SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
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FORM 10-Q
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QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF
THE SECURITIES EXCHANGE ACT OF 1934
FOR THE QUARTERLY PERIOD ENDED MARCH 31, 2002
Commission File Number: 1-11616
THE STUDENT LOAN CORPORATION
(Exact name of registrant as specified in its charter)
DELAWARE 16-1427135
(State or other jurisdiction of (I.R.S. Employer Identification No.)
incorporation or organization)
750 WASHINGTON BLVD. 06901
STAMFORD, CONNECTICUT (Zip Code)
(Address of principal executive offices)
(203) 975-6292
(Registrant's telephone number, including area code)
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Indicate by check mark whether the registrant (1) has filed all reports
required to be filed by Section 13 or 15(d) of the Securities Exchange Act of
1934 during the preceding 12 months (or for such shorter period that the
registrant was required to file such reports), and (2) has been subject to such
filing requirements for the past 90 days.
Yes X No
On May 3, 2002, there were 20,000,000 shares of The Student Loan
Corporation's Common Stock outstanding.
Form 10-Q
Part I Financial Information Page
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Item 1 - Financial Statements
Statements of Income (Unaudited) for the Three-Month
Periods Ended March 31, 2002 and 2001 ........................ 3
Balance Sheets as of March 31, 2002 (Unaudited) and
December 31, 2001 (Audited) .................................. 4
Statements of Cash Flows (Unaudited) for the
Three-Month Periods Ended March 31, 2002 and 2001 ............ 5
Notes to Financial Statements (Unaudited) .................... 6-8
Item 2 - Management's Discussion and Analysis of Financial Condition
and Results of Operations .................................... 9-12
Item 3 - Quantitative and Qualitative Discussion About Market Risk .......... 13
Part II Other Information
Item 6 - Exhibits and Reports on Form 8-K ................................... 14
Signature ............................................................................... 15
2
PART I: FINANCIAL INFORMATION
ITEM 1. FINANCIAL STATEMENTS
THE STUDENT LOAN CORPORATION
STATEMENTS OF INCOME
(Dollars in thousands, except per share amounts)
(Unaudited)
Three months ended
March 31,
-------------------------
2002 2001
--------- ---------
REVENUE
Interest income $ 262,884 $ 307,031
Interest expense 163,276 249,730
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NET INTEREST INCOME 99,608 57,301
Provision for loan losses (2,001) (1,814)
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Net interest income after provision for loan losses 97,607 55,487
Gain on student loan securitization 3,121 --
Fee and other income 5,968 2,297
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TOTAL REVENUE, NET $ 106,696 $ 57,784
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OPERATING EXPENSES
Salaries and employee benefits $ 6,159 $ 4,687
Other expenses 17,545 16,554
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TOTAL OPERATING EXPENSES $ 23,704 $ 21,241
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INCOME BEFORE INCOME TAXES $ 82,992 $ 36,543
Income taxes 33,340 14,276
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NET INCOME $ 49,652 $ 22,267
========= =========
DIVIDENDS DECLARED $ 14,000 $ 14,000
========= =========
BASIC AND DILUTED EARNINGS PER COMMON SHARE $ 2.48 $ 1.11
========= =========
(based on 20 million average shares outstanding)
DIVIDENDS DECLARED PER COMMON SHARE $ 0.70 $ 0.70
========= =========
OPERATING RATIOS
Net interest margin 2.16% 1.41%
Operating expense as a percentage of
average student loans 0.51% 0.52%
Return on Equity 30.12% 15.71%
See accompanying notes to financial statements.
