SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
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FORM 10-Q
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QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(D) OF
THE SECURITIES EXCHANGE ACT OF 1934
FOR THE QUARTERLY PERIOD ENDED SEPTEMBER 30, 1998
THE STUDENT LOAN CORPORATION
(Exact name of registrant as specified in its charter)
DELAWARE 16-1427135
(State or other jurisdiction of (I.R.S. Employer Identification No.)
incorporation or organization)
99 GARNSEY ROAD 14534
PITTSFORD, NEW YORK (Zip Code)
(Address of principal executive offices)
(716) 248-7187
(Registrant's telephone number, including area code)
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Indicate by check mark whether the registrant (1) has filed all reports
required to be filed by Section 13 or 15(d) of the Securities Exchange Act of
1934 during the preceding 12 months (or for such shorter period that the
registrant was required to file such reports), and (2) has been subject to such
filing requirements for the past 90 days. Yes X No
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On November 10, 1998, there were 20,000,000 shares of The Student Loan
Corporation's Common Stock outstanding.
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Form 10-Q
Part I Financial Information
Page
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Item 1 - Financial Statements
Statements of Income for the Three and Nine Months
Ended September 30, 1998 and 1997 . . . . . . . . . . . . . . . 3
Balance Sheets as of September 30, 1998 and December 31, 1997 . 4
Statements of Cash Flows for the Nine Months Ended
September 30, 1998 and 1997 . . . . . . . . . . . . . . . . . . 5
Item 2 - Management's Discussion and Analysis of Financial
Condition and Results of Operations . . . . . . . . . . . . . 9-13
Part II Other Information
Item 6 - Exhibits and Reports on Form 8-K . . . . . . . . . . . . . . . 14
Signature . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 15
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PART I. FINANCIAL INFORMATION
Item 1. Financial Statements.
THE STUDENT LOAN CORPORATION
STATEMENTS OF INCOME
(Dollars in thousands, except per share amounts)
Three months ended Nine months ended
September 30, September 30,
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1998 1997 1998 1997
-------- -------- -------- --------
REVENUE
Interest income $161,633 $148,084 $481,172 $435,430
Interest expense 114,713 104,963 339,783 304,356
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Net interest income 46,920 43,121 141,389 131,074
Provision for loan losses 721 783 2,403 2,235
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Net interest income after
provision for loan losses 46,199 42,338 138,986 128,839
Fee and other income 785 2,700 1,563 2,744
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Total revenue, net $ 46,984 $ 45,038 $140,549 $131,583
-------- -------- -------- --------
OPERATING EXPENSES
Salaries and employee benefits $ 7,746 $ 8,572 $ 24,965 $ 23,904
Other expenses 11,724 8,581 30,015 27,842
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Total operating expenses $ 19,470 $ 17,153 $ 54,980 $ 51,746
-------- -------- -------- --------
Income before income taxes $ 27,514 $ 27,885 $ 85,569 $ 79,837
Income taxes 11,473 11,498 35,274 32,531
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NET INCOME $ 16,041 $ 16,387 $ 50,295 $ 47,306
======== ======== ======== ========
DIVIDENDS DECLARED $ 3,000 $ 3,000 $ 9,000 $ 7,800
======== ======== ======== ========
BASIC and DILUTED EARNINGS PER COMMON SHARE
(based on 20 million
average shares outstanding) $ 0.80 $ 0.82 $ 2.51 $ 2.37
======== ======== ======== ========
DIVIDENDS DECLARED PER COMMON SHARE $ 0.15 $ 0.15 $ 0.45 $ 0.39
======== ======== ======== ========
OPERATING RATIOS
Net interest margin 2.29% 2.36% 2.36% 2.44%
Operating expense as a percentage
of average insured student loans 0.95% 0.94% 0.92% 0.96%
See accompanying notes to financial statements.
