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SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
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FORM 10-Q
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QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF
THE SECURITIES EXCHANGE ACT OF 1934
FOR THE QUARTERLY PERIOD ENDED JUNE 30, 1999
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 BLVD. 06901
STAMFORD, CONNECTICUT (Zip Code)
(Address of principal executive offices)
(203) 975-6292
(Registrant's telephone number, including area code)
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Indicate by check mark whether the registrant (1) has filed all reports
required to be filed by Section 13 or 15(d) of the Securities Exchange Act of
1934 during the preceding 12 months (or for such shorter period that the
registrant was required to file such reports), and (2) has been subject to such
filing requirements for the past 90 days.
Yes [X] No [ ]
On August 6, 1999, there were 20,000,000 shares of The Student Loan
Corporation's Common Stock outstanding.
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Form 10-Q
<TABLE>
<CAPTION>
Page
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<S> <C>
Part I Financial Information
Item 1 - Financial Statements
Statements of Income (Unaudited) for the Three and Six
Month Periods Ended June 30, 1999 and 1998 ................... 3
Balance Sheets as of June 30, 1999 (Unaudited) and December
31, 1998 ..................................................... 4
Statements of Cash Flows (Unaudited) for the Six Month
Periods Ended June 30, 1999 and 1998 ......................... 5
Notes to Financial Statements (Unaudited) .................... 6-8
Item 2 - Management's Discussion and Analysis of Financial Condition
and Results of Operations .................................... 9-14
Part II Other Information
Item 4 - Submission of matters to a vote of security-holders ............. 15
Item 6 - Exhibits and Reports on Form 8-K .............................. 15
Signature ...................................................................... 16
</TABLE>
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PART I. FINANCIAL INFORMATION
ITEM 1. FINANCIAL STATEMENTS.
THE STUDENT LOAN CORPORATION
STATEMENTS OF INCOME
(Dollars in thousands, except per share amounts)
(Unaudited)
<TABLE>
<CAPTION>
Three months ended Six months ended
June 30, June 30,
------------------------- -------------------------
1999 1998 1999 1998
-------- -------- -------- --------
<S> <C> <C> <C> <C>
REVENUE
Interest income $172,646 $162,704 $344,047 $319,539
Interest expense 115,041 113,619 229,600 225,070
-------- -------- -------- --------
Net interest income 57,605 49,085 114,447 94,469
Provision for loan losses 1,261 894 2,061 1,682
-------- -------- -------- --------
Net interest income after provision for loan losses 56,344 48,191 112,386 92,787
Fee and other income 645 416 1,593 778
-------- -------- -------- --------
Total revenue, net $ 56,989 $ 48,607 $113,979 $ 93,565
-------- -------- -------- --------
OPERATING EXPENSES
Salaries and employee benefits $ 4,381 $ 8,288 $ 10,326 $ 17,218
Other expenses 13,811 10,473 25,196 18,292
-------- -------- -------- --------
Total operating expenses $ 18,192 $ 18,761 $ 35,522 $ 35,510
-------- -------- -------- --------
Income before income taxes $ 38,797 $ 29,846 $ 78,457 $ 58,055
Income taxes 16,157 12,399 32,681 23,802
-------- -------- -------- --------
NET INCOME $ 22,640 $ 17,447 $ 45,776 $ 34,253
======== ======== ======== ========
DIVIDENDS DECLARED $ 9,000 $ 3,000 $ 15,000 $ 6,000
======== ======== ======== ========
BASIC AND DILUTED EARNINGS PER COMMON SHARE -
(based on 20 million average shares outstanding) $ 1.13 $ 0.87 $ 2.29 $ 1.71
======== ======== ======== ========
DIVIDENDS DECLARED PER COMMON SHARE $ 0.45 $ 0.15 $ 0.75 $ 0.30
======== ======== ======== ========
OPERATING RATIOS
Net interest margin 2.57% 2.47% 2.57% 2.40%
Operating expense as a percentage of
average insured student loans 0.81% 0.94% 0.80% 0.90%
</TABLE>
See accompanying notes to financial statements.
