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 September 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 November 8, 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>
<CAPTION>
THE STUDENT LOAN CORPORATION
STATEMENTS OF INCOME
(Dollars in thousands, except per share amounts)
Three months ended Nine months ended
September 30, September 30,
1996 1995 1996 1995
<S>
REVENUE <C> <C> <C> <C>
Interest income $135,322 $126,471 $404,914 $369,779
Interest expense 93,188 85,785 272,769 249,140
Net interest income 42,134 40,686 132,145 120,639
Provision for loan losses 556 226 1,796 412
Net interest income after provision for loan losses 41,578 40,460 130,349 120,227
Fee and other income 11 15 37 46
Total revenue $41,589 $40,475 $130,386 $120,273
OPERATING EXPENSES
Salaries and employee benefits $7,448 $7,299 $23,206 $21,820
Other expenses 7,861 7,059 24,732 21,702
Total operating expenses $15,309 $14,358 $47,938 $43,522
Income before income taxes $26,280 $26,117 $82,448 $76,751
Income taxes 10,727 10,804 34,318 31,943
NET INCOME $15,553 $15,313 $48,130 $44,808
NET INCOME - Core (excluding floor income) $15,329 $15,254 $47,382 $44,632
NET INCOME -Floor $224 $59 $748 $176
DIVIDENDS DECLARED $1,200 $1,200 $3,600 $3,600
PER COMMON SHARE - (based on 20 million average shares outstanding)
Net income - Core $0.77 $0.77 $2.37 $2.23
Floor income $0.01 --- $0.04 $0.01
Net income $0.78 $0.77 $2.41 $2.24
Dividends declared $0.06 $0.06 $0.18 $0.18
OPERATING RATIOS -
Net interest margin 2.56% 2.84% 2.73% 2.91%
Net interest margin - Core 2.54% 2.83% 2.70% 2.90%
Operating expense as a percentage of
average insured student loans 0.93% 1.00% 0.99% 1.05%
</TABLE>
See accompanying notes to financial statements.
2
<PAGE>
THE STUDENT LOAN CORPORATION
BALANCE SHEETS
(Dollars in thousands)
September 30, December 31,
1996 1995
ASSETS
Insured student loans $6,690,727 $6,169,825
Allowance for loan losses 1,601 548
Insured student loans, net 6,689,126 6,169,277
Cash 453 579
Deferred tax benefits 41,753 49,948
Other assets 196,243 167,593
Total Assets $6,927,575 $6,387,397
LIABILITIES AND STOCKHOLDERS' EQUITY
Short-term borrowings $4,132,428 $2,509,496
Long-term notes 2,300,000 3,400,000
Payable to principal stockholder 22,343 29,066
Other liabilities 125,223 145,784
Total Liabilities 6,579,994 6,084,346
Common stock 200 200
Additional paid-in capital 134,109 134,109
Retained Earnings 213,272 168,742
Total Stockholders' Equity 347,581 303,051
Total Liabilities and Stockholders' Equity $6,927,575 $6,387,397
AVERAGE INSURED STUDENT LOANS $6,472,890 $5,669,364
(year-to-date)
See accompanying notes to financial statements.
3
<PAGE>
THE STUDENT LOAN CORPORATION
STATEMENTS OF CASH FLOWS
(Dollars in thousands)
Nine months ended
September 30,
1996 1995
Cash flows from operating activities:
Net income $48,130 $44,808
Adjustments to reconcile net income to
net cash from operating activities:
Depreciation and amortization 2,747 1,693
Provision for loan losses 1,796 411
Deferred tax provision 8,195 8,940
Increase in accrued interest receivable (30,154) (83,929)
Decrease(Increase) in other assets 1,745 1,753
Decrease in other liabilities (27,283) (1,013)
Net cash provided by operating activities 5,176 (27,337)
Cash flows from investing activities:
Origination of loans (1,046,377) (1,051,537)
Net sale (purchase) of loans 40,383 (33,577)
Repayment of loans 482,877 338,241
Capital expenditures on premises and equipment (1,517) (1,241)
Net cash used in investing activities (524,634) (748,114)
Cash flows from financing activities:
Net increase in short-term borrowings 522,932 779,937
Dividends paid (3,600) (3,600)
Net cash provided by financing activities 519,332 776,337
Net decrease in cash (126) 886
Cash - beginning of period 579 373
Cash - end of period $453 $1,259
Supplemental disclosure of cash flow information:
Cash paid during the periods for:
Interest $299,392 $253,199
Income taxes $49,119 $281
See accompanying notes to financial statements.