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THE STUDENT LOAN CORPORATION
BALANCE SHEETS
(Dollars in thousands)
September 30, December 31,
1998 1997
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ASSETS
Insured student loans $ 8,321,293 $ 7,625,157
Allowance for loan losses 2,240 2,014
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Insured student loans, net 8,319,053 7,623,143
Cash 144 2,108
Deferred tax benefits 36,486 41,581
Other assets 246,972 207,118
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Total Assets $ 8,602,655 $ 7,873,950
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LIABILITIES AND STOCKHOLDERS' EQUITY
Short-term borrowings $ 4,312,273 $ 5,696,605
Long-term notes 3,628,000 1,610,000
Payable to principal stockholder 14,671 17,063
Restructuring liabilities 15,826 17,724
Other liabilities 187,468 129,436
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Total Liabilities 8,158,238 7,470,828
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Common stock 200 200
Additional paid-in capital 134,380 134,380
Retained earnings 309,837 268,542
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Total Stockholders' Equity 444,417 403,122
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Total Liabilities and Stockholders' Equity $ 8,602,655 $ 7,873,950
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AVERAGE INSURED STUDENT LOANS $ 8,004,291 $ 7,269,249
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(year-to-date)
See accompanying notes to financial statements.
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THE STUDENT LOAN CORPORATION
STATEMENTS OF CASH FLOWS
(Dollars in thousands)
Nine months ended
September 30,
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1998 1997
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Cash flows from operating activities:
Net income $ 50,295 $ 47,306
Adjustments to reconcile net income to
net cash from operating activities:
Depreciation and amortization 4,263 4,587
Provision for loan losses 2,403 2,235
Deferred tax provision 5,095 5,113
Increase in accrued interest receivable (36,535) (32,827)
Increase in other assets (2,919) (390)
Increase (decrease) in other liabilities 55,640 (32,603)
Decrease in restructuring liabilities (1,898) --
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Net cash provided by (used in) operating activities 76,344 (6,579)
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Cash flows from investing activities:
Disbursements of loans (1,401,518) (1,091,074)
Repayment of loans 729,262 501,916
Net (purchase) sale of loans (30,250) 39,767
Capital expenditures on furniture and equipment (470) (1,821)
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Net cash used in investing activities (702,976) (551,212)
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Cash flows from financing activities:
Net (decrease) increase in borrowings with
original maturities of one year or less (509,332) 593,122
Proceeds from long-term borrowings 2,018,000 1,272,000
Repayments of long-term debt (875,000) (1,300,000)
Dividends paid to stockholders (9,000) (7,800)
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Net cash provided by financing activities 624,668 557,322
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Net decrease in cash (1,964) (469)
Cash - beginning of period 2,108 567
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Cash - end of period $ 144 $ 98
========== ===========
Supplemental disclosure of cash flow information:
Cash paid for:
Interest $ 280,309 $ 317,070
Income taxes $ 30,875 $ 21,111
See accompanying notes to financial statements.
5
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THE STUDENT LOAN CORPORATION
Notes to Financial Statements
September 30, 1998
1. SIGNIFICANT ACCOUNTING POLICIES
INTERIM FINANCIAL INFORMATION
The financial information of The Student Loan Corporation (the
"Company") as of September 30, 1998 and for the three and nine-month
periods ended September 30, 1998 and 1997 is unaudited and includes
all adjustments (consisting of normal recurring accruals) which, in
the opinion of management, are necessary to state the Company's
financial position and results of operations in accordance with
generally accepted accounting principles.
Certain amounts in the prior period's financial statements have been
reclassified to conform with the current period's presentation. Such
reclassification had no effect on the results of operations as
previously reported.
DISCLOSURE CHANGE
Information on core net income, representing net income exclusive of
floor income attributable to the fixed minimum interest rates on
certain loans in the Company's portfolio, will no longer be provided
starting with this quarter's reporting. This change is being made due
to the increasing immateriality of floor income in recent years
brought about by amendments to the Federal Higher Education Act of
1965, which effectively eliminated fixed minimum interest rates on most
guaranteed student loans disbursed after July 1992.