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THE STUDENT LOAN CORPORATION
BALANCE SHEETS
(Dollars in thousands)
<TABLE>
<CAPTION>
June 30, December 31,
1999 1998
(Unaudited)
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<S> <C> <C>
ASSETS
Insured student loans $9,108,253 $8,636,343
Allowance for loan losses 2,405 2,370
---------- ----------
Insured student loans, net 9,105,848 8,633,973
Cash 214 37
Deferred tax benefits 29,056 31,936
Other assets 269,732 237,196
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TOTAL ASSETS $9,404,850 $8,903,142
========== ==========
LIABILITIES AND STOCKHOLDERS' EQUITY
Short-term borrowings $4,149,931 $3,908,046
Long-term notes 4,569,000 4,310,000
Payable to principal stockholder 12,680 13,957
Restructuring liabilities 3,123 7,611
Other liabilities 174,667 198,997
---------- ----------
Total Liabilities 8,909,401 8,438,611
---------- ----------
Common stock 200 200
Additional paid-in capital 134,522 134,380
Retained earnings 360,727 329,951
---------- ----------
Total Stockholders' Equity 495,449 464,531
---------- ----------
TOTAL LIABILITIES AND STOCKHOLDERS' EQUITY $9,404,850 $8,903,142
========== ==========
AVERAGE INSURED STUDENT LOANS $8,964,131 $8,111,639
(year-to-date) ========== ==========
</TABLE>
See accompanying notes to financial statements.
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THE STUDENT LOAN CORPORATION
STATEMENTS OF CASH FLOWS
(Dollars in thousands)
(Unaudited)
<TABLE>
<CAPTION>
Six months ended
June 30,
-----------------------------
1999 1998
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<S> <C> <C>
Cash flows from operating activities:
Net income $ 45,776 $ 34,253
Adjustments to reconcile net income to
net cash from operating activities:
Depreciation and amortization 4,475 2,758
Provision for loan losses 2,062 1,682
Deferred tax provision 2,880 3,667
Increase in accrued interest receivable (32,596) (20,199)
Decrease (Increase) in other assets 49 (247)
Decrease in other liabilities (25,464) (23,811)
Decrease in restructuring liabilities (4,489) (229)
--------- -----------
NET CASH USED IN OPERATING ACTIVITIES (7,307) (2,126)
--------- -----------
Cash flows from investing activities:
Disbursements of loans (919,605) (846,134)
Repayment of loans 569,848 488,625
Purchase of loans (308,144) (48,715)
Sale of loans 179,610 33,817
Capital expenditures on furniture and equipment (110) (359)
--------- -----------
NET CASH USED IN INVESTING ACTIVITIES (478,401) (372,766)
--------- -----------
Cash flows from financing activities:
Net increase (decrease) in borrowings with original
maturities of one year or less 241,885 (601,074)
Proceeds from long-term borrowings 259,000 1,430,000
Repayment of long-term debt -- (450,000)
Dividends paid to stockholders (15,000) (6,000)
--------- -----------
NET CASH PROVIDED BY FINANCING ACTIVITIES 485,885 372,926
--------- -----------
NET INCREASE (DECREASE) IN CASH 177 (1,966)
CASH - BEGINNING OF PERIOD 37 2,108
--------- -----------
CASH - END OF PERIOD $ 214 $ 142
========= ===========
SUPPLEMENTAL DISCLOSURE OF CASH FLOW INFORMATION:
Cash paid for:
Interest $ 233,485 $ 214,532
Income taxes $ 14,199 $ 20,068
</TABLE>
See accompanying notes to financial statements.
