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SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
__________________
FORM 10-K
__________________
ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(D)
OF
THE SECURITIES EXCHANGE ACT OF 1934
FOR THE FISCAL YEAR ENDED DECEMBER 31, 1996
COMMISSION FILE NUMBER 1-11616
__________________
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)
__________________
SECURITIES REGISTERED PURSUANT TO SECTION 12(B) OF THE ACT:
NAME OF EACH EXCHANGE
TITLE OF EACH CLASS ON WHICH REGISTERED
------------------- -------------------
Common Stock New York Stock Exchange
SECURITIES REGISTERED PURSUANT TO SECTION 12(G) OF THE ACT:
None
__________________
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
--- ---
Indicate by check mark if disclosure of delinquent filers pursuant to Item 405
of Regulation S-K is not contained herein, and will not be contained, to the
best of registrant's knowledge, in definitive proxy or information statements
incorporated by reference in Part III of this Form 10-K or any amendment to this
Form 10-K. x
----
The aggregate market value of voting stock held by non-affiliates of the
registrant as of March 22, 1997 was approximately $164 million. On that date,
there were 20,000,000 shares of Common Stock outstanding.
DOCUMENTS INCORPORATED BY REFERENCE:
Portions of the Proxy Statement relating to the registrant's Annual Meeting of
Stockholders to be held May 9, 1997 are incorporated by reference into Part III
of this Report.
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PART I
ITEM 1. BUSINESS
The Student Loan Corporation (the "Company") originates, holds and services
student loans. The Company is one of the nation's largest originators and
holders of guaranteed student loans made under the federal Higher Education Act
of 1965, as amended (the "Act").
The Act provides for several programs of loans to students and parents of
students attending degree-granting programs at colleges and universities, as
well as non-degree granting training programs at proprietary schools. The loans
made under these programs ("Federal Family Education Loans" or "FFELP loans")
are guaranteed for 98% of principal and accrued interest by either state or
private non-profit guarantee agencies (100% for loans disbursed before October
1, 1993). The guarantee agencies are 78% to 98% reinsured by the federal
government (80% to 100% for loans disbursed before October 1, 1993).
The Company's primary source of revenues is net interest income on its
portfolio. Substantially all FFELP loans earn interest at a floating rate based
on a 2.50% to 3.50% spread over 91-day or 52-week Treasury Bill rates. This
spread for most newly disbursed loans is currently 2.50% during periods when
interest on the loans is being paid by the federal government, and 3.10% during
other periods. Most loans made prior to July 1992 earn interest at a fixed rate
or a minimum market rate of return, whichever is higher. The Company has
received substantial income (referred to as "floor income" in its financial
reports) as a result of these minimum interest rates during periods when
prevailing Treasury Bill rates have been low. The Company earned $1.0 million
in net floor income in 1996. Floor earnings in 1997 will depend on prevailing
Treasury bill rates.
As of December 31, 1996, the Company held approximately $6.8 billion of FFELP
loans, almost all of which were originated by the Company. The Company services
substantially all of the FFELP loans that it originates. Loan servicing is an
important component of the Company's business, because failure to service a loan
in accordance with specific procedures prescribed by federal and guarantee
agency regulations may result in loss of the guarantee on the loan or the loss
of certain federal subsidy payments.
In order to comply with the provisions of the Act, all of the Company's FFELP
loans are held, and all new FFELP loans are originated, by the Company through a
trust established solely for the benefit of the Company (the "Trust"). This
requirement is applicable to the Company because any institution that does not
fall within the Act's definition of "eligible lender" may hold and originate
FFELP loans only through a trust or similar arrangement with an eligible lender.
The terms of the Trust require an institution qualifying as an eligible lender
under the provisions of the Act to act as trustee of the Trust; Citibank (New
York State) ("CNYS") currently acts as trustee (the "Trustee").
The Company was incorporated in Delaware in November 1992 to hold and operate
the business it conducted for more than 25 years as a division of CNYS, or as a
division of Citibank, N.A., an affiliate of CNYS. Unless the context requires
otherwise, references to the Company herein include the assets and operations
transferred to, and the liabilities assumed or incurred by, the Company in
December 1992 as if such assets had been owned and such operations had been
conducted by the Company, and such liabilities had been obligations of the
Company, at all relevant times. References herein to the "Federal Family
Education Loan Program" or the "FFEL Program" and "FFELP loans" are to the loan
programs authorized by the Act and the loans made by private lenders thereunder.
Such references, unless the context requires otherwise, do not include federal
direct lending.
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THE FFEL PROGRAM
The U.S. Department of Education (the "Department" or the "Secretary")
administers the FFEL Program under Title IV of the Act. FFELP loans are made by
eligible lenders and guaranteed for 98% of principal and accrued interest (100%
for loans disbursed before October 1, 1993) by state and private non-profit
guarantee agencies. The agencies, in turn, are reimbursed by the Department for
specified percentages of their losses from default claims paid. Amounts payable
by guarantee agencies that are not reimbursed by the Department may be covered
by insurance premiums, reserve funds, investment income, federal cost allowances
and collections on defaulted loans. Approximately 6,500 lenders and 47
guarantee agencies participate in the program, with more than $56 billion in
FFELP loans currently outstanding.
The FFEL Program currently authorizes several types of guaranteed student
loans: (i) loans to students who pass certain need tests ("Stafford Loans");
(ii) loans to students who do not pass the Stafford need tests or who need
additional loans to supplement their Stafford Loans ("Unsubsidized Stafford
Loans"); (iii) loans to parents of students ("PLUS Loans") who are dependents
and whose need exceeds the amount available in the form of Unsubsidized Stafford
or Stafford Loans; and (iv) loans to consolidate the borrower's obligations
under various federally authorized student loan programs into a single loan
("Consolidation Loans"). Before July 1994, the program also authorized loans to
graduate and professional students and independent undergraduate students and,
under certain circumstances, dependent undergraduate students ("Supplemental
Loans to Students" or "SLS Loans") who needed additional loans to supplement
their Unsubsidized Stafford or Stafford Loans; the Company's portfolio includes
SLS Loans originated before that date. As of July 1994, the SLS program was
replaced by an expanded Unsubsidized Stafford Loan Program.
Amendments to the Act adopted in 1993 (the "1993 Amendments") provide that an
increasing percentage of federally sponsored student loans be made directly by
the federal government rather than by lenders such as the Company. The 1993
Amendments also impose additional costs on originators and holders of loans.
For a discussion of the effects of the 1993 Amendments on the Company, see Item
7 of this Annual Report.
FFELP loans must be originated and serviced in accordance with strict
guidelines mandated by the Department and the guarantee agencies. Failure to
comply with program requirements may result in the loss of subsidy payments or
the guarantee, making proper servicing a fundamental requirement of an
investment in student loans. Economies of scale in servicing are also important
because of the complex servicing procedures and the small size of individual
loans.
ORIGINATION OF STUDENT LOANS
The Company is one of the nation's largest originators of FFELP loans. In the
twelve months ended December 31, 1996, the Company originated $1.4 billion of
FFELP loans. The Company's main sources of borrowers include referrals from
financial aid administrators, customers of CNYS and other bank affiliates
(collectively, "Citibank"), repeat borrowers and college fair participants.
A student must attend an eligible educational institution to participate in
the FFEL Program. The approximately 6,500 eligible institutions can be divided
into three categories: four-year colleges and universities, two-year
institutions, and proprietary schools most of which conduct one-year programs.
In addition to other criteria, school eligibility is determined by the default
rate on guaranteed loans to its students. Over the past several years, the
number of eligible schools has decreased, principally as a result of a decline
in the number of eligible proprietary schools with acceptable default rates.
Under the Act,
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eligible lenders, subject to certain restrictions, may choose not to make loans
to students attending certain schools, defined by school type, geographic
location or default experience.
MARKETING
Management believes that because FFELP loans offered by different lenders have
similar economic terms, borrower selection of a lender is influenced mainly by
non-economic factors. The Company attributes its growth primarily to its
emphasis on providing service to financial aid administrators, its success in
accessing Citibank's customer base and its employment of a focused marketing
team.
Management believes that the schools' financial aid administrators are one of
the most important influences on lender selection. Financial aid administrators
are permitted, in order to streamline the financing process, to develop a list
of lenders which students may utilize. Accordingly, the Company focuses
marketing efforts on financial aid administrators. One way is by offering a
complete package of loan products, including alternative loans. See
"Alternative Loan Products" below. The Company believes that a complete product
line is a key criterion in a student's selection of a lender.
The Company provides financial aid administrators with informational brochures
designed to assist students in evaluating their student loan options, and
maintains a dedicated toll-free number for financial aid administrators. The
Company also assists financial aid administrators by emphasizing service to
current and past borrowers. Management believes its dedication to providing
quality service to its borrowers is a significant competitive advantage.
The Company has seventeen Account Managers whose territories are arranged to
overlay the six regions of the National Association of Student Financial Aid
Administrators (NASFAA). This configuration allows the Company to better
service the financial aid community. The Account Managers assist financial aid
administrators, resolve problems and issues, provide updates on the Company's
programs and provide information for students.
One of the Company's goals is to originate loans to repeat borrowers. In
1996, approximately 77% of the Company's new Stafford Loans were made to repeat
borrowers. Management believes that the Company benefits from lending to repeat
borrowers because it can increase the loan balance serviced without a
proportionate increase in servicing costs.
Under agreements with the Company, certain affiliates make available the
Company's informational brochures through Citibank branches and in credit card
statements. The Company is responsible for providing information and loan
applications in response to all inquiries.
The Company has student borrowers from all 50 states, the District of Columbia
and U.S. territories. Approximately half of the Company's loan portfolio is
comprised of loans made to students from New York and California.
APPLICATION PROCESS
The student and school complete a combined application/promissory note and
mail it either to the Company or directly to the guarantor. The application
must be approved by both the guarantor and the Company. If it is approved, a
guarantee certificate is then issued and sent to the Company. After receiving
the notice of guarantee, the Company makes disbursements on the loan directly to
the school, and sends a disclosure statement to the student confirming the terms
of the loan. The Company estimates
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that 95% of all potential borrowers whose applications are received eventually
take out a student loan from the Company.
ALTERNATIVE LOAN PRODUCTS
Lenders and guarantee agencies have developed alternative loan programs for
students who do not qualify for government aid. Typically, students attending
higher-priced undergraduate and graduate schools use alternative loans to
finance all or part of their education. The Company offers alternative loans
insured by The Education Resource Institute ("TERI"), a not-for-profit agency.
At December 31, 1996, the Company had $82 million of alternative loans
outstanding.
Although they are guaranteed by private insurers, alternative loans are not
part of the FFEL Program, are not reinsured by the federal government and
receive no interest subsidies. Alternative loans are offered based on the
student's or parent's creditworthiness as opposed to financial need.
GUARANTEE AGENCIES
The Act authorized guarantee agencies to support education financing and
credit needs of students at post-secondary schools. The Act requires every
state either to establish its own agency or to contract with another guarantee
agency. Under various programs throughout the United States, guarantee agencies
insure and sometimes service and hold FFELP loans. The guarantee agencies are
reinsured by the federal government for 78% to 98% of claims paid (80% to 100%
for loans disbursed before October 1, 1993), depending on their claims
experience.
For each guaranteed loan, guarantee agencies collect from the borrower a one-
time insurance premium that may not exceed 1% of the principal amount of the
loan. The Act requires that a combined loan origination fee and insurance
premium be paid by the borrower on Unsubsidized Stafford Loans. This fee is
passed through to the federal government by the originating lender. Current
regulations provide for a 3% origination fee.
The guarantee agencies generally guarantee loans for students attending
institutions in their particular state or region or for their residents
attending schools in another state. States that do not have their own guarantee
agency contract with United Student Aid Funds, a multi-state guarantee agency,
or another state agency.
The 1992 amendments to the Act clarified the Department's responsibilities in
the event of guarantee agency failures. If an agency's administrative or
financial condition falls below specified levels or the Secretary determines
that the agency is in danger of financial collapse, the Secretary is authorized
to undertake specified actions to assure the continued payment of claims,
including the transfer of guarantees to another agency or to the Department.
The Act provides that guarantors are deemed to have a contractual right against
the United States to receive reinsurance in accordance with its provisions. In
addition, if the Secretary determines that a guarantee agency is unable to meet
its insurance obligations, holders of loans may submit insurance claims directly
to the Secretary until the obligations are transferred to a new or successor
guarantor capable of meeting those obligations. Federal reinsurance and
insurance payments for defaulted loans are paid from the Student Loan Insurance
Fund established under the Act. The Secretary is authorized, to the extent
provided in advance by appropriations acts, to issue obligations to the
Secretary of the Treasury to provide funds to make any required federal
payments.
The Company has internal limits on its exposure level to any one guarantor.
In addition, the Company performs annual financial evaluations of each guarantee
agency with which the Company does
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business. Each guarantor is rated on a scale ranging from "very strong" to "very
weak". The ratings are determined using an in-house credit scoring model that
grades four main variables--management/structure, default rates, reserves and
profitability--and assigns a rating based on the guarantor's overall score. The
Company also uses a risk rating system that enables it to assess the risks
inherent in its student loan assets. Once a guarantor's rating falls below
"average", it is subject to more frequent review. To date, all claims made by
the Company and accepted for payment by guarantee agencies have been paid.
CREDIT
Although substantially all of the Company's loans are guaranteed as to
principal and interest, certain requirements must be met in order to maintain
guarantee coverage. See "Servicing, Collections, Claims and Recovery" below.
These requirements specify school and borrower eligibility criteria and
establish procedural guidelines.
