SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
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FORM 10-Q
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QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF
THE SECURITIES EXCHANGE ACT OF 1934
FOR THE QUARTERLY PERIOD ENDED SEPTEMBER 30, 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 November 5, 2001, there were 20,000,000 shares of The Student Loan
Corporation's Common Stock outstanding.
Form 10-Q
Part I Financial Information
Page
Item 1 - Financial Statements
Statements of Income (Unaudited) for the Three-
and Nine-month Periods Ended September 30, 2001
and 2000 ............................................ 3
Balance Sheets as of September 30, 2001 (Unaudited)
and December 31, 2000 (Audited) ..................... 4
Statements of Cash Flows (Unaudited) for the
Nine-Month Periods Ended September 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 6 - Exhibits and Reports on Form 8-K ..................... 12
Signature ............................................................. 13
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PART 1: FINANCIAL INFORMATION
ITEM 1. FINANCIAL STATEMENTS
THE STUDENT LOAN CORPORATION
STATEMENTS OF INCOME
(Dollars in thousands, except per share amounts)
(Unaudited)
Three months ended Nine months ended
September 30, September 30,
------------- -------------
2001 2000 2001 2000
---- ---- ---- ----
REVENUE
Interest income $262,042 $297,223 $884,437 $773,608
Interest expense 187,411 236,971 662,850 581,154
-------- -------- -------- --------
NET INTEREST INCOME 74,631 60,252 221,587 192,454
Provision for loan losses (2,202) (1,087) (5,767) (3,693)
-------- -------- -------- --------
Net interest income after provision for loan losses 72,429 59,165 215,820 188,761
Fee and other income 3,404 3,314 7,865 5,019
-------- -------- -------- --------
TOTAL REVENUE, NET $ 75,833 $ 62,479 $223,685 $193,780
-------- -------- -------- --------
OPERATING EXPENSES
Salaries and employee benefits $ 5,886 $ 4,523 $ 16,624 $ 13,878
Other expenses 17,552 15,964 51,920 45,664
-------- -------- -------- --------
TOTAL OPERATING EXPENSES $ 23,438 $ 20,487 $ 68,544 $ 59,542
-------- -------- -------- --------
INCOME BEFORE INCOME TAXES $ 52,395 $ 41,992 $155,141 $134,238
Income taxes 21,554 17,447 63,061 55,787
-------- -------- -------- --------
NET INCOME $ 30,841 $ 24,545 $ 92,080 $ 78,451
======== ======== ======== ========
DIVIDENDS DECLARED $ 14,000 $ 12,000 $ 42,000 $ 36,000
======== ======== ======== ========
BASIC AND DILUTED EARNINGS PER COMMON SHARE $ 1.54 $ 1.23 $ 4.60 $ 3.92
======== ======== ======== ========
(based on 20 million average shares outstanding)
DIVIDENDS DECLARED PER COMMON SHARE $ 0.70 $ 0.60 $ 2.10 $ 1.80
======== ======== ======== ========
OPERATING RATIOS
Net interest margin 1.69% 1.70% 1.74% 2.04%
Operating expense as a percentage of
average insured student loans 0.53% 0.58% 0.54% 0.63%
Return on Equity 19.94% 17.71% 20.73% 19.53%
See accompanying notes to financial statements.
3
THE STUDENT LOAN CORPORATION
BALANCE SHEETS
(Dollars in thousands)
September 30, December 31,
2001 2000
(Unaudited) (Audited)
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ASSETS
Insured student loans $17,810,491 $15,774,291
Less: Allowance for loan losses (3,584) (2,872)
----------- -----------
Insured student loans, net 17,806,907 15,771,419
Cash 249 323
Other assets 521,414 471,489
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TOTAL ASSETS $18,328,570 $16,243,231
=========== ===========
LIABILITIES AND STOCKHOLDERS' EQUITY
Short-term borrowings $15,159,300 $12,332,804
Long-term notes 2,200,000 3,057,000
Payable to principal stockholder 8,115 9,551
Deferred income taxes 85,073 47,656
Other liabilities 253,661 223,958
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Total Liabilities 17,706,149 15,670,969
----------- -----------
Common stock, $0.01 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 487,370 437,290
----------- -----------
Total Stockholders' Equity 622,421 572,262
----------- -----------
TOTAL LIABILITIES AND STOCKHOLDERS' EQUITY $18,328,570 $16,243,231
=========== ===========
AVERAGE INSURED STUDENT LOANS
(year-to-date) $17,035,367 $13,226,364
=========== ===========
See accompanying notes to financial statements.
