Attached files
file | filename |
---|---|
EX-31.1 - EXHIBIT31.1 FOR FORM 10-K 123109 - STUDENT LOAN CORP | exhibit31_1.htm |
EX-24.1 - EXHIBIT24.1 FOR FORM 10-K 123109 - STUDENT LOAN CORP | exhibit24_1.htm |
EX-31.2 - EXHIBIT31.2 FOR FORM 10-K 123109 - STUDENT LOAN CORP | exhibit31_2.htm |
EX-32.1 - EXHIBIT32.1 FOR FORM 10-K 123109 - STUDENT LOAN CORP | exhibit32_1.htm |
UNITED
STATES
SECURITIES
AND EXCHANGE COMMISSION
Washington,
D.C. 20549
__________________
FORM
10-K
__________________
(Mark
One)
|
|
x
|
ANNUAL
REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF
1934
|
For
the fiscal year ended December 31, 2009
|
|
or
|
|
¨
|
TRANSITION
REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF
1934
|
For
the transition period from ___ to
___
|
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)
975-6320
(Registrant's
telephone number, including area code)
__________________
Securities
Registered Pursuant to Section 12(b) of the Act:
Common
Stock
|
New
York Stock Exchange
|
|
Title
of Each Class
|
Name
of Each Exchange on which
Registered
|
Securities
Registered Pursuant to Section 12(g) of the Act:
None
Indicate
by check mark if the registrant is a well-known seasoned issuer, as defined in
Rule 405 of the Securities Act.
Yes
|
o
|
No
|
x
|
Indicate
by check mark if the registrant is not required to file reports pursuant to
Section 13 or 15(d) of the Act.
Yes
|
o
|
No
|
x
|
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
|
o
|
Indicate
by check mark whether the registrant has submitted electronically and posted on
its corporate Website, if any, every Interactive Data File required to be
submitted and posted pursuant to Rule 405 of Regulations S-T during the
preceding 12 months (or for such shorter period that the registrant was required
to submit and post such files).
Yes
|
x
|
No
|
o
|
Indicate
by check mark if disclosure of delinquent filers pursuant to Item 405 of
Regulation S-K is not contained herein, and will not be contained, to the best
of registrant's knowledge, in definitive proxy or information statements
incorporated by reference in Part III of this Form 10-K or any amendment to this
Form 10-K. x
Indicate
by check mark whether the registrant is a large accelerated filer, an
accelerated filer, a non-accelerated filer, or a smaller reporting company. See
definition of “large accelerated filer,” ”accelerated filer” and “small
reporting company” in Rule 12b-2 of the Exchange Act.
Large
accelerated filer o
|
Accelerated
filer x
|
|
Non-accelerated
filer o (Do not check if a
smaller reporting company)
|
Smaller
reporting company o
|
Indicate
by check mark whether the registrant is a shell company (as defined in Rule
12b-2 of the Exchange Act).
Yes
|
o
|
No
|
x
|
The
aggregate market value of the voting stock held by non-affiliates of the
registrant as of June 30, 2009 was $148,800,000, (based on 4,000,000 shares held
by non-affiliates and a closing sale price of $37.20 per share as reported for
the New York Stock Exchange).
As of
February 24, 2010, there were 20,000,000 shares of The Student Loan
Corporation’s common stock outstanding.
Documents
incorporated by Reference:
Portions
of the Proxy Statement relating to the registrant's Annual Meeting of
Stockholders to be held May 13, 2010 are incorporated by reference into Part III
of this Form 10-K.
CONTENTS
2
|
Glossary
|
6
|
Management’s
Discussion and Analysis
|
44
|
Other
Business and Industry Information
|
52
|
Risk
Factors
|
68
|
Management’s
Report on Internal Control over Financial Reporting
|
69
|
Report
of Independent Registered Public Accounting Firm – Internal Control over
Financial Reporting
|
70
|
Report
of Independent Registered Public Accounting Firm – Consolidated Financial
Statements
|
71
|
Consolidated
Financial Statements
|
75
|
Notes
to Consolidated Financial Statements
|
115
|
Securities
and Exchange Commission Information
|
116
|
Exhibits
and Financial Statement Schedules
|
117
|
10-K
Cross Reference Index
|
119
|
Directors
and Executive Officers
|
120
|
Stockholder
Information
|
125
|
Exhibit
Index
|
SELECTED
FINANCIAL DATA
|
||||||||||||||||||||
YEARS
ENDED DECEMBER 31,
|
||||||||||||||||||||
(Dollars
in millions, except per share amounts)
|
2009
|
2008
|
2007
|
2006
|
2005
|
|||||||||||||||
STATEMENTS
OF INCOME DATA
|
||||||||||||||||||||
Net
interest income
|
$ | 278 | $ | 331 | $ | 389 | $ | 412 | $ | 493 | ||||||||||
Gains
on loans sold and securitized
|
46 | 4 | 112 | 216 | 153 | |||||||||||||||
Total operating
expenses (4)
|
138 | 179 | 180 | 166 | 149 | |||||||||||||||
Net income (4)
|
126 | 73 | 186 | 289 | 312 | |||||||||||||||
BALANCE
SHEETS DATA (as of December 31,)
|
||||||||||||||||||||
Loans
|
$ | 28,339 | $ | 25,643 | $ | 22,034 | $ | 21,289 | $ | 25,146 | ||||||||||
Total assets (4)
|
31,018 | 28,237 | 23,901 | 22,681 | 26,006 | |||||||||||||||
Short-term
borrowings
|
7,198 | 13,656 | 13,373 | 11,137 | 10,781 | |||||||||||||||
Long-term
borrowings
|
21,391 | 11,830 | 8,100 | 9,200 | 13,200 | |||||||||||||||
Total stockholders’
equity (4)
|
1,670 | 1,594 | 1,635 | 1,561 | 1,368 | |||||||||||||||
EARNINGS
DATA
|
||||||||||||||||||||
Cash
dividends declared per common share
|
$ | 2.48 | $ | 5.72 | $ | 5.59 | $ | 4.98 | $ | 4.32 | ||||||||||
Basic
and diluted earnings per common share
|
$ | 6.28 | $ | 3.67 | $ | 9.29 | $ | 14.43 | $ | 15.61 | ||||||||||
Net interest margin
(1)
|
0.96 | % | 1.31 | % | 1.66 | % | 1.61 | % | 1.87 | % | ||||||||||
Total
operating expenses as a percentage of average managed
loans
|
0.32 | % | 0.45 | % | 0.50 | % | 0.51 | % | 0.51 | % | ||||||||||
Return on average
equity (4)
|
7.9 | % | 4.6 | % | 11.6 | % | 19.8 | % | 25.0 | % | ||||||||||
OTHER
|
||||||||||||||||||||
Average
interest bearing assets
|
$ | 28,649 | $ | 25,031 | $ | 23,400 | $ | 25,624 | $ | 26,398 | ||||||||||
Average
managed loans
|
43,560 | 39,938 | 36,109 | 32,403 | 29,237 | |||||||||||||||
FFEL
Program Stafford and PLUS Loan disbursements
|
5,751 | 5,737 | 4,601 | 3,782 | 3,225 | |||||||||||||||
CitiAssist® Loans
disbursed under commitments to purchase(2)
|
1,248 | 1,759 | 1,755 | 1,781 | 1,628 | |||||||||||||||
FFEL
Program Consolidation Loans volume and other FFEL Program loan
purchases
|
71 | 844 | 2,389 | 5,409 | 5,976 | |||||||||||||||
Book
value per share (as of December 31,)
|
$ | 83.52 | $ | 79.71 | $ | 81.74 | $ | 78.04 | $ | 68.38 | ||||||||||
Common stock price
(3)
|
||||||||||||||||||||
High
|
$ | 58.45 | $ | 138.75 | $ | 216.06 | $ | 241.00 | $ | 241.50 | ||||||||||
Low
|
$ | 24.61 | $ | 20.82 | $ | 106.75 | $ | 160.65 | $ | 162.50 | ||||||||||
Close
(as of December 31,)
|
$ | 46.57 | $ | 41.00 | $ | 110.00 | $ | 207.30 | $ | 209.23 | ||||||||||
Total
number of employees (as of December 31,)
|
248 | 355 | 558 | 571 | 551 | |||||||||||||||
(1)
|
Amount
is calculated by dividing annual net interest income by average interest
bearing assets for the period.
|
(2)
|
CitiAssist
loans are originated by Citibank, N.A. and The Student Loan Corporation is
committed to purchase the loans after final
disbursement.
|
(3)
|
Common
stock price is based on The New York Stock Exchange composite
listing.
|
(4)
|
Certain
prior period amounts reflect changes resulting from the correction of
immaterial errors, See Note 3 to the Consolidated Financial Statements for
additional information.
|
1
Glossary
Listed
below are definitions of key terms that are used throughout this Annual Report
and Form 10-K.
Borrower Benefits — Borrower
benefits are incentives in the form of interest rate reductions to borrowers for
timely payment or automated clearing house payment methods as well as principal
reductions.
College Cost Reduction and Access Act
(CCRA Act) — The College Cost Reduction and Access Act was signed into
law on September 27, 2007. This Act eliminated the EP program
(defined below), thereby decreasing The Student Loan Corporation’s (the Company)
reimbursement rates on Federal Family Education Loan (FFEL) Program loans. Under
the CCRA Act, the Company will receive a 97% or 98% reimbursement rate for
substantially all claims filed after October 1, 2007, depending on the
origination date of the loan. The provisions of the CCRA Act also include
further reduction in the reimbursement rate to 95% for new loans disbursed on or
after October 1, 2012 as well as reductions in special allowance payments of 55
basis points for Stafford and Consolidation Loans and 85 basis points for PLUS
Loans.
Conduit — The U.S. Department of
Education (the Department) sponsored student loan-backed commercial paper
conduit, Straight-A Funding, LLC (the Conduit) provides additional liquidity
support to eligible student lenders by providing funding for FFEL Program
Stafford and PLUS loans first disbursed on or after October 1, 2003 and before
July 1, 2009, and fully disbursed by September 30, 2009. In addition
to providing financing at a cost based on market rates, a significant benefit to
lenders is that eligible loans are permitted to have borrower benefits, which
are currently not permitted under the Participation and Purchase Programs
(defined below). Funding from the Conduit is provided indirectly by
the capital markets through the sale to private investors of government
back-stopped asset-backed commercial paper. The Company receives
funding equal to 97% of the principal and interest to be
capitalized of the pledged student loans. The Conduit program
expires in January 2014. The commercial paper issued by the Conduit has
short-term maturities generally ranging up to 90 days. In the event
the commercial paper issued by the Conduit cannot be reissued at maturity and
the Conduit does not have sufficient cash to repay investors, the Federal
Financing Bank (FFB) has committed to provide short-term liquidity to the
Conduit. If the Conduit is not able to issue sufficient commercial
paper to repay its investors or liquidity advances from the FFB, the Company can
either secure alternative financing and repay its Conduit borrowings or sell the
pledged student loans to the Department at a predetermined price equal to either
97% or 100% of the accrued interest and outstanding principal of pledged loans,
depending on first disbursement date and certain other loan
criteria.
CitiAssist® Loans — CitiAssist
loans are loans that are originated through an alternative private loan program
and do not carry federal government guarantees. These loans are the Company’s
proprietary loan product, offered as a means to finance higher education costs
that exceed borrowers’ available financial resources, including any resources
available through the FFEL Program. In order to comply with certain
legal and regulatory requirements, CitiAssist loans are originated by Citibank,
N.A. (CBNA) through an intercompany agreement. Following full
disbursement, the Company purchases all qualified CitiAssist loans from
CBNA.
2
Consolidation Loans —
Consolidation Loans are loans that allow eligible borrowers to combine multiple
federally guaranteed loans, including those of both the FFEL and Federal Direct
Student Loan Programs, into a single aggregate guaranteed loan. The
borrower interest rate on a Consolidation Loan is a fixed rate that represents
the weighted average interest rate of the loans retired. The maximum
term of a Consolidation Loan is 30 years.
Deferment —Deferment is a
period of time during which the borrower, upon meeting certain conditions, is
not required to make payments of loan principal, or interest in some
cases. Deferment types include, but are not limited to: in-school,
internship or residency, unemployment, economic hardship and military service.
The borrower remains liable for the interest that accrues on any unsubsidized
loan during the deferment period. Any interest that remains unpaid at
the end of the deferment period is added to the principal balance.
Department — The Department is
the U.S. Department of Education.
Exceptional Performer (EP)
Designation — The Exceptional Performer designation was granted to those
FFEL Program loan servicers that met the performance standards established by
the Department. The Company and several of its servicers obtained
Exceptional Performer status effective in 2004. Under previous
Department rules, as long as Exceptional Performer eligibility was maintained,
the Company received 100% reimbursement on all eligible FFEL Program default
claims that were submitted for reimbursement by the Company or its eligible
third-party servicers. Under the Deficit Reduction Act, the reimbursement rate
on defaulted loans submitted for reimbursement on or after July 1, 2006 was
reduced to 99%. The CCRA Act eliminated the Exceptional Performer
Program as of October 1, 2007, reducing substantially all default claim
reimbursements to between 97% and 98%.
FFEL Program — The FFEL
Program is the Federal Family Education Loan Program, administered by the
Department.
FFEL Program Subsidized and
Unsubsidized Stafford and PLUS Loans — Subsidized and Unsubsidized
Federal Stafford and PLUS Loans are those loans that are guaranteed against loss
under the FFEL Program in the event of borrower default, death, disability,
bankruptcy or closed school. Subsidized Federal Stafford Loans
are those loans generally made to students who pass certain need
criteria. Unsubsidized Federal Stafford Loans are designed for
students who do not qualify for subsidized Federal Stafford Loans due to
parental and/or student income and assets in excess of permitted amounts or
whose need exceeds the basic Stafford limit. Federal PLUS Loans,
which are also unsubsidized, are made to parents of dependent students and to
graduate and professional students. The borrower interest rates on
Stafford and PLUS Loans originated prior to July 1, 2006 reset each July 1st
while newer loans have a fixed borrower rate.
3
Floor Income — The amount of
additional interest income generated when net interest margin exceeds the
minimum expected spreads on FFEL Program loans. Floor income, which
is a component of net interest income, is defined as the difference between the
income earned at the borrower payment rate less the Department-stipulated asset
spread and the funding cost of the asset. Floor income has been reduced under
certain provisions of the Deficit Reduction Act which became effective April 1,
2006. These provisions require the rebate of almost all floor income to the
Department from loans for which the first disbursement was made on or after
April 1, 2006. Floor income, as defined by the Company, is a financial measure
that is not defined by U.S. generally accepted accounting principles
(GAAP).
Forbearance — Forbearance is a
period of time during which the borrower is permitted to temporarily cease
making regular monthly payments. Interest continues to accrue during the
forbearance period and any accrued interest that remains unpaid at the end of
the forbearance period will be added to the principal
balance. Forbearance is available to assist borrowers who are unable
to make their regularly scheduled payments for such reasons as: experiencing
temporary financial difficulties, being affected by a natural disaster, or
participating in an internship or residency program. Under the FFEL
Program, some types of forbearance are granted based on meeting eligibility
requirements; others are granted at the discretion of the lender.
Higher Education Act — The
Higher Education is the Higher Education Act of 1965, as amended.
Managed Student Loan Assets —
Managed Student loan assets represent the portfolio of student loans owned by
the Company and reported on its balance sheet, as well as those loans that are
serviced on behalf of securitization trusts and certain other
lenders.
Loan Participation Purchase Program
(Participation Program) — In 2008, the Department
established the Loan Participation Purchase Program pursuant to the Ensuring
Continued Access to Student Loans Act of 2008 (ECASLA). The Participation
Program provides FFEL Program lenders with short-term liquidity through the
purchase by the Department of participation interests in pools of loans. FFEL
Program lenders pay interest on the principal amount of participation interests
outstanding at a rate equal to the 90-day Commercial Paper rate as published by
the Department (CP) plus 50 basis points.
4
Loan Purchase Commitment Program
(Purchase Program) — In 2008, the Department
established the Loan Purchase Commitment Program pursuant to ECASLA. Under the
Purchase Program, the Department purchases eligible FFEL Program loans at a
price equal to the sum of outstanding principal, accrued interest and the 1%
origination fee paid to the Department plus $75 per loan.
Private Education Loans —
Private education loans primarily consist of CitiAssist loans (as described
above) and private consolidation loans.
Qualifying Special Purpose Entities
(QSPE) — A qualifying special purpose entity is a trust or other entity
that meets the QSPE qualifications of Accounting Standards Codification (ASC)
860, which places significant restrictions on the permitted activities of a
QSPE, which is a passive entity that cannot engage in active decision
making.
Residual Interests — Residual
interests represent an entity’s right to receive cash flows from the loans it
securitizes and sells to QSPEs that are in excess of amounts needed to pay
servicing, derivative costs (if any), other fees, and the principal and interest
on the notes backed by the loans.
Retained Interest — Retained
interest is the term used to identify the securitization asset that is formed by
the combination of residual interests, servicing assets and retained
notes.
Servicing Assets — Servicing
assets represent the value of the cash flows that result from contracts to
service financial assets under which the estimated future revenues from the
contractually specified servicing fees are expected to exceed adequate
compensation associated with servicing such assets. The servicing
asset is recognized only when it is contractually separated from the underlying
assets by the sale or securitization of the asset with servicing
retained.
Special Allowance Payment (SAP)
— Special allowance payments are those interest payments made by the
federal government when the stated interest rate on the FFEL Program loans
provides less than prescribed rates of return, as defined by the Higher
Education Act. When that occurs, the federal government makes a SAP,
which increases the lender’s loan yield by a legally specified markup over a
base rate tied to either CP or the 91-day Treasury Bill auction yield, depending
on the origination date. When the stated interest rate on the FFEL
Program loans provides more than prescribed rates of return, the Company earns
floor income (see above). Most FFEL Program loans qualify for the
federal government’s SAP.
Term Asset-Backed Securities Loan
Facility (TALF) — In November 2008, the
Federal Reserve Bank authorized the Term Asset-Backed Securities Loan Facility
to provide additional liquidity support to the asset-backed securities
market. Under TALF, the Federal Reserve Bank of New York extends
loans to investors to purchase qualifying AAA-rated asset-backed securities,
including those backed by student loans. The TALF is currently
available until March 31, 2010.
5
MANAGEMENT’S
DISCUSSION AND ANALYSIS
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 of 1995. Forward-looking statements are
typically identified by the words or phrases “believe”, “expect”, “anticipate”,
“intend”, “estimate”, “may increase”, “may result in”, “may fluctuate”, and
similar expressions or future or conditional verbs such as “will”, “should”,
“would” and “could”. These forward-looking statements involve risks
and uncertainties, which could cause the Company actual results to differ
materially from those the Company expects, including, but not limited
to:
·
|
the
amount, availability, and cost of future short- and long-term financing to
the Company from CBNA, government funding programs, securitizations, whole
loan sales, and other sources;
|
·
|
fluctuations
in interest rates and between various interest rate indices, particularly
the manner in which short-term rates affect the Company’s funding costs,
consolidation rates, the rates at which interest accrues on its loan
portfolio and the effects of interest rate fluctuations on the demand for
student loans;
|
·
|
the
Company’s ability to acquire or originate loans in the amounts anticipated
and with interest rates that generate sufficient yields and
margins;
|
·
|
the
availability and amount of loan subsidies and any effect on the Company’s
net interest margin;
|
·
|
any
change in ownership of the Company that could result from the potential
disposition by CBNA;
|
·
|
the
effects of legislative and regulatory changes that affect the demand for,
collectibility of and interest rates on student loans, especially the
establishment of certain fixed rates of interest on FFEL Program loans, as
well as the President’s 2010 budget proposal which could eliminate the
FFEL Program;
|
·
|
actual
credit losses, loan collection strategies and their impact on delinquency
rates, and the adequacy of loan loss reserves;
|
·
|
general
economic conditions, including, without limitation, the performance of
financial markets and unemployment rates;
|
·
|
the
availability of alternative financing options to students and their
parents, including competitive products offered by other
lenders;
|
·
|
the
effects of changes in GAAP, including, without limitation, the Financial
Accounting Standards Board’s (FASB) Statement of Financial Accounting
Standards (SFAS) No. 166, Accounting for Transfers of
Financial Assets - an amendment of FASB Statement No. 140 (SFAS
166), now authoritative under ASC 860, and FASB Statement of Financial
Accounting Standards No. 167, Amendments to FASB
Interpretation No. 46(R) (SFAS167), now authoritative under ASC
810-10;
|
·
|
the
success of the Company’s strategic repositioning
efforts;
|
·
|
the
adequacy of the Company’s capital expenditures and of funds allocated for
future capital expenditures;
|
·
|
the
amount of financial aid available to students and their parents and cost
of education;
|
6
·
|
changes
in prepayment rates on student loans from anticipated rates and in the
quality and profitability of those loans that move into repayment status,
as well as actual experience with the repayment cycle of the loan
portfolio;
|
·
|
the
performance of the Company’s loan portfolio servicers, insurers,
risk-sharers and higher education institution clients;
|
·
|
the
Company’s and other servicers’ ability to continue to service the loan
portfolio in accordance with their contractual
obligations;
|
·
|
loan
origination costs;
|
·
|
the
volume of loan consolidations; and
|
·
|
the
success of the Company’s marketing and sales
efforts.
|
There are
a number of other risks and uncertainties that could cause actual results to
differ materially from the forward-looking statements, including those described
in Risk Factors on page
54. Except as required by law, the Company undertakes no obligation
to publicly update or revise any of the forward-looking statements, whether as a
result of new information, future events or otherwise.
7
The
following discussion should be read in conjunction with the Consolidated
Financial Statements and accompanying Notes.
See Glossary starting on page 2
for a description of certain terms used in this Annual Report and Form
10-K.
Management’s
Discussion and Analysis provides the Company’s perspective on its operations and
its current business environment, including the following:
Business Overview – a general
description of the Company’s business as well as the impacts of market
conditions on the business and business trends.
2009 in Summary and
2010 Expectations – a review of key events affecting the Company’s
historical and future operating results.
Accounting Changes and Future
Application of Accounting Standards – a summary of new and expected
changes to accounting standards, including the expected impact of changes in
GAAP related to the Company’s securitization trusts.
Critical Accounting Estimates
– an overview of accounting policies that require critical judgments and
estimates.
Financial Condition – a
discussion and analysis of the Company’s loan portfolio, disbursement and
procurement activity and allowance for loan losses.
Results of Operations – a
review of the Company’s results of operations for the years ended December 31,
2009, 2008 and 2007 and discussion of the key factors impacting those
results.
Liquidity and Capital
Resources – an analysis of the Company’s sources and uses of cash and
capital obligations.
Related Party Transactions – a
discussion of significant transactions carried out between the Company and
Citigroup Inc. (Citigroup) and/or its affiliates, including CBNA.
Legislation and Regulations –
a discussion of legislative activities that affect the student loan
industry.
Risk Management – a
description of activities the company has undertaken in an effort to manage
credit, operating and market risks.
8
Business
Overview
The
Company 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 incorporated in
1992 under the laws of the State of Delaware. CBNA owns 80% of the Company’s
outstanding common stock and is an indirect wholly owned subsidiary of
Citigroup. The majority of the Company’s loans are originated and
guaranteed under the FFEL Program, authorized by the Department under the Higher
Education Act. The Company, which has a trust agreement to originate loans
through CBNA, is an originator, manager and servicer of student loans made in
accordance with federally sponsored guaranteed student loan
programs.
Congress
is currently considering legislation that may result in significant changes to
federal student loan programs. The President and various industry
groups have offered proposals for reform, the most significant of which could
result in the elimination of the FFEL Program. In September 2009, the
House of Representatives approved a bill which, among other changes, would
eliminate the FFEL Program. The Senate has not yet introduced a
companion bill. The Company cannot predict what the new legislation
will look like in its final form. Any of the proposed changes, in
particular the proposal to eliminate the FFEL Program, could have a material
adverse effect on the Company’s financial condition and results of
operations. See Legislation and Regulations on
page 38 for additional information about the proposals.
The
Company, through its trust agreement with CBNA, is also a leading originator,
manager and servicer of private education loans. The Company’s
portfolio of private education loan products provides it with the ability to
offer a full array of student loan products to students and their parents. The
Company is committed to providing exceptional service to borrowers and schools,
offering competitive and innovative products with solutions that allow students
and their families to finance the education of their choice.
The
earnings of the Company are primarily generated by the spread between the
interest earned on its loan assets, (based on the 90-day Commercial Paper rate
as published by the Department (CP), the prime rate, or the 91-day Treasury Bill
rate) and the interest paid on its borrowings (based on London Interbank Offered
Rate (LIBOR), CP or the prime rate). Net interest income is impacted
by, among other things: spread changes between CP, the prime rate or the 91-day
Treasury Bill rate and LIBOR; credit premiums on the Company’s debt; legislative
changes that impact FFEL Program subsidies; utilization rates of borrower
benefits; and portfolio growth or contraction. The Company regularly
monitors interest rates and may enter into interest rate derivative agreements
in an effort to manage its interest rate risk exposure.
9
The
Company utilizes funding from various sources for liquidity and to fund new loan
originations including government sponsored programs, securitizations and
borrowings from CBNA. The Conduit provides funding to the Company for
certain of its FFEL Program Stafford and PLUS loans which were fully disbursed
by September 30, 2009. In addition, since December 2008 the Company
has been utilizing the Department’s Participation and Purchase Programs
available through the Ensuring Continued Access to Student Loans Act
(ECASLA). These programs are currently only available for FFEL
Program loans disbursed for the remainder of the 2009 – 2010 academic
year. As a result of the capital market dislocation experienced in
2008 and into 2009, these programs offered by ECASLA have been vital for lenders
of FFEL Program loans who want to continue to offer these
products. If continued disruption is experienced in the markets and
these programs are not extended or similar programs are not made available,
student lenders, including the Company, may find it difficult to remain in this
segment of the industry.
The
Company also utilizes funding available through an Omnibus Credit Agreement with
CBNA. An extension to the Omnibus Credit Agreement, dated November
30, 2000, between the Company and CBNA (Original Omnibus Credit Agreement),
which was set to expire on December 31, 2009, was entered into on December 22,
2009. Subsequently, an Amended and Restated Omnibus Credit Agreement
was executed on January 29, 2010 between the Company and CBNA. See
Liquidity and Capital
Resources on page 33 for additional detail on both the extension and the
newly executed agreement.
Gains on
sales of loans through the Purchase Program, whole loan sales and off-balance
sheet securitizations have contributed significantly to the Company’s historical
earnings. Future gains on sales of loans will depend on the
availability of certain programs, market conditions, and the Company’s
operational strategies. As a result of accounting changes effective
January 1, 2010, the Company’s future securitizations will likely be accounted
for as secured borrowings rather than as sales. See Note 2 to the
Consolidated Financial Statements for additional information related to these
accounting changes.
For
additional information about the Company’s business, see Other Business and Industry Information on
pages 46 through 53.
2009
in Summary
External
economic factors including continued disruption in the financial markets,
overall weakening of the U.S. economy and changes to the legislative and
regulatory environment made 2009 a very challenging year. These
factors, combined with an increase in the Company’s cost of funds as it shifted
its funding mix towards more long-term funding, contributed to net interest
margin compression. In addition to continued deterioration in the
economic environment, higher loan balances and seasoning of the Company’s
student loan portfolio as more loans entered repayment resulted in an increase
in the Company’s allowance for loan losses.
10
Despite
the challenges posed by external factors, the Company maintained its focus on
securing alternative third party funding and expanding long-term
liquidity. During 2009, the Company leveraged its portfolio to secure
$15.7 billion of long-term funding, including $10.4 billion of funding from the
Conduit. The Company also executed four securitizations, including
three FFEL Program loan securitizations which provided $3.9 billion of funding,
and a private education loan securitization under the TALF which contributed an
additional $1.4 billion of funding. The average funding cost of these
new long-term borrowings is significantly higher than that of the shorter-term
borrowings which were replaced, which contributed to the net interest margin
compression described above.
During
2009, the Company also continued to leverage the Participation Program for
funding new FFEL Program loan originations. Since its inception, the
program has funded $5.3 billion of the Company’s FFEL Program Stafford and PLUS
loan disbursements. The Company also utilized the Purchase Program,
selling $3.0 billion of loans to the Department in 2009.
In
addition to taking advantage of these government-sponsored funding initiatives
and renewed investor interest in the student loan asset-backed securities
market, the Company benefited from other opportunities during the year,
including:
·
|
the
Company’s strategic repositioning and cost management
efforts;
|
·
|
recent
pricing changes on the Company’s private education
loans;
|
·
|
increasing
loan balances;
|
·
|
lower
borrower prepayment activity, which had a positive impact on the Company’s
fair value of retained interests from securitizations;
and
|
·
|
lower
amortization of deferred origination costs as a result of lower loan
origination and premium costs.
|
Together,
these factors helped to reduce the impact of the external economic factors
described above.
Net
income of $125.7 million, or $6.28 per share, for the year ended December 31,
2009, increased by $52.2 million or 71% compared to net income of $73.4 million,
or $3.67 per share, reported for 2008. Higher funding costs on the Company
recent funding transactions decreased net interest income by $123.6 million for
2009 as compared to 2008. However, other factors, including gains on
loans sold to the Department through the Purchase Program, operating expense
reductions, and the positive impacts of improved market conditions on the
Company’s assets measured at fair value, more than offset the decrease in net
interest income.
The
Company’s managed student loan portfolio grew by $0.8 billion or 2% to $42.9
billion during 2009. The managed portfolio includes $28.3 billion of
the Company’s owned loan assets and $14.6 billion of loans serviced on behalf of
securitization trusts or other lenders. Originations for the year
ended December 31, 2009 included FFEL Program Stafford and PLUS loan
originations of $5.8 billion, up modestly compared with the $5.7 billion
originated in 2008. The Company also made new CitiAssist loan
commitments of $1.2 billion during 2009, which was 29% lower than 2008
reflecting a more targeted origination strategy.
11
2010
Expectations
A dynamic
regulatory environment and ongoing uncertainty in the capital markets are
expected to make 2010 another challenging year. The Company will need
to take full advantage of its core strengths, including its relationships with
schools and universities and its capital market experience, to ensure its
continued success.
The
Company’s Amended and Restated Omnibus Credit Agreement provides funding through
December 30, 2010, however the cost of funding under this agreement is
significantly higher than the borrowings that are expected to mature over the
next twelve months. This will further compress the Company’s net
interest margin. Unless the Company is able to identify and implement other
funding alternatives, maturing borrowings will need to be replaced with new
borrowings under this agreement at higher rates. In addition, before the end of
2010, the Company will need to negotiate an extension to this agreement with
CBNA or enter into one or more alternative funding arrangements in order to
maintain adequate liquidity in 2011.
The
Amended and Restated Omnibus Credit Agreement also contains a provision that if
a change of control were to occur which results in an entity other than CBNA or
its affiliates owning more than 50% of the voting equity interest in the
Company, all outstanding borrowings under the Original Omnibus Credit Agreement
and all new borrowings under the Amended and Restated Omnibus Credit Agreement
would become due and payable immediately. The Company is part of a
group of businesses within Citigroup, referred to as Citi Holdings.
Citigroup intends to exit these businesses as quickly as practicable, yet
possible in an economically rational manner through business divestitures,
portfolio run-off and asset sales. The Company’s management is
currently working with Citi Holdings to provide information necessary to support
Citi Holdings’ efforts to explore possible disposition and
combination alternatives with regard to its ownership in the Company.
See Liquidity and Capital Resources on page 33 for
additional details.
High
unemployment rates are expected to persist throughout 2010. This situation is
expected to result in an increase in credit losses in 2010. In addition, in view
of the current regulatory envirnoment, the Company is likely to implement
changes to the Company’s private education loan loss mitigation programs,
including, among other things, that participation by borrowers in private
education loan forbearance and loss mitigation programs be subject to more
rigorous requirements, that shorter forbearance periods be granted and that
minimum periods of payment performance be required between grants of
forbearance. The Company expects that these changes, when implemented, will
materially increase net credit losses attributable to private education
loans.
Legislative
changes may also impact the FFEL Program during 2010. The Participation and
Purchase Programs are currently only available for FFEL Program Stafford and
PLUS loan originations for the remainder of the 2009 – 2010 academic year.
Without an extension of these programs, the Company will find it difficult to
continue to offer FFEL Program loans. In addition, the Obama administration
continues to advocate for the elimination of the FFEL Program. In September
2009, the House of Representatives approved a bill which, among other things,
would eliminate the FFEL Program. The Senate has not yet introduced a
companion bill. If legislation currently proposed or similar
legislation is passed into law this could have a material adverse effect on the
Company’s financial condition and results of operations. See Legislation and Regulations on
page 38 for additional information about the proposals.
12
Finally,
accounting changes will have a significant impact on the Company’s Consolidated
Financial Statements starting January 1, 2010 and will result in the
reconsolidation of $14.1 billion of student loan assets, including related
deferred origination and premium costs, that were sold to securitization trusts
during 2004 through 2008. These securitization trusts hold loans with relatively
higher yields than the Company’s on-balance sheet portfolio and generally carry
a lower cost of funds than the Company’s on-balance sheet borrowings. As a
result, although the accounting changes do not impact the economic substance of
these securitization transactions, the changes will result in an increase in net
interest income during 2010. See Accounting Changes and Future
Application of Accounting Standards on page 13 for more information
regarding the impact of these changes.
The
Student Loan Corporation remains committed to providing unparalleled solutions
to help students and their families finance the education of their choice.
Although it is difficult to predict the outcome of any of these uncertainties,
the Company will continue to work proactively to address each of these
challenges as 2010 unfolds.
Accounting
Changes and Future Application of Accounting Standards
The
Company’s earnings have historically been impacted by valuation changes on its
subordinated residual interests (i.e., interest-only strips), servicing rights
and, in certain cases, subordinated notes issued by the trusts (collectively,
retained interests) from off-balance sheet securitizations. The fair
value of the Company’s retained interests fluctuates based on factors such as
current and expected future interest rate changes, prepayment and default rates
and regulatory changes. Other factors that have historically affected
earnings include loan servicing revenue and loan servicing costs, the
effectiveness of the Company’s economic hedges, changes in applicable laws and
regulations, alternative financing options available to students and their
parents, competition, and overall economic conditions.
As a
result of accounting changes effective January 1, 2010, the Company’s future
securitizations will likely all be accounted for as secured
borrowings. The accounting changes will also result in the
consolidation of assets previously sold to unconsolidated securitization
entities and debt issued by those entities, and the elimination of retained
interests, all of which affect the Company’s financial position. The
accounting changes will impact the Company’s results of operations beginning in
2010 in two ways. First, the Company will no longer recognize gains
or losses on securitization transactions when they are executed or when retained
interests are subsequently remeasured at fair value. Second, the
Company will begin to recognize in its financial statements the net interest
income of these trusts along with loan loss provisions, mark-to-market gains and
losses on derivatives held by the trusts and trust operating
expenses.
13
The
Company’s adoption of these accounting standards updates and the associated
reconsolidation of its off-balance sheet securitization trusts on January 1,
2010 will result in a net increase in its assets and liabilities of
approximately $13.6 billion and $14.0 billion, respectively. The
$13.6 billion of assets reflects the reconsolidation of $14.6 billion of loan
assets, deferred origination and premium costs and other trust assets, less the
elimination of previously recognized retained interests. In addition,
the cumulative effect of adopting these new accounting standards updates as of
January 1, 2010, is an aggregate after- tax charge to retained earnings of
approximately $0.4 billion. This includes a pretax charge of
approximately $0.6 billion primarily related to the establishment of deferred
origination costs and loan loss reserves and the reversal of retained interests
held as well as a decrease in related deferred tax liabilities of approximately
$0.2 billion.
Historically,
the majority of the Company’s derivative financial instruments were interest
rate derivative and option agreements. The interest rate derivatives
were used in an effort to manage the interest rate risk inherent in the retained
interests in the Company’s off-balance sheet securitizations. The option
agreements were designated as economic hedges to the floor income component of
the residual interests. The Company closed out of these derivative
positions during the fourth quarter of 2009 in anticipation of the accounting
changes described above, which result in the consolidation of the Company’s
previously unconsolidated securitizations and elimination of the related
retained interests being hedged.
See Notes
1 and 2 to the Consolidated Financial Statements for additional discussion of
accounting changes and future applications of accounting standards.
Critical
Accounting Estimates
Certain
accounting estimates made by management are considered to be important to the
determination of the Company’s consolidated financial condition. Since
management is required to make difficult, complex or subjective judgments and
estimates, actual results could differ, possibly materially, from those
estimates. The most significant of these critical estimates and judgments are
those used to account for student loan securitizations, the value of related
retained interests, allowance for loan losses and loans held for
sale. See the Notes to the Consolidated Financial Statements for more
information on the Company’s accounting estimates.
Retained
interests in off-balance sheet student loan securitizations
Fair
value measurements of the Company’s retained interests in its off-balance sheet
securitizations have been performed using discounted cash flow
models. Key assumptions used to measure the fair value of retained
interests include discount rate, basis spreads between the Company’s interest
earning assets (primarily based on CP, the prime rate, or the 91-day Treasury
Bill rate) and its funding costs (primarily based on LIBOR), anticipated net
credit loss rate, anticipated prepayment rates and projected borrower benefit
utilization rates. These assumptions are subject to change due to
various factors such as regulatory changes, fluctuations in market conditions
and borrower behavior.
14
Accounting
changes that are effective January 1, 2010, will result in the consolidation of
assets previously sold to unconsolidated securitization entities and the
elimination of these retained interests. See Accounting Changes and Future
Application of Accounting Standards on page 13 and Note 2 to the
Consolidated Financial Statements for additional information on these accounting
changes.