The rate of student loan defaults tends to be significantly higher than
default rates for other consumer loans, especially among students at proprietary
schools. In an effort to reduce the high default rates, revised eligibility
requirements for schools, which include default rate limits, have been
implemented by the Department. In order to maintain eligibility in the FFEL
Program, schools must maintain default rates below the specified thresholds, and
both guarantors and lenders are required to ensure that loans are made to
students attending schools that meet default criteria. Accordingly, the Company
has procedures designed to assure that it lends only to students attending
institutions which meet the Act's default limits.
PORTFOLIO
At December 31, 1996, the Company held approximately $6.8 billion of FFELP
loans. The Company's strategy is to continue to build its loan portfolio by
originating loans. The Company has also purchased relatively small portfolios
of student loans from other lenders. Management continually evaluates loan
acquisition opportunities.
Unlike many other lenders, the Company has a policy of holding all loans that
it originates. Management believes this policy makes the repayment process
easier for the borrower and therefore gives the Company a marketing advantage
with potential borrowers and financial aid administrators. The Company's
borrowers do not face the confusion or inconvenience that can occur when a loan
is transferred to another lender or servicer.
Loans in different stages of repayment have different profitability
characteristics. Loans of students who are currently in school tend to be the
most valuable. The low servicing costs and longer durations associated with
these loans are the key profitability factors. Students who are in school do
not generally pay current interest on their loans. In most cases, interest
payments on their loans are made directly to the Company by the federal
government. In other instances, interest accrues on loans during the period
when the student borrower is in school. Loans to students who have graduated,
or left school, but are not yet in repayment, or who have received either a
deferment or a forbearance, have similar profitability characteristics. These
loans have similar servicing requirements and differ only by expected average
life.
Loans to borrowers in repayment are generally less profitable than the in-
school group. Servicing costs are higher as a result of monthly payment
processing and customer service inquiries. Loans which have gone to claim are
the least valuable because of their high servicing costs and the likelihood that
a small percentage will be denied insurance due to servicing or origination
defects, and will therefore be uncollectible.
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SERVICING, COLLECTIONS, CLAIMS AND RECOVERY
General. The Company services substantially all of the student loans in its
portfolio. At December 31, 1996, loans comprising less than 2% of the principal
amount of the portfolio were serviced by another party.
Company operations, including servicing, are conducted at facilities located
in Pittsford, New York. The loan servicing unit is responsible for account
maintenance, deferment processing and handling customer inquiries. Servicing
was also conducted at a Sacramento, California facility, which was closed as of
July 1996. Those servicing operations have been transferred to the Pittsford,
New York facility.
The collections, claims and recovery units are responsible for contacting
delinquent borrowers, conducting due diligence procedures on delinquent loans,
filing claims with guarantee agencies on defaulted loans, curing rejected
guarantee claims and due diligence violations and pursuing recovery of defaulted
loans deemed ineligible for claim.
Loans are serviced according to policies and procedures mandated by the
Department and guarantee agency regulations. Regulations dictate specific
policies and procedures governing in-school account maintenance, the conversion
of loans from in-school to repayment status, deferment processing, collections
and claim filing.
Delinquencies, Defaults and Claims Processing. Student loan delinquencies
tend to be higher than those of other types of consumer loans. Generally, FFELP
loan decisions are based on the borrower's qualifications for government
assistance rather than the borrower's ability to repay the loan. FFELP lenders
are prohibited from requiring collateral.
Once repayment begins, and a borrower is past due for a payment, the loan is
considered to be delinquent. A borrower is not considered to have defaulted on
a student loan until 180 days after the payment due date.
Lender agreements entered into by the Company and each guarantee agency give
the Company a contractual right to make claims against the agencies on defaulted
loans, provided that the Company has adhered to the collections and due
diligence procedures prescribed by the agencies.
The Company's collections department begins contact before the tenth day of
delinquency with the mailing of a reminder notice indicating the delinquent
status of the account. Additional letters are sent as required by the
guarantors or more frequently where the Company deems it appropriate. Telephone
contact is initiated after 30 days of delinquency using an automated outbound
call management system. At least four telephone calls are required between 30
and 149 days past due. All telephone calls are automatically registered, and a
synopsis of each call is noted in the borrower's loan history.
At prescribed times, the Company requests collection assistance from the
relevant guarantee agency before submitting a claim. These requests are made to
notify the guarantee agency of seriously delinquent accounts before claim and
allow the agency to make additional attempts to collect on the loan. Any loans
which have had returned or rejected claims are worked by the Company's
collection department.
Loans which are 180 days delinquent are considered to be in default. When the
loan is approximately 255 days past due, the Company submits a claim form to the
guarantee agency in order to request reimbursement for the defaulted loan.
Federal regulations require that claims be filed with the guarantor
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not later than the 270th day of delinquency. Failure to file a claim within this
period may result in loss of the guarantee.
A claim may be rejected by a guarantee agency under certain circumstances,
including, for example, if a claim is not timely filed, adequate documentation
is not maintained, the loan is improperly serviced or the lender does not
perform the required due diligence. Once a loan ceases to be guaranteed, it is
ineligible for interest and special allowance benefits.
Claims which are rejected may be "cured" or made eligible for reinstatement of
the guarantee, and interest and special allowance benefits, by locating the
borrower in the case of a skip trace involving a timely filing violation, or by
obtaining a payment or a new signed repayment obligation from the borrower in
the case of a due diligence violation. Historically, the Company has been able
to cure approximately 60% of all rejected claims.
Interest penalties may be assessed for certain violations of the due diligence
requirements. Interest penalties occur from errors in due diligence that may not
have caused the loss of the guarantee on the loan. Examples of errors that
cause interest penalties include missed collection calls or failures to send a
collection letter as required.
Claims rejected by a guarantee agency are compiled during each month. The
Company establishes a projected charge-off date which allows a full four months
to effect a cure. Prior to charging off the loan, the Company vigorously
attempts to cure the defect in the servicing or collect on the loan by using
either Company personnel or outside collection agencies.
The Company is required to absorb a 2% loss on amounts of principal and
interest on defaulted FFELP loans disbursed after September 30, 1993 that are
sent as claims to guarantee agencies. The Company has established a reserve for
these losses and periodic provisions are reflected in its statements of income.
At December 31, 1996, the Company's recorded reserve was $1.6 million.
Quality Control/Compliance. Management recognizes the importance of
maintaining compliance with Department and guarantee agency regulations and
reporting requirements. Accordingly, the Company has implemented policies and
procedures to monitor and review ongoing processes that have an impact on, or
may jeopardize, a loan guarantee or lender eligibility. An internal compliance
staff conducts frequent audits of loan origination, disbursement and servicing
activities to ensure adherence with regulatory requirements. As a further step,
the Company has implemented a "filter" process which identifies potential
problem areas for focused attention.
The Company has a formal quality control program that monitors and measures
performance and customer satisfaction levels. Management believes that the
Company's emphasis on service excellence has led to improved efficiencies and
increased customer satisfaction.
SEASONALITY
Origination of student loans is generally subject to seasonal trends which
correspond to the beginning of the school year. The months of August, September
and October account for approximately 40% of the annual applications. While
applications are seasonal, the Company's earnings generally are not. Due to the
Company's large portfolio, any one month's new disbursements or run-off do not
materially change the size of the portfolio. Interest revenue is therefore
fairly stable throughout the year. Disbursement levels are generally highest at
the beginning of school years.
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COMPETITION
The student loan industry is highly competitive. The Company competes with
approximately 6,500 other eligible lenders. Despite the large number of
competitors, the industry is somewhat concentrated. According to Department
statistics, the top 100 lenders accounted for approximately 81% of new loan
volume in the twelve months ended September 30, 1995.
The Company is a leading originator of FFELP loans and has been steadily
increasing its market share over the last six years. The Company believes that
one factor in its growth has been the continuing consolidation of the industry,
evidenced by the fact that more than 4,700 lenders have dropped out of the
program since 1985. Lenders have departed primarily due to the increasingly
difficult administrative and servicing requirements mandated by the Department
and the overall consolidation of the financial services industry. As a large
participant in the student loan industry, the Company has been able to adjust
quickly to regulatory changes and increase market share. The Company competes
by offering a full array of FFELP loan products and by emphasizing the quality
of its service.
The Company is one of the nation's largest holders of FFELP loans. The
largest holder, Sallie Mae, has a portfolio that is several times larger than
the Company's. Although Sallie Mae does not compete directly with the Company
in making loans, it acquires FFELP loans (including newly originated loans)
through arrangements with a number of eligible lenders.
The Federal Direct Lending Program (FDLP), which also provides guaranteed
loans to students has in recent years reduced the origination volume available
for FFELP loans. Currently, FDLP accounts for approximately one-third of
guaranteed student loan originations. This percentage does not appear to be
materially changing at this time.
REGULATION
The Higher Education Act and Implementing Regulations. The Act and the
related implementing regulations (the "Regulations") specify rules regarding
loan origination practices. A lender can lose eligibility to participate in the
program if it does not comply. Lenders are prohibited from offering points,
premiums, payments or other inducements, directly or indirectly, to any
educational institution, guarantee agency or individual in order to secure loan
applications, and may not offer loans as an inducement to a prospective
borrower, either directly or indirectly, to purchase insurance policies or other
products. In addition, a lender may not conduct unsolicited mailings of student
loan applications to students who have not previously received student loans
from that lender. Lenders may not engage in fraudulent or misleading
advertising or discriminate against any borrower or applicant.
The Act requires the exercise of due diligence in the collection of FFELP
loans. The Regulations define due diligence as requiring specific steps at
specific intervals. The Act also mandates the exercise of reasonable care and
diligence in the making and collection of loans, and provides that the
Department may disqualify a lender (which could include the Company or the
Trustee as a holder of FFELP loans) from originating insured loans if the
Department is not satisfied that the foregoing standards have been or will be
met.
The Act requires a guarantee agency to ensure that due diligence will be
exercised by the lender in making and collecting loans guaranteed by that
agency. In some cases, guarantee agencies dictate minimum collection
requirements beyond those set forth in the Regulations, including the timing of
collection calls and letters, telephone contacts, skip trace procedures and pre-
claims filing procedures. The Company's policy is to perform all required
procedures and, when deemed appropriate, to take
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additional steps in the collection process. The Company has established
procedures and standards for due diligence that are exercised in servicing its
loans. If the Company does not comply with the established due diligence
standards, the Company's ability to realize the benefits of any guarantee may be
adversely affected.
There can be no assurance that the provisions of the Act will be reauthorized
subsequent to expiration on September 30, 1998. In addition, provisions of the
Act may be amended by Congress at any time prior to that date. Any such
amendment, or the failure to reauthorize the Act in 1998, could have a material
adverse effect on the Company's business and prospects.
Department of Education. The Company's business is subject to the rules and
regulations of the Department and guarantee agencies with respect to
originating, processing, disbursing, selling and servicing student loans. The
Department is authorized to prescribe regulations that are necessary to carry
out the purpose and provisions of the Act. The Regulations can include
standards for guarantor capital levels, establishment of minimum standards with
respect to sound management and accountability under the Act, collection and
reporting of data on loan volume and default reimbursement by eligible lenders
and guarantors, audits of eligible lenders and guarantee agencies and loan
documentation review. The Department is also authorized to limit, suspend or
terminate lenders from participation in the program as well as impose civil
penalties for program violations by lenders or servicers. The Department
conducts frequent on-site audits of the Company's student loan servicing
activities. Guarantee agencies conduct similar audits on a biennial basis.
Historically, the student loan industry has been subject to increasing
regulatory and reporting requirements, concentrated primarily in the area of
loan servicing due diligence. Both the Department and the guarantee agencies
have established stringent servicing requirements, along with mandatory audit
criteria that must be met by the lender in order to receive guarantee benefits.
During 1996, the Company was audited by five guarantee agencies. The final
reports showed no material exceptions.
Bank Regulatory Matters. The Company is a direct operating subsidiary of
CNYS, a New York State bank that is not a member of the Federal Reserve System.
An operating subsidiary of a New York State bank is subject, in general, to
examination and supervision by the New York State Banking Department and the
Federal Deposit Insurance Corporation. The Company is subject to the New York
Banking Law and the Federal Deposit Insurance Act, which limit the permissible
investment and business activities in which an operating subsidiary of a bank
may engage and restrict affiliate transactions.
EMPLOYEES
As of December 31, 1996, the Company had approximately 810 employees, none of
whom is covered by a collective bargaining agreement. The Company considers its
employee relations to be good.
ITEM 2. PROPERTIES
CNYS provides the Company's Pittsford office under an agreement expiring in
December 1997, with an option to renew for an additional five-year term. On
July 1, 1996, the Company closed its Western Region customer service call
center, maintained in a leased facility in Sacramento, CA. Under an intercompany
arrangement with a Citicorp subsidiary, the Company was obligated under its
Sacramento
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lease commitments only through December 1996. Management believes that the
Company's facilities are adequate for its continuing operations.
ITEM 3. LEGAL PROCEEDINGS
The Company is not party to any litigation which, in management's opinion, is
likely to result in any material liability to the Company.
In recent years court cases have been filed in several states suggesting that
lenders should be subject to defenses to repayment raised by borrowers based on
alleged school misconduct. Such cases suggest that some origination practices
result in a special relationship between the lender and the school, bringing the
loan within the purview of state and federal consumer protection law. Since
January 1, 1994, all promissory notes evidencing FFELP loans have been required
by the Act to contain a clause that specifically acknowledges that the borrower
may assert defenses to repayment based on school misconduct where the lender has
such a relationship with the school. The Company has been named as a defendant
in several cases relating to loans made to students at schools that are alleged
to have engaged in misconduct. The Company believes that the pending cases will
not result in any material liability to the Company.
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
Not applicable.
