<PAGE>
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
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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, 1998
COMMISSION FILE NUMBER 1-11616
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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)
750 WASHINGTON BOULEVARD 06901
STAMFORD, CT 06901 (Zip Code)
(Address of principal offices)
(203) 975-6292
(Registrant's telephone number, including area code)
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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
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SECURITIES REGISTERED PURSUANT TO SECTION 12(G) OF THE ACT:
None
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Indicate by check mark whether the registrant (1) has filed all reports
required to be filed by Section 13 or 15(d) of the Securities Exchange Act of
1934 during the preceding 12 months (or for such shorter period that the
registrant was required to file such reports), and (2) has been subject to such
filing requirements for the past 90 days. Yes X No
--- ---
Indicate by check mark if disclosure of delinquent filer 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
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The aggregate market value of voting stock held by non-affiliates of the
registrant as of February 12, 1999 was approximately $176 million. On that date,
there were 20,000,000 shares of Common Stock outstanding.
DOCUMENTS INCORPORATED BY REFERENCE:
Portions of the Proxy Statement related to the registrant's Annual Meeting of
Stockholders to be held May 13, 1999 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 the nation's largest originator and the second
largest holder of Federal Family Education Loan ("FFEL") program loans
authorized by the Department of Education (the "Department") made under the
Federal Higher Education Act of 1965, as amended (the "Act"). The Company also
holds and originates student loans that are not insured under the Act, including
CitiAssist loans, a 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 Citigroup. 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. CNYS is a wholly owned subsidiary of Citigroup Inc.
Citicorp Merger
On October 8, 1998, Citicorp, the parent corporation of CNYS, merged with and
into a newly formed, wholly owned subsidiary of Travelers Group Inc. (TRV).
Following the merger TRV changed its name to Citigroup, Inc. and became the
holding company for the combined Citicorp and Travelers businesses.
Forward-Looking Statements
Certain statements contained in this report that are not historical facts are
forward-looking statements. The Company's actual results may differ materially
from those suggested by the forward-looking statements, which are typically
identified by the words or phrases "believe", "expect", "anticipate",
"estimate", "may increase", "may result in", and similar expressions. These
forward-looking statements involve risks and uncertainties including, but not
limited to, the following: the Company's ability to implement its restructuring
plan; the effects of future legislative changes; actual credit losses
experienced by the Company in future periods compared to the estimates used in
calculating reserves; fluctuations in the interest rates paid by the Company for
its funding and received on its loan portfolio; the success of the Company's
hedging policies; the effect of year 2000 issues; as well as general economic
conditions, including the performance of financial markets and the passage of
regulatory changes.
Future Application of Accounting Standards
See Note 17 to the Financial Statements for a discussion of recently issued
accounting pronouncements.
FINANCIAL CONDITION AND RESULTS OF OPERATIONS
Summary
The Company's 1998 net income was $73.4 million ($3.67 basic earnings per
share), up $21.7 million (42%), or $1.09 per share, from 1997 net income of
$51.7 million ($2.58 basic earnings per share). Of the increase, $16.4 million
was attributable to a restructuring reserve reversal of $7.5 million ($4.4
million after tax) in 1998 and the $20.5 million ($12.0 million after tax)
charge to 1997 earnings to establish the reserve. See restructuring reserve
discussion below.
On a comparable basis, in which the one time and other items for 1998 and
1997 are excluded, 1998 net income was $69.0 million (or $3.45 basic earnings
per share), $6.9 million (11%) higher than 1997 net income of $62.1 million
($3.11 basic earnings per share). These one time items for 1998 include the $4.4
million (after tax) offset to operating expense to record the restructuring
reserve adjustment, $2.2 million (after tax) interest income received as lawsuit
proceeds from the Department of Education, and $2.2 million (after tax)
transition expenses incurred related to the migration of certain of the
Company's operating activities to affiliates. For 1997, one time and other items
include the $12.0 million (after tax) charge to operating expense to record the
restructuring reserve and the $1.6 million (after tax) proceeds from the sale of
a non-strategic portfolio.
Exclusive of the one-time items, the $6.9 million increase of 1998 over 1997
net income was primarily attributable to higher interest income generated by a
$1 billion (13%) increase in the Company's loan portfolio, partially offset by
higher 1998 pre-tax operating expenses of $1.3 million. This increase in
operating expenses is primarily attributable to costs incurred in the Company's
year 2000 compliance efforts and increases to the Company's sales force, as well
as other initiatives. Excluding one-time items, operating expenses as a
percentage of average insured student loans improved from 0.94% for 1997 to
0.86% for 1998.
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Net interest margin declined to 2.37% in 1998 from 2.42% in 1997. The decline
in the margin was primarily the result of less favorable funding spreads as well
as lower yields on the FFEL program loan portfolio.
At December 31, 1998, the Company's insured student loan assets reached $8.6
billion, up 13% from December 31, 1997 levels of $7.6 billion. The increase in
loans outstanding was primarily due to new loan disbursements, partially offset
by repayments of loans. New FFEL program disbursements of $1,833 million for
1998 were up $234 million (15%) from 1997 disbursement levels. The 1998
disbursements included $245 million of loan consolidations, an increase of $120
million (96%) from 1997. The 1998 disbursements do not include approximately
$193 million in CitiAssist loans disbursed in 1997 and 1998 by CNYS, but not yet
acquired by the Company. In order to comply with certain legal requirements,
CitiAssist loans are originated by CNYS. The Company will purchase most of these
CitiAssist loans following full disbursement of the loan. The Company expects to
acquire substantially all of the CitiAssist originations, which meet certain
eligibility requirements, during the first half of 1999. CNYS CitiAssist
originations of $175 million in 1998 were $108 million (161%) higher than the
prior year. The Company's loans outstanding balance at December 31, 1998
included $45 million of CitiAssist loans, which is $31 million more than at
December 31, 1997 and is reflective of the loan purchases made during 1998,
partially off-set by repayments.
In addition, approximately $100 million of other loan portfolio purchases
were made and $65 million of loans were acquired in loan consolidation
transactions in 1998, compared to $0.5 million of portfolio purchases and $20
million of consolidation loans acquired in 1997.
The allowance for loan losses balance primarily represents estimated
potential losses arising from the risk-sharing provisions of the FFEL and
CitiAssist programs. FFEL program loans submitted for default claim are subject
to the 2% risk-sharing provisions of the Act. CitiAssist loans are subject to 5%
risk sharing losses in accordance with provisions of an agreement with Guaranty
National Insurance Company ("GNIC"), the insurer of these loans. A small number
of CitiAssist loans are not insured against loss. The allowance for loan losses
balance increased to $2.4 million at December 31, 1998, compared to $2.0 million
at the end of 1997, primarily reflecting growth in the portfolio of loans that
are in repayment and could incur losses on default claims.
Restructuring Plan
In the fourth quarter of 1997, the Company announced a restructuring plan to
realign its business and processing structure, involving the outsourcing of
various parts of its operations, which had been based in the Company's
Pittsford, NY office, to affiliated companies. The restructuring plan was
designed to take advantage of the larger economies of scale and more global
operating systems configurations being employed by those affiliates. The plan
will involve the termination of approximately 425 employees, primarily in loan
originations, loan servicing, marketing, finance, credit and legal functions.
In connection with the restructuring plan, the Company established a
restructuring reserve and incurred a $20.5 million pre-tax charge in, including
$16.2 million in severance and out-placement benefits, $2.8 million in furniture
and equipment write-downs and $1.5 million in exit costs. Additional costs,
including transition costs of $3.7 million, did not qualify for recognition in
the initial $20.5 million charge and were expensed as incurred in 1998. The
furniture and equipment write-downs of $2.8 million were taken against the
reserve in 1997 and $2.6 million in severance, outplacement, exit, and other
costs were taken against the reserve in 1998.
Based on revised reserve projections, a $7.5 million reduction in the
restructuring reserve was recognized as an offset to operating expenses in 1998.
This reserve adjustment resulted primarily from a decision to retain certain key
business functions, including approximately 200 Pittsford-based employees,
primarily in technology and accounting positions, and the migration of certain
other employees in finance, administration, sales and marketing positions to a
facility in Stamford, CT. Much greater than expected employee attrition, prior
to eligibility for severance pay, also contributed to the reserve adjustment.
Of the $7.6 million remaining reserve balance at December 31, 1998, $1.2
million will be used for ongoing severance and outplacement costs for the 200
employees already on job discontinuance. It is anticipated that approximately
225 further staff reductions will occur during 1999 under the plan. The
restructuring plan is expected to be complete by mid-1999. See Note 3 of the
Notes to the Financial Statements for further information on the Company's
restructuring plan.
Net Interest Income
Net interest income, interest earned from student loans less interest expense on
borrowings, was $192.3 million for 1998, compared with $175.9 million for 1997.
The increase of $16.4 million is a result of higher interest revenue
attributable to the growth in the loan portfolio, partially offset by diminished
net interest margins. 1998 interest income also includes the receipt of a one-
time interest payment of $3.7 million ($2.2 million after tax), representing the
Company's share of a judgment rendered in a lawsuit by lenders against the
Department of Education. The Department of Education was judged to have failed
to have made certain required special allowance interest payments for the period
July 1, 1992 through January 1, 1995. Net interest margin declined to 2.37% in
1998, compared to 2.42% in 1997. This decline was primarily attributable to less
favorable funding
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spreads between the rates earned on the Company's assets and the rates it pays
on its funding. Also, the legislated 30 basis points reduction of the lender
yield on FFEL program loans originated after July 1, 1998, combined with other
previously legislated interest reductions, contributed to the margin decline as
loans at these lower rates were added to the portfolio.
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. The majority of interest rate swap
agreements are with Citibank, N.A., an affiliate of CNYS.
The following table sets forth the average rates earned on interest earning
assets and paid on interest bearing liabilities.