3
THE STUDENT LOAN CORPORATION
BALANCE SHEETS
(Dollars in thousands)
March 31, December 31,
2002 2001
(Unaudited) (Audited)
------------ ------------
ASSETS
Student loans $ 18,110,624 $ 18,236,966
Less: Allowance for loan losses (3,884) (3,584)
------------ ------------
Student loans, net 18,106,740 18,233,382
Loans available for sale 538,646 --
Cash 203 1,222
Other assets 510,449 482,492
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TOTAL ASSETS $ 19,156,038 $ 18,717,096
============ ============
LIABILITIES AND STOCKHOLDERS' EQUITY
Short-term borrowings $ 17,742,015 $ 15,383,800
Long-term borrowings 100,000 2,200,000
Payable to principal stockholder 7,305 7,282
Deferred income taxes 103,395 93,908
Other liabilities 515,264 380,404
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Total Liabilities 18,467,979 18,065,394
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Common stock, $0.01 par value; authorized 50,000,000
shares; 20,000,000 shares issued and outstanding 200 200
Additional paid-in capital 135,205 134,851
Retained earnings 552,303 516,651
Accumulated other changes in equity from nonowner sources 351 --
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Total Stockholders' Equity 688,059 651,702
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TOTAL LIABILITIES AND STOCKHOLDERS' EQUITY $ 19,156,038 $ 18,717,096
============ ============
AVERAGE STUDENT LOANS $ 18,714,881 $ 17,296,907
============ ============
(year-to-date)
See accompanying notes to financial statements.
4
THE STUDENT LOAN CORPORATION
STATEMENTS OF CASH FLOWS
(Dollars in thousands)
(Unaudited)
Three months ended
March 31,
---------------------------
2002 2001
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Cash flows from operating activities:
Net income $ 49,652 $ 22,267
Adjustments to reconcile net income to
net cash from operating activities:
Gain on securitization of loans (3,121) --
Depreciation and amortization 15,355 11,506
Provision for loan losses 2,001 1,814
Deferred tax provision 9,487 779
(Increase) in accrued interest receivable (3,381) (24,348)
(Increase) decrease in other assets (23,164) 8,909
Increase in other liabilities 135,236 6,286
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NET CASH PROVIDED BY OPERATING ACTIVITIES 182,065 27,213
----------- -----------
Cash flows from investing activities:
Disbursements of loans (957,193) (811,651)
Loan purchases held to maturity (266,126) (854,797)
Loan purchases available for resale (303,418) --
Repayment of loans 702,997 523,362
Proceeds on loan securitization 249,317 --
Sale of loans 148,891 60,507
Capital expenditures on equipment and computer software (1,767) (1,933)
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NET CASH (USED IN) INVESTING ACTIVITIES (427,299) (1,084,512)
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Cash flows from financing activities:
Net increase in borrowings with original
maturities of one year or less 158,215 1,071,235
New long-term borrowings 100,000 --
Dividends paid to stockholders (14,000) (14,000)
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NET CASH PROVIDED BY FINANCING ACTIVITIES 244,215 1,057,235
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NET DECREASE IN CASH (1,019) (64)
CASH - BEGINNING OF PERIOD 1,222 323
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CASH - END OF PERIOD $ 203 $ 259
=========== ===========
SUPPLEMENTAL DISCLOSURE OF CASH FLOW INFORMATION:
Cash paid for:
Interest $ 23,044 $ 260,682
Income taxes paid, net of refunds $ 37,801 $ (11,922)
See accompanying notes to financial statements.
5
THE STUDENT LOAN CORPORATION
NOTES TO FINANCIAL STATEMENTS (UNAUDITED)
MARCH 31, 2002
1. SIGNIFICANT ACCOUNTING POLICIES
INTERIM FINANCIAL INFORMATION
The financial information of The Student Loan Corporation (the
"Company") as of March 31, 2002 and for the three-month periods ended
March 31, 2002 and 2001 is unaudited and includes all adjustments
(consisting of normal recurring accruals) which, in the opinion of
management, are necessary to fairly state the Company's financial
position and results of operations in conformity with accounting
principles generally accepted in the United States of America. The
accompanying financial statements should be read in conjunction with
the financial statements and related notes included in the Company's
2001 Annual Report and Form 10-K.
Certain amounts in the prior year's financial statements have been
reclassified to conform with the current year's presentation. Such
reclassifications had no effect on the results of operations as
previously reported.