4
THE STUDENT LOAN CORPORATION
STATEMENTS OF CASH FLOWS
(Dollars in thousands)
(Unaudited)
Nine months ended
September 30,
-------------
2001 2000
---- ----
Cash flows from operating activities:
Net income $ 92,080 $ 78,451
Adjustments to reconcile net income to
net cash from operating activities:
Depreciation and amortization 41,396 23,030
Provision for loan losses 5,767 3,693
Deferred tax provision 37,417 3,088
(Increase) in accrued interest receivable (57,035) (150,776)
Decrease in other assets 11,395 6,781
Increase in other liabilities 28,346 94,203
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Net cash provided by operating activities 159,366 58,470
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Cash flows from investing activities:
Disbursement of loans (1,905,419) (1,723,571)
Purchase of loans (1,880,762) (3,330,372)
Repayment of loans 1,425,596 1,031,829
Sale of loans 279,378 231,346
Capital expenditures on equipment and computer software (5,729) (4,919)
----------- -----------
Net cash (used in) investing activities (2,086,936) (3,795,687)
----------- -----------
Cash flows from financing activities:
Net (decrease)/increase in borrowings with original
maturities of one year or less (230,504) 3,773,245
Proceeds from long-term borrowings 2,200,000 --
Dividends paid to stockholders (42,000) (36,000)
----------- -----------
Net cash provided by financing activities 1,927,496 3,737,245
----------- -----------
Net (decrease)/increase in cash (74) 28
Cash - beginning of period 323 251
----------- -----------
Cash - end of period $ 249 $ 279
=========== ===========
Supplemental disclosure of cash flow information:
Cash paid for:
Interest $ 663,646 $ 503,661
Net income taxes (refunded)/paid $ (11,282) $ 46,836
See accompanying notes to financial statements.
5
THE STUDENT LOAN CORPORATION
NOTES TO FINANCIAL STATEMENTS (UNAUDITED)
SEPTEMBER 30, 2001
1. SIGNIFICANT ACCOUNTING POLICIES
INTERIM FINANCIAL INFORMATION
The financial information of The Student Loan Corporation (the
"Company") as of September 30, 2001 and for the three- and nine-month
periods ended September 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 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 September 30, 2001, the Company had outstanding short-
and long-term borrowings with CNYS of $15.2 billion and $2.2 billion,
respectively, compared to $12.3 billion and $3.1 billion, respectively,
at December 31, 2000. For the three- and nine-month periods ended
September 30, 2001, the Company incurred $187.4 million and $662.9
million, respectively, in interest expense payable to CNYS and its
affiliates, compared to $237.0 million and $581.2 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 December 31, 2000 and for the nine-month period ended September
30,2001, 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. For further
information, see LEGAL PROCEEDINGS in the Company's Annual Report on
Form 10-K for the year ended December 31, 2000 and Quarterly Reports on
Form 10-Q for the quarters ended March 31, 2001 and June 30, 2001.
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 loans with higher yields 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 nine months ended September 30, 2001, the net student loan
portfolio of the Company increased by $2.0 billion (13%) to $17.8
billion from $15.8 billion at December 31, 2000. This growth was the
result of loan disbursements totaling $1,905 million and loan purchases
of $1,881 million in the first nine months of 2001, partially offset by
$279 million in loan sales and $1,426 million in loan reductions
(attributable to borrower principal repayments and claims paid by
guarantors), and other adjustments of $45 million. During the nine
months ended September 30, 2000, the Company made loan disbursements of
$1,724 million, loan purchases of $3,330 million, loan sales of $231
million, loan reductions of $1,032 million and other adjustments of $26
million.
From time to time, the Company makes purchases of guaranteed student
loans in the secondary student loan market. For the first nine months
of 2001, the Company's student loan purchases were $1,881 million, a
decrease of $1,450 million (44%) from the amount of loan purchases for
the same period in 2000. The Company's participation in the secondary
market is dependent upon market conditions.
The Company's loan disbursements and new CitiAssist loan commitments
for the first nine months of 2001 were $2,373 million, representing an
increase of $304 million (15%) as compared to those made in the same
period of 2000. The increase is primarily attributable to a growth of
$129 million (38%) in CitiAssist loan commitments to $468 million for
the first nine months of 2001, compared to $339 million for the same
period last year. FFEL Program Stafford and Plus loan disbursements of
$1,577 million in the first nine months of 2001 were $113 million (8%)
higher than the $1,464 million disbursed during the same period of
2000. Federal Consolidation Program loan originations of $328 million
for the first nine months of 2001 increased $62 million (23%) compared
to the same period of 2000.
During the first nine months of 2001, the Company made $664 million in
interest payments, principally to CNYS, compared to $504 million for
the same period in 2000. The increase is attributable to changes in
both the size of the borrowings and timing of interest payments.
