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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, 1997
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 February 13, 1998 was approximately $187 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 8, 1998 are incorporated by reference into Part III
of this Report.
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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 Federal Family Education Loan ("FFEL") program loans made under
the Federal Higher Education Act of 1965, as amended (the "Act"). The Company
also holds and/or originates student loans that are not insured under the Act,
including CitiAssist loans, a new product introduced in 1997.
The Company was incorporated in Delaware on November 4, 1992 and commenced
operations on December 22, 1992. For more than 25 years 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.
Financial Condition and Results of Operations
Restructuring Plan
In December 1997 the Company formulated a restructuring plan which will realign
its business and processing structure. The Company will be outsourcing a
significant part of its operations to subsidiaries of Citicorp over the next 12
to 15 months. This will allow the Company to take advantage of the larger
economies of scale and more global operating systems configurations being
employed by Citibank. A portion of the expense savings generated by these
programs will be reinvested in new products, marketing programs and additional
cost and quality initiatives designed to further increase revenues and reduce
expenses. The Company expects the restructuring to substantially impact all of
its approximately 800 Pittsford-based employees over the next 12-15 months.
In connection with this plan, the Company recorded a $20.5 million pre-tax
charge in the fourth quarter of 1997 representing the costs the Company expects
to incur. These charges include $16.2 million for severance benefits, $2.8
million for furniture and equipment write-downs and $1.5 million for other
expenses. Substantially all of the plan will be completed over the next 12-15
months. Additional costs, which do not qualify for recognition in the charge,
will be expensed as incurred in the implementation of the restructuring plan
over the next 12-15 months. The fourth quarter charges resulted in an $8.5
million reduction in income tax expense for 1997 and has resulted in increased
deferred tax assets at year-end. A reserve in the amount of $17.7 million has
been recorded at December 31, 1997, which reflects the liability for future cash
outflows associated with the $20.5 million charge less the $2.8 million
furniture and equipment write-downs.
Summary
The Company's 1997 total net income was $51.7 million ($2.58 basic
earnings per share), down $13.2 million (20%), or $0.67 per share, from 1996 net
income of $64.9 million ($3.25 basic earnings per share). The decline resulted
primarily from the restructuring costs discussed above, which reduced 1997 net
income by $12.0 million. The Company had net income from interest rate floors of
$0.8 million in 1997 as compared to $1.0 million in 1996, a decrease of $0.2
million. The decrease in floor net income was primarily the result of periods of
higher short-term interest rates during 1997. Excluding the restructuring
charge, 1997 total net income was $63.7 million, 2% below 1996.
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Other than the restructuring factors noted above, the decline in net income for
the year was primarily due to lower net interest margins (which resulted in flat
net interest income despite an 11% increase in the student loan portfolio) and
higher operating costs, partially offset by a $2.7 million pre-tax gain on the
sale of several distressed loan portfolios. Core net interest margin (excluding
floors) declined to 2.40% in 1997 from 2.65% in 1996. The decline in the margin
was primarily the result of unusually wide spreads between the 91-day Treasury
Bill rate (the base rate for most of the Company's interest-earning assets) and
the rates on the Company's funding (which are based on other short-term money
market rates), as well as lower yields on the FFEL program loan portfolio. At
December 31, 1997, the Company's insured student loan assets reached $7.6
billion, up 11% from December 31, 1996 levels of $6.9 billion. The increase in
loans outstanding was primarily due to new loan disbursements, partially offset
by repayments of loans. New disbursements of $1,474 million for 1997 were up $49
million (3%) from 1996 disbursement levels. The 1997 disbursements do not
include approximately $70 million of CitiAssist loans disbursed by CNYS. In
order to comply with New York State Banking Law and certain other requirements,
CitiAssist loans are originated by CNYS. The Company purchases these loans
following full disbursement of the loan. The vast majority of these 1997
originations, which meet certain eligibility requirements, will be acquired by
the Company in the first quarter of 1998. The volume of CitiAssist loan
purchases is expected to increase throughout 1998 and beyond.
The allowance for loan losses balance represents the 2% risk-sharing loss
estimates on potential future default claims that the Company expects to incur
as a result of the provisions of the Omnibus Budget Reconciliation Act of 1993
as well as potential losses that could occur from CitiAssist loans. CitiAssist
loans submitted for claim are subject to 5% risk sharing losses in accordance
with provisions of an agreement with TuitionGard, the insurer of these loans. A
small number of CitiAssist loans are not insured against loss. The allowance for
loan losses balance was $2.0 million at December 31, 1997, compared to $1.6
million at the end of 1996, reflecting growth in the portfolio of loans
originated since October 1, 1993 that are in repayment and could result in
losses on default claims.
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. 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. Since currently all interest rate
swap agreements are with Citibank, NA, an affiliate of CNYS having an
investment-grade external credit rating, the Company has successfully managed
credit risk. Net swap interest receivable or payable is accrued and recorded as
an adjustment to interest expense.
Net interest income was $175.9 million for 1997, compared with $175.2 million
for 1996. The increase of $0.7 million is a result of increased interest revenue
attributable to the growth in the loan portfolio, partially offset by diminished
net interest margins. Interest income resulting from floors was $1.4 million in
1997, compared with $1.8 million in 1996. Core net interest margin declined to
2.40% in 1997, compared to 2.65% in 1996. This decline was primarily
attributable to unusually wide spreads between the 91-day Treasury Bill rates
(the base rate for most of the Company's interest-earning assets) and the rates
on the Company's funding (which are based on other short-term money market
rates), as well as more loans in the portfolio carrying lower in-school yields.
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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) 1997 1996 1995
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Income/ Income/ Income/
Balance Expense Rate Balance Expense Rate Balance Expense Rate
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<S> <C> <C> <C> <C> <C> <C> <C> <C> <C>
Average insured student loans $7,269 $ 588 8.09% $6,548 $ 542 8.28% $5,669 $ 501 8.83%
Average non-interest
earning assets 222 223 229
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Total average assets $7,491 $6,771 $5,898
============================================================================================
Average interest bearing liabilities $6,997 $ 412 5.89% $6,321 $ 367 5.81% $5,443 $ 339 6.22%
Average non-interest bearing
liabilities 110 117 172
Average equity 384 333 283
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Total average liabilities and equity $7,491 $6,771 $5,898
============================================================================================
Net interest margin $7,269 $ 176 2.42% $6,548 $ 175 2.68% $5,669 $ 162 2.86%
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Core net interest margin $7,269 $ 175 2.40% $6,548 $ 173 2.65% $5,669 $ 161 2.85%
============================================================================================
Average 91-day Treasury Bill rate
for Stafford revenue 5.16% 5.16% 5.68%
Average 52-week Treasury Bill rate
for PLUS/SLS reset 5.75% 5.75% 5.58%
</TABLE>
The following table shows the components of the annual changes in net interest
income.
<TABLE>
<CAPTION>
Rate/Volume Analysis
(Dollars in millions) 1997 Compared to 1996 1996 Compared to 1995
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Increase (Decrease) Due to Change In: Increase (Decrease) Due to Change In:
Volume Rate (a) Net (b) Volume Rate (a) Net (b)
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<S> <C> <C> <C> <C> <C> <C>
Interest earning assets $58.6 $(12.7) $45.9 $74.1 $(32.2) $41.9
Interest bearing liabilities $39.8 $ 5.4 $45.2 $52.1 $(23.5) $28.6
-------------------------------------------------------------------------------------
Net interest earnings $18.8 $(18.1) $ 0.7 $22.0 $ (8.7) $13.3
=====================================================================================
</TABLE>
(a) Changes in rates for interest bearing liabilities refer to fluctuations in
Federal Funds, LIBOR and Treasury Bill indices.
(b) Rate/volume variance is allocated based on the percentage relationship of
changes in volume and changes in rate to the absolute dollar amount of changes
in each.
Operating Expenses
Operating expenses for 1997 (excluding the effect of restructuring costs
discussed below) were $68.1 million or 0.94% of average insured student loans,
compared to $62.0 million or 0.95% of average insured student loans for 1996.
The increase in operating expenses of $6.1 million (10%) is attributable
primarily to costs incurred to promote and service the new CitiAssist
alternative loan product. Including costs of $16.2 million for employee
termination benefits, $2.8 million of furniture and equipment write-downs and
$1.5 million of other costs relating to the restructuring plan, the Company's
operating expenses totaled $88.6 million (or 1.22% of average insured student
loans), which is $26.6 million higher than last year.
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 and, like other companies, is
assessing and repairing its computer applications and business processes to
provide for their continued functionality. The Company is also assessing the
readiness of external entities with which it interacts, including guarantors,
vendors, counterparties, customers, and payment systems. The Company expects
that the principal costs will be those associated with the remediation and
testing of its computer applications. This effort is underway, following a
process of inventory, scoping
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and analysis, modification, testing and certification, and implementation. Most
of the functionality of the Company's main computer system, Diploma, was already
Year 2000 compliant when installed in 1995. The Company does not expect to incur
operational problems which could result in Year 2000 implementation delays for
any of its computer systems. The Company incurred no material incremental Year
2000 expenses in 1997. In 1998, the Company expects to incur approximately $2.3
million of Year 2000 expenses, substantially all of which represents
reallocations of existing resources, and expects to incur less than one million
dollars of costs in 1999.
Income Taxes
The Company had deferred tax assets of $40.7 million and $39.2 million at
December 31, 1997 and 1996, 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. New deferred tax assets of $8.5 million were recorded in December
1997 to reflect the tax effect of the restructuring costs. See Notes 1 and 12 to
the financial statements for further discussion.
The Company's effective tax rates were 40.82% for 1997, 41.42% for 1996, and
41.55% for 1995.