LOANS AVAILABLE FOR SALE
Loans available for sale represent loans originated or purchased by the
Company for future securitization. These loans are recorded at the
lower of cost or market value.
USE OF ESTIMATES
In preparing the financial statements in conformity with GAAP,
management has used a number of estimates and assumptions relating to
the reporting of assets and liabilities, the disclosure of contingent
assets and liabilities and the reported amounts of revenues and
expenses during the reporting period. Actual results could differ from
those estimates and assumptions.
2. RELATED PARTY TRANSACTIONS
Citibank (New York State) ("CNYS"), an indirect wholly owned subsidiary
of Citigroup Inc., owns 80% of the outstanding common stock of the
Company. A number of significant transactions are carried out between
the Company on the one hand and Citigroup and its affiliates on the
other hand. At March 31, 2002, the Company had outstanding short- and
long-term borrowings with CNYS of $17.7 billion and $0.1 billion,
respectively, compared to $15.4 billion and $2.2 billion, respectively,
at December 31, 2001. For the three-month period ended March 31, 2002,
the Company incurred $163.3 million in interest expense payable to CNYS
and its affiliates, compared to $249.7 million for the same period in
2001. In addition, Citigroup and its subsidiaries engage in other
transactions and servicing activities with the Company, including cash
management, data processing, income tax payments, loan servicing,
employee benefits, payroll administration and facilities management.
Management believes that the terms of these transactions are, in the
aggregate, no less favorable to the Company than those which could be
obtained from unaffiliated parties.
6
3. INTEREST RATE SWAP AGREEMENTS
To better match the interest rate characteristics of its borrowings
with its loan assets, the Company, from time to time, enters into
interest rate swap agreements on portions of its portfolio. The swap
agreements are intended to reduce the risk caused by differences
between borrowing and lending rates. Consistent with the requirements
of Financial Accounting Standards Board ("FASB") Statement of Financial
Accounting Standards No. 133, management expects the Company's hedge
program to be highly effective in offsetting changes in either the fair
value or cash flows for the risk being hedged.
During the first quarter of 2002, the Company entered into $400 million
of swap agreements that will be effective as cash flow hedges. The swap
agreements commence in July 2002 and have one-year terms. The fair
value of the swaps was not material at March 31, 2002.
4. COMMITMENTS AND CONTINGENCIES
In February 2000, three stockholders' derivative complaints, captioned
"Alan Kahn v. Citigroup Inc.", "Kenneth Steiner v. Citigroup Inc.", and
"Katherine F. Petty v. Citigroup Inc.", were filed in the Delaware
Court of Chancery against the Company and its directors (as well as
Citigroup and certain subsidiaries). In April 2000, the Delaware Court
of Chancery consolidated the three complaints for all purposes under
the caption "In re The Student Loan Corp. Derivative Litigation", and
designated the "Alan Kahn v. Citigroup Inc." complaint as the operative
pleading. The action remains pending. For further information, see
"Legal Proceedings" in the Company's Annual Report on Form 10-K for the
year ended December 31, 2001.
In the ordinary course of business, the Company is also involved in
various legal 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.
Amendments to the Higher Education Act of 1965 (the "Act") have
significantly reduced the net interest spreads earned on the Federal
Family Education Loan ("FFEL") Program guaranteed student loan
portfolio as new loans with lower yields were added to the portfolio
and older, more profitable loans were repaid. As the funding costs have
not been similarly reduced, pressure on margins will continue as more
loans are originated with lower yields. In addition, Congress may amend
the Act at any time, possibly resulting in further reductions in FFEL
Program loan subsidies, which could occur in the form of increased
risk-sharing costs or reduced margins. Any such amendment could
adversely affect the Company's business and prospects.