Average Balance Sheet
<TABLE>
<CAPTION>
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1998 1997 1996
------------------------------- ---------------------------- -------------------------
Balance Income/ Rate Balance Income Rate Balance Income/ Rate
(Dollars in millions) Expense Expense Expense
- ------------------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C>
Average insured student loans $8,112 $ 646 7.96% $7,269 $588 8.09% $6,548 $542 8.28%
Average non-interest earning assets 252 222 223
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Total average assets $8,364 $7,491 $6,771
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Average interest bearing liabilities $7,797 $ 454 5.82% $6,997 $412 5.89% $6,321 $367 5.81%
Average non-interest bearing liabilities 136 110 117
Average equity 431 384 333
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Total average liabilities and equity $8,364 $7,491 $6,771
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Net interest margin $8,112 $ 192 2.37% $7,269 $176 2.42% $6,548 $175 2.68%
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Average 91-day Treasury Bill rate
at the final auction date before
June 1st for Stafford revenue 5.16% 5.16% 5.16%
Average 52-week Treasury Bill rate
at the final auction date before
June 1st for PLUS/SLS reset 5.65% 5.75% 5.75%
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</TABLE>
The following table shows the components of the annual changes in net interest
income.
Rate/Volume Analysis
<TABLE>
<CAPTION>
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1998 Compared to 1997 1997 Compared to 1996
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Increase (Decrease) due to change in: Increase (Decrease) due to change in:
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(Dollars in millions) Volume Rate (a) Net (b) Volume Rate (a) Net (b)
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<S> <C> <C> <C> <C> <C> <C>
Interest earning assets $67.3 ($ 9.2) $58.1 $58.6 ($ 12.7) $45.9
Interest bearing liabilities 46.6 (4.9) 41.7 39.8 5.4 45.2
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Net interest earnings $20.7 ($ 4.3) $16.4 $18.8 ($ 18.1) $ 0.7
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</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.
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The Company manages credit risk by entering into swap agreements with those
counterparties having investment-grade external credit ratings. Net swap
interest receivable or payable is accrued and recorded as an adjustment to
interest expense.
Special Allowance 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.
Operating Expenses
Operating expenses for 1998 (excluding the effect of the restructuring
adjustment/costs discussed above and transition costs of $3.7 million) were
$69.4 million or 0.86% of average insured student loans, compared to $68.1
million or 0.94% of average insured student loans for 1997. The increase in
operating expenses of $1.3 million (2%) is attributable primarily to costs
incurred in the Company's Year 2000 compliance efforts as well as increases to
the Company's sales force and other initiatives. The 0.08% improvement in the
expense ratio was primarily attributable to efficiencies in operational and
administrative expenses. Including the $7.5 million restructuring reserve
adjustment reflected as a reduction of operating expenses in 1998, the $3.7
million transition costs and the $20.5 million restructuring charge recorded in
1997, the Company's 1998 operating expenses totaled $65.6 million (or 0.81% of
average insured student loans), $23.0 million lower than last year's expenses of
$88.6 million (or 1.22% of average insured student loans).
Income Taxes
The Company had deferred tax assets of $31.9 million and $41.6 million at
December 31, 1998 and 1997, 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. Included in total deferred tax assets at December 31, 1998 and 1997
are the tax effects of the restructuring reserve as of those dates of $3.2
million and $7.3 million, respectively. See Notes 1 and 12 to the Financial
Statements for further discussion.
The Company's effective tax rates were 41.35% for 1998, 40.82% for 1997, and
41.42% for 1996.
1997 Compared to 1996
The Company's 1997 net income was $51.7 million ($2.58 basic earnings per
share), down $13.2 million (20%) over net income of $64.9 million ($3.25 basic
earnings per share) for 1996. The decline in net income for 1997 occurred
primarily from the $20.5 million ($12.0 million after tax) restructuring reserve
charge which was recorded in 1997. Excluding the restructuring charge, 1997 net
income was $63.7 million, $1.2 million (2%) less than 1996. This decline in net
income is primarily attributable to lower net interest margins and higher
operating costs, partially offset by a $1.6 million after-tax gain on the sale
of several distressed loan portfolios.
At December 31, 1997, net loans outstanding reached $7.6 billion, an increase
of $730.4 million (11%) from December 31, 1996. The increase in loans
outstanding was due primarily to new loan disbursements, partially offset by
loan repayments. FFEL program disbursements of $1,600 million for 1997 were up
$36 million (2%) from 1996 disbursement levels. In addition, the portfolio
balance at year-end 1997 included $13.7 million of loans originated through the
CitiAssist program, launched during that year. The allowance for loan losses
balance was $2.0 million at December 31, 1997, $0.4 million higher than the
balance at the end of 1996.
Net interest income was $175.9 million for 1997, compared with $175.2 million
for 1996. The $0.7 million increase was a result of portfolio growth, partially
offset by diminished net interest margins. Net interest margin for 1997 declined
to 2.42% from 2.68% in 1996. This net interest margin decline was primarily
attributable to an unusually wide spread between the indices which determine the
rates earned on the Company's interest-earning assets and the rates it pays on
its funding. In addition, lower yields on newer FFEL program loan originations
contributed to the decline.
Operating expenses, excluding the $20.5 million restructuring costs discussed
above, were $68.1 million or 0.94% of average insured student loans for 1997
compared to $61.9 million or 0.95% of average insured student loans for 1996.
Increases in operating expenses were due primarily to costs incurred to promote
and service the new CitiAssist alternative loan product. Including the $20.5
million restructuring charge incurred in 1997, the Company's operating expenses
totaled $88.6 million (or 1.22% of average insured student loans), which is
$26.7 million higher than in 1996.
Regulatory Impacts
The Company's loan portfolio is primarily comprised of loans originated under
the FFEL program. Since 1992, the Act, which governs the FFEL program and the
related Federal Loan Consolidation program, has increased costs and reduced
interest payments to lenders. These legislative changes have progressively
reduced the net interest margin of the Company's portfolio.
Amendments to the Act also introduced a competitor program, the Federal
Direct Student Loan program ("direct lending") under which the federal
government (rather than financial
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institutions such as the Company) originates loans directly to students using
U.S. Treasury funds. Direct lending accounted for approximately 35%, on a
national basis, of all guaranteed student loans made in the 1997-98 academic
year, significantly less than the maximum 50% market share for that period
contemplated by the Act. There has been little growth in the program's share in
recent years. However, the impact of the FDSL program on the Company's future
originations is dependent upon such factors as further growth in direct lending
and the relative size of the FFEL program in the years to come.
Amendments to the Act adopted in recent years 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. As legislated in the Act, reauthorized October 1, 1998,
the interest rate paid by borrowers on loans originated on or after July 1, 1998
was decreased by 0.80%. The rate earned by lenders was reduced by 0.30%, with
the 0.50% difference funded by the federal government through changes in the
special allowance formula. There is no guarantee that the 0.50% special
allowance payment will not be further reduced in subsequent budget cycles.
In addition, lenders are currently required to pay a 0.5% origination fee for
all FFEL program loans and pay an annual fee of 1.05% of the outstanding
balances of Federal Consolidation loans held. The Act also includes risk-sharing
provisions that apply to guaranteed defaulted FFEL program 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. In addition,
other amendments to existing provisions of the Act may be enacted by Congress at
any time, possibly resulting in further reductions in loan subsidies in the form
of increased risk sharing costs and reduced interest margins. Any such amendment
could adversely effect the Company's business and prospects.
The Company has experienced a steady decline in net interest margin, as new
loans with lower yields were added to the portfolio and older, more profitable
loans were repaid. Pressure on margins will continue as more loans are
originated with the recently enacted 0.30% lender-absorbed yield cut. Therefore,
in order to continue improving its net income in future years, the Company has
sought to increase the size of its portfolio to take advantage of greater
economies of scale. In recent years, 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 and simplified workflow and
reconcilement.
Risk Management
The Company considers risk management to be an important business objective. The
Company believes that its greatest exposure is with market, credit, operational
and regulatory risks.
Market risk is the risk of loss arising from changes in market interest rates
and prices. The Company manages market risk by entering into interest rate swap
agreements to better match the interest rate characteristics of its liabilities
with that of its assets. The Company's Asset/Liability Management Committee
("ALCO") reviews the current and prospective funding requirements and makes
recommendations to management that may impact interest rate swap agreement and
other decisions. Also, the Company periodically reviews expectations for the
market and sets limits as to interest rate and liquidity risk exposure.
The Company manages credit risk by maintaining risk-sharing agreements with
servicers performing underwriting operations and by entering only into interest
rate swap agreements with those having investment-grade external credit ratings.
In addition, the Company prepares annual credit programs for its loan products,
requiring the preparation of a detailed risk analysis by loan type, and senior
management's approval of the program. Also, the Company is periodically
reviewed by Citigroup business risk review and corporate audit teams for
portfolio quality and process compliance. The Company has consistently scored
well on these reviews. Credit risk is minimized by the federal guarantees
maintained on its FFEL program student loan portfolios.
Operational risks are those risks arising from servicing issues that could
cause losses to the guaranteed student loan portfolio. FFEL program loans that
are not originated or serviced in accordance with Department regulations risk
loss of guarantee or interest penalties. The Company manages operational and
credit risk by conducting compliance and process reviews of the Company's loan
servicers and through contractual remedies for any losses incurred due to
servicing errors.
The Company is subject to regulatory risk as the federal government sets the
terms and conditions of the loans in the FFEL program guaranteed loan portfolio,
and has periodically reduced the returns to lenders in the reauthorization and
budget-setting processes.
Market Risk
The Company's primary market risk exposure is to movements in US dollar interest
rates, the only currency in which the Company operates. As noted above, the
Company manages its interest rate risk exposure through the use of derivative
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instruments in the form of interest rate swap agreements to better match the
interest rate characteristics of its liabilities with that of its assets. Under
these agreements, the Company receives interest payments based on the
characteristics of its liabilities and makes payments based on the interest rate
characteristics of the Company's assets. These derivatives are utilized to
manage interest rate risk in response to changing market conditions as well as
to change the characteristics of the related liabilities. All of the Company's
derivatives agreements terminate within one year. None of the Company's
financial instruments are used for trading purposes. Additional information
about interest rate swap agreements is located in Note 13 to the Financial
Statements.