PART II
ITEM 5. MARKET FOR THE REGISTRANT'S COMMON EQUITY AND RELATED STOCKHOLDER
MATTERS
Since December 17, 1992 the Company's Common Stock has been listed and traded
on the New York Stock Exchange under the symbol STU. The number of holders of
record of Common Stock as of February 14, 1997 was approximately 62. The
following table sets forth the high, low and closing sales prices for the Common
Stock during each fiscal quarter of 1995 and 1996.
<TABLE>
<CAPTION>
COMMON STOCK PRICES
1st 2nd 3rd 4th
Quarter Quarter Quarter Quarter
------- --------- ------- -------
<S> <C> <C> <C> <C> <C>
1995
High $24 3/4 $ 27 $32 3/4 $35 1/2
Low 18 3/8 24 25 1/2 30 3/4
Close 24 1/4 26 7/8 30 7/8 34
1996
High $41 1/4 $39 1/4 $36 3/8 $38 7/8
Low 33 5/8 34 7/8 32 1/8 33 3/8
Close 38 5/8 36 33 1/2 37 1/4
</TABLE>
The Company paid a quarterly dividend of $0.06 per share on the common stock
in each of the first three quarters of 1996 and in each quarter of 1995. The
regular quarterly dividend was increased to $0.12 per share beginning with the
fourth quarter 1996. A regular quarterly dividend of $0.12 per share was also
paid during the first quarter of 1997.
11
<PAGE>
ITEM 6. SELECTED FINANCIAL DATA
The information set forth under the heading "Financial Highlights" included in
Annex A is incorporated herein by reference.
ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS
The information set forth under the heading "Management's Discussion and
Analysis" included in Annex A is incorporated herein by reference.
ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA
The Company's financial statements and supplementary data included in Annex A
are incorporated herein by reference.
ITEM 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND
FINANCIAL DISCLOSURE
None.
PART III
ITEM 10. DIRECTORS AND EXECUTIVE OFFICERS OF THE REGISTRANT
The information as to the directors and executive officers of the Company set
forth under the captions "Directors and Nominees for Election as Director" and
"Executive Officers" in the Proxy Statement relating to the Company's Annual
Meeting of Stockholders to be held on May 9, 1997 (the "Proxy Statement") is
incorporated into this Report by reference.
ITEM 11. EXECUTIVE COMPENSATION
The information set forth under the caption "Compensation" in the Proxy
Statement is incorporated into this Report by reference.
ITEM 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT
The information set forth under the caption "Directors and Nominees for
Election as Director-- Share Ownership of Named Executives" and "--Certain Other
Share Owners" in the Proxy Statement is incorporated into this Report by
reference thereto. There are no arrangements known to the Company, the
operation of which may at a subsequent date result in a change in control of the
Company.
ITEM 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS
The information set forth under the caption "Certain Relationships and Related
Transactions" in the Proxy Statement is incorporated into this Report by
reference thereto.
PART IV
ITEM 14. EXHIBITS, FINANCIAL STATEMENT SCHEDULES AND REPORTS ON FORM 8-K
(a) List of documents included in Annex A filed as part of this Annual Report:
12
<PAGE>
(1) The following financial statements of the Company and the independent
auditors' report are incorporated by reference in Part II, Item 8.
. Statements of Income for the years ended December 31, 1996, 1995
and 1994.
. Balance Sheets as of December 31, 1996 and 1995.
. Statements of Cash Flows for the years ended December 31, 1996,
1995 and 1994.
. Statements of Stockholders' Equity for the years ended December
31, 1996, 1995 and 1994.
. Notes to Financial Statements.
(2) All schedules have been omitted from this Annual Report because they
are not required or the required information is included in the financial
statements or the notes thereto.
(b) Reports on Form 8-K
None.
13
<PAGE>
(c) Exhibits
3.1 Restated Certificate of Incorporation of the Company/(1)/
3.2 Bylaws of the Company, as amended/(2)/
10.1 Warehousing Advance Agreement, dated January 31, 1995, between the
Company and Student Loan Marketing Association/(2)/
10.2 Trust Agreement between the Company and CNYS/(1)/
10.3 Asset Transfer Agreement between the Company and CNYS/(1)/
10.4 Non-Competition Agreement among the Company, CNYS and Citicorp/(1)/
10.5 Tax Agreement between the Company and CNYS/(1)/
10.6 Facility Sharing Agreement between the Company and CNYS/(1)/
10.7 Citicorp 1988 Stock Incentive Plan (filed as exhibit 4 to Citicorp's
Registration Statement on Form S-8 (file no. 33-21332) and
incorporated herein by reference)
10.8 Restated Revolving Credit Agreement, dated June 29, 1993, between the
Company and CNYS/(3)/
10.8(a) Amendment to Restated Revolving Credit Agreement/(4)/
10.8(b) Loan Agreement, dated December 1, 1994, between the Company and
Citibank, N.A./(2)/
10.8(c) Omnibus Credit Agreement, dated March 30, 1995, between the
Company and CNYS/(5)/
10.8(d) Amendment to Omnibus Credit Agreement, dated March 30, 1995,
between the Company and CNYS/(6)/
10.9 1993 Stock Incentive Plan of the Company/(3)/
22.1 Subsidiaries of the Company (omitted; the Company has no subsidiaries)
23.1 Consent of KPMG Peat Marwick LLP
24.1 Powers of Attorney
27 Financial Data Schedule
_______________________
/(1)/ Filed as an exhibit (with the corresponding number) to the Company's
1992 Annual Report on Form 10-K and incorporated herein by reference.
/(2)/ Filed as an exhibit (with the corresponding number) to the Company's
Quarterly Report on Form 10-Q for the quarter ended June 30, 1993 and
incorporated herein by reference.
/(3)/ Filed as an exhibit (with the corresponding number) to the Company's
Quarterly Report on Form 10-Q for the quarter ended June 30, 1994 and
incorporated herein by reference.
/(4)/ Filed as an exhibit (with the corresponding number) to the Company's
1994 Annual Report on Form 10-K and incorporated herein by reference.
/(5)/ Filed as exhibit 10.6(c) to the Company's Quarterly Report on Form 10-Q
for the quarter ended September 30, 1995 and incorporated herein by
reference.
/(6)/ Filed as exhibit 10.8(d) to the Company's 1995 Annual Report on Form 10-
K and incorporated herein by reference.
14
<PAGE>
Annex A
<TABLE>
<CAPTION>
(Dollars in millions, except per Years ended December 31,
share amounts)
- ----------------------------------------------------------------------------------------
1996 1995 1994 1993 1992
- ----------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C>
STATEMENTS OF INCOME DATA
Net interest income $ 175.2 $ 161.9 $ 146.0 $ 147.7 $ 116.7
Total operating expenses 62.0 57.6 51.0 40.0 35.0
Income before cumulative effect
of accounting change /(1)/ 64.9 60.6 55.4 64.7 51.0
Net income $ 64.9 $ 60.6 $ 54.9 $ 64.7 $ 51.0
- ----------------------------------------------------------------------------------------
BALANCE SHEETS DATA
(as of December 31, )
Total assets $7,118.3 $6,387.4 $5,365.1 $4,346.9 $3,490.0
Long-term notes 2,075.0 3,400.0 1,100.0 600.0 600.0
Payable to principal stockholder $ 19.8 $ 29.1 $ 32.2 $ 40.0 --
- ----------------------------------------------------------------------------------------
EARNINGS DATA
Cash dividends declared per
common share $ 0.30 $ 0.24 $ 0.24 $ 0.18 --
Net income per common share
before cumulative effect of
accounting change /(1)/ $ 3.25 $ 3.03 $ 2.77 $ 3.23 $ 2.55
Net income per common share $ 3.25 $ 3.03 $ 2.75 $ 3.23 $ 2.55
Net interest margin Operating 2.68% 2.85% 3.18% 3.98% 3.77%
Operating expenses as a 0.95% 1.02% 1.11% 1.09% 1.13%
percentage of average insured
student loans
- ----------------------------------------------------------------------------------------
EARNINGS DATA, CORE /(2)/
Net income $ 63.9 $ 60.3 $ 47.8 $ 40.4 $ 36.1
Earnings per common share $ 3.20 $ 3.01 $ 2.39 $ 2.02 $ 1.81
Net interest margin 2.65% 2.85% 2.85% 2.86% 3.00%
- ----------------------------------------------------------------------------------------
OTHER
Average insured student loans $6,547.5 $5,669.4 $4,591.4 $3,688.2 $3,904.4
Average number of loans accounts
serviced (thousands) 1,706 1,497 1,226 1,041 903
Loan disbursements (3) $1,425.0 $1,441.6 $1,434.4 $1,171.2 $ 932.7
Book value per share
(as of December 31, ) $ 18.10 $ 5.15 $ 12.36 $ 9.85 $ 5.09
Common stock price (4)
High $ 41 1/4 $ 35 1/2 $ 20 7/8 $ 30 1/2 $ 21 1/4
Low $ 32 1/8 $ 18 3/8 $ 18 1/8 $ 14 1/4 $ 16 7/8
Close $ 37 1/4 $ 34 $ 18 1/4 $ 18 7/8 $ 20
Total number of employees
(as of December 31, ) 810 790 788 662 560
- ----------------------------------------------------------------------------------------
</TABLE>
<PAGE>
MANAGEMENT'S DISCUSSION AND ANALYSIS
General
The following discussion should be read in conjunction with the financial
statements and accompanying notes.
Background The Student Loan Corporation (the "Company") originates, holds and
services student loans. The Company is one of the nation's largest holders and
originators of guaranteed student loans made under the Federal Higher Education
Act of 1965, as amended. The Company was incorporated in Delaware on November 4,
1992 and commenced operations on December 22, 1992. Prior to December 22, 1992,
the Company operated as a division (the "Division") of Citibank (New York State)
(CNYS), a subsidiary of Citicorp. On December 22, 1992, the assets of the
Division were exchanged with CNYS for 20 million shares of the Company's common
stock and the Company's agreement to pay approximately $2.8 billion to CNYS and
to assume certain obligations of CNYS. On December 23, 1992, CNYS sold 4 million
shares of its holdings of the Company's common stock in an initial public
offering and continues to own 80% of the Company's outstanding common stock.
Regulatory Impacts In 1993, provisions of the Omnibus Budget Reconciliation Act
(the "1993 Amendments") were enacted which included significant changes to the
Federal Family Education Loan (FFEL)Program. The 1993 Amendments impose
additional costs and income restrictions on originators and holders of FFEL
Program loans in the form of origination fees, risk sharing costs, and interest
rate reductions. The 1993 Amendments also instituted the Federal Direct Student
Loan (FDSL) Program by which guaranteed student loans are made directly by the
Federal government ("direct lending") rather than by lending institutions such
as the Company, effectively reducing the number of potential borrowers available
for FFEL Program originations.
Under the FDSL Program, the Federal government lends directly to students using
U.S. Treasury funds. Direct lending accounted for approximately 5%, on a
national basis, of all guaranteed student loans made in the 1994-95 academic
year and an estimated 35% in 1995-96. The 1993 Amendments allow direct lending
to originate up to 50% in each of 1996-97 and 1997-98 and 60% in 1998-99.
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 FFEL
Programs.
The impact of the FDSL Program on the Company's future originations is dependent
on such factors as the ultimate success of direct lending and the relative size
of the FFEL Program in the years to come, which cannot be determined at this
time.
Besides establishing the FDSL Program, the 1993 Amendments include other
provisions designed to reduce the cost of the FFEL Program to the Federal
government. The interest rate paid by the Federal government to holders of loans
during in-school, grace and deferment periods was reduced 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 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 insured defaulted loans disbursed on or after October 1,
1993 that are submitted to a guarantor 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 has experienced a decline in net interest margin over the last few
years due to the provisions of the 1993 Amendments, as new loans with these
provisions were added to the portfolio and older, more profitable loans were
repaid. The interest spread for in-school, grace and deferment periods declined
for loans disbursed on or after July 1, 1995, with a full-year impact occurring
in 1996. Therefore, in order to maintain or improve its net income in future
years, the Company needs to substantially increase the size of its portfolio;
there is no assurance that the Company will be able to do so. Since 1994, the
Company has aggressively pursued both new and existing marketing programs,
expanded its guarantor relationships, and
10
<PAGE>
sought new ways to meet the education finance needs of schools and students,
including the implementation of non-Federally guaranteed loan programs that are
not dependent on Federal funding and authorization. The Company is also
participating in specialized student loan delivery efforts with automated
processing which gives college and university financial aid offices single-
source student loan access.
It is expected that the Federal government's 1997 budget reconciliation package
will include further reductions in FFEL Program loan subsidies, possibly in the
form of increased risk sharing costs and reduced interest margins.
Floor Income Most FFEL Program loans originated prior to July 23, 1992 have
fixed interest rates, and qualify for the Federal government's special allowance
payment (SAP). Whenever the rate paid by the borrower would be lower, the SAP
increases the loan yield to 2.50, 3.10, 3.25 or 3.50 percentage points,
depending on its origination date, over a base rate tied either to the 91-day or
52-week Treasury Bill auction rates. In low rate environments, the stated rates
on most loans disbursed prior to July 1992 become, in effect, floors. Under the
FFEL Program, the majority of loans disbursed after July 1992 have variable
interest rates, effectively eliminating floor income on these loans. The
Company's floor income is significantly higher in periods when prevailing 91-day
Treasury Bill rates are 5% or below. Because prevailing rates were at or below
5% for a portion of 1996, the Company earned $1.0 million in floor net income in
1996, compared to $0.3 million in 1995 when interest rates were higher. At
December 31, 1996 and 1995, the Company held approximately $1.7 billion and $1.9
billion, respectively, in loans that could earn floor income.
