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SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
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FORM 10-Q
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QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF
THE SECURITIES EXCHANGE ACT OF 1934
FOR THE QUARTERLY PERIOD ENDED JUNE 30, 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
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On August 3, 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- and Six-month Periods
Ended June 30, 2001 and 2000................................................... 3
Balance Sheets as of June 30, 2001 (Unaudited)
and December 31, 2000 (Audited)................................................ 4
Statements of Cash Flows (Unaudited) for the Six-Month Periods Ended
June 30, 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...................................................... 8-10
Item 3 - Quantitative and Qualitative Discussion About Market Risk........................ 11
Part II Other Information
Item 1 - Legal Proceedings................................................................ 12
Item 4 - Submissions of Matters to a Vote of Securityholders.............................. 12
Item 5 - Other Information................................................................ 12
Item 6 - Exhibits and Reports on Form 8-K ................................................ 12
Signature .......................................................................................... 13
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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 Six months ended
June 30, June 30,
------------------------ ------------------------
2001 2000 2001 2000
------------ ----------- ----------- ------------
REVENUE
Interest income $ 315,364 $ 249,799 $ 622,395 $ 476,386
Interest expense 225,710 181,444 475,440 344,184
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NET INTEREST INCOME 89,654 68,355 146,955 132,202
Provision for loan losses 1,751 1,368 3,565 2,606
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Net interest income after provision for loan losses 87,903 66,987 143,390 129,596
Fee and other income 2,165 649 4,462 1,705
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TOTAL REVENUE, NET $ 90,068 $ 67,636 $ 147,852 $ 131,301
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OPERATING EXPENSES
Salaries and employee benefits $ 6,051 $ 5,121 $ 10,738 $ 9,355
Other expenses 17,814 16,086 34,368 29,700
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TOTAL OPERATING EXPENSES $ 23,865 $ 21,207 $ 45,106 $ 39,055
------------ ----------- ----------- ------------
INCOME BEFORE INCOME TAXES $ 66,203 $ 46,429 $ 102,746 $ 92,246
Income taxes 27,231 19,308 41,507 38,340
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NET INCOME $ 38,972 $ 27,121 $ 61,239 $ 53,906
============ =========== =========== ============
DIVIDENDS DECLARED $ 14,000 $ 12,000 $ 28,000 $ 24,000
============ =========== =========== ============
BASIC AND DILUTED EARNINGS PER COMMON SHARE -
(based on 20 million average shares outstanding) $ 1.95 $ 1.36 $ 3.06 $ 2.70
============ =========== =========== ============
DIVIDENDS DECLARED PER COMMON SHARE $ 0.70 $ 0.60 $ 1.40 $ 1.20
============ =========== =========== ============
OPERATING RATIOS
Net interest margin 2.10% 2.25% 1.77% 2.26%
Operating expense as a percentage of
average student loans 0.56% 0.70% 0.54% 0.66%
Return on equity 26.37% 20.29% 21.14% 20.47%
See accompanying notes to financial statements.
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THE STUDENT LOAN CORPORATION
BALANCE SHEETS
(Dollars in thousands)
June 30, December 31,
2001 2000
(Unaudited) (Audited)
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ASSETS
Student loans $ 17,361,919 $ 15,774,291
Less: Allowance for loan losses (3,468) (2,872)
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Student loans, net 17,358,451 15,771,419
Cash 1,351 323
Other assets 526,059 471,489
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TOTAL ASSETS $ 17,885,861 $ 16,243,231
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LIABILITIES AND STOCKHOLDERS' EQUITY
Short-term borrowings $ 13,779,370 $ 12,332,804
Long-term notes 3,057,000 3,057,000
Payable to principal stockholder 8,115 9,551
Deferred income taxes 69,750 47,656
Other liabilities 366,046 223,958
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Total Liabilities 17,280,281 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 470,529 437,290
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Total Stockholders' Equity 605,580 572,262
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TOTAL LIABILITIES AND STOCKHOLDERS' EQUITY $ 17,885,861 $ 16,243,231
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AVERAGE STUDENT LOANS $ 16,781,658 $ 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)
Six months ended
June 30,
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2001 2000
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Cash flows from operating activities:
Net income $ 61,239 $ 53,906
Adjustments to reconcile net income to
net cash from operating activities:
Depreciation and amortization 24,785 13,427
Provision for loan losses 3,565 2,606
Deferred tax provision 22,094 2,148
(Increase) in accrued interest receivable (59,667) (80,471)
Decrease/(increase) in other assets 7,995 (6,207)
Increase in other liabilities 140,731 81,396
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NET CASH PROVIDED BY OPERATING ACTIVITIES 200,742 66,805
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Cash flows from investing activities:
Disbursement of loans (1,147,139) (1,061,707)
Purchase of loans (1,578,765) (2,459,993)
Repayment of loans 968,752 676,162
Sale of loans 142,645 81,913
Capital expenditures on equipment and computer software (3,773) (3,562)
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NET CASH (USED IN) INVESTING ACTIVITIES (1,618,280) (2,767,187)
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Cash flows from financing activities:
Net increase in borrowings with original
maturities of one year or less 1,446,566 2,724,455
Dividends paid to stockholders (28,000) (24,000)
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NET CASH PROVIDED BY FINANCING ACTIVITIES 1,418,566 2,700,455
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NET INCREASE IN CASH 1,028 73
CASH - BEGINNING OF PERIOD 323 251
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CASH - END OF PERIOD $ 1,351 $ 324
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SUPPLEMENTAL DISCLOSURE OF CASH FLOW INFORMATION:
Cash paid for:
Interest $ 336,048 $ 235,820
Net income taxes (refunded)/paid $ (11,828) $ 46,584
See accompanying notes to financial statements.