1996 Compared to 1995
The Company's 1996 core net income was $63.9 million ($3.20 core basic earnings
per share), up $3.6 million (6%) over core net income of $60.3 million ($3.01
core basic earnings per share) for 1995. The Company's 1996 total net income was
$64.9 million, which was $4.3 million (7%), or $0.22 basic earnings per share,
higher than 1995 net income. The improvement in core net income for 1996
occurred primarily as a result of increased interest income due to growth of
$723.4 million (12%) in the student loan portfolio, partially offset by a
decline in the core net interest margin.
Net income from interest rate floors increased by $0.7 million to $1.0 million
in 1996 as compared to $0.3 million in 1995. The increase in floor net income
was attributable primarily to lower short-term interest rates in 1996.
At December 31, 1996, net loans outstanding totaled $6.9 billion, an increase of
$723.4 million (12%) from December 31, 1995. The increase in loans outstanding
was due primarily to new loan disbursements, partially offset by loan
repayments. Disbursements for 1996 were approximately $1,425 million, 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 consolidations for 1996, compared with 1995. This
decrease was partially offset by a $51 million (4%) increase in FFEL program
disbursements for 1996.
The allowance for loan losses balance was $1.6 million at December 31, 1996,
$1.1 million higher than the balance at the end of 1995. The increase reflects
the risk sharing loss estimates on greater potential future delinquency claims
(as a result of growth in the portion of the portfolio that is subject to the 2%
risk sharing provisions of the 1993 Amendments).
Net interest income was $175.2 million for 1996, compared with $161.9 million
for 1995. The $13.3 million (8%) increase was a result of portfolio growth as
well as improvement in floor income. Interest income resulting from floors was
$1.8 million in 1996, compared to $0.6 million in 1995. Core net interest margin
for 1996 declined to 2.65% from 2.85% in 1995. This decline was primarily
attributable to new loan originations carrying lower in-school yields, as well
as lower variable short-term interest rates (relative to the Company's funding
costs) as of the July 1, 1996 reset date.
Operating expenses were $61.9 million or 0.95% of average insured student loans
for 1996 compared to $57.6 million or 1.02% of average insured student loans for
1995. Increases in operating expenses were due primarily to costs incurred to
handle the greater servicing needs and operational requirements of the expanded
portfolio. The 0.07% improvement in the Company's 1996 expense ratio compared to
1995 is primarily attributable to 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.
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Regulatory Impacts
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 imposed 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.
Under the FDSL program, the Federal government lends directly to students using
U.S. Treasury funds. Direct lending accounted for approximately 30 - 40%, on a
national basis, of all guaranteed student loans made in the 1995-96 and 1996-97
academic years. The 1993 Amendments allow direct lending to originate up to 50%
in 1997-98 and 60% in 1998-99. In the last two years there has been very little
growth in the program. The schools that volunteer for the direct lending program
usually participate in that program exclusively, thereby effectively restricting
the borrower pool available for new FFEL program originations. However, at the
discretion of the Department of Education, schools may choose to participate in
both the FDSL and the FFEL programs.
The impact of the FDSL program on the Company's future originations is dependent
upon such factors as any further growth in direct lending and the relative size
of the FFEL program in the years to come.
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 FFEL
program loans during in-school, grace and deferment periods, and the maximum
interest rate borne by most loans in repayment periods, was reduced from 3.10%
to 2.50% over the 91-day Treasury Bill rate, reset annually, for most loans
disbursed on or after July 1, 1995.
The 1993 Amendments also include provisions which will change the interest rate
paid by the Federal government to holders of FFEL program loans disbursed on or
after July 1, 1998, to 1% over the 10-year Treasury Bill rate, reset annually.
The Company is involved in an industry-wide effort to change these provisions
due to the inherent volatility they introduce to the economics of funding and
holding these loans. The Administration has proposed maintaining the current
91-day Treasury Bill index, but reducing the interest rate of loans originated
after June 30, 1998 by 0.80% from the current rate. Another proposal would
extend the current interest rate structure until July 1999. Resolution of this
issue may not occur for many months. However, if no Congressional action is
taken, the 10-year plus 1% formula will take effect for loans disbursed on or
after July 1, 1998. Both this rate as well as the Administration proposal would
materially reduce the Company's net interest margin if new loans were originated
under either of these rate structures.
The Company already 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. Therefore, in order to
maintain or improve its net income in future years, the Company desires to
substantially increase the size of its portfolio to take advantage of greater
economies of scale. There is no assurance that the Company will be able to do
so. Since the provisions of the 1993 Amendments took effect, the Company has
aggressively pursued both new and existing marketing programs, expanded its
guarantor relationships, and developed new loan products, such as CitiAssist,
that are not dependent on Federal funding, guarantees and authorization. The
Company is also participating in specialized automated student loan delivery
efforts, such as Education Loan Management (ELM) Resources, which gives college
and university financial aid offices single-source student loan access.
In addition, the 1993 Amendments require that lenders 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
out-
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standing balances of such loans. The 1993 Amendments also introduced
risk-sharing provisions that apply to insured defaulted loans disbursed on or
after October 1, 1993. Those loans that are submitted to a guarantor for claim
are generally paid the claim amount less a risk sharing cost, calculated at 2%
of the sum of the outstanding loan balance and accrued interest.
There can be no assurance that the provisions of the Act will be reauthorized
prior to its expiration on September 30, 1998. In addition, provisions of the
Act may be amended by Congress at any time prior to that date, possibly
resulting in further reductions in FFEL program loan subsidies in the form of
increased risk sharing costs and reduced interest margins. 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.
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 stated interest rate on these FFEL program loans provides
less than a market rate of return, the Federal government pays a SAP which
increases the loan yield to various specified margins, depending on its
origination date, over a base rate tied to either the 91-day or 52-week Treasury
Bill auction rates. In low rate environments, the stated fixed rates on most
loans disbursed prior to July 1992 become, in effect, floors. Substantially all
FFEL program 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 $0.8 million of net floor income in 1997, compared
to $1.0 million in 1996 when short-term interest rates were lower. At December
31, 1997 and 1996, the Company held approximately $1.5 billion and $1.7 billion,
respectively, of loans that could earn floor income.
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 1997 or in
the past three years, nor are any material capital expenditures anticipated in
1998. Restructuring costs of $16.2 million for employee termination benefits and
$1.5 million of other costs will be paid from cash generated from current
operations. The Company does not expect that the payment of the restructuring
costs will have a significant effect on its liquidity or financial position.
The Company's cash used for investing activities amounted to $739.8 million in
1997, $729.9 million in 1996, and $1,000.5 million in 1995. Investing activities
were financed in 1997, 1996, and 1995 primarily through the utilization of
available long and short-term credit lines. New borrowings, net of repayments,
at December 31, 1997 and December 31, 1996 increased $722.4 million and $674.8
million, respectively, compared to the previous year-end.
The Company's future cash needs will depend primarily on the volume of new loan
disbursements and purchases as well as the cash provided (or used) by operating
activities. The Company expects new loan disbursements and purchases volume to
continue to be funded primarily through additional borrowing. The Company may
enter into other 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.
In December 1997, the Company retired a $600 million Student Loan Marketing
Association ("Sallie Mae") note. Interest on the Sallie Mae note was based on
the 91-day Treasury Bill rate. The borrowing had been collateralized by insured
student loans at a rate of 106% of the outstanding balance of the debt.
On March 1, 1997, the Company renegotiated its Omnibus Credit Agreement with
CNYS, increasing the maximum credit allowable under short-term borrowings to
$4.5 billion from $2.8 billion and increasing the maximum aggregate credit level
to $8.0 billion
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from $6.4 billion. Any unused credit within the $8.0 billion limit is currently
eligible for new long-term borrowings. The credit facilities are at variable
interest rates based on LIBOR, federal funds, or the 91-day Treasury bill rate.
During 1997, $1.7 billion in net short-term borrowings and $1.6 billion in
long-term borrowings were made under this agreement and $3.1 billion in total
short- and long-term borrowings were paid.
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 long-term
lines. Although the maximum aggregate credit under this facility at that time
remained at $6.4 billion, the credit limit was reapportioned between maximum
short and long-term credit lines. Under this amendment, $0.5 billion in net new
short-term borrowings and $0.1 billion in new long-term borrowings were made in
1996. At December 31, 1996, $2.6 billion of short-term debt and $2.9 billion of
debt with original maturities greater than one year were outstanding under these
facilities.
In the first quarter of 1997, all of the Company's commercial paper matured and
the Company discontinued the program. This short-term funding source,
representing issuances to unaffiliated investors, was replaced with other
short-term funding available from the Omnibus Credit Agreement with CNYS. The
program had $463 million outstanding 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. Management believes that liquidity and capital are sufficient
to meet the Company's anticipated requirements for the next twelve months.
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Other Business and Industry Information
Student Loans
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 are made to parents of students who are dependents. The Federal
Consolidation Loan program allows certain borrower's loans of both the FFEL and
Federal Direct Student Loan programs to be combined into one aggregate insured
loan with an extended repayment term. The Company's portfolio also includes
Federal Supplemental Loans for Students ("SLS loans") made prior to July 1994,
when the program was terminated. Federal SLS loans include loans to graduate,
professional and independent undergraduate students, and, under certain
circumstances, dependent undergraduate students. The SLS program was replaced
with an expanded Unsubsidized Stafford loan program.
The U.S. Department of Education administers the FFEL program under Title IV of
the Act. In order to comply with the provisions of the Act, all of the Company's
FFEL program loans are held, and all new FFEL program loans are originated, by
the Company through a trust established solely for the benefit of the Company
(the "Trust"). Any institution that does not fall within the Act's definition of
"eligible lender" may hold and originate FFEL program loans only through a trust
or similar arrangement with an eligible lender. The Company's trust agreement is
with Citibank (New York State) ("CNYS"), a New York State bank, which qualifies
as an eligible lender under the provisions of the Act.
