The Student Loan Corporation (NYSE:STU) today reported net loss
of $539.6 million, or $26.98 per share, for the quarter ended
September 30, 2010, compared to net income of $54.8 million, or
$2.74 per share, reported for the same quarter of 2009. The
Company’s current quarter net loss reflects an after-tax impairment
charge of $562.2 million on certain loans which the Company expects
to sell to SLM Corporation (Sallie Mae) and Citibank, N.A. (CBNA)
pursuant to the Asset Purchase Agreements entered into on September
17, 2010. Excluding the impact of the impairment charge, the
Company would have recognized net income of $22.6 million, a $32.2
million decrease compared to the same quarter of last year. This
decrease reflects higher funding costs and a higher provision for
loan losses, which more than offset the positive impact of the
consolidation of the Company’s previously unconsolidated
securitization trusts and gains on loan sales.
“The definitive agreement entered into between the Company and
Discover Financial Services (Discover) for Discover to acquire the
Company’s private student loan business presents an opportunity for
the Company to continue its mission to assist students with
financing the education of their choice. We are pleased that
Discover intends to leverage and build upon the Company’s 52 years
of experience, proven market leadership, robust distribution, and
private education loan product expertise to continue serving
schools, students and families nationwide. The combination of the
Company’s and Discover’s private education loan capabilities is
expected to provide a more robust, comprehensive suite of education
finance solutions for students and their families,” said The
Student Loan Corporation’s Chairman, President and Chief Executive
Officer, Michael Reardon.
Net interest income of $96.9 million for the quarter ended
September 30, 2010 was $22.8 million (31%) higher than the same
quarter of 2009. This increase reflects a net increase of $38.2
million related to the consolidation of the Company’s previously
unconsolidated securitization trusts, $17.5 million for pricing
changes on the Company’s private education loans, $4.9 million for
higher loan balances, and $2.2 million for the impact of favorable
changes in the spreads between Commercial Paper and the London
Interbank Offered Rate (LIBOR) and the Prime rate and LIBOR. These
increases were partially offset by higher funding costs which
decreased net interest income by $21.9 million, amortization of the
upfront commitment fee on the Company’s Amended and Restated
Omnibus Credit Agreement (Omnibus Credit Agreement) of $9.3 million
and fees on the undrawn balance of $8.2 million.
Net interest margin of 0.90% for the quarter ended September 30,
2010 was eleven basis points lower than the same period of 2009.
Net interest margin excluding the amortization of the Omnibus
Credit Agreement upfront commitment fee and fees on the undrawn
balance was 1.06% for the third quarter of 2010, five basis points
higher than the third quarter of 2009 reflecting the consolidation
of the Company’s previously unconsolidated securitization trusts
partially offset by higher funding costs.
For the quarter ended September 30, 2010 the Company recorded
other losses of $848.6 million as compared to other income of $86.2
million for the same period in 2009. This primarily reflects a
pre-tax impairment charge of $900.8 million on certain loans which
the Company expects to sell to Sallie Mae and CBNA pursuant to the
Asset Purchase Agreements entered into on September 17, 2010. This
impairment change represents the difference between the carrying
value and the fair value of these loans as of September 30, 2010.
Upon the expected closing of the transactions contemplated by these
agreements, which is expected to occur during the fourth quarter of
2010, the Company expects to record a pre-tax gain of approximately
$507 million. The expected gain relates primarily to the difference
between the fair value and the carrying value of the Company’s
secured borrowings collateralized by FFEL Program loans. These
borrowings generally have interest rates that are lower than
prevailing interest rates and, as a result, the fair value of these
borrowings is less than carrying value. Upon closing of the
transactions, these borrowings will be extinguished and a gain will
be recognized. The actual gain or loss recorded upon closing of the
transactions could differ materially from this estimate based on
various factors, including changes in economic conditions which
affect the fair value of the assets and liabilities included in the
transactions, failure to satisfy closing conditions, additional
costs incurred in connection with the transactions or changes in
the composition or amounts of the net assets sold.