2. FORWARD-LOOKING STATEMENTS
Certain statements contained in this report that are not historical
facts are forward-looking statements. The Company's actual results may
differ materially from those suggested by the forward-looking
statements, which are typically identified by the words "believe,"
"expect," "anticipate," "estimate," and similar expressions. These
forward-looking statements involve risks and uncertainties including,
but not limited to, the following: the Company's ability to implement
its restructuring plan; the effects of future legislative changes;
actual credit losses experienced by the Company in future periods,
compared to the estimates used in calculating reserves; fluctuations in
the interest rates paid by the Company for its funding and received on
its loan portfolio; the success of the Company's hedging policies; and
the effect of Year 2000 issues.
3. COMMITMENTS AND CONTINGENCIES
REGULATORY IMPACTS
Loans originated under the Federal Family Education Loan ("FFEL")
program make up a substantial majority of the Company's assets. Since
1992, a series of amendments to the Higher Education Act of 1965 (the
"Act"), which governs the FFEL program and the related Federal Loan
Consolidation program, has increased costs and reduced interest
payments to lenders. These legislative changes have progressively
reduced the net interest margin of the Company's portfolio. Most
recently, legislation effective July 1, 1998 decreases by a minimum of
0.30% the interest rate paid to lenders on loans originated on or after
that date. The amount of the lender reduction can vary depending on the
interest environment.
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The 1993 amendments to the Act also introduced a competitor program,
the Federal Direct Student Loan program ("direct lending"), in which
private lenders such as the Company do not participate. Direct lending
currently accounts for approximately 35% of the student loans
originated under federally sponsored programs.
4. RESTRUCTURING PLAN
In the fourth quarter of 1997, the Company announced a restructuring
plan to realign its business and processing structure, involving the
outsourcing of various parts of its operations to subsidiaries of
Citicorp, allowing the Company to take advantage of the larger
economies of scale and more global operating systems configurations
being employed by Citicorp. On October 27, 1998, in connection with the
earlier announcement, the Company announced that certain of its
non-operating support functions, such as Marketing, Finance and
Administration, will be moving to Stamford, CT in early 1999.
Restructuring costs related to this move are included in the 1997 Plan.
The Company expects to retain approximately 200 Pittsford-based
employees, primarily in the technology and accounting functions.
In connection with the restructuring plan, the Company incurred a $20.5
million pre-tax charge in 1997, including $16.2 million in severance
benefits, $2.8 million in furniture and equipment write-downs and $1.5
million in other costs. Additional costs, which did not qualify for
recognition in the initial $20.5 million charge, are being expensed as
incurred in the implementation of the restructuring plan. These costs
are not expected to be material.
Of the $20.5 million total restructuring charge, $2.8 million in
furniture and equipment write-downs was taken in 1997, resulting in a
$17.7 million available reserve at December 31, 1997. Of this
remainder, approximately $1.9 million was used in the first nine months
of 1998, leaving $15.8 million in the reserve at September 1998.
Approximately 80 staff reductions were made in the first three quarters
of 1998. The restructuring plan is expected to be complete by mid-1999.
5. RELATED PARTY TRANSACTIONS
Citibank (New York State) ("CNYS"), a subsidiary of Citicorp (which
since October 8, 1998 has been a subsidiary of Citigroup, Inc.), owns
80% of the outstanding common stock of the Company. A number of
significant transactions are carried out between the Company on the one
hand and Citigroup, Inc. and its affiliates on the other hand. At
September 30, 1998, the Company had outstanding short-term and
long-term borrowings of $4.3 billion and $3.6 billion, respectively,
with CNYS, compared to short-term and long-term borrowings of $5.7
billion and $1.6 billion, respectively, with CNYS at December 31, 1997.