Allowance
for loan losses
The
allowance provides a reserve for estimated losses inherent in the Company’s loan
portfolio. Loss guarantees from the U.S. Government or private insurance
coverage partially mitigate the Company’s exposure to loan losses. The allowance
is established based on amounts of estimated probable losses inherent in the
Company’s FFEL Program and private education loan portfolios. Losses are
estimated from historical delinquency and credit loss experience, which are
updated for recent performance and then applied to the current aging of the
portfolio.
Government
risk-sharing provisions applicable to FFEL Program loans, changes in the quality
of loans moving into repayment, the effectiveness of loss mitigation programs
including forbearance, the economic environment, and changes in the Company’s
collections strategies could impact delinquency rates and credit loss rates. To
the extent that future changes in any of these factors differ materially from
the Company’s current estimates, further changes in the allowance for loan
losses may result. For more information on the allowance for loan losses, see
Notes 1 and 4 to the Consolidated Financial Statements.
Private
education student loan forbearance policies at banks and other financial
institutions, including The Student Loan Corporation, are subject to various
regulatory requirements. In review of the current regulatory
environment, the Company is likely to implement changes to the Company’s
private education loan loss mitigation programs including, among other things,
that participation by borrowers in private education loan forbearance and loss
mitigation programs be subject to more rigorous requirements, that shorter
forbearance periods be granted and that minimum periods of payment performance
be required between grants of forbearance. The Company expects that these
changes, when implemented, will materially increase net credit losses
attributable to private education loans.
Loans
held for sale
Loans
that the Company plans to include in off-balance sheet securitization or sale
transactions, including loans that the Company originates in anticipation of
sale under the Purchase Program are originated into loans held for
sale. Management continually assesses its future securitization and
loan sale plans and may transfer loans or record loans directly into the held
for sale portfolio to meet the Company’s anticipated near term sale and
securitization requirements. These loans are recorded at the lower of cost,
consisting of principal and deferred costs, or fair value. As the
cost of certain loans held for sale are transferred back into the operating loan
portfolio and the fair value exceeds the carrying value of the loan, the Company
records lower of cost or fair value write down.
15
Consolidated
Financial Condition and Results of Operations
Financial
Condition
Loans
At
December 31, 2009, the Company’s student loan assets, including deferred costs,
were comprised of FFEL Program loans, private education loans and an inventory
of Federal Stafford and PLUS loans held for sale. See Note 4 to the Consolidated
Financial Statements for a presentation of the loan portfolio by program
type.
Balances
related to the Company’s owned and managed loan portfolios are summarized
below:
Ending
Balances
|
||||||||
(Dollars
in millions)
|
December
31, 2009
|
December
31, 2008
|
||||||
Owned
loans
|
$ | 28,339 | $ | 25,643 | ||||
Managed
loans
|
42,938 | 42,107 |
Year
to Date Average Balances
|
||||||||
(Dollars
in millions)
|
December
31, 2009
|
December
31, 2008
|
||||||
Owned
loans
|
$ | 27,804 | $ | 24,316 | ||||
Managed
loans
|
43,560 | 39,938 |
The table
below shows the aggregate activity in the Company’s loan
portfolios:
(Dollars
in millions)
|
2009
|
2008
|
||||||
Balance
at beginning of period
|
$ | 25,643 | $ | 22,034 | ||||
FFEL
Program Stafford and PLUS Loan disbursements
|
5,751 | 5,737 | ||||||
Private
education loan purchases from CBNA
|
1,844 | 1,326 | ||||||
Secondary
market and other loan procurement activities
|
71 | 844 | ||||||
Loan
reductions (1)
|
(1,827 | ) | (2,004 | ) | ||||
Loan
sales, including deferred costs
|
(2,997 | ) | (132 | ) | ||||
Loan
securitizations, including deferred costs
|
– | (2,064 | ) | |||||
Deferred
costs and other adjustments
|
(146 | ) | (98 | ) | ||||
Balance
at end of period
|
$ | 28,339 | $ | 25,643 | ||||
(1)
|
Loan
reductions are attributable primarily to borrower principal payments, loan
defaults and loan
consolidations.
|
16
Loan
Disbursements and Procurement Activity
The
Company makes loans through the retail and wholesale channels. The retail
channel represents loan activity initiated through the Company’s relationships
with colleges and universities. The majority of the Company’s new
FFEL Program Stafford and PLUS loan and school-certified private education loan
originations are initiated through the efforts of the Company’s retail sales
force. The Company originates the remaining portion of such originations
by marketing directly to students and their families, for example, through
direct mail, email and online advertising campaigns. In previous years,
the Company also originated FFEL Program and private education loan
consolidations through direct marketing to consumers. The wholesale
channel, which accounts for a small fraction of the Company’s new loan
originations, represents loan activity initiated outside of the retail channel,
such as purchases of loans originated by other lenders under loan purchase
commitments.
Details
of the Company’s origination activity are presented in the table
below:
(Dollars
in millions)
|
2009
|
2008
|
Difference
|
%
Change
|
||||||||||||
Retail:
|
||||||||||||||||
FFEL
Program Stafford and PLUS Loan originations
|
$ | 5,751 | $ | 5,737 | $ | 14 | 0 | % | ||||||||
CitiAssist
loans disbursed under commitments to purchase(1)
|
1,248 | 1,759 | (511 | ) | (29 | )% | ||||||||||
Total
Retail
|
6,999 | 7,496 | (497 | ) | (7 | )% | ||||||||||
Wholesale:
|
||||||||||||||||
Loan
consolidation and other secondary market volume (2)
|
71 | 844 | (773 | ) | (92 | )% | ||||||||||
Total
Originations
|
$ | 7,070 | $ | 8,340 | $ | (1,270 | ) | (15 | )% | |||||||
(1)
|
Represents
CitiAssist loans disbursed by CBNA. These loans have been or will be
purchased by the Company after final
disbursement.
|
(2)
|
Approximately
half of the 2008 volume represents consolidations of student loans already
held in the Company’s loan
portfolio.
|
The
Company’s FFEL Program loan originations for the year ended December 31, 2009
were slightly higher than originations for the same period in 2008, reflecting
the withdrawal of many lenders from the FFEL Program and overall growth in the
marketplace, offset by schools moving from the FFEL Program to the Department’s
Direct Lending Program and the expansion of preferred lender lists to comply
with regulatory requirements and concerns. See Legislation and Regulations on
page 38 for further details.
17
CitiAssist
loan commitments in 2009 are significantly lower than 2008, primarily reflecting
the Company’s refined origination strategy which included, among other things,
changes to its underwriting standards. These changes resulted in the
discontinuation of Uninsured CitiAssist Custom Loan programs and significantly
reduced the volume of originations at certain schools.
In order
to comply with certain legal and regulatory requirements, private education
loans are originated by CBNA through an intercompany agreement. After
final disbursement, the Company purchases the loans from CBNA. At
December 31, 2009 and December 31, 2008, the private education loans disbursed
and still held by CBNA were $0.4 billion and $1.0 billion,
respectively.
Historically,
loans were not specifically purchased or originated for resale, and accordingly
were recorded in the Company’s portfolio. However, certain FFEL
Program loans originated since the fourth quarter of 2008 were originated with
the intent of selling to the Department under the Purchase Program and,
accordingly, have been recorded directly into the held for sale
portfolio. At December 31, 2009, $2.4 billion of loans were
classified as held for sale.
Allowance
for loan losses
The
Company develops its allowance for loan losses using four segments: FFEL
Program, Insured CitiAssist, Uninsured CitiAssist Standard and Uninsured
CitiAssist Custom. Uninsured CitiAssist Standard is primarily
composed of CitiAssist loans that have been approved based on standard
underwriting criteria similar to Insured CitiAssist and were originated on or
after January 1, 2008. Uninsured CitiAssist Custom is primarily
composed of loans made to non-traditional students or loans with less stringent
underwriting standards. The Company no longer originates Uninsured
CitiAssist Custom loans.
Although
the Company evaluates the adequacy of its allowance for loan losses using four
segments, the entire allowance for loan losses is available to absorb credit
losses from any segment of the Company’s owned loans. The allowance for loan
losses includes all losses at each reporting period that are both probable and
estimable. However, no assurance can be provided that the allowance for loan
losses will be adequate to cover all losses that may in fact be realized in the
future, or that a higher reserve for loan losses will not be
required. For a full understanding of the methodology used to
calculate allowance for loan losses, see Note 1 to the Consolidated Financial
Statements.
The
Company’s allowance for loan losses at December 31, 2009 increased by $38.8
million compared to December 31, 2008. This increase is largely due
to continued deterioration in the economic environment, higher loan balances,
seasoning of the portfolio as more loans entered repayment and the impact of
implementing forbearance and loss mitigation policy changes as a result of the
current regulatory environment.
18
The
provision for loan losses for the year ended December 31, 2009 was virtually
unchanged from 2008 as the impact of economic deterioration and portfolio
seasoning in 2009 was similar in size to the loan loss build associated with the
Uninsured CitiAssist Custom segment of the Company’s portfolio in
2008.
The
Company’s December 31, 2009 allowance for loan losses and related provision
include $3.0 million related to the impact of implementing forbearance and loss
mitigation policy changes. These changes would result in, among other
things, more rigorous requirements for participation in private education loan
forbearance and loss mitigation programs, shorter forbearance periods and the
requirement for minimum periods of payment performance between forbearance
grants. When fully adopted, these policy changes are expected to
result in materially higher credit losses and related allowance for loan losses
beginning in 2010.
Charge-offs
increased by $35.6 million for the year ended December 31, 2009 compared to 2008
primarily due to seasoning of the CitiAssist portfolios as more loans entered
repayment and prevailing economic conditions, including the high unemployment
rate. The Company expects charge-offs will continue to increase as a
result of the continued seasoning of the portfolios, credit deterioration across
all portfolios and the impact of implementing forbearance and loss mitigation
policy changes as a result of the current regulatory
environment.
19
An
analysis of the allowance for loan losses and its components is presented in the
table below:
(Dollars
in thousands)
|
2009
|
2008
|
2007
|
|||||||||
Balance
at beginning of period
|
||||||||||||
FFEL
Program
|
$ | 14,445 | $ | 12,312 | $ | 6,911 | ||||||
Insured
CitiAssist
|
8,512 | 3,214 | 721 | |||||||||
Uninsured
CitiAssist Standard
|
11,891 | – | – | |||||||||
Uninsured
CitiAssist Custom
|
75,481 | 26,589 | 6,565 | |||||||||
$ | 110,329 | $ | 42,115 | $ | 14,197 | |||||||
Provision
for loan losses
|
||||||||||||
FFEL
Program
|
$ | 20,528 | $ | 17,396 | $ | 15,458 | ||||||
Insured
CitiAssist
|
24,466 | 14,051 | 6,036 | |||||||||
Uninsured
CitiAssist Standard
|
28,675 | 12,138 | – | |||||||||
Uninsured
CitiAssist Custom
|
67,183 | 97,310 | 38,426 | |||||||||
$ | 140,852 | $ | 140,895 | $ | 59,920 | |||||||
Charge
offs
|
||||||||||||
FFEL
Program
|
$ | (12,783 | ) | $ | (12,622 | ) | $ | (8,403 | ) | |||
Insured
CitiAssist
|
(15,796 | ) | (8,753 | ) | (3,543 | ) | ||||||
Uninsured
CitiAssist Standard
|
(9,499 | ) | (247 | ) | – | |||||||
Uninsured
CitiAssist Custom
|
(78,121 | ) | (58,996 | ) | (24,099 | ) | ||||||
$ | (116,199 | ) | $ | (80,618 | ) | $ | (36,045 | ) | ||||
Recoveries
|
||||||||||||
FFEL
Program
|
$ | – | $ | – | $ | – | ||||||
Insured
CitiAssist
|
– | – | – | |||||||||
Uninsured
CitiAssist Standard
|
150 | – | – | |||||||||
Uninsured
CitiAssist Custom
|
13,966 | 10,578 | 5,697 | |||||||||
$ | 14,116 | $ | 10,578 | $ | 5,697 | |||||||
Other
(1)
|
||||||||||||
FFEL
Program
|
$ | – | $ | (2,641 | ) | $ | (1,654 | ) | ||||
Insured
CitiAssist
|
– | – | – | |||||||||
Uninsured
CitiAssist Standard
|
– | – | – | |||||||||
Uninsured
CitiAssist Custom
|
– | – | – | |||||||||
$ | – | $ | (2,641 | ) | $ | (1,654 | ) | |||||
Balance
at end of period
|
||||||||||||
FFEL
Program
|
$ | 22,190 | $ | 14,445 | $ | 12,312 | ||||||
Insured
CitiAssist
|
17,182 | 8,512 | 3,214 | |||||||||
Uninsured
CitiAssist Standard
|
31,217 | 11,891 | – | |||||||||
Uninsured
CitiAssist Custom Programs
|
78,509 | 75,481 | 26,589 | |||||||||
$ | 149,098 | $ | 110,329 | $ | 42,115 | |||||||
(1)
|
Represents
adjustments to the reserve for loans sold, securitized or reclassified as
held-for-sale.
|
20
Private Education Loan
Losses
The
Company’s private education loan portfolio is not guaranteed by the federal
government. Although private education loans do not carry a federal government
guarantee, 58% of the outstanding balances of these loans carry private
insurance through United Guaranty Commercial Insurance Company of North Carolina
and New Hampshire Insurance Company (UGCIC/NHIC), and 2% of the outstanding
balances are insured through Arrowood Indemnity Company
(Arrowood). UGCIC/NHIC are subsidiaries of American International
Group (AIG). Arrowood is a wholly owned subsidiary of Arrowpoint
Capital Corporation (Arrowpoint).
These
insurance providers insure the Company against a portion of losses arising from
borrower loan default, bankruptcy or death. Under the Arrowood
program, private education loans submitted for default claim are generally
subject to a risk-sharing deductible of 5% of the outstanding principal and
accrued interest balances. Under the UGCIC/NHIC program, default claims are
generally subject to risk-sharing deductibles between 10% and 20% of
the outstanding principal and accrued interest balances.
From 2003
through 2007, UGCIC/NHIC insured the Company for maximum portfolio losses
ranging from 12.5% to 13.5% over the life of the loans. The Company
is exposed to 100% of losses that exceed these thresholds. For loans
insured during 2005 and 2006, the insurance premium is calculated under an
experience-rated plan, which may require additional premium payments of up to
$58.2 million in order to maintain insurance coverage for these loans if the
loss limits exceed the established parameters. If parameters are
exceeded in 2010, payments would be required beginning in 2011. The
Company ceased insuring new CitiAssist Standard loans in January
2008.
At
December 31, 2009, NHIC was rated A+/ Negative by Standard & Poor’s and
Aa3/Negative by Moody’s. UGCIC is no longer rated. On February 24,
2009, Moody’s withdrew its rating of both UGCIC and its parent citing business
reasons, which Moody’s defines as reasons unrelated to bankruptcy,
reorganization status or adequacy of information. AIG, the
parent company of UGCIC and NHIC, continues to receive financial support from
the US Treasury and the Federal Reserve Bank in support of its financial
difficulties. AIG is in the process of restructuring the company. Although,
UGCIC and NHIC continue to make claim payments as agreed, any failure of AIG, or
sale or restructuring of UGCIC/NHIC, could have an adverse impact on the
Company’s financial condition and results of operations as it relates to the
Company’s UGCIC/NHIC insured loan portfolio.
21
From 1997
to 2002, the Company purchased private insurance from RSAUSA. RSAUSA
decided to exit the U.S. market and sold RSAUSA in 2007 to Arrowpoint, a company
owned and operated by their management and independent
directors. Arrowpoint is being operated in a run-off mode and it is
no longer generating new business. Arrowpoint’s stated business
objective is to meet policy holder obligations and profitably wind-down the
business. As part of the purchase, Arrowpoint agreed to certain
operating restrictions and the appointment of a claims monitor to protect policy
holders. Arrowood is making claim payments on a regular
basis. Neither Arrowpoint nor Arrowood is rated. Any
failure of either could have an adverse impact on the Company’s financial
condition and results of operations as it relates to the Company’s Arrowood
insured loan portfolio.
Information
on private education loans, including delinquency and insurance coverage, are
shown in the table below:
December
31, 2009
|
December
31, 2008
|
||||||||||||||||||||||||||||||
(Dollars
in thousands)
|
Insured
|
Uninsured
Standard
|
Uninsured
Custom
|
Total
|
Insured
|
Uninsured
Standard
|
Uninsured
Custom
|
Total
|
|||||||||||||||||||||||
Total
private education loans
|
$ | 4,408,479 | $ | 2,000,260 | $ | 1,023,732 | $ | 7,432,471 | $ | 4,541,439 | $ | 409,686 | $ | 910,420 | $ | 5,861,545 | |||||||||||||||
Private
education loans in repayment
|
2,752,005 | 501,365 | 694,630 | 3,948,000 | 2,183,558 | 181,384 | 587,634 | 2,952,576 | |||||||||||||||||||||||
Private
education loans in forbearance
|
273,839 | 84,470 | 56,978 | 415,287 | 213,479 | 26,402 | 40,265 | 280,146 | |||||||||||||||||||||||
Percent
of private education loans in repayment that are delinquent 30 - 89
days
|
2.3 | % | 1.9 | % | 4.1 | % | 2.5 | % | 2.3 | % | 1.0 | % | 4.2 | % | 2.6 | % | |||||||||||||||
Percent
of private education loans in repayment that are delinquent 90 days or
more
|
1.9 | % | 0.4 | % | 1.2 | % | 1.6 | % | 1.6 | % | 0.1 | % | 1.2 | % | 1.4 | % | |||||||||||||||
Allowance
for loan losses
|
$ | 17,182 | $ | 31,217 | $ | 78,509 | $ | 126,908 | $ | 8,512 | $ | 11,891 | $ | 75,481 | $ | 95,884 | |||||||||||||||
Private
education loans covered by risk-sharing agreements with
schools
|
– | – | 482,423 | 482,423 | – | – | 474,481 | 474,481 | |||||||||||||||||||||||
Year-to-date
average of private education loans in repayment
|
2,372,212 | 273,478 | 600,392 | 3,246,082 | 1,639,070 | 103,025 | 494,416 | 2,236,511 | |||||||||||||||||||||||
Year-to-date
average of private education loans in repayment and
forbearance
|
2,655,263 | 319,543 | 656,031 | 3,630,837 | 1,840,280 | 116,403 | 528,241 | 2,484,924 | |||||||||||||||||||||||
Year-to-date
net credit losses as a percentage of average loans in
repayment
|
0.7 | % | 3.4 | % | 10.7 | % | 2.8 | % | 0.5 | % | 0.2 | % | 9.8 | % | 2.6 | % | |||||||||||||||
Year-to-date
net credit losses as a percentage of average loans in repayment and
forbearance
|
0.6 | % | 2.9 | % | 9.8 | % | 2.5 | % | 0.5 | % | 0.2 | % | 9.2 | % | 2.3 | % | |||||||||||||||
Allowance
as a percentage of total loan balance
|
0.4 | % | 1.6 | % | 7.7 | % | 1.7 | % | 0.2 | % | 2.9 | % | 8.3 | % | 1.6 | % | |||||||||||||||
Allowance
as a percentage of total loans in repayment
|
0.6 | % | 6.2 | % | 11.3 | % | 3.2 | % | 0.4 | % | 6.6 | % | 12.8 | % | 3.3 | % | |||||||||||||||
Allowance
coverage of annualized year-to-date net credit losses (in
years)
|
1.1 | 3.3 | (1) | 1.2 | 1.4 | 1.0 | 48.1 | (1) | 1.6 | 1.7 |
(1)
|
The
Company began originating loans in this portfolio in January 2008, so few
loans have entered repayment. Accordingly, the amount of net
credit losses is disproportionately low relative to the allowance for loan
losses, which includes an allowance for loans not yet in
repayment.
|
22
Forbearance
usage and delinquency rates generally increased between December 31, 2008 and
December 31, 2009. The increase is primarily due to prevailing
economic conditions, including the high unemployment rate. The table
below shows the composition and status of the private education loan portfolio
by number of months in repayment. The economic conditions are
affecting new and established repayment borrowers. At December 31,
2009, approximately 19% of the loans that have been in repayment less than 12
months are either in forbearance or greater than 30 days delinquent, compared
with 16% at December 31, 2008. A similar trend is also evident for
loans that have been in repayment for 25 months or more, with the percentages at
8% and 6% at December 31, 2009 and December 31, 2008,
respectively. The Company expects these trends to continue for at
least the next twelve months and has increased its allowance for loan loss
reserves accordingly.
December
31, 2009
|
||||||||||||||||||||
(Dollars
in thousands)
|
Months
in Repayment
|
Not
in Repayment
|
Total
|
|||||||||||||||||
0 – 12 | 13 – 24 | 25 | + | |||||||||||||||||
Loans
in-school/grace/deferment
|
$ | – | $ | – | $ | – | $ | 3,069,184 | $ | 3,069,184 | ||||||||||
Loans
in forbearance
|
267,028 | 82,267 | 65,992 | – | 415,287 | |||||||||||||||
Loans
in repayment - < 30 days
|
1,304,954 | 1,130,137 | 1,368,145 | – | 3,803,236 | |||||||||||||||
Loans
in repayment – delinquent 30-59 days
|
21,728 | 22,053 | 20,921 | – | 64,702 | |||||||||||||||
Loans
in repayment – delinquent 60-89 days
|
9,400 | 11,375 | 14,250 | – | 35,025 | |||||||||||||||
Loans
in repayment – delinquent 90+ days
|
10,300 | 16,655 | 18,082 | – | 45,037 | |||||||||||||||
Total
|
$ | 1,613,410 | $ | 1,262,487 | $ | 1,487,390 | $ | 3,069,184 | $ | 7,432,471 |
December
31, 2008
|
||||||||||||||||||||
(Dollars
in thousands)
|
Month
in Repayment
|
Not
in Repayment
|
Total
|
|||||||||||||||||
0 – 12 | 13 – 24 | 25 | + | |||||||||||||||||
Loans
in-school/grace/deferment
|
$ | – | $ | – | $ | – | $ | 2,628,822 | $ | 2,628,822 | ||||||||||
Loans
in forbearance
|
200,931 | 57,142 | 22,073 | – | 280,146 | |||||||||||||||
Loans
in repayment - < 30 days
|
1,317,080 | 802,003 | 726,313 | – | 2,845,396 | |||||||||||||||
Loans
in repayment – delinquent 30-59 days
|
22,726 | 17,415 | 11,549 | – | 51,690 | |||||||||||||||
Loans
in repayment – delinquent 60-89 days
|
9,626 | 7,948 | 6,980 | – | 24,554 | |||||||||||||||
Loans
in repayment – delinquent 90+ days
|
10,658 | 10,698 | 9,581 | – | 30,937 | |||||||||||||||
Total
|
$ | 1,561,021 | $ | 895,206 | $ | 776,496 | $ | 2,628,822 | $ | 5,861,545 |
Forbearance
is a key collection tool for borrowers experiencing temporary financial
difficulties who need a little time to resolve the difficulties and are willing
to resume making payments. Currently, CitiAssist borrowers are
generally limited to 12 months of cumulative forbearance time over the life of
the loan. Borrower performance after using forbearance is monitored
and the tool has proven to be effective in helping to prevent
defaults.
23
The table
below reflects the effectiveness of using forbearance by tracking performance of
accounts that were granted forbearance in 2006. Over 75% of the loans
after at least 3 years since receiving forbearance are either in repayment
status or have paid in full.
In-school
/ Grace / Deferment
|
Repayment
|
Forbearance
|
Defaulted
|
Paid
|
Total
|
30 | + % | 90 | + % | |||||||||||||||||||||||
Forbearance
for the 1st
time in 2006
|
9.7 | % | 56.5 | % | 1.6 | % | 13.0 | % | 19.1 | % | 100 | % | 3.3 | % | 1.0 | % |
Private
education student loan forbearance policies at banks and other financial
institutions, including The Student Loan Corporation, are subject to various
regulatory requirements. See Allowance for
Loan Losses on page 18 for further details.
Another
default prevention tool offered to help private loan borrowers is an interest
only payment plan. As of December 31, 2009, approximately $0.8
billion, or 19% of CitiAssist loans are using this repayment option. In
view of the current regulatory envirnoment, the Company is likely
to implement changes to this requirement option currently available to
private student loan borrowers.
The
Company stopped originating new Uninsured Custom loans in November
2008. The increase in the loan balance to $1.0 billion at December
31, 2009 from $0.9 billion at December 31, 2008 is due to the purchase of loans
from CBNA in 2009 after final disbursements. The Uninsured Custom
loans at December 31, 2009 include $193.9 million of higher risk loans made to
students attending proprietary schools. Most of these Uninsured
Custom loans did not follow the Company’s standard underwriting
process. Approximately 50% of the Uninsured Custom loans are covered
by risk-sharing agreements with higher education institutions. Under these
programs, the institution assumes a portion of the Company’s credit exposure for
the covered loans. The risk-sharing agreements generally take one of two forms:
i) the school reimburses the Company for a specified percentage of losses of 50%
to 100% when the losses exceed an agreed upon threshold ranging from 0% to 100%,
or ii) the school pays 8% to 50% of the total disbursed amount to compensate for
future expected losses. Although this reduces the Company’s overall
risk, these programs generally transfer less risk away from the Company than
private insurance coverage.
24
Results
of Operations
Factors
Affecting Net Interest Income
Net
Interest Margin Spread Analysis
A net
interest margin spread analysis for the Company’s on-balance sheet portfolio is
as follows:
2009
|
2008
|
Favorable
(Unfavorable) Change
|
||||||||||
Student
loan yield
|
3.00 | % | 5.24 | % | (2.24 | %) | ||||||
Consolidation
loan rebate fees
|
(0.23 | )% | (0.27 | )% | 0.04 | % | ||||||
Accreted
interest on residual interests
|
0.24 | % | 0.26 | % | (0.02 | )% | ||||||
Amortization
of deferred loan origination and purchase costs
|
(0.30 | )% | (0.39 | )% | 0.09 | % | ||||||
Net
yield
|
2.71 | % | 4.84 | % | (2.13 | %) | ||||||
Cost
of funds(1)
|
(1.75 | )% | (3.53 | )% | (1.78 | )% | ||||||
Net
interest margin
|
0.96 | % | 1.31 | % | (0.35 | %) | ||||||
|
(1)
|
Cost
of funds was calculated by dividing interest expense by average interest
bearing assets.
|
The
Company’s net interest margin is affected by a variety of factors, including the
interest rate environment, regulatory actions and competition. The Company’s
student loan yield is either based on CP or Treasury rates (FFEL Program loans)
or the prime rate (private education loans) plus an incremental credit
premium. The Company has the ability to set credit premiums on its
private education loans to reflect current market conditions at
origination. However, credit premiums earned on FFEL Program loans
are prescribed under the Higher Education Act. The CCRA Act reduced the yield on
new loans originated on or after October 1, 2007. The impact of this
reduction will grow over time as the amount of loans originated after October 1,
2007 increases relative to the Company’s overall portfolio.
In
contrast, the Company’s cost of funds is primarily based on three month LIBOR
plus an incremental credit premium. LIBOR rates on the Company’s debt
reset periodically while credit premiums are fixed based on market rates at the
time of borrowing.
25
The
Company’s net interest margin decreased by 35 basis points for the year ended
December 31, 2009 compared to 2008. The decrease in margin was attributable to
decreases in the student loan yield that exceeded decreases in the Company’s
cost of funds. The yield on the Company’s student loan assets decreased
primarily due to an overall decline in interest rates, but was also affected by
a dislocation experienced during the first half of the year between the indices
used to calculate a significant amount of the Company’s interest revenue (CP and
Prime) and LIBOR, the index used to determine most of the Company’s interest
expense. Although the spread between CP and LIBOR during most of 2009 was higher
than the historical average, by the end of 2009, the spread had reverted to the
historical long-term average. This dislocation decreased net interest
income by $29.9 million or 10 basis points for the year ended December 31, 2009
as compared to 2008. In September 2009, H.R. 3221, the Student Aid and Fiscal
Responsibility Act of 2009, was approved by the House. This
Act, among other things, attempts to provide a solution for the net interest
margin compression experienced by the Company and other holders of FFEL Program
loans as a result of any divergence between CP and LIBOR. The
provision, if enacted into law, would allow holders to elect to use, for
calendar quarters beginning January 1, 2010, the 1-month LIBOR index in lieu of
the current 90-day CP index. See Legislation and Regulations on
page 38 for further details.
The
Company’s cost of funds was also impacted by the overall decline in interest
rates. However, credit premiums are increasing as the Company
refinances maturing term debt with new long-term borrowings. During
2009, the Company obtained $5.3 billion of long-term structural liquidity
through securitization transactions with contractual maturities ranging from May
2016 through August 2043. Because pricing on the asset portfolio is
fixed at origination, these term funding transactions, as well as any future
funding transactions executed under the existing unfavorable market conditions,
will continue to have an adverse impact on net interest margin for the life of
the borrowings. For the year ended December 31, 2009, higher credit premiums as
well as the shift from one month LIBOR to longer-term base indices such as three
month LIBOR decreased the Company’s net interest income by $123.6 million or 43
basis points compared to 2008.
In an
effort to mitigate net interest margin compression, the Company continuously
refines its private education loan product pricing to reflect current market
conditions and has also reduced certain borrower incentive programs for new FFEL
Program and private education loan originations. In addition,
the Company has accessed several new sources of funding including the
Participation Program and the Conduit for FFEL Program loans and TALF
securitizations for private education loans. These new sources
provide funding that better matches the tenor of the Company’s assets at more
favorable credit premiums than alternative sources. See Legislation and Regulations on
page 38 and Liquidity and
Capital Resources on page 33, for further details.
At
December 31, 2009 and 2008, the Company’s outstanding borrowings had contractual
weighted average interest rates of 1.6% and 3.3%, respectively.
26
Average
Balance Sheet
Years
Ended December 31,
|
||||||||||||
(Dollars
in millions)
|
2009
|
2008
|
2007
|
|||||||||
Average
Balances:
|
||||||||||||
Assets
|
||||||||||||
Average
interest bearing assets
|
$ | 28,649 | $ | 25,031 | $ | 23,395 | ||||||
Average
non-interest bearing assets
|
1,558 | 1,024 | 968 | |||||||||
Total
average assets
|
$ | 30,207 | $ | 26,055 | $ | 24,363 | ||||||
Liabilities
|
||||||||||||
Average
interest bearing liabilities
|
$ | 27,812 | $ | 23,925 | $ | 22,038 | ||||||
Average
non-interest bearing liabilities
|
824 | 402 | 692 | |||||||||
Average
equity
|
1,571 | 1,728 | 1,633 | |||||||||
Total
average liabilities and equity
|
$ | 30,207 | $ | 26,055 | $ | 24,363 | ||||||
Net
Interest Income:
|
||||||||||||
Interest
income (1)
|
$ | 779 | $ | 1,212 | $ | 1,564 | ||||||
Interest
expense
|
(503 | ) | (884 | ) | (1,175 | ) | ||||||
Net interest income
(1)
|
$ | 276 | $ | 328 | $ | 389 | ||||||
Interest
Income (Expense) Average Rates:
|
||||||||||||
Interest
income/ average interest bearing assets
|
2.72 | % | 4.84 | % | 6.68 | % | ||||||
Total
interest income / total average assets
|
2.58 | % | 4.65 | % | 6.42 | % | ||||||
Interest
expense / average interest bearing assets
|
(1.76 | )% | (3.53 | )% | (5.02 | )% | ||||||
Total
interest expense / total average assets
|
(1.66 | )% | (3.39 | )% | (4.82 | )% | ||||||
Net
interest income / average interest bearing assets
|
0.96 | % | 1.31 | % | 1.66 | % |
(1) Amounts
represent interest income less interest earned on restricted cash and cash
equivalents.
Rate/Volume
Analysis
The
following table shows the contribution to year-over-year changes in net interest
income (interest income less interest expense) due to changes in both the
weighted average balances and interest rates of loan assets and funding
liabilities:
2009
Compared to 2008
|
2008
Compared to 2007
|
|||||||||||||||||||||||
Increase
(decrease) due to change in:
|
Increase
(decrease) due to change in:
|
|||||||||||||||||||||||
(Dollars
in millions)
|
Volume
|
Rate
|
Net
|
Volume
|
Rate
|
Net
|
||||||||||||||||||
Interest
earning assets
|
$ | 177 | $ | (612 | ) | $ | (435 | ) | $ | 109 | $ | (457 | ) | $ | (348 | ) | ||||||||
Interest
bearing liabilities
|
154 | (535 | ) | (381 | ) | 101 | (392 | ) | (291 | ) | ||||||||||||||
Net
interest income
|
$ | 23 | $ | (77 | ) | $ | (54 | ) | $ | 8 | $ | (65 | ) | $ | (57 | ) |
27
2009
Compared to 2008
The
Company’s comparisons of financial highlights are as follows:
Years
Ended
December
31,
|
||||||||||||||||
(Dollars
in thousands)
|
2009
|
2008
|
Favorable
(Unfavorable) Change
|
Favorable
(Unfavorable)
%
Change
|
||||||||||||
Net
interest income
|
$ | 277,647 | $ | 331,299 | $ | (53,652 | ) | (16 | )% | |||||||
Provision
for loan losses
|
(140,852 | ) | (140,895 | ) | 43 | 0 | % | |||||||||
Gains
on loans sold and securitized
|
45,989 | 3,794 | 42,195 | 1,112 | % | |||||||||||
Fee
and other income
|
155,491 | 101,197 | 54,294 | 54 | % | |||||||||||
Operating
expenses
|
(137,851 | ) | (178,726 | ) | 40,875 | 23 | % | |||||||||
Provision
for income taxes
|
(74,752 | ) | (43,242 | ) | (31,510 | ) | (73 | )% | ||||||||
Net
income
|
$ | 125,672 | $ | 73,427 | $ | 52,245 | 71 | % | ||||||||
Total
operating expenses as a percentage of average managed student
loans
|
0.32 | % | 0.45 | % | 0.13 | % | ||||||||||
Return
on average equity
|
7.9 | % | 4.6 | % | 3.3 | % | ||||||||||
Effective
tax rates
|
37.3 | % | 37.1 | % | (0.2 | )% |
Net
interest income
Net
interest income of $277.6 million for the year ended December 31, 2009 decreased
by $53.7 million compared to 2008. This decrease reflects higher
average funding costs on new long-term secured borrowings and the dislocation
experienced during the first half of the year between CP and Prime versus
LIBOR. These decreases in net interest income were partially offset
by higher average loan balances as well as by pricing changes on the Company’s
more recent private education loan originations. Other factors which
offset the decreases in net interest income include, among other things, a more
stable interest rate environment in 2009 as compared with 2008 and lower
amortization of deferred origination and premium costs as a result of lower
origination and premium costs. The net interest margin for the year
ended December 31, 2009 was 0.96%, a 35 basis point decrease compared to the
same period in 2008. See Factors Affecting
Net Interest Income on page 25 for further information.
Provision
for loan losses
The
provision for loan losses was virtually unchanged from 2008 as the impact of
economic deterioration and portfolio seasoning in 2009 replaced the large loan
loss build in 2008 for losses inherent in the higher risk private education loan
segment of the Company’s portfolio. For a full discussion of trends
in the Company’s loan losses, see Allowance for
Loan Losses on page 18.
28
Gains
on loans sold and securitized
Gains on
loans sold and securitized of $46.0 million for the year ended December 31, 2009
increased by $42.2 million compared to the same period in 2008 reflecting gains
on loans sold to the Department under the Purchase Program.
Fee
and other income
Fee and
other income was $155.5 million for the year ended December 31, 2009 as compared
to $101.2 million for the same period of 2008. This increase
reflects a $32.5 million smaller write-down of the Company’s held for sale
portfolio. The Company also had increases in net mark-to-market gains
of $18.1 million, reflecting the benefits of market improvement on the fair
value of the Company’s retained notes, partially offset by decreases in the net
gains on the Company’s residual interests and servicing assets.
Operating
expenses
Total
operating expenses of $137.9 million for the year ended December 31, 2009 were
$40.9 million lower than the same period in 2008. The Company’s
operating expense ratio excluding restructuring and related charges for the year
ended December 31, 2009 was 0.32%, 10 basis points lower than the same period in
2008. These decreases reflect the ongoing benefits of the Company’s
repositioning efforts.
`
2008
Compared to 2007
The
Company’s comparisons of financial highlights are as follows:
Years
Ended
December
31,
|
||||||||||||||||
(Dollars
in thousands)
|
2008
|
2007
|
Favorable/
(Unfavorable) Change
|
Favorable/
(Unfavorable)
%
Change
|
||||||||||||
Net
interest income
|
$ | 331,299 | $ | 388,647 | $ | (57,348 | ) | (15 | )% | |||||||
Provision
for loan losses
|
(140,895 | ) | (59,920 | ) | (80,975 | ) | (135 | )% | ||||||||
Gains
on loans sold and securitized
|
3,794 | 111,858 | (108,064 | ) | (97 | )% | ||||||||||
Fee
and other income
|
101,197 | 36,301 | 64,896 | 179 | % | |||||||||||
Operating
expenses
|
(178,726 | ) | (179,882 | ) | 1,156 | 1 | % | |||||||||
Provision
for income taxes
|
(43,242 | ) | (111,252 | ) | 68,010 | 61 | % | |||||||||
Net
income
|
$ | 73,427 | $ | 185,752 | $ | (112,325 | ) | (60 | )% | |||||||
Total
operating expenses as a percentage of average managed student
loans
|
0.45 | % | 0.50 | % | 0.05 | % | ||||||||||
Return
on average equity
|
4.6 | % | 11.6 | % | (7.0 | )% | ||||||||||
Effective
tax rates
|
37.1 | 37.5 | % | 0.4 | % |
29
Net
interest income
Net
interest income of $331.3 million for the year ended December 31, 2008 decreased
by $57.3 million as compared to the same period in 2007. This decrease was
mainly the result of a decrease in net interest margin, offset in part by higher
average loan balances. The net interest margin for year ended December 31, 2008
was 1.31%, which was a 35 basis point decrease from the same period in 2007.