5
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THE STUDENT LOAN CORPORATION
NOTES TO FINANCIAL STATEMENTS (UNAUDITED)
JUNE 30, 1999
1. SIGNIFICANT ACCOUNTING POLICIES
INTERIM FINANCIAL INFORMATION
The financial information of The Student Loan Corporation (the "Company")
as of June 30, 1999 and for the three and six-month periods ended June 30,
1999 and 1998 includes all adjustments (consisting of normal recurring
adjustments) which, in the opinion of management, are necessary to fairly
state the Company's financial position and results of operations in
conformity with generally accepted accounting principles ("GAAP"). The
accompanying financial statements should be read in conjunction with the
financial statements and related notes included in the Company's 1998
Annual Report and Form 10-K.
2. USE OF ESTIMATES
In preparing the financial statements in conformity with GAAP, 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. Actual results could differ from those estimates and
assumptions.
3. COMMITMENTS AND CONTINGENCIES
REGULATORY IMPACTS
The Company's loan portfolio is primarily comprised of loans originated
under the Federal Family Education Loan ("FFEL") program. Since 1992, a
series of amendments to the Higher Education Act of 1965 (the "Act"),
which governs the FFEL program, have increased costs and reduced interest
payments to lenders. These legislative changes have progressively reduced
the net interest margin of the Company's portfolio.
The 1993 amendments to the Act also introduced a competitor program, the
Federal Direct Student Loan program ("direct lending"), in which private
lenders such as the Company do not participate. Direct lending currently
accounts for approximately one-third of the student loans originated under
federally sponsored programs.
4. RESTRUCTURING PLAN
In the fourth quarter of 1997, the Company announced a restructuring plan
to realign its business and processing structure. The restructuring plan
included the outsourcing of various parts of the Company's operations,
which had been based in the Company's Pittsford, New York 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 Company
expects to retain
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approximately 200 Pittsford-based employees, primarily in the technology
and accounting functions, and employ approximately 100 employees in
administration, finance, marketing, sales and other activities in
Stamford, Connecticut and in field locations throughout the United States.
In connection with the restructuring plan, the Company recorded a $20.5
million pre-tax charge in the fourth quarter of 1997, including $16.2
million relating to estimated severance benefits, $2.8 million relating to
furniture and equipment write-downs and $1.5 million relating to other
estimated exit costs. Additional costs, including $4.0 million of
transition costs incurred in the first half of 1999 (of which $0.7 million
was incurred in the second quarter), did not qualify for recognition in
the initial $20.5 million charge and were expensed as incurred.
Of the $20.5 million restructuring reserve, $17.4 million has been used
through June 30, 1999, including $3.1 million used during the second
quarter of 1999. Of the $3.1 million, severance and outplacement costs
were $1.6 million and the remaining $1.5 million represents a reserve
release that was offset to operating expenses. The total overall $17.4
million usage includes $2.8 million in furniture and equipment
write-downs, $4.2 million in severance and outplacement costs paid to the
approximately 380 employees on job discontinuance, $1.4 million in other
exit costs, and $9.0 million in reserve releases. The Company's
restructuring plan is substantially complete at this time with
approximately half of the $3.1 million reserve balance at June 30, 1999
designated for the approximately 120 terminated employees still receiving
severance benefits. The remainder of the reserve will be used for the
estimated 35 employees yet to be placed on job discontinuance.
Approximately 20 staff reductions were made in the second quarter of 1999,
bringing the 1999 year-to-date total to 180.
The expectations of the Company relating to the restructuring plan are
forward-looking statements within the meaning of the Private Securities
Litigation Reform Act. See "Forward-Looking Statements" on page 9.