5. LOAN SECURITIZATION
In the first quarter of 2002, the Company commenced a program to
participate in asset-backed securitizations. As a participant in the
securitizations, the Company will ultimately sell certain portfolios of
FFEL Program loans, including Federal Consolidation Loans, to an
independent trust, and the trust, in turn, will issue securities backed
by student loan assets to investors. Although the securitized student
loans would then be removed from the Company's financial statements,
the Company would retain the administrative and servicing functions for
the transferred portfolios. The Company accounts for its securitization
transactions in accordance with the provisions of FASB Statement No.
140, "Accounting for Transfers and Servicing of Financial Assets and
Extinguishments of Liabilities, a replacement of FASB Statement No.
125."
7
On March 27, 2002, the Company securitized approximately $249 million
of Federal Consolidation Loans through a trust, which was established
to purchase the loans. The Company sells loans into the trust through a
wholly owned, special purpose subsidiary formed to acquire the
Company's loans at par value. A pre-tax gain of $3.1 million was
recorded as a result of the securitization. The gain was reflective of
the difference between the carrying value of the assets sold to the
trust by the Company's wholly owned special purpose subsidiary and the
fair value of the assets received from the trust. Through its
participation in the securitization, the Company receives
administrative and servicing fees on the securitized portfolio. At the
time of the securitization, the Company recorded approximately $12.6
million in residual trust assets, composed of a note receivable of
approximately $8.5 million and residual trust equity of approximately
$4.1 million. These assets are included in Other Assets on the
Company's financial statements. The Company expects to receive
investment income on the residual trust assets. The Company regularly
reviews these residual trust assets for impairment and accounts for
them as investments in available-for-sale debt securities. At March 31,
2002, the fair values of these assets approximated their carrying
values. No servicing asset or liability was recognized at the time of
the securitization since the fair value of the servicing revenues
approximated the fair value of the servicing costs.
The fair values of the retained interests at the time of the
securitization (and at March 31, 2002) were based primarily on the
following key assumptions: constant prepayment rate of 3%, anticipated
credit losses of 0.24%, and loan spread of 1.47%. These key assumptions
have been stress-tested to demonstrate the pretax sensitivity to the
fair values that could result from adverse changes to these assumptions
of 10% and 20%. The results of the stress tests are reflected in the
table below.
(In thousands of dollars) March 31, 2002
------------------------- --------------
Carrying value of retained interests $12,615.4
Constant prepayment rate
+10% (222.7)
+20% (462.9)
Anticipated credit losses
+10% (140.9)
+20% (281.9)
Loan spread
-10% (217.6)
-20% (435.1)
These estimates and assumptions are subject to change and, therefore,
the fair values of the retained interests as presented in the financial
statements are subject to possible impairment and may not be fully
recoverable. Also, actual experience may result in concurrent changes
to more than one assumption, resulting in a potential impact that may
be different from the sum of the individual effects shown above.
At March 31, 2002, the Company managed a portfolio composed of $18,124
million of owned and held student loans (amount includes approximately
$12.6 million of retained residual trust interests); $539 million of
student loans owned and available for sale; and $236 million of loans
securitized and removed from the financial statements of the Company
(amount is net of approximately $12.6 million of retained residual
trust interests); resulting in a total managed student loan portfolio
of $18,899 million.
For the first quarter of 2002, the only cash flow transaction between
the Company and, ultimately, the securitization trust was $249 million
of securitization proceeds paid to the Company for the student loan
assets transferred. At March 31, 2002, the securitized portfolio
balance of $249 million included $5.5 million of loans with payments
past due 30-89 days and $4.8 million of loans with payments past due 90
or more days. There were no credit losses or credit loss recoveries in
the securitized portfolio in the first quarter of 2002. Any credit
losses incurred in the securitized portfolio in future periods will be
charged to other income as incurred.