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THE STUDENT LOAN CORPORATION
NOTES TO FINANCIAL STATEMENTS (UNAUDITED)
JUNE 30, 2001
1. SIGNIFICANT ACCOUNTING POLICIES
INTERIM FINANCIAL INFORMATION
The financial information of The Student Loan Corporation (the
"Company") as of June 30, 2001 and for the three- and six-month
periods ended June 30, 2001 and 2000 is unaudited and 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 have 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 June 30, 2001, the Company had outstanding
short- and long-term borrowings with CNYS of $13.8 billion and $3.1
billion, respectively, compared to $12.3 billion and $3.1 billion,
respectively, at December 31, 2000. For the three- and six-month
periods ended June 30, 2001, the Company incurred $225.7 million and
$475.4 million, respectively, in interest expense payable to CNYS and
its affiliates, compared to $181.4 million and $344.2 million,
respectively, for the same periods 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 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 June 30, 2001 and December 31, 2000, and for the three- and
six-month periods 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. COMMITMENTS AND CONTINGENCIES
In October 1999, Citigroup proposed to acquire by merger the 20% of
the Company's common stock not already beneficially owned by
Citigroup. Citigroup and the Special Committee of the Company's
independent directors, formed to evaluate the proposal, subsequently
announced the termination of discussions regarding the proposal.
Various stockholder legal complaints were filed against the Company
and its directors (as well as Citigroup and certain subsidiaries) as a
result of the proposal and the termination of discussions regarding
the proposal. See LEGAL PROCEEDINGS on page 12 for further discussion.
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 six months ended June 30, 2001, the net student loan
portfolio of the Company grew by $1.6 billion (10%) from the balance
at December 31, 2000. This growth was the result of loan disbursements
totaling $1,147 million and loan purchases of $1,579 million in the
first six months of 2001, partially offset by $143 million in loan
sales and $969 million in loan reductions (attributable to repayments
and claims paid by guarantors), and other adjustments of $27 million.
During the six months ended June 30, 2000, the Company made loan
disbursements of $1,047 million, loan purchases of $2,460 million,
loan sales of $82 million, loan reductions of $662 million and other
adjustments of $15 million.
From time to time, the Company makes purchases of guaranteed student
loans in the secondary student loan market. For the first six months of
2001, the Company's student loan purchases have decreased $881 million
(36%) compared to loan purchases for the same period in 2000. This
decrease is attributable to a decline in the availability of student
loans meeting the Company's criteria for purchase.
The Company's loan disbursements and new CitiAssist loan commitments
for the first six months of 2001 of $1,381 million were $142 million
(11%) 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 six months of 2001, new CitiAssist loan
commitments increased to $234 million, a $57 million (32%) increase
from the same period last year. FFEL Program Stafford and Plus loan
disbursements of $929 million in the first six months of 2001 are $45
million (5%) higher than the $884 million disbursed during the same
period of 2000. Federal Consolidation Program loan originations of
$218 million for the first half of 2001 increased $40 million (23%)
compared to the same period of 2000.
During the first six months of 2001, the Company made $336 million in
interest payments, principally to CNYS, compared to $236 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 in the first quarter of 2001. The tax refund, less
tax payments made during the first half of 2001, resulted in net cash
received of $11.8 million. The Company made income tax payments of
$46.6 million during the first half of 2000.
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In the first six months of 2001, short-term debt increased by $1.4
billion to $13.8 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 $2.7 billion. The $3.1
billion long-term borrowings balance at June 30, 2001 remained
unchanged from the balance at December 31, 2000.
The Company paid a quarterly dividend of $0.70 per common share on
June 1, 2001. On July 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 September 4, 2001 to stockholders of record on August
15, 2001.
RESULTS OF OPERATIONS
QUARTER ENDED JUNE 30, 2001
Net income was $39.0 million ($1.95 basic and diluted earnings per
share) for the second quarter of 2001. This was an increase of $11.9
million (44%) from earnings for the same period last year. The
increase in net income was primarily attributable to the higher
interest income generated by loan portfolio growth as well as more
favorable spreads between the interest rates earned on the Company's
student loan assets and paid on its borrowings
As market interest rates continued to fall during the second quarter
of 2001, the Company was able to replace maturing debt at more
favorable rates thereby realizing additional net interest income and
improved spreads. The note rate on the majority of the Company's
student loan assets will be reset downward on July 1st, curtailing
much of the benefit that existed during the second quarter of 2001. As
a result, the Company anticipates a normalization of its interest
margin, commencing in the third quarter.
