(Mark
One)
|
||
x
|
QUARTERLY
REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF
1934
|
|
For
the quarterly period ended June 30, 2008
|
||
or
|
||
¨
|
TRANSITION
REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF
1934
|
|
For
the transition period from ___ to ___
|
Delaware
|
16-1427135
|
|
(State
or other jurisdiction of
|
(I.R.S.
Employer Identification No.)
|
|
incorporation
or organization)
|
||
750
Washington Blvd.
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06901
|
|
Stamford,
Connecticut
|
(Zip
Code)
|
|
(Address
of principal executive offices)
|
Yes
|
x
|
No
|
o
|
Large
accelerated filer x
|
Accelerated
filer o
|
|
Non-accelerated
filer o (Do not check if
a smaller reporting company)
|
Smaller
reporting company o
|
Yes
|
o
|
No
|
x
|
Part
I
|
Consolidated
Financial Information
|
||
Page
|
|||
Item
1 -
|
Consolidated
Financial Statements
|
||
Consolidated
Statements of Income (Unaudited) for the Three and Six Months
Ended June 30, 2008 and 2007
|
2
|
||
Consolidated
Balance Sheets as of June 30, 2008 (Unaudited) and December 31,
2007
|
3
|
||
Consolidated
Statements of Changes in Stockholders’ Equity (Unaudited) for the Six
Months Ended June 30, 2008 and 2007
|
4
|
||
Consolidated
Statements of Cash Flows (Unaudited) for the Six Months
Ended June 30, 2008 and 2007
|
5
|
||
Notes
to Consolidated Financial Statements (Unaudited)
|
6–
17
|
||
Item
2 -
|
Management’s
Discussion and Analysis of Financial Condition and Results of
Operations
|
18 –
32
|
|
Item
3 -
|
Quantitative
and Qualitative Disclosures About Market Risk
|
33
|
|
Item
4 -
|
Controls
and Procedures
|
33
|
|
Part
II
|
Other
Information
|
||
Item
1A-
|
Risk
Factors
|
34
– 37
|
|
Item
6 -
|
Exhibits
|
38
|
|
Signature
|
39
|
||
Exhibit
Index
|
40
|
Item
1.
|
Consolidated
Financial Statements
|
Three
months ended
|
Six
months ended
|
|||||||||||||||
June
30,
|
June
30,
|
|||||||||||||||
2008
|
2007
|
2008
|
2007
|
|||||||||||||
NET
INTEREST INCOME
|
||||||||||||||||
Interest
income
|
$ | 318,769 | $ | 400,674 | $ | 648,516 | $ | 779,321 | ||||||||
Interest
expense
|
(199,379 | ) | (297,797 | ) | (447,679 | ) | (582,687 | ) | ||||||||
Net
interest income
|
119,390 | 102,877 | 200,837 | 196,634 | ||||||||||||
Provision
for loan losses
|
(45,827 | ) | (3,895 | ) | (71,139 | ) | (14,423 | ) | ||||||||
Net
interest income after provision for loan losses
|
73,563 | 98,982 | 129,698 | 182,211 | ||||||||||||
OTHER
INCOME
|
||||||||||||||||
Gains
on loans securitized
|
1,262 | 48,548 | 1,262 | 48,548 | ||||||||||||
Gains
on loans sold
|
859 | 2,492 | 2,314 | 20,266 | ||||||||||||
Fee
and other income
|
39,012 | 9,420 | 50,471 | 24,283 | ||||||||||||
Total
other income
|
41,133 | 60,460 | 54,047 | 93,097 | ||||||||||||
OPERATING
EXPENSES
|
||||||||||||||||
Salaries
and employee benefits
|
13,593 | 16,120 | 29,062 | 30,570 | ||||||||||||
Restructuring
and related charges
|
8,735 | – | 8,735 | 735 | ||||||||||||
Other
expenses
|
29,521 | 29,631 | 58,187 | 58,644 | ||||||||||||
Total
operating expenses
|
51,849 | 45,751 | 95,984 | 89,949 | ||||||||||||
Income
before income taxes
|
62,847 | 113,691 | 87,761 | 185,359 | ||||||||||||
Income
taxes
|
20,831 | 43,174 | 30,511 | 70,819 | ||||||||||||
NET
INCOME
|
$ | 42,016 | $ | 70,517 | $ | 57,250 | $ | 114,540 | ||||||||
DIVIDENDS
DECLARED AND PAID
|
$ | 28,600 | $ | 28,600 | $ | 57,200 | $ | 54,600 | ||||||||
BASIC
EARNINGS PER COMMON SHARE
|
$ | 2.10 | $ | 3.53 | $ | 2.86 | $ | 5.73 | ||||||||
(based
on 20 million average shares outstanding)
|
||||||||||||||||
DIVIDENDS
DECLARED AND PAID PER COMMON SHARE
|
$ | 1.43 | $ | 1.43 | $ | 2.86 | $ | 2.73 |
June
30,
|
December
31,
|
|||||||
2008
|
2007
|
|||||||
(Unaudited)
|
||||||||
ASSETS
|
|
|||||||
Federally
insured student loans
|
$ | 14,719,407 | $ | 16,244,273 | ||||
Private
education loans
|
5,819,978 | 4,696,337 | ||||||
Deferred
origination and premium costs
|
660,296 | 668,082 | ||||||
Allowance
for loan losses
|
(81,817 | ) | (42,115 | ) | ||||
Student
loans, net
|
21,117,864 | 21,566,577 | ||||||
Other
loans and lines of credit
|
18,157 | 87,437 | ||||||
Loans
held for sale
|
1,926,538 | 337,790 | ||||||
Cash
|
656 | 25 | ||||||
Residual
interests in securitized loans
|
701,598 | 633,074 | ||||||
Other
assets
|
1,333,562 | 1,154,956 | ||||||
Total
Assets
|
$ | 25,098,375 | $ | 23,779,859 | ||||
LIABILITIES
AND STOCKHOLDERS' EQUITY
|
||||||||
Short-term
borrowings, payable to principal stockholder
|
$ | 11,801,600 | $ | 13,373,000 | ||||
Long-term
borrowings, payable to principal stockholder
|