This decrease in margin is the result of an increase in the cost of funds
resulting from the refinancing of maturing term debt under less favorable
conditions, resulting in higher credit premiums over LIBOR. These higher credit
premiums decreased the Company’s net interest income by $79.7
million. Also driving this decrease was a $16.3 million reduction in
interest income due to the enactment of the CCRA Act.
Provision
for loan losses
The
increase in provision for loan losses in 2008 over 2007 reflects increased
reserves caused by the continued seasoning of the uninsured CitiAssist portfolio
as well as revised loss estimates, discontinuing the purchase of private
insurance, the bankruptcy of a for-profit school, legislative changes reducing
claim reimbursement rates on FFEL Program loans and higher loan
volumes. For a full discussion of trends in the Company’s loan
losses, see Allowance for
Loan Losses on page 18.
Gains
on loans sold and securitized
Gains on
loans sold and securitized for the year ended December 31, 2008 totaled $3.8
million, a $108.1 million decrease from the same period in 2007. Overall
degradation of market conditions, which began during 2007 and continued through
2008, virtually eliminated the market for whole loan sales and significantly
impacted the economics of securitizations.
Fee
and other income
The
increase in fee and other income was primarily due to an increase in net gains
on the Company’s derivatives and retained interests from securitizations of
$104.7 million reflecting lower than expected borrower benefit utilization and a
decline in prepayments which extended the expected life of the securitization
trusts. The increase was partially offset by a lower of cost or fair
value write down of $34.7 million taken on held for sale loans recorded in
2008. See Note 15 to the Consolidated Financial Statements for
further information regarding the retained interests in off-balance sheet
securitized assets and the effect of changes in each of the key assumptions used
to determine the fair value of the retained interests. For more information on
the Company’s derivative agreements, see Note 13 to the Consolidated Financial
Statements.
30
Operating
expenses
Total
operating expenses of $178.7 million for the twelve months ended December 31,
2008 were $1.2 million lower than 2007. Included in the 2008 and 2007
operating expenses were $12.4 million and $0.7 million, respectively of
restructuring and related charges, primarily severance, associated with the
Company’s strategic repositioning efforts. Excluding these
restructuring and related charges in both periods, operating expenses for 2008
were $12.8 million or 7% lower than the prior year. The Company’s
operating expense ratio excluding restructuring and related charges (total
operating expenses less restructuring and related charges as a percentage of
average managed student loans) for 2008 was 0.42%, eight basis points lower than
2007, reflecting the effects of the Company’s strategic realignment
activities. See Note 18 to the Consolidated Financial Statements for
further information regarding the Company’s restructuring and related
charges.
Securitization
Activity and Off-Balance Sheet Transactions
Securitization
Activity
The
Company securitizes student loans through the establishment of bankruptcy remote
trusts, which purchase loans from the Company and sell notes backed by those
loans. The Company utilizes proceeds from securitizations to assist
in funding new loan origination activities and to pay down short- and long-term
borrowings with CBNA. Securitizations that have historically qualified for sale
treatment are referred to as off-balance sheet transactions and those that have
not are recorded as financings and are included in the Company’s Consolidated
Balance Sheets. The Company generally retains a residual interest in
as well as the servicing rights on its off-balance sheet
transactions.
Accounting
changes, effective January 1, 2010, will make it more difficult for
securitizations to qualify for off-balance sheet treatment. The
accounting changes will also result in the consolidation of assets previously
sold to unconsolidated securitization entities as well as the associated notes
issued by these securitization entities and the elimination of retained
interests, all of which will affect the Company’s financial position in
2010. See Accounting
Changes and Future Application of Accounting Standards on page 13 and
Note 2 to the Consolidated Financial Statements for additional information on
the accounting changes.
The
Company completed four securitization financings during 2009, as compared to one
securitization financing and one securitization sale during 2008. The
Company’s FFEL Program loans funded through the Conduit during 2009 were also
accounted for as secured borrowings.
31
The
following table summarizes the Company’s securitization activity:
Years
Ended December 31,
|
||||||||||||
(Dollars
in thousands)
|
2009
|
2008
|
2007
|
|||||||||
Securitization
sales:
|
||||||||||||
Student
loans securitized (1)
|
$ | – | $ | 2,035,540 | $ | 2,876,812 | ||||||
Net
proceeds from student loans securitized during the
period
|
– | 1,973,207 | 2,907,581 | |||||||||
Realized
gains on loans securitized
|
– | 1,262 | 70,814 | |||||||||
Securitization
financings:
|
||||||||||||
Student
loans securitized (1)
|
$ | 6,008,203 | $ | 1,993,213 | $ | – | ||||||
Student
loans funded through the Conduit (1)
|
10,477,198 | – | – | |||||||||
Total
student loans funded through securitization financings (1)
|
$ | 16,485,401 | $ | 1,993,213 | $ | – | ||||||
Net
proceeds from student loans securitized (2)
|
$ | 5,271,234 | $ | 1,798,638 | $ | – | ||||||
Net
proceeds from student loans funded through the Conduit during the current
period (2)
|
10,389,529 | – | – | |||||||||
Total
net proceeds from securitization financings (2)
|
$ | 15,660,763 | $ | 1,798,638 | $ | – |
(1)
|
Amounts
represent the carrying value of the student loans securitized as of the
securitization date.
|
(2)
|
Amounts
represent net proceeds of loans securitized or funded through the Conduit
as of the securitization / funding
date.
|
The
difference between student loans securitized or funded through the Conduit and
the net proceeds received is largely a result of required overcollateralization,
but also reflects issuance costs and notes not issued on the date of the
securitization.
The
following table reflects balances related to all of the Company’s
securitizations:
(Dollars
in thousands)
|
December
31, 2009
|
December
31, 2008
|
||||||
Total
off-balance sheet student loans securitized (1)
|
$ | 13,896,812 | $ | 15,096,341 | ||||
Total
on-balance sheet student loans securitized (2)
|
7,649,159 | 1,890,139 | ||||||
Total
on-balance sheet student loans funded through the Conduit
|
10,060,877 | – | ||||||
Total
secured borrowings from on-balance sheet securitizations and the
Conduit
|
16,999,976 | 1,727,744 | ||||||
Residual
interests from off-balance sheet student loans securitized
|
820,291 | 942,807 | ||||||
Servicing
assets from off-balance sheet student loans securitized
|
176,587 | 208,133 |
(1)
|
Amounts
include securitized loan balances from ten off-balance sheet
securitizations as of both December 31, 2009 and December 31,
2008.
|
(2)
|
Amounts
include securitized loan balances for five on-balance sheet
securitizations as of December 31, 2009 and one as of December 31,
2008.
|
32
For
further information on the Company’s student loan securitizations, see Notes 1
and 15 to the Consolidated Financial Statements.
Other
off-balance sheet arrangements
The
Company also has credit commitments with schools and institutions which are
detailed in Sources and Uses of
Cash below, as well a foreign currency derivative agreement which is
described in Note 13 to the Consolidated Financial Statements.
Liquidity
and Capital Resources
Sources
and Uses of Cash
In
determining the appropriate mix of funding, the Company strives to balance the
competing objectives of maximizing net interest income and minimizing risk. In
an effort to manage risk, the Company seeks to match the terms of its funding
with the terms of its revenue producing assets, particularly the interest rate
characteristics (including the index on which the rate is based and the timing
of rate resets) and weighted average lives. The Company has historically relied
on two primary sources of funding, the Omnibus Credit Agreement and
securitizations. However, during 2009 the Company diversified its
sources of funding by accessing secured borrowings from the Conduit, the
Participation Program and through a TALF securitization. Also during
2009, the Company began selling eligible loans to the Department under the
Purchase Program. The Company has and will continue to shift its use
of its available sources or augment funding with additional funding sources in
response to changing market conditions.
The
following table summarizes the Company’s primary sources and uses of
cash:
Years
ended December 31,
|
||||||||||||
(Dollars
in billions)
|
2009
|
2008
|
2007
|
|||||||||
Sources
of Cash:
|
||||||||||||
Proceeds
from securitizations, net of principal repayments
|
$ | 5.0 | $ | 3.9 | (1) | $ | 4.7 | (1) | ||||
Proceeds
from secured borrowings related to the Conduit, net of principal
repayments
|
10.2 | – | – | |||||||||
Proceeds
related to the Participation and Purchase Programs, net of principal
repayments
|
4.1 | 1.0 | – | |||||||||
Proceeds
from borrowings with CBNA, net of principal repayments
|
– | 1.3 | 1.1 | |||||||||
Borrower
repayments on student loans and other loan reductions
|
1.8 | 2.0 | 3.4 | |||||||||
Uses
of Cash:
|
||||||||||||
Loan
disbursements and other procurement activities
|
$ | (7.7 | ) | $ | (7.9 | ) | $ | (8.8 | ) | |||
Repayments
of borrowings with CBNA, net of proceeds
|
(13.2 | ) | – | – |
(1)
|
Includes proceeds from whole loan sales |
33
The
Company had cash expenditures for equipment and computer software which were
primarily composed of software developed for internal use. Cash
expenditures for equipment and computer software totaled $7.6 million and $8.6
million for the years ended December 31, 2009 and 2008,
respectively.
The
Participation and Purchase Programs
The
Participation Program provides lenders with short-term liquidity for new FFEL
Program loan originations. Under the Purchase Program, the Department
purchases eligible FFEL Program loans at a price that exceeds the outstanding
principal, accrued interest and origination fees, resulting in gains on the sale
of loans. These programs are currently only available for FFEL
Program loans disbursed for the remainder of the 2009 – 2010 academic
year. As a result of the capital market dislocation experienced in
2008 and into 2009, these programs offered by ECASLA were vital for lenders of
FFEL program loans who wanted to continue to offer these products. If
continued disruption is experienced in the markets and these programs are not
extended or similar programs are not made available, student lenders, including
the Company, may find it difficult to remain in this segment of the
industry. See Legislation and Regulations on
page 38 for further details.
The
Conduit
The
Conduit provides additional liquidity support to eligible student lenders by
providing funding for FFEL Program Stafford and PLUS loans first disbursed on or
after October 1, 2003 and before July 1, 2009, and fully disbursed by September
30, 2009. In addition to providing financing at a cost based on
market rates, a significant benefit to lenders is that eligible loans are
permitted to have borrower benefits, which are currently not permitted under the
Participation and Purchase Programs. Funding from the Conduit is
provided indirectly by the capital markets through the sale to private investors
of government back-stopped asset-backed commercial paper. The Company
receives funding equal to 97% of the principal and interest to be capitalized of
the pledged student loans through the issuance of a funding note which is
purchased by the Conduit. The
funding note matures no later than January 2014. The commercial paper
issued by the Conduit has short-term maturities generally ranging up to 90
days. In the event the commercial paper issued by the Conduit cannot
be reissued at maturity and the Conduit does not have sufficient cash to repay
investors, the FFB has committed to provide short-term liquidity to the
Conduit. If the Conduit is not able to issue sufficient commercial
paper to repay its investors or liquidity advances from the FFB, the Company can
either secure alternative financing and repay its Conduit borrowings or sell the
pledged student loans to the Department at a predetermined price equal to either
97% or 100% of the accrued interest and outstanding principal of pledged loans,
depending on first disbursement date and certain other loan
criteria. If the Company were to sell the pledged loans to the
Department, it would likely result in a significant loss to the
Company.
34
Term
Asset-Backed Loan Facility Securitizations
In
November 2008, the Federal Reserve Board authorized the Term Asset-Backed
Securities Loan Facility to provide additional liquidity support to the
asset-backed securities market. Under TALF, the Federal Reserve Bank of New York
extends loans to investors to purchase qualifying AAA-rated asset-backed
securities, including those backed by student loans. Although the
terms of these transactions are competitive relative to other forms of funding
currently available, the credit spreads currently required in the market are in
excess of those earned by the underlying student loan assets. As a
result, the Company’s 2009 TALF securitization provided funding for only 60% of
the principal amounts of securitized loans. The Company has the
option to redeem the notes beginning on the February 2014 distribution date
through and including the July 2014 distribution date at a price equal to 90% of
the outstanding principal balance of the notes, plus all accrued and unpaid
interest on the notes. The TALF program is currently available until
March 31, 2010. Until its expiration, the Company will continue to
consider the TALF program to fund its balance sheet. Future TALF
deals that the Company may enter into will not have a redemption
option.
Omnibus
Credit Agreement
During
December 2009, the Company entered into an amendment (the Extension) of its
Omnibus Credit Agreement with CBNA, which was originally set to expire on
December 31, 2009. The Extension changed the expiration date of the
Omnibus Credit Agreement from December 31, 2009 to January 31,
2010. In addition, the Extension lowered the maximum aggregate credit
available under the Omnibus Credit Agreement from $30.0 billion to $10.5
billion, effective January 1, 2010.
On
January 29, 2010, the Company entered into an Amended and Restated Omnibus
Credit Agreement with CBNA. The Amended and Restated Omnibus Credit Agreement
supersedes and replaces in its entirety the Original Omnibus Credit Agreement
and is effective as of January 1, 2010.
The
Amended and Restated Omnibus Credit Agreement provides up to $6.6 billion in
aggregate credit for new borrowings, including separate tranches (with their own
sublimits and pricing) for overnight funding, FFEL Program loan funding, private
education loan funding and illiquid asset funding. The initial term of the
Amended and Restated Omnibus Credit Agreement expires on December 30, 2010 and
all new borrowings will be due and payable on or before this date. The cost
of borrowing for overnight funding is based on the higher of the overnight
federal funds target or overnight LIBOR, while the total cost of funding for
other tranches is determined as follows:
Interest
Rate, based on one-month
LIBOR
plus
|
Fee
on Undrawn
Balance
|
|
FFEL
Program Loans.................
|
75
basis points
|
30
basis points
|
Private
Education Loans...........
|
450
basis points
|
200
basis points
|
Illiquid
Assets............................
|
400
basis points on the first $600
million
of funding and 655
basis points
for
supplemental funding (up to
$1.1
billion in aggregate)
|
100
basis points
|
35
The
Amended and Restated Omnibus Credit Agreement also requires (1) a pledge of most
of the Company’s financial assets to secure the Company’s obligations; (2) a $57
million upfront commitment fee; and (3) a comprehensive package of
representations, warranties, conditions, covenants (including a borrowing base
and various other financial covenants) and events of default. CBNA’s consent is
required for the release of pledged collateral for whole loan sales,
securitizations, and participation in government funding programs, with the
exception of the Conduit, the Participation Program and the Purchase Program,
and certain specified potential securitizations in the first quarter of
2010.
The $9.5
billion of borrowings outstanding under the Original Omnibus Credit Agreement as
of December 31, 2009 are subject to the representations, warranties, conditions,
covenants (including a borrowing base and various other financial covenants) and
events of default contained in the Amended and Restated Omnibus Agreement.
These borrowings will continue to mature based on their originally contracted
maturities, unless a change of control or an event of default, as defined by the
Amended and Restated Omnibus Credit Agreement, occurs. A change of
control is defined as any event that results in an entity other than CBNA or its
affiliates owning more than 50% of the voting equity interest in the
Company. If a change of control or an event of default (certain of
which require explicit action by CBNA to effect an acceleration) under the
Amended and Restated Omnibus Credit Agreement were to occur, all outstanding
borrowings under the Original Omnibus Credit Agreement and all new borrowings
under the Amended and Restated Omnibus Credit Agreement would become due and
payable immediately.
The terms
of the Amended and Restated Omnibus Credit Agreement are significantly less
favorable than those of the Original Omnibus Credit Agreement and will
substantially increase the Company’s funding costs and reduce net
income.
Future Funding Expectations
The
Company’s future cash needs will depend primarily on the volume of new loan
disbursements as well as the cash provided by, or used in, operating activities.
The Company currently expects new loan disbursement volumes to be funded via the
various sources described above. In addition, the Company will
continue to evaluate alternative funding sources. However, there can
be no assurance that any such alternatives will provide terms that are
comparable to or more favorable than those currently available to the
Company. Management believes liquidity and capital will be sufficient
to meet the Company's anticipated requirements until the expiration of the term
of the Amended and Restated Omnibus Credit Agreement on December 30, 2010
utilizing funding available from the Amended and Restated Omnibus Credit
Agreement and via the securitization market and government
programs. This is dependent upon, among other things, the capital
markets providing uninterrupted and cost effective funding. In
addition, any disposition of its ownership in the Company by Citigroup which
results in a change of control whereby an entity other than CBNA or its
affiliates owns more than 50% of the voting equity interest in the Company, or
other event that results in the early termination of the Amended and Restated
Omnibus Credit Agreement, could materially and adversely impact the Company’s
liquidity and capital requirements.
36
Contractual
Obligations
The
following table includes aggregated information about the Company’s contractual
obligations. These contractual obligations impact the Company’s short- and
long-term liquidity and capital resource needs. The table includes information
about payments due under specified contractual obligations as of December 31,
2009.
The
Company’s primary contractual cash obligations are indicated in the chart
below:
(Dollars
in millions)
|
Total
|
2010
|
2011
|
2012
|
2013
|
2014
|
Thereafter
|
|||||||||||||||||||||
Contractual
long-term borrowings (1)
|
$ | 25,602 | $ | 4,211 | $ | 1,591 | $ | 850 | $ | 914 | $ | 10,187 | $ | 7,849 | ||||||||||||||
Operating
lease commitments (2)
|
8 | 2 | 2 | 2 | 1 | 1 | – | |||||||||||||||||||||
Loan
purchase commitments(2)
|
643 | 643 | – | – | – | – | – | |||||||||||||||||||||
Loan
disbursement commitments (2)
|
1,999 | 1,999 | – | – | – | – | – |
(1)
|
Amounts
include the $4.2 billion current portion of long-term
borrowings. For additional information about long-term debt,
see Note 6 to the Consolidated Financial
Statements.
|
(2)
|
For
additional information, see Note 17 to the Consolidated Financial
Statements.
|
Generally,
the Company purchases loans under commitment obligations within one year of
first disbursement or in accordance with contractual terms. These contractual
terms may stipulate that the loans are not to be purchased by the Company until
after the borrowers’ graduation dates. The Company also provides lines of credit
to certain institutions. Such lines are used by these organizations exclusively
to disburse FFEL Program loans which the Company will subsequently purchase. At
December 31, 2009, these organizations have unused lines of credit of $13.4
million. The Company did not have any loan sales commitments at
December 31, 2009.
As of
December 31, 2009, the Company had $17.0 billion of long-term secured borrowings
of which $0.2 billion is denominated in Euros. In addition, $0.1
billion of notes associated with certain securitization transactions remain
available for issuance. The total authorized borrowings of $17.1
billion were collateralized by $15.7 billion of FFEL Program Consolidation Loans
and $2.0 billion of private education loans. Principal payments on
the secured borrowings are made as funds are collected on the collateralized
loans.
Related
Party Transactions
A number
of significant transactions are carried out between the Company and Citigroup
and/or CBNA and its affiliates. CBNA is a party to certain intercompany
agreements entered into by the Company, including the Amended and Restated
Omnibus Credit Agreement, a tax-sharing agreement and student loan originations
and servicing agreements. In addition, the Company maintains a trust
agreement with CBNA through which it originates FFEL Program
loans. Management believes that the terms under which these
transactions and services are provided are no less favorable to the Company than
those that could be obtained from third parties.
37
The
Amended and Restated Omnibus Credit Agreement supersedes and replaces in its
entirety the Omnibus Credit Agreement, dated November 30, 2000, between the
Company and CBNA, as amended (the Original Omnibus Credit
Agreement). $9.5 billion of outstanding borrowings at December 31,
2009 were made under the Original Omnibus Credit Agreement. For
further information about the Company’s borrowings, see Note 6 to the
Consolidated Financial Statements.
The
Company participates in certain of Citigroup’s deferred stock-based compensation
plans under which Citigroup stock or stock options are granted to certain of the
Company’s employees. In addition, Citigroup and its subsidiaries engage in other
transactions and servicing activities with the Company, including facilities
procurement, employee benefits, data processing, telecommunications, payroll
processing and administration, income tax payments, and others. These fees are
based on assessments of actual usage or using other allocation methods, which,
in the opinion of management, approximate actual usage. For an analysis of
intercompany expenses, see Note 10 to the Consolidated Financial
Statements.
The
Company is part of a group of businesses within Citigroup, referred to as Citi
Holdings, which Citigroup intends to exit as quickly as practicable, yet
possible in an economically rational manner through business divestitures,
portfolio run-off and asset sales. The Company’s management is
currently working with Citi Holdings to provide information necessary to support
Citi Holdings’ efforts to explore possible disposition and
combination alternatives with regard to its ownership in the
Company. See Note 10 to the Consolidated Financial Statements for
more details.
Legislation
and Regulations
Legislative
and Regulatory Impacts
FFEL
Program
On
February 26, 2009, President Obama released a summary
of his 2010 proposed budget initiatives. The President’s proposal
asks the Congress to end government support for financial institutions which
make student loans. If the President's proposals are enacted into law, student
lenders would cease making FFEL Program loans in July of 2010. The House
and Senate passed the Full Year 2009 budget resolution (S. Con. Res 13) on
April 29, 2009. The resolution includes the President’s proposals
related to student lending, although further legislation would be required in
order to effect any changes to the FFEL Program. As of December 31,
2009 no action had been taken on the legislative proposals to end the FFEL
Program nor had any extension of the ECASLA law been enacted.
In
September 2009, H.R. 3221, the Student Aid and Fiscal
Responsibility Act of 2009, was approved by the House of Representatives.
H.R. 3221 would implement substantially all of the President’s proposals and,
most notably, would convert all new federal student lending on or after July 1,
2010 to the Federal Direct Loan Program. H.R. 3221 also contains a
provision which attempts to provide a solution for the net interest margin
compression experienced by the Company and other holders of FFEL Program loans
as a result of the divergence between CP and LIBOR. The provision
would allow holders to elect to use, for calendar quarters beginning January 1,
2010, the one-month LIBOR index in lieu of the current 90-day Commercial Paper
index. A loan holder’s choice under this provision would be
irrevocable. The Senate has not yet introduced a companion
bill.
38
Various
industry groups have proposed alternatives to the President’s proposal which
would preserve the FFEL Program, mainly by extending the Participation and
Purchase Programs and utilizing existing private lenders to service new
originations. The Company believes that these proposals would provide cost
savings similar to the President’s proposal, due to the government’s lower cost
of funds, while preserving for consumers the choice of originating lenders and
the benefits of private sector loan servicing.
The
Purchase Program is expected to significantly increase the amount of loans owned
by the Department. To ensure uninterrupted servicing of the loans
once purchased by the Department, service contracts were awarded by the
Department to four external servicers. If H.R. 3221 is enacted without
significant modification, the Company believes that the Department would be
required to solicit additional proposals for servicing Federal Direct Lending
Program loans after July 1, 2010.
In short,
significant changes to the FFEL Program are likely in the near-term. The Company
cannot predict what the new legislation will look like in its final form. Any of
the proposed changes, in particular H.R. 3221’s proposal to eliminate the FFEL
Program, could have a material adverse effect on the Company’s financial
condition and results of operations. However, no action has been
taken by Congress with respect to the SAFRA bill nor an extension or
ECASLA.
Other
Developments
In
July 2009, the Private Student Loan Debt Swap Act of 2009 was introduced into
the Senate. As proposed, this act would allow certain private
education loan borrowers, who, at the time of taking out the private education
loan, were eligible for loans through federally guaranteed student loan
programs, to refinance their private education loans under the Federal Direct
Loan Program. The Company cannot predict whether this legislation
will be enacted in this form, if at all, or the potential impact on the
Company’s financial condition or results of operations.
Congress
is considering a number of financial institution regulatory changes which, if
enacted into law, would have material effects on how consumer credit products
are offered, advertised, and regulated. A key component of the
proposed regulatory changes is the creation of a Consumer Financial Protection
Agency (CFPA), which would be granted authority to both regulate providers of
credit, savings, payment, and other consumer financial products and services and
to set minimum standards for such products and services. However, the
current proposal would also allow state consumer protection laws to apply, even
if they provide greater protection than the CFPA, as long as they are not in
conflict with requirements imposed by the proposed act or the rules that the
CFPA adopts. This type of regulatory framework is materially
different from that which currently exists for financial institutions such as
the Company, whose principal regulator is the Office of the Comptroller of the
Currency (OCC), with state enforcement and visitation deemed preempted by the
authority of the OCC. At this time it is difficult what, if any
regulatory changes will look like in their final form. However, if
the proposed or similar regulatory framework is enacted into law, this could
have a material effect on the Company by substantially increasing the complexity
of its operations.
The U.S.
Supreme Court, in a recent case, Cuomo v. The Clearing House
Association, L.L.C. and Office of the Comptroller of the Currency, ruled
in favor of the authority of states to enforce their own laws when they are not
otherwise preempted. While the scope of the impact this decision will
have is yet to be determined, it appears likely to increase the regulatory
burden on the Company.
39
Certain
members of Congress have indicated that they wish to introduce legislation which
would eliminate the exemption of qualifying private student loans from being
discharged in bankruptcy. Current law provides that qualifying
private student loans, such as most of the Company's CitiAssist loans, cannot be
discharged unless the debtor can prove the payment of the debt will impose an
undue hardship. If such legislation were to enacted into law, this
could have a material effect on the Company by substantially increasing credit
losses.
From
February to May 2009, the Department held a series of negotiated rulemaking
sessions with industry representatives to develop federal regulations to support
the H.R. 4137, the Higher
Education Opportunity Act of 2008 (HEOA), provisions. Final
regulations were published October 28 and 29, 2009 and become effective July 1,
2010. The Company has assessed the content of these regulations and
will be making the necessary system and process modifications prior to the
effective date to ensure ongoing compliance.
Historical
Legislative and Regulatory Impacts
Over the
past decade, certain amendments to the Higher Education Act, which governs the
FFEL Program, have reduced the interest premium earned by holders of FFEL
Program loans. The most significant such amendment was the CCRA Act, which was
signed into law on September 27, 2007. This has contributed to an
overall reduction in yields as new, lower yielding loans are added to the
portfolio and older, more profitable loans are repaid. In addition, amendments
to the Higher Education Act authorized the enactment of the Federal Direct Loan
Program (Direct Lending) which private lenders, such as the Company, are not
eligible to participate in and which directly competes with the FFEL Program in
originating student loans.
The
Ensuring Continued Access to Student Loans Act was signed by President Bush on
May 7, 2008. This law, among other things, allows the Department to purchase
qualifying Stafford and PLUS loans during the 2008-2009 academic
year. It was enacted to respond to the belief that there was a
problem for students attempting to obtain FFEL Program loans due to lenders
partially or wholly withdrawing from the FFEL Program market as a result of the
liquidity constraints in the capital markets, higher costs of funds and the
effects of the CCRA Act. On July 3, 2008, the Company filed a
required Notice of Intent to Participate with the Department. The
Company received its initial funding through the Participation Program on
December 5, 2008 and began participating loans on that same date.
During
2008, in an effort to provide additional liquidity to support new lending, the
Department also published regulations on the Conduit. This was in
response to the Department’s concern that some lenders may continue to have
difficulty obtaining funding to make loan commitments for the 2009-2010 academic
year, or to make subsequent disbursements on loans, without a commitment from
the Department to purchase those loans. During the year ended December 31, 2009,
the Company received a cumulative $10.4 billion in funding from the Conduit for
a portion of its FFEL Program loan portfolio.
40
The HEOA
was signed into law on August 14, 2008. Along with revisions to the Higher
Education Act, it also reauthorized the federal student loan programs through
2014. Many of the provisions of the HEOA were effective as of the
date of enactment, with others taking effect July 1, 2009. The majority of the
provisions pertain to increasing consumer awareness by increasing the amount of
information that must be disclosed to borrowers throughout the lifecycle of the
loan.
On
October 23, 2008, the Department issued final regulations, published at Federal
Register Vol. 73, No. 206, which were needed to implement provisions contained
in the CCRA Act. The majority of the content of this regulatory package pertains
to the new Income-based Repayment (IBR) option that was effective July 1, 2009.
This Income-based Repayment plan is available to most Direct Lending and FFEL
Program borrowers. It provides for a monthly payment amount based on the
borrower’s student loan debt, adjusted gross income, family size and the poverty
line for the borrower’s state of residence. It also provides for the
possible forgiveness of any remaining balance after 25 years of qualifying
payments. The Company has implemented system and procedural changes
needed to begin providing borrowers with this new repayment option as of July 1,
2009. Additional system changes are in process to support future phases of the
IBR lifecycle.
Pending
Litigation
The
Company is subject to various claims, lawsuits and other actions that arise in
the normal course of business. Most of these matters are claims by
borrowers disputing the manner in which their loans have been processed, the
accuracy of the Company’s reports to credit bureaus, or actions taken with
respect to collecting on delinquent or defaulted loans. Management
believes that ultimate resolutions of these claims, lawsuits and other actions
will not have a material adverse effect on the Company’s business, financial
condition or results of operations.
41
Quantitative
and Qualitative Disclosures About Market Risk
Risk
Management
Risk
management is an important component of meeting the business objectives of the
Company. The Company actively manages credit, operating and market risks. These
and other risks are detailed in Risk Factors on page 54. This
section describes the activities undertaken by the Company in an effort to
manage these risks.
Credit
Risk
Credit
risk is the risk that borrowers may be unable to repay their loan in full as
due. Credit risk is partially mitigated by federal guarantees maintained on the
Company’s FFEL Program student loan portfolio and by its credit loss insurance
carried on a portion of its private education loan portfolio.
The
Company receives 97% or 98% reimbursement on substantially all FFEL Program loan
default claims, depending on the origination date of the loan. As a
result of the CCRA Act, the reimbursement rate will decrease to 95% on new loans
disbursed on or after October 1, 2012.
Approximately
60% of the Company’s private education loans carry private insurance coverage
and a portion of the uninsured loans are covered by risk-sharing agreements with
certain schools. The Company is exposed to 100% of the credit losses on loans
that are not covered by private insurance or risk-sharing agreements. In
addition, effective January 1, 2008, the Company ceased insuring new CitiAssist
loan originations, thereby increasing the Company’s exposure to credit losses on
private education loans.
The
Company seeks to mitigate credit risk in the private loan portfolio by adhering
to consistent underwriting criteria for most loans, primarily using automated
systems and processes. The underwriting is driven by proprietary scoring models
and credit policies and implemented through a front end underwriting platform.
The economic and competitive environments are also monitored and policies
adjusted as needed. For private loans which are insured by Arrowood
or UGCIC/NHIC, their concurrence is also sought for any account maintenance
changes. The Company has a dedicated collections unit focused on default
prevention and charge-off recoveries. Collection strategies vary
depending on the risk characteristics of each portfolio segment including
contact methods, contact intensity, skip tracing and post charge-off recovery
follow-up. The Company’s Credit Risk Management department sets credit policy,
evaluates portfolio performance on an on-going basis and works closely with the
Underwriting and Collections units. Credit Risk Management also
regularly monitors commercial credit risk associated with lines of credit as
well as counterparty risk related to insurers, external loan servicers,
custodians, disbursement agents and schools.
42
Operating Risk
Operating
risk is the risk that the entity will be unable to properly service its loan
portfolio. The majority of the Company’s operating risks relate to servicing
defects in the Company’s student loan portfolio that could potentially result in
losses. In addition, FFEL Program loans that are not originated or serviced in
accordance with Department regulations risk loss of guarantee or interest
penalties. Private education loans that are not originated or
serviced in accordance with provisions set forth in the respective agreements
with private insurers risk cancellation of insurance coverage. Through
various agreements with securitization trusts, the Company is subject to
operating risk as a seller, servicer and administrator of student
loans. These agreements subject the Company to repurchase,
substitution or reimbursement provisions to resolve breaches of representations,
warranties, servicing requirements and other obligations under these
agreements. In an effort to manage operating risk, the Company
conducts compliance and process reviews of both the Company’s internal
operations and external loan servicers.
In
addition, the Company is subject to operating risk resulting from the servicing
of a substantial portion of its loan portfolio by a single servicer, which is an
affiliate of Citigroup. The Company believes that its policies, procedures and
servicer reviews partially mitigate this risk. In the event of default by this
servicer, other third-party servicers could assume the servicing functions for
these loans.
The
Company is part of a group of businesses within Citigroup, referred to as Citi
Holdings, which Citigroup intends to exit as quickly as practicable, yet
possible in an economically rational manner through business divestitures,
portfolio run-off and asset sales. The Company’s management is currently working
with Citi Holdings to provide information necessary to support Citi Holdings’
efforts to explore possible disposition and combination alternatives with
regard to its ownership in the Company. The agreements governing
Citigroup’s role as servicer for the Company contain provisions that would
terminate the agreement if an event that results in a change in control were to
take place. For additional information, see Risk Factors beginning on page
54.
The
Company’s guaranteed FFEL Program loan portfolio is subject to regulatory risk.
Under the Higher Education Act, the FFEL Program is subject to periodic
amendments and reauthorization. As a result, the interest subsidies, origination
costs, and the existence of the program itself are subject to change. For
example, the CCRA Act made several changes to the Higher Education Act, which
are discussed in more detail in the Legislation and Regulations -
Legislative and Regulatory
Impacts section on page 38.
Market
Risk
Market
risk encompasses liquidity risk, interest rate risk and foreign currency
exchange rate risk. Liquidity risk is the risk that an entity may be unable to
meet a financial commitment to a customer, creditor or investor when due.
Interest rate risk is the risk to earnings that arises from changes in interest
rates. Foreign currency exchange rate risk is the risk to earnings that arises
from fluctuations in foreign currency exchange rates. The Company
strives to manage market risk through its Asset/Liability Management Committee
(ALCO). ALCO reviews current and prospective funding requirements and makes risk
mitigation recommendations to management. Also, the Company periodically reviews
expectations for the market and sets limits as to interest rate and liquidity
risk exposure.
43
The
Company’s primary market risk exposure results from fluctuations in the spreads
between the Company’s borrowing and lending rates, which may be impacted by
shifts in market interest rates and differences in the frequency at which
interest rates on the Company’s interest bearing assets and liabilities
reset. The Company’s retained interests are also exposed to market
risk from fluctuations in market interest rates. The Company’s overall risk
management strategy includes monitoring interest rates and it may enter into
derivative agreements in an effort to manage its exposure to interest rate
variability.
Historically,
the majority of the Company’s derivative financial instruments were interest
rate derivative and option agreements with CBNA, an investment-grade
counterparty. The interest rate derivatives were used in an effort to
manage the interest rate risk inherent in the retained interests in the
Company’s off-balance sheet securitizations. The option agreements were
designated as economic hedges to the floor income component of the residual
interests. These interest rate derivative and option agreements were
not designated as hedges and did not qualify for hedge accounting treatment
under ASC 815. The Company closed out of these derivative positions during the
fourth quarter of 2009 in anticipation of accounting changes effective January
1, 2010, which will impact the Company’s Consolidated Financial Statements
starting January 1, 2010, in the consolidation of the Company’s previously
unconsolidated securitizations and elimination of the related retained interests
being hedged. At December 31, 2008, the interest rate derivative
agreements had a notional amount of $13.3 billion and the option agreements had
a notional amount of $12.1 billion.
The
Company currently has one cross-currency swap that is intended to manage its
exposure to foreign currency exchange rate fluctuations on its Euro denominated
secured borrowing. At December 31, 2009, the notional value of this
swap was $0.2 billion. The swap
matures at the earlier of the date at which the respective notes mature, the
trust loan assets have been liquidated or 2032.
For more
information on the Company’s interest rate derivative and option agreements and
its foreign currency swap see Note 13 to the Consolidated Financial
Statements.
At
December 31, 2009, $3.0 billion of the Company’s outstanding unsecured
borrowings under the original Omnibus Credit Agreement and the Company’s secured
borrowings from the TALF securitization included derivatives embedded in the
respective debt instruments. These embedded options have been determined to be
clearly and closely related to the debt instruments as these terms are defined
in ASC 815 and, therefore, do not require bifurcation.
The
Company’s principal measure of market risk due to interest rate changes is
Interest Rate Exposure (IRE). IRE measures the change in expected net interest
margin that results solely from unanticipated, instantaneous changes in market
rates of interest. Other factors such as changes in volumes, spreads, margins
and the impact of prior period pricing decisions can also change current period
interest income, but are not captured by IRE. While IRE assumes that the Company
makes no additional changes in pricing or balances in response to the
unanticipated rate changes, in practice the Company may alter its portfolio mix,
customer pricing or hedge positions, which could significantly impact reported
net interest margin. IRE does not measure the impact that interest rate changes
would have on the Company’s earnings related to instruments classified as
trading.
44
IRE is
calculated by multiplying the gap between interest sensitive items, including
loan assets, borrowings and certain derivative instruments, by a 100 basis point
instantaneous change in the yield curve. The exposures in the table below
represent the approximate change in net interest margin for the next 12 months
based on current balances and pricing that would result from specific
unanticipated changes in interest rates:
December
31,
|
||||||||||||||||
(Dollars
in millions)
|
2009
|
2008
|
||||||||||||||
100
basis points
|
Increase
|
Decrease
|
Increase
|
Decrease
|
||||||||||||
Change
in net interest income
|
$ | (15.1 | ) | $ | 20.9 | $ | (6.8 | ) | $ | 21.5 |
In
addition, the Company has exposure to uneven shifts in interest rate curves
(e.g., CP to LIBOR spreads). The Company, through ALCO, actively manages these
risks by setting IRE limits and takes action in response to interest rate
movements against the existing structure.