Market risk is measured using various tools, including Earnings-at-Risk. The
Earnings-at-Risk calculation reflects the repricing gaps in the position
embedded in the portfolio. The Company prepares Earnings-at-Risk calculations to
measure the discounted pre-tax earnings impact over a specified time span of a
specified shift in the interest rate yield curve. The yield curve shift is
statistically derived as a two standard deviation change in a short-term
interest rate over the period required to defease the position (usually two
weeks). As of December 31, 1998, the rate shift over a two-week defeasance
period applied to the interest yield curve for purposes of calculating Earnings-
at-Risk was 55 basis points.
As of December 31, 1998, a 55 basis point (two standard deviation) increase
in the interest yield curve would have a potential negative impact on the
Company's pre-tax earnings of approximately $5.6 million for 1999 and
approximately $24.8 million for the total five-year period 1999-2003. The table
below illustrates potential impacts of both a 55 basis point increase and a 55
basis point decrease in the interest yield curve by year.
The Earnings-at-Risk calculation below portrays the Company's exposure to
fluctuations in interest rates using a static approach to the balance sheet mix
and parallel shifts in the interest rate curves. It is a measure to look at
exposures based upon the Company's position at one particular point in time. In
addition, the Company has significantly greater exposure to uneven shifts in
interest rate curves (i.e. the Treasury Bill to LIBOR rate spreads). The
Company, through its ALCO, actively manages these risks and sets Earnings-at-
Risk limits and if interest rates move against the existing structure, the
appropriate actions are taken.
<TABLE>
<CAPTION>
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Earnings-at-risk (on pre-tax earnings)
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(Dollars in millions) 1999 2000 2001 2002 2003 Total
- -------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C>
Two standard deviation increase ($5.6) ($5.8) ($5.2) ($4.5) ($3.7) ($24.8)
Two standard deviation decrease $4.9 $6.3 $5.7 $4.9 $4.0 $25.8
- -------------------------------------------------------------------------------------------------------------
</TABLE>
Year 2000
The Company recognizes that the arrival of the year 2000 poses a unique
worldwide challenge to the ability of time sensitive computer systems to
recognize the date change from December 31, 1999 to January 1, 2000. The Company
has assessed and is modifying its computer systems and business processes to
provide for their continuing functionality and is assessing the readiness of
third parties with which it interfaces.
The Company is highly dependent on computer systems and system applications
for conducting its ongoing business functions. The inability of systems to
recognize properly the year 2000 could result in major systems failure or
miscalculations that would disrupt the Company's ability to meet its customer
and other obligations on a timely basis and the Company has engaged in a process
of identifying, assessing and modifying its computer programs to address this
issue. As part of and following achievement of year 2000 compliance, systems are
subjected to a process that validates the modified programs before they can be
used in production. The Company was substantially complete with these year 2000
initiatives by year-end 1998. Substantially all of the lines of code in the
Company's business applications are through the modification phase and have been
tested and certified. In addition, the majority of non-year 2000 compliant
business applications needing to be replaced with compliant applications have
been replaced. The year 1999 is primarily being used for external testing, full
integration testing and production assurance.
The pre-tax cost associated with the required modifications and conversions
is expected to total approximately $5.4 million through 1999, funded from a
combination of a reprioritization of technology development initiatives and
incremental costs and is being expensed as incurred. Of the total, approximately
$3.2 million has been incurred to date, including approximately $2.4 million in
1998.
The Company is also addressing other technology-related matters including
end-user computer applications, networks, data centers, applications
replacement, and desktops and these are similarly progressing towards timely
resolution.
The Company is also addressing year 2000 issues that may exist outside its
own technology activities, including its facilities and other business
processes, external service providers and other third parties with which it
interfaces. Substantially all of
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the Company's facilities and related systems have been investigated and
modification is underway.
Significant third parties with which the Company has systems interfaces
include customers and counterparties, external service providers, technology
vendors, payment and clearing systems, and the utility infrastructure upon which
all corporations rely. Unreadiness by these third parties would expose the
Company to the potential for loss, impairment of business processes and
activities, and disruption of financial markets. The Company is addressing these
risks through bilateral and multiparty efforts and participation in industry and
country initiatives. While significant third parties are generally engaged in
efforts intended to address and resolve their year 2000 issues on a timely
basis, it is possible that a series of failures by third parties could have a
material adverse effect on the Company's results of operations in future
periods.
The Company is creating contingency plans intended to address perceived risks
associated with its year 2000 effort. These activities include contingency
planning to mitigate any remaining risks associated with remediation of critical
systems, business resumption planning to address the possibility of systems
failure, and market resumption planning to address the possibility of the
failure of systems or processes outside the Company's control. Contingency
planning, and preparations for the management of the date change, will continue
through 1999. Notwithstanding these activities, the failure of efforts to
address, in a timely manner, the year 2000 issue, could have a material adverse
effect on the Company's results of operations in future periods.
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 1998 or in
the past three years, nor are any material capital expenditures anticipated in
1999. Restructuring reserve expenditures of $7.6 million for employee
termination benefits will be paid from cash generated from current operations.
The Company does not expect that the payment of the restructuring costs will
have a material effect on its liquidity or financial position.
The Company's cash used for investing activities amounted to $1,021.1 million
in 1998, $739.8 million in 1997, and $729.9 million in 1996. Investing
activities were financed in 1998, 1997, and 1996 primarily through the
utilization of available long and short-term credit lines. New borrowings, net
of repayments, at December 31, 1998 and December 31, 1997 increased $911.4
million and $722.4 million, respectively, compared to borrowings outstanding at
the end of the previous year.
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
volumes to continue to be funded primarily through additional 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.
On March 1, 1998, the Company renegotiated its Omnibus Credit Agreement with
CNYS, increasing the maximum aggregate credit level for combined short and long-
term debt to $10.0 billion from $8.0 billion. Under this agreement, $0.3 billion
in new short-term borrowings were made in 1998 and $0.7 billion in original
short-term borrowings were repaid. Also, $2.7 billion in new long-term
borrowings were made and $1.4 billion in long-term borrowings were repaid in
1998. The credit facilities are at variable interest rates based on LIBOR,
federal funds or the 91-day Treasury Bill rate.
At December 31, 1998, $3.9 billion in original short-term borrowings and $4.3
billion in long-term borrowings were outstanding under the CNYS agreement.
On March 1, 1997, the Company and CNYS agreed to increase the maximum
aggregate credit level of the agreement at that time from $6.4 million to $8.0
billion. During 1997, $1.7 billion in net short-term borrowings and $1.6 billion
in long-term borrowings were made under this agreement and $1.5 billion in long-
term borrowings were repaid. At December 31, 1997, $4.3 billion in original
short-term borrowings and $3.0 billion in long-term borrowings were outstanding
under the CNYS agreement.
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.
7
<PAGE>
Other Business and Industry Information
Student Loans
The Company's portfolio is comprised primarily of loans originated through the
FFEL program. These loans consist of subsidized Federal Stafford loans,
Unsubsidized Federal Stafford loans, Federal PLUS ("PLUS") loans and Federal
Consolidation loans.
The U.S. Department of Education (the "Department") 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. 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 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 alternative
loan programs, primarily CitiAssist, introduced in 1997, and TERI. Alternative
loan programs are available 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, parent's, or co-signer's creditworthiness as opposed to
financial need, and most are insured by a private insurer.
Origination of FFEL Program Loans
In the years ended December 31, 1998 and 1997, the Company originated $1.8
billion and $1.6 billion, respectively, 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 7,000 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 does 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
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 Citigroup's
customer base and its employment of a focused account management.
Management believes that 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. The Company
has Account Managers who 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.
Under agreements with the Company, certain affiliates make available the
Company's informational brochures through Citibank branches and in credit card
statements. This will be expanded to include Travelers and certain of its
affiliates going forward. The Company has student borrowers from all 50 states,
the District of Columbia and the U.S. territories. Approximately half of the
Company's loan portfolio is comprised of loans made to students from New York
and California.
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
8
<PAGE>
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. Also, 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. In
addition, lenders may not engage in fraudulent or misleading advertising or
discriminate against any borrower or applicant.
FFEL Program 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. The insurance 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.
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
The Company's FFEL program loans are guaranteed as to principal and interest by
certain state or non-profit guarantee agencies, which are reinsured by the
federal government. However, 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 guide-
lines. The Company's collections department or servicers begin contact before
the tenth day of delinquency and continue prescribed collection efforts through
mailings and telephone contact.
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 loan
is rejected for claim payment by a guarantor, the Company's collection
department again works the account for payment and/or institutes a process to
reinstate the guarantee.
At year end 1998, the Company considered loans which are 180 days delinquent
to be in default. When the loan was approximately 239 days past due, the Company
submitted a claim to the guarantee agency requesting reimbursement for the
defaulted loan. Federal regulations required that claims be filed with the
guarantor no later than the 270th day of delinquency. Failure to file a claim
within this period could have resulted in a loss of the guarantee. The
reauthorization of the Act in October 1998 included new provisions for
determining delinquency. Under these new provisions, loans with delinquencies
occurring on or after October 1998 that are 270 days past due are considered to
be in default. Claims submission dates will likewise be similarly delayed to
comply with the change in the definition of default status.
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 1998, the Company was able to cure approximately
70% of all rejected claims. For these rejected claims, the Company allows a full
four months for collections/ servicers 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.
9
<PAGE>
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. These policies and procedures continue to be monitored at the
Company's primary servicer, an affiliate to which loan originations and
servicing migrated in 1998. An internal compliance staff conducts frequent
audits of loan origination and disbursement and servicing activities to ensure
adherence with regulatory requirements.
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 1998, the Company was audited by five
guarantee agencies and a third party insurer, as well as the Department of
Education. The final reports showed no material exceptions.
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 7,000 other eligible lenders. Despite the large number of
competitors, the industry is somewhat concentrated. According to Department
statistics, the top 25 lenders accounted for approximately 90% of new loan
volume in 1997.