9,150,000 | 8,100,000 | ||||||
Long-term
secured borrowings
|
1,830,988 | – | ||||||
Deferred
income taxes
|
264,089 | 287,462 | ||||||
Other
liabilities
|
427,403 | 395,174 | ||||||
Total
Liabilities
|
23,474,080 | 22,155,636 | ||||||
Common
stock, $0.01 par value; authorized 50,000,000 shares; 20,000,000 shares
issued and outstanding
|
200 | 200 | ||||||
Additional
paid-in capital
|
141,377 | 141,355 | ||||||
Retained
earnings
|
1,482,718 | 1,482,668 | ||||||
Total Stockholders' Equity
|
1,624,295 | 1,624,223 | ||||||
Total
Liabilities and Stockholders' Equity
|
$ | 25,098,375 | $ | 23,779,859 |
Six
months ended June 30,
|
||||||||
2008
|
2007
|
|||||||
COMMON
STOCK AND ADDITIONAL PAID-IN CAPITAL
|
||||||||
Balance,
beginning of period
|
$ | 141,555 | $ | 141,524 | ||||
Capital
contributions and other changes
|
22 | 19 | ||||||
Balance,
end of period
|
$ | 141,577 | $ | 141,543 | ||||
RETAINED
EARNINGS
|
||||||||
Balance,
beginning of period
|
$ | 1,482,668 | $ | 1,410,968 | ||||
Cumulative
effect of adoption of accounting standard, net of taxes of
$506
|
– | 809 | ||||||
Net
income
|
57,250 | 114,540 | ||||||
Common
dividends declared, $2.86 per common share in 2008 and $2.73 per common
share in 2007
|
(57,200 | ) | (54,600 | ) | ||||
Balance,
end of period
|
$ | 1,482,718 | $ | 1,471,717 | ||||
ACCUMULATED
OTHER COMPREHENSIVE INCOME
|
||||||||
Balance,
beginning of period
|
$ | – | $ | 809 | ||||
Cumulative
effect of adoption of accounting standard, net of taxes of
$(506)
|
– | (809 | ) | |||||
Balance,
end of period
|
$ | – | $ | – | ||||
TOTAL
STOCKHOLDERS' EQUITY
|
$ | 1,624,295 | $ | 1,613,260 |
Six
months ended
|
||||||||
June
30,
|
||||||||
2008
|
2007
|
|||||||
Cash
flows from operating activities:
|
||||||||
Net
income
|
$ | 57,250 | $ | 114,540 | ||||
Adjustments
to reconcile net income to net cash from operating
activities:
|
||||||||
Depreciation
and amortization of equipment and computer software
|
6,696 | 7,142 | ||||||
Amortization
of deferred loan origination and purchase costs
|
49,124 | 54,638 | ||||||
Accreted
interest on residual interests
|
(30,964 | ) | (28,813 | ) | ||||
Provision
for loan losses
|
71,139 | 14,423 | ||||||
Restructuring
and related charges
|
8,735 | 735 | ||||||
Other
non-cash charges
|
9,105 | – | ||||||
Deferred
tax provision
|
(23,373 | ) | (16,212 | ) | ||||
Gains
on loans sold and securitized
|
(3,576 | ) | (68,814 | ) | ||||
(Gain)
loss on residual interest valuation
|
(46,758 | ) | 1,892 | |||||
Loss
on servicing asset valuation
|
7,314 | 12,397 | ||||||
Change
in loans held for sale
|
(156,707 | ) | (134,807 | ) | ||||
Change
in loans held for sale origination and purchase costs
|
(3,593 | ) | (2,212 | ) | ||||
Proceeds
from loans sold
|
114,392 | 150,978 | ||||||
Cash
received on residual interests in trading securitized
assets
|
66,064 | 36,374 | ||||||
Change
in accrued interest receivable
|
(39,100 | ) | (139,139 | ) | ||||
Change
in other assets
|
(38,370 | ) | (17,074 | ) | ||||
Change
in other liabilities
|
24,134 | (78,196 | ) | |||||
Net
cash provided by (used in) operating activities
|
71,512 | (92,148 | ) | |||||
Cash
flows from investing activities:
|
||||||||
Change
in loans
|
(3,137,199 | ) | (2,800,561 | ) | ||||
Change
in loan origination and purchase costs
|
(97,248 | ) | (135,034 | ) | ||||
Proceeds
from loans sold and securitized
|
1,973,207 | 1,973,607 | ||||||
Change
in restricted cash
|
(51,975 | ) | – | |||||
Capital
expenditures on equipment and computer software
|
(5,450 | ) | (3,971 | ) | ||||
Net
cash used in investing activities
|
(1,318,665 | ) | (965,959 | ) | ||||
Cash
flows from financing activities:
|
||||||||
Net
change in borrowings with original maturities of one year or
less
|
(2,771,400 | ) | 106,500 | |||||
Proceeds
from borrowings with original terms of one year or more
|
2,550,000 | 3,000,000 | ||||||
Proceeds
from issuance of secured borrowings
|
1,848,530 | – | ||||||
Repayments
of secured borrowings
|
(22,146 | ) | – | |||||
Repayments
of borrowings with original terms of one year or more
|
(300,000 | ) | (2,000,000 | ) | ||||
Dividends
paid to stockholders
|
(57,200 | ) | (54,600 | ) | ||||
Net
cash provided by financing activities
|
1,247,784 | 1,051,900 | ||||||
Net
increase (decrease) in cash
|
631 | (6,207 | ) | |||||
Cash
- beginning of period
|
25 | 6,570 | ||||||
Cash
- end of period
|
$ | 656 | $ | 363 | ||||
Supplemental
disclosure:
|
||||||||
Cash
paid (received) for:
|
||||||||
Interest
|
$ | 511,080 | $ | 589,927 | ||||
Income
taxes, net
|
$ | (2,310 | ) | $ | 83,936 |
|
1.