45
O OTHER
BUSINESS AND INDUSTRY INFORMATION
Student
Loans
The
Company’s student loan portfolio is composed of both FFEL Program loans and
private education loans. The Company is currently eligible to make the following
types of FFEL Program loans: subsidized Federal Stafford, unsubsidized Federal
Stafford, Federal PLUS and Federal Consolidation Loans. Subsidized Federal
Stafford Loans are generally made to students who meet certain need criteria.
Unsubsidized Federal Stafford Loans are designed for students who do not qualify
for subsidized Federal Stafford Loans due to parental and/or student income and
assets in excess of permitted amounts. PLUS Loans are made to parents
of dependent students and to graduate and professional students. This program
allows multiple federal loans, including those of both the FFEL and the Federal
Direct Student Loan Programs, to be combined into one single guaranteed loan.
The lender under Federal Consolidation Loans is required to pay to the
Department a monthly fee generally equal to 0.0875% (1.05% per annum) of the
monthly ending principal and accrued interest balances of Federal Consolidation
Loans held. A borrower may request the Company to consolidate
government-guaranteed loans held by other student loan originators and holders.
Under such circumstances, those student loans not already in the Company’s
portfolio are purchased at face value from the other lenders prior to
consolidation. The repayment periods on Federal Consolidation Loans are extended
to periods of up to 30 years, depending on the loan balance. Due to market
conditions, the Company has withdrawn from the Federal Consolidation Loan
Program and is not actively originating new loans. The Company’s portfolio also
includes loans made under the Federal Supplemental Loans for Students (SLS
Loans) and Health Education Assistance Loans (HEAL Loans) programs, although no
new loans are being originated under these programs. See Note 4 to the
Consolidated Financial Statements for a presentation of the loan portfolio by
product type.
The
Department administers the FFEL Program under Title IV of the Higher Education
Act. An institution, such as the Company, that does not fall within the Higher
Education Act’s definition of “eligible lender” may hold and originate FFEL
Program loans only through a trust or similar arrangement with an eligible
lender. In order to comply with the Higher Education Act, all of the Company’s
FFEL Program loans are held, and all new FFEL Program loans are originated by
the Company, through a trust established solely for the benefit of the Company
with CBNA, a national banking association and an eligible lender under the
provisions of the Higher Education Act.
Congress
is currently considering legislation that may result in significant changes to
federal student loan programs. The President and various industry
groups have offered proposals for reform, the most significant of which could
result in the elimination of the FFEL Program. In September 2009, the
House of Representatives approved a bill which, among other changes, would
eliminate the FFEL Program. The Senate has not yet introduced a
companion bill.
The
Company’s CitiAssist loan program is available to students who either do not
qualify for government student loan programs or seek additional educational
financing beyond that available through government programs and other sources.
See Origination of Private Education Loans below for more
details.
46
The
Company also participates in the secondary student loan market through purchases
of loans that consist of subsidized Federal Stafford Loans, unsubsidized Federal
Stafford Loans, PLUS Loans, Federal Consolidation Loans and HEAL Loans.
Illiquidity in the secondary loan market during the year has significantly
reduced the Company’s activities in this market. A portion of the Company’s
Federal Consolidation Loans have been generated through third-party marketing
channels. Loans acquired through these channels generally have lower yields than
student loans sourced through primary channels.
Origination
of FFEL Program Loans
The
Company is one of the nation’s largest originators and holders of student loans
guaranteed under the FFEL Program. The Company’s student loan volume primarily
results from the Company’s sales and marketing efforts (see Marketing on page 49) and
repeat borrowers.
A student
must attend an eligible educational institution, as determined by the
Department, in order to participate in the FFEL Program. Eligible institutions
can be divided into three categories: four-year colleges and universities,
two-year institutions and proprietary schools. In addition to other criteria,
the Department determines school eligibility, in part, based on the default rate
on guaranteed loans to a school’s students.
For FFEL
Program loans originated by the Company, the borrower completes a Master
Promissory Note and sends it either to the Company or directly to the
guarantor. Before the loan can be approved, the school must certify
both the borrower's attendance at the school as well as the loan amount the
borrower is entitled.
Loan
applications can be completed online at www.studentloan.com,
through the guarantor’s website or via a paper application. Both the guarantor
and the Company must approve the loan request. Upon guarantor
approval, the guarantor sends a notice of guarantee to the
Company. After receiving the notice of guarantee, the Company makes
the loan disbursement directly to the school as directed by the school and sends
a disclosure statement to the borrower confirming the terms of the
loan. The Company also originates loans through certain guarantors
under “blanket guarantee” agreements, which authorize the Company to disburse
funds without having to obtain the guarantor’s approval on each individual loan
application prior to disbursing the funds.
The
Company strives to offer students and parents opportunities to save money in
repaying their education loans. The Company believes that the
borrower benefits that it provides to the recipients of FFEL Program loans are
competitive compared to those offered in the current market.
The
Higher Education Act requires that guarantors charge a one-time federal default
fee equal to 1% of the principal amount of Stafford and PLUS Loans. The federal
default fee must be deposited into the Federal Fund held by the
guarantor. Guarantors have the option to charge this fee to the
borrower and deduct it from the loan or waive some or all of the fee for the
borrower and subsidize the payment on behalf of the borrower.
47
The
Higher Education Act also requires the payment of an origination fee to
Department on all Stafford and PLUS Loans. For Stafford Loans, the
lender may charge this fee to the borrower or waive some or all of the fee for
the borrower and subsidize the payment on behalf of the borrower. For
PLUS Loans, borrowers are responsible for paying the origination
fee. Lenders are responsible for forwarding the origination fees to
the federal government. The origination fee on Stafford Loans is being phased
out between July 1, 2006 and July 1, 2010 under the Higher Education
Act.
Origination
of Private Education Loans
The
private education loan program is designed to assist students by providing
education financing that is intended to supplement any financial aid that may be
available through grants, scholarships or under the FFEL or Direct Lending
Programs. During 2009 and 2008, the Company made two types of private education
loans: CitiAssist loans and private consolidation
loans. Due to market conditions the Company withdrew from the private
loan consolidation market.
In order
to comply with certain legal and regulatory requirements, CitiAssist loans are
originated by CBNA, the Company’s principal shareholder, and are serviced by the
Company. In accordance with the provisions of an intercompany agreement,
origination and servicing fees are charged to CBNA for underwriting, disbursing
and servicing private education loans for CBNA. Shortly following full
disbursement, the Company purchases the private education loans from
CBNA.
Private
education loans are credit based installment loans and subject to state laws and
federal consumer banking regulations as well as the Higher Education Act as
reauthorized in 2008. Private education loans are not insured by the federal
government, however, a portion of the Company’s private education loans are
insured by private insurers. Effective January 1, 2008, the Company ceased
insuring new CitiAssist loan originations.
Students,
and co-signers, if applicable, complete and submit CitiAssist loan applications
online at www.studentloan.com.
In addition to general eligibility criteria, a certification of enrollment from
the school is required and a co-signer may also be necessary. The
majority of the loan disbursements are made directly to the school and a
disclosure statement is sent to the borrower confirming the terms of the
loan.
The
Company suspended originations of new private consolidation loans on October 1,
2008 due to increased funding costs as a result of ongoing disruption in the
capital markets. The Company continues to monitor market conditions
and will adjust its strategy accordingly.
48
Seasonality
Origination
of student loans generally follows seasonal trends, which correspond to the
beginning of the school year. Student loans are disbursed as directed by the
school and are usually divided into two or three equal disbursements released at
specified times during the school year. The two disbursement periods of August
through October and December through February account for approximately
three-quarters of the Company’s total annual disbursements. While
applications and disbursements are seasonal, the Company’s earnings are
generally not tied to this cycle. There are also seasonal trends in
the collections cycle as most traditional borrowers enter repayment in
November.
Marketing
The
Company is committed to the following marketing strategies: providing
exceptional service to borrowers and schools, offering competitive and
innovative products to students and their families, optimizing targeted
marketing initiatives, and recruiting and retaining a superior team of sales and
marketing professionals.
The
schools play an integral role in the students’ selection of a lender. Through
the Company’s proprietary website, www.FAAOnline.com,
schools are able to electronically process and track their students’ loan
applications, certify loans, and monitor approvals and
disbursements. Dedicated Account Managers and a Priority Services
telephone team support the schools by assisting with loan processing and issue
resolution.
The
Company employs direct marketing strategies to help drive customer acquisition
and retention. Such strategies may include cross-selling with
Citigroup, Inc., affiliate companies, email marketing, online media,
sponsorships, and strategic partnerships with third party vendors and marketing
services providers.
The
Company continues to enhance the customer experience on its website, www.studentloan.com. To
illustrate, in 2008, the Company redesigned this website, including online
application processes, based on customer feedback and usability
studies. In 2009, the Company launched a comprehensive set of online
tools and calculators on its website, which included a student loan comparison
tool as well as online repayment resources that enable borrowers to
confidentially manage their student loan payments and protect their credit
history.
The
Company’s borrowers are students and parents from all 50 states, the District of
Columbia and the U.S. territories. In addition, the Company’s
borrowers also include international students attending school in the United
States as well as domestic students attending eligible foreign
institutions. Approximately 30% of the Company’s loan portfolio is
comprised of loans made to or on behalf of students who reside in New York and
California.
49
Competition
The
market for student loans is comprised of numerous eligible
lenders. With over 50 years of experience, the Company is one of the
nation’s largest originators and holders of FFEL Program and private education
loans. The Company continues to maintain its superior performance on the loans
that it services. This simplifies the repayment process for borrowers and
provides the Company with a competitive advantage over other
lenders.
SLM
Corporation (Sallie Mae) continues to be the largest originator and holder of
FFEL Program loans. Other key FFEL Program lenders include JPMorgan
Chase and Wells Fargo.
The
Federal Direct Lending Program, which also provides federal student loans
directly to students and parents, has grown significantly and hence reduced the
overall volume of loans available for origination through the FFEL
Program. Due to recent legislative proposals, the most significant of
which could result in the elimination of the FFEL Program, , the Federal Direct
Lending Program has experienced more significant growth as an increased number
of schools have moved from the FFEL Program to the Federal Direct Lending
Program.
In terms
of private education loans, the Company primarily competes against Sallie Mae,
JPMorgan Chase and Wells Fargo as well as state and regional
lenders.
FFEL
Program Collections and Claims
Certain
requirements must be met in order to maintain the government guarantee coverage
on FFEL Program loans. These requirements specify school and borrower
eligibility criteria and establish servicing requirements and procedural
guidelines. The Company’s collections department, or that of its servicers,
begins contact in the event of payment delinquency shortly after initial
delinquency occurs and makes prescribed collection efforts through mailings,
telephone contact and skip tracing, as required.
At
prescribed times prior to submitting a claim, the Company requests collection
assistance from the relevant guarantor. These requests serve to notify the
guarantor of seriously delinquent accounts before a claim is submitted and allow
the guarantor an opportunity to make additional attempts to collect on the loan.
If a loan is rejected for claim payment by a guarantor due to a violation of
FFEL Program due diligence collection requirements, the collections department
or servicer resumes working the account for payment and/or institutes a process
to reinstate the guarantee.
FFEL
Program loans that are 270 days past due are considered to be in
default. Claims must be filed with the guarantor no later than the
360th day
of delinquency or loss of guarantee could occur.
50
In
addition to due diligence collection violations, a claim may be rejected by a
guarantor or insurer under certain other circumstances, including, for example,
if a claim is not filed in a timely manner, adequate documentation is not
maintained or the loan is improperly serviced. Once a loan ceases to be
guaranteed, it is ineligible to earn government subsidized interest and special
allowance benefits. As an EP designated servicer, the Company benefited from
certain provisions of the EP program that did not require that due diligence be
performed on each claim before payment but instead relied on periodic EP audits.
As a result of the termination of the EP program, guarantors are now required to
perform due diligence on all claims before payment which have resulted in an
increase in the number of rejected claims and/or delays in payment of
claims.
Rejected
claims may be “cured”, involving reinstatement of the guarantee or insurance and
possible collection of reinstated interest and special allowance benefits, as
applicable. Reinstatement of the loan guarantee or insurance can occur when the
lender performs certain collections activities in cases involving timely claim
filing violations or obtains a payment or a new signed repayment agreement from
the borrower in certain cases involving collection due diligence violations. For
rejected claims, the Company attempts to cure the rejects before the loans are
written off against the allowance for loan losses. If loans reach 450
days of delinquency without a claim being paid, the remaining balance is written
off against the allowance for loan losses.
The rate
of defaults for FFEL Program student loans, especially among students at
proprietary schools, tends to be higher than default rates for other
credit-based types of loans. In order to maintain eligibility in the FFEL
Program, schools must maintain default rates below specified levels, among other
criteria, and both guarantors and lenders are required to ensure that loans are
made only to FFEL Program eligible students attending FFEL Program eligible
schools that meet default criteria. Accordingly, the Company has procedures in
place to assure that it provides FFEL Program Loans only to students attending
institutions that meet the Higher Education Act’s default limits.
Quality
and Regulatory Reviews
The
Company recognizes the importance of maintaining compliance with federal and
state laws and regulations, as well as Department of Education regulations,
guarantor policies and reporting requirements. Accordingly, the Company has
implemented policies and procedures to monitor and review ongoing processes that
have an impact on, or may jeopardize a loan guarantee or lender eligibility. An
affiliate of the Company, Citibank (South Dakota), National Association,
services most of the Company’s internally serviced student loan portfolio. The
remainder of the loan portfolio is serviced by third-party servicers. Citibank
(South Dakota), National Association also conducts regular ongoing compliance
reviews at its facility.
51
The
Company has a formal quality assurance program that monitors and measures
performance and customer satisfaction levels. These quality assurance reviews
include, but are not limited to, reviews of loan origination, due diligence and
disbursement processes, including work performed to ensure adherence to
regulatory requirements. Also, the Company’s Compliance and Control staff
monitors results of risk and control self-assessments performed throughout the
Company under Citibank policy. Additionally, the Company is periodically
reviewed by Citigroup Audit and Risk Review teams, student loan guarantors, the
Department and third-party loan insurers to monitor portfolio quality and
processing compliance. Also, individual departments perform self-reviews on a
risk-based frequency. These reviews are done to ensure compliance with the
federal, guarantor and corporate policies/procedures, as well as to identify
areas needing process or control improvements.
Historically,
the student loan industry has been subject to extensive regulatory and reporting
requirements, concentrated primarily in the areas of loan servicing and due
diligence. Both the Department and the guarantors have established
stringent servicing requirements that each eligible lender must
meet. In addition, the Department and the guarantors have developed
audit criteria that each lender must pass in order to receive guarantee
benefits. The Higher Education Act and the Department's regulations
authorize it to limit, suspend or terminate lenders from participation in the
FFEL Program, as well as impose civil penalties, if lenders violate program
regulations. The Department regularly conducts audits of the
Company’s student loan servicing activities. Guarantors conduct
similar audits on a biennial basis. In addition, an independent compliance
review of the Company’s FFEL Program student loan portfolio, as required by the
Department, is conducted. None of the audits conducted during 2009
disclosed any material audit exceptions.
Also, as
an operating subsidiary of CNBA, the Company is subject, in general, to
examination and supervision by the Office of the Comptroller of the
Currency. The Company is subject to various federal laws including
the National Bank Act and certain provisions of the Bank Holding Company Act and
Federal Reserve Act, which, among other provisions, restrict certain
transactions with affiliates and regulate the business activities in which a
subsidiary of a national bank may engage.
Employees
At
December 31, 2009 and 2008, the Company had 248 and 355 employees, respectively,
none of whom was covered by a collective bargaining agreement. These amounts do
not include approximately 962 employees of Citibank (South Dakota), National
Association primarily located in Sioux Falls and Kansas City, Missouri, who
perform the majority of the loan originations and servicing work on the
Company’s student loans under the provisions of an intercompany
agreement.
Properties
The
Company maintains its headquarters in Stamford, Connecticut and also occupies a
facility located in Pittsford, New York. The Pittsford, New York
facility is maintained under a lease agreement with CBNA that expires in May
2014. The Stamford, Connecticut facility is leased on a
month-to-month basis. The Company believes that its facilities are
generally adequate to meet its ongoing business needs.
52
Legal
Proceedings
In the
ordinary course of business, the Company is a defendant, co-defendant or party
to various litigation 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 matters would not be likely to have a material adverse
effect on the results of the Company’s operations, financial condition or
liquidity.
Comparison
of Cumulative Five-Year Total Shareholder Return
The
following graph compares the Company’s cumulative total shareholder return for
the last five years with the cumulative total shareholder return of the S&P
500 index and of SLM Corporation. The graph and table show the value at year-end
2009 of $100 invested at the closing price on December 31, 2004 in the Company’s
common stock, the S&P 500, and SLM Corporation common stock. The return
calculated assumes reinvestment of dividends during the period
presented. The comparisons in this table are not intended to forecast
or be indicative of future performance of the common stock.
53
RISK
FACTORS
Certain
of the statements below are forward-looking statements within the meaning of the
Private Securities Litigation Reform Act. See Forward-Looking Statements on
page 6.
The
following discussion sets forth certain risks that the Company believes could
cause its actual future results to differ materially from expected or historical
results. However, the discussion below is not exhaustive, and other factors
could have a material adverse impact on the Company’s results. These factors
include, natural disasters, acts of terrorism and epidemics and the factors
listed under Forward-Looking
Statements on page 6, among others.
The
Company’s financial condition is dependent upon and could be adversely affected
by the extent to which management can successfully manage interest rate
risks.
The
majority of the Company’s earnings are generated from the spread between the
Company’s interest earning assets (primarily based on CP, the prime rate, or the
91-day Treasury Bill rate) and its funding costs (primarily based on LIBOR or
CP). The success of the Company is dependent upon management’s
ability to identify properly and respond promptly to changes in interest rate
conditions. Particularly in the current market environment, which has been
characterized by dislocation, illiquidity and government intervention, changes
in the interest rate environment can be difficult to predict and the Company’s
ability to respond to changes after they occur is hampered by market
constraints, legislation and the terms of the Company’s existing student loan
assets. As a result, changes in the spread between the interest rates earned on
the Company’s assets and incurred on the Company’s liabilities could have an
adverse effect on the Company's financial condition and results of
operations.
The
Company regularly monitors interest rates and may enter into interest rate
derivative agreements in an effort to manage its interest rate risk exposure.
The Company’s derivative instruments do not qualify for hedge accounting under
ASC 815, and consequently, the change in fair value of these derivative
instruments is included in the Company's earnings. Changes in market assumptions
regarding future interest rates could significantly impact the valuation of the
Company's derivative instruments and, accordingly, impact the Company’s
financial position and results of operations.
The
Company's interest rate risk management activities could expose the Company to
losses if future events differ from certain of the Company’s assumptions about
the future regulatory and credit environment. If the Company’s economic hedging
activities are not appropriately monitored or executed, these activities may not
effectively mitigate its interest rate sensitivity or have the desired impact on
its results of operations or financial condition.
One of
the Company’s objectives in determining the appropriate mix of funding is to
match the weighted average life of its loan assets with that of its borrowings.
However, market constraints and the fact that the Company cannot always predict
the speed at which borrowers repay their loans generally make obtaining a
perfect match very difficult and cost-prohibitive. In addition, credit premiums
earned on the Company’s loan assets are fixed at the time of origination. As a
result, the Company’s net interest margin may be adversely affected if the
Company cannot refinance its maturing debt at rates that are comparable to its
current rates. This is expected to have an increasing
impact in 2010 as borrowings mature and are replaced with new borrowings
under the Company’s Amended and Restated Omnibus Credit Agreement with higher
funding costs.
54
The
Company’s business operations are dependent upon Citigroup and any change that
impacts Citigroup’s involvement in the Company could have an adverse effect on
the Company’s financial condition and operations.
Citigroup
indirectly owns 80% of the Company’s common stock. Through various subsidiaries,
Citigroup serves as the Company’s:
·
|
Lender
–At December 31, 2009, the Company had outstanding borrowings of $9.5
billion under the Original Omnibus Credit Agreement. The
Amended and Restated Omnibus Credit Agreement will provide up to $6.6
billion of additional funding through December 30, 2010 and all new
borrowings will be due and payable on or before this
date.
|
·
|
Trustee
– An affiliate of Citigroup acts as eligible lender trustee for the
Company pursuant to a trust agreement since the Company does not meet the
definition of an eligible lender in the Higher Education
Act.
|
·
|
Originating
Lender – The Company originates its private education loans through an
agreement with an affiliate of Citigroup, under its authority as a
federally chartered bank, providing certain benefits to which the Company
would not otherwise be entitled. The Company subsequently acquires such
loans pursuant to the terms of a separate agreement with the
affiliate.
|
·
|
Service
Provider – The majority of the work to originate and service the Company’s
FFEL Program and private education loans is performed by an affiliate of
Citigroup. Citigroup also provides many other services to the Company,
including, but not limited to, cash management, tax return preparation,
data processing, telecommunications, payroll processing and benefits
administration. These arrangements provide economies of scale that
significantly reduce the Company’s operating
expenses.
|
The
Amended and Restated Omnibus Credit Agreement contains a provision that if a
change of control were to occur which results in an entity other than CBNA or
its affiliates owning more than 50% of the voting equity interest in the
Company, all outstanding borrowings under the Original Omnibus Credit Agreement
and all new borrowings under the Amended and Restated Omnibus Credit Agreement
would become due and payable immediately.
The
agreements governing Citigroup’s role as originating lender and servicer for the
Company contain provisions that would terminate the agreements if an event that
results in a change in control were to take place.
55
The
Company has outsourced a significant portion of its overall operations to
certain affiliates and third parties. The Company’s business operations could be
adversely impacted if any of the existing agreements with these service
providers was terminated or could not be renewed with substantially similar
terms. In addition, the Company is subject to the risk that these providers may
not continue to provide the level of service that is needed to effectively
operate the Company’s business, including timely response to changes in the
Company’s demand for services. If any of these risks were to be
realized, and assuming similar agreements with service providers could not be
established, the Company could experience interruptions in operations that could
negatively impact the Company’s ability to meet customer demand for loan
originations and disbursements, damage its relationships with customers, and
reduce its market share, all of which could materially adversely affect the
Company’s results of operations and financial condition.
In
January 2009, Citigroup announced that it was realigning its structure into two
distinct businesses for management reporting purposes: Citicorp, which is
composed of Citigroup’s core businesses, and Citi Holdings, in which the Company
is now included, which is composed of non-core businesses. Citigroup
intends to exit the Citi Holdings’ businesses as quickly as practicable, yet
possible in an economically rational manner through business divestitures,
portfolio run-off, and asset sales, and has made substantial progress divesting
and exiting businesses from Citi Holdings, having completed or announced 18
divestitures in 2009. The Company’s management is currently working
with Citi Holdings’ management to provide the information necessary to support
Citi Holdings’ efforts to explore possible disposition and combination
alternatives with regard to its ownership in the Company. These
efforts could result in a change in ownership of the Company, including, among
other possibilities, an eventual sale of all or part of Citigroup’s ownership in
the Company, or of all or part of the Company, to an unaffiliated third
party.
The
Company does not know how a potential disposition of its ownership would affect
the Company's business or its operations, although given the various
relationships between Citigroup and the Company the effect could be material and
adverse. Among other things, any disposition of its ownership in the
Company by Citigroup that results in Citigroup or any of its subsidiaries owning
less than 50% of the voting equity interest in the Company could result in the
termination of certain agreements, including the Company’s servicing and
origination agreements. If a disposition or combination
event results in an entity other than CBNA or its affiliates owning more
than 50% of the voting equity interest in the Company, all outstanding
borrowings under the Original Omnibus Credit Agreement and all new borrowings
under the Amended and Restated Omnibus Credit Agreement would become due and
payable immediately. The Company’s business operations could be
materially and adversely impacted if any of these agreements cannot be replaced
with agreements with substantially similar or more favorable
terms.
56
Liquidity
is essential to the Company’s business, and the Company relies on external
sources, including the Omnibus Credit Agreement, capital markets, and government
programs to fund its balance sheet. Failure to secure cost-effective
funding would adversely impact the Company’s ability to fund student loan
originations and could materially increase the Company’s cost of
funds.
Uninterrupted
access to liquidity is essential to the Company’s business. The
Company’s liquidity and funding has been, and could continue to be, materially
adversely affected by factors the Company cannot control, such as the continued
general disruption of the financial markets or negative views about the
financial services industry in general.
The
Company’s Amended and Restated Omnibus Credit Agreement provides funding through
December 30, 2010, however the cost of funding under this agreement is
significantly higher than the borrowings that are expected to mature over the
next twelve months. This will further compress the Company’s net
interest margin. Unless the Company is able to identify and implement other
funding alternatives, maturing borrowings will need to be replaced with new
borrowings under this agreement at higher rates. In addition, before the end of
2010, the Company will need to negotiate an extension to this agreement with
CBNA or enter into one or more alternative funding arrangements in order to
maintain adequate liquidity in 2011.
The
Amended and Restated Omnibus Credit Agreement also requires a comprehensive
package of representations, warranties, conditions, covenants (including a
borrowing base and various other financial covenants) and events of
default.
The
Amended and Restated Omnibus Credit Agreement supersedes and replaces in its
entirety the Omnibus Credit Agreement, dated November 30, 2000, between the
Company and CBNA, as amended (the Original Omnibus Credit
Agreement). At December 31, 2009, the Company had $9.5 billion of
outstanding borrowings made under the Original Omnibus Credit Agreement which
will continue to mature based on their originally contracted maturities, unless
a change of control or an event of default, as defined by the Amended and
Restated Omnibus Credit Agreement, occurs. A change of control is
defined as any event that results in an entity other than CBNA or its affiliates
owning more than 50% of the voting equity interest in the
Company. The Company is part of a group of businesses within
Citigroup, referred to as Citi Holdings. Citigroup intends to exit these
businesses as quickly as practicable, yet possible in an economically rational
manner through business divestitures, portfolio run-off and asset
sales. The Company’s management is currently working with Citi Holdings to
provide information necessary to support Citi Holdings’ efforts to explore
possible disposition and combination alternatives with regard to its
ownership in the Company. If a change of control or an event of
default (certain of which require explicit action by CBNA to effect an
acceleration) under the Amended and Restated Omnibus Credit Agreement were to
occur, all outstanding borrowings under the Original Omnibus Credit Agreement
and all new borrowings under the Amended and Restated Omnibus Credit Agreement
would become due and payable immediately. In either event, the
Company would no longer have a guaranteed funding source, which would have a
material adverse effect on, among other things, the Company's ability to
originate new loans, repay its debt obligations, fund business operations
and maintain the current level of profitability.
57
In
addition, since the latter half of 2007, the dislocation and illiquidity in the
asset-backed securities and credit markets have adversely impacted the Company’s
securitization activities. To the extent that these market conditions
continue, they are likely to have a further adverse impact on the Company’s
ability to execute future securitization transactions that provide favorable
pricing. Current market conditions have impeded the Company’s ability
to complete off-balance sheet securitization transactions that result in a gain,
and have had a negative impact on credit premiums on secured borrowings through
on-balance sheet securitizations. In addition, the current economic
downturn and net interest margin compression between the Company’s interest
earning assets (primarily based on CP, the prime rate, or the 91-day Treasury
Bill rate) and its funding costs (primarily based on LIBOR, though some are
based on CP and the prime rate) could adversely affect existing securitization
trusts sponsored by the Company. If any of these trusts were to default on its
obligations to noteholders, the Company’s ability to execute future
securitization transactions would be negatively affected.
In
addition to funding available to the Company under the Amended and Restated
Omnibus Credit Agreement and through loan securitizations, the Company has
further diversified its sources of funding, and continues to seek additional
alternative sources of funding. Since December 2008, the Company has been
utilizing funding available under the Participation Program. In the
second quarter of 2009, the Company began selling eligible loans to the
Department under the Purchase Program. These programs are only
approved through the remainder of the 2009-2010 academic year. After
such time, the Company may need to identify other alternative sources of
funding, which may not be available on favorable pricing or terms, if at
all.
During
the second quarter of 2009, the Company also accessed additional funding through
the Conduit. Funding for the Conduit will be provided by the capital markets. In
the event the commercial paper issued by the Conduit cannot be reissued or
“rolled” at maturity and the Conduit does not have sufficient cash to repay
investors, the Department has committed to provide liquidity to the Conduit by
entering into forward purchase agreements to purchase the eligible student loans
backing the Conduit at a predetermined price. The predetermined price represents
a discount to the principal balance of the loans. Accordingly, a sale
of loans to the Department would result in a loss to the Company and negatively
impact its results of operations.
58
Our
business is subject to extensive regulation and recent market disruptions have
led to proposals for new laws and regulations, or changes to existing laws and
regulations.
As a
participant in the financial services industry, the Company is subject to
extensive regulation. In addition, as a result of the current economic and
market downturn, there has been increased discussion of, and calls for,
additional legislative changes and increased scrutiny from a variety of
regulators. New laws or regulations, or changes in enforcement of existing laws
or regulations applicable to the Company’s business, may adversely affect the
Company. Legislative or regulatory changes could lead to business disruptions,
impact the value of assets that the Company holds or the scope or profitability
of its business activities, require the Company to change certain of its
business practices and expose the Company to additional costs (including
compliance costs) and liabilities. For example, private student loan
forbearance policies at banks and other financial institutions, including The
Student Loan Corporation, are subject to various regulatory
requirements. In view of the current regulatory envirnoment, the
Company is likely to implement changes to the Company’s private education
loan loss mitigation programs including, amount other things, that participation
by borrowers in private education loan forbearance and loss mitigation programs
are subject to more rigorous requirements, that shorter forbearance periods be
granted and that minimum periods of payment performance be required between
grants of forbearance. The Company expects that these changes, when implemented,
will materially increase net credit losses attributable to private education
loans.
Other
regulatory changes currently being considered include financial institution
regulatory changes by Congress, which, if enacted into law, would have material
effects on how consumer credit products are offered, advertised, and regulated,
and changes by the Department to rules and regulations over the Higher Education
Act.
The
Company’s business and earnings are affected by the fiscal policies adopted by
regulatory authorities of the United States. For example, policies of the
Federal Reserve Board directly influence the rate of interest paid by commercial
banks, including CBNA, the Company’s primary funding source, on its
interest-bearing deposits. This may affect the Company’s cost of borrowing from
CBNA, and also may affect the value of financial instruments, including retained
interests in securitizations and assets held for sale by the Company. In
addition, such changes in fiscal policy may adversely affect the ability of the
Company’s borrowers to repay their loans on a timely basis and the ability of
prospective borrowers to qualify for loans.
If any of
these or similar types of regulatory changes were to be adopted, they could have
an adverse effect on the Company’s financial condition and results of
operations. For further information on the impact of other recent
legislative and regulatory activities, see Legislation and Regulations on
page 38.
59
Recent
governmental proposals could end government support for financial institutions
that make student loans which would have a significant adverse effect on the
Company’s business.
On
February 26, 2009, President Obama released a summary
of his 2010 proposed budget initiatives. The President’s proposal
asks the Congress to end government support for financial institutions which
make student loans. If the President's proposals are enacted into law, student
lenders would cease making FFEL Program loans in July of 2010. The House
and Senate passed the Full Year 2009 budget resolution (S. Con. Res 13) on
April 29, 2009. The resolution includes the President’s proposals
related to student lending, although further legislation would be required in
order to effect any changes to the FFEL Program.
In
September 2009, H.R. 3221, the Student Aid and Fiscal
Responsibility Act of 2009, was approved by the House of Representatives.
H.R. 3221 would implement substantially all of the President’s proposals and,
most notably, would convert all new federal student lending on or after July 1,
2010 to the Federal Direct Loan Program. H.R. 3221 also contains a
provision which attempts to provide a solution for the net interest margin
compression experienced by the Company and other holders of FFEL Program loans
as a result of the divergence between CP and LIBOR. The provision
would allow holders to elect to use, for calendar quarters beginning January 1,
2010, the 1-month LIBOR index in lieu of the current 90-day Commercial Paper
index. A loan holder’s choice under this provision would be
irrevocable. The Senate has not yet introduced a companion bill.
Various
industry groups have proposed alternatives to the President’s proposal which
would preserve the FFEL Program, mainly by extending the Participation and
Purchase Programs and utilizing existing private lenders to service new
originations. The Company believes that these proposals would provide cost
savings similar to the President’s proposal, due to the government’s lower cost
of funds, while preserving for consumers the choice of originating lenders and
the benefits of private sector loan servicing.
In short,
significant changes to the FFEL Program are likely, although as of December 31,
2009 no action had been taken on the legislative proposals to end the FFEL
Program nor had any extension of the ECASLA law been enacted.
60
In
addition, the Company is a leading originator and owner of student loans insured
under the Higher Education Act. The Company’s financial results and
business are largely affected by the provisions of the Higher Education Act.
Amendments to the Higher Education Act may be implemented from time to time. New
legislation could impact the Company’s products, its industry or otherwise
affect its operations and the environment in which it operates in substantial
and unpredictable ways. In recent years, many changes to the Higher
Education Act have been implemented that adversely impact the operating
environment of the Company and its financial results. Certain amendments to the
Higher Education Act governing the FFEL Program have reduced the interest spread
earned by holders of FFEL Program guaranteed student loans. The Company is also
subject to rules and regulations of the agencies that act as guarantors of the
student loans, known as guaranty agencies. In addition, the Company is subject
to certain federal and state banking laws, regulations, and examinations, as
well as federal and state consumer protection laws and lending regulations,
including, specifically with respect to the Company's CitiAssist loan portfolio,
certain state usury laws and related regulations, and many other lending laws.
These laws and regulations impose substantial requirements upon lenders and
servicers involved in consumer finance. Failure to comply with these laws and
regulations could result in liability to borrowers, the imposition of civil
penalties and potential class action lawsuits.
For
further information on the impact of these recent legislative activities and
other developments, see Legislation and Regulations on
page 38.
The
Company is dependent on funding from the Conduit to fund a significant amount of
its loans and any market conditions impacting the Conduit’s ability to provide
this funding could result in significant losses to the Company.
The
Company is utilizing funding from the Conduit for additional liquidity, with
$10.2 billion in funding outstanding at December 31, 2009. Funding
from the Conduit is provided indirectly by the capital markets through the sale
to private investors of government back-stopped asset-backed commercial paper,
thereby providing financing at a cost based on market rates. The
Company receives funding equal to 97% of the principal and interest to be
capitalized of the pledged student loans. The Conduit program expires
in January 2014. The commercial paper issued by the Conduit has short-term
maturities generally ranging up to 90 days. In the event the
commercial paper issued by the Conduit cannot be reissued at maturity and the
Conduit does not have sufficient cash to repay investors, the FFB has committed
to provide short-term liquidity to the Conduit. If the Conduit is not
able to issue sufficient commercial paper to repay its investors or liquidity
advances from the FFB, the Company can either secure alternative financing and
repay its Conduit borrowings or sell the pledged student loans to the Department
at a predetermined price equal to either 97% or 100% of the accrued interest and
outstanding principal of pledged loans, depending on first disbursement date and
certain other loan criteria. If the Company were to sell the pledged
loans to the Department, it would likely result in a significant loss to the
Company.
61
The Company’s profitability could be
adversely affected by general economic conditions as well as regional economic
trends.
Factors
that could significantly affect profitability include:
·
|
The
demand for and interest rates on student loans;
|
·
|
The
cost to the Company of funding such loans;
|
·
|
The
level and volatility of interest rates and inflation;
and
|
·
|
The
number of borrowers who are unable to meet their payment
obligations.
|
Rising
interest rates could reduce demand for student loans, as some prospective
borrowers could defer attendance at certain eligible educational institutions or
pursue programs at less costly institutions, and thus borrow less, or otherwise
determine that the cost of borrowing for higher education is too great. During
periods of economic weakness, particularly in the case of high unemployment or
high inflation, the relative cost of higher education may increase materially.
As a result, some prospective borrowers may defer pursuing higher education
until economic conditions improve. Also, the ability of some borrowers to repay
their loans on a timely basis may deteriorate, resulting in higher delinquencies
and losses. To the extent that weakness in the U.S. economy continues or
worsens, the Company may experience an increase in defaults and loan losses and,
if the conditions persist for an extended period of time, the Company may exceed
contractual maximum portfolio loss limits related to the insurance on its
private education loan portfolio.
Any of
these conditions may be more prevalent in those particular regions of the United
States that have been affected by natural disasters or regional economic
downturns. If the regions affected were those in which a large segment of the
Company’s loans had been originated or its borrowers reside, a disproportionate
reduction in new loan originations could occur, accompanied by higher
delinquencies and losses. The Company has a high concentration of student loan
originations in New York and California, and as such, has a proportionately
greater exposure to economic disruptions in these states.
The Company’s financial condition is
dependent upon and could be adversely affected by the extent to which management
can successfully manage credit risks.
The
Company’s credit risk exposure has been partially mitigated through government
guarantees, third-party insurers, and certain school risk-sharing
agreements. The Company actively monitors the creditworthiness of its
insurers, but in the event that a guarantor, third-party insurer or risk-share
school is unable to meet its contractual obligations under the related
arrangements, the Company’s financial condition could be adversely
affected.