The Company is the nation's largest originator of FFEL program loans and has
been increasing its market share over the last seven years. The Company believes
that one factor in its growth has been the continuing consolidation of the
industry. Lenders have departed primarily due to acquisitions in the industry,
as well as 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 more quickly to regulatory changes and increase
market share. The Company competes by offering a full array of FFEL program loan
products and by emphasizing the quality of its service.
The Company is the nation's second largest holder 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 has
stated its intentions to do so in the future. The Company competes directly with
Sallie Mae in making wholesale loan purchases.
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 35%
of guaranteed student loan originations.
Employees
At December 31, 1998, the Company had approximately 464 employees, none of whom
is covered by a collective bargaining agreement. Upon completion of the
Company's restructuring plan and including the hiring of additional staff for
the Stamford, CT location in 1999, the number of employees will be approximately
300. Under the restructuring plan, the Company's loan originations and servicing
activities are being contracted to other Citigroup subsidiaries. This migration
is on track to be substantially complete by mid-1999.
Properties
The Company's facilities are maintained in Pittsford, NY under a renewable one-
year lease agreement with CNYS expiring in December 1999. As the Company's
restructuring plan nears completion, management will reevaluate its facilities
requirements. The Company is also relocating certain functions, including
finance, marketing, credit, legal and administration to space leased from
Citigroup in Stamford, CT.
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.
10
<PAGE>
Independent Auditors' Report
To 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, 1998 and 1997 and the related statements of income,
stockholders' equity and cash flows for each of the years in the three-year
period ended December 31, 1998. 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, 1998 and 1997 and the results of its operations and its cash
flows for each of the years in the three-year period ended December 31, 1998 in
conformity with generally accepted accounting principles.
Rochester, New York
January 15, 1999
11
<PAGE>
The Student Loan Corporation
STATEMENTS OF INCOME
<TABLE>
<CAPTION>
- -------------------------------------------------------------------------------------------------
Years ended December 31,
-------------------------------
(Dollars in thousands, except per share amounts) 1998 1997 1996
- -------------------------------------------------------------------------------------------------
<S> <C> <C> <C>
Revenue
Interest income (notes 2) $646,558 $588,480 $542,527
Interest expense (notes 5, 6, and 9) 454,227 412,541 367,294
- -------------------------------------------------------------------------------------------------
Net interest income 192,331 175,939 175,233
Provision for loan losses (note 2) 3,882 3,310 2,500
- -------------------------------------------------------------------------------------------------
Net interest income after provision for loan losses 188,449 172,629 172,733
Fee and other income (note 9) 2,323 3,292 47
- -------------------------------------------------------------------------------------------------
Total revenue, net 190,772 175,921 172,780
- -------------------------------------------------------------------------------------------------
Operating expenses
Salaries and employee benefits (notes 9 and 10) 32,602 32,517 30,639
Restructuring (adjustments) expenses (note 3) (7,500) 20,500 -
Other expenses (notes 8 and 9) 40,516 35,590 31,306
- -------------------------------------------------------------------------------------------------
Total operating expenses 65,618 88,607 61,945
- -------------------------------------------------------------------------------------------------
Income before income taxes 125,154 87,314 110,835
Income taxes (note 12) 51,745 35,644 45,905
- -------------------------------------------------------------------------------------------------
Net Income $ 73,409 $ 51,670 $ 64,930
- -------------------------------------------------------------------------------------------------
Basic earnings per common share (note 15) $3.67 $2.58 $3.25
- -------------------------------------------------------------------------------------------------
<CAPTION>
STATEMENTS OF STOCKHOLDERS' EQUITY
- -------------------------------------------------------------------------------------------------
(Dollars in thousands, Common Additional Retained Total
except per share amounts) Stock Paid-In Earnings
Capital
- -------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
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
Net Income - - 73,409 73,409
Dividends declared, $0.60 per common share - - (12,000) (12,000)
- -------------------------------------------------------------------------------------------------
Balance at December 31, 1998 $200 $134,380 $329,951 $464,531
- -------------------------------------------------------------------------------------------------
</TABLE>
See accompanying notes to financial statements.
12
<PAGE>
The Student Loan Corporation
BALANCE SHEETS
<TABLE>
<CAPTION>
- ---------------------------------------------------------------------------------------------------------
December 31,
------------------------
(Dollars in thousands, except per share amounts) 1998 1997
- ---------------------------------------------------------------------------------------------------------
<S> <C> <C>
Assets
Insured student loans (note 2) $8,636,343 $7,625,157
Allowance for loan losses (note 2) 2,370 2,014
- ---------------------------------------------------------------------------------------------------------
Insured student loans, net 8,633,973 7,623,143
Cash 37 2,108
Deferred tax benefits (note 12) 31,936 41,581
Other assets (note 4) 237,196 207,118
- ---------------------------------------------------------------------------------------------------------
Total assets $8,903,142 $7,873,950
- ---------------------------------------------------------------------------------------------------------
Liabilities and stockholders' equity
Liabilities
Short-term borrowings (note 5) $3,908,046 $5,696,605
Long-term notes (note 6) 4,310,000 1,610,000
Payable to principal stockholder (note 12) 13,957 17,063
Restructuring liabilities (note 3) 7,611 17,724
Other liabilities (note 7) 198,997 129,436
- ---------------------------------------------------------------------------------------------------------
Total liabilities 8,438,611 7,470,828
- ---------------------------------------------------------------------------------------------------------
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 134,380 134,380
Retained earnings 329,951 268,542
- ---------------------------------------------------------------------------------------------------------
Total stockholders' equity 464,531 403,122
- ---------------------------------------------------------------------------------------------------------
Total liabilities and stockholders' equity $8,903,142 $7,873,950
- ---------------------------------------------------------------------------------------------------------
</TABLE>
See accompanying notes to financial statements.
13
<PAGE>
The Student Loan Corporation
STATEMENTS OF CASH FLOWS
<TABLE>
<CAPTION>
- ------------------------------------------------------------------------------------------
Years ended December 31,
---------------------------------------
(Dollars in thousands) 1998 1997 1996
- ------------------------------------------------------------------------------------------
<S> <C> <C> <C>
Cash flows from operating activities:
Net Income $ 73,409 $ 51,670 $ 64,930
Adjustments to reconcile net income
to net cash from operating activities:
Depreciation and amortization 5,889 6,103 3,993
Provision for loan losses 3,882 3,310 2,500
Deferred tax provision (benefit) 9,645 (2,338) 10,705
Restructuring (adjustments) expenses (7,500) 20,500 -
Increase in accrued interest receivable (26,523) (25,415) (20,085)
(Increase) Decrease in other assets (3,079) 1,240 1,814
Increase (Decrease) in other liabilities 63,842 (25,333) (2,747)
- ------------------------------------------------------------------------------------------
Net cash provided by operating activities 119,565 29,737 61,110
- ------------------------------------------------------------------------------------------
Cash flows from investing activities:
Disbursements of loans (1,833,391) (1,599,749) (1,564,143)
Purchase of loans (194,293) (34,050) (76,489)
Sale of loans 68,258 93,430 69,728
Repayment of loans 938,951 802,626 842,732
Capital expenditures on premises and equipment (602) (2,007) (1,705)
- ------------------------------------------------------------------------------------------
Net cash used in investing activities (1,021,077) (739,750) (729,877)
- ------------------------------------------------------------------------------------------
Cash flows from financing activities:
Net (decrease) increase in borrowings
with original maturities of one year or less (413,559) 1,237,354 574,755
Proceeds from long-term borrowings 2,700,000 1,610,000 100,000
Repayments of long-term borrowings (1,375,000) (2,125,000) -
Dividends paid to stockholders (12,000) (10,800) (6,000)
- ------------------------------------------------------------------------------------------
Net cash provided by financing activities 899,441 711,554 668,755
- ------------------------------------------------------------------------------------------
Net (decrease) increase in cash (2,071) 1,541 (12)
Cash - beginning of period 2,108 567 579
- ------------------------------------------------------------------------------------------
Cash - end of period $ 37 $ 2,108 $ 567
- ------------------------------------------------------------------------------------------
Supplemental disclosure:
Cash paid for:
Interest $ 396,215 $ 432,212 $ 376,130
Income taxes $ 45,377 $ 27,798 $ 66,820
- ------------------------------------------------------------------------------------------
</TABLE>
See accompanying notes to financial statements.
14
<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 is a single segment.
CNYS, a subsidiary of Citicorp and also Citigroup Inc., is the largest
shareholder in the Company, with an 80% interest. The accompanying financial
statements include expenses for facilities, employee benefits, and certain
services provided by CNYS and other Citigroup 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 the results of operations as previously
reported.
Disclosure Change
Information on core net income, representing net income exclusive of floor
income attributable to the fixed minimum interest rates on certain loans in the
Company's portfolio, is no longer being provided. This disclosure change is
being made due to the increasing immateriality of floor income in recent years
brought about by amendments to the Federal Higher Education Act of 1965 ("the
Act"), which effectively eliminated fixed minimum interest rates on most
guaranteed student loans disbursed after July 1992.
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 student loans originated under the Federal Family
Education Loan ("FFEL") program authorized by the Department of Education (the
"Department") under the Act, as amended, and are insured by guarantors. 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 on a level
yield basis over the average life of a student loan in those portfolios.
The Company also has a portfolio of alternative loans, primarily CitiAssist.
These loans are insured against loss by a private insurer.
When a guarantor denies payment of a claim, the Company discontinues accruing
interest on the defaulted loan. FFEL program 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 $512,000 and
$1,771,000 at December 31, 1998 and 1997, respectively. Non-accrual loans at
December 31, 1997 included $966,000 of distressed loan purchases made in 1995.
Of these loan purchases, $700,000 was recovered and the remainder was written
off as an operating loss in 1998.