The amounts classified as short-term debt as of September 30, 1998 and
December 31, 1997 included $0.5 billion and $1.4 billion, respectively,
of debt originally issued as long-term that, as of these dates, matures
within 12 months. For the three and nine-month periods ended September
30, 1998, the Company incurred $114.7 million and $339.8 million,
respectively, in interest expense payable to CNYS and its affiliates,
compared to $95.9 million and $272.2 million, respectively, in interest
expenses payable to CNYS and its affiliates for the same periods in
1997. In addition, Citigroup, Inc. and its subsidiaries engage in other
transactions and servicing activities, including cash management, data
processing, income tax payments, employee benefits and facilities
management, with the Company. Management believes that the terms of
these transactions are, in the aggregate, no less favorable to the
Company than those which could be obtained from unaffiliated parties.
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6. 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. The swap agreements
are intended to reduce the risk caused by differences between borrowing
and lending rates. Entering into swap agreements to pay interest based
on the interest rate characteristics of the Company's assets and to
receive interest based on the characteristics of the Company's
liabilities effectively limits the risk of the potential interest rate
variability. The counterparty for most interest rate swap agreements
outstanding at September 30, 1998 was Citibank, N.A., an affiliate of
CNYS.
Interest rate swap agreements with a carrying value of $0.5 million,
representing accrued interest receivable, were determined to have an
estimated fair value of $1.3 million payable at September 30, 1998. At
December 31, 1997, interest rate swap agreements with a carrying value
of $0.4 million of interest payable had an estimated fair value of $0.6
million payable. The fair values were based on approximate values
obtained from Citibank, N.A., the Company's dealer in these financial
instruments, and represent the estimated amounts which would be payable
upon termination of the agreements. Fair values vary from period to
period based on changes in such factors as LIBOR and Treasury Bill
interest rates and the timing of contractual settlements. The aggregate
notional principal amounts outstanding at September 30, 1998 and
December 31, 1997 totaled $2.8 billion and $2.2 billion, respectively.
7. SHORT AND LONG-TERM BORROWINGS
Effective March 1, 1998, an amendment to the existing Omnibus Credit
Agreement with CNYS increased the credit available to the Company to
$10 billion. In the first nine months of 1998, $2.0 billion in new
long-term borrowings was made and $0.9 billion in original long-term
borrowings was paid. Also, during this period $0.2 billion of new
short-term borrowings was made and $0.7 billion of borrowings with
original maturities of one year or less was repaid. The amounts
classified as short-term debt as of September 30, 1998 and December 31,
1997 include $0.5 billion and $1.4 billion, respectively, of debt
originally issued as long-term that, as of these dates, matures within
twelve months.
8. IMPACT OF RECENTLY ISSUED ACCOUNTING STANDARDS
In June 1998, FASB issued SFAS No. 133, "Accounting for Derivative
Instruments and Hedging Activities," which becomes effective on January
1, 2000 for calendar year companies such as the Company. This new
standard will significantly change the accounting treatment of the
Company's derivative contracts. Depending on the underlying risk
management strategy, these accounting changes could affect reported
earnings, assets, liabilities, and stockholders' equity. As a result,
the Company may have to reconsider its risk management strategies,
since the new standard would not reflect the results of many of those
strategies in the same manner as current accounting practice. The
Company is in the process of evaluating the impact of the new standard.
8
<PAGE>
Item 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION
AND RESULTS OF OPERATIONS.
RESTRUCTURING PLAN
In the fourth quarter of 1997, the Student Loan Corporation (the "Company")
announced a restructuring plan to realign its business and processing structure,
involving the outsourcing of various parts of its operations to subsidiaries of
Citicorp, allowing the Company to take advantage of the larger economies of
scale and more global operating systems configurations being employed by
Citicorp. On October 27, 1998, in connection with the earlier announcement, the
Company announced that certain of its non-operating support functions, such as
Marketing, Finance and Administration, will be moving to Stamford, CT in early
1999. Restructuring costs related to this move are included in the 1997 plan.
The Company expects to retain approximately 200 Pittsford-based employees,
primarily in the technology and accounting functions.