62
At
December 31, 2009, NHIC was rated A+/ Negative by Standard & Poor’s and
Aa3/Negative by Moody’s. UGCIC is not rated. On February 24, 2009,
Moody’s withdrew its rating of both UGCIC and its parent citing business
reasons, which Moody’s defines as reasons unrelated to bankruptcy,
reorganization status or adequacy of information. AIG, the
parent company of UGCIC and NHIC, continues to receive financial support from
the US Treasury and the Federal Reserve Bank in support of its financial
difficulties. AIG is in the process of restructuring the company. Although,
UGCIC and NHIC continue to make claim payments as agreed, any failure of AIG, or
sale or restructuring of UGCIC/NHIC, could have an adverse impact on the
Company’s financial condition and results of operations as it relates to the
Company’s UGCIC/NHIC insured loan portfolio.
Due to
recent regulatory changes and the current economic environment, several student
lenders as well as the Company have tightened their
underwriting. This decrease in the availability of student loans may
adversely impact the financial condition of certain schools with which the
Company does business. The current economic environment is also
affecting the financial condition of certain schools with which the Company does
business, particularly private non-profit schools. The Company’s results could
be adversely impacted to the extent that the schools for which it originates
loans do not continue as going concerns. In addition, school closings
could result in an increase in defaults for the borrowers attending these
schools at the time they close and a significant increase in school closings
could materially increase the Company’s allowance for loan losses.
From April
1997 to 2002, the Company purchased private insurance from
RSAUSA. RSAUSA decided to exit the U.S. market and sold RSAUSA in
2007 to Arrowpoint, a company owned and operated by their management and
independent directors. Arrowpoint is being operated in a voluntary
run-off mode with the objective of successfully meeting policyholder obligations
and achieving a solvent run-off. As part of the purchase, Arrowpoint agreed to
certain operating restrictions and the appointment of a claims monitor to
protect policy holders. Arrowood, the Arrowpoint subsidiary which
directly insures the Company's loans, is making claim payments on a regular
basis. Neither Arrowpoint nor Arrowood is rated. Any
failure of either could have an adverse impact on the Company’s financial
condition and results of operations as it relates to the Company’s Arrowood
insured loan portfolio.
63
The
Company’s credit risk exposure is also impacted by the size and performance of
the Uninsured CitiAssist Standard and Uninsured CitiAssist Custom loan
portfolios that are not originated under a risk-sharing relationship, which has
grown over recent years. As of December 31, 2009, the uninsured private
education loan portfolio included $193.9 million of higher risk loans made to
students attending proprietary schools. Most of these higher risk loans did not
follow the Company’s traditional underwriting process. The Company no
longer originates Uninsured CitiAssist Custom loans.
The
Company’s allowance for loan losses is dependent on estimates. These estimates
are based on historical experience, adjusted for qualitative factors including
changes in recent performance, general economic conditions or applicable laws
and regulations. If actual experience varies significantly from historical
experience or the Company’s projections of the impact of changes in qualitative
factors are inaccurate, the Company’s estimated allowance for loan losses may be
insufficient to cover losses inherent in the Company’s portfolio.
Future
decreases in the volume of student loan originations could adversely affect the
financial condition of the Company.
Loan
origination volume generated by individual schools is primarily dependent on
whether the Company appears on the school’s list of lenders, as well as the
number of students at that school that need financial aid. Origination volume
could be negatively affected by the Company’s determination to suspend lending
to certain schools, efforts to implement a more targeted origination
strategy for private education loans and withdrawal from the
consolidation loan market, although the Company may experience some growth in
the markets in which it continues to operate as competitors exit these segments.
The Company may be adversely impacted by borrowers’ or schools’ decisions to use
competing lenders, each school’s option to choose the Federal Direct Lending
Program instead of choosing to participate in the FFEL Program, or a school’s
decision to begin making student loans itself.
The
Company’s ability to maintain or increase market share is largely dependent upon
its ability to offer competitively priced, desirable loan products as well as
its ability to communicate effectively to prospective borrowers and schools
about these products. The Company plans to continue to offer competitively
priced products by managing its expenses through economies of scale, which
reduce its origination and servicing costs. The Company also plans to expand its
electronic communications with prospective borrowers and those that affect their
decision making. An inability to achieve these goals could adversely affect the
Company’s competitive position in the marketplace.
Servicing
defects in the Company’s loan portfolio could potentially result in
losses.
FFEL
Program loans that are not originated and serviced in accordance with Department
regulations risk loss of guarantee or interest
penalties. Non-compliance with Department regulations can also result
in the limitation, suspension or termination of the Company from the FFEL
Program. Private education loans that are not originated and serviced
in accordance with provisions set forth in the respective agreements with
private insurers risk cancellation of insurance coverage. In an effort to manage
these risks, the Company conducts compliance and process reviews of both the
Company’s internal operations and external loan servicers. Servicing failures
may have an adverse effect on the Company’s loan losses and, for FFEL Program
loans, interest income.
64
Other
risk of loss resulting from inadequate or failed internal processes, people or
systems, or from external events may have an adverse effect on the Company’s
financial condition.
The
Company is subject to many types of operating risks which include, but are not
limited to, risk of loss resulting from inadequate or failed internal processes,
people or systems, or from external events. These operational risks encompass
reputational and franchise elements associated with the Company’s business
practices or market conduct. They also include the risk of failing to comply
with applicable laws, regulations, regulatory administrative actions or the
Company’s internal policies. Given the high volume of transactions at
the Company, certain errors may be repeated or compounded before they are
discovered and rectified. In addition, the Company’s necessary dependence upon
automated systems to record and process its transaction volume may further
increase the risk that technical system flaws or employee tampering or
manipulation of those systems will result in losses that are difficult to
detect. The Company may also be subject to disruptions of its operating systems
arising from events that are wholly or partially beyond its control (for
example, natural disasters, acts of terrorism, epidemics, computer viruses, and
electrical/ telecommunications outages), which may give rise to losses in
service to borrowers and/or monetary loss to the Company, increasing operating
expenses and adversely affecting the Company’s competitive position. All of
these risks are also applicable where the Company relies on outside vendors to
provide services to it and its borrowers.
In
the normal course of business the Company is exposed to various legal risks that
could have an adverse effect on the Company’s business operations.
Various
issues may give rise to legal risk and cause harm to the Company and its
business prospects. These issues include appropriately dealing with
potential conflicts of interest, legal and regulatory requirements, ethical
issues, privacy laws and information security policies. Failure to address these
issues appropriately could also give rise to litigation claims against the
Company, or subject the Company to regulatory enforcement actions, fines and
penalties.
The
CCRA Act and increased funding costs have decreased the profitability of FFEL
Program loans. The Company has changed its strategic focus in an effort to
address these changes, but there can be no assurance that the Company’s efforts
will be successful.
The CCRA
Act reduced SAP for new originations by 55 basis points for Stafford and
Consolidation Loans and 85 basis points for PLUS Loans. In addition, it reduced
lender reinsurance from 99% to 97% by eliminating the EP program with a further
reduction to 95% for loans originated on or after October 1, 2012, and increased
the lender fee from 0.50% to 1.00% for new originations. At the same time,
dislocation and illiquidity in the credit markets have significantly increased
credit spreads on the Company’s new securitization transactions and borrowings
under the Omnibus Credit Agreement. The confluence of these events
has made the Company less profitable.
65
In
response to these events, the Company has:
·
|
Suspended
lending at certain schools where loans with lower balances and shorter
interest-earning periods currently result in unsatisfactory
returns;
|
·
|
|
·
|
Withdrawn
from the consolidation loan markets;
|
·
|
|
·
|
Reduced
certain borrower incentive programs for new originations;
and
|
·
|
|
·
|
Restructured
various functional areas of its business and eliminated 215 positions in
2008.
|
If these
actions or any future actions that the Company may undertake in an effort to
address these events are not successful, the Company’s future profitability may
be adversely affected.
The
Company’s amended Non-Competition Agreement with CBNA and Citigroup provides
fewer protections to the Company and may result in competition between the
Company and its majority shareholder or other Citigroup affiliates.
Effective
August 8, 2008, the Company has amended the Non-Competition Agreement among the
Company, CBNA and Citigroup to allow CBNA or any of its affiliates to
acquire another business engaged in student lending. If the revenues
from student lending represent more than 5% of the consolidated revenues of the
acquired business, then CBNA or its affiliates are required to cease student
lending or use commercially reasonable efforts to sell the acquired student
lending business (which sale may be made to the Company) within eight months of
the acquisition. If, however, student lending represents 5% or
less of the consolidated revenues of the acquired business or if after using
commercially reasonable efforts, CBNA or its affiliates are unable to sell the
competing business at a price equal to or greater than the implied price, then
CBNA or its affiliates may continue to engage in the competing
business. Consequently, the Company may face direct competition from
its majority shareholder or other Citigroup affiliates, which could have an
adverse impact on the Company’s financial condition or results of
operations.
66
Corporate
Governance and Controls
The
Company has a Code of Conduct that expresses the values that drive employee
behavior and maintains the Company’s commitment to the highest standards of
conduct. The Code of Conduct applies to the Company’s employees, executive
officers and directors. In addition, the Company adopted a Code of
Ethics for Financial Professionals which applies to all finance, accounting,
treasury, tax and investor relations professionals and which supplements the
companywide Code of Conduct.
Both the
Code of Conduct and the Code of Ethics for Financial Professionals can be found
on the Company’s website at www.studentloan.com by
clicking on the “Investor Relations” link and then clicking on the “Board and
Management” link. If the Company makes substantive amendments to its
Code of Conduct or Code of Ethics by fraud professionals, or grants any waiver,
including any implicit waiver, it will disclose the nature of the amendment or
waiver on its website. The Company’s Corporate Governance Guidelines
and the charter for both the Audit Committee and Compensation Committee are
available free of charge on the website or by writing to The Student Loan
Corporation, Investor Relations, 750 Washington Boulevard, Stamford, CT
06901.
Controls
and Procedures
Disclosure
The
Company maintains disclosure controls and procedures (as defined in the
Securities Exchange Act of 1934, as amended (the Exchange Act) Rule 13a-15(e)
and 15d-15(e)) that are designed to ensure that information required to be
disclosed by the Company in the reports that it files or submits under the
Exchange Act is recorded, processed, summarized and reported on a timely basis
and that such information is accumulated and communicated to the Company’s
management, including its Chief Executive Officer, or CEO, and its Chief
Financial Officer, or CFO, to allow timely decisions regarding required
disclosure. The Company's management, with the participation of the Company’s
CEO and CFO, has evaluated the effectiveness of the Company's disclosure
controls and procedures as of the end of the period covered by this
report. Based on such evaluation, the Company’s management, including
the CEO and CFO, concluded that the Company's disclosure controls and procedures
were effective as of December 31, 2009.
Changes
in Internal Control Over Financial Reporting
Except as
expressly noted below in Management’s Report on Internal
Control over Financial Reporting, there has not been any change in the
Company’s internal control over financial reporting (as such term is defined in
Rules 13a-15(f) and 15d-15(f) under the Exchange Act) during the quarter ended
December 31, 2009 that has materially affected, or is reasonably likely to
materially affect, the Company’s internal control over financial
reporting.
67
MANAGEMENT’S
REPORT ON INTERNAL CONTROL OVER FINANCIAL
REPORTING
|
The
management of the Company is responsible for establishing and maintaining
adequate internal control over financial reporting, as such term is defined in
Rule 13a-15(f) promulgated under the Exchange Act. The Company’s
internal control over financial reporting is a process designed under the
supervision of the Company’s principal executive and principal financial
officers, and effected by the Company’s board of directors, management and other
personnel, to provide reasonable assurance regarding the reliability of
financial reporting and the preparation of financial statements for external
purposes in accordance with generally accepted accounting
principles. This process includes those policies and procedures
that:
·
|
Pertain
to the maintenance of records that, in reasonable detail, accurately and
fairly reflect the transactions and dispositions of the assets of the
Company;
|
·
|
Provide
reasonable assurance that transactions are recorded as necessary to permit
preparation of financial statements in accordance with generally accepted
accounting principles, and that receipts and expenditures of the Company
are being made only in accordance with proper authorizations of management
and directors of the Company; and
|
·
|
Provide
reasonable assurance regarding prevention or timely detection of
unauthorized acquisition, use or disposition of the Company’s assets that
could have a material effect on the financial
statements.
|
Because
of its inherent limitations, internal control over financial reporting may not
prevent or detect all misstatements. Projections of any evaluation of
effectiveness to future periods are subject to the risk that (i) controls may
become inadequate because of changes in condition, or (ii) the degree of
compliance with the policies or procedures may deteriorate.
Material
Weakness Related to Accounting for Income Taxes
In the
process of preparing the Company’s consolidated financial statements for the
three months ended March 31, 2009, management identified a material weakness in
internal control over financial reporting in the design and monitoring of the
Company’s processes to analyze, record, value and reconcile current and deferred
income tax accounts. A material weakness is a deficiency, or
combination of deficiencies, in internal control over financial reporting such
that there is a reasonable possibility that a material misstatement of the
Company’s annual or interim financial statements would not be prevented or
detected on a timely basis.
During
the second quarter of 2009, the Company identified additional errors in current
and deferred income taxes arising from this material weakness. These errors
related to how the Company accounted for and recorded in its income tax returns
temporary differences between pretax financial income and taxable income,
specifically related to its off-balance sheet securitization
transactions. The Company assessed the materiality of the cumulative
errors and determined that these errors were immaterial to amounts reported in
prior period financial statements. The correction of prior periods
for these immaterial errors is reflected in the Company’s Quarterly Reports on
Form 10-Q for the second and third quarters of 2009 and this Annual Report on
Form 10-K, and will continue to be reflected in the Company’s future Exchange
Act reports, as applicable.
68
During
2009, the Company undertook the following steps to improve internal control over
processes to analyze, record, value and reconcile current and deferred income
tax accounts:
·
|
assumed
responsibility for calculations of tax reserves previously performed by
its tax advisors within Citigroup;
|
·
|
implemented
clear policies and sustainable processes for calculating, reconciling and
reviewing tax accounts, including increased control over spreadsheets, in
an effort to better ensure the accuracy of these
accounts;
|
·
|
enhanced
communication and cooperation between the Company’s controllers’ group and
its tax advisors within Citigroup;
|
·
|
increased
the level of resources dedicated to tax accounting and reporting during
the fourth quarter of 2009; and
|
·
|
reviewed
existing processes for the preparation and review of income tax returns
and implemented changes during the fourth quarter of 2009 as
necessary.
|
Management
evaluated the new controls implemented, as well as pre-existing controls related
to accounting for income taxes, and concluded that the controls are designed
properly and operating effectively. Based on this review, management believes
that the internal controls in place as of December 31, 2009 with respect to
processes to analyze, record, value and reconcile current and deferred income
tax accounts provide reasonable assurance that tax transactions are properly
recorded and disclosed, and that a tax-related material misstatement or omission
would be prevented or timely detected by the Company during the preparation of
its annual or interim financial statements. Accordingly, management has
concluded that the material weakness no longer exists.
Management’s
Assessment of Internal Control over Financial Reporting
The
Company’s management assessed the effectiveness of the Company’s internal
control over financial reporting as of December 31, 2009. In making
this assessment, the Company’s management used the criteria set forth by the
Committee of Sponsoring Organizations of the Treadway Commission (COSO) in
Internal Control-Integrated Framework. Based on their assessment, management
believes that, as of December 31, 2009, the Company’s internal control over
financial reporting is effective based on those criteria.
The
effectiveness of the Company’s internal control over financial reporting has
been audited by KPMG LLP, the Company’s independent registered public accounting
firm, as stated in their reports on pages 70 and 71, which expressed an
unqualified opinion on the effectiveness of the Company’s internal control over
financial reporting as of December 31, 2009.
69
REPORT
OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM – INTERNAL CONTROL OVER
FINANCIAL REPORTING
|
The
Board of Directors and Stockholders
The
Student Loan Corporation:
We have
audited the internal control over financial reporting of The Student Loan
Corporation and subsidiaries (the Company) as of December 31, 2009, based on
criteria established in Internal Control - Integrated
Framework issued by the Committee of Sponsoring Organizations of the
Treadway Commission (COSO).
The Company's management is responsible for maintaining effective
internal control over financial reporting and for its assessment of the
effectiveness of internal control over financial reporting, included in the
accompanying Management’s Report on Internal Control over Financial Reporting.
Our responsibility is to express an opinion on the Company’s internal control
over financial reporting based on our audit.
We
conducted our audit in accordance with the standards of the Public Company
Accounting Oversight Board (United States). Those standards require that we plan
and perform the audit to obtain reasonable assurance about whether effective
internal control over financial reporting was maintained in all material
respects. Our audit included obtaining an understanding of internal control over
financial reporting, assessing the risk that a material weakness exists, and
testing and evaluating the design and operating effectiveness of internal
control based on the assessed risk. Our audit also included performing such
other procedures as we considered necessary in the circumstances. We believe
that our audit provides a reasonable basis for our opinion.
A
company's internal control over financial reporting is a process designed to
provide reasonable assurance regarding the reliability of financial reporting
and the preparation of financial statements for external purposes in accordance
with generally accepted accounting principles. A company's internal
control over financial reporting includes those policies and procedures that (1)
pertain to the maintenance of records that, in reasonable detail, accurately and
fairly reflect the transactions and dispositions of the assets of the company;
(2) provide reasonable assurance that transactions are recorded as necessary to
permit preparation of financial statements in accordance with generally accepted
accounting principles, and that receipts and expenditures of the company are
being made only in accordance with authorizations of management and directors of
the company; and (3) provide reasonable assurance regarding prevention or timely
detection of unauthorized acquisition, use, or disposition of the company’s
assets that could have a material effect on the financial
statements.
Because
of its inherent limitations, internal control over financial reporting may not
prevent or detect misstatements. Also, projections of any evaluation
of effectiveness to future periods are subject to the risk that controls may
become inadequate because of changes in conditions, or that the degree of
compliance with the policies or procedures may deteriorate.
In our
opinion, The Student Loan Corporation and subsidiaries maintained, in all
material respects, effective internal control over financial reporting as of
December 31, 2009, based on criteria established in Internal Control - Integrated
Framework issued by the Committee of Sponsoring Organizations of the
Treadway Commission.
We also
have audited, in accordance with the standards of the Public Company Accounting
Oversight Board (United States), the consolidated balance sheets of the Company
as of December 31, 2009 and 2008, and the related consolidated statements of
income, changes in stockholders’ equity, and cash flows for each of the years in
the three-year period ended December 31, 2009, and our report dated February 26,
2010 expressed an
unqualified opinion on those consolidated financial statements.
/s/ KPMG LLP
New York,
New York
February
26, 2010
70
REPORT
OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM – CONSOLIDATED FINANCIAL
STATEMENTS
|
The
Board of Directors and Stockholders
The
Student Loan Corporation:
We have
audited the accompanying consolidated balance sheets of The Student Loan
Corporation and subsidiaries (the Company) as of December 31, 2009 and 2008, and
the related consolidated statements of income, changes in stockholders’ equity,
and cash flows for each of the years in the three-year period ended December 31,
2009. These consolidated financial statements are the responsibility of the
Company’s management. Our responsibility is to express an opinion on these
consolidated financial statements based on our audits.
We
conducted our audits in accordance with the standards of the Public Company
Accounting Oversight Board (United States). Those standards require
that we plan and perform the audit to obtain reasonable assurance about whether
the financial statements are free of material misstatement. An audit
includes examining, on a test basis, evidence supporting the amounts and
disclosures in the financial statements. An audit also includes assessing the
accounting principles used and significant estimates made by management, as well
as evaluating the overall financial statement presentation. We
believe that our audits provide a reasonable basis for our opinion.
In our
opinion, the consolidated financial statements referred to above present fairly,
in all material respects, the financial position of The Student Loan Corporation
and subsidiaries as of December 31, 2009 and 2008, and the results of their
operations and their cash flows for each of the years in the three-year period
ended December 31, 2009, in conformity with U.S. generally accepted accounting
principles.
As
discussed in note 1 to the consolidated financial statements, in 2007 the
Company changed its methods of accounting for fair value measurements, the fair
value option for financial assets and financial liabilities, and uncertainty in
income taxes.
We also
have audited, in accordance with the standards of the Public Company Accounting
Oversight Board (United States), the Company’s internal control over financial
reporting as of December 31, 2009, based on criteria established in Internal Control - Integrated
Framework issued by the Committee of Sponsoring Organizations of the
Treadway Commission (COSO), and our report dated February 26, 2010 expressed an
unqualified opinion on the effectiveness of the Company’s internal control over
financial reporting.
/s/ KPMG
LLP
New York,
New York
February
26, 2010
71
CONSOLIDATED
FINANCIAL STATEMENTS
|
The
Student Loan Corporation and Subsidiaries
CONSOLIDATED
STATEMENTS OF INCOME
(Dollars
in thousands, except share and per share amounts)
|
Years
ended December 31,
|
|||||||||||
2009
|
2008
|
2007
|
||||||||||
NET
INTEREST INCOME
|
||||||||||||
Interest
income
|
$ | 780,292 | $ | 1,215,412 | $ | 1,563,811 | ||||||
Interest
expense (Notes 6 and 10)
|
(502,645 | ) | (884,113 | ) | (1,175,164 | ) | ||||||
Net
interest income
|
277,647 | 331,299 | 388,647 | |||||||||
Provision
for loan losses (Note 4)
|
(140,852 | ) | (140,895 | ) | (59,920 | ) | ||||||
Net
interest income after provision for loan losses
|
136,795 | 190,404 | 328,727 | |||||||||
OTHER
INCOME
|
||||||||||||
Gains
on loans securitized (Note 15)
|
– | 1,262 | 70,814 | |||||||||
Gains
on loans sold
|
45,989 | 2,532 | 41,044 | |||||||||
Fee
and other income (Notes 8, 10, 13 and 15)
|
155,491 | 101,197 | 36,301 | |||||||||
Total
other income
|
201,480 | 104,991 | 148,159 | |||||||||
OPERATING
EXPENSES
|
||||||||||||
Salaries
and employee benefits (Notes 10 and 11)
|
32,134 | 48,573 | 61,628 | |||||||||
Restructuring
and related charges (Note 18)
|
(381 | ) | 12,389 | 735 | ||||||||
Other
expenses (Notes 9 and 10)
|
106,098 | 117,764 | 117,519 | |||||||||
Total
operating expenses
|
137,851 | 178,726 | 179,882 | |||||||||
Income
before income taxes
|
200,424 | 116,669 | 297,004 | |||||||||
Provision
for income taxes (Note 12)
|
74,752 | 43,242 | 111,252 | |||||||||
NET
INCOME
|
$ | 125,672 | $ | 73,427 | $ | 185,752 | ||||||
BASIC
AND DILUTED EARNINGS PER COMMON SHARE
|
||||||||||||
Based on
20,000,000 average shares outstanding
|
$ | 6.28 | $ | 3.67 | $ | 9.29 | ||||||
DIVIDENDS
DECLARED AND PAID PER COMMON
SHARE
|
$ | 2.48 | $ | 5.72 | $ | 5.59 |
See
accompanying Notes to Consolidated Financial Statements.
72
The
Student Loan Corporation and Subsidiaries
CONSOLIDATED BALANCE SHEETS
December
31,
|
||||||||
(Dollars
in thousands, except share and per share amounts)
|
2009
|
2008
|
||||||
ASSETS
|
||||||||
Federally
insured student loans (Note 4)
|
$ | 17,948,706 | $ | 18,064,662 | ||||
Private
education loans (Note 4)
|
7,432,471 | 5,861,545 | ||||||
Deferred
origination and premium costs (Note 4)
|
548,083 | 635,449 | ||||||
Allowance
for loan losses (Note 4)
|
(149,098 | ) | (110,329 | ) | ||||
Student
loans, net
|
25,780,162 | 24,451,327 | ||||||
Other
loans and lines of credit (Note 4)
|
5,616 | 9,016 | ||||||
Loans
held for sale (Notes 1 and 4)
|
2,409,267 | 1,072,316 | ||||||
Cash
|
17,998 | 595 | ||||||
Residual
interests in securitized loans (Note 15)
|
820,291 | 942,807 | ||||||
Other
assets (Note 5)
|
1,984,907 | 1,761,338 | ||||||
Total
Assets
|
$ | 31,018,241 | $ | 28,237,399 | ||||
LIABILITIES
AND STOCKHOLDERS’ EQUITY
|
||||||||
Liabilities
|
||||||||
Short-term
borrowings, payable to principal stockholder (Note 6)
|
$ | 5,131,000 | $ | 12,654,200 | ||||
Short-term
secured borrowings, payable to Department of Education (Note
6)
|
2,066,686 | 1,002,211 | ||||||
Long-term
borrowings, payable to principal stockholder (Note 6)
|
4,391,000 | 10,102,000 | ||||||
Long-term
secured borrowings (Note 6)
|
16,999,976 | 1,727,744 | ||||||
Deferred
income taxes (Note 12)
|
410,546 | 382,155 | ||||||
Other
liabilities (Note 7)
|
348,612 | 774,886 | ||||||
Total
liabilities
|
29,347,820 | 26,643,196 | ||||||
Stockholders’
Equity
|
||||||||
Preferred
stock, par value $0.01 per share; authorized
10,000,000
shares; no shares issued or outstanding
|
– | – | ||||||
Common
stock, par value $0.01 per share; authorized
50,000,000
shares; 20,000,000 shares issued and outstanding
|
200 | 200 | ||||||
Additional
paid-in capital
|
141,869 | 141,723 | ||||||
Retained
earnings
|
1,528,352 | 1,452,280 | ||||||
Total
stockholders’ equity
|
1,670,421 | 1,594,203 | ||||||
Total
Liabilities and Stockholders’ Equity
|
$ | 31,018,241 | $ | 28,237,399 |
See
accompanying Notes to Consolidated Financial Statements.
73
The
Student Loan Corporation and Subsidiaries
CONSOLIDATED
STATEMENTS OF CHANGES IN STOCKHOLDERS’ EQUITY
Years
ended December 31,
|
||||||||||||
(Dollars
in thousands, except per share amounts)
|
2009
|
2008
|
2007
|
|||||||||
COMMON
STOCK AND ADDITIONAL PAID-IN CAPITAL
|
||||||||||||
Balance,
beginning of period
|
$ | 141,923 | $ | 141,555 | $ | 141,524 | ||||||
Capital
contributions and other changes
|
146 | 368 | 31 | |||||||||
Balance,
end of period
|
$ | 142,069 | $ | 141,923 | $ | 141,555 | ||||||
RETAINED
EARNINGS
|
||||||||||||
Balance,
beginning of period
|
$ | 1,452,280 | $ | 1,493,253 | $ | 1,418,492 | ||||||
Net
income
|
125,672 | 73,427 | 185,752 | |||||||||
Cumulative
effect of adoption of accounting standard, net of taxes of $506 in
2007
|
– | – | 809 | |||||||||
Common
dividends declared, $2.48, $5.72 and $5.59 per common share in 2009, 2008
and 2007, respectively
|
(49,600 | ) | (114,400 | ) | (111,800 | ) | ||||||
Balance,
end of period
|
$ | 1,528,352 | $ | 1,452,280 | $ | 1,493,253 | ||||||
ACCUMULATED
OTHER CHANGES IN EQUITY FROM NONOWNER SOURCES
|
||||||||||||
Balance,
beginning of period
|
$ | – | $ | – | $ | 809 | ||||||
Net
change in unrealized gains on investment securities, net of taxes of
$(506) in 2007 (Note 1)
|
– | – | (809 | ) | ||||||||
Balance,
end of period
|
$ | – | $ | – | $ | – | ||||||
TOTAL
STOCKHOLDERS’ EQUITY
|
$ | 1,670,421 | $ | 1,594,203 | $ | 1,634,808 |
See
accompanying Notes to Consolidated Financial Statements.
74
The
Student Loan Corporation and Subsidiaries
CONSOLIDATED
STATEMENTS OF CASH FLOWS
Years
ended December 31,
|
||||||||||||
(Dollars
in thousands)
|
2009
|
2008
|
2007
|
|||||||||
Cash
flows from operating activities:
|
||||||||||||
Net
income
|
$ | 125,672 | $ | 73,427 | $ | 185,752 | ||||||
Adjustments
to reconcile net income to net cash from operating
activities:
|
||||||||||||
Depreciation
and amortization of equipment and computer software
|
10,338 | 12,285 | 14,429 | |||||||||
Amortization
of deferred loan origination and purchase costs
|
86,688 | 96,700 | 109,728 | |||||||||
Accreted
interest on residual interests
|
(69,177 | ) | (65,510 | ) | (59,177 | ) | ||||||
Provision
for loan losses
|
140,852 | 140,895 | 59,920 | |||||||||
Deferred
tax benefit (provision)
|
28,391 | (27,872 | ) | 13,237 | ||||||||
Gains
on loans sold and securitized
|
(45,989 | ) | (3,794 | ) | (111,858 | ) | ||||||
Gain
on residual interest valuation
|
(19,564 | ) | (326,039 | ) | (2,733 | ) | ||||||
Loss
(gain) on servicing asset valuation
|
31,547 | (9,021 | ) | 15,668 | ||||||||
Other
changes in loans held for sale including loan origination and premium
costs
|
(4,391,761 | ) | (697,690 | ) | (300,198 | ) | ||||||
Proceeds
from loans sold and securitized
|
2,527,737 | 141,075 | 232,305 | |||||||||
Cash
received on residual interests in trading securitized
assets
|
211,258 | 138,681 | 65,388 | |||||||||
Change
in accrued interest receivable
|
(80,067 | ) | (55,097 | ) | (187,984 | ) | ||||||
Restructuring
and related charges
|
(381 | ) | 12,389 | 735 | ||||||||
Change
in other assets
|
499,342 | (317,651 | ) | (212,875 | ) | |||||||
Change
in other liabilities
|
(425,747 | ) | 380,379 | (3,697 | ) | |||||||
Other
non-cash charges
|
13,626 | 15,962 | – | |||||||||
Net
cash used in operating activities
|
(1,357,235 | ) | (490,881 | ) | (181,360 | ) | ||||||
Cash
flows from investing activities:
|
||||||||||||
Change
in loans
|
(1,498,145 | ) | (5,214,719 | ) | (5,084,958 | ) | ||||||
Change
in loan origination and purchase costs
|
771 | (127,209 | ) | (232,674 | ) | |||||||
Proceeds
from loans sold and securitized
|
515,276 | 1,973,207 | 4,474,616 | |||||||||
Change
in restricted cash and cash equivalents
|
(642,921 | ) | (47,615 | ) | – | |||||||
Capital
expenditures on equipment and computer software
|
(7,617 | ) | (8,646 | ) | (6,569 | ) | ||||||
Net
cash used in investing activities
|
(1,632,636 | ) | (3,424,982 | ) | (849,585 | ) | ||||||
Cash
flows from financing activities:
|
||||||||||||
Net
change in borrowings payable to principal stockholder with original
maturities of three months or less
|
(4,686,200 | ) | 3,433,200 | (4,963,800 | ) | |||||||
Proceeds
from other short-term borrowings
|
4,309,862 | 4,021,812 | 4,250,000 | |||||||||
Repayments
of other short-term borrowings
|
(6,256,387 | ) | (3,008,601 | ) | (1,250,000 | ) | ||||||
Proceeds
from long-term borrowings
|
15,639,570 | 8,082,620 | 7,100,000 | |||||||||
Repayments
of long-term borrowings
|
(5,949,971 | ) | (8,498,198 | ) | (4,000,000 | ) | ||||||
Dividends
paid to stockholders
|
(49,600 | ) | (114,400 | ) | (111,800 | ) | ||||||
Net
cash provided by financing activities
|
3,007,274 | 3,916,433 | 1,024,400 | |||||||||
Net
increase (decrease) in cash
|
17,403 | 570 | (6,545 | ) | ||||||||
Cash
- beginning of period
|
595 | 25 | 6,570 | |||||||||
Cash
- end of period
|
$ | 17,998 | $ | 595 | $ | 25 | ||||||
Supplemental
disclosure:
|
||||||||||||
Cash
paid for:
|
||||||||||||
Interest
|
$ | 584,588 | $ | 905,666 | $ | 1,168,513 | ||||||
Income
taxes, net
|
$ | 53,772 | $ | 52,779 | $ | 176,049 |
See accompanying Notes to Consolidated
Financial Statements.
75
NOTES
TO CONSOLIDATED FINANCIAL STATEMENTS
1. SIGNIFICANT
ACCOUNTING POLICIES
Background
The
accompanying Consolidated Financial Statements of The Student Loan Corporation
(the Company), a Delaware corporation, include the accounts of the Company and
its wholly owned subsidiaries: SLC Student Loan Receivables I, Inc., SLC Conduit
I LLC and the trusts the Company has formed for its on-balance sheet
securitization transactions. SLC Student Loan Receivables I, Inc. is
a special-purpose entity formed in 2001 for the purpose of acquiring student
loans originated or acquired by the Company and transferring such loans to, and
depositing the student loans in, securitization trusts. SLC Conduit I LLC is a
limited liability company formed in 2009 for the purpose of acquiring Federal
Family Education Loan (FFEL) Program loans originated or acquired by the Company
and issuing funding notes to the Department sponsored
student loan-backed commercial paper conduit, Straight-A Funding, LLC (the
Conduit). Educational Loan Center, Inc., a former subsidiary of the
Company, was dissolved on June 30, 2008. All intercompany balances
and transactions have been eliminated.
The
Company, which has a trust agreement to originate loans through Citibank, N.A.
(CBNA), is an originator, manager and servicer of student loans, including loans
made in accordance with federally sponsored guaranteed student loan programs as
well as private education loans. CBNA owns 80% of the Company’s
outstanding common stock and is an indirect wholly owned subsidiary of Citigroup
Inc. (Citigroup).
Basis
of Presentation
The
Company’s accounting policies are in conformity with U.S. generally accepted
accounting principles (GAAP). The Company’s operations are a single segment for
financial reporting purposes, as the Company’s only operations consist of
originating, managing and servicing student loans.
Certain
amounts in the prior years’ financial statements and notes have been
reclassified to conform to the current year’s presentation.
See Note
3 for an understanding of changes to certain previously reported amounts
resulting from the correction of immaterial errors.
76
Hierarchy
of Generally Accepted Accounting Principles
In June
2009, the Financial Accounting Standards Board (FASB) issued then authoritative
Statement of Financial Accounting Standards (SFAS) No. 168 The FASB Accounting Standards
Codification and the Hierarchy of Generally Accepted Accounting
Principles, (SFAS 168), now authoritative under FASB Accounting Standards
CodificationTM
(Codification or ASC) ASC 105-10. This established the ASC as the
single source of authoritative GAAP recognized by the FASB to be applied by
nongovernmental entities. Rules and interpretive releases of the Securities and
Exchange Commission (SEC) under authority of federal securities laws are also
sources of authoritative GAAP for SEC registrants. The Codification supersedes
all existing non-SEC accounting and reporting guidance. All other
nongrandfathered, non-SEC accounting literature not included in the Codification
has become nonauthoritative.
Use
of Estimates
The
preparation of the Consolidated Financial Statements in conformity with GAAP
requires the Company to make estimates based on assumptions about current and
future economic and market conditions (including, but not limited to, credit
risk, market liquidity and interest rates) which affect reported amounts and
related disclosures in the Company’s financial statements. Although current
estimates reflect existing conditions and expected trends, as appropriate, it is
reasonably possible that actual conditions in the future could differ from those
estimates. Such differences could have a material adverse effect on
the Company’s results of operations and financial position. Among other effects,
such changes could result in credit losses and expenses in excess of established
reserves in the allowance for loan losses and decreases in the fair value of
retained interests in its securitized loans in the form of subordinated residual
interests (i.e., interest-only strips), servicing rights and, in certain cases,
subordinated notes issued by the trusts (collectively, retained
interests).
Subsequent
Events
The
Company has evaluated subsequent events through February 26, 2010, which is the
date its Consolidated Financial Statements were issued.
Revenue
Recognition
Revenues,
which include net interest income, fees and gains on loans sold and securitized,
if any, are recognized as they are earned. Interest income includes
special allowance payments (SAP) from and excess interest payments to the
federal government as prescribed under the Higher Education Act of 1965, as
amended (the Higher Education Act), and is net of amortization of premiums and
origination costs. The Company accounts for premiums and origination costs and
deferred financing costs in accordance with ASC 310-20. Deferred premiums and
origination costs on the Company’s loan portfolio and deferred financing costs
are amortized using the interest method and recognized as yield adjustments to
net interest income.
77
Loans
The
Company has a portfolio of student loans originated under the FFEL Program
authorized by the U.S. Department of Education (the Department) under the Higher
Education Act, which are insured by guaranty agencies (guarantors). The Company
recognizes student loan interest income as it is earned. SAP from and
excess interest payments to the federal government, if any, are recognized as
yield adjustments to interest income.
The
Company also has a portfolio of private education loans primarily consisting of
CitiAssist®
loans. Some of those loans are insured against loss by private
insurers or covered under other risk-sharing agreements with creditworthy
schools. Other loans, including many higher risk loans, are neither
insured nor covered under risk-sharing agreements. The Company is
exposed to 100% of loss on such loans. Effective January 1, 2008, the Company
elected to stop insuring new CitiAssist loan originations.
Allowance
for Loan Losses
The
Company has an allowance for loan losses that provides a reserve for estimated
losses on: (1) the portion of the FFEL Program loan portfolio that is subject to
the risk-sharing provisions of the Higher Education Act and (2) the private
education loan portfolio, after considering credit risk insurance coverage
obtained from third parties on certain loans, the impact of any risk-sharing
agreements with certain schools and counterparty risk ratings. Estimated losses
are calculated using historical delinquency and credit loss experience adjusted
for aging of the portfolio, market conditions and other factors impacting the
portfolio that are not captured by historical trends. These factors
include, among other things, internal policy changes, regulatory changes and
general economic conditions affecting borrowers, private insurers, risk sharers,
and higher education institution clients. Losses that are probable
and estimable are expensed currently which increases the provision for loan
losses. Actual losses are charged against the reserve as they occur,
and subsequent recoveries are credited back to the reserve.