Allowance for Loan Losses
The allowance for loan losses primarily represents a reserve for estimated
losses on the Company's FFEL program loan portfolio under the risk-sharing
provisions of the Act. Under these provisions 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. The risk
sharing loss on these loans is calculated at 2% of the total claimed amount,
including principal and accrued interest. The allowance for loan losses also
includes estimates of CitiAssist risk sharing losses. CitiAssist loans insured
by Guaranty National Insurance Company ("GNIC"), a private third party insurer,
are
15
<PAGE>
subject to risk sharing losses calculated at 5% of the combined principal and
accrued interest balances. Estimated loan losses are accrued when guaranteed and
third party insured student loans become greater than 90 days delinquent. Risk
sharing losses which arise from actual claims with guarantors and GNIC 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
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 ended December 31, 1998,
the Company's policy is to defer and amortize any such gains or losses that do
arise 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/Citigroup, and is included in certain combined or unitary state/local
income or franchise tax returns of Citicorp/Citigroup 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/Citigroup 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 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/Citigroup 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 judgment that realization is more likely than not.
Earnings Per Share
Basic earnings per share is computed by dividing income applicable to common
stock (net income after deducting preferred stock dividends, if any) by the
weighted-average number of common shares outstanding for the period.
Diluted earnings per share shows the dilutive effect 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 and is
computed by dividing net income by the weighted-average sum of common shares
outstanding and common stock equivalents for the period. The Company had no
securities or other contracts to issue company common stock which could result
in dilution in 1998, 1997 or 1996.
2 STUDENT LOANS
Student loans consist primarily of loans originated under government sponsored
guaranteed loan programs, principally the FFEL program and, generally, have
repayment terms of between five and ten years. Whenever the stated interest rate
on FFEL program loans 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 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.
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 single 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 new loans through this program were discontinued. Federal SLS
loans include loans to graduate, professional and independent undergraduate
students, and, under certain circumstances, dependent undergraduate students. In
1994, the SLS program was replaced with an expanded Unsubsidized Stafford loan
program.
The Company's portfolio also contains loans originated through alternative
loan programs developed for students who either do not qualify for government
student loan programs or need additional financial assistance beyond that
available
16
<PAGE>
through government programs. Alternative loans are offered based on the
student's, co-signer's, or parent's creditworthiness.
Prior to 1997, the majority of the Company's alternative loans were
originated through programs with The Educational Resource Institute ("TERI") to
medical and graduate students. 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, 1998 and 1997, the Company held $74.7 million and $80.2 million,
respectively, of TERI insured loans, which were serviced by a third party.
In early 1997, the Company launched its alternative loan product, CitiAssist,
which offers students another means by which they are able 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.
In order to comply with certain legal requirements, CitiAssist loans are
originated by CNYS, the Company's principal shareholder. These loans are
serviced by the Company or a related party servicer. 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 at a
mutually agreed upon date after the final disbursement is made. The Company
amortizes the premium as a reduction of interest income over the average life of
a loan in the portfolio. As of December 31, 1998, and 1997, the Company's
CitiAssist portfolio totaled $44.6 million and $13.7 million, respectively.
The Company's student loan portfolio is summarized by program type as follows:
<TABLE>
<CAPTION>
- --------------------------------------------------------------------------------------
December 31,
-----------------------
($000's) 1998 1997
- --------------------------------------------------------------------------------------
<S> <C> <C>
Stafford/Consolidation (including deferred origination
costs of $24.0 million in 1998 and $20.2 million in 1997) $7,633,178 $6,626,023
SLS/PLUS 883,862 905,285
Supplemental/PEP/Assist 74,712 80,158
CitiAssist 44,591 13,691
- --------------------------------------------------------------------------------------
Total student loans $8,636,343 $7,625,157
- --------------------------------------------------------------------------------------
</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.
The Act requires every state either to establish its own guarantor or to
contract with another guarantee agency in order to support the education
financing and credit needs of students at post-secondary schools. 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.
For each FFEL program loan, guarantee agencies collect from the borrower a
one-time insurance premium that may not exceed 1% of the principal amount of the
loan. Also, the Act requires that a combined loan origination fee and insurance
premium be paid by the borrower on Unsubsidized Stafford loans. This fee is
passed through to the federal government by the originating lender. Current
regulations provide for a 3% origination fee.
Most CitiAssist loans are insured against default and other losses through
GNIC, a private third party insurer, and are not reinsured by the federal
government. Most insured CitiAssist loans submitted for claim are paid the claim
amount less a risk sharing loss, calculated at 5% of the sum of the outstanding
principal and accrued interest balances. During 1998, $8,000 of CitiAssist loans
were submitted for claim. No such claims were made in 1997. Some CitiAssist
loans are not insured against loss. At December 31, 1998, the Company held $2.7
million of CitiAssist loans that did not carry third party insurance. The
Company is exposed to losses of up to 100% on these loans.
17
<PAGE>
The following schedule provides an analysis of the Company's student loans by
guarantor/insurer:
<TABLE>
<CAPTION>
- ------------------------------------------------------------------------------------
December 31,
------------------------------------
($000's) 1998 % 1997 %
- ------------------------------------------------------------------------------------
<S> <C> <C>
United Student Aid Funds $3,841,874 44 $3,393,482 45
ED FUND 1,901,904 22 1,755,823 23
New York Higher Education Service Corp. 1,976,138 23 1,713,492 22
Illinois Student Aid Commission 327,338 4 316,919 4
TERI 74,712 1 80,158 1
GNIC 41,888 1 12,994 -
Other guarantors 468,723 5 349,821 5
- ------------------------------------------------------------------------------------
Total guaranteed/insured 8,632,577 100 7,622,689 100
Not guaranteed/insured 3,766 - 2,468 -
- ------------------------------------------------------------------------------------
Total student loans $8,636,343 100 $7,625,157 100
- ------------------------------------------------------------------------------------
</TABLE>
FFEL program loans are subject to regulatory requirements relating to servicing
in order to maintain the guarantee on principal and interest. In the event of
default on a student loan or borrower's death, disability, or bankruptcy, the
Company files a claim with the guarantor of the loan. Provided the loan has been
properly originated and serviced, the guarantor generally pays the Company 98%
of the sum of the loan's unpaid principal balance and accrued interest on
claimed defaulted loans disbursed on or after October 1, 1993. The 2% amount not
reimbursed is charged off to allowance for loan losses. FFEL program claims
filed due to a borrower's death, disability, or bankruptcy are not subject to
the 2% risk sharing loss provisions. For loans disbursed prior to October 1,
1993, the Company is generally paid 100% of the claim amount. 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, interest income is not accrued. 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 are charged to operating expense as incurred and amounted to
$1.3 million in each of 1998 and 1997, and $1.4 million in 1996.
Alternative loans insured by TERI are not subject to risk sharing provisions.
However, most CitiAssist loans, insured by a third party, are subject to 5% risk
sharing provisions. A small amount of CitiAssist loans are not insured against
loss and are potentially exposed to losses of up to 100%. At December 31, 1998
and 1997, the Company had established reserves for estimated risk sharing and
other losses on FFEL program and CitiAssist loans as allowance for loan losses.
Changes in the allowance for loan losses are as follows:
<TABLE>
<CAPTION>
- ------------------------------------------------------------
($000's) 1998 1997 1996
- ------------------------------------------------------------
<S> <C> <C> <C>
Balance at beginning of year $ 2,014 $ 1,570 $ 548
Provision for loan losses 3,882 3,310 2,500
Losses on claimed loans (3,526) (2,866) (1,478)
- ------------------------------------------------------------
Balance at December 31 $ 2,370 $ 2,014 $ 1,570
- ------------------------------------------------------------
</TABLE>
18
<PAGE>
Amendments to the Act also included provisions which provided rebates of
excess interest to either the borrowers or the Department 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 of the 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.
In 1993, other amendments of the Act were enacted which included other
significant changes to the FFEL program. These 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. These Amendments also instituted a competitor program, 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.
Direct lending accounted for approximately 35%, on a national basis, of all
student loans made under federal programs in the 1996-97 and 1997-98 academic
years. The Amendments allow direct lending to originate up to 60% of all such
loans nationally in 1998-99.
Amendments to the Act in recent years 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. In addition, recent legislation decreases the interest rate paid
by borrowers by 0.80% on loans originated on or after July 1, 1998. The rate
earned by lenders was reduced by 0.30%, with the 0.50% difference funded by the
federal government through changes in the special allowance formula. In
addition, lenders are required to pay a 0.5% origination fee for all new FFEL
program loans disbursed and pay an annual fee of 1.05% of the outstanding
balances of federal consolidation loans held.
3 RESTRUCTURING PLAN
In the fourth quarter of 1997, the Company announced a restructuring plan to
realign its business and processing structure, involving the outsourcing of
various parts of its operations, which had been based in the Company's
Pittsford, NY office, to affiliated companies. The restructuring plan was
designed to take advantage of the larger economies of scale and more global
operating systems configurations being employed by those affiliates.
In connection with the restructuring plan, the Company established a
restructuring reserve and incurred a $20.5 million pre-tax charge in 1997,
including $16.2 million in severance benefits, $2.8 million in furniture and
equipment write-downs and $1.5 million in exit costs. Additional costs,
including transition costs of $3.7 million, did not qualify for recognition in
the initial $20.5 million charge and were expensed as incurred in 1998. Future
implementation costs will be expensed as incurred, but are not expected to be
material. The plan provisions, which involve the termination of approximately
425 employees primarily in the loan originating, loan servicing, marketing,
finance, credit, and legal functions, includes the migration of administration,
finance, marketing and other activities to facilities in Stamford, CT.
Of the $20.5 million total restructuring charge, the furniture and equipment
write-downs were taken in 1997, leaving a $17.7 million available reserve
balance at December 31, 1997. Based on revised reserve projections, a $7.5
million reduction in the restructuring reserve balance was recognized,
offsetting operating expenses in the fourth quarter of 1998. The reserve
adjustment resulted primarily from a decision to retain approximately 200
Pittsford-based employees, primarily in technology and accounting positions, and
the migration of certain other employees in finance, administration, sales and
marketing positions to a facility in Stamford. Much greater than expected
employee attrition, prior to eligibility for severance pay, also contributed to
the reserve adjustment.
