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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 SEPTEMBER 30, 2000
THE STUDENT LOAN CORPORATION
(Exact name of registrant as specified in its charter)
<TABLE>
<S> <C>
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)
</TABLE>
(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
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On November 6, 2000, there were 20,000,000 shares of The Student Loan
Corporation's Common Stock outstanding.
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Form 10-Q
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<S> <C> <C>
Part I Financial Information
Page
----
Item 1 - Financial Statements
Statements of Income (Unaudited) for the Three- and Nine- Month Periods
Ended September 30, 2000 and 19993................................................. 3
Balance Sheets (Unaudited) as of September 30, 2000
and December 31, 1999.............................................................. 4
Statements of Cash Flows (Unaudited) for the Nine-
Month Periods Ended September 30, 2000 and 1999.................................... 5
Notes to Financial Statements (Unaudited).......................................... 6 - 8
Item 2 - Management's Discussion and Analysis of Financial Condition
and Results of Operations.......................................................... 9 - 13
Item 3 - Quantitative and Qualitative Discussion About Market Risk*............................... 10- 11
Part II Other Information
Item 6 - Exhibits and Reports on Form 8-K................................................. 14
Signature..................................................................................................... 15
</TABLE>
*This discussion is presented in Part I, Item 2 and is incorporated
herein by reference.
2
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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
September 30,
-----------------------------------------------
2000 1999
--------------------- -----------------------
<S> <C> <C>
REVENUE
Interest income $ 297,223 $ 173,997
Interest expense 236,971 122,815
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NET INTEREST INCOME 60,252 51,182
Provision for loan losses 1,087 703
--------------------- -----------------------
Net interest income after provision for loan losses 59,165 50,479
Fee and other income 3,314 891
--------------------- -----------------------
TOTAL REVENUE, NET $ 62,479 $ 51,370
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OPERATING EXPENSES
Salaries and employee benefits $ 4,523 $ 5,569
Other expenses 15,964 12,187
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TOTAL OPERATING EXPENSES $ 20,487 $ 17,756
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INCOME BEFORE INCOME TAXES $ 41,992 $ 33,614
Income taxes 17,447 14,001
--------------------- -----------------------
NET INCOME $ 24,545 $ 19,613
===================== =======================
DIVIDENDS DECLARED $ 12,000 $ 12,000
===================== =======================
BASIC AND DILUTED EARNINGS PER COMMON SHARE -
(based on 20 million average shares outstanding) $ 1.23 $ 0.98
===================== =======================
DIVIDENDS DECLARED PER COMMON SHARE $ 0.60 $ 0.60
===================== =======================
OPERATING RATIOS
Net interest margin 1.70% 2.19%
Operating expense as a percentage of
average insured student loans 0.58% 0.76%
Return on equity 17.71% 15.40%
</TABLE>
<TABLE>
<CAPTION>
Nine months ended
September 30,
----------------------------------------------------
2000 1999
--------------------- -------------------------
<S> <C> <C>
REVENUE
Interest income $ 773,608 $ 518,045
Interest expense 581,154 352,415
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NET INTEREST INCOME 192,454 165,630
Provision for loan losses 3,693 2,765
--------------------- -------------------------
Net interest income after provision for loan losses 188,761 162,865
Fee and other income 5,019 2,484
--------------------- -------------------------
TOTAL REVENUE, NET $ 193,780 $ 165,349
--------------------- -------------------------
OPERATING EXPENSES
Salaries and employee benefits $ 13,878 $ 15,895
Other expenses 45,664 37,383
--------------------- -------------------------
TOTAL OPERATING EXPENSES $ 59,542 $ 53,278
--------------------- -------------------------
INCOME BEFORE INCOME TAXES $ 134,238 $ 112,071
Income taxes 55,787 46,682
--------------------- -------------------------
NET INCOME $ 78,451 $ 65,389
===================== =========================
DIVIDENDS DECLARED $ 36,000 $ 27,000
===================== =========================
BASIC AND DILUTED EARNINGS PER COMMON SHARE -
(based on 20 million average shares outstanding) $ 3.92 $ 3.27
===================== =========================
DIVIDENDS DECLARED PER COMMON SHARE $ 1.80 $ 1.35
===================== =========================
OPERATING RATIOS
Net interest margin 2.04% 2.44%
Operating expense as a percentage of
average insured student loans 0.63% 0.79%
Return on equity 19.53% 17.97%
</TABLE>
See accompanying notes to financial statements.