The Company's portfolio also contains loans originated through specifically
tailored alternative loan programs. Alternative loan programs were developed for
students who either do not qualify for government student loan programs or need
additional financial assistance beyond that available through government
programs. Alternative loans are offered based on the student's or parent's
creditworthiness as opposed to financial need.
The majority of the Company's alternative loans have been originated through
programs with The Educational Resource Institute ("TERI") for Supplemental loans
and Professional Education Plan ("PEP") loans. TERI program loans include 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. The Company terminated its originations program with TERI in
1997. As of December 31, 1997 and 1996, the Company held $80.2 million and $82.2
million, respectively, of TERI insured loans, which were serviced by a third
party.
In early 1997, the Company launched its new alternative loan product,
CitiAssist, which offers students another means to meet their educational
financing needs. CitiAssist loans are used to help close the gap between
students' higher education costs and their available financial resources. The
loan is prime rate based with FFEL program repayment characteristics, such as
deferment of both principal and interest payments while the student is in
school. Most CitiAssist loans are insured against default and other losses
through a private third party insurer, TuitionGard, which is not reinsured by
the Federal government. Most insured CitiAssist loans submitted for claim are
paid the claim amount less a risk sharing cost, calculated at 5% of the sum of
outstanding principal and accrued interest. As of December 31, 1997, no
CitiAssist loans have been submitted for claim. A small amount of CitiAssist
loans do not carry third party insurance. The Company is exposed to a potential
100% loss on these uninsured loans.
In order to comply with New York State Banking law and certain other
requirements, CitiAssist loans are originated by CNYS, the Company's principal
shareholder, however are serviced by the Company. Expenses incurred by the
Company to underwrite, disburse and service CitiAssist loans for CNYS are
reflected in a service fee charged to CNYS based on the provisions of an
intercompany agreement. The loans are purchased by the Company at a premium
shortly after the final disbursement is made. The premium is amortized as a
reduction of interest income over the average life of a loan in the portfolio.
As of December 31, 1997, the Company's CitiAssist portfolio totaled $13.7
million.
8
<PAGE>
Origination of FFEL Program Student Loans
In the twelve months ended December 31, 1997, the Company originated $1.5
billion of FFEL program loans. The Company's main sources of borrowers include
referrals from financial aid administrators, customers of 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. Under the Act, 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.
The student and school complete a combined application/promissory note and send
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 by the
guarantor, 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 that 95% of all
potential borrowers whose FFEL program loan applications are received eventually
take out a student loan from the Company.
Seasonality
Origination of student loans is generally subject to seasonal trends which
correspond to the beginning of the school year. The two periods of August
through October and December through February account for approximately 75% of
the Company's total annual disbursements. 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.
Marketing
Management believes that because most FFEL program loans offered by different
lenders have similar economic terms, borrower selection of a lender is
influenced mainly by non-economic factors. Unlike many other lenders, the
Company has a policy of holding and servicing substantially all of the loans
that it originates. Management believes that this policy makes the repayment
process easier for the borrower and gives the Company a marketing advantage with
potential borrowers and financial aid administrators ("FAA's"). The Company
attributes its growth primarily to its emphasis on providing service to FAA's,
its success in accessing Citibank's customer base and its employment of a
focused marketing team.
Management believes that the schools' FAA's are one of the most important
influences on lender selection. FAA's 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 meeting the needs of FAA's
by offering a variety of financial services. The Company offers a complete line
of loan products, including alternative loans. The Company believes this is a
key criterion in a student's selection of a lender.
The Company provides FAA's with informational brochures designed to assist
students in evaluating their student loan options, and maintains a dedicated
toll-free number for FAA's. The Company also emphasizes its exceptional 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 Account Managers which service the financial aid community. The
Account Managers assist FAA's in resolving problems and issues, provide updates
on the Company's programs and provide information for students.
9
<PAGE>
A lender can lose eligibility to participate in the FFEL program if it does not
comply with certain rules specified in the Act. 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 FFEL program 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.
Under agreements with the Company, certain affiliates of CNYS 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.
Guarantee Agencies
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
("guarantors"), which are reinsured by the Federal government. The Act provides
that guarantors have contractual rights against the Federal government to
receive reinsurance in accordance with its provisions.
Each guaranteed loan disbursed on or after July 1, 1994 is charged a one-time
insurance premium that may not exceed 1% of the principal amount of the loan and
a 3% Federal origination fee, which is passed through to the Federal government
by the originating lender. Both fees are obligations of the borrower and are
deducted from the loan proceeds prior to disbursement.
The Act requires every state either to establish its own guarantor or to
contract with another guarantee agency in order to support education financing
and credit needs of students at post-secondary schools. 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.
If a guarantor's administrative or financial condition falls below specified
levels or the Secretary of Education 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 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 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.
Collection of FFEL Program Loans
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. These requirements specify school and borrower eligibility criteria
and establish servicing requirements and procedural guidelines. The Company's
collections department begins contact before the tenth day of delinquency and
continues prescribed collection efforts through mailings and telephone contact.
10
<PAGE>
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. If a
claimed loan is rejected for payment by a guarantor, the Company's collection
department again works the account for payment and/or institutes a process to
reinstate the guarantee.
Loans which are 180 days delinquent are considered to be in default. When the
loan is approximately 239 days past due, the Company submits a claim to the
guarantee agency requesting reimbursement for the defaulted loan. Federal
regulations require that claims be filed with the guarantor not later than the
270th day of delinquency. Failure to file a claim within this period may result
in a 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," receive 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. In 1997, the Company was able to cure approximately 78%
of all rejected claims. For these rejected claims, the Company allows a full
four months for collections to work the accounts in attempts to effect cures
before they are written off as operating losses.
Interest penalties may be assessed for certain violations of the due diligence
requirements. Examples of errors that cause interest penalties include missed
collection calls or failures to send collection letters as required.
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.
Quality and Regulatory Reviews
The Company 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 immediate
attention.
The Company also 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.
Regulations of the Department of Education authorize the Department to limit,
suspend or terminate lenders from participation in the program, as well as
impose civil penalties, if lenders or servicers violate program regulations. In
order to monitor this, the Department conducts frequent on-site audits of the
Company's student loan servicing activities. Guarantee agencies conduct similar
audits on a biennial basis. During 1997, the Company was audited by two
guarantee agencies. The final reports showed no material exceptions.
11
<PAGE>
Historically, the student loan industry has been subject to increasing
regulatory and reporting requirements, concentrated primarily in the areas of
loan servicing and 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.
Also, as an operating subsidiary of a New York State bank, the Company 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 New York State Banking Law and the Federal Deposit Insurance Act,
which restrict affiliate transactions and limit the permissible investment and
business activities in which an operating subsidiary of a bank may engage.
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 FFEL program 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.
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 FFEL program and alternative loan products and by emphasizing the quality of
its service.
The Company is one of the nation's largest holders of FFEL program 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 at this time (it acquires FFEL program loans including newly
originated loans through arrangements with a number of eligible lenders), it may
decide to do so in the future.
The Federal Direct Student Lending (FDSL) program, which also provides
guaranteed loans to students, has in recent years reduced the origination volume
available for FFEL program loans. Currently, FDSL accounts for approximately
one-third of guaranteed student loan originations.
Employees
As of December 31, 1997, the Company had approximately 844 employees, none of
whom is covered by a collective bargaining agreement.
Properties
The Company's facilities are maintained in Pittsford, NY under a renewable one-
year lease agreement with CNYS expiring in December 1998. Upon completion of the
Company's restructuring plan, management will re-evaluate its facilities
requirements.
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 FFEL program 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.
12
<PAGE>
Independent Auditor's Report
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, 1997 and 1996 and the related statements of income,
stockholders' equity and cash flows for each of the years in the three-year
period ended December 31, 1997. 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, 1997 and 1996 and the results of its operations and its cash
flows for each of the years in the three-year period ended December 31, 1997 in
conformity with generally accepted accounting principles.
/s/ KPMG Peat Marwick LLP
Rochester, New York
February 4, 1998
13
<PAGE>
The Student Loan Corporation
<TABLE>
<CAPTION>
- --------------------------------------------------------------------------------------
Statements of Income Years ended December 31,
- --------------------------------------------------------------------------------------
(Dollars in thousands, except per share amounts) 1997 1996 1995
- --------------------------------------------------------------------------------------
<S> <C> <C> <C>
Revenue
Interest income (notes 2 and 9) $588,480 $542,527 $500,617
Interest expense (notes 5, 6, and 9) 412,541 367,294 338,744
------------------------------
Net interest income 175,939 175,233 161,873
Provision for loan losses (note 2) 3,310 2,500 674
------------------------------
Net interest income after provision
for loan losses 172,629 172,733 161,199
Fee and other income (note 9) 3,292 47 50
------------------------------
Total revenue, net 175,921 172,780 161,249
------------------------------
Operating Expenses
Salaries and employee benefits (notes 9 and 10) 32,517 30,639 29,065
Restructuring expenses (note 3) 20,500 -- --
Other expenses (notes 8 and 9) 35,590 31,306 28,502
------------------------------
Total operating expenses 88,607 61,945 57,567
------------------------------
Income before income taxes 87,314 110,835 103,682
Income taxes (note 12) 35,644 45,905 43,083
------------------------------
Net Income $ 51,670 $ 64,930 $ 60,599
==============================
Net Income-Core (excluding floor net income) $ 50,840 $ 63,883 $ 60,269
==============================
Net Income-Floor (note 2) $ 830 $ 1,047 $ 330
==============================
Basic and Diluted Earnings per Common Share (note 15)
Net income-Core $ 2.54 $ 3.20 $ 3.01
Net income-Floor (note 2) $ 0.04 $ 0.05 $ 0.02
------------------------------
Net income $ 2.58 $ 3.25 $ 3.03
==============================
</TABLE>
See accompanying notes to financial statements.