4
<PAGE>
THE STUDENT LOAN CORPORATION
Notes to Financial Statements
September 30, 1996
1. SIGNIFICANT ACCOUNTING POLICIES
INTERIM FINANCIAL INFORMATION
The financial information of The Student Loan Corporation (the "Company") as
of September 30, 1996 and for the three-month and nine-month periods ended
September 30, 1996 includes all adjustments (consisting of normal recurring
accruals) which, in the opinion of management, are necessary to state the
Company's financial position and results of operations in accordance with
generally accepted accounting principles.
Certain amounts in prior period's financial statements have been reclassified to
conform with the current period'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 increased 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 and income limitations 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. Increases in direct
lending, as legislated, would effectively reduce the number of potential new
loans available for origination under the FFEL Program by lenders such as the
Company. (See the Regulatory Impacts section of Item 2, "Management's Discussion
and Analysis," for further information.)
5
<PAGE>
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 September
30, 1996, the Company had outstanding short-term borrowings of $3.6 billion and
long-term borrowings of $1.7 billion with CNYS, compared to short-term and
long-term borrowings of $2.3 billion each with CNYS at September 30, 1995. For
the nine month period ending September 30, 1996, the Company incurred $226.8
million in interest expenses payable to CNYS and its affiliates, compared to
$228.1 million in interest expenses payable to CNYS and its affiliates for the
same period in 1995. 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 unaffiliated parties to manage interest rate exposure on certain
interest bearing liabilities brought about by incongruities between borrowing
and lending rates. All swap agreements currently maintained are basis swaps.
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 September 30, 1996 was either CNYS, the majority
stockholder, or one of its affiliates.
Interest rate swap agreements with a carrying value of $0.6 million,
representing accrued interest payable, were determined to have an estimated fair
value of $2.0 million at September 30, 1996. At September 30, 1995, interest
rate swap agreements with a carrying value of $25,000 of interest payable had an
estimated fair value of $3.7 million. The fair values, based on approximate
values obtained from dealers in these financial instruments, represent the
estimated amounts which would be payable upon termination of the agreements.
Market values vary from period to period based on changes in such factors as
LIBOR and Treasury Bill interest rates and timing of contractual settlements.
The aggregate notional principal amounts outstanding at September 30, 1996 and
1995 totaled $1.9 billion and $1.6 billion, respectively.
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 nine months ended September 30, 1996, the insured student loan
portfolio of The Student Loan Corporation (the "Company") grew by $519.8 million
(8%) to nearly $6.7 billion from the balance at December 31, 1995. This growth
was the result of loan disbursements totaling $1,046.4 million in the first nine
months of 1996, partially offset by $482.9 million in loan reductions
(attributable to repayments and claims paid by guarantors), loan sales net of
loan purchases of $40.4 million and other adjustments of $3.3 million. This
compares to loan disbursements of $1,051.5 million, net loan purchases of $33.6
million and loan reductions of $338.2 million in the first nine months of 1995.
The Company's new loan disbursements of $1,046.4 million made in the first nine
months of 1996 were $5.1 million less than those made in the same period of
1995. This decline is attributable primarily to a $25.8 million decrease in loan
consolidations made under various agreements with the Department of Education
and several of its subcontractors, partially offset by an increase in FFEL
Program disbursements. The decrease in loan consolidations was anticipated due
to limited opportunities to originate significant new volumes of this type of
loan after 1995. FFEL Program disbursements increased $15.2 million during the
first three quarters of 1996 compared to the same period in 1995 despite
increased competition from 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 1994-95. New loan volume for
the FDSL Program's share of all guaranteed student loans nationally is
authorized 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 declines
in the Company's disbursements in future periods; such declines could adversely
affect the Company's net income. See "Regulatory Impacts" below.