In connection with the restructuring plan, the Company incurred a $20.5 million
pre-tax charge in 1997, including $16.2 million in severance benefits, $2.8
million in furniture and equipment write-downs and $1.5 million in other costs.
Additional costs, which did not qualify for recognition in the initial $20.5
million charge, are being expensed as incurred in the implementation of the
restructuring plan. These costs are not expected to be material.
Of the $20.5 million total restructuring charge, $2.8 million in furniture and
equipment write-downs was taken in 1997, resulting in a $17.7 million available
reserve at December 31, 1997. Of this remainder, approximately $1.9 million was
used in the first nine months of 1998, leaving $15.8 million in the reserve at
September 30, 1998. Approximately 80 staff reductions were made in the first
nine months of 1998. The restructuring plan is expected to be complete by
mid-1999.
FINANCIAL CONDITION
During the nine months ended September 30, 1998, the Company's net insured
student loan portfolio grew by $695.9 million (9%) from the balance at December
31, 1997. This growth was the result of loan disbursements totaling $1,401.5
million and loan purchases net of loan sales of $30.3 million in the first nine
months of 1998, partially offset by $729.3 million in loan reductions
(attributable to repayments and claims paid by guarantors) and other adjustments
of $6.6 million. This compares to loan disbursements of $1,091.1 million, loan
reductions of $501.9 million, loan sales net of loan purchases of $39.8 million,
and other adjustments of $5.2 million in the first nine months of 1997.
The Company's new loan disbursements of $1,401.5 million made in the first nine
months of 1998 were $310.4 million (28%) more than those made in the same period
of 1997. This increase is attributable primarily to new Federal Family Education
Loan ("FFEL") program disbursements of $1,208.6 million in the first nine months
of 1998 compared to $1,087.4 million during the same period of 1997. This
increase of $121.2 million (11%) in FFEL program disbursements does not include
originations made under the Federal Loan Consolidation program, which, due to a
change in Federal regulations in the fourth quarter of 1997, now permits the
Company to consolidate Federal Direct Student Loans. The Company launched an
initiative to provide this expanded consolidation loan product in late 1997. As
a result, consolidation loan originations overall for the first nine months of
1998 have increased $104 million (54%) compared to the same period of 1997. For
much of 1998, Sallie Mae, the Company's largest competitor, has not made
consolidation loans; however, Sallie Mae recently reentered this market.
9
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During the first three quarters of 1998, the Company made $280.3 million in
interest payments to CNYS or one of its affiliates, compared to $317.1 million
of interest paid in the same period in 1997. The difference is due to changes in
the timing of interest payment dates. The Company paid $30.9 million in income
taxes during the first nine months of 1998, compared to $21.1 million for the
same period last year. The difference in the amount of taxes paid is primarily
due to a timing difference in making intercompany tax payments, and does not
reflect any significant changes in applicable income tax rates.
Other assets increased $39.9 million (19%) from the December 31, 1997 level,
principally as a result of increased interest receivable attributable to
increased interest income resulting from growth in the student loan portfolio
and timing of interest receipts. Other liabilities, principally comprised of
accrued interest and income taxes payable, increased $58.0 million (45%) from
December 31, 1997, primarily due to increases in interest payable as a result of
increased borrowings to fund the larger student loan portfolio as well as timing
differences in making payments.
Effective March 1, 1998, an amendment to the existing Omnibus Credit Agreement
with CNYS increased the credit available to the Company to $10 billion. In the
first nine months of 1998, $2.0 billion in new long-term borrowings was made and
$0.9 billion in original long-term borrowings was paid. Also, during this period
$0.2 billion of new short-term borrowings was made and $0.7 billion of
borrowings with original maturities of one year or less was repaid. The amounts
classified as short-term debt as of September 30, 1998 and December 31, 1997
include $0.5 billion and $1.4 billion, respectively, of debt originally issued
as long-term that, as of these dates, matures within twelve months.