|
BASIS OF
PRESENTATION AND SIGNIFICANT ACCOUNTING
POLICIES
|
|
2.
|
RESTRUCTURING
AND RELATED CHARGES
|
|
3.
|
INCOME
TAXES
|
|
5.
|
STUDENT
LOANS
|
June
30,
|
December
31,
|
|||||||
(Dollars in
thousands)
|
2008
|
2007
|
||||||
Federal
Stafford Loans
|
$ | 7,793,332 | $ | 8,687,483 | ||||
Federal
Consolidation Loans
|
6,507,410 | 6,364,762 | ||||||
Federal
SLS/PLUS/HEAL Loans
|
418,665 | 1,192,028 | ||||||
Private
education loans
|
5,819,978 | 4,696,337 | ||||||
Total
student loans held, excluding deferred costs
|
20,539,385 | 20,940,610 | ||||||
Deferred
origination and premium costs
|
660,296 | 668,082 | ||||||
Student
loans held
|
21,199,681 | 21,608,692 | ||||||
Less:
allowance for loan losses
|
(81,817 | ) | (42,115 | ) | ||||
Student
loans held, net
|
21,117,864 | 21,566,577 | ||||||
Loans
held for sale, excluding deferred costs
|
1,895,069 | 331,263 | ||||||
Deferred
origination and premium costs
|
31,469 | 6,527 | ||||||
Loans
held for sale
|
1,926,538 | 337,790 | ||||||
Other
loans and lines of credit
|
18,157 | 87,437 | ||||||
Total
loan assets
|
$ | 23,062,559 | $ | 21,991,804 |
|
6.
|
OTHER
ASSETS
|
June
30,
|
December
31,
|
|||||||
(Dollars in
thousands)
|
2008
|
2007
|
||||||
Accrued
interest receivable
|
||||||||
from
student loan borrowers/others
|
$ | 759,874 | $ | 649,219 | ||||
from
federal government
|
35,131 | 106,686 | ||||||
Servicing
asset from securitization activity
|
191,798 | 199,112 | ||||||
Collateral
on derivatives with CBNA
|
148,024 | 86,699 | ||||||
Retained
notes from securitization activities
|
81,637 | 24,204 | ||||||
Restricted
cash
|
51,975 | – | ||||||
Equipment
and computer software (1)
|
31,894 | 34,563 | ||||||
Other
|
33,229 | 54,473 | ||||||
Total
other assets
|
$ | 1,333,562 | $ | 1,154,956 |
|
(1)
|
Amounts
are reflected net of accumulated depreciation and software amortization of
$55 million and $53 million at June 30, 2008 and December 31, 2007,
respectively. The Company disposed of equipment and computer
software with a net book value of $1.4 million during the six months ended
June 30, 2008, of which $0.6 million was included in restructuring
charges.
|
|
7.
|
FEE
AND OTHER INCOME
|
Three Months Ended | Six Months Ended | |||||||||||||||
June 30, | June 30, | |||||||||||||||
(Dollars in
thousands)
|
2008
|
2007
|
2008
|
2007
|
||||||||||||
(Losses)
gains related to residual interests
|
$ | (23,661 | ) | $ | (114 | ) | $ | 46,758 | $ | (1,892 | ) | |||||
Mark-to-market
gains (losses) on derivatives
|
54,469 | (1,920 | ) | (17,951 | ) | (1,662 | ) | |||||||||
Servicing
revenue net of valuation gains and losses on servicing
assets
|
13,422 | 8,489 | 30,252 | 20,125 | ||||||||||||
Foreign
currency translation gains (losses)
|
480 | – | (4,290 | ) | – | |||||||||||
Late
fees
|
1,362 | 1,509 | 3,379 | 3,541 | ||||||||||||
Other
origination and servicing fees from CBNA
|
1,069 | 1,020 | 2,801 | 3,081 | ||||||||||||
Other
(expense) income (1)
|
(8,129 | ) | 436 | (10,478 | ) | 1,090 | ||||||||||
Total
fee and other income
|
$ | 39,012 | $ | 9,420 | $ | 50,471 | $ | 24,283 |
(1) | Amounts for the three and six months ended June 30, 2008 include a $6 million contingent loss reserve on a commitment to fund private education loans at a certain proprietary school and a $4 million valuation allowance on loans held for sale. |
|
8.
|
RELATED
PARTY TRANSACTIONS
|
Three
Months Ended
June
30,
|
Six Months
Ended
June
30,
|
|||||||||||||||
(Dollars
in thousands)
|
2008
|
2007
|
2008
|
2007
|
||||||||||||
Revenues:
|
||||||||||||||||
Interest
income
|
$ | 706 | $ | 285 | $ | 1,537 | $ | 532 | ||||||||
Interest
expense
|
181,644 | 297,796 | 429,215 | 582,682 | ||||||||||||
Fee
and other income:
|
||||||||||||||||
Derivative
valuation gain (loss)
|
54,373 | (1,920 | ) | (22,458 | ) | (1,662 | ) | |||||||||
Other
origination and servicing fees
|
1,069 | 1,020 | 2,801 | 3,081 | ||||||||||||
Operating
Expenses:
|
||||||||||||||||
Salaries
and employee benefits
|
||||||||||||||||
Employee
benefits and administration
|
$ | 2,546 | $ | 2,810 | $ | 5,590 | $ | 5,523 | ||||||||
Stock-based
compensation
|
528 | 558 | 1,638 | 1,413 | ||||||||||||
Other
expenses
|
||||||||||||||||
Servicing,
professional and other fees paid
|
13,634 | 11,689 | 26,585 | 23,479 | ||||||||||||
Data
processing and communications
|
1,606 | 1,518 | 3,139 | 3,040 | ||||||||||||
Premises
|
674 | 774 | 1,357 | 1,527 | ||||||||||||
Other
|
4,461 | 395 | 6,374 | 1,163 |
|
9.