Results of Operations
Summary The Company's 1996 core net income (net income excluding floor net
income and the cumulative effect of accounting changes) was $63.9 million ($3.20
per share), up $3.6 million (6%) over core net income of $60.3 million ($3.01
per share) for 1995. The Company's 1996 total net income was $64.9 million, $4.3
million (7%), or $0.22 per share, higher than 1995. The Company had net income
from interest rate floors of $1.0 million in 1996 as compared to $0.3 million in
1995, an increase of $0.7 million. The increase in floor net income was
primarily a result of lower short-term interest rates during a portion of 1996.
The improvement in core net income for the year was primarily generated by
increased interest income attributed to the growth of $723.4 million (12%) in
the student loan portfolio, partially offset by a decline in the core net
interest margin to 2.65% in 1996 from 2.85% in 1995. The expected decline in the
margin was primarily the result of new loan originations carrying lower in-
school yields as well as lower variable interest rates (relative to the
Company's funding costs) as of the July 1, 1996 reset date.
At December 31, 1996, the Company's insured student loan assets reached $6.9
billion, up 12% from December 31, 1995 levels of $6.2 billion. The increase in
loans outstanding was primarily due to new loan disbursements, partially offset
by repayments of loans. New disbursements of $1,425 million for 1996 were down
$17 million (1%) from 1995 disbursement levels. This decline was primarily due
to the mid-1996 phase-out of a special loan consolidation agreement with the
Department of Education and several of its contractors, resulting in a $74
million decrease in these loan consolidations in 1996 compared to 1995. This
decrease was partially offset by a $51 million (4%) increase in FFEL Program
disbursements for 1996, despite the nationwide growth in direct lending market
share from 5% in the 1994-95 academic year to an estimated 35% in 1995-96.
The allowance for loan losses represents an estimate of the 2% risk-sharing
losses that the Company expects to incur as a result of the provisions of the
Omnibus Budget Reconciliation Act of 1993. The allowance for loan losses balance
was $1.6 million at December 31, 1996, compared to $0.5 million at the end of
1995, reflecting growth in the portfolio of loans originated since October 1,
1993 that are in repayment and displaying characteristics indicative of
potential future claims.
11
<PAGE>
MANAGEMENT'S DISCUSSION AND ANALYSIS
Net Interest Income Net interest income is interest earned from student loans
less interest expense on borrowings. The Company seeks to minimize interest rate
exposure by funding floating rate loans with floating rate liabilities which are
based on the same indices as the rates earned on the loans. The Company, from
time to time, enters into interest rate swap agreements to manage interest rate
risk by better matching the interest rate characteristics of its borrowings with
the interest rate characteristics of its assets. Credit risk has been managed by
entering into interest rate swap agreements with related or third parties which
have investment-grade external credit ratings. Currently, all interest rate swap
agreements are with Citibank, NA, an affiliate of CNYS. Net swap interest
receivable or payable is accrued and recorded as an adjustment to interest
expense.
Net interest income was $175.2 million for 1996, compared with $161.9 million
for 1995. The increase of $13.3 million is a result of the growth in the
portfolio as well as growth in floor income. Interest income resulting from
floors was $1.8 million in 1996, compared with $0.6 million in 1995. Core net
interest margin declined to 2.65% in 1996, compared to 2.85% in 1995. This
decline was primarily attributable to new loan originations carrying lower in-
school yields as well as lower variable interest rates (relative to the
Company's funding costs) as of the July 1, 1996 reset date.
The following table sets forth the average rates earned on interest earning
assets and paid on interest bearing liabilities.
<TABLE>
<CAPTION>
Average Balance Sheet
(Dollars in millions) 1996 1995 1994
-------------------------------------------------------------------------------
Income/ Income/ Income/
Balance Expense Rate Balance Expense Rate Balance Expense Rate
-------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C>
Average insured student loans $6,548 $ 542 8.28% $5,669 $ 501 8.83% $4,591 $ 368 7.99%
Average non-interest earning assets 223 229 169
-------------------------------------------------------------------------------
Total average assets $6,771 $5,898 $4,760
Average interest bearing liabilities $6,321 $ 367 5.81% $5,443 $ 339 6.22% $4,390 $ 222 5.06%
Average non-interest bearing liabilities 117 172 147
Average equity 333 283 223
-------------------------------------------------------------------------------
Total average liabilities and equity $6,771 $5,898 $4,760
Net interest margin $6,548 $ 175 2.68% $5,669 $ 162 2.86% $4,591 $ 146 3.18%
Core net interest margin $6,548 $ 173 2.65% $5,669 $ 161 2.85% $4,591 $ 131 2.85%
Average 91-day Treasury Bill rate
for Stafford revenue 5.16% 5.68% 4.38%
Average 52-week Treasury Bill rate
for PLUS/SLS reset 5.75% 5.58% 4.42%
</TABLE>
The following table shows the components of the annual changes in net interest
income.
<TABLE>
<CAPTION>
Rate/Volume Analysis
(Dollars in millions) 1996 Compared to 1995 1995 Compared to 1994
-------------------------------------------------------------------------------
Increase (Decrease) Due to Change In: Increase (Decrease) Due to Change In:
Volume Rate Net(a) Volume Rate Net(a)
-------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C>
Interest earning assets $74.1 $(32.2) $41.9 $92.5 $ 40.0 $132.5
Interest bearing liabilities 52.1 (23.5) 28.6 59.5 57.1 116.6
-------------------------------------------------------------------------------
Net interest earnings $22.0 $( 8.7) $13.3 $33.0 $(17.1) $ 15.9
</TABLE>
(a) Rate/volume variance is allocated based on the percentage relationship of
changes in volume and changes in rate to the absolute dollar amountof changes in
each.
12
<PAGE>
Operating Expenses Operating expenses for 1996 were $62.0 million or 0.95% of
average insured student loans, compared to $57.6 million or 1.02% of average
insured student loans for 1995. The increase in operating expenses is due
primarily to costs incurred to handle greater servicing needs and meet the
expanded operational requirements of a larger portfolio. The 0.07% improvement
in the Company's 1996 expense ratio (expenses as a percentage of average insured
student loans) is primarily attributable to improvements in operating
efficiencies generated, in part, by the consolidation of the Company's customer
servicing centers in mid-1996 as well as greater economies of scale.
The Company is in the process of assessing and modifying its computer
applications to ensure their continuing functionality for the "year 2000" and
beyond. At the present time, the Company does not anticipate the incurrence of
material incremental costs related to "year 2000" conversion costs in any single
future year.
Income Taxes The Company has deferred tax assets of $39.2 million and $49.9
million at December 31, 1996 and 1995, respectively. The income tax benefits
primarily arose as a result of payments made by the Company to CNYS in exchange
for the transfer of assets to the Company and the execution of a noncompetition
agreement. See Notes 1 and 11 to the financial statements for further
discussion.
The Company's effective tax rates were 41.42% for 1996, 41.55% for 1995, and
41.63% for 1994.
Liquidity and Capital Resources
The Company's primary funding needs are those required to finance its loan
portfolio and meet its cash requirements for new loan originations and company
operations. The Company incurred no material capital expenditures in 1996 or in
the past three years, nor are any material capital expenditures anticipated in
1997.
The Company's cash used for investing activities amounted to $729.9 million in
1996, $1,000.5 million in 1995, and $988.7 million in 1994. Investing activities
were financed in 1996, 1995, and 1994 primarily through the utilization of
available long and short-term credit lines and a commercial paper program.
Borrowings at December 31, 1996 increased $674.8 million compared to the prior
year-end.
The Company's future cash flow needs will depend primarily on the volume of new
loan disbursements as well as the cash provided (or used) by operating
activities. The Company expects new loan disbursement volume to continue to be
funded primarily through additional borrowing. The Company may also enter into
agreements to purchase existing student loans or student loan portfolios which
would also be financed primarily through incremental borrowing.
The Company carefully weighs interest rate risk in choosing between funding
alternatives. It currently meets its funding requirements through credit
facilities provided by CNYS and the Student Loan Marketing Association (SLMA),
with additional funding available through a commercial paper program.
At December 31, 1996 and 1995, the Company had outstanding borrowings with SLMA
totaling $0.6 billion, due on January 30, 1998, bearing interest based on the
91-day Treasury Bill rate. The borrowing is collateralized by insured student
loans at a rate of 106% of the outstanding balance of the debt.
In April 1996, the Company amended its existing $6.4 billion credit agreement
with CNYS to convert $0.8 billion of unused short-term credit to available long-
term borrowings. Although the maximum aggregate credit under this facility
remained at $6.4 billion, the credit limit was reapportioned to provide maximum
credit of $2.8 billion for short-term borrowings and $3.6 billion for long-term.
Under this amendment, $0.1 billion in new long term borrowings were made in
October 1996. During 1996, $0.5 billion in net new short-term borrowings were
made. The credit facilities are at variable interest rates based on LIBOR,
federal funds, or the 91-day or 52-week Treasury bill rate. Under these
facilities, $2.6 billion of short-term debt and $2.9 billion
13
<PAGE>
of debt with original maturities greater than one year were outstanding at
December 31, 1996. At December 31, 1995, $2.1 billion of short-term debt and
$2.8 billion of debt with original maturities greater than one year were
outstanding under these facilities.
In addition, the Company has a $0.5 billion commercial paper program,
representing issuances to unaffiliated investors. The program had $463 million
outstanding at December 31, 1996 and $452 million outstanding at December 31,
1995, with maturities of 270 days or less. In November 1996, the Company entered
into a one-year $0.5 billion revolving credit agreement with a syndicate of
banks. The credit agreement serves as a backstop liquidity facility for the
commercial paper program and may also be used for general corporate purposes.
There were no borrowings outstanding under this facility at December 31, 1996.
The Company currently has no specific plans for additional future financing
programs. However, the Company continues to explore alternative sources of low-
cost funding and is currently reevaluating its overall funding structure.
Management believes that liquidity and capital are sufficient to meet the
Company's anticipated requirements for the next twelve months.
1995 Compared to 1994
The Company's 1995 core net income was $60.3 million ($3.01 per share), up $12.5
million (26%) over core net income of $47.8 million ($2.39 per share) for 1994.
The Company's 1995 total net income was $60.6 million, which was $5.7 million
(10%), or $0.28 per share, higher than 1994, primarily as a result of increased
interest income due to growth in the portfolio.
Net income from interest rate floors decreased by $7.3 million to $0.3 million
in 1995 as compared to $7.6 million in 1994. The decrease in floor net income
was attributable primarily to higher short-term interest rates.
At December 31, 1995, loans outstanding totaled $6.2 billion, an increase of
$1.0 billion (19%) from December 31, 1994. The increase in loans outstanding was
due both to new loan disbursements and the purchase of a $43 million student
loan portfolio. Disbursements for 1995 were approximately $1.4 billion,
substantially unchanged from 1994 disbursement levels even though 1995
disbursements included $127 million in new loan consolidations made under
special agreements with the Department of Education and several of its
contractors.
Net interest income was $161.9 million for 1995, compared with $146.0 million
for 1994. The $15.9 million (11%) increase was a result of portfolio growth,
partially offset by a decline in floor income. Interest income resulting from
floors was $0.6 million in 1995, compared to $13.1 million in 1994. Core net
interest margin for 1995 remained the same as that for 1994 at 2.85%, despite
better than expected funding spreads, which were offset by reduced margins
caused by the dilution of older, more profitable loans with newer loans carrying
lower interest rates.
Operating expenses were $57.6 million or 1.02% of average insured student loans
for 1995 compared to $51.0 million or 1.11% of average insured student loans for
1994. Increases in operating expenses were due to higher operational losses on
guaranteed student loans and salary and employee benefit costs from additional
staff hired for the 1995 customer system conversion, coupled with servicing
related operating requirements. The 0.09% improvement in the Company's expense
ratio during 1995 was attributable to the increase in loan originations as the
result of significant marketing investments made by the Company in 1994 and 1995
as well as improvements in operating efficiencies generated since the
implementation of the Company's new customer servicing system in May 1995.
14
<PAGE>
The Board of Directors and Stockholders
of The Student Loan Corporation
We have audited the accompanying balance sheets of The Student Loan Corporation
as of December 31, 1996 and 1995 and the related statements of income,
stockholders' equity and cash flows for each of the years in the three-year
period ended December 31, 1996. These financial statements are the
responsibility of the Company's management. Our responsibility is to express an
opinion on these financial statements based on our audits.
We conducted our audits in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audit to obtain
reasonable assurance about whether the financial statements are free of material
misstatement. An audit includes examining, on a test basis, evidence supporting
the amounts and disclosures in the financial statements. An audit also includes
assessing the accounting principles used and significant estimates made by
management, as well as evaluating the overall financial statement presentation.
We believe that our audits provide a reasonable basis for our opinion.
In our opinion, the financial statements referred to above present fairly, in
all material respects, the financial position of The Student Loan Corporation as
of December 31, 1996 and 1995 and the results of its operations and its cash
flows for each of the years in the three-year period ended December 31, 1996 in
conformity with generally accepted accounting principles.
As discussed in the notes to the financial statements, the Company adopted
Statement of Financial Accounting Standards No. 112 in 1994.