During the first nine months of 1996, the Company made $299.4 million in
interest payments, principally to CNYS or one of its affiliates, compared to the
$253.2 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 $49.1 million in income taxes
during the first nine months of 1996, compared to $0.3 million for the same
period last year. This difference is primarily due to timing changes in making
intercompany tax payments to CNYS.
Other assets increased $28.7 million (17%) 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 on most loans in the
portfolio and timing of interest receipts. Other liabilities, principally
comprised of accrued interest and income taxes payable, decreased by $20.6
million (14%) from the December 31, 1995 balance, primarily due to timing
differences for intercompany income tax and interest payments.
At June 30, 1996, $0.5 billion of long-term debt became due within one year and
was reclassified to short-term. Also, at July 1, 1996, a $0.6 billion portion of
long-term debt was reclassed to short-term as the debt became due within twelve
months. No changes in terms or overall size of credit limits for long or
short-term debt were made in the first three quarters of 1996.
The Company paid a quarterly dividend of $0.06 per common share on September 2,
1996. The Board of Directors declared an increased regular quarterly dividend on
the Company's common stock of $0.12 per share, to be paid on December 2, 1996 to
stockholders of record on November 15, 1996.
7
<PAGE>
RESULTS OF OPERATIONS
Quarter Ended September 30, 1996
Core net income (excluding floor income) was $15.3 million ($0.77 per share) for
the third quarter of 1996, an increase of $75,000 from income reported for the
same period last year. Higher interest income generated by growth of $0.8
billion (13%) in the Company's student loan portfolio from third quarter 1995
levels was offset by lower net interest margins and an increase of $1.0 million
(7%) in operating expenses.
Total net income for the third quarter of 1996 was $15.6 million, or $0.78 per
share, an increase of $0.2 million (2%) over net income of $15.3 million, or
$0.77 per share, for the same period last year. The Company earned floor income
of $0.2 million ($0.01 per share) for the third quarter of 1996, compared to
$0.1 million for the same period last year.
Core net interest margin was 2.54% for the third quarter of 1996, 0.29% lower
than the 2.83% margin occurring in the third quarter of 1995 and 0.25% lower
than the margin for the second quarter of 1996. The difference is primarily the
result of lower in-school revenue rates on the majority of the Company's new
loan originations and lower interest rates on variable rate loans which reset
annually each July 1.
Third quarter 1996 net income was further improved through additional
efficiencies in operating expenses resulting, in part, from the consolidation of
the Company's customer servicing centers earlier in 1996. While third quarter
1996 operating expenses were up almost $1.0 million from the same period last
year, operating expenses as a percentage of average insured student loans
decreased to 0.93%, an improvement of 0.07% compared to third quarter 1995.
The provision for loan losses was $0.3 million greater for the third 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 becoming potentially subject to the 2% risk-sharing provisions of the 1993
Amendments. See "Regulatory Impacts" below.
Nine Months Ended September 30, 1996
Core net income was $47.4 million ($2.37 per share) for the first nine months of
1996, an increase of $2.8 million (6%) from levels of $44.6 million ($2.23 per
share) generated in the first nine months of 1995. The increase was primarily
attributable to higher interest income generated by a $0.8 billion (13%) growth
in the Company's student loan portfolio from September 30, 1995 levels,
partially offset by lower net interest margins and increased operating expenses.
The Company earned net income of $48.1 million, or $2.41 per common share, for
the nine months ended September 30, 1996, a 7% increase from $44.8 million, or
$2.24 per common share, for the corresponding period in 1995. The Company earned
floor income of $0.7 million ($0.04 per share) for the first three quarters of
1996, compared to $0.2 million ($0.01 per share) for the same period last year.