On October 8, 1998, Citicorp, the parent corporation of CNYS, completed its
merger with a subsidiary of Travelers Group Inc., which was renamed Citigroup
Inc. and became the holding company for the combined Citicorp and Travelers
businesses. The Company is exploring opportunities to cross-sell its products
through Citigroup's sales agents.
In the 1998 third quarter, the Company adopted the American Institute of
Certified Public Accountants recently issued Statement of Position "Accounting
for the Costs of Computer Software Developed or Obtained for Internal Use" (SOP
98-1). This Statement of Position provides guidance on accounting for the costs
of computer software that was purchased or developed for internal use. The
impact of adopting SOP 98-1 was not material.
The Company paid a quarterly dividend of $0.15 per common share on September 1,
1998. The Board of Directors has declared a regular quarterly dividend on the
Company's common stock of $0.15 per share to be paid on December 1, 1998 to
stockholders of record on November 16, 1998.
YEAR 2000 ISSUES
As described in the 1997 Annual Report and Form 10-K, the Company recognizes
that the arrival of the Year 2000 poses a unique worldwide challenge to the
ability of all systems to recognize the date change from December 31, 1999 to
January 1, 2000. The Company has assessed and is repairing its computer systems
and business processes to provide for their continuing functionality. In
addition, an assessment of the readiness of third parties with which the Company
interfaces is ongoing.
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For the Company's computer applications, a process of inventory, scoping and
analysis, modification, testing and certification, and implementation is
underway, funded from a combination of a reprioritization of technology
development initiatives and incremental costs. The Company expects this work to
be substantially complete by year-end 1998, leaving the year 1999 primarily for
full integration testing and production assurance. The Company does not
anticipate that the related overall costs will be material to any single year or
quarter. The Company expects to incur approximately $2.3 million of Year
2000-related costs in 1998 and $2.0 million in 1999. Of the $2.3 million
expected to be incurred in 1998, approximately $1.7 million was expended in the
first three quarters of the year, including $0.6 million in the third quarter of
1998.
Substantially all of the lines of code in the Company's business applications
are through the modification phase, and the majority have been tested and
certified. In addition, the majority of business applications to be sunset (that
is, removed from use in favor of replacement applications) have been sunset as
part of the Company's ongoing technology expenditures.
In other efforts related to information technology, the Company is addressing
its end-user computer applications, networks, data center systems, and the
desktop environment. The majority of the Company's end-user computing
applications have been certified, the majority of such applications to be sunset
have been sunset, the majority of inventory items related to the Company's
networks have been deployed compliant, and the majority of hardware and software
elements of data center systems are complete.
The Company is also addressing Year 2000 issues that may exist outside its own
information technology activities, including its facilities and other business
processes, as well as the external service providers and other third parties
with which it interfaces. Substantially all of the Company's facilities and
related systems have been investigated, and modification and certification are
underway.
Significant third parties with which the Company interfaces with regard to the
Year 2000 problem include customers and business partners (counterparties,
supply chains), technology vendors and service providers, the global financial
market infrastructure (payment and clearing systems), and the utility
infrastructure (power, transportation, telecommunications) on which all
corporations rely. Unreadiness by these third parties would expose the Company
to the potential for loss, impairment of business processes and activities, and
disruption of financial markets. The Company is assessing these risks through
bilateral and multiparty efforts and participation in industry, country, and
global initiatives.
The Company is creating contingency plans intended to address perceived risks
associated with its Year 2000 effort. These activities include remediation
contingency planning intended to mitigate any risks associated with a failure to
complete remediation of mission-critical systems, scenario planning to identify
potential problems, business resumption contingency planning to address the
possibility of systems failure, event management, and market resumption
contingency planning to address the possibility of the failure of systems or
processes outside the Company's control. The primary focus for contingency
planning will be during 1999. The Company cannot predict the effect on the
Company of a failure of a third party to timely address Year 2000 issues.