14
<PAGE>
The Student Loan Corporation
<TABLE>
<CAPTION>
- --------------------------------------------------------------------------------
Balance Sheets December 31,
- --------------------------------------------------------------------------------
(Dollars in thousands, except per share amounts) 1997 1996
- --------------------------------------------------------------------------------
<S> <C> <C>
Assets
Insured student loans (notes 2 and 6) $7,625,157 $6,894,291
Allowance for loan losses (note 2) 2,014 1,570
-----------------------
Insured student loans, net 7,623,143 6,892,721
Cash 2,108 567
Deferred tax benefits (notes 3 and 12) 40,743 39,243
Other assets (note 4) 207,118 185,804
-----------------------
Total Assets $7,873,112 $7,118,335
-----------------------
Liabilities and Stockholders' Equity
Liabilities
Short-term borrowings (note 5) $5,696,605 $4,509,251
Long-term notes (note 6) 1,610,000 2,075,000
Payable to principal stockholder (note 12) 17,063 19,833
Restructuring liabilities (note 3) 17,724 --
Other liabilities (note 7) 128,598 152,270
-----------------------
Total liabilities 7,469,990 6,756,354
-----------------------
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 134,380 134,109
Retained earnings 268,542 227,672
-----------------------
Total stockholders' equity 403,122 361,981
-----------------------
Total Liabilities and Stockholders' Equity $7,873,112 $7,118,335
=======================
</TABLE>
See accompanying notes to financial statements.
15
<PAGE>
The Student Loan Corporation
<TABLE>
<CAPTION>
- -----------------------------------------------------------------------------------------------------
Statements of Stockholders' Equity
- -----------------------------------------------------------------------------------------------------
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, 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
Net Income -- -- 51,670 51,670
Dividends declared, $0.54 per common share -- -- (10,800) (10,800)
Other -- 271 -- 271
-----------------------------------------------
Balance at December 31, 1997 $ 200 $ 134,380 $ 268,542 $ 403,122
===============================================
</TABLE>
See accompanying notes to financial statements.
16
<PAGE>
The Student Loan Corporation
<TABLE>
<CAPTION>
- ---------------------------------------------------------------------------------------------
Statements of Cash Flows Years ended December 31,
- ---------------------------------------------------------------------------------------------
(Dollars in thousands) 1997 1996 1995
- ---------------------------------------------------------------------------------------------
<S> <C> <C> <C>
Cash Flows from Operating Activities:
Net income $ 51,670 $ 64,930 $ 60,599
Adjustments to reconcile net income to net
cash from operating activities:
Depreciation and amortization 6,103 3,993 1,888
Provision for loan losses 3,310 2,500 674
Deferred tax provision (benefit) (1,500) 10,705 11,782
Restructuring expense 20,500 -- --
Increase in accrued interest receivable (25,415) (20,085) (36,636)
Decrease in other assets 1,240 1,814 689
Decrease in other liabilities (26,171) (2,747) (33,020)
------------------------------------------
Net cash provided by operating activities 29,737 61,110 5,976
------------------------------------------
Cash Flows from Investing Activities:
Disbursements of loans (1,474,349) (1,425,019) (1,441,631)
Net sale (purchase) of loans 59,380 52,859 (31,341)
Repayment of loans 677,226 643,988 474,128
Capital expenditures on furniture and equipment (2,007) (1,705) (1,613)
------------------------------------------
Net cash used in investing activities (739,750) (729,877) (1,000,457)
------------------------------------------
Cash Flows from Financing Activities:
Net increase in borrowings with original maturity
of one year or less 1,237,354 574,755 599,487
Proceeds from long-term borrowings 1,610,000 100,000 400,000
Repayments of long-term debt (2,125,000) -- --
Dividends paid to stockholders (10,800) (6,000) (4,800)
------------------------------------------
Net cash provided by financing activities 711,554 668,755 994,687
------------------------------------------
Net increase (decrease) in cash 1,541 (12) 206
Cash - beginning of period 567 579 373
------------------------------------------
Cash - end of period $ 2,108 $ 567 $ 579
------------------------------------------
Supplemental disclosure:
Cash paid for:
Interest $ 432,212 $ 376,130 $ 320,121
Income taxes $ 27,798 $ 66,820 $ 44,217
==========================================
</TABLE>
See accompanying notes to financial statements.
17
<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, employee
benefits, 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.
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 used a number of estimates and assumptions relating to the
reporting of assets and liabilities, the disclosure of contingent assets and
liabilities and the reported amounts of revenues and expenses during the
reporting period in preparing the 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 a student
loan in those portfolios as yield adjustments.
When a guarantor denies payment of 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 reduces interest income by the
amounts of all previously accrued, uncollected interest. These amounts of
principal and interest write-offs 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 result in
lower current operating expenses. Non-interest accruing loans were $1,771,000
and $2,580,000 at December 31, 1997 and 1996, respectively. Non-accrual loans at
December 31, 1997 and 1996 include $966,000 and $989,000, respectively, of
distressed loan purchases made in 1995.
Allowance for Loan Losses
The allowance for loan losses represents an accrual of the estimated risk-
sharing losses that the Company expects to incur. Under the Omnibus Budget
Reconciliation Act of 1993, claims on defaulted FFEL program student loans
disbursed on or after October 1, 1993 that are approved for reimbursement by a
guarantor are paid net of a risk-sharing loss, calculated at 2% of the total
claimed amount, including principal and interest. CitiAssist
18
<PAGE>
loans insured by TuitionGard, a private third party insurer, are subject to 5%
principal and interest risk sharing losses. Estimated loan losses are accrued on
insured and guaranteed student loans that are greater than 90 days delinquent.
Such losses which arise from actual claims with guarantors and TuitionGard are
charged against the allowance as they are incurred.
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 resulting in gains or losses in the three-year
period ending December 31, 1997, 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 of Citicorp or its subsidiaries. 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
In the fourth quarter of 1997, the Company adopted Statement of Financial
Standards ("SFAS") No. 128, "Earnings Per Share," which establishes new
standards for computing and presenting earnings per share.
Under SFAS No. 128, basic earnings per share excludes dilution and is computed
by dividing income applicable to common stock (net income after deducting
preferred stock dividends) by the weighted-average number of common shares
outstanding for the period.
Diluted earnings per share reflects the potential dilution that could occur if
securities or other contracts to issue common stock were exercised or converted
into common stock or otherwise resulted in the issuance of common stock.
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 certain FFEL program loans disbursed prior to July 1992 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
19
<PAGE>
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
equal to a stated percentage over the 91-day or 52-week Treasury Bill rate,
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 $0.8 million of net floor income in 1997, $1.0
million in 1996, and $0.3 million in 1995, with year-to-year fluctuations caused
primarily by changes in prevailing short-term interest rates. At December 31,
1997 and 1996, the Company held approximately $1.5 billion and $1.7 billion,
respectively, of loans that could earn floor income.
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 are made to parents of students who are dependents. The Federal
Consolidation Loan program allows certain borrower's loans of both the FFEL and
Federal Direct Student Loan programs to be combined into one aggregate insured
loan with an extended repayment term. The Company's portfolio also includes
Federal Supplemental Loans for Students ("SLS loans") made prior to July 1994,
when the program was terminated. Federal SLS loans include loans to graduate,
professional and independent undergraduate students, and, under certain
circumstances, dependent undergraduate students. The SLS program was replaced
with an expanded Unsubsidized Stafford loan program.
The Company's portfolio also contains loans originated through specifically
tailored alternative loan programs. Alternative loan programs were developed for
students who either do not qualify for government student loan programs or need
additional financial assistance beyond that available through government
programs. Alternative loans are offered based on the student's or parent's
creditworthiness as opposed to financial need.
The majority of the Company's alternative loans have been originated through
programs with The Educational Resource Institute ("TERI") for Supplemental loans
and Professional Education Plan ("PEP") loans. TERI program loans include 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. The Company terminated its originations program with TERI in
1997. As of December 31, 1997 and 1996, the Company held $80.2 million and $82.2
million, respectively, of TERI insured loans, which were serviced by a third
party.
In early 1997, the Company launched its new alternative loan product,
CitiAssist, which offers students another means to meet their educational
financing needs. CitiAssist loans are used to help close the gap between
students' higher education costs and their available financial resources. The
loan is prime rate based with FFEL program repayment characteristics, such as
deferment of both principal and interest payments while the student is in
school. Most CitiAssist loans are insured against default and other losses
through a private third party insurer, TuitionGard, which is not reinsured by
the Federal government. Most insured CitiAssist loans submitted for claim are
paid the claim amount less a risk sharing cost, calculated at 5% of the sum of
outstanding principal and accrued interest. As of December 31, 1997, no
CitiAssist loans have been submitted for claim. A small amount of CitiAssist
loans do not carry third party insurance. The Company is exposed to a potential
100% loss on these uninsured loans.
In order to comply with New York State Banking law and certain other
requirements, CitiAssist loans are originated by CNYS, the Company's principal
shareholder, however are serviced by the Company. Expenses incurred by the
Company to underwrite, disburse and service CitiAssist loans for CNYS are
reflected in a service fee charged to CNYS based on the
20
<PAGE>
provisions of an intercompany agreement. The loans are purchased by the Company
at a premium shortly after the final disbursement is made. The premium is
amortized as a reduction of interest income over the average life of a loan in
the portfolio. As of December 31, 1997, the Company's CitiAssist portfolio
totaled $13.7 million.