The
Company ceases to accrue interest income on a student loan when one of the
following events occurs: (1) a FFEL Program loan loses its guarantee, (2) an
insured private education loan reaches 150 days of delinquency or (3) an
uninsured private education loan reaches 90 days of
delinquency. Accrual of interest is resumed if the loan guarantee is
reinstated or when principal and interest become current
again. Interest received on non-accruing loans is recorded directly
into interest income. The Company immediately writes off the loan balance
corresponding to the unguaranteed portion of FFEL Program loans at the end of
the month in which the loan is at least 270 days delinquent and the uninsured
portion of private education loans at the end of the month in which the loan is
at least 120 days delinquent. The Company also writes off the loan
balances for loans in which the guarantee claim is not received for FFEL Program
and private education loans after 450 days and 240 days of delinquency,
respectively. When loans or portions of loans are written off, the
Company reduces interest income for the amounts of accrued, uncollected interest
and unamortized deferred premiums and origination costs.
The
Company’s FFEL Program and private education loans contain terms that allow the
borrower to postpone payments while in school or to postpone or reduce payments
if they meet certain income or financial hardship criteria. The
Company continues to accrue interest income on such loans. This
accrued interest increases the borrowers’ unpaid balance.
78
Transfer
of Student Loans through Sale or Securitization
Whole
Loan Sales
The
Company accounts for its whole loan sales in accordance with the provisions of
ASC 860-10-40. In order for a transfer of financial assets to be considered a
sale, the assets transferred by the Company must have been isolated from the
seller, even in bankruptcy or other receivership, and the purchaser must have
the right to pledge or exchange the assets transferred. In addition, the sale
accounting rules of ASC 860-10-40-5 requires the Company to relinquish effective
control over the loans sold as of the sale date.
Loans
Securitized
The
Company uses two distinct methods of accounting for its
securitizations. Certain of the Company’s securitizations currently
meet the qualifications of ASC 860-10-40-5 to be accounted for as a
sale. The qualifications are that the assets transferred are legally
isolated from the Company, even in the event of a bankruptcy; that the holders
of the beneficial interests are not constrained from pledging or exchanging
their interests; and that the transferor does not maintain effective control
over the transferred assets. The Company uses a two-step structure
with a qualifying special purpose entity (QSPE) to obtain legal
isolation. For the Company’s securitizations which are currently
accounted for as a sale, referred to as off-balance sheet securitizations, the
transferred assets are removed from the consolidated balance sheet and a gain or
loss is recognized. The Company’s securitizations that fail to meet
the accounting requirements for a sale in accordance with ASC 860-10-40-5 are
accounted for as secured borrowings and the transferred assets are consolidated
in the Company’s financial statements. These transactions are
referred to as on-balance sheet securitizations. See Note 2 for
accounting changes which will affect how the Company accounts for its
off-balance sheet securitization entities as well as future securitization
transactions effecitive January 1, 2010.
The
Company’s on-balance sheet securitization transactions are collateralized by
certain of its student loans, which are recorded in Federally insured student loans
and Private education
loans, and by accrued interest on the student loans and restricted cash
and cash equivalents, which are recorded in Other assets on the
Consolidated Balance Sheets.
Historically,
the Company’s off-balance sheet securitizations have resulted in gains and
losses recognized at the time of securitization which are reported in Gains on loans
securitized. These securitization gains and losses represent
the difference between the cost basis of the assets sold and the fair value of
the assets received, including, as applicable, cash and retained
interests. Retained interests in off-balance sheet securitization
trusts are in the form of residual interests, servicing assets, and retained
notes. All of the Company’s retained interests are recorded at fair
value in accordance with GAAP. Unrealized gains and losses on
retained interests are reported in Fee and other income. Accreted
interest on residual interests is reported in Interest
income. The Company estimates the fair value of the residual
interests and servicing assets using an income approach by determining the
present value of expected future cash flows using modeling techniques that
incorporate management's best estimates of key assumptions, including prepayment
speeds, credit losses, borrower benefits and discount rates.
79
Cash is
received from the trusts for servicing fee revenues, residual interest
distributions and payments of principal and interest on retained
notes.
Additional
information on the Company's securitization activities may be found in Note
15.
Loans
Financed through Department of Education Programs
The
Company has funded certain of its FFEL Program loans through the
Conduit. The funding received from the Conduit is accounted for as
secured borrowings and the student loans pledged as collateral are recorded in
Federally insured student
loans on the Company’s Consolidated Balance Sheets. See Notes
6 and 15 for additional information regarding the Conduit.
The
Company also obtains short-term debt financing for new FFEL Program Stafford and
PLUS loan originations through the Department’s Loan Participation Purchase
Program (the Participation Program). The borrowings through the
Participation Program are collateralized by the funded FFEL Program Stafford and
PLUS loans which are recorded in Loans held for sale on the
Company’s Consolidated Balance Sheet. Loans funded under the
Participation Program are either sold to the Department pursuant to the
Department’s Loan Purchase Commitment Program (the Purchase Program) or
refinanced prior to the Participation Program’s
expiration. Additional information pertaining to the Company’s
borrowings through the Participation Program can be found in Note
6.
Loans
Held for Sale
Loans
held for sale are loans that the Company plans to include in off-balance sheet
securitization or sale transactions, including loans that the Company originates
in anticipation of sale under the Purchase Program. Management
continually assesses its future securitization and loan sale plans and may
transfer loans or record loans directly into the held for sale portfolio to meet
the Company’s anticipated near term sale and securitization requirements. These
loans are recorded at the lower of cost, consisting of principal and deferred
costs, or fair value evaluated on an aggregate basis. During 2009,
loans held for sale were composed of loans to be sold to the Department under
the Purchase Program, which provides for a purchase price that is higher than
the carrying value of the loans. During 2009 and 2008, the cost of
certain loans held for sale exceeded fair value. Accordingly, the
Company recorded lower of cost or fair value write downs on these loans held for
sale of $2.2 million and $34.7 million for the years ended December 31, 2009 and
December 31, 2008, respectively. The write downs related to loans that were
transferred from loans held for sale back into the operating loan portfolio
during the respective periods.
80
Changes
in the Company’s loans held for sale are presented in the table
below:
Year
Ended December 31,
|
||||||||
(Dollars
in thousands)
|
2009
|
2008
|
||||||
Balance
at beginning of period
|
$ | 1,072,316 | $ | 337,790 | ||||
Origination
and purchases
|
4,613,839 | 720,465 | ||||||
Transfers
into loans held for sale
|
– | 2,418,695 | ||||||
Transfers
back into the operating loan portfolio
|
(55,601 | ) | (2,208,644 | ) | ||||
Loan
sales
|
(2,997,024 | ) | (138,543 | ) | ||||
Fair
value write down of loans held for sale
|
(2,185 | ) | (34,672 | ) | ||||
Other
(1)
|
(222,078 | ) | (22,775 | ) | ||||
Balance
at end of period
|
$ | 2,409,267 | $ | 1,072,316 |
|
(1)
|
Amount
includes borrower principal payments and loan
consolidations.
|
Restricted Cash and Cash
Equivalents
Restricted
cash and cash equivalents represents amounts related to the Company’s secured
borrowings. This cash must be used to make payments related to the secured
borrowings and is classified as a component of Other assets. Amounts on
deposit in these accounts represent reserve accounts or are the result of timing
differences between when principal and interest is collected on the trust assets
and when principal and interest is paid on trust liabilities.
Derivatives
The
Company currently has one cross-currency swap that is intended to manage its
exposure to foreign currency exchange rate fluctuations on its Euro denominated
secured borrowing. The Company historically had derivative financial instruments
including interest rate swaps and floor options which were intended to
economically hedge the interest rate risk inherent in its residual interests and
servicing assets in off-balance sheet securitizations. The Company
closed out of these positions during the fourth quarter of 2009 in anticipation
of accounting changes effective January 1, 2010, which will result in the
consolidation of the Company’s previously unconsolidated securitizations and the
elimination of the related retained interests. The Company’s
derivative instruments do not qualify for hedge accounting under ASC 815 and are
carried at fair value in Other
assets and Other
liabilities with changes in fair value recorded currently in Fee and other
income.
Internally
Developed Software
Certain
direct costs associated with the development of internal use software are
capitalized. The Company capitalizes development costs for internal use software
in accordance with the provisions of ASC 350-40. These costs are included in
Other assets and are
amortized by the straight-line method over the service period, not to exceed ten
years. Capitalization of development costs starts after the
preliminary project stage is completed and ends when the project is
substantially complete and ready for its intended use. Capitalized internally
developed software costs are periodically reviewed for
impairment. Capitalized costs of projects deemed to be obsolete or
abandoned are written off as operating expenses.
81
Employee
Benefits Expense
The
Company’s employee benefits are provided under programs administered and
maintained by Citigroup. Employee benefits expense includes prior and
current service costs of pension and other postretirement benefit plans, which
are accrued on a current basis based on a Citigroup allocation that is applied
to employee salary costs. Any pension obligation
pertaining to these plans is a liability of Citigroup.
Earnings
Per Share
Basic
earnings per common share is computed by dividing income applicable to common
stockholders by the weighted-average number of common shares outstanding for the
period. In 2009, 2008 and 2007, the Company had no securities or other contracts
to issue Company common stock that could result in dilution.
Income
Taxes
The
Company is included in the consolidated federal income tax return of Citigroup,
and is included in certain combined or unitary state/local income or franchise
tax returns of Citigroup or its subsidiaries. While the Company is
included in these consolidated, combined or unitary returns, it has agreed to
pay to CBNA an amount equal to the federal, state and local taxes the Company
would have paid had it filed its returns on a separate company basis and the
amount, if any, by which the tax liability of any unitary group (of which any
Citigroup affiliate other than the Company is a member) is adjusted by virtue of
the inclusion of the Company’s activity in the group’s unitary
return. CBNA has agreed to pay the Company an amount equal to the tax
benefit of the actual tax loss of the Company as if the Company filed a separate
return and the amount, if any, by which the tax liability of any unitary group
(of which any Citigroup affiliate other than the Company is a member) is
adjusted by virtue of the inclusion of the Company’s activity in the group’s
unitary return.
Deferred
income tax assets and liabilities are recorded for the future tax consequences
of events that have been recognized in the Consolidated Financial Statements or
tax returns based upon enacted tax laws and rates. Deferred tax
assets are recognized subject to management’s judgment that realization is more
likely than not. Since all of the Company’s deferred tax assets are expected to
be realized, the Company does not maintain a valuation allowance for these
assets, in accordance with ASC 740.
ASC 740
sets out a framework for preparers to use to determine the appropriate level of
tax reserves to maintain for uncertain tax positions, using a two-step approach
wherein a tax benefit is recognized if a position is more-likely-than-not to be
sustained. The amount of the benefit is then measured to be the highest tax
benefit which is greater than fifty percent likely to be realized. ASC 740 also
sets out disclosure requirements to enhance transparency of an entity's tax
reserves.
82
Accounting
Changes
Following
the Codification, the FASB will not issue new GAAP in the form of Statements,
FASB Staff Positions or Emerging Issues Task Force Abstracts. Instead, it will
issue Accounting Standards Updates, which will serve to update the Codification,
provide background information about the guidance and provide the basis for
conclusions on the changes to the Codification.
ASC
105-10 does not change GAAP, it changes the way the guidance is organized and
presented. These changes have impacted how the Company references GAAP in its
financial statements and in its accounting policies for financial statements
issued for interim and annual periods beginning with the period ended September
30, 2009.
Subsequent
Events
In May
2009, the FASB issued then authoritative SFAS No. 165, Subsequent Events (SFAS 165),
now authoritative under ASC 855-10. The accounting standard
established general standards of accounting for and disclosure of events that
occur after the balance sheet date but before the financial statements are
issued or are available to be issued. The accounting standard was
effective for interim or annual financial periods ending after June 15,
2009.
Measurement
of Fair Value in Inactive Markets
In April
2009, the FASB issued then authoritative FSP FAS 157-4, Determining Fair Value When the
Volume and Level of Activity for the Asset or Liability Have Significantly
Decreased and Identifying Transactions That Are Not Orderly, now ASC
820-10-35. The change
in accounting guidance reaffirms that fair value is the price that would be
received to sell an asset or paid to transfer a liability in an orderly
transaction between market participants at the measurement date under current
market conditions. This also reaffirms the need to use judgment in determining
if a formerly active market has become inactive and in determining fair values
when the market has become inactive. The adoption of the change in
accounting guidance had no effect on the Company’s Consolidated Financial
Statements.
Determining
Fair Value in Inactive Markets
In
October 2008, the FASB issued then authoritative FSP FAS 157-3, Determining Fair Value of Financial
Assets When the Market for That Asset is Not Active, now ASC
820-10-35. The FSP clarifies that companies can use internal
assumptions to determine the fair value of a financial asset when markets are
inactive, and do not necessarily have to rely on broker quotes. This also
confirms a joint statement by the FASB and the SEC in which they stated that
companies can use internal assumptions when relevant market information does not
exist and provides an example of how to determine the fair value for a financial
asset in a non-active market. The FASB emphasized that the FSP is not new
guidance, but rather clarifies the principles in ASC 820, Fair Value Measurements and
Disclosures. The adoption of the change in accounting guidance had no
effect on the Company’s Consolidated Financial Statements.
83
Additional
Disclosures for Derivative Instruments
On
January 1, 2009, the Company adopted then authoritative SFAS No. 161, Disclosures about Derivative
Instruments and Hedging Activities, an amendment to SFAS 133, now ASC
815-10-50. The change in accounting guidance required enhanced
disclosures about derivative instruments and hedged items that are accounted for
under ASC 815 and related interpretations. No comparative information
for periods prior to the effective date is required. See Note 13 for
disclosures related to the Company’s hedging activities and derivative
instruments. The change in accounting guidance had no impact on how
the Company accounts for these instruments.
Fair
Value Measurements
As of
January 1, 2007, the Company elected to early-adopt SFAS No. 157, Fair Value Measurements (SFAS
157), now authoritative under ASC 820. ASC 820 defines fair value, establishes a
consistent framework for measuring fair value and expands disclosure
requirements about fair value measurements.
2. FUTURE
APPLICATION OF ACCOUNTING STANDARDS
Elimination
of QSPEs and Changes in the Consolidation Model for Variable Interest
Entities
In June
2009, the FASB issued then authoritative SFAS No. 166, Accounting for Transfers of
Financial Assets, an amendment of FASB Statement No. 140 (SFAS 166), now
authoritative under ASC 860, which eliminates QSPEs from the guidance in ASC
860. This change will have a significant impact on the Company’s
Consolidated Financial Statements as the Company will lose sale treatment for
assets previously sold to QSPEs, as well as for certain future
sales. SFAS 166 is effective for the Company on January 1,
2010.
Simultaneously,
the FASB issued SFAS No. 167, Amendments to FASB Interpretation
No. 46(R) (SFAS 167), now authoritative under ASC 810-10, which details
three key changes to the consolidation model in FASB Interpretation No. 46
(Revised December 2003), Consolidation of Variable Interest
Entities (FIN 46(R)). First, former QSPEs will now be included in the
scope of SFAS 167. In addition, the FASB has changed the method of analyzing
which party to a variable interest entity (VIE) should consolidate the VIE
(known as the primary beneficiary) to a qualitative determination of which party
to the VIE has power combined with potentially significant benefits and losses,
instead of the current quantitative risks and rewards model. The entity that has
power has the ability to direct the activities of the VIE that most
significantly impact the VIE’s economic performance. Finally, the new standard
requires that the primary beneficiary analysis be reevaluated whenever
circumstances change. The current rules require reconsideration of the primary
beneficiary only when specified reconsideration events occur.
84
As a
result of implementing these changes in GAAP, the Company expects to be required
to consolidate VIEs and former QSPEs with which it has involvement on January 1,
2010. The Company will consolidate all of the VIEs and former QSPEs by initially
measuring the assets and liabilities of the VIEs and former QSPEs at their
carrying values (the amounts at which the assets and liabilities would have been
carried in the Consolidated Financial Statements, if the Company had always
consolidated these VIEs and former QSPEs).
The
Company expects that the adoption of these accounting standards updates and the
associated reconsolidation of its off-balance sheet securitization trusts will
result in a net increase in its assets and liabilities of approximately $13.6
billion and $14.0 billion, respectively. The $13.6 billion of assets
reflects the reconsolidation of $14.6 billion of loan assets, deferred
origination and premium costs and other trust assets, less the
elimination of previously recognized retained interests.
In
addition, the cumulative effect of adopting these new accounting standards
updates as of January 1, 2010, based on financial information as of December 31,
2009, has resulted in an estimated aggregate after tax charge to retained
earnings of approximately $0.4 billion, reflecting a pretax charge of
approximately $0.6 billion primarily related to the establishment of deferred
origination costs and loan loss reserves and the reversal of retained interests
held and a decrease in related deferred tax liabilities of approximately $0.2
billion.
Additional
Disclosures Regarding Fair Value Measurements
In
January 2010, the FASB issued Accounting Standards Update (ASU) 2010-06, Improving Disclosures about Fair
Value Measurements. The ASU requires disclosure of the amounts of
significant transfers in and out of Level 1 and 2 fair value measurements and
the reasons for the transfers. The disclosures are effective for reporting
periods beginning after December 15, 2009. Additionally, disclosures of the
gross purchases, sales, issuances and settlements activity in Level 3 fair value
measurements will be required for fiscal years beginning after December 15,
2010.
85
3. CORRECTION
OF IMMATERIAL ERRORS
The
Company had previously identified certain errors in the tax provision and
related accounts from prior periods. The errors primarily related to
accounting for state and local income taxes, deferred tax amounts for loan
securitizations, and accounting for uncertain tax positions. Certain
of these errors were recorded as out of period immaterial adjustments in prior
periods. The Company assessed the materiality of these errors and
concluded that they are immaterial to amounts reported in prior period financial
statements. The correction of these immaterial amounts will continue
to be reflected in the Company’s current and future Exchange Act
reports. The impact of the correction on the Company’s previously
reported Consolidated Statements of Income is provided below.
Year
Ended
December
31, 2008
|
Year
Ended
December
31, 2007
|
|||||||||||||||
(Dollars in
thousands)
|
As
Reported
|
As
Corrected
|
As
Reported
|
As
Corrected
|
||||||||||||
Income
Taxes
|
$ | 40,714 | $ | 43,242 | $ | 114,677 | $ | 111,252 | ||||||||
Net
Income
|
74,806 | 73,427 | 182,691 | 185,752 | ||||||||||||
Basic
and Diluted Earnings Per Share
|
$ | 3.74 | $ | 3.67 | $ | 9.13 | $ | 9.29 |
In
addition, the Company recorded an increase in its deferred tax liabilities of
$140.5 million and a decrease in its current income taxes of $149.7 with a
corresponding increase in its retained earnings of $9.2 million in its December
31, 2008 Consolidated Balance Sheet.
4. STUDENT
LOANS
The
Company’s portfolio of student loans consists primarily of loans originated
under government guaranteed loan programs, principally the FFEL Program, and
private education loans, primarily CitiAssist loans.
The
Company, which has a trust agreement to originate loans through CBNA, is an
originator, manager and servicer of student loans made in accordance with
federally sponsored guaranteed student loan programs. The Company
owns and manages the following types of FFEL Program loans: subsidized Federal
Stafford, unsubsidized Federal Stafford, Federal PLUS and Federal Consolidation
Loans. In addition, the Company’s government-guaranteed portfolio includes
Federal Supplemental Loans for Students (SLS Loans) and Health Education
Assistance Loans (HEAL Loans). When the statutory interest rates on most FFEL
Program loans provide less than prescribed rates of return, the Company receives
compensation from the federal government as defined by the Higher Education
Act. The federal government pays a special allowance payment (SAP),
which increases the Company’s loan yield over a base rate tied to either the
90-day Commercial Paper rate as published by the Department (CP) or the 91-day
Treasury Bill auction yield, depending on the loan origination date. In
addition, the federal government generally pays the stated interest rate on
subsidized Federal Stafford Loans while the borrower is in school, grace or
deferment.
The
Company’s FFEL Program loan portfolio expands through disbursements of new FFEL
Program loans as well as secondary market and other loan procurement
activity. Purchases may include FFEL Program loans purchased through
third-party purchase agreements. These agreements obligate the
Company to purchase eligible loans offered for sale and/or originated by the
other party. The contractual premium on the loans purchased under
these contracts varies from agreement to agreement.
The
Company’s private education loans portfolio contains loans originated through
alternative programs. These loans are generally for students who
either seek additional financial assistance beyond that available through the
government programs and other sources or do not qualify for federal government
sponsored student loan programs. Private education loans are
generally offered based on the borrower’s or co-signer’s
creditworthiness. Private education loans are prime or London
Interbank Offered Rate (LIBOR) rate-based with provisions similar to the FFEL
Program, such as deferment of both principal and interest payments while the
student is in school.
In order
to comply with certain legal and regulatory requirements, private education
loans are originated by CBNA, the Company’s principal shareholder. In
accordance with the provisions of an intercompany agreement, origination and
servicing fees are charged to CBNA for the underwriting, disbursing and
servicing of private education loans. After full disbursement, the
Company purchases all private education loans from CBNA.
86
The
Company’s loans are summarized by program type as follows:
December
31,
|
||||||||
(Dollars in
thousands)
|
2009
|
2008
|
||||||
Federal
Stafford Loans
|
$ | 10,414,533 | $ | 10,188,076 | ||||
Federal
Consolidation Loans
|
5,864,695 | 6,312,535 | ||||||
Federal
SLS/PLUS/HEAL Loans
|
1,669,478 | 1,564,051 | ||||||
Private
education loans
|
7,432,471 | 5,861,545 | ||||||
Total
student loans held, excluding deferred costs
|
25,381,177 | 23,926,207 | ||||||
Deferred
origination and premium costs
|
548,083 | 635,449 | ||||||
Student
Loans held
|
25,929,260 | 24,561,656 | ||||||
Less:
allowance for loan losses
|
(149,098 | ) | (110,329 | ) | ||||
Student
Loans held, net
|
25,780,162 | 24,451,327 | ||||||
Loans
held for sale, excluding deferred costs
|
2,381,026 | 1,058,953 | ||||||
Deferred
origination and premium costs
|
28,241 | 13,363 | ||||||
Loans
held for sale
|
2,409,267 | 1,072,316 | ||||||
Other
loans and lines of credit
|
5,616 | 9,016 | ||||||
Total
loan assets
|
$ | 28,195,045 | $ | 25,532,659 |
Certain
of the Company’s student loans have been pledged as collateral against its
secured borrowings, including $15.7 billion of FFEL Program loans and $2.0
billion of private education loans. In addition, the Company’s loans
held for sale have been pledged as collateral against secured borrowings with
the Department. See Note 6 for additional information.
The
Company’s FFEL Program loan holdings are guaranteed by the federal government in
the event of a borrower’s default, death, disability, bankruptcy, school
closure, false certification or unpaid school refund, subject to risk-sharing
provisions established by the federal government. Insurance on FFEL
Program loans is provided by certain state or not-for-profit guarantors, which
are reinsured by the federal government.
The
Higher Education Act requires every state to either establish its own guarantor
or contract with another guarantor in order to support the education financing
and credit needs of students at post-secondary schools. FFEL Program guarantors
in each state generally guarantee loans for students attending schools in their
particular state or region or guarantee loans for their residents attending
schools in another state.
FFEL
Program loans are subject to regulatory requirements relating to servicing in
order to maintain the loan’s guarantee. In the event of default on a
student loan or a borrower’s death, disability or bankruptcy, the Company files
a claim with the guarantor of the loan.
87
As of
December 31, 2009, the Company receives reimbursement on substantially all FFEL
Program loan claims at a rate of 97% or 98%, depending on the origination date
of the loan. FFEL Program loan claims are subject to rejection by the
guarantor in the event of loan servicing or origination defects. If servicing or
origination defects are identified, the claimed loan is rejected and returned to
the Company for remedial loan servicing. During the remedial
servicing period, usually lasting several months, interest income is not
accrued. The loans in remediation were not material at both December
31, 2009 and 2008. If the guarantee on the rejected claim cannot be reinstated,
the defaulted loan is written off against the allowance for loan losses,
generally, within four months of the claim rejection. Guarantor claim payments
on loans with minor servicing defects are subject to interest penalty deductions
that are charged directly against current period interest income.
The
following tables provide details of loans, excluding allowance for loan losses
and deferred origination and premium costs, by type of guaranty or risk-sharing
agreement:
December
31,
|
|||||||||||||
(Dollars in
thousands)
|
2009
|
%
|
2008
|
%
|
|||||||||
Federal
Loan Guarantors
|
|||||||||||||
New
York State Higher Education Services Corporation
|
$ | 5,666,453 | 20 | $ | 5,545,464 | 22 | |||||||
EdFund
|
4,166,747 | 15 | 4,020,974 | 16 | |||||||||
United
Student Aid Funds
|
2,160,860 | 8 | 2,039,040 | 8 | |||||||||
American
Student Assistance
|
1,904,759 | 7 | 1,887,695 | 8 | |||||||||
Texas
Guaranteed Student Loan Corporation
|
1,673,498 | 6 | 1,198,959 | 5 | |||||||||
Great
Lakes Higher Education
|
1,208,439 | 4 | 911,416 | 4 | |||||||||
Education
Credit Management Corporation
|
909,362 | 3 | 692,280 | 3 | |||||||||
Other
federal loan guarantors
|
2,636,559 | 10 | 2,822,925 | 11 | |||||||||
Total
federally guaranteed
|
20,326,677 | 73 | 19,118,753 | 77 | |||||||||
Private
education loan insurers
|
4,408,479 | 16 | 4,541,439 | 18 | |||||||||
Total
guaranteed/insured
|
24,735,156 | 89 | 23,660,192 | 95 | |||||||||
Other
unguaranteed/uninsured (1)
|
3,027,047 | 11 | 1,333,984 | 5 | |||||||||
Total
loans
|
$ | 27,762,203 | 100 | $ | 24,994,176 | 100 | |||||||
(1)
|
Primarily
includes uninsured CitiAssist loans
|
The
Company’s private education loan portfolio is not guaranteed by the federal
government. Although private education loans do not carry a federal government
guarantee, 58% of the outstanding balances of these loans carry private
insurance through United Guaranty Commercial Insurance Company of North Carolina
and New Hampshire Insurance Company (UGCIC/NHIC), and 2% of the outstanding
balances are insured through Arrowood Indemnity Company
(Arrowood). UGCIC/NHIC are subsidiaries of American International
Group (AIG). Arrowood is a wholly owned subsidiary of Arrowpoint
Capital Corporation (Arrowpoint).
88
These
insurance providers insure the Company against a portion of losses arising from
borrower loan default, bankruptcy or death. Under the Arrowood
program, private education loans submitted for default claim are generally
subject to a risk-sharing deductible of 5% of the outstanding principal and
accrued interest balances. Under the UGCIC/NHIC program, default claims are
generally subject to risk-sharing deductibles between 10% and 20% of
the outstanding principal and accrued interest balances.
From 2003
through 2007, UGCIC/NHIC insured the Company for maximum portfolio losses
ranging from 12.5% to 13.5% over the life of the loans. The Company
is exposed to 100% of losses that exceed these thresholds. While
these losses are not currently forecast to exceed these thresholds, if
deterioration in market conditions continues, or if unanticipated regulatory
changes are required that adversely affect private education loan performance,
losses could be higher than expected. For loans insured during 2005
and 2006, the insurance premium is calculated under an experience-rated plan,
which may require additional premium payments of up to $58.2 million in order to
maintain insurance coverage for these loans if the loss limits exceed the
established parameters. If parameters are exceeded in 2010, payments
would be required beginning in 2011. The Company ceased insuring new
CitiAssist Standard loans in January 2008.
A portion
of the uninsured loans are covered by risk-sharing agreements with schools and
universities. Under these programs, the school or university assumes a portion
of the Company’s credit exposure for the covered loans. The risk-sharing
agreements generally take one of two forms: i) the school reimburses the Company
for a specified percentage of losses of 50% to 100% when the losses exceed an
agreed upon threshold ranging from 0% to 100% or ii) the school pays 8% to 50%
of the total disbursed amount to compensate for future expected
losses.
The
allowance for loan losses provides a reserve for estimated risk-sharing and
other credit losses on FFEL Program and CitiAssist loans. Changes in the
Company’s allowance for loan losses are as follows:
(Dollars in
thousands)
|
2009
|
2008
|
2007
|
|||||||||
Balance
at beginning of year
|
$ | 110,329 | $ | 42,115 | $ | 14,197 | ||||||
Provision
for loan losses
|
140,852 | 140,895 | 59,920 | |||||||||
Charge
offs
|
(116,199 | ) | (80,618 | ) | (36,045 | ) | ||||||
Recoveries
|
14,116 | 10,578 | 5,697 | |||||||||
Other
(1)
|
- | (2,641 | ) | (1,654 | ) | |||||||
Balance
at end of year
|
$ | 149,098 | $ | 110,329 | $ | 42,115 | ||||||
|
(1)
|
Represents reserve
amounts associated with loans
securitized.
|
At
December 31, 2009 the Company had $0.7 million of FFEL Program loans and $40.8
million of private education loans that ceased accruing interest as compared to
$1.2 million of FFEL Program loans and $31.7 million of private education loans
at December 31, 2008. The Company also had $770.7 million of FFEL
Program loans and $20.9 million of private education loans that were 90 days
delinquent or greater and were still accruing interest at December 31, 2009 as
compared to $631.6 million of FFEL Program loans and $10.0 million of private
education loans at December 31, 2008.
89
5. OTHER
ASSETS
Other
assets are summarized as follows:
|
December 31, | ||||||||
(Dollars in
thousands)
|
2009
|
2008
|
||||||
Accrued
interest receivable:
|
||||||||
from
student loan borrowers
|
$ | 889,461 | $ | 798,113 | ||||
from
federal government
|
1,607 | 12,889 | ||||||
Restricted
cash and cash equivalents
|
690,536 | 47,615 | ||||||
Servicing
asset from securitization activity
|
176,587 | 208,133 | ||||||
Income
taxes receivable
|
114,077 | 101,721 | ||||||
Deferred
financing fees
|
39,667 | 4,136 | ||||||
Equipment
and computer software (1)
|
24,745 | 27,457 | ||||||
Retained
notes from securitization activities
|
19,750 | 66,487 | ||||||
Collateral
on derivatives with CBNA
|
- | 387,498 | ||||||
Derivative
agreements with CBNA
|
- | 91,559 | ||||||
Other
|
28,477 | 15,730 | ||||||
Total
other assets
|
$ | 1,984,907 | $ | 1,761,338 |
|
(1)
|
Amounts are reflected
net of accumulated depreciation and software amortization of $67.0 million
and $59.1 million at December 31, 2009 and 2008,
respectively.
|
Depreciation
and software amortization expense totaled $10.3 million, $12.3 million and $14.4
million for the years ended December 31, 2009, 2008 and 2007,
respectively. Included in equipment and computer software are
capitalized internally developed software costs of $23.9 million and $25.4
million at December 31, 2009 and 2008, respectively. During the years
ended December 31, 2009 and 2008, the Company capitalized $7.6 million and $7.7
million in costs related to software development, respectively. The
Company did not have any significant disposals of equipment and computer
software during the year ended December 31, 2009. The Company
disposed of equipment and computer software with a net book value of $3.5
million during the year ended December 31, 2008, of which $2.9 million is
included in Other
expenses and $0.6 million is included in Restructuring and related
charges.
At
December 31 2009, restricted cash and cash equivalents increased by $642.9
million and deferred financing fees increased by $35.5 million from December 31,
2008. These increases reflect the additional cash reserves required
and deferred financing fees on secured borrowings from the Conduit and the four
securitization transactions completed during 2009.
90
Historically,
the majority of the Company’s derivative financial instruments were interest
rate swaps and floor options with CBNA, which were intended to economically
hedge the interest rate risk inherent in its retained interests in its
off-balance sheet securitizations. The terms of the derivative
agreements with CBNA required that the Company maintain collateral on these
derivative instruments. The Company closed out of these interest rate
swap and floor option derivative positions during the fourth quarter of 2009 in
anticipation of accounting changes effective January 1, 2010, which will result
in the consolidation of the Company’s previously unconsolidated securitizations
and elimination of the related retained interests being hedged. As a result of
closing out of these derivatives, the Company no longer maintains collateral
that was previously required on these derivatives with CBNA. For
further information on the Company’s derivative agreements, see Note
13.
During
2009, the Company sold retained subordinated notes from its June 2008
securitization. The 70% decrease in the retained notes at December
31, 2009 compared to December 31, 2008 primarily reflects the sale.
6. SHORT-
AND LONG-TERM BORROWINGS
The
following table summarizes the Company’s total borrowings:
December
31, 2009
|
December
31, 2008
|
|||||||||||||
(Dollars
in thousands)
|
Ending
Balance
|
Contracted
Weighted Average Interest
Rate
|
Ending
Balance
|
Contracted
Weighted Average Interest
Rate
|
||||||||||
Unsecured
borrowings:
|
||||||||||||||
Short-term
borrowings, payable to principal stockholder
|
$ | 5,131,000 | 2.08 | % | $ | 12,654,200 | 2.55 | % | ||||||
Long-term
borrowings, payable to principal stockholder
|
4,391,000 | 2.79 | % | 10,102,000 | 4.30 | % | ||||||||
Total
unsecured borrowings
|
$ | 9,522,000 | $ | 22,756,200 | ||||||||||
Secured
borrowings:
|
||||||||||||||
Short-term
secured borrowings
|
$ | 2,066,686 | 0.79 | % | $ | 1,002,211 | 3.37 | % | ||||||
Long-term
secured borrowings from
on-balance
sheet securitizations
|
6,812,894 | 2.26 | % | 1,727,744 | 3.22 | % | ||||||||
Long-term
secured borrowings from the Conduit
|
10,187,082 | 0.63 | % | – | – | |||||||||
Total
secured borrowings
|
$ | 19,066,662 | $ | 2,729,955 | ||||||||||
Total
Borrowings:
|
$ | 28,588,662 | $ | 25,486,155 |
During
December 2009, the Company entered into an amendment (the Extension) of its
Omnibus Credit Agreement with CBNA, which was originally set to expire on
December 31, 2009. The Extension changed the expiration date of the
Omnibus Credit Agreement from December 31, 2009 to January 31,
2010. In addition, the Extension lowered the maximum aggregate credit
available under the Omnibus Credit Agreement from $30.0 billion to $10.5
billion, effective January 1, 2010.
91
On
January 29, 2010, the Company entered into an Amended and Restated Omnibus
Credit Agreement with CBNA. The Amended and Restated Omnibus Credit Agreement
supersedes and replaces in its entirety the Original Omnibus Credit Agreement
and is effective as of January 1, 2010. The Company’s unsecured
borrowings at December 31, 2009 and December 31, 2008 represent borrowings
outstanding under the terms of Original Omnibus Credit Agreement.
The
Amended and Restated Omnibus Credit Agreement provides $6.6 billion in aggregate
credit for new borrowings, including separate tranches (with their own sublimits
and pricing) for overnight funding, FFEL Program loan funding, private education
loan funding and illiquid asset funding. The initial term of the Amended and
Restated Omnibus Credit Agreement expires on December 30, 2010 and all new
borrowings will be due and payable on or before this date. The cost of borrowing
for overnight funding is based on the higher of the overnight federal funds
target or overnight LIBOR, while the total cost of funding for other
tranches is determined as follows:
Interest
Rate, based on one-month
LIBOR
plus
|
Fee
on Undrawn
Balance
|
|
FFEL
Program Loans.................
|
75
basis points
|
30
basis points
|
Private
Education Loans...........
|
450
basis points
|
200
basis points
|
Illiquid
Assets............................
|
400
basis points on the first $600
million
of funding and 655
basis points
for
supplemental funding (up to
$1.1
billion in aggregate)
|
100
basis points
|
The
Amended and Restated Omnibus Credit Agreement also requires (1) a pledge of most
of the Company’s financial assets to secure the Company’s obligations; (2) a $57
million upfront commitment fee; and (3) a comprehensive package of
representations, warranties, conditions, covenants (including a borrowing base
and various other financial covenants) and events of default. CBNA’s consent is
required for the release of pledged collateral for whole loan sales,
securitizations, and participation in government funding programs, with the
exception of the Conduit, the Participation Program and the Purchase Program,
and certain specified potential securitizations in the first quarter of
2010.
The $9.5
billion of borrowings outstanding under the Original Omnibus Credit Agreement as
of December 31, 2009 will continue to mature based on their originally
contracted maturities, unless a change of control or an event of default, as
defined by the Amended and Restated Omnibus Credit Agreement,
occurs. A change of control is defined as any event that results in
an entity other than CBNA or its affiliates owning more than 50% of the voting
equity interest in the Company. If a change of control or an event of
default (certain of which require explicit action by CBNA to effect an
acceleration) under the Amended and Restated Omnibus Credit Agreement were to
occur, all outstanding borrowings under the Original Omnibus Credit Agreement
and all new borrowings under the Amended and Restated Omnibus Credit Agreement
would become due and payable immediately. The borrowings outstanding
under the Original Omnibus Credit Agreement are also subject to the
representations, warranties, conditions, covenants (including a borrowing base
and various other financial covenants) and events of default contained in the
Amended and Restated Omnibus Agreement.