At March 31, 2002, the Company's $18.6 billion owned portfolio included
$612.7 million of loans with payments past due 30-89 days and $605.1
million of loans with payments past due 90 or more days. Credit losses,
net of recoveries, of $1.7 million were recorded in the Company's owned
portfolio in the first quarter of 2002.
8
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS
FINANCIAL CONDITION
During the quarter ended March 31, 2002, the Company's student loan
portfolio, composed primarily of loans originated under the Federal
Family Education Loan ("FFEL") Program, decreased by $0.1 billion (1%)
to $18.1 billion from $18.2 billion at December 31, 2001 due to the
establishment of a separate portfolio of loans available for sale.
Changes in the portfolio were the result of loan disbursements totaling
$957 million and loan purchases of $266 million in the first quarter of
2002, partially offset by $149 million in loan sales, $703 million in
loan reductions (attributable to borrower principal payments and claims
paid by guarantors), $490 million in loans transferred to the new
portfolio and other adjustments of $7 million. During the three months
ended March 31, 2001, the Company made loan disbursements of $812
million, loan purchases of $855 million, loan sales of $61 million,
loan reductions of $523 million and other adjustments of $13 million.
As indicated above, during the first quarter of 2002 the Company
established a portfolio of loans available for sale. At March 31, 2002,
this portfolio had a balance of $539 million, composed of $490 million
of loans transferred from the held portfolio and $303 million of loans
purchased in the first quarter of 2002, partially offset by loan
securitizations of approximately $249 million and other adjustments of
$5 million.
From time to time, the Company makes guaranteed student loan purchases,
composed primarily of secondary market and Federal Consolidation Loan
purchases. For the first quarter of 2002, the Company's student loan
purchases included $266 million purchased for its held portfolio and
$303 million purchased for resale. This is a decrease of $286 million
(33%) from the loan purchases for the same period in 2001. The
Company's ongoing participation in the secondary market is dependent
upon market conditions.
The Company's loan disbursements and new CitiAssist Loan commitments,
for the first three months of 2002 were $1,221 million, representing an
increase of $229 million (23%) as compared to those made in the same
period of 2001. The increase is primarily attributable to growth of $84
million (47%) in CitiAssist Loan commitments to $264 million for the
first quarter of 2002, compared to $180 million for the same period
last year. CitiAssist Loans are originated through an alternative loan
program and do not carry federal government guarantees. FFEL Program
Stafford and Plus Loan disbursements of $767 million in the first
quarter of 2002 were $73 million (11%) higher than the $694 million
disbursed during the same period of 2001. Federal Consolidation Loan
originations for the first quarter of 2002 were $190 million, an
increase of $72 million (61%) compared to the same period of 2001.
In the first quarter of 2002, the Company commenced a program to
securitize certain portfolios of FFEL Program student loan assets. The
Company accounts for its securitization transactions in accordance with
the provisions of FASB Statement No. 140, "Accounting for Transfers
and Servicing of Financial Assets and Extinguishments of Liabilities, a
replacement of FASB Statement No. 125."
During the securitization process, a predetermined portfolio of student
loan assets is ultimately sold to an independent trust, and the trust,
in turn, issues student loan asset-backed securities to investors.
Under the Company's program to securitize student loans, the loans
are removed from the financial statements of the Company. However, the
Company retains administrative and servicing rights for the securitized
loan portfolios.
9
On March 27, 2002, the Company securitized approximately $249 million
of Federal Consolidation Loans through a trust, which was established
to purchase the loans. The Company sells loans into the trust through a
wholly owned, special purpose subsidiary formed to acquire the
Company's loans at par value. A pre-tax gain of $3.1 million was
recorded as a result of the securitization. The gain was reflective of
the difference between the carrying value of the assets sold to the
trust by the Company's wholly owned special purpose subsidiary and the
fair value of the assets received from the trust. At the time of the
securitization, the Company recorded approximately $12.6 million in
residual trust assets, composed of a note receivable of approximately
$8.5 million and residual trust equity of approximately $4.1 million.