The Company's student loan portfolio is summarized by program type as follows:
<TABLE>
<CAPTION>
December 31,
($000's) 1997 1996
----------------------------
<S> <C> <C>
Stafford/Consolidation (including deferred origination
costs of $20.2 million in 1997 and $17.0 million in 1996) $6,626,023 $ 5,881,300
SLS/PLUS 905,285 930,761
Supplemental / PEP / Assist 80,158 82,230
CitiAssist 13,691 --
----------------------------
Total student loans $7,625,157 $6,894,291
============================
</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
("guarantors"), which are reinsured by the Federal government.
FFEL program guarantors 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 following schedule provides an analysis of the Company's student loans by
guarantor/insurer:
<TABLE>
<CAPTION>
December 31,
($000's) 1997 % 1996 %
---------------------------------------
<S> <C> <C> <C> <C>
United Student Aid Funds $3,393,482 45 $ 2,895,395 42
California Student Aid Commission 1,755,823 23 1,632,277 24
New York Higher Education Service Corp. 1,713,492 22 1,482,053 21
Illinois Student Aid Commission 316,919 4 316,385 5
TERI 80,158 1 82,230 1
TuitionGard 12,994 -- -- --
Other Guarantors 349,821 5 483,371 7
---------------------------------------
Total guaranteed/insured $7,622,689 100 $6,891,711 100
Not guaranteed/insured 2,468 -- 2,580 --
---------------------------------------
Total student loans $7,625,157 100 $6,894,291 100
=======================================
</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 unpaid principal balance and accrued interest on claimed
defaulted loans, reflecting a 2% risk sharing loss as described below. FFEL
program claims filed due to a borrower's death, disability, or bankruptcy are
not subject to the 2% risk sharing loss provisions. Generally, guarantors of
FFEL program loans are reinsured by the Federal government for 78-98% of claims
paid (80-100% for loans disbursed before October 1,1993) depending on their
claims experience.
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, charged against interest income, for minor
servicing defects. Net operational losses resulting from servicing or
origination defects, which are charged to operating expense as incurred,
amounted to $1.3 million in 1997, $1.4 million in 1996 and $1.6 million in 1995.
21
<PAGE>
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 and 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 imposed 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.
Under the FDSL program, the Federal government lends directly to students using
U.S. Treasury funds. Direct lending accounted for approximately 30 - 40%, on a
national basis, of all guaranteed student loans made in the 1995-96 and 1996-97
academic years. The 1993 Amendments allow direct lending to originate up to 50%
in 1997-98 and 60% in 1998-99. The schools that volunteer for the direct lending
program usually participate in that program exclusively, thereby effectively
restricting the borrower pool available for new FFEL program originations.
However, at the discretion of the Department of Education, schools may be
allowed to participate in both the FDSL and 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 FFEL
program loans during in-school, grace and deferment periods was reduced from
3.10% to 2.50% over the 91-day Treasury Bill rate, reset annually, for most
loans disbursed on or after July 1, 1995. Also, provisions change the interest
rate on FFEL program loans disbursed on or after July 1, 1998 to 1% over the
10-year Treasury Bill rate, reset annually. The Administration has proposed
maintaining the current 91-day Treasury Bill index, but reducing the interest
rate for most loans originated after June 30, 1998 by 0.80% from the current
rate. Another proposal would extend the current interest rate structure until
July 1999. Resolution of this issue may not occur for many months. However, if
no Congressional action is taken, the 10-year plus 1% formula will take effect
for loans disbursed on or after July 1, 1998. Both this rate as well as the
Administration proposal would materially reduce the Company's net interest
margin if new loans were originated under either of these rate structures. 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, insured defaulted loans disbursed on or after October 1,
1993 that are submitted to a guarantor for claim are generally paid the claim
amount less a risk sharing cost, calculated at 2% of the sum of the outstanding
loan balance and accrued interest. Alternative loans insured by TERI are not
subject to the risk sharing provisions, and most CitiAssist loans, insured by a
third party, are subject to 5% risk sharing provisions. Some CitiAssist loans
are not insured against loss and are potentially exposed to losses up to 100%.
At December 31, 1997 and 1996, the Company had established reserves for these
estimated risk sharing and other losses as allowance for loan losses.
Changes in allowance for loan losses are as follows:
<TABLE>
<CAPTION>
($000's) 1997 1996
-------------------------
<S> <C> <C>
Balance at beginning of year $ 1,570 $ 548
Provision for loan losses 3,310 2,500
Losses on claimed loans (2,866) (1,478)
-------------------------
Balance at December 31, $ 2,014 $ 1,570
=========================
</TABLE>
22
<PAGE>
3 Restructuring Plan
In December 1997 the Company formulated a restructuring plan which will realign
its business and processing structure. The Company will be outsourcing a
significant part of its operations to subsidiaries of Citicorp over the next 12
to 15 months. This will allow the Company to take advantage of the larger
economies of scale and more global operating systems configurations being
employed by Citibank. The Company expects the restructuring to substantially
impact all of its approximately 800 Pittsford-based employees over the next
12-15 months.
In connection with this plan, the Company recorded a $20.5 million pre-tax
charge in the fourth quarter of 1997 representing the costs the Company expects
to incur. These charges include $16.2 million for severance benefits, $2.8
million for furniture and equipment write-downs and $1.5 million for other
expenses. Substantially all of the plan will be completed over the next 12-15
months. Additional costs, which do not qualify for recognition in the charge,
will be expensed as incurred in the implementation of the restructuring plan
over the next 12 to 15 months. The fourth quarter charges resulted in a $8.5
million reduction in income tax expense for 1997 and has resulted in increased
deferred tax assets at year-end. A reserve in the amount of $17.7 million has
been recorded at December 31, 1997, which reflects the liability for future cash
outflows associated with the $20.5 million charge less the $2.8 million
furniture and equipment write-downs.
4 Other Assets
Other assets are summarized as follows:
<TABLE>
<CAPTION>
December 31,
($000's) 1997 1996
-------------------------
<S> <C> <C>
Accrued interest receivable
From borrowers 160,409 136,276
From Federal government 44,949 43,667
Other 1,760 5,861
-------------------------
Total other assets $207,118 $185,804
=========================
</TABLE>
5 Short-Term Borrowings
Short-term borrowings are summarized below:
<TABLE>
<CAPTION>
December 31, 1997 December 31, 1996
--------------------------------------------------------------
Weighted Weighted
Average Average
($000's) Amount Interest Rate Amount Interest Rate
--------------------------------------------------------------
<S> <C> <C> <C> <C>
Notes payable $4,321,605 5.76% $2,621,355 5.62%
Commercial paper -- -- 462,896 5.49%
Short-term portion of long-term notes 1,375,000 6.29% 1,425,000 6.09%
--------------------------------------------------------------
Total short-term borrowings $5,696,605 5.89% $4,509,251 5.76%
==============================================================
</TABLE>
Short-term borrowings have an original or remaining term to maturity of one year
or less.
At December 31, 1997 and 1996, notes payable consisted of borrowings made under
an Omnibus Credit Agreement with CNYS, the majority stockholder. On March 1,
1997, the Company renegotiated its credit agreement with CNYS, increasing the
maximum credit allowable under short-term borrowings to $4.5 billion from $2.8
billion and increasing the maximum aggregate credit level to $8.0 billion from
$6.4 billion. During 1997, $3.3 billion in new short-term borrowings were made
under this agreement and $1.6 billion in original short-term borrowings were
paid. At April 1996, an amendment to the credit agreement converted $0.8 billion
of unused short-term credit to long-term credit lines, thereby reducing the
23
<PAGE>
maximum credit allowable for short-term borrowings at that time to $2.8 billion.
The interest rates payable on the credit facilities are variable, based on
either the overnight or monthly Federal Funds rate or the LIBOR rate adjusted by
the average 91-day T-Bill rate.
In the first quarter of 1997, all of the Company's commercial paper matured and
the Company discontinued the program. This funding source, representing
issuances to unaffiliated investors, was replaced by short-term funding
available from the Omnibus Credit Agreement with CNYS. During 1997 and 1996, 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 was
established by the market at the time of issuance. Discounts and premiums
incurred in commercial paper transactions were amortized to interest expense
over the term 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 served as a
backstop liquidity facility for the commercial paper program. This credit
agreement, which had no outstanding balance at December 31, 1996, expired in
November 1997 and was not renewed. A new facility will be procured if and when
the Company decides to issue new commercial paper.
6 Long-Term Notes
A summary of long-term notes follows:
<TABLE>
<CAPTION>
December 31,
($000's) 1997 1996
----------------------------
<S> <C> <C>
Student Loan Marketing Association (Sallie Mae) Note, based on the 91-day
Treasury Bill rate (note rate is 5.92% at December 31, 1996), repricing
weekly, paid
December 23, 1997 $ -- $ 600,000
Citibank (New York State) (CNYS) Notes, based on the
52-week Treasury Bill rate (note rate is 6.32% at December 31, 1996)
repricing annually, paid July 1, 1997 -- 500,000
CNYS Note, based on the 91-day Treasury Bill rate
(note rate is 6.10% at both December 31, 1997 and 1996),
repricing quarterly, due October 1, 1998 400,000 400,000
CNYS Note, based on attributes of both LIBOR and the 91-day
Treasury Bill rate (note rate is 6.36% at December 31, 1997),
repricing quarterly, due April 3, 2000 100,000 --
CNYS Notes, based on LIBOR (note rates are 6.08% and 5.96% at December 31, 1997
and 1996, respectively), repricing quarterly, series due between April 1, 1998
and November 1, 2000 2,485,000 2,000,000
Less: short-term portion (1,375,000) (1,425,000)
----------------------------
Total long-term notes $ 1,610,000 $ 2,075,000
============================
</TABLE>
In December 1997, the $600 million Sallie Mae notes were retired, prior to the
scheduled January 30, 1998 due date. At December 31, 1996, the SLMA notes were
secured by $636 million of insured student loans.