Excluding the impairment charge, the Company’s other income was
$52.2 million, a $34.0 million decrease from the same period in
2009. This decrease primarily reflects changes in the Company’s fee
and other income related to the Company’s securitization activities
largely as a result of the consolidation of the Company’s
previously unconsolidated securitization trusts. This decrease was
partially offset by larger gains on loans sold to the Department of
Education under the Loan Purchase Commitment Program in the third
quarter of 2010 compared to 2009.
Total operating expenses of $40.6 million for the quarter ended
September 30, 2010 were $5.9 million higher than the same period in
2009. Operating expenses during the third quarter of 2010 included
a $5.0 million write-off of Omnibus Credit Agreement upfront
commitment fees, which resulted from the Company’s reduction in the
aggregate commitment amount under the agreement and legal and
financial advisory costs of $2.9 million associated with the
transactions described above. While the reduction in the commitment
amount resulted in a write-off in the current quarter, it reduces
fees incurred on the undrawn balance. The Company’s operating
expense ratio (total operating expenses less the write-off of
Omnibus Credit Agreement upfront commitment fees as a percentage of
average managed student loans) for the third quarter of 2010 was
0.33%, one basis point higher than the same quarter of 2009
reflecting the legal and financial advisory costs noted above.
The Company’s allowance for loan losses at September 30, 2010
was $37.6 million, a decrease of $111.5 million compared to $149.1
million at December 31, 2009. This decrease primarily reflects the
$166.1 million reduction of allowance for loan losses related to
loans transferred into held for sale during the third quarter. This
decrease was partially offset by an increase of $54.6 million
associated with changes in expected recoveries on certain of the
Company’s higher risk insured private education loans, which the
Company now expects will exceed the aggregate maximum insurer
coverage; private education loan loss mitigation policy changes;
additional reserves for newly consolidated student loan assets; and
portfolio seasoning. Net credit losses increased by $16.7 million
during the third quarter compared to the same period in 2009,
primarily due to the loan loss mitigation policy changes and
seasoning of the Uninsured CitiAssist Standard and Custom
portfolios.
During the twelve-month period ended September 30, 2010, the
Company’s managed student loan portfolio decreased by 13% to $37.8
billion primarily due to the sale of $4.6 billion of FFEL Program
loans to the Department of Education under the Purchase Program.
The managed portfolio includes $37.3 billion of the Company’s owned
loan assets of which $33.4 billion is expected to be sold to Sallie
Mae and CBNA and is therefore included in loans held for sale.
Originations for the quarter ended September 30, 2010 included new
private education loan commitments of $0.2 billion, which was 45%
lower than the same period in 2009, reflecting the Company’s
refined origination strategy. The Company also made FFEL Program
Stafford and PLUS loan originations of $0.1 billion, a decrease of
95% as compared to the third quarter of 2009 due to schools moving
to the Direct Loan Program following the passage of the Health Care
and Education Reconciliation Act of 2010.
During the third quarter of 2010, the Company leveraged its
portfolio to secure an additional $0.9 billion of long-term
structural liquidity through a FFEL Program loan securitization. As
a result of completing this securitization, the Company reduced the
aggregate commitment under the Amended and Restated Omnibus Credit
Agreement by $1.0 billion.
On October 13, 2010, the Company’s Board of Directors elected
not to declare a dividend in light of the expected merger with
Discover and asset purchase transactions with Sallie Mae and
CBNA.
The Student Loan Corporation (NYSE: STU) is one of the nation's
leading originators and holders of student loans providing a full
range of education financing products and services to meet the
needs of students, parents, schools and lenders. The company was
previously a division of Citibank and became a NYSE-listed
corporation in 1992. Citibank, N.A. is the majority shareholder.
Citibank was one of the first banks to finance higher education,
beginning in 1958.
For information or inquiries regarding student loans, please
call 1-800-STUDENT. Customers with Telecommunication Devices for
the Deaf (TDD) may call 1-800-846-1298. College planning and
financing information is also available at www.studentloan.com.
The foregoing description of the contemplated transactions and
the related agreements does not purport to be complete and is
qualified in its entirety by reference to the preliminary proxy
statement and its annexes filed with the U.S. Securities and
Exchange Commission on October 7, 2010.
