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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 MARCH 31, 2001
COMMISSION FILE NUMBER: 1-11616
THE STUDENT LOAN CORPORATION
(Exact name of registrant as specified in its charter)
DELAWARE 16-1427135
(State or other jurisdiction of (I.R.S. Employer Identification No.)
incorporation or organization)
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 May 4, 2001, there were 20,000,000 shares of The Student Loan
Corporation's Common Stock outstanding.
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Form 10-Q
Part I Financial Information
Page
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Item 1 - Financial Statements
Statements of Income (Unaudited) for the Three-Month Periods
Ended March 31, 2001 and 2000 ........................................ 3
Balance Sheets as of March 31, 2001 (Unaudited)
and December 31, 2000 ...................................... 4
Statements of Cash Flows (Unaudited) for the Three-Month Periods Ended
March 31, 2001 and 2000 .............................................. 5
Notes to Financial Statements (Unaudited) ............................ 6 - 7
Item 2 - Management's Discussion and Analysis of Financial Condition
and Results of Operations ............................................ 8 - 11
Item 3 - Quantitative and Qualitative Discussion About Market Risk* ........ 9
Part II Other Information
Item 1 - Legal Proceedings .................................................. 12
Item 6 - Exhibits and Reports on Form 8-K ................................... 12
Signature ........................................................................... 13
* This discussion is presented in Part I, Item 2 and is incorporated herein
by reference.
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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)
Three months ended
March 31,
2001 2000
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REVENUE
Interest income $307,031 $226,587
Interest expense 249,730 162,740
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NET INTEREST INCOME 57,301 63,847
Provision for loan losses 1,814 1,238
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Net interest income after provision for loan losses 55,487 62,609
Fee and other income 2,297 1,056
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TOTAL REVENUE, NET $ 57,784 $ 63,665
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OPERATING EXPENSES
Salaries and employee benefits $ 4,687 $ 4,234
Other expenses 16,554 13,614
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TOTAL OPERATING EXPENSES $ 21,241 $ 17,848
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INCOME BEFORE INCOME TAXES $ 36,543 $ 45,817
Income taxes 14,276 19,032
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NET INCOME $ 22,267 $ 26,785
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DIVIDENDS DECLARED $ 14,000 $ 12,000
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BASIC AND DILUTED EARNINGS PER COMMON SHARE - $ 1.11 $ 1.34
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(based on 20 million average shares outstanding)
DIVIDENDS DECLARED PER COMMON SHARE $ 0.70 $ 0.60
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OPERATING RATIOS
Net interest margin 1.41% 2.25%
Operating expense as a percentage of
average insured student loans 0.52% 0.63%
Return on equity 15.71% 20.66%
See accompanying notes to financial statements.
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THE STUDENT LOAN CORPORATION
BALANCE SHEETS
(Dollars in thousands)
March 31, December 31,
2001 2000
(Unaudited) (Audited)
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ASSETS
Insured student loans $16,844,441 $15,774,291
Allowance for loan losses 3,372 2,872
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Insured student loans, net 16,841,069 15,771,419
Cash 259 323
Other assets 488,469 471,489
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TOTAL ASSETS $17,329,797 $16,243,231
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LIABILITIES AND STOCKHOLDERS' EQUITY
Short-term borrowings $13,404,039 $12,332,804
Long-term notes 3,057,000 3,057,000
Payable to principal stockholder 8,522 9,551
Deferred income taxes 51,435 47,656
Other liabilities 228,193 223,958
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Total Liabilities 16,749,189 15,670,969
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Common stock, $.01 par value; authorized 50,000,000
shares; 20,000,000 shares issued and outstanding 200 200
Additional paid-in capital 134,851 134,772
Retained earnings 445,557 437,290
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Total Stockholders' Equity 580,608 572,262
TOTAL LIABILITIES AND STOCKHOLDERS' EQUITY $17,329,797 $16,243,231
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AVERAGE INSURED STUDENT LOANS $16,457,439 $13,226,364
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(year-to-date)
See accompanying notes to financial statements.