|
DERIVATIVE
AGREEMENTS
|
June
30, 2008
|
December
31, 2007
|
|||||||||||||||||||||||
Fair
Value
|
Fair
Value
|
|||||||||||||||||||||||
(Dollars in
thousands)
|
Notional
|
Asset
|
Liability
|
Notional
|
Asset
|
Liability
|
||||||||||||||||||
LIBOR-Based
Swaps
|
$ | 11,901,800 | $ | 1,813 | $ | 31,828 | $ | 8,495,000 | $ | 34,492 | $ | 2,113 | ||||||||||||
Interest
Rate Floor Options
|
12,020,859 | 1,772 | 118,072 | 8,743,266 | 1,372 | 89,193 | ||||||||||||||||||
Foreign
Currency Swap
|
232,050 | 4,507 | – | – | – | – |
10.
|
STUDENT
LOAN SECURITIZATIONS
|
Three
Months Ended
|
Six
Months Ended
|
|||||||||||||||
June
30,
|
June
30,
|
|||||||||||||||
(Dollars
in thousands)
|
2008
|
2007
|
2008
|
2007
|
||||||||||||
Securitization
sales:
|
||||||||||||||||
Student
loans securitized (1)
|
$ | 2,035,540 | $ | 1,201,603 | $ | 2,035,540 | $ | 1,201,603 | ||||||||
Net
proceeds from student loans securitized during the period
|
1,973,207 | 1,221,216 | 1,973,207 | 1,221,216 | ||||||||||||
Realized
gains on loans securitized
|
1,262 | 48,548 | 1,262 | 48,548 | ||||||||||||
Securitization
financings:
|
||||||||||||||||
Student
loans securitized (1)
|
$ | – | $ | – | $ | 1,993,213 | $ | – | ||||||||
Net
proceeds from student loans securitized during the period (2)
|
273,619 | – | 1,799,830 | – |
|
(1)
|
Amounts
represent the value of the student loans securitized as of the
securitization date.
|
|
(2)
|
The
proceeds received during the three months ended June 30, 2008 represent
additional issuances of notes from the first quarter’s on-balance sheet
securitization transaction. The difference between student
loans securitized and net proceeds received for the six months ended June
30, 2008 primarily reflects $57 million of unissued notes and $130 million
of required overcollateralization (see Note
12).
|
Six Months
Ended
|
||||||||
June
30,
|
||||||||
(Dollars
in thousands)
|
2008
|
2007
|
||||||
Cash
received from trusts for servicing
|
$ | 37,443 | $ | 31,065 | ||||
Cash
received from trusts on residual interests
|
66,064 | 36,374 |
Three
Months Ended
|
Six
Months Ended
|
|||||||||||||||
June
30,
|
June
30,
|
|||||||||||||||
(Dollars
in thousands)
|
2008
|
2007
|
2008
|
2007
|
||||||||||||
Balance
at beginning of period
|
$ | 197,065 | $ | 164,367 | $ | 199,112 | $ | 169,234 | ||||||||
Changes
in fair value due to changes in inputs and assumptions
|
3,407 | 135 | 10,325 | 3,261 | ||||||||||||
Other
changes (1)
|
(8,674 | ) | (7,665 | ) | (17,639 | ) | (15,658 | ) | ||||||||
Student
loan securitizations (2)
|
– | 17,240 | – | 17,240 | ||||||||||||
Balance
at end of period
|
$ | 191,798 | $ | 174,077 | $ | 191,798 | $ | 174,077 |
(1)
|
Amounts
represent the effects of cash received and the passage of
time.
|
|
(2)
|
The off-balance sheet
securitization that took place during the second quarter of
2008 did not generate a servicing
asset.
|
June
30, 2008
|
December 31, 2007 | |||||
Weighted
average discount rate:
|
||||||
FFEL
Program Consolidation Loans
|
10.64 | % |
10.56
|
% | ||
FFEL
Program Stafford and PLUS loan (1)
|
10.64 | % |
-
|
|||
Private
education loans
|
13.64 | % | 12.56 | % | ||
Constant
prepayment rates:
|
||||||
FFEL
Program Consolidation Loans
|
1.22%
to 2.46
|
% | 1.73% to 3.09 | % | ||
FFEL
Program Stafford and PLUS loan (1)
|
8.97 | % | - | |||
Private
education loans
|
11.61 | % | 13.03 | % | ||
Anticipated
credit losses, net of insurance and guarantees:
|
||||||
FFEL
Program Consolidation Loans
|
0.31 | % | 0.30 | % | ||
FFEL
Program Stafford and PLUS loan (1)
|
0.53 | % | - | |||
Private
education loans
|
0.85 | % | 0.81 | % | ||
Expected
basis spread between LIBOR and Commercial Paper rate (1)
|
12.3
basis points
|
12.0 basis points | ||||
Utilization
rate of borrower benefits:
|
||||||
Automated
clearing house (1)
|
10.0%
to 90.1
|
% | 10.0% to 40.2 | % | ||
On
time payments (1)
|
0%
to 55.7
|
% | 0% to 41.3 | % |
(1) | These assumptions are unchanged from those used for the 2008-2 trust at the inception date of the securitization, which was June 26, 2008. |
June
30, 2008
|
December
31, 2007
|
|||||
Weighted
average discount rate:
|
||||||
FFEL
Program Consolidation Loans
|
5.83 | % | 5.80 | % | ||
Private
education loans
|
6.33 | % | 6.30 | % | ||
Constant
prepayment rates:
|
||||||
FFEL
Program Consolidation Loans
|
1.22%
to 2.46
|
% |
1.73%
to 3.09
|
% | ||
Private
education loans
|
11.61 | % | 13.03 | % | ||
Weighted