Also, during 1998 $1.2 million of the reserve balance was used for severance
and outplacement costs for the approximately 200 employees on job discontinuance
and $1.4 million was used for exit costs related to the closure of the Company's
operating units. Of the $7.6 million remaining reserve balance at December 31,
1998, $1.2 million will be used for ongoing severance and outplacement costs for
the employees already on job discontinuance. It is anticipated that
approximately 225 further staff reductions will occur during 1999 under the
plan. The restructuring plan is expected to be complete by mid-1999.
19
<PAGE>
The following chart shows the activity in the restructuring reserve.
<TABLE>
<CAPTION>
- ------------------------------------------------------------------------------
December 31,
-------------------------
($000's) 1998 1997
- ------------------------------------------------------------------------------
<S> <C> <C>
Balance at beginning of year $ 17,724 $ -
1997 restructuring charge - 20,500
Write-down of furniture and equipment - (2,776)
Utilization of reserve (2,613) -
Change in 1997 reserve estimates (7,500) -
- ------------------------------------------------------------------------------
Total restructuring liabilities $ 7,611 $ 17,724
- ------------------------------------------------------------------------------
</TABLE>
4 OTHER ASSETS
Other assets are summarized as follows:
<TABLE>
<CAPTION>
- ------------------------------------------------------------------------------
December 31,
-------------------------
($000's) 1998 1997
- ------------------------------------------------------------------------------
<S> <C> <C>
Accrued interest receivable
from borrowers $ 186,772 $160,409
from federal government 45,109 44,949
Other 5,315 1,760
- ------------------------------------------------------------------------------
Total other assets $ 237,196 $207,118
- ------------------------------------------------------------------------------
</TABLE>
5 SHORT-TERM BORROWINGS
Short-term borrowings are summarized below:
<TABLE>
<CAPTION>
- ------------------------------------------------------------------------------------------------------
December 31, 1998 December 31, 1997
-------------------------------------------------------------
Weighted Weighted
Average Average
($000's) Amount Interest Rate Amount Interest Rate
- ------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
Notes payable $3,902,340 5.72% $4,321,605 5.76%
Other short-term borrowings 5,706 8.75% - -
Short-term portion of long-term notes - - 1,375,000 6.29%
- ------------------------------------------------------------------------------------------------------
Total short-term borrowings $3,908,046 5.72% $5,696,605 5.89%
- ------------------------------------------------------------------------------------------------------
</TABLE>
20
<PAGE>
Short-term borrowings have an original or remaining term to maturity of one year
or less. At December 31, 1998 and 1997, notes payable consisted of borrowings
made under an Omnibus Credit Agreement with CNYS. On March 1, 1998, the Company
renegotiated its existing credit agreement with CNYS, increasing the maximum
aggregate credit limit for combined short and long-term borrowings from $8.0
billion to $10.0 billion. Under this agreement, $0.3 billion in new short-term
borrowings were made and $0.7 billion in original short-term borrowings were
repaid during 1998. During 1997, $3.3 billion of new short-term borrowings were
made and $1.6 billion in original short-term borrowings were repaid under the
$8.0 billion agreement. The interest rates payable on the credit facilities are
variable, based on either the overnight or monthly Federal Funds rate, the LIBOR
rate, or the average 91-day Treasury Bill rate.
Other short-term borrowings at December 31, 1998 represent funding obtained
from Citibank, N.A., a subsidiary of Citigroup, at an overnight rate. The
borrowing was paid on January 4, 1999.
6 LONG-TERM NOTES
A summary of long-term notes follows:
<TABLE>
<CAPTION>
- --------------------------------------------------------------------------------------------
December 31,
------------------------
($000's) 1998 1997
- --------------------------------------------------------------------------------------------
<S> <C> <C>
CNYS Notes, based on LIBOR (note rates ranged from 5.31% - 5.53%
at December 31, 1998 and were 6.08% at December 31, 1997),
repricing quarterly, series at December 31, 1998 due between
March 1, 2000 and November 1, 2001 and at December 31, 1997
were due between April 1, 1998 and November 1, 2000 $4,210,000 $ 2,485,000
CNYS Note, based on the 91-day Treasury Bill rate
(note rate was 6.10% at December 31, 1997),
repricing quarterly, paid October 1, 1998 - 400,000
CNYS Note, based on attributes of both LIBOR and the 91-day
Treasury Bill rate (note rates were 6.75% and 6.36% at
December 31, 1998 and 1997, respectively),
repricing quarterly, due April 3, 2000 100,000 100,000
Less: short-term portion - (1,375,000)
- --------------------------------------------------------------------------------------------
Total long-term notes $4,310,000 $ 1,610,000
- --------------------------------------------------------------------------------------------
</TABLE>
On March 1, 1998, the Company renegotiated its existing Omnibus Credit Agreement
with CNYS, increasing the maximum aggregate credit limit available for combined
short and long-term borrowings from $8.0 billion to $10.0 billion. Maturity
dates and terms for all existing outstanding notes remained the same. Under this
agreement, $2.7 billion in new long-term borrowings were made and $1.4 billion
in long-term borrowings were repaid in 1998. During 1997, $1.6 billion in new
long-term borrowings were made and $1.5 billion in long-term notes were repaid
under the $8.0 billion agreement.
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.
21
<PAGE>
7 OTHER LIABILITIES
Other liabilities are summarized as follows:
<TABLE>
<CAPTION>
- ---------------------------------------------------------------------------------
December 31,
-------------------
($000's) 1998 1997
- ---------------------------------------------------------------------------------
<S> <C> <C>
Interest payable, primarily to CNYS and its affiliates $106,331 $ 48,295
Income tax liability, payable primarily to CNYS 13,766 17,380
Accrued liabilities and other 78,900 63,761
- ---------------------------------------------------------------------------------
Total other liabilities $198,997 $129,436
- ---------------------------------------------------------------------------------
</TABLE>
8 OTHER EXPENSES
A summary of other expenses follows:
<TABLE>
<CAPTION>
- ------------------------------------------------------------------------------------------
Years ended December 31,
---------------------------
($000's) 1998 1997 1996
- ------------------------------------------------------------------------------------------
<S> <C> <C> <C>
Data processing $ 6,452 $ 4,312 $ 4,077
Servicing, professional, guarantor and other fees paid 14,259 9,068 8,166
Advertising and marketing 4,801 7,454 4,908
Stationery, supplies and postage 2,064 2,486 2,403
Premises, primarily rent 3,377 2,213 3,226
Communications 2,484 3,503 2,792
Depreciation 126 1,694 1,181
Operational losses on guaranteed student loans 1,343 1,297 1,390
Travel and entertainment 2,122 1,503 1,226
Minor equipment 959 477 368
Other 2,529 1,583 1,569
- ------------------------------------------------------------------------------------------
Total other expenses $ 40,516 $ 35,590 $31,306
- ------------------------------------------------------------------------------------------
</TABLE>
22
<PAGE>
9 RELATED PARTY TRANSACTIONS
At December 31, 1998 and 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, 1998, 1997 and 1996. 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 to CNYS 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.
The Company has a loan servicing agreement with CNYS to service CitiAssist
loans prior to purchase by the Company. Amounts earned by the Company for this
service are included in the chart below.
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. Also, as a result of the Company's restructuring plan and the
outsourcing of certain of its loan originations and servicing activities to
subsidiaries of Citigroup in 1998, the Company incurred $6.4 million in loan
origination and servicing expenses payable to subsidiaries of Citigroup. This
amount is included in the chart below. 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. 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 activity described
in Note 11, and income tax matters described in Notes 1, 7 and 12:
<TABLE>
<CAPTION>
- -----------------------------------------------------------------------------------
Years ended December 31,
-----------------------------
($000's) 1998 1997 1996
- -----------------------------------------------------------------------------------
<S> <C> <C> <C>
Revenues
Fees for servicing of student loan portfolios $ 2,185 $ 564 $ 48
- -----------------------------------------------------------------------------------
Expenses
Cost of funding provided $454,338 $372,310 $306,042
Telecommunications 671 668 652
Facilities 3,316 1,986 2,422
Processing of payments and outgoing mail 416 470 418
Payroll and benefits administration 484 428 446
Data processing 4,078 2,062 1,997
Statement production 1,931 2,093 941
Loan originations and servicing 6,388 - -
Other 703 632 92
- -----------------------------------------------------------------------------------
</TABLE>
10 EMPLOYEE BENEFITS
The Company's employees are covered under various Citigroup 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. Citigroup charges the Company a fringe rate calculated by allocating a
portion of the total Citigroup cost of providing benefits based on the ratio of
the total Company salary expense to total Citigroup salaries. The fringe rate
applied to salaries was 29.00% for 1998, 32.00% for 1997, and 31.74% for 1996.
In determining the fringe rate, Citigroup considers the historical benefit and
salary experience for all Citigroup employees, adjusted for expected changes in
experience reflected in actuarial assumptions.
23
<PAGE>
If Citigroup's percentage ownership in the Company is reduced below 50%, the
Company will withdraw from participation in certain Citigroup benefit plans and
will procure benefits coverage for its employees independently. The expense
incurred for independent benefits coverage may be higher than the benefit costs
currently being paid.
Pension Plans
Retirement benefits under the Citigroup 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. The amount of pension expense allocated to the Company was $742,000,
$947,000, and $994,000 in 1998, 1997 and 1996, respectively.
Postretirement Benefits
Under Citigroup benefit plans, 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. The Company's net periodic postretirement benefit cost,
representing the amount charged by Citigroup for the period, was $12,000 for
1998, $273,000 for 1997 and $281,000 for 1996.
Postemployment Benefits
Postemployment benefits, such as disability and similar benefits provided to
former or inactive employees, are administered by Citigroup. The amount of
contribution charged to the Company by Citigroup for postemployment benefits was
$154,000 for 1998, $116,000 for 1997, and $151,000 for 1996.
11 STOCK OPTION PLAN
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 has authorized the issuance of options, up to a
maximum of 500,000 shares, to these employees over a five year period, which
ended on January 1, 1998.
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 become 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. No additional options were
granted after 1993.