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THE STUDENT LOAN CORPORATION
STATEMENTS OF CASH FLOWS
(Dollars in thousands)
(Unaudited)
Three months ended
March 31,
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2001 2000
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Cash flows from operating activities:
Net income $ 22,267 $ 26,785
Adjustments to reconcile net income to
net cash from operating activities:
Depreciation and amortization 11,506 6,242
Provision for loan losses 1,814 1,238
Deferred tax provision 779 940
(Increase) in accrued interest receivable (24,348) (48,174)
Decrease in other assets 8,909 5,014
Increase in other liabilities 6,286 41,848
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NET CASH PROVIDED BY OPERATING ACTIVITIES 27,213 33,893
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Cash flows from investing activities:
Disbursements of loans (811,651) (766,113)
Purchase of loans (854,797) (577,333)
Repayment of loans 523,362 382,707
Sale of loans 60,507 40,331
Capital expenditures on equipment and computer software (1,933) (1,836)
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NET CASH (USED IN) INVESTING ACTIVITIES (1,084,512) (922,244)
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Cash flows from financing activities:
Net increase in borrowings with original
maturities of one year or less 1,071,235 904,040
Dividends paid to stockholders (14,000) (12,000)
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NET CASH PROVIDED BY FINANCING ACTIVITIES 1,057,235 892,040
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NET (DECREASE) INCREASE IN CASH (64) 3,689
CASH - BEGINNING OF PERIOD 323 251
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CASH - END OF PERIOD $ 259 $ 3,940
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SUPPLEMENTAL DISCLOSURE OF CASH FLOW INFORMATION:
Cash paid for:
Interest $ 260,682 $ 125,784
Income taxes paid, net of refunds $ (11,922) $ 11,154
See accompanying notes to financial statements.
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THE STUDENT LOAN CORPORATION
NOTES TO FINANCIAL STATEMENTS (UNAUDITED)
MARCH 31, 2001
1. SIGNIFICANT ACCOUNTING POLICIES
INTERIM FINANCIAL INFORMATION
The financial information of The Student Loan Corporation (the
"Company") as of March 31, 2001 and for the three-month periods ended
March 31, 2001 and 2000 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 accounting principles generally accepted
in the United States of America. The accompanying financial statements
should be read in conjunction with the financial statements and related
notes included in the Company's 2000 Annual Report and Form 10-K.
Certain amounts in the prior year's financial statements have been
reclassified to conform with the current year's presentation. Such
reclassifications had no effect on the results of operations as
previously reported.
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 March 31, 2001, the Company had outstanding short- and
long-term borrowings with CNYS of $ 13.4 billion and $3.1 billion,
respectively, compared to $12.3 billion and $3.1 billion, respectively,
at December 31, 2000. For the three-month period ended March 31, 2001,
the Company incurred $249.7 million in interest expense payable to CNYS
and its affiliates, compared to $162.7 million for the same period in
2000. 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.
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At March 31, 2001 and December 31, 2000, and for the quarters then
ended, the Company was not a party to any interest rate swap agreements
and managed interest rate risk directly through its funding agreements.
On January 1, 2001, the Company adopted Statement of Financial
Accounting Standards No. 133, "Accounting for Derivative Instruments
and Hedging Activities", as amended. Adoption had no material impact on
the Company's financial statements.
5. SHORT AND LONG-TERM BORROWINGS
In the first quarter of 2001, short-term debt increased by $1.1 billion
to $13.4 billion. For the same period in 2000, short-term debt
increased by $0.9 billion. The $3.1 billion long-term borrowings
balance at March 31, 2001 remained unchanged from the balance at
December 31, 2000. Long-term borrowings at March 31, 2000 also remained
unchanged from that outstanding at December 31, 1999.
6. COMMITMENTS AND CONTINGENCIES
On February 3, 2000, a consolidated amended class action complaint was
filed in Delaware Chancery Court under the caption "In re The Student
Loan Corp. Shareholders Litigation" in response to the 1999
announcement of Citigroup's proposal to acquire the 20% of the
Company's stock not already beneficially owned by Citigroup. On
February 17, 2000, Citigroup and the Special Committee of the Company's
independent directors, formed to evaluate Citigroup's proposal,
publicly announced the termination of discussions regarding the
proposal. On March 28, 2001, the Delaware Court dismissed the action.
Also, in February 2000, three stockholders' derivative complaints,
captioned "Alan Kahn v. Citigroup Inc.", "Kenneth Steiner v. Citigroup
Inc.", and "Katherine F. Petty v. Citigroup Inc.", were filed in
Delaware Chancery Court against the Company and its directors (as well
as Citigroup and certain subsidiaries). The complaints allege, among
other things, that defendants breached their fiduciary duties by
engaging in a series of self-dealing transactions that are unfair to
the Company and a misuse of corporate assets. Plaintiffs assert that
Citigroup will continue to self-deal to benefit itself and further
depress the price of the Company's outstanding public stock so that it
can acquire the stock at a depressed price in the future. The action
remains pending.
For further information regarding each of these proceedings, see "Legal
Proceedings" on page 12 of the Company's Annual Report on Form 10-K for
the year ended December 31, 2000.
