) in the Company's student loan portfolio from second
quarter 1995 levels, partially offset by lower net interest margins and an
increase of $1.3 million (8%) in operating expenses.
Total net income for the second quarter of 1996 was $16.1 million, or $0.80 per
share, an increase of $1.9 million (14%) over net income of $14.1 million, or
$0.71 per share, for the same period last year. The Company earned floor income
of $0.3 million ($0.01 per share) for the second quarter of 1996, compared to
$0.1 million for the same period last year.
Core net interest margin was 2.79% for the second quarter of 1996, 0.05% lower
than the 2.84% margin occurring in the second quarter of 1995, substantially the
same as first quarter 1996. The difference is generally the result of lower
in-school revenue rates effective on loans disbursed on or after July 1, 1995.
The interest rates on the majority of the Company's new loan originations reset
annually each July 1. After July 1, 1995, short-term interest rates declined,
thus lowering the Company's funding costs and creating higher net interest
margins on these loans in the first two quarters of 1996. While this
relationship continued through June 30, 1996, these loans reset at July 1, 1996
and the margins on these loans are expected to decline in the second half of
1996.
Second quarter 1996 net income was further improved through additional
efficiencies in operating expenses generated since implementation of the
Company's new servicing system in May 1995. While second quarter 1996 operating
expenses were up $1.3 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 0.07% compared to second quarter 1995.
The provision for loan losses was $0.5 million greater for the second quarter of
1996 than the provision recorded in the same period last year due to larger
amounts of loans disbursed on or after October 1, 1993 rolling into repayment
and thus becoming subject to the 2% risk-sharing provisions of the 1993
Amendments. See "Regulatory Impacts" below.
Six Months Ended June 30, 1996
Core net income was $32.1 million ($1.60 per share) for the first half of 1996,
an increase of $2.7 million (9%) from first half 1995 levels of $29.4 million
($1.47 per share). The increase was primarily attributable to higher interest
income generated by a $0.9 billion (16%) growth in the Company's student loan
portfolio from June 30, 1995 levels, partially offset by lower net interest
margins and increased operating expenses.
The Company earned net income of $32.6 million, or $1.63 per common share, for
the six months ended June 30, 1996, a 10% increase from $29.5 million, or $1.48
per common share, from the corresponding period in 1995. The Company earned
floor income of $0.5 million ($0.03 per share) for the first two quarters of
1996, compared to $0.1 million ($0.01 per share) for the same period last year.
<PAGE>
Total operating expenses for the first half of 1996 were $32.6 million, an
increase of $3.5 million (12%) from the first half of 1995. The operating
expense increase was attributable primarily to increased costs resulting from
growth in the portfolio and approximately $1.2 million in non-recurring costs
related to the consolidation of Customer Service operations in Pittsford, NY and
the closing of the Sacramento, CA facility on July 1, 1996. Additional
efficiencies in operating expenses are expected as a result of the consolidation
of facilities. Operating expenses as a percentage of average insured student
loans for the first half of 1996 decreased to 1.02%, an improvement of 0.05%
compared to the first half of 1995.
The provision for loan losses was $1.1 million greater for the first six months
of 1996 than the provision recorded in the same period in 1995 due to the
significantly larger amounts of loans disbursed on or after October 1, 1993 that
rolled into repayment and thus became subject to the 2% risk-sharing provisions
of the 1993 Amendments.
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.
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 also included cost shifting provisions affecting the FFEL
Program. 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 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 continues to work through the Consumer Bankers Association (CBA) on
developing significant reform proposals for the student loan program that the
Company hopes will greatly simplify the current program. The Company has begun
meeting with other higher education industry leaders, and it is hopeful that
together they will be able to build a consensus to support the reform proposals.
<PAGE>
PART II. OTHER INFORMATION
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY-HOLDERS.
At the Company's 1996 Annual Meeting of Stockholders, held May 10,
1996, the Company's stockholders took the following actions:
1) Two directors were re-elected to the Board of Directors: Peter
Gallant and Laura Williamson (with holders of 18,734,424 shares
voting in favor, none voting against and 90,750 abstaining).
Mr. Gallant and Ms. Williamson will each serve until the 1999 meeting
of stockholders.
2) The selection of KPMG Peat Marwick as the Company's independent
auditors for the 1996 fiscal year was ratified, with holders of
18,824,124 shares voting in favor, none voting against and 1,050
abstaining.
ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K.
(b) Reports on Form 8-K: none.
<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: August 9, 1996
THE STUDENT LOAN CORPORATION
By /s/Michael S. Piemonte
Michael S. Piemonte
Vice President, Treasurer and
Chief Financial Officer