/s/ KPMG Peat Marwick LLP
Rochester, New York
January 16, 1997
15
<PAGE>
THE
STUDENT LOAN
CORPORATION
Statements of Income
<TABLE>
<CAPTION>
[Dollars in thousands, except per share amounts] Years ended December 31,
1996 1995 1994
----------------------------------
<S> <C> <C> <C>
Revenue
Interest income (notes 2 and 8) $542,527 $500,617 $368,082
Interest expense (notes 4, 5, and 8) 367,294 338,744 222,066
----------------------------------
Net interest income 175,233 161,873 146,016
Provision for loan losses (note 2) 2,500 674 88
----------------------------------
Net interest income after provision
for loan losses 172,733 161,199 145,928
Fee and other income (note 8) 52 60 72
----------------------------------
Total revenue, net 172,785 161,259 146,000
----------------------------------
Operating Expenses
Salaries and employee benefits
(notes 8 and 9) 30,639 29,065 26,320
Other expenses (notes 7 and 8) 31,311 28,512 24,704
----------------------------------
Total operating expenses 61,950 57,577 51,024
----------------------------------
Income before income taxes and cumula-
tive effect of accounting change 110,835 103,682 94,976
Income taxes (note 11) 45,905 43,083 39,537
----------------------------------
Income before cumulative effect of
accounting change 64,930 60,599 55,439
Cumulative effect of accounting change
for postemployment benefits (note 9) -- -- (512)
----------------------------------
Net Income $ 64,930 $ 60,599 $ 54,927
Net Income-Floor (note 2) $ 1,047 $ 330 $ 7,632
Net Income-Core (excluding floor net
income and cumulative effect of
accounting change) $ 63,883 $ 60,269 $ 47,807
Per Common Share
Net income-Core $ 3.20 $ 3.01 $ 2.39
Net income-Floor (note 2) $ 0.05 $ 0.02 $ 0.38
----------------------------------
Net income before cumulative effect
of accounting change $ 3.25 $ 3.03 $ 2.77
Cumulative effect of accounting change
for postemployment benefits -- -- $ (0.02)
----------------------------------
Net income $ 3.25 $ 3.03 $ 2.75
</TABLE>
See accompanying notes to financial statements.
16
<PAGE>
THE
STUDENT LOAN
CORPORATION
BALANCE SHEETS
<TABLE>
<CAPTION>
[Dollars in thousands, except per share amounts] December 31,
1996 1995
----------------------
<S> <C> <C>
Assets
Insured student loans (notes 2 and 5) $6,894,291 $6,169,825
Allowance for loan losses (note 2) 1,570 548
----------------------
Insured student loans, net 6,892,721 6,169,277
Cash 567 579
Deferred tax benefits (note 11) 39,243 49,948
Other assets (note 3) 185,804 167,593
----------------------
Total Assets $7,118,335 $6,387,397
Liabilities and Stockholders' Equity
Liabilities
Short-term borrowings (note 4) $4,509,251 $2,509,496
Long-term notes (note 5) 2,075,000 3,400,000
Payable to principal stockholder (note 11) 19,833 29,066
Other liabilities (note 6) 152,270 145,784
----------------------
Total liabilities 6,756,354 6,084,346
----------------------
Stockholders' Equity
Preferred stock, par value $0.01 per share;
authorized 10,000,000 shares; no
shares issued or outstanding -- --
Common stock, par value $0.01 per share;
authorized 50,000,000 shares,
20,000,000 shares issued and
outstanding 200 200
Additional paid-in capital 134,109 134,109
Retained earnings 227,672 168,742
----------------------
Total stockholders' equity 361,981 303,051
----------------------
Total Liabilities and Stockholders' Equity $7,118,335 $6,387,397
</TABLE>
See accompanying notes to financial statements.
17
<PAGE>
THE
STUDENT LOAN
CORPORATION
STATEMENTS OF STOCKHOLDERS' EQUITY
<TABLE>
<CAPTION>
Additional
Common Paid-In Retained
[Dollars in thousands, except per share amounts] Stock Capital Earnings Total
---------------------------------------
<S> <C> <C> <C> <C>
Balance at December 31, 1993 $200 $134,009 $ 62,816 $197,025
Net Income -- -- 54,927 54,927
Dividends declared, $0.24 per
common share -- -- (4,800) (4,800)
---------------------------------------
Balance at December 31, 1994 200 134,009 112,943 247,152
Net Income -- -- 60,599 60,599
Dividends declared, $0.24 per
common share -- -- (4,800) (4,800)
Other -- 100 -- 100
---------------------------------------
Balance at December 31, 1995 200 134,109 168,742 303,051
Net Income -- -- 64,930 64,930
Dividends declared, $0.30 per
common share -- -- (6,000) (6,000)
---------------------------------------
Balance at December 31, 1996 $200 $134,109 $227,672 $361,981
</TABLE>
See accompanying notes to financial statements.
18
<PAGE>
THE
STUDENT LOAN
CORPORATION
STATEMENTS OF CASH FLOWS
<TABLE>
<CAPTION>
(Dollars in thousands) Years ended December 31,
1996 1995 1994
---------------------------------------
<S> <C> <C> <C>
Cash Flows
from Operating Activities
Net income $ 64,930 $ 60,599 $ 54,927
Adjustments to reconcile net income
to net cash from operating activities:
Cumulative effect of accounting change -- -- 512
Depreciation and amortization 3,993 1,888 2,632
Provision for loan losses 2,500 674 88
Provision for deferred taxes 10,705 11,782 11,571
Increase in accrued interest receivable (20,085) (36,636) (40,629)
(Increase) decrease in other assets 1,814 689 (3,340)
Increase (decrease) in other liabilities (2,747) (33,020) 59,853
---------------------------------------
Net cash provided by operating activities 61,110 5,976 85,614
---------------------------------------
Cash Flows
from Investing Activities
Disbursements of loans (1,425,019) (1,441,631) (1,434,414)
Net sale (purchase) of loans to
(from) nonaffiliates 52,859 (31,341) (7,192)
Repayment of loans 643,988 474,128 453,919
Capital expenditures on premises
and equipment (1,705) (1,613) (999)
---------------------------------------
Net cash used in investing activities (729,877) (1,000,457) (988,686)
---------------------------------------
Cash Flows
from Financing Activities
Net increase (decrease) in short-term
borrowings 574,755 (1,300,513) 407,772
Proceeds from long-term borrowings 100,000 2,300,000 500,000
Dividends paid to stockholders (6,000) (4,800) (4,800)
---------------------------------------
Net cash provided by financing activities 668,755 994,687 902,972
---------------------------------------
Net increase (decrease) in cash (12) 206 (100)
Cash - beginning of period 579 373 473
---------------------------------------
Cash - end of period $ 567 $ 579 $ 373
Supplemental disclosure
Cash paid for:
Interest $ 376,130 $ 320,121 $ 189,542
Income taxes $ 66,820 $ 44,217 $ 7,740
---------------------------------------
</TABLE>
See accompanying notes to financial statements.
19
<PAGE>
NOTES TO FINANCIAL STATEMENTS
1 Significant Accounting Policies
Basis of Presentation The Student Loan Corporation (the "Company"), through a
trust agreement with Citibank (New York State) ("CNYS"), is an originator,
holder, and servicer of student loans, consisting primarily of loans made in
accordance with Federally sponsored guaranteed student loan programs. The
accounting policies of the Company are in conformity with generally accepted
accounting principles.
The Company was incorporated on November 4, 1992 and commenced operations on
December 22, 1992. Prior to December 22, 1992, it operated as a division (the
"Division") of CNYS, a subsidiary of Citicorp.
On December 22, 1992, the assets of the Division were exchanged for 20 million
shares of the Company's common stock and the Company's agreement to pay
approximately $2.8 billion to CNYS and to assume certain obligations of CNYS. On
December 23, 1992, CNYS sold 4 million shares of its holdings of the Company's
common stock in an initial public offering and continues to own 80% of the
Company's outstanding common stock.
The accompanying financial statements include expenses for facilities and
certain services provided by CNYS and other Citicorp affiliates. Such expenses
are assessed based on actual usage or using other allocation methods which, in
the opinion of management, approximate actual usage. Management believes that
the allocation methods are reasonable and representative of the amounts that
such allocated expenses would have cost had the Company operated as an
unaffiliated entity. Services currently provided by affiliates are expected to
continue as needed under similar arrangements.
Certain amounts in the prior years' financial statements have been reclassified
to conform with the later years' presentations. Such reclassification had no
effect on operations as previously reported.
Use of Estimates Management has made a number of estimates and assumptions
relating to the reporting of assets and liabilities and the disclosure of
contingent assets and liabilities to prepare these financial statements in
conformity with generally accepted accounting principles. Actual results could
differ from those estimates.
Loans Loans primarily consist of insured student loans originated under the
Federal Family Education Loan (FFEL) Program. Interest on student loans is
recognized as it is earned. Federally mandated loan origination or lender fees
paid on disbursements made on or after October 1, 1993, as well as other loan
origination costs and premiums and discounts on loan portfolio purchases, are
deferred and amortized to interest income over the average life of the student
loan as a yield adjustment.
Due to the smaller-balance and homogeneous nature of the loans held by the
Company, the loans are generally excluded from the loan impairment provisions
and disclosures required by Statement of Financial Accounting Standards (SFAS)
No. 114, "Accounting by Creditors for Impairment of a Loan," and SFAS No. 118,
"Accounting by Creditors for Impairment of a Loan - Income Recognition and
Disclosures."
When a guarantor denies a request to pay a claim, the Company discontinues
accruing interest on the defaulted loan. Claim denials can occur for a number of
reasons, such as the Company not following appropriate due diligence procedures
as defined in the guarantor's policies. At the time it is determined that the
guarantee cannot be reinstated, the Company charges off the outstanding
principal balance to operating expenses and all previously accrued, uncollected
interest to net interest income. These amounts are not material for the periods
presented. The Company continues its attempt to recover the loan balance from
either the guarantor or the borrower. Recoveries on loans previously charged off
decrease current operating expenses. Non-accrual loans were $2,580,000 and
$2,591,000 at December 31, 1996 and 1995, respectively. Non-accrual loans at
December 31, 1996 and 1995 include $988,575 and $2,071,000, respectively, of
distressed loan purchases made during 1995.
Allowance for Loan Losses The allowance for loan losses represents an estimate
of the 2% risk-sharing losses that the Company expects to incur as a result of
the provisions of the Omnibus Budget Reconciliation Act of 1993. Under this
provision, holders of insured defaulted loans disbursed on or after October 1,
1993 that are submitted to a guarantor for claim are required to absorb a loss,
calculated as 2% of the sum of the outstanding principal balance and unpaid
accrued interest. Estimated loan losses are accrued as a provision
20
<PAGE>
for loan losses at the time that a guaranteed student loan becomes greater than
90 days delinquent. Such losses which arise from actual claims with guarantors
are charged to allowance for loan losses as incurred.
Furniture and Equipment Furniture and equipment is a component of other assets
and is stated at cost less accumulated depreciation. Depreciation is computed on
the straight-line method and is charged to operations over the estimated useful
lives of the furniture and equipment, which ranges between two and ten years.
Interest Rate Swap Agreements The Company manages its exposure to interest rate
risk through the use of derivatives in the form of interest rate swap
agreements. These swaps are designated as hedges of certain interest bearing
liabilities and are effective in reducing the risk caused by basis differences
between borrowing and lending rates. These interest rate swap agreements are
held for purposes other than trading and are generally held to their full
contract maturity dates. Although there were no swap terminations prior to
contract maturity dates during each of the three years ending December 31, 1996,
the Company's policy is to defer and amortize any such gains or losses
consistent with the original hedge accounting strategy. Net swap interest
receivable or payable is accrued and recorded as an adjustment to interest
expense.
Income Taxes The Company is included in the consolidated Federal income tax
return of Citicorp, and is included in certain combined or unitary state/local
income or franchise tax returns. While the Company is included in these
consolidated, combined or unitary returns, it has agreed to pay to CNYS an
amount equal to the Federal, state and local taxes the Company would have paid
had it filed its returns on a separate company basis and the amount by which the
tax liability of any unitary group (of which any Citicorp affiliate other than
the Company is a member) is increased by virtue of the inclusion of the
Company's activity in the group's unitary return. CNYS has agreed to pay to the
Company an amount equal to the tax benefit of the actual tax loss of the Company
as if the Company filed a separate return and the amount, if any, by which the
tax liability of any unitary group (of which any Citicorp affiliate other than
the Company is a member) is reduced by virtue of the inclusion of the Company's
activity in the group's unitary return.
Deferred income taxes are recorded for the future tax consequences of events
that have been recognized in the financial statements or tax returns based upon
enacted tax laws and rates. The deferred tax asset is recognized subject to
management's judgement that realization is more likely than not.
Earnings Per Share Net income per common share was calculated by dividing net
income by the weighted average number of common shares outstanding, which was 20
million during 1996, 1995, and 1994. There were no materially dilutive common
stock equivalents for 1996, 1995 or 1994.
2 Student Loans
Student loans consist primarily of loans originated under government sponsored
guaranteed loan programs, principally the FFEL Program and, generally, have
repayment terms of between five and ten years. Whenever the stated interest rate
on FFEL Program loans provides less than a market rate of return, the Federal
government pays a special allowance payment (SAP) which increases the loan yield
to 2.50, 3.10, 3.25 or 3.50 percentage points, depending on its origination
date, over a base rate tied either to the 91-day or 52-week Treasury Bill
auction rates. While the student is in school, generally, the Federal government
pays both the SAP (if any) and the stated interest rate, or the student defers
payment and makes no principal or interest payments. In low rate environments,
the stated fixed rates on most loans disbursed prior to July 1992 become, in
effect, floors. Under the FFEL Program, the majority of loans disbursed after
July 1992 have variable interest rates, effectively eliminating floor income on
these loans. The Company's floor income is significantly less in periods when
prevailing 91-day Treasury Bill rates exceed 5%. The Company earned $1.0 million
of net floor income in 1996, $0.3 million in 1995 and $7.6 million in 1994, with
year-to-year fluctuations caused primarily by changes in prevailing short-term
interest rates. At December 31, 1996 and 1995, the Company held $1.7 billion and
$1.9 billion, respectively, of loans that could earn floor income.