The Company is also involved in various litigation matters incidental
to and typical of the business in which it is engaged. In the opinion
of the Company's management, the ultimate resolution of these
proceedings will not be likely to have a material adverse effect on the
results of the Company's operations, financial position or liquidity.
In recent years, amendments to the Higher Education Act of 1965 (the
"Act") have significantly reduced the net interest margin of the
guaranteed student loan portfolio as new loans with lower yields were
added to the portfolio and older, more profitable loans were repaid.
Pressure on margins will continue as more loans are originated with
lower yields. In addition, the Act may be amended by Congress at any
time, possibly resulting in further reductions in FFEL Program loan
subsidies. Any such amendments could adversely affect the Company's
business and prospects.
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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; the success of the
Company's hedging policies; the Company's ability to acquire or
originate loans in the amounts anticipated and with interest rates to
generate sufficient yields and margins; 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 three months ended March 31, 2001, the net student loan
portfolio of the Company grew by $1.1 billion (6.8%) from the balance
at December 31, 2000. This growth was the result of loan disbursements
totaling $812 million and loan purchases of $855 million in the first
quarter of 2001, partially offset by $61 million in loan sales and $523
million in loan reductions (attributable to repayments and claims paid
by guarantors), and other adjustments of $13 million. During the three
months ended March 31, 2000, the Company made loan disbursements of
$766 million, loan purchases of $577 million, loan sales of $40
million, loan reductions of $383 million and other adjustments of $7
million.
The Company's loan disbursements and new CitiAssist loan commitments
for the first quarter of 2001 of $992 million were $95 million (10%)
more than those made in the same period of 2000. This increase is
attributable primarily to increases in new CitiAssist loan commitments.
During the first three months of 2001, new CitiAssist loan commitments
increased to $180 million, a $49 million (37%) increase from the same
period last year. FFEL Program Stafford and Plus loan disbursements of
$694 million in the first three months of 2001 are $26 million (4%)
higher than the $668 million disbursed during the same period of 2000.
Federal Consolidation Program loan originations of $118 million for the
first quarter of 2001 increased $20 million (20%) compared to the same
period of 2000.
During the first quarter of 2001, the Company made $261 million in
interest payments, principally to CNYS, compared to $126 million for
the same period in 2000. 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's income taxes, payable primarily to CNYS, were
overfunded at December 31, 2000, generating a refund from CNYS of $12
million during the first quarter of 2001. The tax refund, less tax
payments made during the first quarter of 2001, resulted in net cash
received of $11.9 million. The Company made income tax payments of
$11.2 million during the first quarter of 2000.
In the first quarter of 2001, short-term debt increased by $1.1 billion
to $13.4 billion. The new borrowings were used primarily for new loan
disbursements and loan purchases made through the secondary market and
third party loan consolidation channels. For the same period of 2000,
short-term debt increased by $0.9 billion. The $3.1 billion long-term
borrowings balance at March
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31, 2001 remained unchanged from the balance at December 31, 2000.
Also, long-term borrowings at March 31, 2000 remained consistent with
that outstanding at December 31, 1999.
The Company paid a quarterly dividend of $0.70 per common share on
March 1, 2001. On April 19, 2001, the Board of Directors declared a
regular quarterly dividend on the Company's common stock of $0.70 per
share to be paid June 1, 2001 to stockholders of record on May 15,
2001.
RISK MANAGEMENT
Risk management is an important business objective of the Company. The
Company actively manages market, credit and operating risks. For
further information, see "Risk Management" beginning on page 5 of the
Company's Annual Report on Form 10-K for the year ended December 31,
2000.
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. The Company prepares
Earnings-at-Risk calculations to measure the discounted pre-tax
earnings impact over a preset time span of a specific upward and
downward shift in the interest rate yield curve. The Earnings-at-Risk
calculation reflects the repricing gaps in the position as well as
option positions, both explicit and embedded in the loan portfolio. The
exposure is calculated by multiplying the gap between interest
sensitive items, including assets, liabilities, and derivative
instruments, by a 100 basis point change in the yield curve.
The Earnings-at-Risk calculation measures the Company's position at one
point in time. As indicated in the table below, as of March 31, 2001 a
100 basis point increase in the interest yield curve would have a
potential positive impact on the Company's pre-tax earnings of
approximately $13.9 million for the next twelve months and a potential
negative impact of approximately $44.7 million for all periods after
March 2001. A 100 basis point decrease in the interest yield curve as
of March 31, 2001 would have a potential positive impact on the
Company's pre-tax earnings of approximately $3.6 million for the
subsequent twelve-month period and approximately $99.1 million for all
periods after March 2001.