92
At
December 31, 2009, $3.0 billion of the Company’s outstanding unsecured
borrowings under the original Omnibus Credit Agreement and the Company’s secured
borrowings from the TALF securitization included derivatives embedded in the
respective debt instruments. These embedded options have been determined to be
clearly and closely related to the debt instruments as these terms are defined
in ASC 815 and, therefore, do not require bifurcation.
Secured
borrowings increased by $16.3 billion from December 31, 2008 to December 31,
2009 from the completion of four on-balance sheet securitizations, funding
obtained from the Conduit and a net increase in short-term secured borrowings
from the Department under the Participation Program of $1.1
billion. Proceeds from these long-term secured borrowings were
primarily used to pay down short- and long-term unsecured
borrowings. Of the secured borrowings at December 31, 2009 and
December 31, 2008, $0.2 billion is denominated in Euros and an additional $0.1
billion of notes remains available for issuance. At December 31,
2009, the total authorized long-term secured borrowings of $17.0 billion were
collateralized by $15.7 billion of FFEL Program loans and $2.0 billion of
private education loans. Principal payments on the secured borrowings
are made as principal amounts are collected on the collateralized
loans.
See Note
15 for additional information regarding collateralized assets and associated
liabilities related to the Company’s long-term secured borrowing.
The
Conduit provides additional liquidity support to eligible student lenders by
providing funding for FFEL Program Stafford and PLUS loans first disbursed on or
after October 1, 2003 and before July 1, 2009, and fully disbursed by September
30, 2009. In addition to providing financing at a cost based on
market rates, a significant benefit to lenders is that eligible loans are
permitted to have borrower benefits, which are currently not permitted under the
Participation and Purchase Programs. Funding from the Conduit is
provided indirectly by the capital markets through the sale to private investors
of government back-stopped asset-backed commercial paper. The Company
receives funding equal to 97% of the principal and interest to be capitalized of
the pledged student loans. The commercial paper issued by the Conduit
has short-term maturities generally ranging up to 90 days. In the
event the commercial paper issued by the Conduit cannot be reissued at maturity
and the Conduit does not have sufficient cash to repay investors, the Federal
Financing Bank (FFB) has committed to provide short-term liquidity to the
Conduit. If the Conduit is not able to issue sufficient commercial
paper to repay its investors or liquidity advances from the FFB, the Company can
either secure alternative financing and repay its Conduit borrowings or sell the
pledged student loans to the Department at a predetermined price equal to either
97% or 100% of the accrued interest and outstanding principal of pledged loans,
based on first disbursement date and certain other loan criteria. If
the Company were to sell the pledged loans to the Department, this would likely
result in a significant loss to the Company.
Short-Term
Borrowings
Short-term
borrowings have a remaining term to maturity of one year or less. The Company
expects that each of the unsecured short-term borrowings will be refinanced with
new borrowings. At December 31, 2009, all of the short-term borrowings had
variable interest rates. The Company’s short-term secured borrowings
increased by $1.1 billion at December 31, 2009 compared to December
31, 2008. This reflects new loans originated under the Participation
Program during 2009 net of the sale of FFEL Program loans to the
Department under the Purchase Program. At December 31, 2009 the total
short-term secured borrowings of $2.1 billion were collateralized by $2.3
billion of FFEL Program Stafford and PLUS loans included in the
Company’s held for sale portfolio.
93
Long-Term
Borrowings
December
31,
|
||||||||
(Dollars
in thousands)
|
2009
|
2008
|
||||||
Secured
borrowings related to the Conduit, based on LIBOR (note rate of 0.63% at
December 31, 2009), due no later than January 2014
|
$ | 10,187,082 | $ | – | ||||
Secured
borrowings entered into during February 2009, based on LIBOR (note rates
ranged from 2.02% to 2.77% at December 31, 2009), due May 2016 – May
2024
|
515,063 | – | ||||||
Secured
borrowing entered into during July 2009, based on LIBOR (note rate of
1.92% at December 31, 2009), due August 2043
|
1,882,905 | – | ||||||
Secured
borrowing entered into during August 2009, based on prime (note rate
of 4.75% at December 31, 2009), due June 2033
|
1,394,606 | – | ||||||
Secured
borrowing entered into during December 2009, based on LIBOR (note rate of
1.00% at December 31, 2009), due December 2043
|
1,432,000 | – | ||||||
Secured
borrowing entered into during 2008, based on LIBOR (note rates ranged from
0.85% to 1.88% at December 31, 2009), due March 2013 – March
2038
|
1,588,320 | 1,727,744 | ||||||
CBNA
Notes, based on LIBOR (note rates ranged from 2.01% to 2.80% at December
31, 2009), due August 2010 - April 2012
|
4,652,000 | 5,389,000 | ||||||
CBNA
Notes, based on LIBOR or strike rate, whichever is higher (note rate of
2.90% at December 31, 2009), due July 2010
|
2,000,000 | 2,000,000 | ||||||
CBNA
Notes, based on LIBOR or strike rate, whichever is higher (note rate of
2.82% at December 31, 2009), due July 2015
|
1,000,000 | 1,000,000 | ||||||
CBNA
Notes, based on prime rate, (note rate of 2.86% at December 31, 2009), due
April 2013
|
850,000 | 850,000 | ||||||
CBNA
Notes, fixed rate (note rate of 5.39% at December 31, 2009), due September
2016
|
100,000 | 100,000 | ||||||
CBNA
Notes, based on LIBOR (note rate 0.96% at December 31, 2008), matured
December 2009
|
– | 2,000,000 | ||||||
CBNA
Notes, based on LIBOR or strike rate, whichever is higher (note rate of
4.73% at December 31, 2008), matured January 2009
|
– | 1,300,000 | ||||||
CBNA
Notes, based on prime rate, (note rate of 2.20% at December 31, 2008),
repaid December 2009
|
– | 1,500,000 | ||||||
Less:
portion of long-term borrowings due within one year
|
(4,211,000 | ) | (4,037,000 | ) | ||||
Total
long-term borrowings
|
$ | 21,390,976 | $ | 11,829,744 |
94
Interest
due on secured borrowings from the Company’s on-balance sheet securitizations is
variable based on either three-month LIBOR or prime plus a fixed
premium. Interest due on secured borrowings from the Conduit is
variable based on the rate at which the Conduit is able to issue CP, plus fixed
costs associated with the Conduit. All of the Company’s unsecured
borrowings that are based upon LIBOR or prime rates are variable borrowings in
which the interest rate resets every one to three months depending on the
specific terms of each borrowing.
At
December 31, 2009, aggregate annual maturities on long-term debt obligations
(based on final maturity dates) were as follows: $1.6 billion in
2011, $0.9 billion in 2012, $0.9 billion in 2013, $10.2 billion in 2014, $1.0
billion in 2015, and $6.8 billion thereafter.
7. OTHER
LIABILITIES
Other
liabilities are summarized as follows:
December
31,
|
||||||||
(Dollars in
thousands)
|
2009
|
2008
|
||||||
Net
interest owed to the government
|
$ | 173,475 | $ | 24,796 | ||||
Interest
payable
|
63,898 | 151,382 | ||||||
Liability
from derivative agreements on foreign currency translation
|
17,381 | 24,935 | ||||||
Restructuring
reserve
|
28 | 5,048 | ||||||
Liability
from derivative agreements with CBNA (Note 13)
|
– | 463,628 | ||||||
Accounts
payable and other liabilities
|
93,830 | 105,097 | ||||||
Total
other liabilities
|
$ | 348,612 | $ | 774,886 |
During
the fourth quarter of 2009, the Company closed out of its derivative agreements
with CBNA which hedged the Company’s retained interests. This was
done in anticipation of accounting changes effective January 1, 2010 which
will eliminate the Company’s retained interests.
8. FEE
AND OTHER INCOME
A summary
of fee and other income follows:
Years
Ended December 31,
|
||||||||||||
(Dollars in
thousands)
|
2009
|
2008
|
2007
|
|||||||||
Net
gains from securitization retained interests and related derivatives (Note
15)
|
$ | 143,305 | $ | 126,058 | $ | 21,353 | ||||||
Other
origination and servicing fees from CBNA (Note 10)
|
6,108 | 7,406 | 7,271 | |||||||||
Late
fees
|
5,200 | 2,016 | 6,063 | |||||||||
Fair
value write down on loans held for sale
|
(2,185 | ) | (34,672 | ) | – | |||||||
Mark-to-market
gains (losses) on foreign currency swap net of translation (losses)
gains
|
1,643 | (1,790 | ) | – | ||||||||
Other
income
|
1,420 | 2,179 | 1,614 | |||||||||
Total
fee and other income
|
$ | 155,491 | $ | 101,197 | $ | 36,301 |
95
9. OTHER
EXPENSES
A summary
of other expenses follows:
Years
Ended December 31,
|
||||||||||||
(Dollars in
thousands)
|
2009
|
2008
|
2007
|
|||||||||
Servicing,
professional, and other fees
|
$ | 70,585 | $ | 73,265 | $ | 63,507 | ||||||
Data
processing and communications
|
13,375 | 12,261 | 13,072 | |||||||||
Depreciation
and amortization
|
10,338 | 12,285 | 15,205 | |||||||||
Stationery,
supplies and postage
|
4,477 | 6,429 | 6,040 | |||||||||
Premises
|
2,177 | 2,650 | 3,005 | |||||||||
Advertising
and marketing
|
1,366 | 3,907 | 8,635 | |||||||||
Travel
and entertainment
|
300 | 1,004 | 2,042 | |||||||||
Disposal
of equipment and computer software
|
8 | 2,849 | – | |||||||||
Other
|
3,472 | 3,114 | 6,013 | |||||||||
Total
other expenses
|
$ | 106,098 | $ | 117,764 | $ | 117,519 |
10. RELATED
PARTY TRANSACTIONS
CBNA, an
indirect wholly owned subsidiary of Citigroup, owns 80% of the outstanding
common stock of the Company. Pursuant to various intercompany
agreements, a number of significant transactions are carried out between the
Company and Citigroup, CBNA and/or their affiliates. Related party agreements
with CBNA include an Omnibus Credit Agreement, a tax-sharing agreement and
student loan originations and servicing agreements. In addition, the
Company maintains a trust agreement with CBNA through which it originates FFEL
Program loans. Also, the Company has an agreement for education loan
servicing with Citibank (South Dakota), National
Association. Management believes that the terms under which these
transactions and services are provided are no less favorable to the Company than
those that could be obtained from unaffiliated third parties.
The
Company is part of a group of businesses within Citigroup, referred to as Citi
Holdings. Citigroup intends to exit these businesses as quickly as
practicable, yet possible in an economically rational manner through business
divestitures, portfolio run-off and asset sales. The Company’s management
is currently working with Citi Holdings to provide information necessary to
support Citi Holdings’ efforts to explore possible disposition and
combination alternatives with regard to its ownership in the
Company.
96
Detailed
below is a summary of the Company’s transactions with either CBNA or other
Citigroup affiliates which are included in the accompanying Consolidated
Statements of Income:
Years
Ended December 31,
|
||||||||||||
(Dollars in
thousands)
|
2009
|
2008
|
2007
|
|||||||||
Revenue
|
||||||||||||
Interest
income
|
$ | 431 | $ | 2,550 | $ | 1,525 | ||||||
Interest
expense
|
(337,062 | ) | (825,886 | ) | (1,175,159 | ) | ||||||
Fee
and other income (loss) :
|
||||||||||||
Derivative
valuation gain (loss)
|
72,796 | (270,370 | ) | (32,961 | ) | |||||||
Other
origination and servicing fees
|
6,108 | 7,576 | 7,271 | |||||||||
Operating
Expenses
|
||||||||||||
Salaries
and employee benefits:
|
||||||||||||
Employee
benefits and administration
|
$ | 6,618 | $ | 9,123 | $ | 11,041 | ||||||
Stock-based
compensation
|
899 | 2,766 | 2,345 | |||||||||
Other
expenses:
|
||||||||||||
Servicing,
professional and other fees
|
64,112 | 62,327 | 50,890 | |||||||||
Data
processing and communications
|
8,327 | 7,022 | 6,699 | |||||||||
Premises
|
2,156 | 2,619 | 2,973 | |||||||||
Other
|
2,977 | 6,143 | 2,651 |
CBNA
Omnibus Credit Agreement
During
December 2009, the Company entered into an amendment (the Extension) of its
Omnibus Credit Agreement with CBNA, which was originally set to expire on
December 31, 2009. The Extension changed the expiration date of the
Omnibus Credit Agreement from December 31, 2009 to January 31,
2010. In addition, the Extension lowered the maximum aggregate credit
available under the Omnibus Credit Agreement from $30.0 billion to $10.5
billion, effective January 1, 2010.
On
January 29, 2010, the Company entered into an Amended and Restated Omnibus
Credit Agreement with CBNA. The Amended and Restated Omnibus Credit Agreement
supersedes and replaces in its entirety the Original Omnibus Credit Agreement
and is effective as of January 1, 2010. For further information on the Amended
and Restated Omnibus Credit Agreement, see Note 6.
All of
the Company’s outstanding short- and long-term unsecured borrowings were
incurred under the terms of the Original Omnibus Credit Agreement. At
December 31, 2009 the Company had outstanding short- and long-term unsecured
borrowings with CBNA of $5.1 billion and $4.4 billion, respectively, and $12.7
billion and $10.1 billion, respectively, at December 31,
2008. This agreement does not restrict the Company’s right to
borrow from other sources. Interest expense incurred under these
borrowings, as reflected in the table above, has decreased by 59% for the year
ended December 31, 2009 as compared to 2008. For further information
on the Company’s borrowings under the Omnibus Credit Agreement, see Note
6.
97
Interest
Rate Swap and Option Agreements
Historically,
the Company maintained interest rate derivative and option agreements with CBNA,
an investment-grade counterparty. The interest rate derivative
agreements were used in an effort to manage the interest rate risk inherent in
the retained interests in the Company’s off-balance sheet securitizations. The
option agreements were designated as economic hedges to the floor income
component of the residual interests. The Company closed out of these
derivative positions during the fourth quarter of 2009 in anticipation of
accounting changes effective January 1, 2010, which result in the consolidation
of the Company’s previously unconsolidated securitizations and elimination of
the related retained interests being hedged. As a result of closing
out of these derivative agreements, the Company no longer maintains collateral,
previously required on the derivatives with CBNA. For further
information pertaining to the collateral on the Company’s derivatives, see Notes
5 and 13.
Student
Loan Origination Agreement and Servicing Fees Earned
CitiAssist
loans are originated and serviced under an intercompany agreement with
CBNA. After final disbursement by CBNA, the Company purchases all
qualified private education loans at CBNA’s carrying value at the time of
purchase, plus a contractual premium. Total principal balances of CitiAssist
loans purchased by the Company were $1.8 billion and $1.5 billion for the years
ended December 31, 2009 and 2008, respectively. Total premiums paid
by the Company related to CitiAssist loan purchases were $12.1 million and $9.9
million for the years ended December 31, 2009 and 2008,
respectively. At December 31, 2009, the Company was committed to
purchase CitiAssist loans of $0.6 billion under this agreement.
The
Company also earns loan origination and servicing revenue for work performed on
CitiAssist loans held by CBNA prior to purchase by the Company.
Servicing,
Professional and Other Fees Paid
The
majority of the loan originations and servicing work on the Company’s FFEL
Program and CitiAssist loan portfolios was performed under the provisions of
intercompany agreements with affiliates of the Company, including Citibank
(South Dakota), National Association. The increases in the charges
are primarily due to managed loan portfolio growth.
98
Stock-based
Compensation
The
Company participates in various Citigroup stock-based compensation programs
under which Citigroup stock or stock options are granted to certain of the
Company’s employees. The Company has no stock-based compensation programs in
which its own stock is granted. The Company pays Citigroup directly
for participation in certain of its stock-based compensation programs, but
receives a capital contribution for those awards related to participation in the
employee incentive stock option program.
CBNA
Tax-sharing Agreement
The
Company is included in the consolidated federal income tax return of Citigroup,
as well as certain combined or unitary state/local income or franchise tax
returns of Citigroup or its subsidiaries. As such, the Company pays
its income taxes through CBNA. The taxes recorded by the Company are based on an
effective tax rate that approximates the tax expense that would be recognized if
the Company were to file such income tax returns on a stand-alone
basis.
Other
Intercompany Arrangements
Citigroup
and its subsidiaries engage in other transactions and servicing activities with
the Company, including cash management, data processing, telecommunications,
payroll processing and administration, facilities procurement, underwriting, and
others.
Other
information about intercompany transactions is available as
follows: for CitiAssist loans, see Note 4; for short- and long-term
funding and interest rate swap transactions, see Notes 6 and 13; for employee
benefit related transactions, see Note 11; and for income tax matters, see Notes
1, 5 and 12.
11. EMPLOYEE
BENEFITS
The
Company’s employees are covered under various Citigroup benefit plans,
including: medical and life insurance that covers active, retired and disabled
employees; defined benefit pension; dental; defined contribution; salary
continuance for disabled employees and workers compensation. The
Company pays Citigroup a fee for employee benefit costs. The benefit cost rate
on salaries was 27% in 2009, 25% in 2008 and 27% in 2007.
Substantially
all of the Company’s employees participate in Citigroup’s benefit
plans. Any pension obligation pertaining to these plans is a
liability of Citigroup. The fringe rate included approximately $0.9 million for
2007, representing the Company’s defined benefit plan expense
allocation. The plan was eliminated during 2008 and there was no
expense. In 2009 and 2008 the fringe rate included approximately $1.7
million and $2.4 million of contributions made to the employee defined
contribution plan, respectively. These amounts are included with
other employee benefit costs in Employee benefits and
administration in the related party
transactions table in Note 10.
99
12. INCOME
TAXES
The
provision for income taxes consists of the following:
Years
Ended December 31,
|
||||||||||||
(Dollars in
thousands)
|
2009
|
2008
|
2007
|
|||||||||
Current
|
||||||||||||
Federal
|
$ | 41,113 | $ | 63,961 | $ | 82,576 | ||||||
State
|
5,248 | 7,153 | 15,440 | |||||||||
Total
current
|
$ | 46,361 | $ | 71,114 | $ | 98,016 | ||||||
Deferred
|
||||||||||||
Federal
|
$ | 25,580 | $ | (24,443 | ) | $ | 11,150 | |||||
State
|
2,811 | (3,429 | ) | 2,086 | ||||||||
Total
deferred
|
28,391 | (27,872 | ) | 13,236 | ||||||||
Total
income tax provision
|
$ | 74,752 | $ | 43,242 | $ | 111,252 |
The
Company's effective tax rate was 37.3%, 37.1% and 37.5% for the years ended
December 31, 2009, 2008 and 2007, respectively. For further information
regarding the Company’s
correction
of immaterial errors related to taxes, see Note 3.
The
following table presents the actual income tax provisions computed at the
federal statutory income tax rate of 35%:
Years
Ended December 31,
|
||||||||||||
(Dollars in
thousands)
|
2009
|
2008
|
2007
|
|||||||||
Income
taxes computed at federal statutory rate
|
$ | 70,149 | $ | 40,834 | $ | 103,951 | ||||||
State
tax provision, net of federal benefits
|
5,238 | 2,421 | 11,392 | |||||||||
Other,
net
|
(635 | ) | (13) | (4,091 | ) | |||||||
Total
income tax provision
|
$ | 74,752 | $ | 43,242 | $ | 111,252 |
100
Deferred
income taxes consist of the following:
December
31,
|
||||||||
(Dollars in
thousands)
|
2009
|
2008
|
||||||
Deferred
Tax Assets
|
||||||||
Unrealized
losses on derivative instruments
|
$ | 55 | $ | 108,376 | ||||
Allowance
for loan losses
|
56,797 | 42,511 | ||||||
Other
|
6,080 | 3,007 | ||||||
Total
deferred tax assets
|
$ | 62,932 | $ | 153,894 | ||||
Deferred
Tax Liabilities
|
||||||||
Deferred
loan origination costs
|
$ | (164,331 | ) | $ | (187,696 | ) | ||
Internally
developed software costs
|
(8,975 | ) | (9,460 | ) | ||||
Gain
on securitizations and other securitization related
income/(loss)
|
(298,554 | ) | (337,943 | ) | ||||
Other
|
(1,618 | ) | (950 | ) | ||||
Total
deferred tax liabilities
|
$ | (473,478 | ) | $ | (536,049 | ) | ||
Net
deferred tax liabilities
|
$ | (410,546 | ) | $ | (382,155 | ) |
The
following is a rollforward of the Company’s unrecognized tax
benefits.
(Dollars in
thousands)
|
2009
|
2008
|
||||||
Total
unrecognized tax benefits at beginning of period
|
$ | 7,696 | $ | 8,301 | ||||
Net
amount of increases for current year’s tax positions
|
317 | 189 | ||||||
Gross amount of increases for prior years’ tax positions | 321 | - | ||||||
Gross
amount of decreases for prior years’ tax positions
|
- | (794) | ||||||
Total
unrecognized tax benefits at end of period
|
$ | 8,334 | $ | 7,696 |
The total
amount of unrecognized tax benefits at December 31, 2009 that, if recognized,
would affect the effective tax rate is $3.7 million.
Interest
and penalties related to unrecognized tax benefits, which are not included in
the rollforward above, are a component of the provision for income
taxes.
Interest
and Penalties
|
||||||||
(Dollars in
thousands)
|
Pretax
|
Net
of Tax
|
||||||
Interest
and penalties in the balance sheet at January 1, 2009
|
$ | 1,514 | $ | 984 | ||||
Interest
and penalties in the 2009 statement of income
|
(129 | ) | (84 | ) | ||||
Interest
and penalties in the balance sheet at December 31, 2009
|
$ | 1,385 | $ | 900 |
101
The
Company is included in the consolidated U.S. Federal income tax return of
Citigroup and certain multi-combined and unitary state and local tax returns of
Citigroup or its subsidiaries. Citigroup is presently under audit by the
Internal Revenue Service (IRS) for 2003-2005. It is reasonably
possible that the audit will conclude within the next 12 months. The resolution
of the uncertain tax position related to the IRS audit would not affect the
Company’s effective tax rate. The following are the major tax jurisdictions in
which the Company operates and the earliest tax year subject to
examination:
Jurisdiction
|
Tax
year
|
United
States
|
1999
|
California
|
2000
|
New
York
|
2005
|
13. DERIVATIVE
AGREEMENTS
The
Company currently has one cross-currency swap that is intended to manage its
exposure to foreign currency exchange rate fluctuations on its Euro denominated
secured borrowing. The swap matures at the earlier of the date at
which the respective notes mature, the trust loan assets have been liquidated or
2032.
Historically,
the Company maintained interest rate derivative and option agreements with CBNA,
an investment-grade counterparty. The interest rate derivative
agreements were used in an effort to manage the interest rate risk inherent in
the retained interests in the Company’s off-balance sheet securitizations. The
option agreements were designated as economic hedges to the floor income
component of the residual interests. The Company closed out of these
derivative positions during the fourth quarter of 2009 in anticipation of
accounting changes effective January 1, 2010, which result in the consolidation
of the Company’s previously unconsolidated securitizations and elimination of
the related retained interests being hedged. The Company no longer
maintains collateral, previously required on the derivatives with
CBNA. For further information pertaining to the collateral on the
Company’s derivatives, see Notes 5 and 10.
The
Company’s derivative instruments do not qualify for hedge accounting under ASC
815.
The fair
values of the Company’s derivatives are included in Other Assets and Other Liabilities,
respectively, and are provided in the table below:
December
31,
|
||||||||||||||||||||||||
(Dollars in
thousands)
|
2009
|
2008
|
||||||||||||||||||||||
Fair
Value
|
Fair
Value
|
|||||||||||||||||||||||
Notional
|
Asset
|
Liability
|
Notional
|
Asset
|
Liability
|
|||||||||||||||||||
Other
LIBOR Based Swaps
|
– | – | – | 13,342,300 | 37,361 | 65,348 | ||||||||||||||||||
Interest
Rate Floor Options
|
– | – | – | 12,111,261 | 54,198 | 398,280 | ||||||||||||||||||
Foreign
Currency Swap
|
232,050 | – | 17,381 | 232,050 | – | 24,935 |
102
Gains and
losses on the Company’s derivatives are recorded in Fee and Other Income and are
provided in the table below:
Years
Ended December 31,
|
|||
(Dollars in
thousands)
|
2009
|
2008
|
2007
|
Gains
(losses) on LIBOR-Based Swaps
|
$ 58,022
|
$
(29,063)
|
$ 8,133
|
Gains
(losses) on Interest Rate Floor Options
|
14,774
|
(241,307)
|
(41,094)
|
Gains
(losses) on Foreign Currency Swap
|
7,553
|
(24,935)
|
–
|
Net
gains (losses) on derivatives
|
$
80,349
|
$(295,305)
|
$
(32,961)
|
14.
FAIR VALUE OF FINANCIAL INSTRUMENTS (ASC 825-10)
The
estimated fair value of the Company’s financial instruments is presented in the
following table:
December
31, 2009
|
December
31, 2008
|
|||||||||||||||
(Dollars in
thousands)
|
Carrying
Value
|
Estimated
Fair Value
|
Carrying
Value
|
Estimated
Fair Value
|
||||||||||||
Financial
Assets:
|
||||||||||||||||
Total
loan assets
|
$ | 28,195,045 | $ | 25,383,302 | $ | 25,532,659 | $ | 21,398,064 | ||||||||
Cash
and restricted cash and cash equivalents
|
708,534 | 708,534 | 48,210 | 48,210 | ||||||||||||
Accrued
interest receivable
|
891,069 | 776,524 | 811,002 | 698,896 | ||||||||||||
Residual
interests in loans securitized
|
820,291 | 820,291 | 942,807 | 942,807 | ||||||||||||
Collateral
on Derivatives with CBNA
|
– | – | 387,498 | 387,498 | ||||||||||||
Derivative
assets
|
– | – | 91,559 | 91,559 | ||||||||||||
Servicing
assets
|
176,587 | 176,587 | 208,133 | 208,133 | ||||||||||||
Retained
notes from securitization sales
|
19,750 | 19,750 | 66,487 | 66,487 | ||||||||||||
Financial
Liabilities:
|
||||||||||||||||
Short-term
borrowings
|
$ | 7,197,686 | $ | 7,219,301 | $ | 13,656,411 | $ | 13,594,320 | ||||||||
Long-term
borrowings
|
21,390,976 | 21,412,849 | 11,829,744 | 11,384,196 | ||||||||||||
Derivative
liabilities
|
17,381 | 17,381 | 488,563 | 488,563 | ||||||||||||
Interest
payable
|
63,898 | 63,898 | 151,382 | 151,382 |
In
accordance with ASC 825-10, the estimated fair values have been determined by
the Company using available market information and other valuation methodologies
that are described below. The fair value approximates the price that would be
received to sell an asset or paid to transfer a liability in an orderly
transaction between market participants at the measurement date. These estimates
are subjective in nature and involve uncertainties and matters of significant
judgment. Accordingly, the estimates may not be indicative of the amounts that
the Company could realize in a current market exchange. Changes in assumptions
could materially affect the estimates.
103
The
difference between fair value and carrying value may vary from period to period
based on changes in a wide range of factors, including returns required by
investors in financial instruments, LIBOR and CP interest rates, portfolio mix
of variable and fixed rate loans, growth of the portfolio, timing of contractual
repricing, portfolio age, default rates and maturity or contractual settlement
dates.
Total
Loans Assets
The fair
value of loans was calculated by discounting cash flows through expected
maturity using the estimated current relevant yield curve for the interest
rates. The carrying value is presented net of the allowance for loan
losses.
Cash,
Restricted Cash and Cash Equivalents and Accrued Interest
Payable
Due to
the short-term nature of these instruments, carrying value approximates fair
value.
Accrued
Interest Receivable
Most of
the Company’s accrued interest receivable relates to loans that are not
currently in repayment. This accrued interest will be added to the
borrowers’ principal balances when the loans enter
repayment. Accordingly, the fair value of accrued interest receivable
that is expected to be capitalized was calculated using the same methodology
used for the related loan assets. Accrued interest receivable on
loans in repayment is considered short-term and, accordingly, carrying value
approximates fair value.
Residual
Interests in Loans Securitized, Servicing Assets and Retained Notes
The fair
value of the residual interest in the loans securitized, servicing assets and
retained notes (collectively, retained interests) were determined using a
discounted cash flow model. Retained interests from securitization
are recorded at fair value in the Consolidated Financial
Statements. For more information on student loan securitizations, see
Note 15.
Short-Term
and Long-Term Borrowings
The
Company pays interest on its short- and long-term borrowings based on CP, LIBOR
or prime rates. These borrowings generally have variable interest
rates with reset periods ranging from one day to every three months, depending
on the specific terms of each borrowing. Many of the Company’s
borrowings are based on a base index plus a credit premium. These
credit premiums are fixed over the life of the related borrowing. The fair value
of the Company’s borrowings from the Omnibus Credit Agreement, the Conduit and
from its on-balance sheet securitization trusts was calculated by discounting
cash flows through maturity using estimated market discount rates.
Derivatives
and Collateral on Derivatives
Derivatives
are used in an effort to manage interest rate and foreign currency exchange rate
risk. The fair value of derivative instruments was based upon quotes received
from counterparties based on similar instruments in active
markets. Derivatives are recorded at fair value in the Consolidated
Financial Statements. The carrying value of the Company’s collateral
on derivatives approximates fair value.
104
15. STUDENT
LOAN SECURITIZATIONS
The
Company maintains programs to securitize certain portfolios of student loan
assets. Under the Company’s securitization programs,
transactions qualifying as sales under ASC 860-10-40-5 are off-balance sheet
transactions in which the loans are removed from the Consolidated Financial
Statements of the Company and sold to an independent trust. In order to pay for
the loan assets, the trust sells debt securities collateralized primarily by the
student loan assets to outside investors. For off-balance sheet
securitizations, the Company generally retains interests in the form of
subordinated residual interests (i.e., interest-only strips) and servicing
rights.
The
Company also enters into similar securitization transactions that do not qualify
for sale treatment and, accordingly, are accounted for as secured
borrowings. These transactions do not give rise to a gain or loss on
sale. Student loan assets sold to these securitization trusts, along with other
assets and liabilities of the trusts, remain on-balance sheet. The
Company’s FFEL Program loans that are funded through the Conduit are funded
indirectly through the sale of asset-backed commercial paper to private
investors and are also accounted for as secured borrowings with the transferred
assets remaining on-balance sheet. See Notes 1 and 6 for additional
details regarding the Conduit.
At December
31, 2009, the carrying amount of the funded assets through on-balance sheet
securitizations and the Conduit was $19.2 billion of which $15.7 billion is
included in Federally insured
student loans, $2.0 billion is included in Private education loans, and
the remainder is composed primarily of deferred origination and premium costs,
accrued interest and restricted cash and cash equivalents. The
related liabilities of $17.1 billion at December 31, 2009, included $17.0
billion of Long-term secured
borrowings while the remainder is included in Other
liabilities. The assets are restricted from being sold or
pledged as collateral for other borrowings. The cash flows from these
restricted assets may be used only to pay down obligations of the
trust.
Under
terms of all the trust arrangements, the Company has the option, but not the
obligation, to provide financial support, but has never provided such
support. A substantial portion of the credit risk associated with the
securitized loans has been transferred to third party guarantors or insurers
either under the FFEL Program or private credit insurance.
The
following table summarizes the principal amounts and fair values of retained
interests in the Company’s off-balance sheet loan securitizations:
December
31, 2009
|
December
31, 2008
|
|||||||||||||||
(Dollars
in thousands)
|
FFEL
Program
|
Private
education
|
FFEL
Program
|
Private
education
|
||||||||||||
Principal
amounts
|
$ | 11,830,320 | $ | 2,066,492 | $ | 12,809,596 | $ | 2,286,745 | ||||||||
Retained
interests
|
868,529 | 148,099 | 1,042,766 | 174,661 |
105
The
following table summarizes the Company’s securitization activity:
Years
Ended December 31,
|
||||||||||||
(Dollars
in thousands)
|
2009
|
2008
|
2007
|
|||||||||
Securitization
sales:
|
||||||||||||
Student
loans securitized (1)
|
$ | – | $ | 2,035,540 | $ | 2,876,812 | ||||||
Net
proceeds from student loans securitized during the
period
|
– | 1,973,207 | 2,907,581 | |||||||||
Realized
gains on loans securitized
|
– | 1,262 | 70,814 | |||||||||
Securitization
financings:
|
||||||||||||
Student
loans securitized (1)
|
$ | 6,008,203 | $ | 1,993,213 | $ | – | ||||||
Student
loans funded through the Conduit (1)
|
10,477,198 | – | – | |||||||||
Total
student loans funded through securitization financings (1)
|
$ | 16,485,401 | $ | 1,993,213 | $ | – | ||||||
Net
proceeds from student loans securitized (2)
|
$ | 5,271,234 | $ | 1,798,638 | $ | – | ||||||
Net
proceeds from student loans funded through the Conduit during the current
period (2)
|
10,389,529 | – | – | |||||||||
Total
net proceeds from securitization financings (2)
|
$ | 15,660,763 | $ | 1,798,638 | $ | – |
(1)
|
Amounts
represent the carrying value of the student loans securitized as of the
securitization date.
|
(2)
|
Amounts
represent proceeds of loans securitized or funded through the Conduit
net of related financing costs.
|
The
difference between student loans securitized or loans funded through the Conduit
and net proceeds received is largely a result of required overcollateralization,
but also reflects issuance costs and notes not issued on the date of the
securitization.
The
following table reflects amounts received related to off-balance sheet
securitization trusts:
Years
Ended December 31,
|
||||||||||||
(Dollars
in thousands)
|
2009
|
2008
|
2007
|
|||||||||
Cash
received from trusts for servicing
|
$ | 77,769 | $ | 77,863 | $ | 64,868 | ||||||
Cash
received from trusts on residual interests
|
211,257 | 138,681 | 65,388 | |||||||||
Cash
received from trusts on retained notes
|
1,986 | 2,400 | – |
During
the years ended December 31, 2009, 2008 and 2007, the Company earned $77.2
million, $78.2 million and $67.3 million, respectively, of contractually
specified servicing fees. The Company also earned $1.8 million, $2.5
million and $0.1 million on retained notes for the years ended December 31,
2009, 2008 and 2007, respectively.
106
Changes
in the Company’s servicing assets are presented in the table below:
Years
Ended December 31,
|
||||||||||||
(Dollars
in thousands)
|
2009
|
2008
|
2007
|
|||||||||
Balance
at beginning of period
|
$ | 208,133 | $ | 199,112 | $ | 169,234 | ||||||
Changes
in fair value due to changes in inputs and assumptions
|
330 | 43,826 | 16,329 | |||||||||
Other
changes (1)
|
(31,876 | ) | (34,805 | ) | (31,997 | ) | ||||||
Student
loan securitizations (2)
|
– | – | 45,546 | |||||||||
Balance
at end of period
|
$ | 176,587 | $ | 208,133 | $ | 199,112 |
|
(1)
|
Amounts
represent the effects of cash received and the passage of
time.
|
|
(2)
|
There
is no servicing asset or liability associated with the off-balance sheet
FFEL Program Stafford and PLUS loan securitization because the servicing
fee approximated adequate
compensation.
|
The
following table reflects net gains from securitization retained interests and
related derivatives from off-balance sheet securitization trusts, which are
recorded in Fee and other
income:
Years
Ended December 31,
|
||||||||||||
(Dollars in
thousands)
|
2009
|
2008
|
2007
|
|||||||||
Gains
related to residual interests
|
$ | 19,564 | $ | 326,039 | $ | 2,733 | ||||||
Servicing
revenue net of valuation gains and losses on servicing
assets
|
45,769 | 87,173 | 51,606 | |||||||||
Mark-to-market
gains (losses) on derivatives
|
72,796 | (270,370 | ) | (32,961 | ) | |||||||
Realized
and unrealized gains (losses) on retained notes
|
5,176 | (16,784 | ) | (25 | ) | |||||||
Net
gains from securitization retained interests and related
derivatives
|
$ | 143,305 | $ | 126,058 | $ | 21,353 |
The
Company utilizes discounted cash flow models to measure the fair value of its
residual interests and servicing assets. These models require management to make
certain assumptions which, while based on relevant internal and external data,
inherently involve significant judgment and uncertainty. The discount rates,
basis spreads, anticipated net credit loss rates, anticipated prepayment rates
and projected borrower benefit utilization rates are key assumptions utilized to
measure the fair value of these retained interests. The Company’s discount rate
is the sum of the risk-free rate and a risk premium which reflects the
prevailing economic and market conditions at the balance sheet
date. During the year ended December 31, 2009, the Company decreased
the risk premium on its FFEL Program loan trusts' residual interests by 75 basis
points to reflect lower premiums recently experienced in the market on FFEL
Program asset-backed securities transactions. The Company increased the risk
premium of its private education loan residual interests during this same period
by 200 basis points to reflect an increasing level of cash flow uncertainty and
lack of liquidity in the private education loan asset-backed securities
market. The risk-free component of the discount rate on all of the
Company’s residual interests increased by 149 basis points for the year ended
December 31, 2009.
107
The
Company has also lowered its future prepayment assumptions to reflect an overall
slowdown in borrower prepayment activity. The impact of the change in the
prepayment assumptions was a $27.2 million and $3.6 million mark-to-market gain
on the Company’s residual interests and servicing assets, respectively, for the
year ended December 31, 2009.
The
Company also recognized a mark-to-market loss on its residual interests as a
result of the change in the fair value of the floor income embedded in the
residual interest cash flows. During the year ended December 31,
2009, the mark-to-market loss on the floor income embedded in the Company’s
residual interests was $75.7 million.