5. RELATED PARTY TRANSACTIONS
Citibank (New York State) ("CNYS"), a wholly-owned subsidiary of Citicorp
and Citigroup Inc., owns 80% of the outstanding common stock of the
Company. A number of significant transactions are carried out between the
Company on the one hand and Citigroup Inc. and its affiliates on the other
hand. At June 30, 1999, the Company had outstanding short-term and
long-term borrowings with CNYS of $4.1 billion and $4.6 billion,
respectively, compared to $3.9 billion and $4.3 billion, respectively, at
December 31, 1998. For the three and six-month periods ended June 30,
1999, the Company incurred $116.6 million and $231.5 million,
respectively, in interest expense payable to CNYS and its affiliates,
compared to $113.6 million and $225.1 million, respectively, in interest
expenses payable to CNYS and its affiliates for the same periods in 1998.
In addition, Citigroup Inc. and its subsidiaries engage in other
transactions and servicing activities with the Company, including cash
management, data processing, income tax payments, loan servicing, employee
benefits and facilities management. Management believes that the terms of
these transactions are, in the aggregate, no less favorable to the Company
than those which could be obtained from unaffiliated parties.
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6. INTEREST RATE SWAP AGREEMENTS
The Company, from time to time, enters into interest rate swap agreements
with related and third parties solely to hedge interest rate exposure on
certain interest bearing liabilities. The swap agreements are intended to
reduce the risk caused by differences between borrowing and lending rates.
Entering into swap agreements to pay interest based on the interest rate
characteristics of the Company's assets and to receive interest based on
the characteristics of the Company's liabilities effectively limits the
risk of potential interest rate variability. The counterparty for most of
the interest rate swap agreements outstanding at June 30, 1999 was
Citibank, N.A., an affiliate of CNYS.
Interest rate swap agreements with a net carrying value of $2.1 million,
representing accrued interest receivable, were determined to have an
estimated fair value of $2.1 million receivable at June 30, 1999. At
December 31, 1998, interest rate swap agreements with a carrying value of
$0.2 million of interest receivable had an estimated fair value of $3.4
million receivable. The fair values were based on approximate values
obtained from Citibank, N.A., the Company's dealer in these financial
instruments, and represent the estimated amounts which would be receivable
upon termination of the agreements. Fair values vary from period to period
based on changes in such factors as LIBOR and Treasury Bill interest rates
and the timing of contractual settlements. The aggregate notional
principal amounts of swap agreements outstanding at June 30, 1999 and
December 31, 1998 were $4.8 billion and $6.4 billion, respectively. For
the second quarter of 1999, the Company recorded a $2.1 million ($3.1
million year-to-date) reduction of interest expense related to interest
accrued on its swap agreements. The Company recorded $0.8 million ($1.0
million year-to-date) in additional interest expense related to its swaps
during the second quarter of 1998.
7. SHORT AND LONG-TERM BORROWINGS
In the first six months of 1999, short-term debt increased by $0.25
billion to $4.1 billion and $0.01 billion was repaid. Also, long-term
borrowings increased by $0.26 billion to $4.6 billion and none was repaid
during the first half of 1999.
8. IMPACT OF RECENTLY ISSUED ACCOUNTING STANDARDS
In June 1999, the Financial Accounting Standards Board ("FASB") deferred
the effective date of Statement of Financial Accounting Standards ("SFAS")
No. 133, "Accounting for Derivative Instruments and Hedging Activities"
for one year. As a result, SFAS No. 133 will become effective on January
1, 2001 for calendar year companies such as the Company.
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ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS.
FORWARD-LOOKING STATEMENTS
Certain statements contained in this report that are not historical facts are
forward-looking statements within the meaning of the Private Securities
Litigation Reform Act. The Student Loan Corporation's (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," "intend", "estimate," "may increase," "may result in,"
and similar expressions or future or conditional verbs such as "will", "should",
"would" and "could". These forward-looking statements involve risks and
uncertainties including, but not limited to, the following: 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 and the success of the Company's hedging
policies; the ability of the Company and third party vendors to modify computer
systems for the year 2000 date conversion in a timely manner; the ability of the
Company generally to achieve anticipated levels of cost-savings relating to its
restructuring plan; as well as general economic conditions, including the
performance of financial markets and the passage of regulatory changes.