Pursuant to federal tax regulations, the Company has elected to be
included in the consolidated federal income tax return of Citigroup,
and is also included in certain combined or unitary state/local income
or franchise tax returns of Citicorp/Citigroup or its subsidiaries. The
Company's income taxes, which are payable primarily to CNYS, were
overfunded at December 31, 2000, generating a $12 million refund from
CNYS in the first quarter of
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2001. The tax refund, less tax payments made during the first nine
months of 2001, resulted in net cash received of $11.3 million. The
Company made income tax payments of $46.8 million during the first nine
months of 2000.
Deferred income taxes increased by $37.4 million in the first nine
months of 2001. The increase was primarily attributable to the
temporary differences for deferred loan origination and internally
developed software costs for the first nine months of 2001, which are
deducted currently for income tax purposes, but amortized over certain
periods of time for financial statement purposes.
In the first nine months of 2001, short-term debt increased by $2.8
billion to $15.2 billion. The increase was primarily attributable to
the reclass of maturing long-term debt to short-term debt. The $0.9
billion decrease in long-term borrowings at September 30, 2001 is due
to the reclass of $3.1 billion of maturing long-term debt to short-term
and the procurement of $2.2 billion of new long-term borrowings. The
new borrowings were used primarily to fund new loan disbursements and
purchases.
The Company paid a quarterly dividend of $0.70 per common share on
September 4, 2001. On October 18, 2001, the Board of Directors declared
a regular quarterly dividend on the Company's common stock of $0.70 per
share to be paid December 3, 2001 to stockholders of record on November
15, 2001.
RESULTS OF OPERATIONS
QUARTER ENDED SEPTEMBER 30, 2001
Net income was $30.8 million ($1.54 basic and diluted earnings per
share) for the third quarter of 2001. This was an increase of $6.3
million (26%) from earnings for the same period last year. The increase
in net income was primarily attributable to lower funding costs, as
maturing debt was replaced at more favorable rates, and continued
management of operating expenses.
The net interest margin for the third quarter of 2001 was 1.69%, one
basis point lower than the third quarter 2000 margin of 1.70%. The
reduction of net interest margin resulted from the July 1, 2001
interest rate reset, which affected rates on all FFEL Program student
loans and resulted in historically low rates for consolidation loans.
The impact of the rate reset was partially offset by increased floor
revenue. Floor revenue 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.
Total operating expenses for the third quarter of 2001 increased $3.0
million (14%) from the same period last year, primarily due to an
increase 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 0.05% to 0.53%
from the third quarter of 2000 expense ratio of 0.58%. The improvement
in the expense ratio was primarily attributable to portfolio
efficiencies whereby the growth in assets did not require a
commensurate growth in the Company's infrastructure.
The Company's return on equity was 19.9% for the third quarter of 2001,
2.2% higher than the 17.7% return for the same period of 2000.
NINE MONTHS ENDED SEPTEMBER 30, 2001
The Company earned net income of $92.1 million ($4.60 basic earnings
per share) for the nine months ended September 30, 2001, an increase of
$13.6 million (17%) from the first nine months of 2000. The increase
was primarily attributable to higher interest income generated by loan
portfolio growth and continued management of operating expenses.
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Fee income of $7.9 million for the nine months ended September 30, 2001
increased $2.8 million (57%) compared to the same period last year. The
increase is primarily attributable to the implementation of a late fee
program in early 2001.
Total operating expenses for the first nine months of 2001 were $68.5
million, $9.0 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 nine months of 2001 decreased to 0.54%, an improvement of
0.09% compared to the first nine months of 2000. The decrease is
primarily attributable to growth in assets not requiring a commensurate
growth in the Company's infrastructure.
The Company's return on equity was 20.7% for the first three quarters
of 2001, 1.2% higher than the 19.5% return for the same period of 2000.
The Company's effective tax rate was approximately 40.6% for the first
nine 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 yields as a result of amendments to the Higher
Education Act of 1965, which governs the FFEL Program. Pressure on
margins is expected to continue as more loans are originated with lower
lender yields.
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 September 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 $26.3 million for the next twelve months and a potential
negative impact of approximately $77.1 million for all periods after
September 30, 2001. A 100 basis point decrease in the interest yield
curve as of September 30, 2001 would have a potential negative impact
on the Company's pretax earnings of approximately $10.2 million for the
subsequent twelve-month period and a potential positive effect of
approximately $93.2 million for all periods after September 30, 2001.
Earnings-at-Risk (effect on pre-tax earnings) September 30, 2001 September 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 $26.3 ($103.4) ($77.1) $14.6 ($19.9) ($5.3)
----------------------------------------------------------------------------------------------------------------
One hundred basis point decrease ($10.2) $103.4 $93.2 ($8.7) $26.4 $17.7
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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 6. EXHIBITS AND REPORTS ON FORM 8-K
(a) Exhibits
None
(b) Reports on Form 8-K
No reports on Form 8-K were filed during the third 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: November 12, 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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