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RESULTS OF OPERATIONS
QUARTER ENDED SEPTEMBER 30, 1998
Net income was $16.0 million ($0.80 basic and diluted earnings per common share)
for the third quarter of 1998. This was a decrease of $0.3 million (2%) from
earnings for the same period last year, primarily because of a one-time $2.7
million ($1.6 million after-tax) gain on the 1997 sale of certain non-strategic
loans, partially offset by increased interest income generated by growth in the
current year student loan portfolio.
The net interest margin for the third quarter of 1998 was 2.29%, 0.07% lower
than the 2.36% margin for the third quarter of 1997. The reduction in the margin
was primarily attributable to less favorable spreads between the Company's
borrowing and lending rates. The legislated reduction of the yield by a minimum
of 0.30% to lenders on FFEL program loans originated after July 1, 1998 also
contributed to the decline.
Total operating expenses for the third quarter of 1998 were up $2.3 million
(14%) from the same period last year, reflecting higher other expense costs
primarily attributable to the migration of certain of the Company's operating
units to other Citibank locations, partially offset by a $0.8 million reduction
in salaries and employee benefit costs also related to the restructuring. The
third quarter 1998 operating expenses as a percentage of average insured student
loans of 0.95% reflects a 0.01% increase over the third quarter 1997 expense
ratio. The expense ratio increase is also primarily attributable to the
increased costs incurred in the migration of certain of the Company's operating
units.
The provision for the reserve for loan losses was $0.7 million, $0.1 million
(8%) lower for the third quarter of 1998 than that reported for the same period
last year. This decrease reflects a stabilization of the risk sharing reserve.
The reserve is an accrual for the estimated losses expected to be incurred on
potential future default claims resulting from the 2% risk sharing provisions of
the Omnibus Budget Reconciliation Act of 1993 applicable to FFEL program loans
originated after September 1993. The stabilization of the reserve reflects the
application of historical reserve usage to the current portfolio.
NINE MONTHS ENDED SEPTEMBER 30, 1998
The Company earned net income of $50.3 million, $2.51 basic and diluted earnings
per share, for the nine months ended September 30, 1998, an increase of $3.0
million (6%) from the first nine months of 1997. The increase was primarily due
to the 1998 receipt of a one-time interest payment of $3.7 million ($2.2 million
after-tax), representing lawsuit proceeds received from the Department of
Education. Excluding this 1998 payment and excluding the 1997 $1.6 million
after-tax gain on the sale of a loan portfolio described above, the earnings for
the first nine months of 1998 were $2.4 million (5%) higher than that for the
same period of 1997, as higher interest income generated by growth in the
student loan portfolio more than offset the effects of the lower year-to-date
net interest margins.
Total operating expenses for the first three quarters of 1998 were $55.0
million, $3.2 million (6%) higher than expenses for the same period last year,
primarily attributable to the migration of certain of the Company's operating
units to other Citibank locations. However, operating expenses as a percentage
of average insured student loans for the first three quarters of 1998 decreased
to 0.92%, an improvement of 0.04% compared to the same period of 1997, primarily
attributable to productivity improvements and decreased spending on marketing
costs in 1998.
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The provision for the reserve for loan losses was $2.4 million, $0.2 million
(8%) higher for the first nine months of 1998 than that reported for the same
period last year. The reserve is an accrual for the estimated losses expected to
be incurred on potential future default claims resulting from the 2% risk
sharing provisions of the Omnibus Budget Reconciliation Act of 1993, applicable
to FFEL program loans originated after September 1993.
INCOME TAXES
The Company's effective tax rate was approximately 41.2% for the first nine
months of 1998, compared to 40.7% for the same period in 1997.
REGULATORY IMPACTS
Loans originated under the FFEL program make up a substantial majority of the
Company's assets. Since 1992, a series of amendments to the Higher Education Act
of 1965 (the "Act"), which governs the FFEL program and the related Federal Loan
Consolidation program, has increased costs and reduced interest payments to
lenders. These legislative changes have progressively reduced the net interest
margin of the Company's portfolio. Most recently, legislation effective July 1,
1998 decreases by a minimum of 0.30% the interest rate paid to lenders on loans
originated on or after that date. The amount of the lender reduction can vary
depending on the interest environment.