RESTRUCTURING PLAN
In the fourth quarter of 1997, the Company announced a restructuring plan to
realign its business and processing structure. The restructuring plan included
the outsourcing of various parts of the Company's operations, which had been
based in the Company's Pittsford, New York 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 Company expects to retain approximately 200 Pittsford-based
employees, primarily in the technology and accounting functions, and employ
approximately 100 employees in administration, finance, marketing, sales and
other activities in Stamford, Connecticut and in field locations throughout the
United States.
In connection with the restructuring plan, the Company recorded a $20.5 million
pre-tax charge in the fourth quarter of 1997, including $16.2 million relating
to estimated severance benefits, $2.8 million relating to furniture and
equipment write-downs and $1.5 million relating to other estimated exit costs.
Additional costs, including $4.0 million of transition costs incurred in the
first half of 1999 (of which $0.7 million was incurred in the second quarter),
did not qualify for recognition in the initial $20.5 million charge and were
expensed as incurred.
Of the $20.5 million restructuring reserve, $17.4 million has been used through
June 30, 1999, including $3.1 million used during the second quarter of 1999. Of
the $3.1 million, severance and outplacement costs were $1.6 million and the
remaining $1.5 million represents a reserve release that was offset to operating
expenses. The total overall $17.4 million usage includes $2.8 million in
furniture and equipment write-downs, $4.2 million in severance and outplacement
costs paid to the approximately 380 employees on job discontinuance, $1.4
million in other exit costs, and $9.0 million in reserve releases. The Company's
restructuring plan is substantially complete at this time with approximately
half of the $3.1 million reserve balance at June 30, 1999 designated for the
approximately 120 terminated employees still receiving severance benefits. The
remainder of the reserve will be used for the estimated 35 employees yet to be
placed on job
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discontinuance. Approximately 20 staff reductions were made in the second
quarter of 1999, bringing the 1999 year-to-date total to 180.
The expectations of the Company relating to the restructuring plan are
forward-looking statements within the meaning of the Private Securities
Litigation Reform Act. See "Forward-Looking Statements" on page 9.
FINANCIAL CONDITION
During the six months ended June 30, 1999, the net insured student loan
portfolio of the Company grew by $471.9 million (5%) from the balance at
December 31, 1998. This growth was the result of loan disbursements totaling
$919.6 million and loan purchases of $308.1 million in the first six months of
1999, partially offset by $179.6 million in loan sales and $569.8 million in
loan reductions (attributable to repayments and claims paid by guarantors), and
other adjustments of $6.4 million. This compares to loan disbursements of $846.1
million, loan purchases of $48.7 million, loan reductions of $488.6 million,
loan sales of $33.8 million, and other adjustments of $4.4 million in the first
six months of 1998. CitiAssist loan purchases have increased significantly for
the first half of 1999 compared to the same period in 1998 primarily due to
greater CNYS CitiAssist originations. The increase in loan sales for the first
half of 1999 compared to the same period last year is primarily due to increases
in the volume of the federal direct student loan consolidation program.
The Company's loan disbursements and CitiAssist loan commitments for the first
half of 1999 of $1,027.0 million were $120.7 million (13%) more than those made
in the same period of 1998. This increase is attributable primarily to large
increases in CitiAssist loan commitments and Federal Family Education Loan
("FFEL") program disbursements. During the first six months of 1999 CitiAssist
loan commitments increased to $107.4 million, a $47.1 million (78%) increase
from the same period last year. FFEL program disbursements of $775.6 million in
the first six months of 1999 is 7% higher than the $726.4 million disbursed
during the same period of 1998. This $49.2 million increase in FFEL program
disbursements does not include originations made under the Federal Loan
Consolidation program. Consolidation loan originations of $144.0 million for the
first two quarters of 1999 have increased $24.4 million (20%) compared to the
same period of 1998.