The net interest margin for the second quarter of 2001 was 2.10%,
0.15% lower than the second quarter 2000 margin of 2.25%. A margin
decline of approximately 0.25% was due to the Company's decision to
diversify loan sourcing by utilizing non-direct distribution channels.
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.
The margin decline was partially offset by a 0.10% margin improvement
resulting from floor income. 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. Net interest margin compression, resulting from the legislated
interest rate reductions and premium amortizations from secondary
market loan activity, is expected to continue.
Fee income of $2.2 million for the second quarter of 2001 increased
$1.5 million compared to the same period last year. The increase is
primarily attributable to a late fee program that was implemented in
2001.
Total operating expenses for the second quarter of 2001 increased $2.7
million (13%) from the same period last year, primarily due to an
increase of $1.6 million in fees and other costs to service the
significantly larger loan portfolio. Notwithstanding the foregoing,
operating expense as a percentage of average insured student loans
improved 0.14% to 0.56%, from the second quarter of 2000 expense ratio
of 0.70%. 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 26.4% for the second quarter of
2001, 6.1% higher than the 20.3% return for the same period of 2000.
The Company's management continues to expect the full-year 2001 return
to be consistent with last quarter's projections of between 18-20%.
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SIX MONTHS ENDED JUNE 30, 2001
The Company earned net income of $61.2 million ($3.06 basic earnings
per share) for the six months ended June 30, 2001, an increase of $7.3
million (14%) from the first half of 2000. The increase was primarily
attributable to the higher interest income generated by loan portfolio
growth.
Total operating expenses for the first half of 2001 were $45.1
million, $6.1 million (15%) higher than the same period last year due
to increased costs to service the significantly larger portfolio.
Operating expenses as a percentage of average insured student loans
for the first half of 2001 decreased to 0.54%, an improvement of 0.12%
compared to the first half of 2000. The decrease is primarily
attributable to growth in assets not requiring a commensurate growth
in the Company's infrastructure.
The Company's effective tax rate was approximately 40.4% for the first
six months of 2001, compared to 41.6% for the same period in 2000.
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
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
accounts for approximately one-third, on a national basis, of all
student loans originated under federally-sponsored programs.
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ITEM 3. QUANTITATIVE AND QUALITATIVE DISCUSSION ABOUT 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 FFEL Program student loan receivables. 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 June 30,
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 $30.2 million for the next twelve months and a potential
negative impact of approximately $69.0 million for all periods after
June 30, 2001. A 100 basis point decrease in the interest yield curve
as of June 30, 2001 would have a potential positive impact on the
Company's pretax earnings of approximately $22.9 million for the
subsequent twelve-month period and approximately $122.4 million for
all periods after June 30, 2001.
Earnings-at-Risk (effect on pre-tax earnings) June 30, 2001 June 30, 2000
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(Dollars in millions) Next Next
12 Mos. Thereafter Total 12 Mos. Thereafter Total
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One hundred basis point increase $30.2 ($99.2) ($69.0) $26.3 ($15.6) $10.7
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One hundred basis point decrease $22.9 $99.5 $122.4 ($26.1) $15.7 ($10.4)
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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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PART II. OTHER INFORMATION
ITEM 1. LEGAL PROCEEDINGS
For information concerning the three stockholders' derivatives complaints
captioned "In re The Student Loan Corp. Derivative Litigation" see the
description that appears in the fourth, fifth and sixth paragraphs under the
caption "Legal Proceedings" 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 99.01 to this Form 10-Q and incorporated by
reference herein. On July 26, 2001, the Company and its directors (as well as
Citigroup Inc.) filed motions to dismiss the complaint and to stay discovery.
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITYHOLDERS
At the Company's 2001 Annual Meeting of Stockholders, held May 16, 2001, the
Company's stockholders took the following actions:
1. Two directors were elected to the Board of Directors: Bill
Beckmann (with holders of 18,041,772 shares voting in favor,
31,296 shares withheld and none abstaining) ; Glenda Glover (with
holders of 18,041,772 shares voting in favor, 31,296 shares
withheld and none abstaining). Mr. Bill Beckmann and Ms. Glenda
Glover will each serve until the year 2004 meeting of
stockholders. The terms of office of the other existing directors
did not change.
2. The selection of KPMG LLP as the Company's independent auditors
for the 2001 fiscal year was ratified (with holders of 18,078,788
shares voting in favor, 280 shares voting against and none
abstaining).
ITEM 5. OTHER INFORMATION
The Board of Directors elected a third independent director, Jill Fadule, to the
Company's Board of Directors at its July 2001 meeting, increasing the number of
directors to seven. Ms. Fadule was also appointed as a member of the Audit and
the Compensation Committees. She is a consultant to the Merrill Lynch Wealth
Management Services unit. Ms. Fadule was previously the Director of Admissions
and Financial Aid at the Harvard Business School. Her current term as director
expires at the annual meeting in 2002.
ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K
(a) Exhibits
Exhibit Number Description
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99.01 Fourth, fifth and sixth paragraphs under the
caption "Legal Proceedings" 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 second 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: August 13, 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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