These assets are included in Other Assets on the Company's financial
statements. The Company receives administrative and servicing fees on
the securitized portfolio and investment income on the residual trust
assets. See Note 5 to the financial statements for disclosure and
analysis of the key assumptions used to determine the fair value of the
residual trust interests.
During the first three months of 2002, the Company made $23 million in
interest payments, principally to CNYS, compared to $261 million for
the same period in 2001. The decrease is attributable to changes in
both the size of the borrowings and timing of interest payments.
Pursuant to federal tax regulations, the Company has elected to be
included in the consolidated federal income tax return of Citigroup,
and is also included in certain combined or unitary state/local income
or franchise tax returns of Citicorp/Citigroup or its subsidiaries. The
Company paid income taxes, net of refunds, of $38 million, primarily to
CNYS, in the first quarter of 2002. The Company's income taxes were
overfunded at December 31, 2000, which generated a $12 million federal
tax refund from CNYS recorded in the first quarter of 2001.
Deferred income taxes increased by $9.5 million in the first quarter of
2002. The increase was primarily attributable to the temporary
differences for deferred loan origination costs for the first three
months of 2002, which are deducted currently for income tax purposes,
but are amortized as yield adjustments for financial statement
purposes.
In the first three months of 2002, short-term debt increased by $2.4
billion to $17.7 billion. The increase was primarily attributable to
the reclassification of maturing long-term debt to short-term debt. The
$2.1 billion decrease in long-term borrowings at March 31, 2002 is due
to the reclassification of $2.2 billion of maturing long-term debt to
short-term debt and the procurement of $0.1 billion of new long-term
borrowings. The new borrowings were used primarily to fund new loan
disbursements and purchases.
The Company paid a quarterly dividend of $0.70 per common share on
March 1, 2002. On April 18, 2002, the Board of Directors declared a
regular quarterly dividend on the Company's common stock of $0.70 per
share to be paid June 3, 2002 to stockholders of record on May 15,
2002.
RESULTS OF OPERATIONS
QUARTER ENDED MARCH 31, 2002
Net income was $49.7 million ($2.48 basic and diluted earnings per
share) for the first quarter of 2002. This was an increase of $27.4
million (123%) from earnings for the same period last year. The
increase in net income was primarily attributable to increased floor
income and a gain on securitization of student loans in the first
quarter of 2002. Also in the first quarter of 2002, the Company
recorded a $2 million pretax benefit associated with implementation of
a late fee policy.
The net interest margin for the first quarter of 2002 was 2.16%, up 75
basis points from the first quarter 2001 margin of 1.41%. The
improvement was primarily attributable to increased floor income in the
first quarter of 2002. The Company expects the floor income benefit for
the majority of its student loan assets to significantly decline in
July 2002 when borrower rates on most FFEL Program loans reset. During
the first quarter of 2001, the Company's net interest margin and net
income were adversely impacted by several federal funds interest rate
reductions which, in turn, caused an immediate repricing of the
Company's student loan assets, while the Company's liabilities repriced
evenly throughout the quarter.
10
SPECIAL ALLOWANCE AND FLOOR INCOME
Most FFEL Program loans originated prior to July 23, 1992 have fixed
interest rates. Those issued subsequent to July 23, 1992 have variable
rates. Most FFEL Program loans also qualify for the federal
government's special allowance payment ("SAP"). Whenever the stated
interest rates on these FFEL Program loans provide less than prescribed
rates of return, as defined by the Act, the federal government makes a
SAP, which increases the lender's loan yield by markups ranging between
1.74 and 3.50 percentage points per annum, over a base rate tied to
either the 91-day Treasury Bill auction yield or the 90-day Commercial
Paper rate, depending on the loan's origination date.