During the first two quarters of 1999, the Company made $233.5 million in
interest payments, principally to CNYS or one of its affiliates, compared to
$214.5 million for the same period in 1998. The difference is due to changes in
both the size of the borrowings and interest rates, as well as timing of
interest payments. The Company paid $14.1 million in income taxes during the
first two quarters of 1999, compared to $20.1 million for the same period last
year. The difference in the amount of taxes paid is primarily due to a timing
difference in making intercompany tax payments, and does not reflect any
significant changes in applicable income tax rates.
Other assets increased $32.5 million (14%) from December 31, 1998, principally
as a result of additional interest receivable attributable to growth in the
student loan portfolio and timing of interest receipts.
In the first six months of 1999, short-term debt increased by $0.25 billion and
$0.01 billion was repaid. Also, long-term borrowings increased by $0.26 billion
and none was repaid during the first six months of 1999.
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The Company paid a quarterly dividend of $0.45 per common share on June 1, 1999.
The Board of Directors declared an increase in the quarterly dividend on the
Company's common stock to $0.60 per share to be paid on September 1, 1999 to
stockholders of record on August 13, 1999.
MARKET RISK
The Company's primary market risk exposure is to movements in U.S. dollar
interest rates. The Company manages interest rate risk exposure through the use
of derivative instruments in the form of interest rate swap agreements in order
to better match the interest rate characteristics of its liabilities with that
of its assets. Under these agreements, the Company pays interest based on the
interest rate characteristics of the Company's assets and receives interest
based on the characteristics of its liabilities. All of the Company's derivative
agreements terminate within a year and none are used for trading purposes.
Market risk is measured using various tools, including Earnings-at-Risk which
reflects repricing gaps in the position embedded in the portfolio. The Company
prepares Earnings-at-Risk calculations to measure the discounted pre-tax
earnings impact of a two standard deviation shift in a short-term interest rate
over the four-week period required to defease the position. As of June 30, 1999
the rate shift over the defeasance period applied to the interest yield curve
for purposes of calculating Earnings-at-Risk was 45 basis points. The table
below illustrates potential impacts of both a 45 basis point increase and a 45
basis point decrease in the interest yield curve by year.
Earnings-at-Risk (on pre-tax earnings)
<TABLE>
<CAPTION>
- ----------------------------------------------------------------------------------------------
(Dollars in millions) 2000 2001 2002 2003 2004 Total
- ----------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C>
Two standard deviation increase $9.8 ($3.7) ($3.2) ($2.8) ($2.3) ($2.2)
- ----------------------------------------------------------------------------------------------
Two standard deviation decrease $6.0 $4.9 $4.4 $3.8 $3.2 $22.3
- ----------------------------------------------------------------------------------------------
</TABLE>
The Earnings-at-risk calculation is one measure of analyzing exposures based
upon the Company's positions at particular points in time. The Company, through
its Asset/Liability Management Committee, actively manages these risks and sets
Earnings-at-Risk limits to take appropriate actions if interest rates move
against the existing structure.
YEAR 2000
The arrival of the year 2000 poses a unique worldwide challenge to the ability
of time-sensitive computer systems to correctly interpret dates in the year 2000
and beyond. The Company has assessed and has substantially completed
modifications to its computer systems and business processes to provide for
their continuing functionality and is also 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 year 2000 compliance work, systems are subjected to a
validation process that tests modified programs before they can be used in
production.
The pre-tax cost associated with all of the required modifications and
conversions is expected to total approximately $5.1 million through 1999, funded
through a combination of a reprioritization
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of technology development initiatives and incremental costs and is being
expensed as incurred. Of the total, approximately $4.2 million had been incurred
through June 30, 1999, including $1.0 million for the first six months of 1999
(of which approximately $0.5 million was incurred in the second quarter).