3
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THE STUDENT LOAN CORPORATION
BALANCE SHEETS
(Dollars in thousands)
(Unaudited)
<TABLE>
<CAPTION>
September 30, December 31,
2000 1999
----------------- -----------------
<S> <C> <C>
ASSETS
Insured student loans $ 14,629,691 $ 10,864,980
Allowance for loan losses 3,950 3,768
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Insured student loans, net 14,625,741 10,861,212
Cash 279 251
Deferred tax benefits 21,237 24,325
Other assets 459,111 310,680
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TOTAL ASSETS $ 15,106,368 $ 11,196,468
================= =================
LIABILITIES AND STOCKHOLDERS' EQUITY
Short-term borrowings $ 11,085,306 $ 7,312,061
Long-term notes 3,222,000 3,222,000
Payable to principal stockholder 10,021 11,552
Other liabilities 231,209 135,723
----------------- -----------------
Total Liabilities 14,548,536 10,681,336
----------------- -----------------
Common stock 200 200
Additional paid-in capital 134,772 134,523
Retained earnings 422,860 380,409
----------------- -----------------
Total Stockholders' Equity 557,832 515,132
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TOTAL LIABILITIES AND STOCKHOLDERS' EQUITY $ 15,106,368 $ 11,196,468
================= =================
AVERAGE INSURED STUDENT LOANS $ 12,578,556 $ 9,406,600
(year-to-date) ================= =================
</TABLE>
See accompanying notes to financial statements.
4
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THE STUDENT LOAN CORPORATION
STATEMENTS OF CASH FLOWS
(Dollars in thousands)
(Unaudited)
<TABLE>
<CAPTION>
Nine months ended
September 30,
-----------------------------------------------
2000 1999
------------------------ -------------------
<S> <C> <C>
Cash flows from operating activities:
Net income $ 78,451 $ 65,389
Adjustments to reconcile net income to
net cash from operating activities:
Depreciation and amortization 23,030 7,416
Provision for loan losses 3,693 2,765
Deferred tax provision 3,088 6,613
(Increase) in accrued interest receivable (150,776) (53,936)
Decrease (increase) in other assets 6,781 (8,621)
Increase (decrease) in other liabilities 94,203 (68,012)
-------------------- -------------------
NET CASH PROVIDED BY (USED IN) OPERATING ACTIVITIES 58,470 (48,386)
-------------------- -------------------
Cash flows from investing activities:
Disbursements of loans (2,879,645) (1,505,123)
Repayment of loans 2,145,311 780,854
Purchase of loans (3,287,780) (913,657)
Sale of loans 231,346 218,902
Capital expenditures on furniture and equipment (4,919) (371)
-------------------- -------------------
NET CASH USED IN INVESTING ACTIVITIES (3,795,687) (1,419,395)
-------------------- -------------------
Cash flows from financing activities:
Net increase in borrowings with original
maturities of one year or less 3,773,245 5,747,962
Proceeds from long-term borrowings - 259,000
Repayment of long-term debt - (4,512,000)
Dividends paid to stockholders (36,000) (27,000)
-------------------- -------------------
NET CASH PROVIDED BY FINANCING ACTIVITIES 3,737,245 1,467,962
-------------------- -------------------
NET INCREASE IN CASH 28 181
CASH - BEGINNING OF PERIOD 251 37
-------------------- -------------------
CASH - END OF PERIOD $ 279 $ 218
==================== ===================
SUPPLEMENTAL DISCLOSURE OF CASH FLOW INFORMATION:
Cash paid for:
Interest $ 503,661 $ 395,958
Income taxes $ 46,836 $ 35,568
</TABLE>
See accompanying notes to financial statements.
5
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THE STUDENT LOAN CORPORATION
NOTES TO FINANCIAL STATEMENTS (UNAUDITED)
SEPTEMBER 30, 2000
1. SIGNIFICANT ACCOUNTING POLICIES
INTERIM FINANCIAL INFORMATION
The financial information of The Student Loan Corporation (the
"Company") as of September 30, 2000 and for the three- and nine-
month periods ended September 30, 2000 and 1999 includes all
adjustments (consisting of normal recurring accruals) 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 1999 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. RELATED PARTY TRANSACTIONS
Citibank (New York State) ("CNYS"), an indirect wholly-owned
subsidiary of Citigroup Inc., owns 80% of the outstanding common
stock of the Company. A number of significant transactions are
carried out between the Company on the one hand and Citigroup and its
affiliates on the other hand. At September 30, 2000, the Company had
outstanding short-term and long-term borrowings with CNYS of $ 11.1
billion and $3.2 billion, respectively, compared to $7.3 billion and
$3.2 billion, respectively, at December 31, 1999. For the three- and
nine- month periods ended September 30, 2000, the Company incurred
$237.0 million and $581.2 million, respectively, in interest expense
payable to CNYS and its affiliates, compared to $122.8 million and
$354.3 million, respectively, for the same periods in 1999. In
addition, Citigroup 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, payroll administration 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.