Earnings-at-Risk (effect on pre-tax earnings) March 31, 2001 March 31, 2000
(Dollars in millions) 2002 Thereafter Total 2001 Thereafter Total
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One hundred basis point increase $13.9 ($58.6) ($44.7) $16.6 ($12.6) $ 4.0
One hundred basis point decrease $ 3.6 $95.5 $99.1 ($12.3) $23.9 $11.6
Certain information has been restated from that presented in the prior year to
reflect a change in assumptions (specifically revising the measurement of
Earnings-at-Risk from a two standard deviation change in interest rates to a 100
basis point change). The Company's management believes these changes will better
align its Earnings-at-Risk calculation with changes in market interest rates.
The Company, through its Asset/Liability Management Committee, actively manages
these risks by setting Earnings-at-Risk limits and takes the appropriate actions
if interest rates move against the existing structure.
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RESULTS OF OPERATIONS
Quarter Ended March 31, 2001
Net income was $22.3 million ($1.11 basic and diluted earnings per
share) for the first quarter of 2001. This was a decrease of $4.5
million (17%) from earnings for the same period last year. The decrease
in net income was primarily attributable to less favorable spreads
between the interest rates earned on the Company's student loan assets
and paid on its borrowings.
The rapid reduction of market interest rates was brought about by the
federal reserve interest rate reductions beginning in January 2001.
This caused revenue from government special allowance payments to fall
early in the quarter while the cost of funds on debt repriced evenly
throughout the quarter. The Company expects second quarter earnings to
show improvement over the first quarter of 2001, due to floor income
and funding actions taken during the first quarter. Floor income is
earned in declining interest rate environments when the Company's cost
of funds declines while the borrower interest rate remains fixed,
generating excess spread.
The net interest margin for the first quarter of 2001 was 1.41%, 0.84%
lower than the 2.25%, margin for the first quarter of 2000.
Approximately 70% of the decline in the margin is directly attributable
to less favorable interest spreads, and 30% of the decline is due to
the Company's decision to diversify loan sourcing to non-direct
distribution channels, specifically acquiring loans through the
secondary market and utilizing third party sourcing for loan
consolidations. Loans acquired through these channels generally have
lower yields than loans sourced directly through school lender lists.
Continued Company participation in these initiatives will depend on
market conditions. Although management expects net income for the
second quarter of 2001 to improve due to floor income and funding
actions taken during the first quarter, net interest margin
compression, resulting from the legislated interest rate reductions and
premium amortizations from secondary market loan activity, is expected
to continue.
Total operating expenses for the first quarter of 2001 increased $3.4
million (19%) from the same period last year, primarily due to an
increase of $2.6 million in fees and other costs to convert newly
purchased loans and to service the significantly larger loan portfolio.
Notwithstanding, operating expense as a percentage of average insured
student loans improved 0.11% to 0.52%, from the first quarter 2000
expense ratio of 0.63%. The improvement in the expense ratio was
primarily attributable to growth in assets not requiring a commensurate
growth in the Company's infrastructure.
The Company's return on equity was 15.7% for the first quarter of 2001,
5.0% lower than the 20.7% return for the same period of 2000. The
decrease was attributed primarily to less favorable interest spreads.
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 lender interest spreads 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 interest yields and reduced interest spreads.
In order to counteract the reduced net interest margin on the Company's
loan portfolio resulting from the legislation, the Company continues to
pursue both new and existing marketing programs and expand its
guarantor relationships. The Company continues to seek 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.
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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
accounts for approximately one-third, on a national basis, of all
student loans originated under federally sponsored programs.
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PART II. OTHER INFORMATION
ITEM 1. LEGAL PROCEEDINGS
For information concerning the five putative class action stockholder
derivatives complaints captioned "In re The Student Loan Corp. Shareholders
Litigation", see the description that appears in the second and third paragraphs
under the caption "Legal Proceedings" beginning on page 12 of the Annual Report
on Form 10-K of the Company for the year ended December 31, 2000 (File No.
1-11616), which description is included as Exhibit 99.1 to this Form 10-Q and
incorporated by reference herein. On March 28, 2001, the Delaware court entered
a Stipulation and Order, which dismissed the action as moot but retained
jurisdiction for the purpose of determining plaintiffs' application for an award
of counsel fees and reimbursement of expenses.
ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K.
(a) Exhibits
Exhibit Number Description
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99.1 Second and third paragraphs under the caption "Legal Proceedings" beginning on page 12 of
the Annual Report on Form 10-K of the Company for the year ended December 31, 2000 (File
No. 1-11616).
(b) Reports on Form 8-K:
No reports on Form 8-K were filed during the first quarter of 2001.
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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: May 11, 2001
The Student Loan Corporation
By /s/ Steven Gorey
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Steven Gorey
Vice President and
Chief Financial Officer
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