As indicated above, whenever the stated interest rates on qualifying
FFEL Program loans provide less than prescribed rates of return, as
defined by the Act, the federal government pays a SAP, which increases
the loan yield to lenders. In periods of declining interest rates, the
stated fixed borrower rates, which are subject to various annual reset
provisions, become, in effect, interest rate floors. Floor income is
generally available in declining short-term interest rate environments
when the Company's cost of funds declines while this borrower interest
rate remains fixed, generating net interest margin in excess of the
expected spread. Depending on the manner in which the Company's assets
are funded, the Company may earn net interest margin spreads, which
include floor income, on portions of its portfolio until the date the
borrower interest rate is reset, which occurs annually for the majority
of the Company's loans. For the period July 1, 2001 to July 1, 2002,
the Company's floor income significantly declines in periods when
prevailing 91-day Treasury Bill rates exceed 5%. The Company earned
$21.1 million of floor income in the first quarter of 2002, compared to
$5.7 million of floor loss for the same period of 2001. During the
first quarter of 2001, the Company earned less than its expected net
interest spread as a rapid reduction in market interest rates caused
federal government SAP revenue to fall early in the quarter while the
cost of funds on debt repriced evenly over the quarter.
Management expects the majority of the current floor income benefit to
decline significantly when the interest rates on FFEL Program loans
reset on July 1, 2002.
Total operating expenses for the first quarter of 2002 increased $2.5
million (12%) from the same period last year, primarily reflecting the
incremental costs incurred to service the larger loan portfolio. For
the first quarter of 2002, the Company's expense ratio, operating
expenses as a percentage of average student loan assets, improved one
basis point to 0.51% from the first quarter of 2001 expense ratio of
0.52%.
The Company's return on equity was 30.1% for the first quarter of 2002,
14.4% higher than the 15.7% return for the same period of 2001. The
improvement is primarily attributable to increased net interest income
resulting from higher floor income.
OFF-BALANCE SHEET ARRANGEMENTS
In the first quarter of 2002, the Company entered into an off-balance
sheet arrangement in which a portfolio of student loans was
securitized, a process by which the loans were transferred to a special
purpose entity ("SPE"), thereby converting the loans into cash before
they would have been realized in the normal course of business. The SPE
obtains the cash needed to pay the transferor for the loan assets
received by issuing securities to investors in the form of debt
instruments. Investors usually have recourse to the assets in the SPE
and often benefit from other credit enhancements, such as a cash
collateral account, overcollateralization (resulting from maintaining
excess assets in the SPE), or some other form of enhancement. The
transferor can use the cash proceeds from the loan sale to fund new
loan originations, purchase loans or for other business purposes.
11
REGULATORY IMPACTS
Amendments to the Act, which governs the FFEL Program, have reduced the
interest spread earned on the FFEL Program guaranteed student loan
portfolio as new loans with lower yields were added to the portfolio
and older, more profitable loans were repaid. As the funding costs have
not been similarly reduced, pressure on margins is expected to continue
as more loans are originated with lower lender yields. Amendments to
the Act also introduced a competitor program, the Federal Direct
Student Loan Program ("Direct Lending"), in which private lenders such
as the Company do not participate. Direct Lending accounts for
approximately one-third, on a national basis, of all student loans
originated under federally-sponsored programs.
The Company continues to search for ways to take advantage of greater
economies of scale. It is pursuing both new and existing marketing
programs, including e-commerce, and continues to expand its guarantor
relationships and pursue alternative loan products, such as CitiAssist,
that are not dependent on federal funding and program authorization.