average servicing margin
|
24
basis points
|
25
basis points
|
(Dollars
in thousands)
|
Residual
Interests
|
Servicing
Assets
|
||||||
Fair
value at June 30, 2008
|
$ | 701,598 | $ | 191,798 | ||||
Discount
rate
|
||||||||
10%
adverse change
|
(23,048 | ) | (4,604 | ) | ||||
20%
adverse change
|
(44,332 | ) | (8,997 | ) | ||||
Constant
prepayment rate
|
||||||||
10%
adverse change
|
(8,585 | ) | (2,496 | ) | ||||
20%
adverse change
|
(16,965 | ) | (4,951 | ) | ||||
Anticipated
credit losses, net of insurance and guarantees
|
||||||||
10%
adverse change
|
(5,989 | ) | (1,153 | ) | ||||
20%
adverse change
|
(12,078 | ) | (2,328 | ) | ||||
Expected
basis spread between LIBOR and Commercial Paper rate
|
||||||||
10%
adverse change
|
(8,513 | ) | – | |||||
20%
adverse change
|
(17,206 | ) | – | |||||
Borrower
benefits – ACH
|
||||||||
10%
adverse change
|
(4,485 | ) | – | |||||
20%
adverse change
|
(8,961 | ) | – | |||||
Borrower
benefits – on time payments
|
||||||||
10%
adverse change
|
(13,782 | ) | – | |||||
20%
adverse change
|
(27,551 | ) | – | |||||
Servicing
margin
|
||||||||
10%
adverse change
|
– | (19,135 | ) | |||||
20%
adverse change
|
– | (38,087 | ) |
(Dollars
in thousands)
|
June
30, 2008
|
December
31, 2007
|
||||||
Principal
amounts
|
$ | 15,623,599 | $ | 14,123,887 | ||||
Delinquencies
|
470,846 | 413,175 |
Three
Months Ended
|
Six
Months Ended
|
|||||||||||||||
June
30,
|
June
30,
|
|||||||||||||||
(Dollars
in thousands)
|
2008
|
2007
|
2008
|
2007
|
||||||||||||
Credit
losses, net of recoveries:
|
$ | 2,621 | $ | 1,899 | $ | 4,429 | $ | 2,561 |
11.
|
FAIR
VALUE (SFAS 156, 157 AND 159)
|
·
|
Level
1 –
|
Quoted
prices for identical instruments
in active markets.
|
·
|
Level
2 –
|
Quoted
prices for similar instruments in
active markets, quoted prices for identical or similar instruments in
markets that are not active and model-derived valuations whose inputs are
observable or whose primary value drivers are
observable.
|
·
|
Level
3 –
|
Instruments
whose primary value drivers are unobservable.
|
(Dollars
in thousands)
|
Level
2
|
Level
3
|
||||||
Assets
|
||||||||
Residual
interests in securitized loans
|
$ | – | $ | 701,598 | ||||
Other
assets
|
89,729 | 191,798 | ||||||
Total
Assets
|
$ | 89,729 | $ | 893,396 | ||||
Liabilities
|
||||||||
Other
liabilities
|
$ | 149,900 | $ | – |
(Dollars
in thousands)
|
Residual
Interests in Securitized Loans
|
Other
Assets
|
||||||
Balance
at December 31, 2007
|
$ | 633,074 | $ | 199,112 | ||||
Total
gains and losses (realized/unrealized) included in
earnings:
|
||||||||
Interest
income
|
30,964 | – | ||||||
Fee
and other income
|
46,758 | 15,850 | ||||||
Purchases,
issuances and settlements
|
(9,198 | ) | (23,164 | ) | ||||
Balance
at June 30, 2008
|
$ | 701,598 | $ | 191,798 | ||||
Unrealized
gains and losses relating to assets still held at the reporting date (1)
|
$ | 46,758 | $ | 10,325 |
|
(1)
|
The
difference between total gains and losses (realized /unrealized) included
in earnings and unrealized gains and losses relating to assets still held
at the reporting date represents accreted
yield.
|
(Dollars
in thousands)
|
Aggregate
Cost
|
Fair
value
|
||||||
June
30, 2008
|
$ | 1,927,611 | $ | 1,926,538 |
12.
|
SHORT-
AND LONG-TERM BORROWINGS
|
13.
|
COMMITMENTS
AND CONTINGENCIES
|
Ending
Balances
|
||||||||
(Dollars
in millions)
|
June
30, 2008
|
December
31, 2007
|
||||||
Owned
loans
|
$ | 23,144 | $ | 22,034 | ||||
Managed
loans
|
39,330 | 37,311 |
Year
to Date Average Balances
|
||||||||
(Dollars
in millions)
|
June
30, 2008
|
December
31, 2007
|
||||||
Owned
loans
|
$ | 24,065 | $ | 22,825 | ||||
Managed
loans
|
38,951 | 36,109 |
Three
Months Ended
|
Six
Months Ended
|
|||||||||||||||
June
30,
|
June
30,
|
|||||||||||||||
(Dollars
in millions)
|
2008
|
2007
|
2008
|
2007
|
||||||||||||
Retail:
|
||||||||||||||||
FFEL
Program Stafford and PLUS loan disbursements
|
$ | 700 | $ | 582 | $ | 2,595 | $ | 2,094 | ||||||||
CitiAssist
loans disbursed under commitments to purchase (1)
|
176 | 174 | 824 | 886 | ||||||||||||
Total
Retail
|
876 | 756 | 3,419 | 2,980 | ||||||||||||
Loan
consolidation and other secondary market volume (2)
|
170 | 580 | 711 | 1,146 | ||||||||||||
Total
Originations
|
$ | 1,046 | $ | 1,336 | $ | 4,130 | $ | 4,126 |
(1)
|
This amount consists
of the CitiAssist loans that were disbursed by CBNA. These loans have been
or will be purchased by the Company after final
disbursement.