4. INTEREST RATE SWAP AGREEMENTS
To better match the interest rate characteristics of its borrowings
with its loan assets, the Company, from time to time, enters into
interest rate swap agreements, generally with an affiliate, on portions
of its portfolio. The swap agreements are intended to reduce the risk
caused by differences between borrowing and lending rates. Upon
entering into a swap agreement, the Company generally receives payments
based on the three-month LIBOR and makes payments based on the asset
yield, usually the 90-day Treasury Bill rate. The Company effectively
reduces the risk of potential interest rate variability by 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.
6
<PAGE> 7
At September 30, 2000 and December 31, 1999, the Company had no
interest rate swap agreements outstanding and managed interest rate
risk directly through its funding agreements.
For the third quarter and the first three quarters of 2000, the
Company had no interest transactions related to swap agreements. For
the third quarter of 1999, the Company incurred $0.1 million of
interest expense related to swap agreements. In the first three
quarters of 1999, the Company had a reduction of interest expense of
$3.1 million related to these agreements.
5. SHORT AND LONG-TERM BORROWINGS
In the first nine months of 2000, short-term debt increased by $3.8
billion to $11.1 billion. For the same period in 1999, short-term
debt increased by $5.7 billion. The $3.2 billion long-term borrowings
balance at September 30, 2000 did not change from that outstanding at
December 31, 1999. Long-term borrowings increased by $0.3 billion
during the first nine months of 1999 and $4.5 billion was repaid
during that period.
6. FUTURE IMPACTS OF RECENTLY ISSUED ACCOUNTING STANDARDS
In June 1998, the Financial Accounting Standards Board (FASB) issued
Statement of Financial Accounting Standards No. 133, "Accounting for
Derivative Instruments and Hedging Activities", and it amended that
statement in June 1999 and June 2000. The Company will adopt these
new rules on January 1, 2001, when the rules become effective for
calendar year companies, for any derivative instruments held at that
time.
The new standards will significantly change the accounting treatment
of derivative contracts that are employed to manage risk, as well as
certain derivative-like instruments embedded in other contracts. The
rules require that all derivatives be recorded on the balance sheet
at their fair values. The treatment of changes in the fair value of
derivatives depends on the character of the transaction.
For cash flow hedges, in which derivatives hedge the variability of
cash flows related to floating rate assets, liabilities or forecasted
transactions, the accounting treatment will depend on the
effectiveness of the hedge. To the extent these derivatives are
effective in offsetting the variability of the hedged cash flows,
changes in the derivatives' fair values will not be included in
current earnings but will be reported as other changes in
stockholders' equity from nonowner sources. These changes in fair
values will be included in earnings of future periods when they are
also affected by the variability of the hedged cash flows. To the
extent these derivatives are not effective, changes in their fair
values will be immediately included in current earnings. The
Company's cash flow hedges will primarily include hedges of floating
rate borrowings. As a result, while the earnings impact of cash flow
hedges may be similar to existing accounting practice, the amounts
included in other changes in stockholders' equity from nonowner
sources may vary depending on market conditions.
For fair value hedges, in which derivatives hedge the fair value of
assets and liabilities, changes in the fair value of derivatives will
be reflected in current earnings, together with changes in the fair
value of the related hedged item. The Company's fair value hedges would
primarily include hedges of fixed rate long-term debt.
The Company may make changes to risk management strategies and also
anticipates an increase in the complexity of the accounting and
recordkeeping requirements for hedging activities, but overall it
does not foresee a material impact on its financial position or
results of operations from implementing the new rules. The FASB
continues to deliberate potential changes to the new rules, the
effect of which cannot be presently anticipated.
7. COMMITMENTS AND CONTINGENCIES
A consolidated stockholder complaint is pending against the Company.
For further information, see "Legal Proceedings" beginning on page 13
of the Company's Annual Report on Form 10-K for
7
<PAGE> 8
the year-ended December 31, 1999 and on page 13 of the Company's
Quarterly Report on Form 10-Q for the quarterly period ended March
31, 2000.