21
<PAGE>
The Company is currently eligible to make the following types of FFEL Program
loans: Federal Stafford Loans, Unsubsidized Federal Stafford Loans, Federal PLUS
(PLUS) Loans and Federal Consolidation Loans. Federal Stafford Loans are
generally loans made to students who pass certain need criteria. Unsubsidized
Federal Stafford Loans are designed for students who do not qualify for Federal
Stafford Loans due to parental and/or student income and assets in excess of
permitted amounts or whose need exceeds the basic Stafford limit. Federal PLUS
Loans include loans to parents of students who are dependents. Federal
Consolidation Loans allow certain borrowers to combine all of their FFEL Program
loans into one insured loan and extend the repayment term. As of July 1994, the
Federal Supplemental Loans for Students (SLS) program was replaced with an
expanded Unsubsidized Stafford Loan program. The Company's portfolio includes
SLS loans made prior to that date. Federal SLS Loans include loans to graduate,
professional and independent undergraduate students, and, under certain
circumstances, dependent undergraduate students. The SLS borrowing limits have
been incorporated into the expanded Unsubsidized Stafford Loan program.
The Company has entered into alternative loan programs with The Educational
Resource Institute (TERI) for Supplemental Loans and Professional Education Plan
(PEP) loans. In 1994, the TERI program was expanded to offer specifically
tailored loans to medical and graduate students under the following programs:
Medical Assist, Grad Assist, Nursing Assist, Eng Assist and MBA Assist. These
loans are guaranteed by TERI, a not-for-profit corporation, which is not
reinsured by the Federal government. As of December 31, 1996 and 1995, the
Company held $82.2 million and $72.1 million, respectively, of TERI insured
loans, which were serviced by a third party.
The Company's student loan portfolio is summarized by program type as follows:
<TABLE>
<CAPTION>
($000's) December 31,
1996 1995
----------------------
<S> <C> <C>
Stafford/Consolidation (including deferred origination
costs of $17.0 million in 1996 and $13.4 million in 1995) $5,881,300 $5,118,288
SLS/PLUS 930,761 979,476
Supplemental/PEP/Assist 82,230 72,061
----------------------
Total student loans $6,894,291 $6,169,825
</TABLE>
The Company is insured on its holdings of FFEL Program loans in the case of a
borrower's default, death, disability or bankruptcy. Insurance on FFEL Program
loans is provided by certain state or non-profit guarantee agencies, which are
reinsured by the Federal government. Insurance, under similar provisions, on
alternative loan programs is provided by TERI, which is not reinsured by the
Federal government.
The following schedule provides an analysis of the Company's insured student
loans by guarantor:
<TABLE>
<CAPTION>
December 31,
($000's) 1996% 1995%
----------------------------------
<S> <C> <C> <C> <C>
United Student Aid Funds $2,895,395 42 $2,526,465 41
California Student Aid Commission 1,632,277 24 1,561,898 25
New York Higher Education Service Corp. 1,482,053 21 1,307,834 21
Illinois Student Aid Commission 316,385 5 343,929 6
TERI 82,230 1 72,061 1
All Others 485,951 7 357,638 6
----------------------------------
Total student loans $6,894,291 100 $6,169,825 100
</TABLE>
FFEL Program loans are subject to regulatory requirements relating to servicing
in order to maintain the guarantee on principal and interest. In the event of
default on a student loan or borrower's death, disability, or bankruptcy, the
Company files a claim with the guarantor of the loan. Provided the loan has been
properly originated and serviced, the guarantor generally pays the Company 98%
of the sum of the loan's unpaid principal balance and unpaid accrued interest,
reflecting a 2% risk sharing loss as described below. Claims filed due to a
borrower's death, disability, or bankruptcy are not subject to the 2% risk
sharing provisions.
22
<PAGE>
Claims not immediately honored by the guarantor because of servicing or
origination defects are returned to the Company for remedial servicing. During
the remedial servicing period, income is not recognized. On certain paid claims,
guarantors assess interest penalties for minor servicing defects. Net
operational losses resulting from servicing or origination defects are charged
to operating expense and amounted to $1.4 million in 1996, $1.6 million in 1995
and $0.1 million in 1994.
The 1992 Amendments to the Higher Education Act included provisions which
provided for rebates of excess interest to either the borrowers or the
Department of Education on certain loans disbursed on or after July 23, 1992
during periods when the average of the 91-day Treasury Bill rate for a quarter
plus either 3.10% or 3.25% was less than the stated interest rate on the loan.
As a result, previously accrued rebates amounting to $14.5 million were refunded
in the form of principal adjustments to borrower accounts and/ or reductions in
government interest billings during 1995. SLS, PLUS, consolidation loans and
loans with variable interest rates were not subject to the rebates. As a result
of the 1992 Amendments, certain loans originated on or after July 23, 1992 were
converted in 1994 to variable interest rate loans based on the 91-day Treasury
Bill rate, effectively eliminating floor income on these loans.
In 1993, provisions of the Omnibus Budget Reconciliation Act (the "1993
Amendments") were enacted which included significant changes to the FFEL
Program. The 1993 Amendments impose additional costs and income restrictions on
originators and holders of FFEL Program loans in the form of origination fees,
risk sharing costs, and interest rate reductions. The 1993 Amendments also
instituted the Federal Direct Student Loan (FDSL) Program by which student loans
are made directly by the Federal government ("direct lending") rather than by
lending institutions such as the Company, effectively reducing the number of
potential borrowers available for FFEL program originations.
Under the FDSL Program, the Federal government lends directly to students using
U.S. Treasury funds. Direct lending accounted for approximately 5%, on a
national basis, of all guaranteed student loans made in the 1994-95 academic
year and an estimated 35% in 1995-96. The 1993 Amendments call for Direct
Lending to originate up to 50% in each of 1996-97 and 1997-98 and 60% in 1998-
99. 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.
Besides establishing the FDSL Program, the 1993 Amendments include other
provisions designed to reduce the cost of the FFEL Program to the Federal
government. The interest rate paid by the Federal government to holders of loans
during in-school, grace and deferment periods was reduced from 3.10% to 2.50%
over the base rate for most loans disbursed on or after July 1, 1995. In
addition, lenders are required to pay a 0.5% origination fee 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 the outstanding balances
of such loans. Also, holders of insured defaulted loans disbursed on or after
October 1, 1993 that are submitted to a guarantor for claim are required to
absorb a loss, calculated as 2% of the sum of the outstanding loan balance plus
unpaid accrued interest. Loans insured by TERI are not subject to the 2% risk
sharing provisions. Guarantors are subject to similar risk sharing provisions.
Generally, guarantors of FFEL Program loans are reinsured by the Federal
government for 78% to 98% of claims paid (80% to 100% for loans disbursed before
October 1, 1993), depending on their claims experience. At December 31, 1996 and
1995, the Company had reserved for estimated risk sharing losses and reflected
them as allowance for loan losses.
Changes in allowance for loan losses are as follows:
<TABLE>
<CAPTION>
($000's) 1996 1995
----------------
<S> <C> <C>
Balance at beginning of year $ 548 $ 88
Provision for loan losses 2,500 674
Losses on claimed loans (1,478) (214)
----------------
Balance at December 31, $ 1,570 $ 548
</TABLE>
23
<PAGE>
NOTES TO FINANCIAL STATEMENTS
3 Other Assets
Other assets are summarized as follows:
<TABLE>
<CAPTION>
December 31,
($000's) 1996 1995
------------------
<S> <C> <C>
Furniture and equipment, net $ 2,463 $ 1,939
Accrued interest receivable
From borrowers 136,276 111,767
From Federal government 43,667 48,091
Other 3,398 5,796
------------------
Total other assets $185,804 $167,593
</TABLE>
4 Short-Term Borrowings
Short-term borrowings are summarized below:
<TABLE>
<CAPTION>
($000's) December 31, 1996 December 31, 1995
Weighted Weighted
Average Average
Amount Interest Rate Amount Interest Rate
----------------------------------------------------------------
<S> <C> <C> <C> <C>
Notes payable $2,621,355 5.62% $2,057,056 5.96%
Commercial paper 462,896 5.49% 452,440 5.86%
Short-term portion of long
term notes 1,425,000 6.09% -- --
----------------------------------------------------------------
Total short-term borrowings $4,509,251 $2,509,496
</TABLE>
Short-term borrowings have an original or remaining term to maturity of one year
or less.
At December 31, 1996, notes payable consisted of borrowings under credit
facilities with CNYS, the majority stockholder. The notes mature within one
year; however, with the consent of CNYS, the Company has the option to extend
the maturity dates for another year's term, to a maximum final extended maturity
date of December 31, 1998. As of April 1996, the maximum aggregate credit limit
through these short-term facilities was decreased to $2.8 billion as a result of
an amendment, which converted $0.8 billion of unused short-term credit to long-
term credit lines. The maximum short-term credit limit was $3.6 billion at
December 31, 1995. The interest rates payable on the credit facilities are
variable, based on either the overnight or monthly Federal Funds rate.
Commercial paper represents issuances to unaffiliated investors with maturities
of 270 days or less. As of December 31, 1996 and 1995, the Company's agreements
with dealers permitted the Company to have up to $0.5 billion of commercial
paper outstanding at any time. The interest rate is established by the market at
the time of issuance. Discounts and premiums incurred in commercial paper
transactions are amortized to interest expense over the life of the commercial
paper.
In November 1996, the Company entered into a one-year $0.5 billion revolving
credit agreement with a syndicate of banks. The credit agreement is used as a
backstop liquidity facility for the commercial paper program and may also be
used for general corporate purposes. Under this agreement, the Company is
required to meet certain covenants, including restricting the incurrence of
additional long-term debt and the payment of dividends. The Company was in
compliance with these covenants at December 31, 1996. The Company pays an annual
commitment fee, included in interest expense, based on the undrawn portion of
the revolving credit facility. The interest rate charged on any amounts
outstanding is variable, based on the 3-month LIBOR rate or similar indices.
This facility replaces a similar one-year $0.5 billion facility which expired
November 1996. There were no amounts outstanding under either facility at
December 31, 1996 or 1995.
24
<PAGE>
5 Long-Term Notes
A summary of long-term notes follows:
<TABLE>
<CAPTION>
December 31,
($000's) 1996 1995
------------------------
<S> <C> <C>
Student Loan Marketing Association (SLMA) Note, based on the
3-Month Treasury Bill rate (5.92% and 5.75% at December 31, 1996
and 1995, respectively), repricing weekly, due January 30, 1998,
secured by student loans $ 600,000 $ 600,000
Citibank (New York State) (CNYS) Notes, based on the 1-year Treasury
Bill rate (6.32% and 6.58% at December 31, 1996 and 1995,
respectively) repricing annually, due July 1, 1997 500,000 500,000
CNYS Note, based on the 3-month Treasury Bill rate (6.10% at both
December 31, 1996 and 1995), repricing quarterly, due October 1, 1998 400,000 400,000
CNYS Note, based on LIBOR (5.96% and 6.19% at December 31, 1996
and 1995, respectively), repricing quarterly, series due between
July 1, 1997 and December 31, 1998 2,000,000 1,900,000
Less: short-term portion (1,425,000) (--)
------------------------
Total long-term notes $ 2,075,000 $3,400,000
</TABLE>
At December 31, 1996 and 1995, the SLMA notes were secured by $636 million of
insured student loans.
On March 30, 1995, the Company renegotiated its short-term credit facilities
with CNYS and Citibank, N.A., an affiliate of CNYS. Under the new agreement,
$1.9 billion of short-term debt was converted into new long-term borrowings.
On October 1, 1995, the Company amended its March 30, 1995 credit agreement with
CNYS, increasing long-term funding by $0.4 billion and increasing the maximum
aggregate credit facility with CNYS to $6.4 billion.
In April 1996, the Company amended its existing $6.4 billion credit agreement
with CNYS to convert $0.8 billion of unused short-term credit to available long-
term borrowings. Although the maximum aggregate credit under this facility
remained at $6.4 billion, the credit limit was reapportioned to provide maximum
credit of $2.8 billion in short-term borrowings and $3.6 billion in long-term
notes. Under this amendment, an additional $0.1 billion in new long-term
borrowings was made in October 1996.
The Company seeks to minimize interest rate exposure by funding floating rate
loans with floating rate liabilities which are based on the same indices as the
rates earned on the loans. In order to do this, the Company has entered into
interest rate swap agreements to better match the interest rate characteristics
of its borrowings with the interest rate characteristics of its assets. Under
these swap agreements, indices of the interest obligations of the Company's
LIBOR-based note have been swapped into 52-week and 91-day Treasury Bill rates.
See Note 12 for further discussion.
6 Other Liabilities
Other liabilities are summarized as follows:
<TABLE>
<CAPTION>
December 31,
($000's) 1996 1995
------------------
<S> <C> <C>
Interest payable $ 69,997 $ 78,963
Income tax liability, payable primarily to CNYS 7,628 39,252
Accrued liabilities and other 74,645 27,569
------------------
Total other liabilities $152,270 $145,784
</TABLE>
25
<PAGE>
NOTES TO FINANCIAL STATEMENTS
7 Other Operating Expenses
A summary of other operating expenses follows:
<TABLE>
<CAPTION>
Years ended December 31,
($000's) 1996 1995 1994
-------------------------
<S> <C> <C> <C>
Data processing $ 4,077 $ 4,634 $ 4,941
Servicing, professional, guarantor and other fees paid 7,427 4,645 2,409
Advertising and marketing 4,908 5,604 5,679
Stationery, supplies and postage 2,791 3,017 3,155
Premises 3,226 2,959 2,930
Communications 2,792 2,220 1,656
Depreciation 1,181 903 717
Operational losses on guaranteed student loans 1,390 1,563 96
Travel and entertainment 1,226 1,375 969
Minor equipment 368 494 545
Other 1,925 1,098 1,607
-------------------------
Total other expenses $31,311 $28,512 $24,704
</TABLE>
8 Related Party Transactions
At December 31, 1996, CNYS owned 80% of the outstanding stock of the Company.