Options to purchase 2,500 and 39,500 shares of the Company's common stock
remained outstanding at December 31, 1998 and 1997, respectively. No options
were exercised or exercisable, due to the exercise restrictions noted above,
during 1998, 1997 or 1996. Of the options granted in 1993, 37,000 and 19,000
were terminated in 1998 and 1997, respectively. No options expired or were
terminated in 1996. Under the Plan, no additional options are permitted to be
granted after January 1, 1998.
Certain of the Company's key employees participate in Citigroup's Stock
Incentive Plans. Under these Plans, options have been granted to certain key
employees to purchase Citigroup common stock at not less than the fair market
value of the shares at the date of grant for terms of up to 10 years. Under
these plans, Citigroup options were granted to some of the Company's senior
management in each of 1998, 1997, and 1996. Under the 1998 stock option plan,
20% of the options granted become exercisable on the first through fifth year
anniversaries of the date of the grant. Generally 50% of the options granted
from 1995 through 1997 are exercisable beginning on the third anniversary of the
date of the grant and 50% beginning on the fourth anniversary of the date of the
grant and, 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.
12 INCOME TAXES
The provision for income taxes consists of the following:
- ----------------------------------------------
Years ended December 31,
--------------------------
($000's) 1998 1997 1996
- ----------------------------------------------
Current
Federal $32,160 $29,647 $26,809
State 9,940 8,335 8,391
- ----------------------------------------------
Total current 42,100 37,982 35,200
- ----------------------------------------------
Deferred
Federal 7,368 (1,825) 8,153
State 2,277 (513) 2,552
- ----------------------------------------------
Total deferred 9,645 (2,338) 10,705
- ----------------------------------------------
Total income tax
provision $51,745 $35,644 $45,905
- ----------------------------------------------
24
<PAGE>
The 1997 income tax provision was decreased by $8.5 million for 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 exit
costs were incurred in 1997. Due to a $7.5 million adjustment to the reserve in
the fourth quarter of 1998, the 1998 income tax provision increased by $3.1
million. (See note 3.)
The Company's deferred tax assets of $31.9 million and $41.6 million at
December 31, 1998 and 1997, 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 1998 and 1997
deferred tax asset balances also include $3.2 million and $7.3 million,
respectively, 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 Company's total deferred
tax assets.
The Company has agreed to share with CNYS 50% of the deferred tax benefits
arising from the intercompany payments that the Company made to CNYS in exchange
for the transfer of assets. This liability to CNYS is recorded on the balance
sheet as payable to principal stockholder.
Deferred tax assets were comprised of the following:
- -----------------------------------------------------------------------
December 31,
-----------------
($000's) 1998 1997
- -----------------------------------------------------------------------
Loan premium $15,112 $19,388
Account relationship 8,087 8,917
Noncompetition agreement 2,559 2,822
Restructuring costs 3,166 7,313
Other 3,012 3,141
- -----------------------------------------------------------------------
Total deferred tax assets $31,936 $41,581
The reconciliation of the income taxes computed at the Federal
statutory income tax rate of 35% to the actual income tax pro-
visions for 1998, 1997 and 1996 is as follows:
December 31,
-----------------------------
($000's) 1998 1997 1996
- ----------------------------------------------------------------------
Income taxes
computed at
federal statutory rate $43,804 $30,560 $38,792
State tax provision,
net of federal benefits 7,941 5,084 7,113
- ----------------------------------------------------------------------
Total income tax provision $51,745 $35,644 $45,905
- ----------------------------------------------------------------------
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 are accrued and recorded as adjustments to interest expense. In
1998, the Company's interest expense from short and long-term borrowings was
reduced by $0.4 million due to interest rate swaps. In 1997 and 1996, interest
expense increased by $0.3 million and $2.3 million, respectively, due to
interest rate swaps. The net accrued interest receivable balance on swaps at
December 31, 1998 was $0.2 million. An interest payable balance of $0.4 million
was recorded at December 31, 1997. During 1998, 1997 and 1996, net payments of
$0.2 million, $9.2 million, and $2.7 million, respectively, were made to meet
contracted swap agreement obligations. The aggregate notional principal amounts
outstanding at December 31, 1998 and 1997 were $6.4 billion and $2.2 billion,
respectively.
At each of December 31, 1998 and 1997, 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 the liability with its assets,
the Company has entered into interest rate swap agreements with either an
affiliate of CNYS or a third party 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, 1998 and 1997, the Company also owned $7.6
billion and $6.6 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, primarily 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 primarily with related parties having investment-
grade external credit ratings. As of December 31, 1998 and 1997, most interest
rate swap agreements were with Citibank, N.A., an affiliate of CNYS.
Interest rate swap agreements at December 31, 1998 have maturity dates
ranging from January 1, 1999 to August 2,
25
<PAGE>
1999. There were no terminations of interest rate swap agreements before
contract maturity dates in the years 1998, 1997, or 1996.
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, although none of the
Company's financial instruments are held for trading. 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
current market rates for such loans.
Delinquent loans are also valued using the method described above. Credit
risk is not a material component of the loan valuation due to the guaranteed
nature of the loans.
The valuation of student loan floors is estimated using a Black/Scholes
methodology and is included in the fair value of insured student loans.
Cash, Accrued Interest Receivable and Payable and Short-Term Borrowings
Due to the short-term nature of these instruments, carrying value approximates
fair value.
Long-Term Notes
The fair value of these instruments is calculated by discounting cash flows
through maturity using estimated market discount rates. All of the long-term
notes outstanding at December 31, 1998 and 1997 reprice quarterly. Due to the
frequency of repricing, carrying value approximates fair value at these dates.
Derivatives
The carrying value of derivatives represents the estimated net interest the
Company would receive or pay to terminate interest rate swap agreements
associated with long-term notes. The fair value of these costs was based on an
estimate obtained from the counterparty to each interest rate swap agreement.
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>
- ---------------------------------------------------------------------------------------------------------------------------------
1998 1997
-------------------------------------------------------------------------------
Excess of Excess of
Fair Value Fair Value
over over
Carrying Fair Carrying Carrying Fair Carrying
($000's) Value Value Value Value Value Value
- ---------------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C>
Financial Assets
Insured student loans, net $8,633,973 $9,350,312 $716,339 $7,623,143 $8,032,840 $409,697
Cash 37 37 - 2,108 2,108 -
Accrued interest receivable 231,881 231,881 - 205,358 205,358 -
- ---------------------------------------------------------------------------------------------------------------------------------
Financial Liabilities
Short-term borrowings $3,908,046 $3,908,046 $ - $5,696,605 $5,696,605 $ -
Long-term notes 4,310,000 4,310,000 - 1,610,000 1,610,000 -
Related derivatives (asset) liability (216) (3,389) (3,173) 375 575 200
Accrued interest payable 106,547 106,547 - 47,920 47,920 -
- ---------------------------------------------------------------------------------------------------------------------------------
</TABLE>
26
<PAGE>
15 EARNINGS PER SHARE
Basic and diluted earnings per share ("EPS") have been calculated in accordance
with current accounting standards. Under these standards, outstanding stock
options are considered in the diluted earnings per share computation. Although
options to purchase shares of the Company's common stock were outstanding during
all of 1998, 1997 and 1996, the Company had no dilutive common equivalents and
the calculation of both the basic and diluted EPS was the same in each of these
periods.
The net income available to common stockholders was $73.4 million for 1998,
$51.7 million for 1997, and $64.9 million for 1996. The weighted average shares
outstanding during all of 1998, 1997 and 1996 was 20 million. Basic (and
diluted) EPS is $3.67 for 1998, $2.58 for 1997, and $3.25 for 1996, calculated
by dividing income available to common stockholders by the number of weighted
average shares outstanding.
16 COMMITMENTS AND CONTINGENCIES
The Company is obligated under several non-cancelable operating leases for
equipment. Those expenses totaled $0.2 million, $0.5 million, and $0.8 million
for each of the years ended December 31, 1998, 1997, 1996, respectively. Such
expenses exclude payments of $3.3 million, $2.0 million, and $2.4 million in
1998, 1997, 1996, respectively, under the related party facilities and building
services agreement referred to in Note 9. This agreement expires in December
1999.
Future minimum lease payments at December 31, 1998 under agreements
classified as operating leases with noncancelable terms in excess of one year
for the calendar years after December 31, 1998 are as follows:
- ----------------------------------------
($000's) Minimum Lease Payments
- ----------------------------------------
1999 $233
2000 101
2001 66
2002 34
After 2002 -
- ----------------------------------------
Total $434
- ----------------------------------------
At December 31, 1998 and 1997, variable rate loans in the amounts of $506.7
million and $434.4 million, respectively, have been committed, but not
disbursed.
Various legal proceedings arising out of the normal course of business are
pending against the Company. However, management believes that the aggregate
liability arising from these proceedings will not be material to the Company's
financial position or results of operations.
Amendments to the Act have reduced the net interest margin of the guaranteed
student loan portfolio from pre-1994 levels. In addition, other recent
amendments decrease the interest rate paid by borrowers on loans originated on
or after July 1, 1998 by 0.80%. The rate earned by lenders was reduced by 0.30%,
with the 0.50% difference funded by the federal government through changes in
the special allowance formula. There is no guarantee that the 0.50% special
allowance payment will not be further reduced in subsequent budget cycles.
In addition, the Act may be amended by Congress at any time, 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
could adversely affect the Company's business and prospects.
17 FUTURE IMPACTS OF RECENTLY ISSUED
ACCOUNTING STANDARDS
In June 1998, FASB issued SFAS No. 133, "Accounting for Derivative Instruments
and Hedging Activities," which becomes effective on January 1, 2000 for calendar
year companies such as the Company. This new standard will significantly change
the accounting treatment of the Company's derivative contracts. Depending on the
underlying risk management strategy, these accounting changes could affect
reported earnings, assets, liabilities, and stockholders' equity. As a result,
the Company may have to reconsider its risk management strategies, since the new
standard would not reflect the results of many of those strategies in the same
manner as current accounting practice. The Company is in the process of
evaluating the potential impact of the new accounting standard.