|
(2)
|
Approximately
half of the loan consolidation and other secondary market volume presented
in the table above for the six months ended June 30, 2008 and 2007
represent consolidations of student loans already held in the Company’s
loan portfolio.
|
Three
Months Ended
|
Six
Months Ended
|
|||||||||||||||
June
30,
|
June
30,
|
|||||||||||||||
(Dollars
in thousands)
|
2008
|
2007
|
2008
|
2007
|
||||||||||||
Balance
at beginning of period
|
||||||||||||||||
FFEL
Program
|
$ | 13,241 | $ | 9,537 | $ | 12,312 | $ | 6,911 | ||||||||
CitiAssist
Insured
|
5,331 | 1,769 | 3,214 | 721 | ||||||||||||
CitiAssist
Uninsured
|
36,180 | 9,549 | 26,589 | 6,565 | ||||||||||||
$ | 54,752 | $ | 20,855 | $ | 42,115 | $ | 14,197 | |||||||||
Provision
for loan losses
|
||||||||||||||||
FFEL
Program
|
$ | 190 | $ | (2,955 | ) | $ | 4,395 | $ | 869 | |||||||
CitiAssist
Insured
|
2,623 | 317 | 6,107 | 1,709 | ||||||||||||
CitiAssist
Uninsured
|
43,014 | 6,533 | 60,637 | 11,845 | ||||||||||||
$ | 45,827 | $ | 3,895 | $ | 71,139 | $ | 14,423 | |||||||||
Charge
offs
|
||||||||||||||||
FFEL
Program
|
$ | (2,333 | ) | $ | (1,378 | ) | $ | (5,609 | ) | $ | (2,576 | ) | ||||
CitiAssist
Insured
|
(2,369 | ) | (843 | ) | (3,736 | ) | (1,187 | ) | ||||||||
CitiAssist
Uninsured
|
(13,991 | ) | (4,997 | ) | (24,098 | ) | (8,644 | ) | ||||||||
$ | (18,693 | ) | $ | (7,218 | ) | $ | (33,443 | ) | $ | (12,407 | ) | |||||
Recoveries
|
||||||||||||||||
FFEL
Program
|
$ | – | $ | – | $ | – | $ | – | ||||||||
CitiAssist
Insured
|
– | – | – | – | ||||||||||||
CitiAssist
Uninsured
|
2,361 | 802 | 4,436 | 2,121 | ||||||||||||
$ | 2,361 | $ | 802 | $ | 4,436 | $ | 2,121 | |||||||||
Other
(1)
|
||||||||||||||||
FFEL
Program
|
$ | (2,430 | ) | $ | (504 | ) | $ | (2,430 | ) | $ | (504 | ) | ||||
CitiAssist
Insured
|
– | (490 | ) | – | (490 | ) | ||||||||||
CitiAssist
Uninsured
|
– | (1,929 | ) | – | (1,929 | ) | ||||||||||
$ | (2,430 | ) | $ | (2,923 | ) | $ | (2,430 | ) | $ | (2,923 | ) | |||||
Balance
at end of period
|
||||||||||||||||
FFEL
Program
|
$ | 8,668 | $ | 4,700 | $ | 8,668 | $ | 4,700 | ||||||||
CitiAssist
Insured
|
5,585 | 753 | 5,585 | 753 | ||||||||||||
CitiAssist
Uninsured
|
67,564 | 9,958 | 67,564 | 9,958 | ||||||||||||
$ | 81,817 | $ | 15,411 | $ | 81,817 | $ | 15,411 |
(1)
|
Represents
reserve amounts associated with loans sold, securitized or reclassified as
held-for-sale.
|
June
30, 2008
|
December
31, 2007
|
|||||||||||||||||||||||
(Dollars
in thousands)
|
Insured
|
Uninsured
|
Total
|
Insured
|
Uninsured
|
Total
|
||||||||||||||||||
Total
private education loans
|
$ | 4,589,529 | $ | 1,230,449 | $ | 5,819,978 | $ | 3,869,945 | $ | 826,392 | $ | 4,696,337 | ||||||||||||
Private
education loans in repayment
|
1,706,282 | 580,149 | 2,286,431 | 1,443,110 | 494,093 | 1,937,203 | ||||||||||||||||||
Private
education loans in forbearance
|
173,550 | 44,151 | 217,701 | 147,243 | 22,841 | 170,084 | ||||||||||||||||||
Percent
of private education loans that are delinquent 30 - 89
days
|
1.9 | % | 3.6 | % | 2.3 | % | 2.4 | % | 3.8 | % | 2.8 | % | ||||||||||||
Percent
of private education loans that are delinquent 90 days or
more
|
1.6 | % | 1.0 | % | 1.4 | % | 1.3 | % | 1.0 | % | 1.2 | % | ||||||||||||
Allowance
for loan losses
|
$ | 5,585 | $ | 67,564 | $ | 73,149 | $ | 3,214 | $ | 26,589 | $ | 29,803 | ||||||||||||
Private
education loans covered by risk-sharing agreements with
schools
|
– | 496,211 | 496,211 | – | 493,296 | 493,296 |
Six
months ended
|
|||||||||
June
30,
|
|||||||||
2008
|
2007
|
||||||||
Student
loan yield
|
5.70 | % | 7.38 | % | |||||
Consolidation
loan rebate fees
|
(0.28 | ) | % | (0.42 | ) | % | |||
Accreted
interest on residual interests
|
0.25 | % | 0.25 | % | |||||
Amortization
of deferred loan origination and purchase costs
|
(0.40 | ) | % | (0.47 | ) | % | |||
Net
yield
|
5.27 | % | 6.74 | % | |||||
Cost
of funds (1)
|
(3.64 | ) | % | (5.04 | ) | % | |||
Net
interest margin
|
1.63 | % | 1.70 | % |
(1) | Cost of funds was calculated by dividing interest expense by average interest bearing assets. |
For
the six months ended June 30, 2008 vs. the six months ended June 30,
2007
|
||||||||||||
Increase
(decrease) due to change in:
|
||||||||||||
(Dollars