On March 1, 1997, the Company renegotiated its Omnibus Credit Agreement with
CNYS, increasing the maximum aggregate credit level for combined short and
long-term debt to $8.0 billion from $6.4 billion. Any unused credit within the
$8.0 billion limit was made eligible for new long-term borrowings. Under this
agreement, $1.6 billion in new long-term borrowings was made in 1997 and $1.5
billion in long-term notes was paid.
24
<PAGE>
In April 1996, an amendment to the credit agreement with CNYS reclassified $0.8
billion of unused short-term credit to long-term credit lines. Although the
maximum aggregate credit at that time under this facility remained at $6.4
billion, the credit limit was reapportioned to provide a maximum of $2.8 billion
in short-term and $3.6 billion in long-term borrowings. 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. Additionally, 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 notes have been swapped into 52-week and 91-day Treasury Bill rates.
See Note 13 for further discussion.
7 Other Liabilities
Other liabilities are summarized as follows:
<TABLE>
<CAPTION>
December 31,
($000's) 1997 1996
---------------------------
<S> <C> <C>
Interest payable, payable primarily to CNYS and its affiliates $ 48,295 $ 69,997
Income tax liability, payable primarily to CNYS 16,542 7,628
Accrued liabilities and other 63,761 74,645
---------------------------
Total other liabilities $128,598 $152,270
===========================
</TABLE>
8 Other Expenses
A summary of other expenses follows:
<TABLE>
<CAPTION>
Years ended December 31,
1997 1996 1995
($000's) ----------------------------
<S> <C> <C> <C>
Data processing $ 4,312 $ 4,077 $ 4,634
Servicing, professional, guarantor
and other fees paid 10,181 8,937 5,717
Advertising and marketing 7,454 4,908 5,604
Stationery, supplies and postage 2,738 2,791 3,017
Premises, primarily rent 2,213 3,226 2,959
Communications 3,503 2,792 2,220
Depreciation 1,694 1,181 903
Operational losses on guaranteed student loans 1,297 1,390 1,563
Travel and entertainment 1,503 1,226 1,375
Minor equipment 477 368 494
Other 218 410 16
----------------------------
Total other expenses $35,590 $31,306 $28,502
============================
</TABLE>
9 Related Party Transactions
At December 31, 1997, 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 for the years ended December 31, 1997,
1996 and 1995. A change in CNYS's percentage ownership of the Company may change
some of the agreements with related parties (e.g., employee benefits).
As discussed in Note 12, 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.
25
<PAGE>
Since October 1997, the salary and fringe benefits of the Company's chief
executive officer have been paid by a subsidiary of Citicorp other than the
Company, which the chief executive officer also manages.
Expenses (as presented in the chart below) for facilities and building 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 Company's intent that these
transactions be conducted at arm's length.
Below is a summary of related party transactions with CNYS (or its affiliates),
other than CitiAssist loan transactions described in Note 2, employee benefit
related transactions described in Note 10, stock option plan described in Note
11, and income taxes described in Notes 1, 7 and 12:
<TABLE>
<CAPTION>
Years ended December 31,
($000's) 1997 1996 1995
------------------------------
<S> <C> <C> <C>
Revenues
Interest earned from cash management activities $ 22 $ 19 $ --
Fees for servicing student loan portfolios
(primarily CitiAssist for 1997) 564 48 60
------------------------------
Expenses
Cost of funding provided $372,310 $306,042 $272,489
Telecommunications 668 652 452
Facilities and building services 1,986 2,422 2,308
Processing of payments and outgoing mail 470 418 483
Payroll and benefits administration 428 446 362
Data processing 2,062 1,997 1,691
Statement production 2,093 941 --
Audit 450 -- --
Other 182 92 183
==============================
</TABLE>
10 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. As described in
Note 9, since October 1997 the Company's chief executive officer's benefits have
not been paid by the Company or included in the Company's fringe rate. The
fringe rate applied to salaries was 32.00% for 1997, 31.74% for 1996, and 29.97%
for 1995. In determining the fringe rate, Citicorp considers the historical
benefit and salary experience for all Citicorp employees, adjusted for expected
changes in experience reflected in actuarial assumptions.
If Citicorp's percentage ownership in the Company were reduced below 50%, the
Company would withdraw from participation in certain Citicorp benefit plans and
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 $947,000,
$994,000, and $417,000 in 1997, 1996 and 1995, respectively.
26
<PAGE>
Postretirement Benefits
As a subsidiary of 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 salary-related 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 $273,000 for 1997, $281,000 for 1996 and $270,000 for 1995.
Postemployment Benefits
Postemployment benefits, such as disability and similar benefits provided to
former or inactive employees, are administered by Citicorp. The amount of
contribution charged to the Company by Citicorp for postemployment benefits was
$116,000 for 1997, $151,000 for 1996, and $168,000 for 1995.
11 Stock Option Plan
The Company uses the intrinsic value accounting method for stock awards under
which there is generally no charge to earnings for employee stock option awards.
Alternatively, FASB rules permit a method under which a compensation cost for
all stock awards would be calculated and recognized over the service period
(generally equal to the vesting period). This compensation cost would be
determined in a manner prescribed by the FASB using option pricing models,
intended to estimate the fair value of the awards at the grant date. Earnings
per share dilution would be recognized as well.
In 1993, the stockholders of the Company approved the 1993 Stock Incentive Plan
(the "Plan") to grant Company common stock options to certain key employees.
Under the Plan, the Board of Directors authorized the issuance of options, up to
a maximum of 500,000 shares, to these employees over a five-year period,
starting January 1, 1993.
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 grant date or upon the occurrence of certain other events.
Options exercised would be redeemed through the new issuance of previously
authorized, but unissued, shares, the use of treasury shares or the purchase of
shares in open market transactions. Since all options were granted prior to
1995, none are affected by the new FASB rules described above.
Options to purchase 39,500 and 58,500 shares of the Company's common stock
remained outstanding at December 31, 1997 and 1996, respectively . No options
were granted in 1997, 1996 or 1995. No options were exercised or exercisable,
due to the exercise restrictions noted above, during 1997, 1996 or 1995. Of the
options granted, 19,000 were terminated in 1997. No options expired or were
terminated in 1996 or 1995. No additional options may be granted under the Plan
after January 1, 1998.
Certain of the Company's employees participate in Citicorp's 1997 Stock
Incentive Plan and predecessor plans (the "Citicorp Plans"). Under the Citicorp
Plans options have been granted to key employees for terms of up to 10 years to
purchase Citicorp common stock at not less than the fair market value of the
shares at the date of grant. Citicorp options were granted to some of the
Company's senior management in each of 1997, 1996, and 1995. Generally, 50% of
the options granted prior to 1995 are exercisable beginning on the first
anniversary and 50% beginning on the second anniversary of the date of the
grant, and, generally, 50% of the options granted in 1995 and thereafter are
exercisable beginning on the third anniversary and 50% beginning on the fourth
anniversary of the date of the grant.
27
<PAGE>
12 Income Taxes
The provision for income taxes consists of the following:
<TABLE>
<CAPTION>
Years ended December 31,
($000's) 1997 1996 1995
-------------------------------------
<S> <C> <C> <C>
Current
Federal $ 28,993 $ 26,809 $ 23,707
State 8,151 8,391 7,594
-------------------------------------
37,144 35,200 31,301
-------------------------------------
Deferred
Federal (1,171) 8,153 8,924
State (329) 2,552 2,858
-------------------------------------
(1,500) 10,705 11,782
-------------------------------------
Total income tax provision $ 35,644 $ 45,905 $ 43,083
=====================================
</TABLE>
The 1997 income tax provision reflects $8.5 million of income tax benefits
related to the Company's restructuring plan in which $20.5 million in employee
termination benefits, furniture and equipment write-downs and other costs were
incurred in 1997. (See note 3.)
The Company's deferred tax assets of $40.7 million and $39.2 million at December
31, 1997 and 1996, respectively, 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 1997 deferred tax asset balance
also includes $8.5 million in tax benefits related to the restructuring costs.
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.
The Company has agreed to share with CNYS 50% of the deferred tax benefits
arising from the intercompany payments. Accordingly, the liability to CNYS is
recorded on the balance sheet as payable to principal stockholder.
Deferred tax assets were comprised of the following:
<TABLE>
<CAPTION>
December 31,
($000's) 1997 1996
------------------------
<S> <C> <C>
Loan premium $19,388 $25,235
Account relationship 8,917 9,707
Noncompetition agreement 2,822 3,072
Restructuring costs 8,459 --
Other 1,157 1,229
------------------------
Total deferred tax assets $40,743 $39,243
========================
</TABLE>
The reconciliation of the Federal statutory income tax rate of 35% for 1997,
1996 and 1995 to the effective income tax rate reflected in the provisions for
income taxes applicable to operations is as follows:
<TABLE>
<CAPTION>
Years ended December 31,
($000's) 1997 1996 1995
---------------------------
<S> <C> <C> <C>
Income taxes computed at Federal statutory rate $30,560 $38,792 $36,289
State tax provision, net of Federal benefits 5,084 7,113 6,794
---------------------------
Total income tax provision $35,644 $45,905 $43,083
===========================
</TABLE>
28
<PAGE>
13 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, 1997 and 1996 were accrued and recorded as
adjustments to interest expense. Interest expense of $0.3 million and $2.3
million related to interest rate swap activity was recorded for 1997 and 1996,
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, 1997
and 1996 were $0.4 million and $9.3 million, respectively. During 1997 and 1996,
net payments of $9.2 million and $2.7 million, respectively, were made to meet
contracted swap agreement obligations. For 1995, net interest of $3.1 million
was received by the Company. The aggregate notional principal amounts
outstanding at December 31, 1997 and 1996 were $2.2 billion and $2.0 billion,
respectively.