The 1993 amendments to the Act also introduced a competitor program, the Federal
Direct Student Loan program ("direct lending"), in which private lenders such as
the Company do not participate. Direct lending currently accounts for
approximately 35% of the student loans originated under federally sponsored
programs. Further expansion of the direct lending program could adversely affect
the Company's opportunities for growth.
Since 1994, the Company has aggressively pursued both new and existing marketing
programs, expanded its guarantor relationships and sought new ways to meet the
education finance needs of schools and students, including the implementation of
loan programs, such as the Company's CitiAssist product, that are not dependent
on Federal funding, guarantees and authorization.
FORWARD-LOOKING STATEMENTS
Certain statements contained in this report that are not historical facts are
forward-looking statements. The Company's actual results may differ materially
from those suggested by the forward-looking statements, which are typically
identified by the words "believe," "expect," "anticipate," "estimate," and
similar expressions. These forward-looking statements involve risks and
uncertainties including, but not limited to, the following: the Company's
ability to implement its restructuring plan; the effects of future legislative
changes; actual credit losses experienced by the Company in future periods,
compared to the estimates used in calculating reserves; fluctuations in the
interest rates paid by the Company for its funding and received on its loan
portfolio; the success of the Company's hedging policies; and the effect of Year
2000 issues.
13
<PAGE>
PART II. OTHER INFORMATION
Item 6. Exhibits and Reports on Form 8-K.
(a) Exhibits
27 Financial Data Schedule
(b) Reports on Form 8-K: none.
14
<PAGE>
SIGNATURE
Pursuant to the requirements of the Securities Exchange Act of
1934, the registrant has duly caused this report to be signed on its behalf by
the undersigned, thereunto duly authorized.
Date: November 10, 1998
The Student Loan Corporation
By /s/ Yiannis Zographakis
--------------------------
Yiannis Zographakis
Vice President and
Chief Financial Officer
15
<TABLE> <S> <C>
<ARTICLE> 5
<LEGEND>
THE SCHEDULE CONTAINS SUMMARY FINANCIAL INFORMATION EXTRACTED FROM THE STUDENT
LOAN CORPORATION CURRENT REPORT ON FORM 10-Q FOR THE NINE MONTH PERIOD ENDED
SEPTEMBER 30, 1998 AND IS QUALIFIED IN ITS ENTIRETY BY REFERENCE TO SUCH
FINANCIAL STATEMENTS.
</LEGEND>
<MULTIPLIER> 1,000
<S> <C>
<PERIOD-TYPE> 9-MOS
<FISCAL-YEAR-END> DEC-31-1998
<PERIOD-START> JAN-01-1998
<PERIOD-END> SEP-30-1998
<CASH> 144
<SECURITIES> 0
<RECEIVABLES> 8,321,293
<ALLOWANCES> 2,240
<INVENTORY> 0
<CURRENT-ASSETS> 0
<PP&E> 789
<DEPRECIATION> 389
<TOTAL-ASSETS> 8,602,655
<CURRENT-LIABILITIES> 0
<BONDS> 3,628,000
0
0
<COMMON> 200
<OTHER-SE> 444,217
<TOTAL-LIABILITY-AND-EQUITY> 8,602,655
<SALES> 481,172
<TOTAL-REVENUES> 482,735
<CGS> 0
<TOTAL-COSTS> 339,783
<OTHER-EXPENSES> 54,980
<LOSS-PROVISION> 2,403
<INTEREST-EXPENSE> 0
<INCOME-PRETAX> 85,569
<INCOME-TAX> 35,274
<INCOME-CONTINUING> 50,295
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> 50,295
<EPS-PRIMARY> 2.51
<EPS-DILUTED> 2.51
</TABLE>