in millions)
|
Volume
|
Rate
|
Net
|
|||||||||
Interest
earning assets
|
$ | 44 | $ | (175 | ) | $ | (131 | ) | ||||
Interest
bearing liabilities
|
42 | (177 | ) | (135 | ) | |||||||
Net
interest income
|
$ | 2 | $ | 2 | $ | 4 |
Three
Months Ended
|
|||||||||||||||||
June
30,
|
|||||||||||||||||
(Dollars
in thousands)
|
2008
|
2007
|
Favorable
(Unfavorable) Change
|
Favorable
(Unfavorable) % Change
|
|||||||||||||
Net
interest income
|
$ | 119,390 | $ | 102,877 | $ | 16,513 | 16 | % | |||||||||
Provision
for loan losses
|
(45,827 | ) | (3,895 | ) | (41,932 | ) | (1077 | ) | % | ||||||||
Gains
on loans sold and securitized
|
2,121 | 51,040 | (48,919 | ) | (96 | ) | % | ||||||||||
Fee
and other income
|
39,012 | 9,420 | 29,592 | 314 | % | ||||||||||||
Operating
expenses
|
51,849 | 45,751 | (6,098 | ) | (13 | ) | % | ||||||||||
Income
taxes
|
20,831 | 43,174 | 22,343 | 52 | % | ||||||||||||
Net
income
|
$ | 42,016 | $ | 70,517 | $ | (28,501 | ) | (40 | ) | % | |||||||
Total
operating expenses as a percentage of average managed student
loans
|
0.53 | % | 0.52 | % | (0.01 | ) | % | ||||||||||
Return
on average equity
|
10.5 | % | 17.9 | % | (7.4 | ) | % | ||||||||||
Effective
tax rates
|
33.1 | % | 38.0 | % | 4.9 | % | |||||||||||
Six
Months Ended
|
||||||||||||||||
June
30,
|
||||||||||||||||
(Dollars
in thousands)
|
2008
|
2007
|
Favorable
(Unfavorable) Change
|
Favorable
(Unfavorable) % Change
|
||||||||||||
Net
interest income
|
$ | 200,837 | $ | 196,634 | $ | 4,203 | 2 | % | ||||||||
Provision
for loan losses
|
(71,139 | ) | (14,423 | ) | (56,716 | ) | (393 | )% | ||||||||
Gains
on loans sold and securitized
|
3,576 | 68,814 | (65,238 | ) | (95 | )% | ||||||||||
Fee
and other income
|
50,471 | 24,283 | 26,188 | 108 | % | |||||||||||
Operating
expenses
|
95,984 | 89,949 | (6,035 | ) | (7 | )% | ||||||||||
Income
taxes
|
30,511 | 70,819 | 40,308 | 57 | % | |||||||||||
Net
income
|
$ | 57,250 | $ | 114,540 | $ | (57,290 | ) | (50 | )% | |||||||
Total
operating expenses as a percentage of average managed student
loans
|
0.50 | % | 0.51 | % | 0.01 | % | ||||||||||
Return
on average equity
|
7.2 | % | 14.7 | % | (7.5 | )% | ||||||||||
Effective
tax rates
|
34.8 | % | 38.2 | % | 3.4 | % | ||||||||||
Three
Months Ended
|
Six
Months Ended
|
|||||||||||||||
June
30,
|
June
30,
|
|||||||||||||||
(Dollars
in thousands)
|
2008
|
2007
|
2008
|
2007
|
||||||||||||
Securitization
sales:
|
||||||||||||||||
Student
loans securitized (1)
|
$ | 2,035,540 | $ | 1,201,603 | $ | 2,035,540 | $ | 1,201,603 | ||||||||
Net
proceeds from student loans securitized during the period
|
1,973,207 | 1,221,216 | 1,973,207 | 1,221,216 | ||||||||||||
Realized
gains on loans securitized
|
1,262 | 48,548 | 1,262 | 48,548 | ||||||||||||
Securitization
financings:
|
||||||||||||||||
Student
loans securitized (1)
|
$ | – | $ | – | $ | 1,993,213 | $ | – | ||||||||
Net
proceeds from student loans securitized during the period (2)
|
273,619 | – | 1,799,830 | – |
|
(1)
|
Amounts
represent the value of the student loans securitized as of the
securitization date.
|
(2)
|
The
proceeds received during the three months ended June 30, 2008 represent
additional issuances of notes from the first quarter’s on-balance sheet
securitization transaction. The difference between student loans
securitized and net proceeds received for the six months ended June 30,
2008, primarily reflects $57 million of unissued notes and $130 million of
required overcollateralization (see Note
12).
|
(Dollars
in millions)
|
June
30, 2008
|
December
31, 2007
|
||||||
Total
off-balance sheet student loans securitized (1)
|
$ | 15,624 | $ | 14,124 | ||||
Total
on-balance sheet student loans securitized (2)
|
1,962 | – | ||||||
Total
secured borrowings related to on-balance sheet
securitization
|
1,831 | – | ||||||
Residual
interests from off-balance sheet student loans securitized
|
702 | 633 | ||||||
Servicing
assets from off-balance sheet student loans securitized
|
192 | 199 |
(1)
|
Amounts
include securitized loan balances from ten off-balance sheet
securitizations as of June 30, 2008 and nine as of December 31,
2007.
|
(2)
|
Amounts
include securitized loan balances from one on-balance sheet securitization
as of June 30, 2008.