Also, various legal proceedings arising out of the normal course of
business are pending against the Company. Although there can be no
assurances, the Company believes, based on information currently
available, that the ultimate resolution of these legal proceedings
would not be likely to have a material adverse effect on its results
of operations, financial condition or liquidity.
In addition, since 1992 a series of amendments to the Higher
Education Act of 1965 (the "Act"), which governs the Federal Family
Education Loan ("FFEL") Program, have increased costs and reduced
interest payments to lenders. These legislative changes have
progressively reduced the spread the Company receives over the base
indices used to establish interest spreads that borrowers pay and
lenders receive. Furthermore, the increased loan premium amortization
from recent portfolio acquisitions and less favorable funding rates
compared to prior years have additionally contributed to the
reduction of net interest margin. Pressure on margins is expected to
continue as a result of portfolio product mix. 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 spreads. Any such amendments
could adversely affect the Company's business and prospects.
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.
8. SUBSEQUENT EVENT
On November 3, 2000, the Company in conjunction with nine other
participants in the FFEL Program and one trade organization (the
"Plaintiffs") filed a lawsuit against the Secretary of the Department
of Education (the "Defendant"), alleging, among other things, that
the Department violated the Administrative Procedure Act ("APA") and
Title IV, Part D of the Higher Education Act (the "Act") by
implementing certain taxpayer-funded borrower benefit programs,
effective on or after July 1, 2000, only for loans made through the
Direct Lending Program. The Plaintiffs seek declaratory relief with
respect to the proper construction of, and Defendant's non-compliance
with, the applicable provisions of APA and the Act.
One of the issues contained in the lawsuit is the recent Department
of Education decision to begin offering students a significantly
better rate on loan consolidations made through the Direct Lending
Program than is available to borrowers in the FFEL Program. This
difference may have a material impact on the Company's ability and
appropriateness to continue substantial participation in Loan
Consolidation offerings.
8
<PAGE> 9
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; the success of the Company's hedging policies;
the successful resolution of legal proceedings; as well as general
economic conditions, including the performance of financial markets
and the passage of regulatory changes.
FINANCIAL CONDITION
During the nine months ended September 30, 2000, the net insured
student loan portfolio of the Company grew by $3.8 billion (35%) from
the balance at December 31, 1999. This growth was the result of loan
disbursements totaling $2.9 billion and loan purchases of $3.3
billion in the first nine months of 2000, partially offset by $0.2
billion in loan sales and $2.1 billion in loan reductions
(attributable to repayments and claims paid by guarantors), and other
adjustments of $0.1 billion. During the nine months ended September
30, 1999, the Company made loan disbursements of $1.5 billion, loan
purchases of $0.9 billion, loan sales of $0.2 billion, and loan
reductions of $0.8 billion in the first nine months of 1999. The
increase in loan purchases for the first three quarters of 2000
compared to the same period in 1999 is primarily attributable to the
Company's loan portfolio acquisition efforts during this period, as
well as to third party loan consolidation marketing initiated in June
2000.
The Company's loan disbursements and new CitiAssist loan commitments
for the first nine months of 2000 of $3.2 billion were $1.5 billion
(86%) more than those made in the same period of 1999. This increase
is attributable primarily to increases in new Federal Consolidation
program loan disbursements. During the first nine months of 2000, new
CitiAssist loan commitments increased to $0.3 billion, a $0.1 billion
(55%) increase from the same period last year. FFEL Program Stafford
and Plus loan disbursements of $1.5 billion in the first nine months
of 2000 is $0.2 billion (12%) higher than the $1.3 billion disbursed
during the same period of 1999. Federal Consolidation program loan
originations of $1.4 billion for the first three quarters of 2000
have increased $1.2 billion compared to the same period of 1999.
9
<PAGE> 10
During the first nine months of 2000, the Company made $504 million
in interest payments, principally to CNYS, compared to $396 million
for the same period in 1999. The increase is due to changes in both
the size of the borrowings and interest rates as well as timing of
interest payments. The Company paid $47 million in income taxes
during the first three quarters of 2000, compared to $36 million for
the same period last year. The increase in the amount of taxes paid
is primarily due to timing differences in making intercompany tax
payments and does not reflect any significant changes in applicable
income tax rates.