Detailed below is a description of, and amounts relating to, transactions with
CNYS (or its affiliates), which relate to the Company and have been reflected in
the accompanying financial statements. A change in CNYS's percentage ownership
of the Company may change some of the agreements with related parties (e.g.,
funding and employee benefits).
As discussed in Note 11, the Company shares with CNYS 50% of the deferred tax
benefits resulting from the payments made by the Company in November 1992 in
exchange for the transfer of assets to the Company from CNYS and the execution
of a noncompetition agreement.
Expenses for facilities and certain services provided by CNYS (or its
affiliates) are assessed based on actual usage or other allocation methods
which, in the opinion of management, approximate actual usage. Management
believes that such agreements and transactions are on terms no less favorable to
the Company than those which could be obtained from unaffiliated third parties
and it is the intention of the Company that these transactions be conducted at
arm's length.
A summary of related party transactions with CNYS (or its affiliates), other
than employee benefit related transactions described in Note 9, borrowings
described in Notes 4 and 5, income taxes described in Notes 1, 6 and 11 and
other transactions described under Note 1, follows:
<TABLE>
<CAPTION>
Years ended December 31,
($000's) 1996 1995 1994
----------------------------
<S> <C> <C> <C>
Revenues
Interest earned from cash management activities $ 19 $ -- $ 1,188
Fees for servicing of student loan portfolios 48 60 71
----------------------------
Expenses
Cost of funding provided $306,042 $272,489 $147,533
Telecommunications 652 452 --
Facilities 2,422 2,308 2,436
Processing - payment and outgoing mail 418 483 430
Payroll and benefits administration 446 362 305
Data processing 1,997 1,691 878
Statement production 941 -- --
Other 92 183 480
----------------------------
</TABLE>
26
<PAGE>
9 Employee Benefits
The Company's employees are covered under various Citicorp benefit plans,
including medical and life insurance plans that cover active, retired and
disabled employees; defined benefit pension; dental; savings incentive; salary
continuance for disabled employees; workers compensation; and stock purchase
plans. Citicorp charges the Company a fringe rate calculated by allocating a
portion of the total Citicorp cost of providing benefits based on the ratio of
the total Company salary expense to total Citicorp salaries. The fringe rate
applied to salaries was 31.74% for 1996, 29.97% for 1995 and 31.39% for 1994.
The determination of this percentage takes into consideration the historical
benefit and salary experience for all Citicorp employees adjusted for expected
changes in experience reflected in actuarial assumptions.
At such time, if any, that Citicorp's percentage ownership in the Company is
reduced below 50%, the Company will withdraw from participation in certain
Citicorp benefit plans and will procure benefits coverage for its employees
independently. The expense incurred for independent benefits coverage may be
higher than the benefit costs currently being paid.
Pension Plans Retirement benefits under the Citicorp defined benefit pension
plans in which the Company's employees participate are based on years of
credited service, the highest average compensation (as defined), and the primary
social security benefit. While the qualified plan is adequately funded, it is
Citicorp's policy to fund this plan to the extent contributions are tax
deductible. Non-qualified plans are not pre-funded since contributions to these
plans are not tax deductible. The amount of pension expense allocated to the
Company was $994,000, $417,000 and $488,000 in 1996, 1995 and 1994,
respectively.
Postretirement Benefits Through its relationship with Citicorp, the Company
provides postretirement health care and life insurance benefits to all eligible
retired employees. Retirees share in the cost of their health care benefits
through co-payments, service-related contributions and certain deductibles.
Retiree life insurance benefits are noncontributory. Citicorp's policy is to
fund these plans to the extent such contributions are tax-deductible. The net
periodic postretirement benefit cost for the Company, representing the amount of
contribution charged by Citicorp for the period, was $281,000 for 1996, $270,000
for 1995, and $254,000 for 1994.
Postemployment Benefits Effective January 1, 1994, the Company and Citicorp
prospectively adopted the provisions of SFAS No. 112, "Employers' Accounting for
Postemployment Benefits." SFAS No. 112 requires that employers recognize the
estimated cost of disability and similar benefits provided to former or inactive
employees when an event occurs indicating that the payment of benefits is
probable. Before 1994, postemployment expense was recognized as benefits were
paid.
Postemployment benefits are administered by Citicorp. Under the new standard,
the amount of postemployment expense allocated to the Company was $151,000 for
1996, $168,000 for 1995, and $122,000 for 1994. Also, as of January 1, 1994, an
initial cumulative charge in the amount of $512,000, which is net of a deferred
income tax benefit of $365,000, was recorded as a cumulative effect of an
accounting change.
10 Stock Option Plan
In 1993, the stockholders of the Company approved the 1993 Stock Incentive Plan
(the Plan) to grant options to purchase Company common stock to certain key
employees. The Board of Directors has authorized the issuance of options to
purchase a maximum of 500,000 shares of Company common stock under the Plan over
a five year period, effective January 1, 1993. The shares may be either
authorized and unissued shares, treasury shares or shares purchased in open
market transactions.
27
<PAGE>
NOTES TO FINANCIAL STATEMENTS
Under the Plan, options to purchase 58,500 shares of the Company's common stock
were granted to certain key employees in 1993 at an exercise price of $16.13 per
share. The exercise price is the fair market value of the stock on the date of
grant. One half of the options becomes exercisable on the later of the first
anniversary of the date of the grant or thirty days after the date on which
Citicorp's direct or indirect ownership of the Company's common stock drops
below 50%. The remaining options become exercisable on the first anniversary of
the date of exercisability of the options in the first group. The options expire
ten years after the issue date or upon the occurrence of certain other events.
At December 31, 1996 and 1995, options to purchase 58,500 shares of the
Company's common stock were outstanding. No options were granted in 1996, 1995
or 1994. No options expired, or were terminated, exercised, or exercisable, due
to the exercise restrictions noted above, during 1996, 1995 or 1994.
Effective January 1, 1996, the Company adopted the disclosure provisions of SFAS
No. 123, "Accounting for Stock-Based Compensation". For any new transactions
under the Plan, the Company has elected to follow its existing accounting
policies in determining net income; therefore, net income will be unaffected by
SFAS No. 123. However, if the alternative accounting-related provisions of SFAS
No. 123 had been adopted as of the beginning of 1995, the effect on 1996 and
1995 net income would not have been material, nor is the effect on future net
income expected to be material.
11 Income Taxes
Total income taxes for the years ended December 31, 1996, 1995 and 1994 were
allocated as follows:
<TABLE>
<CAPTION>
Years ended December 31,
($000's) 1996 1995 1994
-------------------------
<S> <C> <C> <C>
Provision for income taxes from operations $45,905 $43,083 $39,537
Income tax benefit attributable to cumulative effect
of an accounting change - post-employment
benefits (note 9) -- -- (365)
-------------------------
Total income taxes $45,905 $43,083 $39,172
</TABLE>
The provision for income taxes applicable to operations consists of the
following:
<TABLE>
<CAPTION>
Years ended December 31,
($000's) 1996 1995 1994
-------------------------
<S> <C> <C> <C>
Current
Federal $26,809 $23,707 $21,115
State 8,391 7,594 6,851
-------------------------
35,200 31,301 27,966
-------------------------
Deferred
Federal 8,153 8,924 8,737
State 2,552 2,858 2,834
-------------------------
10,705 11,782 11,571
-------------------------
Total income tax provision $45,905 $43,083 $39,537
</TABLE>
The Company had deferred tax assets of $39.2 million and $49.9 million at
December 31, 1996 and 1995, respectively. The income tax benefits primarily
arose as a result of payments made by the Company to CNYS in exchange for the
transfer of assets to the Company and the execution of a noncompetition
agreement. The Company has agreed to share 50% of the deferred tax benefits with
CNYS. Accordingly, the liability to CNYS is recorded on the balance sheet as
payable to principal stockholder, with the net amount of the tax benefit
allocated to paid-in capital. Management believes that it is more likely than
not that the results of future operations will generate sufficient taxable
income to realize the deferred tax assets.
28
<PAGE>
Deferred tax assets were comprised of the following:
<TABLE>
<CAPTION>
December 31,
($000's) 1996 1995
----------------
<S> <C> <C>
Loan premium $25,235 $34,490
Account relationship 9,707 10,735
Noncompetition agreement 3,072 3,399
Cumulative effect of accounting change - post-employment
benefits (note 9) 360 365
Other 869 959
----------------
Total deferred tax assets $39,243 $49,948
</TABLE>
The reconciliation of the Federal statutory income tax rate of 35% for 1996,
1995 and 1994 to the effective income tax rate reflected in the provisions for
income taxes applicable to operations is as follows:
<TABLE>
<CAPTION>
December 31,
($000's) 1996 1995 1994
-------------------------
<S> <C> <C> <C>
Income taxes computed at Federal statutory rate $38,792 $36,289 $33,242
State tax provision, net of Federal benefits 7,113 6,794 6,295
-------------------------
Total income tax provision $45,905 $43,083 $39,537
</TABLE>
12 Interest Rate Swap Agreements
The Company, from time to time, enters into interest rate swap agreements with
related and third parties solely to hedge interest rate exposure on certain
interest bearing liabilities. Net amounts of interest receivable or payable on
these agreements at December 31, 1996 and 1995 were accrued and recorded as
adjustments to interest expense. Interest expense of $2.3 million and $5.3
million related to interest rate swap activity was recorded for 1996 and 1994,
respectively. For 1995, interest expense was reduced by $2.9 million as a result
of swap activity. The net accrued interest payable balances at December 31, 1996
and 1995 were $9.3 million and $9.7 million, respectively. During 1996, 1995,
and 1994, net payments of $2.0 million, $2.7 million, and $8.8 million,
respectively, were made to meet contracted swap agreement obligations. The
aggregate notional principal amounts outstanding at December 31, 1996 and 1995
were $2.0 billion and $1.9 billion, respectively.
At December 31, 1996 and 1995, the Company owned approximately $0.9 billion and
$1.0 billion, respectively, of SLS and PLUS loans which reset annually based on
the 52-week Treasury Bill yield. The Company funds this portfolio based on a
variable 91-day LIBOR rate. To better match the interest rate characteristics of
the liability with its assets, the Company has entered into interest rate swap
agreements with CNYS, or its affiliate, in which the Company receives payments
based on the 91-day LIBOR and makes payments based on the 52-week Treasury Bill
yield. At December 31, 1996, the Company also owned a $5.9 billion ($5.1 billion
at December 31, 1995) portfolio of Stafford loans that reset weekly based on the
91-day Treasury Bill rate. To better match that portion of the funding that is
based on 91-day LIBOR with the asset, the Company has entered into swaps with
CNYS, or its affiliate, to receive payments based on the 91-day LIBOR and make
payments based on the 91-day Treasury Bill rate. 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.
Credit risk is the exposure to loss in the event of nonperformance by the other
party to a transaction and is a function of the ability of the counterparty to
honor its obligations to the Company. Credit risk has been managed by entering
into swaps with related and third parties which have investment-grade external
credit ratings. Currently, all interest rate swap agreements are with Citibank,
N.A., an affiliate of CNYS.
Interest rate swap agreement maturity dates range from April 1, 1997 to October
1, 1998. During 1997, contracts amounting to $1.4 billion of the total notional
principal amounts outstanding at December 31, 1996 will expire. There were no
terminations of interest rate swap agreements before contract maturity dates in
the years 1996, 1995, or 1994.
29
<PAGE>
NOTES TO FINANCIAL STATEMENTS
13 Fair Value of Financial Instruments
The following provides disclosure of the estimated fair value of the financial
instruments as defined in accordance with current accounting standards. The
estimated fair values have been determined by the Company using available market
information and other valuation methodologies described below. These estimates
are subjective in nature and involve uncertainties and matters of significant
judgement. Accordingly, the estimates may not be indicative of the amounts that
the Company could realize in a current market exchange. Changes in assumptions
could significantly affect the estimates.
As detailed in the accompanying table, the excess of fair value over carrying
value may vary from period to period based on changes in a wide range of
factors, including LIBOR and Treasury Bill interest rates, portfolio mix of
variable and fixed rate loans, maturity dates, timing of contractual
settlements, and growth of the portfolio.
Insured Student Loans, net The fair value of insured student loans, net of
allowance for loan losses, is calculated by discounting cash flows through
expected maturity using estimated market rates.
Delinquent loans are also valued using the method described above. Credit risk
is not a material component of the loan valuation due to the guaranteed nature
of the loans.
The valuation of student loan floors is estimated using a Black/Scholes
methodology and is included in the fair value of insured student loans.
Cash, Accrued Interest Receivable and Payable, Accrued Fees and Expenses Payable
and Short-Term Borrowings Due to the short-term nature of these instruments,
carrying value approximates fair value.
Long-Term Notes The fair value of these instruments is calculated by
discounting cash flows through maturity using estimated market discount rates.
Derivatives The carrying value of derivatives represents the accrued interest
payable, net of interest receivable, on the Company's interest rate swap
agreements at year-end. The fair value is the estimated cost to terminate
interest rate swap agreements associated with long-term notes. The fair value of
these costs was based on an estimate obtained from the Company's dealer in these
financial instruments. See Notes 1 and 12 for further information.