|
·
|
Reduce
the Undergraduate Subsidized Stafford interest rate from 6.80% to 3.40%
over the next five years, with the rate returning to 6.80% on July 1,
2012. The first reduction will occur effective July 1, 2008 as
such, the Undergraduate Subsidized Stafford loans will have an interest
rate of 6.0%.
|
·
|
Reduce
lender SAP for new loans originated on or after October 1, 2007 to 1.19%
for Stafford Loans not in repayment, 1.79% for Stafford Loans in repayment
and PLUS Loans, and 2.09% for Consolidation Loans. This represents a 55
basis point reduction for Stafford and Consolidation Loans and an 85 basis
point reduction for PLUS Loans.
|
·
|
Limit
lender reinsurance to 97% for most claims filed on or after October 1,
2007 by eliminating the EP program, with a further reduction to 95% for
loans made on or after October 1, 2012.
|
·
|
Increase
the lender fee from 0.50% to 1.00% for new loans originated on or after
October 1, 2007.
|
·
|
Create
an income-based repayment plan beginning July 1, 2009 for most FFEL
Program borrowers (currently an income-contingent repayment plan is only
available to Direct Lending borrowers). The new plan provides a
monthly repayment cap of 15% of the amount by which a borrower’s adjusted
gross income exceeds 150% of the poverty line, and forgives remaining debt
after 25 years of repayment.
|
·
|
Require
the Department to conduct a pilot program for an auction of eligible
Federal PLUS Loans (limited to Parent PLUS loans) beginning on July 1,
2009.
|
1)
|
Defining
a preferred lender arrangement between a school and a lender under which
the lender makes educational loans.
|
2)
|
Requiring
a lender that participates in a preferred lender arrangement to certify to
the Secretary of the Department that its preferred lender arrangements
comply with provisions of the Higher Education Act. The certification must
be attested to by the lender’s auditor.
|
3)
|
Requiring
the Department to develop a model disclosure for use by schools and
lenders in disclosing the terms of educational loans (including private
educational loans) offered by the lender.
|
4)
|
Requiring
lenders to submit a report to all schools with which they have preferred
lender arrangements. The schools are required to report this
information to the Department, explaining why the loans are beneficial to
the students. These reports must be available to students and parents.
Schools must also disclose that students are not required to use preferred
lenders.
|
5)
|
Requiring
schools that provide information on private educational loans to inform
the students of their eligibility for Title IV assistance, with a
description of the terms of the loans that are less favorable than Title
IV loans.
|
6)
|
Requiring
schools with preferred lender lists for FFEL Program lenders to list at
least three unaffiliated lenders and, if they recommend private
lenders, at least two unaffiliated lenders. The school must disclose
why it has entered into such an arrangement and disclose the method and
criteria for selecting such lenders. Schools are identified as having a
duty of care to compile the list for the students.
|
7)
|
Amending
the Truth-in-Lending Act to include: additional disclosures in an
application or solicitation upon loan approval of private education loans;
a requirement that a creditor shall notify the school before it may issue
educational loan funds; a restriction that no funds may be disbursed until
acceptance of the loan by the borrower and the expiration of a three
business day right-to cancel period following consummation; and an
expansion of other specific provisions.
|
8)
|
Directing
the General Accountability Office to conduct a study on the impact and
benefits of using non-individual factors (e.g., school attributes) in
underwriting criteria. The study is due one year following enactment of
H.R. 4137.
|
June
30,
|
||||||||||||||||
(Dollars
in millions)
|
2008
|
2007
|
||||||||||||||
100
basis points
|
Increase
|
Decrease
|
Increase
|
Decrease
|
||||||||||||
Change
in interest income
|
$ | (3.3 | ) | $ | (1.8 | ) | $ | 3.1 | $ | 22.4 |
|
Item
4. Controls and
Procedures
|
|
(a)
|
Disclosure
Controls and Procedures
|
|
(b)
|
Internal
Control Over Financial Reporting
|
·
|
Suspended
lending at certain schools where loans with lower balances and shorter
interest-earning periods currently result in unsatisfactory
returns;
|
·
|
Temporarily
withdrawn from the FFEL Program Consolidation Loan
market;
|
·
|
Reduced
certain borrower incentive programs for new originations;
and
|
·
|
Restructured
various functional areas of its business and eliminated a total of 146
positions.
|
·
|
The
demand for and net margins on student loans;
|
·
|
The
cost to the Company of funding such loans; and
|
·
|
The
level and volatility of interest rates and
inflation.
|
Item 6.
|
Exhibits
|
The
Student Loan Corporation
|
|||
By:
|
/s/ Scot H. Parnell
|
||
Scot
H. Parnell
Chief
Financial Officer and Duly Authorized Officer
|
|||
(Principal
Financial Officer)
|
Exhibit
|
|
Number
|
Description of
Exhibit
|
3.1
|
Restated
Certificate of Incorporation of the Company, incorporated by reference to
Exhibit 3.1 to the Company’s 1992 Annual Report and Form 10-K (File No.
1-11616).
|
3.2
|
By-Laws
of the Company, as amended, incorporated by reference to Exhibit 3.2 to
the Company’s 1994 Annual Report and Form 10-K (File No.
1-11616).
|
10.2.11 *
|
Amendment
No. 10, dated as of August 8, 2008, Non-Competition Agreement among the
Company, Citibank, N.A. and Citigroup Inc.
|
31.1 *
|
Certification
of Principal Executive Officer pursuant to Section 302 of the
Sarbanes-Oxley Act of 2002.
|
31.2 *
|
Certification
of Principal Financial Officer pursuant to Section 302 of the
Sarbanes-Oxley Act of 2002.
|
32.1 *
|
Certification
of Chief Executive Officer and Chief Financial Officer pursuant to 18
U.S.C. Section 1350, as adopted pursuant to Section 906 of the
Sarbanes-Oxley Act of 2002.
|