During
2009, the Company did not enter into an off-balance sheet securitization as
compared to one during 2008. The key assumptions used to value the
residual interests and servicing assets of the trusts at the inception date of
the securitization were as follows:
2008
|
||||
Residual
interest discount rates
|
10.64 | % | ||
Constant
prepayment rates
|
8.97 | % | ||
Anticipated
credit losses, net of insurance and guarantees
|
0.53 | % | ||
Basis
spread between LIBOR and CP rates
|
12
basis points
|
|||
Utilization
rates of borrower benefits:
|
||||
Automated
clearing house
|
2.27 | % | ||
On
time payments
|
5.82 | % |
The key
assumptions used to value the residual interests of securitized trusts were as
follows:
December
31,
|
||||||||
2009
|
2008
|
|||||||
Discount
rates:
|
||||||||
FFEL
Program Consolidation Loans
|
11.10 | % | 10.36 | % | ||||
FFEL
Program Stafford and PLUS loan
|
11.10 | % | 10.36 | % | ||||
Private
education loans
|
16.85 | % | 13.36 | % | ||||
Constant
prepayment rates:
|
||||||||
FFEL
Program Consolidation Loans
|
0.16%
to 0.58
|
% |
0.77%
to 1.10
|
% | ||||
FFEL
Program Stafford and PLUS loan
|
4.44 | % | 6.54 | % | ||||
Private
education loans
|
3.45 | % | 8.88 | % | ||||
Anticipated
credit losses, net of insurance and guarantees:
|
||||||||
FFEL
Program Consolidation Loans
|
0.27 | % | 0.32 | % | ||||
FFEL
Program Stafford and PLUS loan
|
0.57 | % | 0.52 | % | ||||
Private
education loans
|
0.90 | % | 0.67 | % | ||||
Basis
spread between LIBOR and CP rates
|
16
basis points
|
13
basis points
|
||||||
Utilization
rates of borrower benefits:
|
||||||||
Automated
clearing house
|
2.6%
to 38.1
|
% |
2.3%
to 40.2
|
% | ||||
On
time payments
|
0%
to 34.5
|
% |
0%
to 35.7
|
% |
108
The key
assumptions used to value the servicing assets of trusts related to
securitization sales were as follows:
December
31,
|
||||||||
2009
|
2008
|
|||||||
Discount
rates:
|
||||||||
FFEL
Program Consolidation Loans
|
5.39 | % | 3.90 | % | ||||
Private
education loans
|
5.89 | % | 4.40 | % | ||||
Constant
prepayment rates:
|
||||||||
FFEL
Program Consolidation Loans
|
0.16%
to 0.58
|
% |
0.77%
to 1.10
|
% | ||||
Private
education loans
|
3.45 | % | 8.88 | % | ||||
Weighted
average servicing margin
|
20
basis points
|
23
basis points
|
There is
no servicing asset associated with the off-balance sheet FFEL Program Stafford
and PLUS loan off-balance sheet securitization.
A
sensitivity analysis is provided in the table below that shows the effects of
adverse changes in each of the key assumptions used to determine the fair value
of the retained interests. The adverse effect of the change in each
assumption is calculated independently while holding all other assumptions
constant. Because the key assumptions may not be independent, the net
effect of simultaneous adverse changes in the key assumptions may be different
from the sum of the individual effects shown in the table.
The
effects of the key assumptions on the residual interests and servicing assets
are presented below:
(Dollars
in thousands)
|
Residual
Interests
|
Servicing
Assets
|
||||||
Fair
value at December 31, 2009
|
$ | 820,291 | $ | 176,587 | ||||
Discount
rate:
|
||||||||
10%
adverse change
|
(25,300 | ) | (4,160 | ) | ||||
20%
adverse change
|
(48,433 | ) | (8,147 | ) | ||||
Constant
prepayment rate:
|
||||||||
10%
adverse change
|
(3,117 | ) | (748 | ) | ||||
20%
adverse change
|
(6,236 | ) | (1,512 | ) | ||||
Anticipated
credit losses, net of insurance and guarantees:
|
||||||||
10%
adverse change
|
(4,146 | ) | (765 | ) | ||||
20%
adverse change
|
(8,354 | ) | (1,423 | ) | ||||
Expected
basis spread between LIBOR and Commercial Paper rate:
|
||||||||
10%
adverse change
|
(8,629 | ) | – | |||||
20%
adverse change
|
(17,257 | ) | – | |||||
Borrower
benefits – automated clearing house:
|
||||||||
10%
adverse change
|
(2,840 | ) | – | |||||
20%
adverse change
|
(5,711 | ) | – | |||||
Borrower
benefits – on time payments:
|
||||||||
10%
adverse change
|
(10,344 | ) | – | |||||
20%
adverse change
|
(20,711 | ) | – | |||||
Servicing
margin:
|
||||||||
10%
adverse change
|
– | (22,166 | ) | |||||
20%
adverse change
|
– | (44,115 | ) |
109
Principal
amounts of off-balance sheet securitized loans and the related loan
delinquencies (loans which are 90 days or more past due) are presented in the
following table:
December
31,
|
||||||||
(Dollars
in thousands)
|
2009
|
2008
|
||||||
Principal
amounts
|
$ | 13,896,812 | $ | 15,096,341 | ||||
Delinquencies
|
553,463 | 658,538 |
Credit
losses, net of recoveries, for the Company’s off-balance sheet securitized loans
are presented in the table below:
Years
Ended December 31,
|
||||||||||||
(Dollars
in thousands)
|
2009
|
2008
|
2007
|
|||||||||
Credit
losses, net of recoveries:
|
$ | 12,697 | $ | 9,374 | $ | 6,661 |
16. FAIR VALUE
(ASC 860-50-35 and 50, ASC 820-10 AND ASC 825-10)
The
Company determines fair value using valuation techniques that are based upon
observable and unobservable inputs. Observable inputs reflect market data
obtained from independent sources, while unobservable inputs reflect the
Company’s market assumptions. These two types of inputs create the following
fair value hierarchy:
·
|
Level
1 –
|
Quoted
prices for identical instruments
in active markets.
|
·
|
Level
2 –
|
Quoted
prices for similar instruments in
active markets, quoted prices for identical or similar instruments in
markets that are not active and model-derived valuations whose inputs are
observable or whose primary value drivers are
observable.
|
·
|
Level
3 –
|
Instruments
whose primary value drivers are unobservable.
|
110
Items
Measured at Fair Value on a Recurring Basis
The
following table presents the Company’s financial assets and liabilities that are
measured at fair value on a recurring basis for each of these hierarchy
levels:
December
31, 2009
|
December
31, 2008
|
|||||||||||||||
(Dollars
in thousands)
|
Level
2
|
Level
3
|
Level
2
|
Level
3
|
||||||||||||
Assets
|
||||||||||||||||
Residual
interests in securitized loans
|
$ | – | $ | 820,291 | $ | – | $ | 942,807 | ||||||||
Other
assets
|
– | 196,337 | 91,559 | 274,620 | ||||||||||||
Total
Assets
|
$ | – | $ | 1,016,628 | $ | 91,559 | $ | 1,217,427 | ||||||||
Liabilities
|
||||||||||||||||
Other
liabilities
|
$ | 17,381 | $ | – | $ | 488,563 | $ | – |
Derivatives
Derivatives
are used in an effort to manage interest rate and foreign currency exchange rate
risk. Fair value was based upon quotes received from counterparties based on
similar instruments in active markets. Derivatives are recorded at fair value
and are included in Other
assets and Other
liabilities in the table above and in the Consolidated Financial
Statements. For more information on derivatives, see Note 13.
Retained
Interests in Securitized Loans
The
Company has classified its residual interests, servicing assets and retained
notes in its off balance-sheet securitizations, included in Other assets as Level 3
instruments and utilizes discounted cash flow models to measure the fair value.
These models require management to make certain assumptions which, while based
on relevant internal and external data, inherently involve significant judgment
and uncertainty. The market for subordinated notes similar to those
retained by the Company is not currently active. During the first
quarter of 2009, the Company changed the discount rate assumptions used in the
retained note discounted cash flow model from ones based solely on non-binding
broker quotes to ones that also consider other market indicators and are
consistent with those used to determine the fair values of the Company’s
residual interests and servicing assets. All of
the Company’s retained interests in off-balance sheet securitizations are
recorded at fair value in the Consolidated Financial Statements. For
more information on loan securitizations, see Note 15.
The
Company recorded $5.2 million of realized and unrealized gains as compared to a
$16.8 million write-down associated with retained notes during the years ended
December 31, 2009 and December 31, 2008, respectively. These gains
and losses are included in Fee
and Other Income in the Consolidated Financial Statements. For
more information on loan securitizations, see Note 15.
111
The
following table presents the changes in the Level 3 fair value
category:
Years
Ended December 31,
|
||||||||||||
(Dollars
in thousands)
|
2009
|
2008
|
2007
|
|||||||||
Residual
interests in securitized loans:
|
||||||||||||
Balance
at beginning of period
|
$ | 942,807 | $ | 633,074 | $ | 546,422 | ||||||
Total
gains (realized/unrealized) included in earnings:
|
||||||||||||
Interest
income
|
69,177 | 65,510 | 59,177 | |||||||||
Fee
and other income
|
19,564 | 326,039 | 2,733 | |||||||||
Purchases,
issuances and settlements
|
(211,257 | ) | (81,816 | ) | 24,742 | |||||||
Balance
at end of period
|
$ | 820,291 | $ | 942,807 | $ | 633,074 | ||||||
Unrealized
gains relating to assets still held at the reporting date (1)
|
$ | 19,564 | $ | 326,039 | $ | 2,733 | ||||||
Servicing
assets and retained notes included in Other assets:
|
||||||||||||
Balance
at beginning of period
|
$ | 274,620 | $ | 199,112 | $ | 169,234 | ||||||
Total
gains (realized/unrealized) included in earnings:
|
||||||||||||
Fee
and other income
|
14,705 | 41,851 | 27,036 | |||||||||
Transfers
into Level 3
|
– | 78,981 | – | |||||||||
Purchases,
sales, issuances and settlements
|
(92,988 | ) | (45,324 | ) | 2,842 | |||||||
Balance
at end of period
|
$ | 196,337 | $ | 274,620 | $ | 199,112 | ||||||
Unrealized
gains relating to assets still held at the reporting date (1)
|
$ | 3,038 | $ | 31,332 | $ | 16,329 |
(1)
|
The
difference between total gains (realized /unrealized) included in earnings
and unrealized gains relating to assets still held at the reporting date
represents accreted yield and realized gains from the sale of retained
notes from the Company’s 2008 off-balance sheet
securitization.
|
112
Items
Measured at Fair Value on a Nonrecurring Basis
Certain
assets and liabilities are measured at fair value on a non-recurring basis and
therefore are not included in the table above. These include assets such as
loans held for sale that are measured at the lower of cost or fair
value.
The fair
value of loans measured at the lower of cost or fair value is determined using
discounted cash flow models or contractual sales price when applicable. Such
loans are generally classified in Level 3 of the fair value hierarchy as these
discounted cash flow models utilize unobservable inputs, including discount
rate, expected prepayment rates and expected credit losses.
During
the years ended December 31, 2009 and 2008, the cost of loans held for sale
exceeded fair value. The Company recorded lower of cost or fair value
write downs on its loans held for sale of $2.2 million for the year ended
December 31, 2009 as compared to $34.7 million for year ended December 31, 2008.
The write downs related to loans that were transferred from loans held for sale
back into the operating loan portfolio during the period.
At
December 31, 2009, the fair value of loans held for sale exceeded the cost basis
of $2.4 billion.
17. COMMITMENTS
AND CONTINGENCIES
The
Company has obligations under several non-cancelable operating leases. Expenses
related to those agreements totaled $1.7 million, $2.5 million and $2.9 million
for the years ended December 31, 2009, 2008 and 2007,
respectively. Included in these amounts are lease expenses with CBNA
for the Pittsford, New York facility of $1.6 million, $2.1 million and $2.4
million for the years ended December 31, 2009, 2008 and 2007,
respectively. This amount is included in Premises in the related
party transactions table in Note 10. The Pittsford, New York
facilities agreement expires in May 2014.
Future
minimum lease payments at December 31, 2009 under agreements classified as
operating leases with non-cancelable terms in excess of one year for the
calendar years after December 31, 2009 are as follows:
(Dollars in
thousands)
|
Minimum
Lease Payments
|
|||
2010
|
$ | 1,711 | ||
2011
|
1,759 | |||
2012
|
1,738 | |||
2013
|
1,754 | |||
2014
|
752 | |||
Thereafter
|
– | |||
Total
|
$ | 7,714 |
At
December 31, 2009, FFEL Program loans in the amount of $2.0 billion have been
committed, but not disbursed. In addition, the Company has forward
purchase agreements, primarily with CBNA, that obligate the Company to purchase
all loans offered for sale and/or originated by the other party. At December 31,
2009, the aggregate obligation under these commitments totaled $0.6
billion.
In
addition, the Company provides lines of credit to certain institutions. Such
lines are used by these organizations exclusively to disburse FFEL Program Loans
which the Company will subsequently purchase. At December 31, 2009, these
institutions had unused lines of credit of $13.4 million available to
them.
113
In the
ordinary course of business, the Company is involved in various litigation
proceedings 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 would not be likely to have a material adverse
effect on the results of the Company’s operations, financial condition or
liquidity.
18. RESTRUCTURING
AND RELATED CHARGES
At
December 31, 2009, the Company had a remaining restructuring reserve of less
than $0.1 million included in Other liabilities, which
decreased from $5.0 million at December 31, 2008.
During
June 2009, the Company announced a restructuring which resulted in the reduction
of 10 positions within the Company. Full implementation of the June
2009 restructuring was completed during October 2009. Restructuring charges of
$0.5 million related to this action were recorded in the second
quarter.
During
2008, the Company announced two restructuring initiatives in an effort to
prudently manage the business through the unprecedented market conditions and to
strategically reposition its business to benefit from certain products,
channels, and operational structure while strategically deploying capital
resources. As a result of the 2008 initiatives, the Company recorded
restructuring and related charges of $12.4 million during 2008. These
charges consisted of severance related costs of $11.8 million and non-cash
charges associated with the impairment of software assets totaling $0.6
million. At December 31, 2009, all of the employees affected by the
2008 restructurings had been terminated.
19. SELECTED
QUARTERLY FINANCIAL DATA (UNAUDITED)
(Dollars
in thousands, except per share amounts)
|
Fourth
|
Third
|
Second
|
First
|
||||||||||||
2009
|
||||||||||||||||
Net
interest income
|
$ | 74,574 | $ | 74,111 | $ | 70,884 | $ | 58,078 | ||||||||
Provision
for loan losses
|
(36,194 | ) | (38,690 | ) | (44,826 | ) | (21,142 | ) | ||||||||
Net
interest income after provision for loan losses
|
38,380 | 35,421 | 26,058 | 36,936 | ||||||||||||
Gains
on loans sold and securitized
|
10,413 | 17,712 | 17,864 | - | ||||||||||||
Fee
and other income
|
49,147 | 68,535 | 30,851 | 6,958 | ||||||||||||
Total
operating expenses
|
(33,074 | ) | (34,707 | ) | (35,211 | ) | (34,859 | ) | ||||||||
Income
taxes
|
(26,785 | ) | (32,154 | ) | (14,300 | ) | (1,513 | ) | ||||||||
Net
income
|
$ | 38,081 | $ | 54,807 | $ | 25,262 | $ | 7,522 | ||||||||
Basic
and diluted earnings per common share
|
$ | 1.90 | $ | 2.74 | $ | 1.26 | $ | 0.38 | ||||||||
Dividends
declared per common share
|
$ | 0.35 | $ | 0.35 | $ | 0.35 | $ | 1.43 | ||||||||
Common
stock price:
|
||||||||||||||||
High
|
$ | 52.18 | $ | 52.55 | $ | 55.55 | $ | 58.45 | ||||||||
Low
|
$ | 40.68 | $ | 36.37 | $ | 34.55 | $ | 24.61 | ||||||||
Close
(at quarter end)
|
$ | 46.57 | $ | 46.40 | $ | 37.20 | $ | 43.44 |
114
(Dollars
in thousands, except per share amounts)
|
Fourth
|
Third
|
Second
|
First
|
||||||||||||
2008
|
||||||||||||||||
Net
interest income
|
$ | 46,941 | $ | 83,521 | $ | 119,390 | $ | 81,447 | ||||||||
Provision
for loan losses
|
(22,965 | ) | (46,791 | ) | (45,827 | ) | (25,312 | ) | ||||||||
Net
interest income after provision for loan losses
|
23,976 | 36,730 | 73,563 | 56,135 | ||||||||||||
Gains
on loans sold and securitized
|
24 | 194 | 2,121 | 1,455 | ||||||||||||
Fee
and other income (loss)
|
33,803 | 16,923 | 39,012 | 11,459 | ||||||||||||
Total
operating expenses
|
(37,715 | ) | (44,855 | ) | (51,935 | ) | (44,221 | ) | ||||||||
Income
taxes
|
(7,780 | ) | (3,553 | ) | (23,164 | ) | (8,745 | ) | ||||||||
Net
income
|
$ | 12,308 | $ | 5,439 | $ | 39,597 | $ | 16,083 | ||||||||
Basic
and diluted earnings per common share
|
$ | 0.62 | $ | 0.27 | $ | 1.98 | $ | 0.80 | ||||||||
Dividends
declared per common share
|
$ | 1.43 | $ | 1.43 | $ | 1.43 | $ | 1.43 | ||||||||
Common
stock price:
|
||||||||||||||||
High
|
$ | 98.07 | $ | 126.15 | $ | 138.75 | $ | 126.00 | ||||||||
Low
|
$ | 20.82 | $ | 83.06 | $ | 90.50 | $ | 92.05 | ||||||||
Close
(at quarter end)
|
$ | 41.00 | $ | 93.00 | $ | 98.08 | $ | 98.90 |
115
SECURITIES
AND EXCHANGE COMMISSION INFORMATION
Form
10-K, Annual Report pursuant to Section 13 or 15(d) of the Securities Exchange
Act of 1934 for the fiscal year ended December 31, 2009, Commission File Number
1-11616.
The
Company is incorporated in the State of Delaware; its I.R.S. Employer
Identification Number is 16-1427135; the address of the principal executive
offices is 750 Washington Boulevard, Stamford, CT 06901; and its phone number is
(203) 975-6861.
The
Company’s common stock is registered pursuant to section 12(b) of the Securities
Exchange Act of 1934 and listed on the New York Stock Exchange under the ticker
symbol “STU”.
The
Company is a well-known seasoned issuer (as defined in Rule 405 of the
Securities Act of 1933).
The
Company is required to file reports pursuant to Section 13 or Section 15(d) of
the Securities Exchange Act of 1934.
The
Student Loan Corporation (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.
Disclosure
of delinquent filers pursuant to Item 405 of Regulation S-K is not contained
herein and will not be contained in the Company’s 2009 Proxy Statement
incorporated by reference in Part III of this Form 10-K, or in any amendment to
this Form 10-K.
The
Company is an accelerated filer (as defined in Rule 12b-2 of the Securities
Exchange Act of 1934).
The
Company is not a shell company (as defined in Rule 12b-2 of the Securities
Exchange Act of 1934).
The
aggregate market value of the four million shares of voting stock held by
non-affiliates of the Company as of the close of trading on June 30, 2009 was
approximately $148.8 million. As of February 23, 2010, there were 20
million shares of the Company’s common stock outstanding.
Certain
information has been incorporated by reference, as described herein, into Part
III of this annual report from the Company’s 2010 Proxy
Statement.
116
EXHIBITS
AND FINANCIAL STATEMENT SCHEDULES
The
following exhibits are either filed herewith or have been previously filed with
the Securities and Exchange Commission and are filed herewith by incorporation
by reference:
·
|
The
Student Loan Corporation’s Restated Certificate of
Incorporation
|
·
|
The
Student Loan Corporation’s By-Laws, as amended
|
·
|
Material
Contracts
|
·
|
Code
of Ethics for Financial Professionals
|
·
|
Powers
of Attorney of The Student Loan Corporation’s Directors Atal, Bailey,
Doynow, Drake, Garside, Glover, Handler and Moseman.
|
·
|
Certifications
pursuant to Section 302 and Section 906 of the Sarbanes-Oxley Act of
2002
|
A more
detailed exhibit index has been filed with the Securities and Exchange
Commission. Stockholders may obtain copies of that index or any of
the documents on that index by writing to: The Student Loan Corporation,
Investor Relations, 750 Washington Boulevard, 9th
Floor, Stamford, CT 06901 or on the Internet at www.studentloan.com.
Financial
Statements filed for The Student Loan Corporation:
·
|
Consolidated
Statements of Income for the years ended December 31, 2009, 2008 and
2007
|
·
|
Consolidated
Balance Sheets as of December 31, 2009 and 2008
|
·
|
Consolidated
Statements of changes in Stockholders’ Equity for the years ended December
31, 2009, 2008 and 2007
|
·
|
Consolidated
Statements of Cash Flows for the years ended December 31, 2009, 2008 and
2007
|
117
10-K
CROSS REFERENCE INDEX
This
Annual Report and Form 10-K incorporate into a single document the requirements
of the accounting profession and the Securities and Exchange Commission,
including a comprehensive explanation of 2009 results.
Part
I
|
Page
|
||
Item
1
|
Business
|
9,
46 - 53
|
|
Item
1A
|
Risk
Factors
|
54
- 66
|
|
Item
1B
|
Unresolved
Staff Comments
|
None
|
|
Item
2
|
Properties
|
52
|
|
Item
3
|
Legal
Proceedings
|
53
|
|
Item
4
|
Submission
of Matters to a Vote of Security Holders
|
None
|
|
Part
II
|
|||
Item
5
|
Market
for Registrant’s Common Equity, Related Stockholder Matters and Issuer
Purchases of Equity Securities
|
53, 114
- 115, 121 - 122
|
|
Item
6
|
Selected
Financial Data
|
1
|
|
Item
7
|
Management’s
Discussion and Analysis of Financial Condition and Results of
Operations
|
6-
41
|
|
Item
7A
|
Quantitative
and Qualitative Disclosures about Market Risk
|
42
- 45
|
|
Item
8
|
Consolidated
Financial Statements and Supplementary Data
|
70
- 115
|
|
Item
9
|
Changes
in and Disagreements with Accountants on Accounting and Financial
Disclosure
|
None
|
|
Item
9A
|
Controls
and Procedures
|
67
- 69
|
|
Item
9 B
|
Other
Information
|
None
|
|
Part
III
|
|||
Item
10
|
Directors,
Executive Officers and Corporate Governance
|
*
|
|
Item
11
|
Executive
Compensation
|
*
|
|
Item
12
|
Security
Ownership of Certain Beneficial Owners and Management and Related
Stockholder Matters
|
*
|
|
Item
13
|
Certain
Relationships and Related Transactions, and Director
Independence
|
*
|
|
Item
14
|
Principal
Accounting Fees and Services
|
*
|
|
Part
IV
|
|||
Item
15
|
Exhibits,
Financial Statement Schedules
|
117
|
|
Availability
of SEC Filings
|
121
- 122
|
||
*
|
The
Student Loan Corporation’s 2010 Proxy Statement that responds to
information required by Part III of Form 10-K is incorporated by reference
into this Annual Report and Form
10-K.
|
118
SIGNATURES
Pursuant
to the requirements of Section 13 or 15(d) 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.
|
|||
The
Student Loan Corporation
|
|||
(Registrant)
|
|||
/s/ Joseph P. Guage
|
|||
Joseph
P. Guage
|
|||
Interim
Chief Financial Officer and Duly Authorized Officer (Principal Financial
Officer)
|
|||
February
26, 2010
|
|||
Pursuant
to the requirements of the Securities Exchange Act of 1934, this report
has been signed below by the following persons on behalf of the Registrant
and in the capacities and on the dates indicated.
|
|||
The
Student Loan Corporation’s Principal Executive Officer, a Director and
also as Attorney-in-Fact for the other directors listed
below:
|
|||
/s/ Michael J. Reardon
|
|||
Michael
J. Reardon
|
|||
February
26, 2010
|
|||
The
Student Loan Corporation’s Principal Financial Officer, Principal
Accounting Officer and also as Attorney-in-Fact for the other directors
listed below:
|
|||
/s/ Joseph P. Guage
|
|||
Joseph
P. Guage
|
|||
February
26, 2010
|
|||
The
Directors of The Student Loan Corporation listed below executed powers of
attorney appointing Michael J. Reardon and Joseph P. Guage their
attorneys-in-fact, empowering both to sign this report on their
behalf:
|
|||
Vikram
A. Atal
|
Rodman
L. Drake
|
Dr.
Evelyn E. Handler
|
|
James
L. Bailey
|
Richard
J. Garside
|
Loretta
Moseman
|
|
Gina
B. Doynow
|
Dr.
Glenda B. Glover
|
||
119
DIRECTORS
AND EXECUTIVE OFFICERS
Directors
|
Executive
Officers
|
Vikram
A. Atal
Executive
Vice President
Citigroup
|
Michael
J. Reardon
Chief
Executive Officer and President
|
James
L. Bailey
Retired
Executive
Vice President
Citibank,
N.A.
|
Joseph
P. Guage
Vice
President and Chief Financial Officer, Controller and Chief Accounting
Officer
|
Gina
B. Doynow
National
Director
North
America Community Relations
Citigroup
|
Christine
Y. Homer
Vice President, Secretary and
General Counsel
|
Rodman
L. Drake
Managing
Director
CIP
Management
|
Patricia
A. Morris
Vice
President and Chief Risk Officer
|
Richard
J. Garside
Chief
Operating Officer
North
American Operations and Technology
Citigroup
|
John
Vidovich
Vice
President and Executive Director of Sales
|
Dr.
Glenda B. Glover
Dean
of the College of Business
Jackson
State University
|
|
Dr.
Evelyn E. Handler
Retired
President
of the University of New Hampshire
President
of Brandeis University
|
|
Loretta
Moseman
Global
Business Treasurer
Citigroup
|
|
Michael
J. Reardon
Chairman,
Chief Executive Officer and President
The
Student Loan Corporation
|
120
STOCKHOLDER
INFORMATION
Investor
Relations
Electronic
or paper copies of the Company’s Form 10-K, other financial information, and
general information about The Student Loan Corporation may be obtained by
writing to Investor Relations, The Student Loan Corporation, 750 Washington
Boulevard, Stamford, CT 06901, or by telephone request to Bradley D. Svalberg,
Director of Investor Relations, at 203-975-6320. Investor relations
information is also available on the Company’s website at http://www.studentloan.com by
clicking on the “Investor Relations” page.
Availability
of SEC Filings
The
Company makes available free of charge on and through its website, at http://www.studentloan.com,
its annual report on Form 10-K, quarterly reports on Form 10-Q, current reports
on Form 8-K, and all amendments to those reports as soon as reasonably
practicable after such material is electronically filed with or furnished to the
Securities and Exchange Commission (SEC). In addition, the Company
provides electronic or paper copies of its filings free of charge upon request
to the Director of Investor Relations. See Investor Relations above. The
SEC posts reports, proxy statements and other information filed by the Company
at http://www.sec.gov.
Corporate
Governance Materials
The
following materials, which have been adopted by the Company, are available free
of charge on the Company’s website at http://www.studentloan.com
under the “Board and Management” page or by writing to the
Director of Investor Relations (see Investor Relations above): the
Company’s (i) corporate governance guidelines, (ii) code of conduct, (iii) code
of ethics for financial professionals, and (iv) charters of (a) the audit
committee and (b) the compensation committee. The code of ethics for
financial professionals applies to the Company’s principal executive officer,
principal financial officer and principal accounting officer. Amendments and
waivers, if any, to the code of ethics for financial professionals will be
disclosed on the Company’s website.
Customer
Service
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.
Annual
Meeting
The
Annual Meeting of Stockholders will be held at 8:30 a.m. on Thursday, May 13,
2010 in New York City.
121
Transfer
Agent and Registrar
The
Company’s transfer agent and registrar is Computershare Investor Services, P.O.
Box 43078, Providence, RI 02940-3078. Their toll free number is (877) 282-1169.
They may also be contacted by e-mail from Computershare’s website at
http://www-us.computershare.com.
Market
for the Registrant’s Common Equity and Related Stockholder Matters
The
Company’s common stock is listed and traded on the New York Stock Exchange under
the ticker symbol “STU”. During the year ended December 31, 2009, the
Company did not repurchase any of its own common stock and did not make any
sales of unregistered securities. The number of holders of record of
the common stock at January 29, 2009 was 33. See quarterly
information on the Company’s common stock on page 114.
122
EXHIBIT
INDEX
Exhibit
Number
|
Description of Exhibit
|
3.1
|
Restated
Certificate of Incorporation of the Company, incorporated by reference to
Exhibit 3.1 to the Company’s 1992 Annual Report on Form 10-K (File No.
1-11616).
|
3.2
|
By-Laws
of the Company, as amended, incorporated by reference to Exhibit 3.2 to
the Company’s Current Report on Form 8-K filed February 4, 2009 (File No.
1-11616).
|
10.1
|
Trust
Agreement, dated as of December 21, 1992, between the Company and CNYS,
incorporated by reference to Exhibit 10.2 to the Company’s 1992 Annual
Report on Form 10-K (File No. 1-11616).
|
10.2.1
|
Non-Competition
Agreement, dated as of December 22, 1992, among the Company, CNYS and
Citicorp, incorporated by reference to Exhibit 10.4 to the Company’s 1992
Annual Report on Form 10-K (File No. 1-11616).
|
10.2.2
|
Amendment
No. 1, dated as of June 22, 2000, to Non-Competition Agreement among the
Company, CNYS and Citigroup Inc., incorporated by reference to Exhibit
10.2.2 to the Company’s 2001 Annual Report on Form 10-K (File
No. 1-11616).
|
10.2.3
|
Amendment
No. 2, dated as of June 22, 2001, to Non-Competition Agreement among the
Company, CNYS and Citigroup Inc., incorporated by reference to Exhibit
10.2.3 to the Company’s 2001 Annual Report on Form 10-K (File
No. 1-11616).
|
10.2.4
|
Amendment
No. 3, dated as of May 5, 2002, to Non-Competition Agreement among the
Company, CNYS and Citigroup Inc., incorporated by reference to Exhibit
10.2.4 to the Company’s Quarterly Report on Form 10-Q for the fiscal
quarter ended June 30, 2004 (File No.
1-11616).
|
10.2.5
|
Amendment
No. 4, dated as of June 22, 2003, to Non-Competition Agreement among the
Company, CNYS and Citigroup Inc., incorporated by reference to Exhibit
10.2.5 to the Company’s Quarterly Report on Form 10-Q for the fiscal
quarter ended June 30, 2004 (File No.
1-11616).
|
10.2.6
|
Amendment
No. 5, dated as of June 22, 2004, to Non-Competition Agreement among the
Company, CBNA and Citigroup Inc., incorporated by reference to Exhibit
10.2.6 to the Company’s Quarterly Report on Form 10-Q for the fiscal
quarter ended June 30, 2004 (File No.
1-11616).
|
10.2.7
|
Amendment
No. 6, dated as of June 22, 2005, to Non-Competition Agreement among the
Company, CBNA and Citigroup Inc., incorporated by reference to Exhibit
10.2.7 to the Company’s Quarterly Report on Form 10-Q for the fiscal
quarter ended June 30, 2005 (File No. 1-11616).
|
10.2.8
|
Amendment
No. 7, dated as of June 22, 2006, to Non-Competition Agreement among the
Company, CBNA and Citigroup Inc., incorporated by reference to Exhibit
10.2.8 to the Company’s Quarterly Report on Form 10-Q for the fiscal
quarter ended June 30, 2006 (File No. 1-11616).
|
10.2.9
|
Amendment
No. 8, dated as of June 19, 2007, to Non-Competition Agreement among the
Company, CBNA and Citigroup Inc., incorporated by reference to Exhibit
10.2.9 to the Current Report on Form 8-K filed June 25, 2007 (File No.
1-11616).
|
10.2.10
|
Amendment
No. 9, dated as of June 22, 2008, to Non-Competition Agreement among the
Company, CBNA and Citigroup Inc., incorporated by reference to Exhibit
10.2.10 to the Current Report on Form 8-K filed June 26, 2008 (File No.
1-11616).
|
10.2.11
|
Amendment No. 10, dated as of
August 8, 2008, Non-Competition Agreement among the Company, Citibank,
N.A. and Citigroup Inc., incorporated by reference to
Exhibit 10.2.11 to the Company’s Quarterly Report on Form 10-Q for the
fiscal quarter ended June 30, 2008 (File No.
1-11616).
|
123
10.2.12
|
Amendment
No. 11, dated as of August 8, 2009, Non-Competition Agreement among the
Company, Citibank, N.A. and Citigroup Inc, incorporated by reference to
Exhibit 10.2.11 to the Company’s Quarterly Report on Form 10-Q for the
fiscal quarter ended June 30, 2009 (File No. 1-11616).
|
10.3
|
Tax
Agreement, dated as of December 22, 1992, between the Company and CNYS,
incorporated by reference to Exhibit 10.5 to the Company’s 1992 Annual
Report on Form 10-K (File No. 1-11616).
|
10.4
|
Omnibus
Credit Agreement, dated November 30, 2000, between the Company and CNYS,
incorporated by reference to Exhibit 10.10 to the Company’s 2000 Annual
Report on Form 10-K(File No. 1-11616).
|
10.4.1
|
Amendment
No. 1, dated as of October 15, 2002, to Omnibus Credit Agreement between
the Company and CNYS, incorporated by reference to Exhibit 10.4.1 to the
Company’s 2002 Annual Report on Form 10-K (File No.
1-11616).
|
10.4.2
|
Amendment
No. 2, dated as of March 5, 2004, to Omnibus Credit Agreement between the
Company and CBNA (as successor to CNYS), incorporated by reference to
Exhibit 10.4.2 to the Company’s 2003 Annual Report on Form 10-K (File No.
1-11616).
|
10.4.3
|
Amendment
No. 3, dated as of January 20, 2005, to Omnibus Credit Agreement between
the Company and CBNA (as successor to CNYS), incorporated by reference to
Exhibit 10.4.3 to the Current Report on Form 8-K filed January 20, 2005
(File No. 1-11616).
|
10.4.4
|
Amendment
No. 4, dated as of February 27, 2009, to Omnibus Credit Agreement between
the Company and CBNA (as successor to CNYS), incorporated by reference to
Exhibit 10.4.4 to the Company’s 2008 Annual Report on Form 10-K (File No.
1-11616).
|
10.4.5
|
Amendment
No. 5, dated as of December 22, 2009, to Omnibus Credit Agreement between
the Company and CBNA (as successor to CNYS), incorporated by reference to
Exhibit 10.1 to the Company’s Current Report on Form 8-K filed December
23, 2009 (File No. 1-11616).
|
10.5
|
Facilities
Occupancy, Management and Support Service Agreement, by and between the
Company and Citicorp North America, Inc., dated as of November 1,
2006.
|
10.6
|
Amended
and Restated Agreement for Education Loan Servicing among the Company,
Citibank USA, N.A. and Citibank, N.A., dated as of January 1, 2008, and
executed on May 5, 2008, incorporated by reference to Exhibit 10.7 to the
Company’s Quarterly Report on Form 10-Q for the fiscal quarter ended March
31, 2008 (File No. 1-11616).
|
10.6.1
|
Amendment
No. 1, dated as of January 1, 2009 and executed as of February 24, 2009 to
Amended and Restated Agreement For Education Loan Servicing, incorporated
by reference to Exhibit 10.6.1 to the Company’s 2008 Annual Report on Form
10-K (File No. 1-11616).
|
10.7
|
Master
Participation Agreement among the Company and the United States Department
of Education, dated as of July 25, 2008, executed through the Adoption
Agreement among the Company and the United States Department of Education,
dated as of November 7, 2008. Incorporated by reference to Exhibit 10.7 to
the Company’s 2008 Annual Report on Form 10-K (File No.
1-11616).
|
10.8
|
Adoption
Agreement among the Company and the United States Department of Education,
dated as of November 7, 2008, incorporated by reference to Exhibit 10.8 to
the Company’s 2008 Annual Report on Form 10-K (File No.
1-11616).
|
10.9
|
Individual
Indemnity Agreement among the Company and the directors, executive
officers and treasurer of the Company, dated January 29, 2009, incorporated by reference to
Exhibit 10.9 to the Company’s 2008 Annual Report on Form 10-K (File No.
1-11616).
|
10.10
|
Amendment
and Restated Omnibus Credit Agreement, dated as of January 29, 2010,
between the Company and CBNA (as successor to CNYS), incorporated by
reference to Exhibit 10.1 to the Company’s Current Report on Form 8-K
filed February 11, 2009 (File No. 1-11616).
|
14.1
|
Code
of Ethics, incorporated by reference to Exhibit 14.1 to the Company’s 2002
Annual Report on Form 10-K (File No. 1-11616).
|
24.1*
|
Powers
of Attorney of The Student Loan Corporation’s Directors Atal, Bailey,
Doynow, Drake, Garside, Glover, Handler and Moseman.
|
31.1*
|
Certification
of Principal Executive Officer pursuant to Section 302 of the
Sarbanes-Oxley Act of 2002.
|
31.2*
|
Certification
of Principal Financial Officer pursuant to Section 302 of the
Sarbanes-Oxley Act of 2002.
|
32.1*
|
Certification
of Chief Executive Officer and Chief Financial Officer pursuant to 18
U.S.C. Section 1350, as adopted pursuant to Section 906 of the
Sarbanes-Oxley Act of 2002.
|
*
|
Filed
herewith
|
124