At each of December 31, 1997 and 1996, the Company owned approximately $0.9
billion of SLS and PLUS loans which reset annually based on the 52-week Treasury
Bill yield. The Company funds this portfolio with 3-month LIBOR indexed debt. To
better match the interest rate characteristics of this liability with its
assets, the Company has entered into interest rate swap agreements with an
affiliate of CNYS for a portion of this portfolio, in which the Company receives
payments based on the 3-month LIBOR and makes payments based on the asset yield.
At December 31, 1997 and 1996, the Company also owned $6.6 billion and $5.9
billion, respectively, 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
3-month LIBOR with the asset, the Company has entered into swaps with an
affiliate of CNYS for a portion of the LIBOR funded portfolio to receive
payments based on the 3-month LIBOR and make payments based on the 91-day
Treasury Bill rate. Entering into basis swap agreements to receive interest
based on the characteristics of the Company's liabilities and pay interest based
on the interest rate characteristics of the Company's assets effectively reduces
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 parties which have investment-grade external credit
ratings. As of December 31, 1997 and 1996, all interest rate swap agreements
were with Citibank, N.A., an affiliate of CNYS.
Interest rate swap agreement maturity dates range from January 2, 1998 to
November 2, 1998. During 1998, all of the contracts outstanding at December 31,
1997, amounting to $2.2 billion total notional principal, will expire. There
were no terminations of interest rate swap agreements before contract maturity
dates in the years 1997, 1996, or 1995.
14 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 and contractual settlement dates, 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.
29
<PAGE>
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 rates. All of the long-term notes
outstanding at December 31, 1997 reprice quarterly. Due to the frequency of
repricing, carrying value approximates fair value at December 31, 1997.
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 an affiliate of CNYS, Citibank, N.A., the
Company's dealer in these financial instruments. See Notes 1 and 13 for further
information.
The estimated fair value of the Company's financial instruments as of December
31, is as follows:
<TABLE>
<CAPTION>
1997 1996
-------------------------------------------------------------------------
Excess of Fair Excess of Fair
Value over Value over
Carrying Fair Carrying Carrying Fair Carrying
Amount Value Value Amount Value Value
($000's) -------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C>
Financial Assets
Insured student loans, net $7,623,143 $8,032,840 $409,697 $6,892,721 $7,197,750 $305,029
Cash 2,108 2,108 -- 567 567 --
Accrued interest receivable 205,358 205,358 -- 179,943 179,943 --
-------------------------------------------------------------------------
Financial Liabilities
Short-term borrowings $5,696,605 $5,696,605 $ -- $4,509,251 $4,509,251 $ --
Long-term notes 1,610,000 1,610,000 -- 2,075,000 2,074,858 (142)
Related derivatives liability 375 575 200 9,286 11,128 1,842
Accrued interest payable 47,920 47,920 -- 60,711 60,711 --
Accrued fees and expenses payable,
including restructuring liabilities 98,027 98,027 -- 82,273 82,273 --
-------------------------------------------------------------------------
</TABLE>
15 Earnings Per Share
Basic and diluted earnings per share ("EPS") have been calculated in accordance
with SFAS No. 128, which requires restatement of all prior period earnings per
share. Because the Company's prior EPS computations agreed with the current
standard, no restatement was made.
Options to purchase shares of the Company's common stock at an exercise price of
$16.13 per share (see note 11) were outstanding during all of 1997, 1996, and
1995, but were not included in the computation of diluted EPS as the conditions
for issuance have not been met. As the Company had no dilutive potential common
shares outstanding during 1997, 1996 or 1995, the calculation of both the basic
and diluted EPS is the same in each of 1997, 1996, and 1995.
The net income available to common stockholders (the same as reported net
income) was $51.7 million for 1997, $64.9 million for 1996, and $60.6 million
for 1995. The weighted average shares outstanding during all of 1997, 1996, and
1995 was 20 million. Basic (and diluted) EPS is $2.58 for 1997, $3.25 for 1996,
and $3.03 for 1995, calculated by dividing income available to common
stockholders by weighted average shares.
30
<PAGE>
16 Commitments and Contingencies
The Company is obligated under several non-cancelable operating leases for
equipment. Those expenses totaled $0.5 million, $0.8 million, and $0.9 million,
for each of the years ended December 31, 1997, 1996, and 1995, respectively.
Such expenses exclude amounts paid of $2.0 million, $2.4 million, and $2.3
million in 1997, 1996, and 1995, respectively, under the related party
facilities and building services agreement referred to in Note 9. This agreement
expired in December 1997 and a renewable short-term agreement has been procured.
Future minimum lease payments at December 31, 1997 under agreements classified
as operating leases with non-cancelable terms in excess of one year for the
calendar years after December 31, 1997 are as follows:
<TABLE>
<CAPTION>
Minimum
Lease
($000's) Payments
- --------------------------------------
<S> <C>
1998 $285
1999 121
2000 11
After 2000 --
- --------------------------------------
Total minimum lease payments $417
======================================
</TABLE>
At December 31, 1997 and 1996, variable rate loans in the amounts of $434.4
million and $350.9 million, respectively, have been committed, but not
disbursed. These amounts do not include any commitments to purchase CitiAssist
Loans as the Company purchased all loans that were eligible for 1997 purchase by
year-end. Loans become eligible for purchase from CNYS after they are fully
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 the July 1994 initiation of the FDSL
program. 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. 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. The Act also changes the interest rate on most new FFEL program
disbursements made on or after July 1, 1998 to the 10-year Treasury Bill rate
plus 1%, resetting annually. The Administration has proposed maintaining the
current 91-day Treasury Bill index, but reducing the interest rate of loans
originated after June 30, 1998 by 0.80% from the current rate. Another proposal
would extend the current interest rate structure until July 1999. Resolution of
this issue may not occur for many months. However, if no Congressional action is
taken, the 10-year plus 1% formula will take effect for loans disbursed on or
after July 1, 1998. Both this rate as well as the Administration proposal would
materially reduce the Company's net interest margin if new loans were originated
under either of these rate structures.
There can be no assurance that the provisions of the Federal Higher Education
Act of 1965 will be reauthorized prior to its expiration on September 30, 1998.
In addition, provisions of the Act may be amended by Congress at any time prior
to that date, possibly resulting in further reductions in FFEL program loan
subsidies in the form of increased risk sharing costs and reduced interest
margins. 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.
31
<PAGE>
17 Future Impacts of Recently Issued Accounting Standards
Effective January 1, 1998 the Company adopted the remaining provisions of SFAS
No. 125, "Accounting for Transfers and Servicing of Financial Assets and
Extinguishments of Liabilities," which relate to the accounting for securities
lending, repurchase agreements, and other secured financing activities. These
provisions, which were delayed for implementation by SFAS No. 127, are not
expected to have a material impact on the Company. In addition, the FASB is
considering certain amendments and interpretations of SFAS No. 125 which, if
enacted in the future, could affect the accounting for transactions within their
scope.
During the first quarter of 1998 the Company will adopt SFAS No. 130, "Reporting
Comprehensive Income," which addresses the manner in which certain adjustments
to stockholders' equity (principally foreign currency translation and unrealized
gains and losses on available for sale securities) are displayed in the
financial statements, with no effect on reported earnings, assets or capital.
Also during 1998 the Company will adopt SFAS No. 131, "Disclosures about
Segments of an Enterprise and Related Information," which revises the
requirements for disclosing segment data. The new standard is not expected to
result in significant changes in the Company's reporting.
32
<PAGE>
Securities and Exchange Commission Information
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, 1997, Commission
File Number 1-11616.
The Student Loan Corporation (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.
The Company is incorporated in the State of Delaware; its I.R.S. Employer
Identification Number is 16-1427135; the address of the principal executive
offices is 99 Garnsey Road, Pittsford, New York, 14534; and its phone number is
(716) 248-7604.
The Company has 20 million shares of common stock registered pursuant to section
12(b) of the Securities Exchange Act of 1934 and listed on the New York Stock
Exchange.
The aggregate market value of voting stock held by non-affiliates of the Company
as of February 13, 1998 was approximately $187 million. On that date, there were
20 million shares of the Company's common stock outstanding to both affiliates
and non-affiliates. Disclosure of delinquent filers pursuant to Item 405 of
Regulation S-K is not contained herein nor in any amendment to this Form 10-K.
Certain information has been incorporated by reference into this annual report
from the Company's 1998 Proxy Statement.
Signatures
Pursuant to the requirements of Section 13 or 15(d) of the Securities Exchange
Act of 1934, the Registrant has duly caused this report to be signed on its
behalf by Carl E. Levinson, Chairman and Chief Executive Officer of The Student
Loan Corporation, thereunto duly authorized, on March 25, 1998.
Pursuant to the requirements of the Securities Exchange Act of 1934, this report
was signed on March 25, 1998 by Carl E. Levinson, Chairman and Chief Executive
Officer; Bill Beckmann, Director; and Yiannis Zographakis, Chief Financial and
Principal Accounting Officer
The Directors of the Student Loan Corporation listed below executed power of
attorneys appointing Bill Beckmann their attorney-in-fact, empowering him to
sign this report on their behalf:
Christopher F. Edley, Peter M. Gallant, Evelyn E. Handler, Laura D. Williamson
33
<PAGE>
Independent Auditors' Consent
The Board of Directors of 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
February 4, 1998, relating to the balance sheets of The Student Loan Corporation
as of December 31, 1997 and 1996, and the related statements of income,
stockholders' equity, and cash flows for each of the years in the three-year
period ended December 31, 1997, which report has been incorporated by reference
in the December 31, 1997 annual report on Form 10-K of The Student Loan
Corporation.