Substantially all of the required modification and internal testing work has
been completed, including modification of all critical systems, and the Company
continues to make satisfactory progress towards full completion of its year 2000
program. The remainder of 1999 will be spent primarily addressing completion of
the remaining external testing, integration testing, and production assurance.
The Company's year 2000 program is also addressing other issues, including
replacement of certain business applications and compliance of end-user
computing applications, networks, data center, desktops, facilities, business
processes, and external providers. Substantially all of the investigation and
necessary remediation of these matters has been completed and substantially all
are considered compliant.
The Company is also addressing year 2000 issues that may exist with other
significant third parties with which it interfaces, including customers and
counterparties and its utility infrastructure. Unreadiness by these parties
would expose the Company to the potential for loss and impairment of business
processes and activities. While these 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 completing contingency plans intended to address perceived risks
associated with its year 2000 effort. These activities include 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.
The expectations of the Company with respect to remediation of year 2000
issues constitute forward-looking statements within the meaning of the
Private Securities Litigation Reform Act. See "Forward-Looking Statements"
on page 9.
RESULTS OF OPERATIONS
Quarter Ended June 30, 1999
Net income was $22.6 million ($1.13 basic and diluted earnings per share) for
the second quarter of 1999. This was an increase of $5.2 million (30%) from
earnings for the same period last year. The increase in net income was primarily
attributable to higher interest income generated by a $1.1 billion increase in
the loan portfolio from the same quarter last year and better spreads between
the Company's lending and borrowing interest rates. Contributing to the increase
in net income was a $0.9 million ($1.5 million pre-tax) release of the
restructuring reserve, which was booked as an offset to operating expenses in
the second quarter of 1999. On a comparable basis, net income grew by 25% after
adjusting second quarter 1999 income for the restructuring reserve release.
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The net interest margin for the second quarter of 1999 was 2.57%, 0.10% higher
than the 2.47% margin for the second quarter of 1998. The improvement in the
margin for the second quarter of 1999 was primarily attributable to lower
funding rates, partially offset by the impact of previously legislated lender
yield reductions on FFELP loans, effective for loans originated on or after July
1, 1998. However, for the remainder of 1999, management expects interest margins
to decrease, as variable-funding arrangements will begin to reflect current,
less attractive market rates.
Total operating expenses for the second quarter of 1999 decreased $0.6 million
(3%) from the same period last year, attributable to reductions in salary and
employee benefit costs related to the restructuring. Also, operating expenses as
a percentage of average insured student loans improved 0.13% to 0.81% from the
second quarter of 1998 expense ratio of 0.94%. The improvement in the expense
ratio is primarily attributable to efficiencies in operational and
administrative expenses.
Return on equity was 18.6% for the second quarter of 1999, 2.1% higher than the
16.5% return for the same period of 1998. The increase was attributed to higher
1999 earnings.
The provision for loan losses was $0.4 million higher for the second quarter of
1999, compared to that recorded for the same period last year. This increase
reflects the risk sharing loss estimates on greater potential future default
claims resulting from growth in the portion of the portfolio that is subject to
the 2% risk sharing provisions of the Federal Higher Education Act of 1965 ("the
Act"), as amended.
Six Months Ended June 30, 1999
The Company earned net income of $45.8 million ($2.29 basic earnings per share)
for the six months ended June 30, 1999, an increase of $11.5 million (34%) from
the first half of 1998. The increase was primarily due to higher interest income
resulting from an increased loan portfolio and better interest rate spreads
between lending and borrowing rates.
Total operating expenses for the first half of 1999 were $35.5 million,
unchanged from the same period last year, as decreases in salary costs resulting
from the restructuring were offset by increased external loan servicing costs.
Operating expenses as a percentage of average insured student loans for the
first half of 1999 decreased to 0.80%, an improvement of 0.10% compared to the
first half of 1998, primarily attributable to efficiencies in administrative and
operational expenses.