Other assets at September 30, 2000 increased $148.4 million (48%)
from December 31, 1999, principally as a result of additional
interest receivable attributable to growth in the student loan
portfolio and timing of interest receipts. Other liabilities,
principally comprised of accrued interest and income taxes payable,
increased $95.5 million (70%) from December 31, 1999, primarily due
to accrued interest on new borrowings and timing differences in
making intercompany interest and tax payments.
In the first nine months of 2000, short-term debt increased by $3.8
billion to $11.1 billion. The increase in borrowings resulted from
the Company's decided action to grow assets by loan sourcing to
non-direct distribution channels, specifically the secondary market
and third party loan consolidation marketing. For the first nine
months of 1999, short-term debt increased by $5.7 billion. This new
short-term debt was used primarily to replace maturing long- term
debt. The $3.2 billion long-term borrowings balance at September 30,
2000 did not change from that outstanding at December 31, 1999.
Long-term borrowings increased by $0.3 billion during the first nine
months of 1999 and $4.5 billion was repaid during that period.
The Company paid a quarterly dividend of $0.60 per common share on
September 1, 2000. On October 19, 2000, the Board of Directors
declared a regular quarterly dividend on the Company's common stock
of $0.60 per share to be paid December 1, 2000 to stockholders of
record on November 15, 2000.
RISK MANAGEMENT
Risk management is an important business objective of the Company.
The Company actively manages market, price and other risks. For
further information, see "Risk Management" beginning on page 6 of the
Company's Annual Report on Form 10-K for the year ended December 31,
1999.
MARKET RISK
The Company's primary market risk exposure is to fluctuations in the
spreads between the Company's borrowing and lending rates, which may
be impacted by shifts in market interest rates. Market risk is
measured using various tools, including Earnings-at-Risk which
reflects repricing gaps in the position as well as option positions,
both explicit and embedded in the loan portfolio. The Company
prepares Earnings-at-Risk calculations to measure the discounted
pre-tax earnings impact over a preset 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 four weeks). As of September 30, 2000, the rate
shift over a four-week defeasance period applied to the interest rate
yield curve for purposes of calculating Earnings-at-Risk was 38 basis
points.
10
<PAGE> 11
The Earnings-at-Risk calculation is a measure to look at exposures
based upon the Company's position at one point in time. As indicated
in the table below, as of September 30, 2000 a 38 basis point (two
standard deviation) increase in the interest yield curve would have a
potential positive impact on the Company's pretax earnings of
approximately $5.6 million in the next twelve months and a potential
negative impact of approximately $2.0 million for the total five-year
period 2001-2005. A two standard deviation decrease in the interest
yield curve would have a potential negative impact on the Company's
pretax earnings of approximately $3.3 million in the next twelve
months and a potential positive impact of approximately $6.7 million
for the five-year period 2001-2005.
<TABLE>
<CAPTION>
Earnings-at-Risk (effect on pre-tax earnings) as of September 30, 2000
-------------------------------------------------------------------------------------------------------------
(Dollars in millions) 2001 2002 2003 2004 2005 Total
-------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C>
Two standard deviation increase $5.6 ($1.9) ($1.9) ($1.9) ($1.9) ($2.0)
-------------------------------------------------------------------------------------------------------------
Two standard deviation decrease ($ 3.3) $2.8 $2.6 $2.4 $2.2 $6.7
-------------------------------------------------------------------------------------------------------------
</TABLE>
<TABLE>
<CAPTION>
Earnings-at-Risk (effect on pre-tax earnings) as of September 30, 1999
-------------------------------------------------------------------------------------------------------------
(Dollars in millions) 2000 2001 2002 2003 2004 Total
-------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C>
Two standard deviation increase $8.4 ($2.7) ($2.9) ($2.6) ($2.2) $ (2.0)
-------------------------------------------------------------------------------------------------------------
Two standard deviation decrease $ - $3.7 $3.9 $3.5 $2.9 $ 14.0
-------------------------------------------------------------------------------------------------------------
</TABLE>
The Company, through its Asset/Liability Management Committee,
actively manages these risks by setting Earnings-at-Risk limits and
takes appropriate actions if interest rates move against the existing
structure.
RESULTS OF OPERATIONS
Quarter Ended September 30, 2000
Net income was $24.5 million ($1.23 basic and diluted earnings per
share) for the third quarter of 2000. This was an increase of $4.9
million (25%) from earnings for the same period last year. The
increase in net income was primarily attributable to higher interest
income generated by loan portfolio growth resulting from new
originations and loan portfolio acquisition efforts.