FORWARD-LOOKING STATEMENTS
Certain statements in this document are “forward-looking
statements” within the meaning of the Private Securities Litigation
Reform Act of 1995. These statements are based on management’s
current expectations and are subject to uncertainty and changes in
circumstances. Actual results may differ materially from those
included in these statements due to a variety of factors. More
information about these factors is contained in the Company’s
filings with the U.S. Securities and Exchange Commission.
THE STUDENT LOAN CORPORATION
CONSOLIDATED STATEMENTS OF INCOME
(Dollars in thousands, except share and
per share amounts)
Three months ended Nine months
ended September 30, September 30, 2010
2009 2010 2009 Unaudited
Unaudited NET INTEREST INCOME Interest income $
279,220 $ 194,401 $ 819,364 $ 585,821 Interest expense
(182,300 ) (120,290 ) (543,012 ) (382,748 )
Net interest income 96,920 74,111 276,352 203,073 Provision
for loan losses (72,886 ) (38,690 ) (158,173 )
(104,658 )
Net interest income after provision for loan
losses 24,034 35,421 118,179
98,415
OTHER (LOSS) INCOME Gains
on loans sold 55,600 17,712 55,600 35,576 Fair value write down of
loans held for sale (900,849 ) (2,185 ) (900,849 ) (2,185 ) Fee and
other (loss) income (3,373 ) 70,720
6,023 108,529
Total other (loss) income
(848,622 ) 86,247 (839,226 )
141,920
OPERATING EXPENSES Salaries and
employee benefits 7,516 7,859 23,081 25,265 Write-off of funding
commitment fee paid to principal stockholder 5,000 – 12,500 – Other
expenses 28,065 26,848 80,682
79,512
Total operating expenses
40,581 34,707 116,263
104,777
(Loss) income before income taxes
(865,169 ) 86,961 (837,310 ) 135,558 (Benefit) provision for income
taxes (325,522 ) 32,154 (318,943 )
47,967
NET (LOSS) INCOME $ (539,647 ) $ 54,807
$ (518,367 ) $ 87,591
DIVIDENDS DECLARED
AND PAID $ 7,000 $ 7,000 $ 21,000 $ 42,600
BASIC AND DILUTED EARNINGS PER COMMON
SHARE
$ (26.98 ) $ 2.74 $ (25.92 ) $ 4.38 (based on
20,000,000 average shares outstanding)
DIVIDENDS DECLARED
AND PAID PER COMMON SHARE $ 0.35 $ 0.35 $ 1.05
$ 2.13
THE STUDENT LOAN CORPORATION
CONSOLIDATED BALANCE SHEETS
(Dollars in thousands, except share and
per share amounts)
September 30, December
31, 2010 2009 Unaudited ASSETS
Federally insured student loans $ – $ 17,948,706 Private education
loans 3,722,533 7,432,471 Deferred origination and premium costs
104,498 548,083 Allowance for loan losses (37,588 )
(149,098 ) Student loans, net 3,789,443 25,780,162 Loans held for
sale 33,486,095 2,409,267 Cash 588 17,998 Deferred income tax asset
214,743 – Residual interests in securitized loans – 820,291 Other
assets 2,459,295 1,990,523
Total Assets $ 39,950,164 $ 31,018,241
LIABILITIES AND STOCKHOLDERS' EQUITY Short-term
borrowings, payable to principal stockholder $ 4,346,400 $
5,131,000 Short-term secured borrowings, payable to Department of
Education – 2,066,686 Long-term borrowings, payable to principal
stockholder 2,800,000 4,391,000 Long-term secured borrowings
31,729,770 16,999,976 Deferred income tax liability – 410,546 Other
liabilities 305,732 348,612
Total Liabilities 39,181,902 29,347,820
Common stock, $0.01 par value; authorized 50,000,000 shares;
20,000,000 shares issued and outstanding 200 200 Additional paid-in
capital 143,185 141,869 Retained earnings 624,877
1,528,352 Total Stockholders' Equity
768,262 1,670,421
Total Liabilities
and Stockholders' Equity $ 39,950,164 $ 31,018,241
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