The provision for loan losses was $2.1 million, $0.4 million (23%) higher for
the first six months of 1999 than that reported for the same period last year.
The increase reflects the risk sharing loss estimates on greater potential
future default claims as a result of growth in the portion of the portfolio that
is subject to the 2% risk sharing provisions of the Omnibus Budget
Reconciliation Act of 1993.
The Company's effective tax rate was approximately 41.7% for the first six
months of 1999, compared to 41.0% for the same period in 1998.
13
<PAGE> 14
REGULATORY IMPACTS
The Company's loan portfolio is primarily comprised of loans originated under
the FFEL program. Since 1992, a series of amendments to the Act, which governs
the FFEL 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.
The 1993 amendments to the Act also introduced a competitor program, the Federal
Direct Student Loan program ("direct lending"), in which private lenders such as
the Company do not participate. Direct lending currently accounts for
approximately one-third of the student loans originated under federally
sponsored programs, approximately the same as the prior two years.
Since 1994, the Company has aggressively pursued both new and existing marketing
programs, expanded its guarantor relationships and sought new ways to meet the
education finance needs of schools and students, including the implementation of
loan programs, such as the Company's CitiAssist product, that are not dependent
on Federal funding, guarantees and authorization.
14
<PAGE> 15
PART II. OTHER INFORMATION
ITEM 4. SUBMISSIONS OF MATTERS TO A VOTE OF SECURITY-HOLDERS.
At the Company's 1999 Annual Meeting of Stockholders, held May 13, 1999,
the Company's stockholders took the following actions:
1. Two directors were elected to the Board of Directors: Peter M. Gallant (with
holders of 18,526,410 shares voting in favor, 1,199,650 abstaining and 26,400
withheld); Laura D. Williamson (with holders of 18,552,610 shares voting in
favor, 1,199,650 abstaining and 200 withheld). Mr. Gallant and Ms. Williamson
will each serve until the year 2002 meeting of stockholders.
2. The selection of KPMG LLP as the Company's independent auditors for the
1999 fiscal year was ratified, with holders of 19,746,150 shares voting in
favor, 500 abstaining and 5,810 voting against.
3. A stockholder proposal recommending the retention of an investment banking
firm to explore plans to maximize stockholder value in the Company was defeated,
with holders of 1,115,952 shares voting in favor, 7,497 abstaining and
18,342,288 voting against.
ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K.
(a) Exhibits
27 Financial Data Schedule
(b) Reports on Form 8-K: none.
15
<PAGE> 16
SIGNATURE
Pursuant to the requirements of the Securities Exchange Act of
1934, the registrant has duly caused this report to be signed on its behalf by
the undersigned, thereunto duly authorized.
Date: August 13, 1999
The Student Loan Corporation
By /s/ Yiannis Zographakis
------------------------------------
Yiannis Zographakis
Vice President and
Chief Financial Officer
16
<TABLE> <S> <C>
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<LEGEND>
THIS SCHEDULE CONTAINS SUMMARY FINANCIAL INFORMATION EXTRACTED FROM THE STUDENT
LOAN CORPORATION QUARTERLY REPORT ON FORM 10-Q FOR THE THREE MONTH PERIOD ENDED
JUNE 30,1999 AND IS QUALIFIED IN ITS ENTIRETY BY REFERENCE TO SUCH FINANCIAL
STATEMENTS.
</LEGEND>
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<PERIOD-TYPE> 3-MOS
<FISCAL-YEAR-END> DEC-31-1999
<PERIOD-START> APR-01-1999
<PERIOD-END> JUN-30-1999
<CASH> 214
<SECURITIES> 0
<RECEIVABLES> 9,108,253
<ALLOWANCES> 2,405
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<TOTAL-ASSETS> 9,404,850
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0
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<SALES> 172,646
<TOTAL-REVENUES> 173,291
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<INCOME-PRETAX> 38,797
<INCOME-TAX> 16,157
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