27
<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, 1998, 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 750 Washington Boulevard, Stamford, CT 06901; and its phone number is
(203) 975-6292.
The Company's common stock is 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 nonaffiliates of the
Company as of February 12, 1999 was approximately $176 million. On that date,
there were 20 million shares of the Company's common stock outstanding.
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 1999 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 Bill Beckmann, Chief Executive Officer of The Student Loan
Corporation, thereunto duly authorized, on March 26, 1999.
Pursuant to the requirements of the Securities Exchange Act of 1934, this
report was signed on March 26, 1999 by Bill Beckmann, Chief Executive Officer,
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:
Peter M. Gallant
Glenda B. Glover
Evelyn E. Handler
Carl E. Levinson
Laura D. Williamson
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 January
15, 1999, relating to the balance sheets of The Student Loan Corporation as of
December 31, 1998 and 1997, and the related statements of income, stockholders'
equity, and cash flows for each of the years in the three-year period ended
December 31, 1998, which report has been incorporated by reference in the
December 31, 1998 annual report on Form 10-K of The Student Loan Corporation.
/s/ KPMG LLP
KPMG LLP
Rochester, New York
March 26, 1999
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, 1998,
1997 and 1996.
Balance Sheets as of December 31, 1998 and 1997.
Statements of Cash Flows for the years ended December 31, 1998,
1997 and 1996.
Statements of Stockholders' Equity for the years ended December 31,
1998, 1997 and 1996.
Notes to Financial Statements.
The Student Loan Corporation filed no reports on Form 8-K for 1998. 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, 750 Washington Boulevard, 9th Floor, Stamford,
CT 06901.
Powers of Attorney of Directors Gallant, Glover, Handler, Levinson and
Williamson as Directors of The Student Loan Corporation are filed herewith.
28
<PAGE>
10-K Cross Reference Index
This Annual Report and Form 10-K incorporate into a single document the
requirements of the Securities and Exchange Commission.
<TABLE>
<CAPTION>
PART I PAGE
<C> <S> <C>
Item 1 Business......................................................... 1 and 8-10
Item 2 Properties....................................................... 10
Item 3 Legal Proceedings................................................ 10
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...................................... 30
Item 6 Selected Financial Data.......................................... 31
Item 7 Management's Discussion and Analysis of Financial
Condition and Results of Operations.............................. 1-7
Item 8 Financial Statements and Supplementary Data...................... 12-27
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.. 28
Signatures..................................................................... 28
</TABLE>
(*) The Student Loan Corporation's 1999 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.
29
<PAGE>
Directors and Executive Officers
Directors
Bill Beckmann
President and Chief Executive Officer
The Student Loan Corporation
Peter M. Gallant
Vice President and Treasurer
Citigroup Inc. and Citibank, N.A
Dr. Glenda Glover
Dean of School of Business
Jackson State University
Dr. Evelyn E. Handler
Former Executive Director
California Academy of Science
Carl E. Levinson
Division Executive
Citicorp Consumer Assets Division
Laura D. Williamson
Vice President
Citibank, N.A
Executive Officers
Bill Beckmann
President and Chief Executive Officer
John R. Coffin
Vice President and General Counsel
Sallyann Colonna
Vice President and Director of Marketing
Sue F. Roberts
Senior Vice President and Director of Sales
Yiannis Zographakis
Vice President and Chief Financial Officer
Stockholders Information
Investor Relations
Copies of the Corporation's Form 10-K, other financial information, and general
information about The Student Loan Corporation may be obtained by writing to
Investor Relations, The Student Loan Corporation, 750 Washington Boulevard,
Stamford, CT 06901, or by telephone request to Bradley D. Svalberg, Director of
Investor Relations, at 203-975-6292. Information is also available on the
Company's website at http://www.studentloan.com.
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 Thursday, May
13, 1999 in Sioux Falls, South Dakota.
Transfer Agent and Registrar
The Company's transfer agent and registrar is 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 12, 1999 was approximately 60. The
following table sets forth the high, low and close sales prices for the common
stock during each fiscal quarter of 1998 and 1997.
<TABLE>
<CAPTION>
- ---------------------------------------------------------------------------------------------------------------------------------
1998 1997
------------------------------------------------------------------------------------------------------------------
1st Quarter 2nd Quarter 3rd Quarter 4th Quarter 1st Quarter 2nd Quarter 3rd Quarter 4th Quarter
- ---------------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C> <C> <C>
High $49 13/16 $51 1/16 $50 7/16 $48 $41 3/8 $44 $47 11/16 $53 15/16
Low 43 7/16 47 43 9/16 40 35 7/8 35 3/4 40 3/4 48
Close 47 13/16 47 1/16 44 7/8 44 7/8 36 3/8 42 7/16 46 3/4 49 3/8
- ---------------------------------------------------------------------------------------------------------------------------------
</TABLE>
The Company paid a quarterly dividend of $0.12 per share on the common stock for
each of the first two quarters of 1997 and $0.15 per share for the third and
fourth quarters of 1997. The quarterly dividend paid during each quarter of 1998
remained at $0.15 per share.
30
<PAGE>
FINANCIAL HIGHLIGHTS
- --------------------------------------------------------------------------------
<TABLE>
<CAPTION>
Years ended December 31,
---------------------------------------------------------------------
(Dollars in millions, except per share amounts) 1998 1997 1996 1995 1994
===========================================================================================================================
<S> <C> <C> <C> <C> <C>
Statements of Income Data
Net interest income $ 192.3 $ 175.9 $ 175.2 $ 161.9 $ 146.0
Total operating expenses, excluding restructuring
adjustments/expenses and 1998 transition costs 69.4 68.1 61.9 57.6 51.0
Restructuring (adjustments) expenses
and 1998 transition costs (3.8) 20.5 -- -- --
Total operating expenses 65.6 88.6 61.9 57.6 51.0
Net income $ 73.4 $ 51.7 $ 64.9 $ 60.6 $ 54.9
Balance Sheets Data (as of December 31)
Total assets $8,903.1 $7,874.0 $7,118.3 $6,387.4 $5,365.1
Long-term notes 4,310.0 1,610.0 2,075.0 3,400.0 1,100.0
Payable to principal stockholder $ 14.0 $ 17.1 $ 19.8 $ 29.1 $ 32.2
Earnings Data
Cash dividends declared per common share $ 0.60 $ 0.54 $ 0.30 $ 0.24 $ 0.24
Basic and diluted earnings per common share $ 3.67 $ 2.58 $ 3.25 $ 3.03 $ 2.75
Net interest margin 2.37% 2.42% 2.68% 2.85% 3.18%
Operating expenses as a percentage of average
insured student loans, excluding restructuring
adjustments/expenses and 1998 transition costs 0.86% 0.94% 0.95% 1.02% 1.11%
Total operating expenses as a percentage of
average insured student loans 0.81% 1.22% 0.95% 1.02% 1.11%
Other
Average insured student loans $8,111.6 $7,269.2 $6,547.5 $5,669.4 $4,591.4
Average number of loan accounts serviced (thousands) 2,105 1,888 1,706 1,497 1,226
Loan disbursements (1)(2)(3) $1,833.4 $1,599.7 $1,564.1 $1,645.3 $1,533.4
Book value per share (as of December 31) $ 23.23 $ 20.16 $ 18.10 $ 15.15 $ 12.36
Common stock price (4)
High $ 51 1/16 $ 53 15/16 $ 41 1/4 $ 35 1/2 $ 20 7/8
Low $ 40 $ 35 3/4 $ 32 1/8 $ 18 3/8 $ 18 1/8
Close $ 44 7/8 $ 49 3/8 $ 37 1/4 $ 34 $ 18 1/4
Total number of employees (as of December 31) 464 844 810 790 788
==========================================================================================================
</TABLE>
(1) 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, in addition to those
made under regular FFEL program guidelines. These specific consolidation
agreements were phased-out in mid-1996.
(2) For 1998 and 1997, disbursements included $245 million and $125 million in
loan consolidations made under new FFEL program regulations.
(3) Including CitiAssist loan commitments, total disbursements were $2,026
million and $1,653 million for 1998 and 1997, respectively.
(4) Common stock price is based on The New York Stock Exchange composite
listing.
31
<TABLE> <S> <C>
<PAGE>
<ARTICLE> 5
<LEGEND>
THE SCHEDULE CONTAINS SUMMARY FINANCIAL INFORMATION EXTRACTED FROM THE STUDENT
LOAN CORPORATION CURRENT REPORT ON FORM 10-K FOR THE TWELVE MONTH PERIOD ENDED
DECEMBER 31, 1998 AND IS QUALIFIED IN ITS ENTIRETY BY REFERENCE TO SUCH
FINANCIAL STATEMENTS.
</LEGEND>
<MULTIPLIER> 1,000
<S> <C>
<PERIOD-TYPE> 12-MOS
<FISCAL-YEAR-END> DEC-31-1998
<PERIOD-START> JAN-01-1998
<PERIOD-END> DEC-31-1998
<CASH> 37
<SECURITIES> 0
<RECEIVABLES> 8,636,343
<ALLOWANCES> 2,370
<INVENTORY> 0
<CURRENT-ASSETS> 0
<PP&E> 963
<DEPRECIATION> 488
<TOTAL-ASSETS> 8,903,142
<CURRENT-LIABILITIES> 0
<BONDS> 4,310,000
0
0
<COMMON> 200
<OTHER-SE> 464,331
<TOTAL-LIABILITY-AND-EQUITY> 8,903,142
<SALES> 646,558
<TOTAL-REVENUES> 648,881
<CGS> 0
<TOTAL-COSTS> 454,227
<OTHER-EXPENSES> 65,618
<LOSS-PROVISION> 3,882
<INTEREST-EXPENSE> 0
<INCOME-PRETAX> 125,154
<INCOME-TAX> 51,745
<INCOME-CONTINUING> 73,409
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> 73,409
<EPS-PRIMARY> 3.67
<EPS-DILUTED> 3.67
</TABLE>