Total operating expenses for the first nine months of 1996 were $47.9 million,
an increase of $4.4 million (10%) from the same period of 1995. The operating
expense increase was attributable primarily to increased costs resulting from
growth in the portfolio and approximately $1.7 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 three quarters of 1996 decreased to 0.99%, an improvement of
0.06% compared to the same period of 1995.
8
<PAGE>
The provision for loan losses was $1.4 million greater for the first nine 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 became potentially 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 increased 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 Company estimates that
approximately 35% of all guaranteed student loans nationally were made under the
direct lending program for the 1995-96 period. 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 continues to work through the Consumer Bankers Association to
develop reform proposals that the Company hopes will simplify the FFEL Program.
The Company continues to meet with higher education industry leaders in an
effort to build a consensus to support the reform proposals.
CLAIM FOR INTEREST BILLINGS
Nine lenders, including the Company, brought suit in September 1995 in U.S.
District Court against the U.S. Secretary of Education to collect an aggregate
of approximately $16 million of special allowance interest billings, which were
previously denied payment by the Department of Education, for the period July
1992 through January 1, 1995. The Company's portion of the claim is
approximately $3 million.
In a decision filed September 30, 1996, the court ordered the Department of
Education to make full payment of the special allowance billings to the nine
lenders. If this decision is not appealed or is upheld on appeal, the Company
would receive approximately $3 million of previously denied special allowance
revenue. The Department of Education has until November 30, 1996 to appeal the
court decision. If the Department of Education does not appeal, the Company will
recognize the $3 million ($0.15 per share) of revenue in the fourth quarter of
1996.
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: November 8, 1996
THE STUDENT LOAN CORPORATION
By /s/Michael S. Piemonte
Michael S. Piemonte
Vice President, Treasurer and
Chief Financial Officer
11
<PAGE>
The Student Loan Corporation
Tax ID#16-1427135
Financial Data Schedule
LEGEND
CIK
MULTIPLIER 1,000
CURRENCY U.S. DOLLARS
TABLE
S
PERIOD-TYPE 9-MONTH
FISCAL-YEAR-END 12/31/96
PERIOD-START 01/01/96
PERIOD-END 09/30/96
EXCHANGE-RATE
CASH 453
INT-BEARING-DEPOSITS 0
FED-FUNDS-SOLD 0
TRADING-ASSETS 0
INVESTMENTS-HELD-FOR-SALE 0
INVESTMENTS-CARRYING 0
INVESTMENTS-MARKET 0
LOANS 6,690,727
ALLOWANCE 1,601
TOTAL-ASSETS 6,927,575
DEPOSITS 0
SHORT-TERM 4,132,428
LIABILITIES-OTHER 125,223
LONG-TERM 2,300,000
PREFERRED-MANDATORY 0
PREFERRED 0
COMMON 200
OTHER-SE 347,381
TOTAL-LIABILITIES-AND-EQUITY 6,927,575
INTEREST-LOAN 404,914
INTEREST-INVEST 0
INTEREST-OTHER 0
INTEREST-TOTAL 404,914
INTEREST-DEPOSIT 0
INTEREST-EXPENSE 272,769
INTEREST-INCOME-NET 132,145
LOAN-LOSSES 1,796
SECURITIES-GAINS 0
EXPENSE-OTHER 47,938
INCOME-PRETAX 82,448
INCOME-PRE-EXTRAORDINARY 48,130
EXTRAORDINARY 0
CHANGES 0
NET-INCOME 48,130
EPS-PRIMARY 2.41
EPS-DILUTED 2.41
THE SCHEDULE CONTAINS SUMMARY FINANCIAL INFORMATION EXTRACTED FROM THE
STUDENT LOAN CORPORATION AND IS QUALIFIED IN ITS ENTIRETY BY REFERENCE TO
SUCH FINANCIAL
STATEMENTS.