FORWARD-LOOKING STATEMENTS
Certain statements contained in this report that are not historical
facts are forward-looking statements within the meaning of the Private
Securities Litigation Reform Act. The Student Loan Corporation's (the
"Company's") actual results may differ materially from those suggested
by the forward-looking statements, which are typically identified by
the words or phrases "believe," "expect," "anticipate," "intend",
"estimate," "may increase," "may result in," and similar expressions or
future or conditional verbs such as "will", "should", "would" and
"could". These forward-looking statements involve risks and
uncertainties including, but not limited to, the following: the effects
of future legislative changes and accounting standards; actual credit
losses experienced by the Company in future periods compared to the
estimates used in calculating reserves; fluctuations in the interest
rates paid by the Company for its funding and received on its loan
portfolio; the success of the Company's hedging policies; the Company's
ability to acquire or originate loans in the amounts anticipated and
with interest rates to generate sufficient yields and margins; the
Company's ability to continue to develop its electronic commerce
initiatives; the Company's success in expanding its guarantor
relationships and products; the Company's ability to utilize
alternative sources of funding, including securitization; the
successful resolution of legal proceedings; as well as general economic
conditions, including the performance of financial markets and the
implementation of regulatory changes.
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ITEM 3. QUANTITATIVE AND QUALITATIVE DISCUSSION ABOUT MARKET RISK
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. Market risk is
measured using various tools, including Earnings-at-Risk. The
Earnings-at Risk calculation seeks to determine the effect that shifts
in interest rates are expected to have on net interest margin in future
periods. The Company prepares Earnings-at-Risk calculations to measure
the discounted pre-tax earnings impact over a preset time span of a
specific upward and downward shift in the interest rate yield curve.
The Earnings-at-Risk calculation, a static and passive measurement that
excludes management's future responses to prospective changes in market
interest rates, reflects the repricing gaps in the position as well as
option positions, both explicit and embedded, in the loan portfolio.
Earnings-at-Risk is calculated by multiplying the gap between interest
sensitive items, including assets, liabilities and derivative
instruments, by a 100 basis point change in the yield curve.
The Earnings-at-Risk calculation measures the Company's position at one
point in time. As indicated in the table below, as of March 31, 2002, a
100 basis point increase in the interest yield curve would have a
potential positive impact on the Company's pre-tax earnings of
approximately $6.5 million for the next twelve months and a potential
negative impact of approximately $107.5 million thereafter. A 100 basis
point decrease in the interest yield curve as of March 31, 2002 would
have a potential negative impact on the Company's pretax earnings of
approximately $6.5 million for the subsequent twelve-month period and a
potential positive effect of approximately $107.5 million thereafter.
Earnings-at-Risk (effect on pre-tax earnings) March 31, 2002 March 31, 2001
--------------------------------------------- ----------------------------------- ---------------------------------
(Dollars in Next Next
millions) 12 Mos. Thereafter Total 12 Mos. Thereafter Total
--------- ------- ---------- ----- ------- ---------- -----
One hundred basis point increase $ 6.5 ($107.5) ($101.0) $ 13.9 ($58.6) ($44.7)
One hundred basis point decrease ($ 6.5) $107.5 $101.0 $ 3.6 $95.5 $99.1
In addition, the Company has significantly greater exposure to uneven
shifts in interest rate curves (i.e., the Treasury Bill to LIBOR rate
spreads). The Company, through its Asset/Liability Management
Committee, actively manages these risks by setting Earnings-at-Risk
limits and takes actions in response to interest rate movements against
the existing structure.
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PART II. OTHER INFORMATION
ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K
(a) Exhibits
None
(b) Reports on Form 8-K
No reports on Form 8-K were filed during the first quarter of 2002;
however, on April 19, 2002, the Company filed a Current Report on Form
8-K, dated March 27, 2002, under Item 5 thereof, describing the terms
of the initial sale of student loan asset-backed notes under the
Company's loan securitization program.
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SIGNATURE
Pursuant to the requirements of the Securities Exchange Act of
1934, the registrant has duly caused this report to be signed on its behalf by
the undersigned, thereunto duly authorized.
Date: May 10, 2002
The Student Loan Corporation
By /s/ Steven Gorey
------------------------------------------
Steven Gorey
Vice President and Principal Financial
and Accounting Officer
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