The net interest margin for the third quarter of 2000 was 1.70%,
0.49% lower than the 2.19%, margin for the third quarter of 1999. The
decline in the margin was primarily attributable to increases in loan
premium amortization resulting from recent portfolio acquisitions and
less favorable funding spreads compared to those for the same period
last year. The pressure on margins is expected to continue as more
loans with lower interest spreads are added to the portfolio and
older loans with higher interest spreads are repaid.
Total operating expenses for the third quarter of 2000 increased $2.7
million (15%) from the same period last year, primarily due to an
increase of $3.9 million in fees and other costs to convert newly
purchased portfolios and service the significantly larger loan
portfolio, partially offset by decreases in current quarter salary
costs. Notwithstanding, operating expense as a percentage of average
insured student loans improved 0.18% to 0.58%, from the third quarter
of 1999 expense ratio of 0.76%. The improvement in the expense ratio
was primarily attributable to portfolio growth and efficiencies in
administrative and operational expenses.
Return on equity was 17.7% for the third quarter of 2000, 2.3% higher
than the 15.4% return for the same period of 1999. The increase was
attributed to higher earnings.
11
<PAGE> 12
Nine Months Ended September 30, 2000
The Company earned net income of $78.5 million ($3.92 basic earnings
per share) for the nine months ended September 30, 2000, an increase
of $13.1 million (20%) compared to earnings for the first nine months
of 1999. The increase was primarily due to higher interest income
generated by loan portfolio growth resulting from new originations
and loan portfolio acquisition efforts. Management believes that the
rapid asset growth was as a result of opportunistic market conditions
in the secondary market and loan consolidation business. Continued
growth in these areas will depend on market conditions.
Total operating expenses for the first nine months of 2000 were $59.5
million, $6.3 million (12%) higher than the same period last year due
to increased costs to service the significantly larger portfolio,
partially offset by decreases in salary costs. Notwithstanding,
operating expense as a percentage of average insured student loans
for the first nine months of 2000 decreased to 0.63%, an improvement
of 0.16% compared to the first nine months of 1999. The improvement
in the expense ratio was primarily attributable to portfolio growth
and efficiencies in administrative and operational expenses.
Return on equity was 19.5% for the nine months ended September 30,
2000, 1.5% higher than the 18.0% return for the same period of 1999.
The increase was attributed to higher earnings.
The Company's effective tax rate was approximately 41.6% for the
first nine months of 2000, compared to 41.7% for the same period in
1999.
REGULATORY IMPACTS
In recent years the Company's loan portfolio, comprised primarily of
loans originated under the FFEL Program, has been subject to
increased costs and reduced interest payments to lenders as a result
of amendments to the Higher Education Act of 1965, which governs the
FFEL Program. Pressure on margins will continue as more loans are
originated with lower revenue yields, resulting in reduced interest
spreads received by FFEL Program lenders.
In order to counteract the reduced net interest margin on the
Company's loan portfolio resulting from these legislative changes,
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
loan program, that are not dependent on Federal funding, guarantees
and authorization.
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.
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OTHER
On November 3, 2000, the Company in conjunction with nine other
participants in the FFEL Program and one trade organization (the
"Plaintiffs") filed a lawsuit against the Secretary of the Department
of Education (the "Defendant"), alleging, among other things, that
the Department violated the Administrative Procedure Act ("APA") and
Title IV, Part D of the Higher Education Act (the "Act") by
implementing certain taxpayer-funded borrower benefit programs,
effective on or after July 1, 2000, only for loans made through the
Direct Lending Program. The Plaintiffs seek declaratory relief with
respect to the proper construction of, and Defendant's non-compliance
with, the applicable provisions of APA and the Act.
One of the issues contained in the lawsuit is the recent Department
of Education decision to begin offering students a significantly
better rate on loan consolidations made through the Direct Lending
Program than is available to borrowers in the FFEL Program. This
difference may have a material impact on the Company's ability and
appropriateness to continue substantial participation in Loan
Consolidation offerings.
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PART II. OTHER INFORMATION
ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K.
(a) Exhibits
27 Financial Data Schedule
(b) Reports on Form 8-K:
No reports on Form 8-K were filed during the third quarter of 2000.
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SIGNATURE
Pursuant to the requirements of the Securities Exchange Act
of 1934, the registrant has duly caused this report to be signed on its behalf
by the undersigned, thereunto duly authorized.
Date: November 10, 2000
The Student Loan Corporation
By /s/ Steven Gorey
----------------
Steven Gorey
Vice President and
Chief Financial Officer
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