The estimated fair value of the Company's financial instruments as of December
31, is as follows:
<TABLE>
<CAPTION>
($000's) 1996 1995
Excess of Fair Excess of Fair
Carrying Fair Value over Carrying Fair Value over
Amount Value Carrying Value Amount Value Carrying Value
-------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C>
Financial Assets
Insured student loans, net $6,892,721 $7,197,750 $305,029 $6,169,277 $6,454,920 $285,643
Cash 567 567 -- 579 579 --
Accrued interest receivable 179,943 179,943 -- 159,858 159,858 --
-------------------------------------------------------------------------------
Financial Liabilities
Short-term borrowings $4,509,251 $4,509,251 $ -- $2,509,496 $2,509,496 $ --
Long-term notes 2,075,000 2,074,858 (142) 3,400,000 3,402,513 2,513
Related derivatives 9,286 11,128 1,842 9,722 13,889 4,167
Accrued interest payable 60,711 60,711 -- 69,241 69,241 --
Accrued fees and
expenses payable 82,273 82,273 -- 66,821 66,821 --
-------------------------------------------------------------------------------
</TABLE>
30
<PAGE>
14 Commitments and Contingencies
The Company is obligated under several non-cancelable operating leases for
equipment and facilities rent. Those expenses totaled $0.8 million, $0.9
million, and $1.3 million for each of the years ended December 31, 1996, 1995,
and 1994, respectively. Such expenses exclude the related party transaction
amounts described in Note 8.
Future minimum lease payments at December 31, 1996 under agreements classified
as operating leases with non-cancelable terms in excess of one year for the
calendar years after December 31, 1996 are as follows:
<TABLE>
<CAPTION>
Minimum
Lease
($000's) Payments
--------
<S> <C>
1997 $2,218
1998 200
1999 75
After 1999 --
--------
Total minimum lease payments $2,493
</TABLE>
The Company has a lease agreement on its principal facility with CNYS, the
majority stockholder, for five years beginning in December 1992. Terms of this
agreement include annual lease payments of $1.8 million which are reflected in
the minimum lease payments table above.
At December 31, 1996 and 1995, loans in the amounts of $350.9 million and $319.8
million, respectively, have been committed, but not disbursed.
Various legal proceedings arising out of the normal course of business are
pending against the Company. However, management believes that the aggregate
liability arising from these proceedings will not be material to the Company's
financial position or results of operations.
Provisions of the Omnibus Budget Reconciliation Act of 1993 included a planned
reduction of the current FFEL Program and initiation of a direct lending
program, which began in July 1994. The impact of these provisions on the
Company's future originations is dependent on such factors as the ultimate
success of direct lending and the relative size of the FFEL Program in the years
to come, which cannot be determined at this time. The Act also imposes
additional costs to hold and disburse guaranteed student loans, which has
reduced the net interest margin of the guaranteed student loan portfolio from
pre-1994 levels.
It is expected that the Federal government's 1997 budget reconciliation package
will include further reductions in FFEL Program loan subsidies, possibly in the
form of increased risk sharing costs and reduced interest margins.
15 Future Impacts of Recently Issued Accounting
Standards
In June 1996, the FASB issued SFAS No. 125, "Accounting for Transfers and
Servicing of Financial Assets and Extinguishments of Liabilities." The statement
provides 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 and on debt
extinguishments. As issued, SFAS No. 125 is effective for transactions occurring
after December 31, 1996. However, as a result of an amendment to SFAS No. 125
issued by the FASB in December 1996, certain provisions of SFAS No. 125 are
deferred for an additional year. Adoption of the new accounting standard is not
expected to have a material impact on the Company.
31
<PAGE>
DIRECTORS AND EXECUTIVE OFFICERS
Directors Executive Officers
Stephen C. Biklen Stephen C. Biklen
President and Chief Executive Officer President and
The Student Loan Corporation Chief Executive Officer
Christopher F. Edley Gerald Bystrak
President Emeritus Vice President and
United Negro College Fund, Inc Director of Operations
Peter M. Gallant John R. Coffin
Vice President and Treasurer Vice President and
Citicorp and Citibank, N.A General Counsel
Evelyn E. Handler Frederick J. Eckert
Executive Director Vice President and
California Academy of Science Director of Sales
Carl E. Levinson Marianne L. Kerry
Division Executive Vice President and
Citicorp Consumer Asset Division Director of Marketing and Development
Laura D. Williamson Michael S. Piemonte
Vice President Vice President and
Citibank, N.A Chief Financial Officer
Greg C. Siembor
Vice President and
Financial Controller
STOCKHOLDERS INFORMATION
Investor Relations Copies of the Corporation's Form 10-K, other financial
information, and general information about The Student Loan Corporation may be
obtained by writing to Investor Relations, The Student Loan Corporation, 99
Garnsey Road, Pittsford, NY 14534, or by telephone request to Bradley D.
Svalberg, Director of Investor Relations at 716-248-7187. Information is also
available on the Company's web site at http://www.citibank.com/student.
Customer Service For information or inquiries regarding student loan accounts,
please call 1-800-967-2400. Hearing impaired customers with a Telecommunications
Device for the Deaf (TDD) may call 1-800-846-1298.
Annual Meeting The Annual Meeting of stockholders will be held at 11:00 a.m. on
Friday, May 9, 1997 at the Lodge at Woodcliff, 199 Woodcliff Drive, Fairport, NY
14450.
Market for the Registrant's Common Equity and Related Stockholder Matters Since
December 17, 1992, the Company's common stock has been listed and traded on the
New York Stock Exchange under the symbol STU. The number of holders of record of
the common stock at February 14, 1997 was approximately 62. The following table
sets forth the high, low and close sales prices for the common stock during each
fiscal quarter of 1996 and 1995.
<TABLE>
<CAPTION>
1996 1995
1st 2nd 3rd 4th 1st 2nd 3rd 4th
Quarter Quarter Quarter Quarter Quarter Quarter Quarter Quarter
-----------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C> <C> <C>
High $41 1/4 $39 1/4 $36 3/8 $38 7/8 $24 3/4 $27 $32 3/4 $35 1/2
Low 33 5/8 34 7/8 32 1/8 33 3/8 18 3/8 24 25 1/2 30 3/4
Close 38 5/8 36 33 1/2 37 1/4 24 1/4 26 7/8 30 7/8 34
</TABLE>
The Company paid a quarterly dividend of $0.06 per share on the common stock for
each of the first three quarters of 1996 and each quarter of 1995. The regular
quarterly dividend was increased to $0.12 per share beginning with the fourth
quarter of 1996.
32
<PAGE>
SIGNATURES
Pursuant to the requirements of Section 13 or 15(d) 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, on March 28, 1997.
THE STUDENT LOAN CORPORATION
By: /s/ Stephen C. Biklen
-----------------------------
Stephen C. Biklen
President and Chief Executive Officer
Pursuant to the requirements of the Securities Exchange Act of 1934, this
report has been signed below by the following persons in the capacities
indicated on March 28, 1997.
Signature Title
--------- -----
/s/ Stephen C. Biklen President, Chief Executive Officer
- -------------------------------- and Director
Stephen C. Biklen
/s/ Michael S. Piemonte Vice President and Chief Financial
- --------------------------------- Officer
Michael S. Piemonte
/s/ Greg C. Siembor Vice President and
- ---------------------------------- Controller (Principal Accounting
Greg C. Siembor Officer)
/s/ Christopher F. Edley* Director
- ----------------------------------
Christopher F. Edley
/s/ Peter M. Gallant* Director
- ----------------------------------
Peter M. Gallant
/s/ Evelyn E. Handler* Director *By
- ---------------------------------- /s/Stephen C. Biklen
Evelyn E. Handler --------------------
Stephen C. Biklen
Individually and as
Attorney-in-Fact
/s/ Carl E. Levinson* Director
- ----------------------------------
Carl E. Levinson
/s/ Laura D. Williamson* Director
- ----------------------------------
Laura D. Williamson
15
<PAGE>
EXHIBIT 23.1
INDEPENDENT AUDITORS' CONSENT
-----------------------------
The Board of Directors
The Student Loan Corporation:
We consent to incorporation by reference in the registration statement No. 33-
63698 on Form S-8 of The Student Loan Corporation of our report dated January
16, 1997, relating to the balance sheets of The Student Corporation as of
December 31, 1996 and 1995, and the related statements of income, stockholders'
equity, and cash flows for each of the years in the three-year period ended
December 31, 1996, which report has been incorporated by reference in the
December 31, 1996 annual report on Form 10-K of the Student Loan Corporation.
Our report refers to the adoption of Statement of Financial Accounting Standards
No. 112 in 1994.
KPMG Peat Marwick LLP
March 21, 1997
<PAGE>
EXHIBIT 24.1
POWER OF ATTORNEY
The undersigned hereby constitutes and appoints Stephen C. Biklen and
Michael S. Piemonte, and each of them, as his or here agent and attorney-in-
fact, with full power of substitution, to execute and file with the Securities
and Exchange Commission the 1996 Annual Report on Form 10K of The Student Loan
Corporation, and to take such other actions as such attorney-in-fact may deem
necessary or advisable in the premises.
___________________________
Christopher F. Edley
Dated: March 28, 1997
<PAGE>
POWER OF ATTORNEY
The undersigned hereby constitutes and appoints Stephen C. Biklen and
Michael S. Piemonte, and each of them, as his or here agent and attorney-in-
fact, with full power of substitution, to execute and file with the Securities
and Exchange Commission the 1996 Annual Report on Form 10K of The Student Loan
Corporation, and to take such other actions as such attorney-in-fact may deem
necessary or advisable in the premises.
___________________________
Evelyn E. Handler
Dated: March 28, 1997
2
<PAGE>
POWER OF ATTORNEY
The undersigned hereby constitutes and appoints Stephen C. Biklen and
Michael S. Piemonte, and each of them, as his or here agent and attorney-in-
fact, with full power of substitution, to execute and file with the Securities
and Exchange Commission the 1996 Annual Report on Form 10K of The Student Loan
Corporation, and to take such other actions as such attorney-in-fact may deem
necessary or advisable in the premises.
-------------------------
Peter M. Gallant
Dated: March 28, 1997
3
<PAGE>
POWER OF ATTORNEY
The undersigned hereby constitutes and appoints Stephen C. Biklen and
Michael S. Piemonte, and each of them, as his or here agent and attorney-in-
fact, with full power of substitution, to execute and file with the Securities
and Exchange Commission the 1996 Annual Report on Form 10K of The Student Loan
Corporation, and to take such other actions as such attorney-in-fact may deem
necessary or advisable in the premises.
___________________________
Laura D. Williamson
Dated: March 28, 1997
4
<PAGE>
POWER OF ATTORNEY
The undersigned hereby constitutes and appoints Stephen C. Biklen and
Michael S. Piemonte, and each of them, as his or here agent and attorney-in-
fact, with full power of substitution, to execute and file with the Securities
and Exchange Commission the 1996 Annual Report on Form 10K of The Student Loan
Corporation, and to take such other actions as such attorney-in-fact may deem
necessary or advisable in the premises.
___________________________
Carl E. Levinson
Dated: March 28, 1997
5
<TABLE> <S> <C>
<PAGE>
<ARTICLE> 9
<LEGEND>
THIS SCHEDULE CONTAINS SUMMARY FINANCIAL INFORMATION EXTRACTED FROM THE CURRENT
REPORT ON FORM 10-K FOR THE YEAR ENDED DECEMBER 31, 1996, AND IS QUALIFIED IN
ITS ENTIRETY BY REFERENCE TO SUCH FINANCIAL STATEMENTS.
</LEGEND>
<MULTIPLIER> 1,000
<S> <C>
<PERIOD-TYPE> YEAR
<FISCAL-YEAR-END> DEC-31-1996
<PERIOD-START> JAN-01-1996
<PERIOD-END> DEC-31-1996
<CASH> 567
<INT-BEARING-DEPOSITS> 0
<FED-FUNDS-SOLD> 0
<TRADING-ASSETS> 0
<INVESTMENTS-HELD-FOR-SALE> 0
<INVESTMENTS-CARRYING> 0
<INVESTMENTS-MARKET> 0
<LOANS> 6,894,291
<ALLOWANCE> 1,570
<TOTAL-ASSETS> 7,118,335
<DEPOSITS> 0
<SHORT-TERM> 4,509,251
<LIABILITIES-OTHER> 152,270
<LONG-TERM> 2,075,000
0
0
<COMMON> 200
<OTHER-SE> 361,781
<TOTAL-LIABILITIES-AND-EQUITY> 7,118,335
<INTEREST-LOAN> 542,257
<INTEREST-INVEST> 0
<INTEREST-OTHER> 0
<INTEREST-TOTAL> 542,527
<INTEREST-DEPOSIT> 0
<INTEREST-EXPENSE> 367,294
<INTEREST-INCOME-NET> 175,233
<LOAN-LOSSES> 2,500
<SECURITIES-GAINS> 0
<EXPENSE-OTHER> 61,950
<INCOME-PRETAX> 110,835
<INCOME-PRE-EXTRAORDINARY> 64,930
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> 64,930
<EPS-PRIMARY> 3.25
<EPS-DILUTED> 3.25
<YIELD-ACTUAL> 0
<LOANS-NON> 0
<LOANS-PAST> 0
<LOANS-TROUBLED> 0
<LOANS-PROBLEM> 0
<ALLOWANCE-OPEN> 0
<CHARGE-OFFS> 0
<RECOVERIES> 0
<ALLOWANCE-CLOSE> 0
<ALLOWANCE-DOMESTIC> 0
<ALLOWANCE-FOREIGN> 0
<ALLOWANCE-UNALLOCATED> 0
</TABLE>