/s/ KPMG Peat Marwick LLP
KPMG Peat Marwick LLP
Rochester, New York
March 23, 1998
Exhibits, Financial Statement Schedules and Reports
on Form 8-K
Financial statements filed for The Student Loan Corporation:
Statements of Income for the years ended December 31, 1997, 1996 and 1995.
Balance Sheets as of December 31, 1997 and 1996.
Statements of Cash Flows for the years ended December 31, 1997, 1996 and 1995.
Statements of Stockholders' Equity for the years ended December 31, 1997, 1996
and 1995.
Notes to Financial Statements.
The Student Loan Corporation filed no reports on Form 8-K for 1997. The Student
Loan Corporation's Restated Certificate of Incorporation, Bylaws of the Company,
as amended, and certain other material contracts have been previously filed with
the Securities and Exchange Commission as exhibits to various registration
statements and periodic reports.
Stockholders may obtain copies of such documents by writing to The Student Loan
Corporation, Investor Relations, 99 Garnsey Road, Pittsford, NY 14534.
Powers of Attorney of Directors Edley, Gallant, Handler, and Williamson as
Directors of The Student Loan Corporation are filed herewith.
34
<PAGE>
10-K Cross Reference Index
This Annual Report and Form 10-K incorporate into a single document the
requirements of the accounting profession and the Securities and Exchange
Commission.
<TABLE>
<CAPTION>
Part I Page
<S> <C> <C>
Item 1 Business .............................................................................. 1 and 8-12
Item 2 Properties ............................................................................ 12
Item 3 Legal Proceedings ..................................................................... 12
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 ............. 36
Item 6 Selected Financial Data ............................................................... 37
Item 7 Management's Discussion and Analysis of Financial Condition and Results of Operations . 1-7
Item 8 Financial Statements and Supplementary Data ........................................... 14-32
Item 9 Changes in and Disagreements with Accountants on
Accounting and Financial Disclosure ................................................... Not Applicable
- ------------------------------------------------------------------------------------------------------------------
Part III
Item 10 Directors and Executive Officers of the Registrant .................................... *
Item 11 Executive Compensation ................................................................ *
Item 12 Security Ownership of Certain Beneficial Owners and Management ........................ *
Item 13 Certain Relationships and Related Transactions ........................................ *
Part IV
Item 14 Exhibits, Financial Statement Schedules, and Reports on Form 8-K ...................... 34
- ------------------------------------------------------------------------------------------------------------------
Signatures ..................................................................................... 33
- ------------------------------------------------------------------------------------------------------------------
</TABLE>
* The Student Loan Corporation's 1998 Proxy Statement is incorporated herein
by reference. Such incorporation by reference shall not include the
information referred to in Item 402(a)(8) of Regulation S-K.
35
<PAGE>
Directors and Executive Officers
DIRECTORS Bill Beckmann
President and Chief Operating Officer
The Student Loan Corporation
Christopher F. Edley
President Emeritus
The College Fund/UNCF
Peter M. Gallant
Vice President and Treasurer
Citicorp and Citibank, N.A.
Dr. Evelyn E. Handler
Executive Director Emeritus
California Academy of Science
Carl E. Levinson
Chairman and Chief Executive Officer
The Student Loan Corporation
Laura D. Williamson
Vice President
Citibank, N.A.
EXECUTIVE OFFICERS Carl E. Levinson
Chairman and
Chief Executive Officer
Bill Beckmann
President and
Chief Operating Officer
Gerald Bystrak
Vice President and
Director of Operations
John R. Coffin
Vice President and
General Counsel
Thomas Quinn
Vice President and
Director of Sales
Yiannis Zographakis
Vice President and
Chief Financial Officer
Stockholder 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
website 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 8,
1998 in New York City.
Transfer Agent and Registrar
Citibank, N.A., Issuer Services, Box 4855, New York, NY 10043.
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 13, 1998 was 57. The following table sets
forth the high, low and close sales prices for the common stock during each
fiscal quarter of 1997 and 1996.
36
<PAGE>
<TABLE>
<CAPTION>
1997 1996
- ------------------------------------------------------------------------------------------------------
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 3/8 $44 $47 11/16 $53 15/16 $41 1/4 $39 1/4 $36 3/8 $38 7/8
Low 35 7/8 35 3/4 40 3/4 48 33 5/8 34 7/8 32 1/8 33 3/8
Close 36 3/8 42 7/16 46 3/4 49 3/8 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 for
each of the first three quarters of 1996 and $0.12 per share for the fourth
quarter of 1996 and the first two quarters of 1997. The quarterly dividend was
increased to $0.15 per share beginning with the third quarter of 1997.
<TABLE>
<CAPTION>
FINANCIAL HIGHLIGHTS STUDENT LOAN CORPORATION
(Dollars in millions, except per Years ended December 31,
share amounts)
- --------------------------------------------------------------------------------------------------------------------------
1997 1996 1995 1994 1993
- --------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C>
STATEMENTS OF INCOME DATA
Net interest income $ 175.9 $ 175.2 $ 161.9 $ 146.0 $ 147.7
Total operating expenses,
excluding restructuring costs $ 68.1 $ 61.9 $ 57.6 $ 51.0 $ 40.0
Restructuring expenses $ 20.5 -- -- -- --
Total operating expenses $ 88.6 $ 61.9 $ 57.6 $ 51.0 $ 40.0
Net income $ 51.7 $ 64.9 $ 60.6 $ 54.9 $ 64.7
- --------------------------------------------------------------------------------------------------------------------------
BALANCE SHEET DATA
(as of December 31)
Total assets $ 7,831.1 $ 7,118.3 $ 6,387.4 $ 5,365.1 $ 4,346.9
Long-term notes $ 1,610.0 $ 2,075.0 $ 3,400.0 $ 1,100.0 $ 600.0
Payable to principal stockholder $ 17.1 $ 19.8 $ 29.1 $ 32.2 $ 40.0
- --------------------------------------------------------------------------------------------------------------------------
EARNINGS DATA
Cash dividends declared per common share $ 0.54 $ 0.30 $ 0.24 $ 0.24 $ 0.18
Basic and diluted earnings per common share(/1/)$ 2.58 $ 3.25 $ 3.03 $ 2.75 $ 3.23
Net interest margin 2.42% 2.68% 2.85% 3.18% 3.98%
Operating expenses as a percentage of average
insured student loans, excluding
restructuring costs 0.94% 0.95% 1.02% 1.11% 1.09%
Total operating expenses as a percentage of
average insured student loans 1.22% 0.95% 1.02% 1.11% 1.09%
- --------------------------------------------------------------------------------------------------------------------------
EARNINGS DATA CORE(/2/)
Net income $ 50.8 $ 63.9 $ 60.3 $ 47.8 $ 40.4
Basic and diluted earnings per common share(/1/)$ 2.54 $ 3.20 $ 3.01 $ 2.39 $ 2.02
Net interest margin 2.40% 2.65% 2.85% 2.85% 2.86%
- --------------------------------------------------------------------------------------------------------------------------
OTHER
Average insured student loans $ 7,269.2 $ 6,547.5 $ 5,669.4 $ 4,591.4 $ 3,688.2
Average number of loan accounts
serviced (thousands) 1,888 1,706 1,497 1,226 1,041
Loan disbursements(/3/) $ 1,474.3 $ 1,425.0 $ 1,441.6 $ 1,434.4 $ 1,171.2
Book value per share
(as of December 31) $ 20.16 $ 18.10 $ 15.15 $ 12.36 $ 9.85
Common stock price(/4/)
High $53 15/16 $ 41 1/4 $ 35 1/2 $ 20 7/8 $ 30 1/2
Low $35 3/4 $ 32 1/8 $ 18 3/8 $ 18 1/8 $ 14 1/4
Close $49 3/8 $ 37 1/4 $ 34 $ 18 1/4 $ 18 7/8
Total number of employees
(as of December 31) 844 810 790 788 662
- --------------------------------------------------------------------------------------------------------------------------
</TABLE>
(1) In 1997 the Company adopted SFAS No. 128, "Earnings per Share" which did not
change earnings per share from that previously reported.
(2) Core earnings data represents earnings data excluding floor net income.
(3) For 1996 and 1995, disbursements included $53 million and $127 million,
respectively, in loan consolidations made under specific agreements with the
Department of Education and several of its contractors. The consolidation
agreements were phased-out in mid-1996.
(4) Common stock price is based on The New York Stock Exchange composite
listing.
37
<TABLE> <S> <C>
<PAGE>
<ARTICLE> 5
<MULTIPLIER> 1,000
<S> <C>
<PERIOD-TYPE> YEAR
<FISCAL-YEAR-END> DEC-31-1997
<PERIOD-START> JAN-01-1997
<PERIOD-END> DEC-31-1997
<CASH> 2108
<SECURITIES> 0
<RECEIVABLES> 7625157
<ALLOWANCES> 2014
<INVENTORY> 0
<CURRENT-ASSETS> 0
<PP&E> 0
<DEPRECIATION> 0
<TOTAL-ASSETS> 7873112
<CURRENT-LIABILITIES> 0
<BONDS> 0
0
0
<COMMON> 200
<OTHER-SE> 402922
<TOTAL-LIABILITY-AND-EQUITY> 7873112
<SALES> 0
<TOTAL-REVENUES> 588480
<CGS> 0
<TOTAL-COSTS> 0
<OTHER-EXPENSES> 88607
<LOSS-PROVISION> 3310
<INTEREST-EXPENSE> 412541
<INCOME-PRETAX> 87314
<INCOME-TAX> 35644
<INCOME-CONTINUING> 51670
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> 51670
<EPS-PRIMARY> 2.58
<EPS-DILUTED> 2.58
</TABLE>
