Student Loan Corp. Reports Earnings Decline of 41% During 2nd Quarter; Private Loan Originations Down 30%

Here is a summary of their earnings release (STU does not hold quarterly conference calls so the earnings annnouncements and 10-Qs and 10-Ks that they file with the SEC are the primary sources of information): 

• Company's balance sheet has benefited from access to Dept. of Education conduit facility...

"...the Company further diversified its sources of funding by accessing $8.5 billion of secured borrowings from the U.S. Department of Education sponsored conduit, Straight-A Funding, LLC (the Conduit)."

• and the Loan Purchase and Participation Program (see SLA Blog post for details regarding lender participation in these programs):

"The Company also continued to draw on financing through the Department of Education’s Loan Participation Purchase Program (the Participation Program) by procuring an additional $0.6 billion of funding for its current quarter disbursements. The Company has funded $2.7 billion of FFEL Program Stafford and PLUS Loan disbursements through the Participation Program since its inception.

At June 30, 2009, $1.3 billion of funding under the Participation Program remained outstanding. During the second quarter of 2009, the Company also completed a $1.2 billion sale of loans to the Department of Education through the Loan Purchase Commitment Program (the Purchase Program). The proceeds of this sale were used to pay back funding from the Participation Program."

• Originations for Stafford and PLUS loans grew 3% in the quarter with almost all volume funded through the Participation Program.  Note that 2nd quarter historically is a slow one for loan originations with the first and third quarters being more robust.  

• Originations for private CitiAssist loans were 30% lower on a year over year basis with the company citing " initiatives the Company has introduced to improve the profitability of its private education loan product and changes to its underwriting standards."
  • SLA Blog reported on the CitiAssist private loan's shift to LIBOR-based pricing which increased margins paid by borrowers.
  • As the #2 private student lender (behind Sallie Mae) with $1.8 billion in private loan originations in 2008, this change in STU's underwriting standards and the corresponding potential decrease in originations, should it continue in the seasonally important third quarter, will strain an already struggling private loan market.  I am hesitant about extrapolating this 30% decline going forward since the 2nd Quarter volumes were so low at $0.1 billion but were it to continue, this would effectively take out another $500 million in loan capacity. 

• Deterioration in credit quality:  The company continued to add to their allowance for bad debts due to increasing defaults in FFELP and private loan portfolios:

"The Company’s allowance for loan losses at June 30, 2009 was $128.7 million, an increase of $18.4 million compared to $110.3 million at December 31, 2008. This increase is largely due to continued deterioration in the economic environment resulting in increases in loss rates for both the FFEL Program and private education loan portfolios."

• I went back and reviewed a 4Q announcement from Citi that they would be using $1 billion in TARP funds to invest in federal student loans.  Given that they are already using the Department of Education's financing programs to fund their FFELP activities and have been since 2008, this didn't make sense to me now and makes even less sense now.  

• Long-term financing:  It is disappointing that the company continues to remain mum on their long-term financing plans given their reliance on their Citibank parent for their financing.  The deadline is now less than six months and counting...Their 1Q 10-Q filing describes the import of the relationship:

"The Company is currently negotiating a new agreement to replace the existing agreement with CBNA, which expires on December 31, 2009.  If the agreement is not extended or replaced by that date, the borrowings outstanding at that date would continue to mature based on their originally contracted maturities. However, if less than 50% of the voting equity interest in the Company is owned or controlled by CBNA or any of Citigroup’s subsidiaries, the Omnibus Credit Agreement terminates and all outstanding borrowings thereunder become due and payable.  In addition, the Company would no longer have a guaranteed funding source for new borrowings, which could negatively impact the Company’s ability to fund future disbursements."