x
|
QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d)
OF THE SECURITIES EXCHANGE ACT OF 1934
|
¨
|
TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE
SECURITIES EXCHANGE ACT OF 1934
|
NEBRASKA
(State or other jurisdiction of incorporation or organization)
|
84-0748903
(I.R.S. Employer Identification No.)
|
121 SOUTH 13TH STREET, SUITE 201
LINCOLN, NEBRASKA
(Address of principal executive offices)
|
68508
(Zip Code)
|
PART I. FINANCIAL INFORMATION
|
||||||||
Item 1.
|
Financial Statements
|
2
|
||||||
Item 2.
|
Management’s Discussion and Analysis of Financial Condition and Results of Operations
|
32
|
||||||
Item 3.
|
Quantitative and Qualitative Disclosures about Market Risk
|
78
|
||||||
Item 4.
|
Controls and Procedures
|
84
|
||||||
PART II. OTHER INFORMATION
|
||||||||
Item 1.
|
Legal Proceedings
|
85
|
||||||
Item 1A.
|
Risk Factors
|
86
|
||||||
Item 2.
|
Unregistered Sales of Equity Securities and Use of Proceeds
|
86
|
||||||
Item 6.
|
Exhibits
|
88
|
||||||
Signatures
|
89
|
|
·
|
Reclassifying the Company’s gains on debt repurchases to “gain on sale of loans and debt repurchases, net” which were previously included in “other income.”
|
|
·
|
Reclassifying costs incurred by the Company related to restructuring activities to “restructure expense,” which were previously included in “salaries and benefits” and “occupancy and communications.” See note 13 for information related to the restructuring activity including additional information related to the types of costs incurred.
|
As of September 30, 2010
|
As of December 31, 2009
|
|||||||||||
Held for investment
|
Held for sale
|
Held for investment
|
||||||||||
Federally insured loans
|
$ | 24,132,245 | 2,081,827 | 23,472,553 | ||||||||
Non-federally insured loans
|
126,923 | — | 163,321 | |||||||||
24,259,168 | 2,081,827 | 23,635,874 | ||||||||||
Unamortized loan premiums/discounts and deferred origination costs, net
|
227,206 | 27,613 | 341,970 | |||||||||
Allowance for loan losses – federally insured loans
|
(32,962 | ) | — | (30,102 | ) | |||||||
Allowance for loan losses – non-federally insured loans
|
(17,250 | ) | — | (20,785 | ) | |||||||
$ | 24,436,162 | 2,109,440 | 23,926,957 | |||||||||
Allowance for federally insured loans - held for investment as a percentage of such loans
|
0.14 | % | 0.13 | % | ||||||||
Allowance for non-federally insured loans as a percentage of such loans
|
13.59 | % | 12.73 | % |
Three months ended September 30,
|
Nine months ended September 30,
|
|||||||||||||||
2010
|
2009
|
2010
|
2009
|
|||||||||||||
Beginning balance
|
$ | 50,797 | 50,000 | 50,887 | 50,922 | |||||||||||
Provision for loan losses
|
5,500 | 7,500 | 16,700 | 23,000 | ||||||||||||
Loans charged off, net of recoveries
|
(6,085 | ) | (4,380 | ) | (18,305 | ) | (13,482 | ) | ||||||||
Purchase of loans
|
— | — | 2,930 | — | ||||||||||||
Sale of loans
|
— | (3,000 | ) | (2,000 | ) | (10,320 | ) | |||||||||
Ending balance
|
$ | 50,212 | 50,120 | 50,212 | 50,120 |
Three months ended September 30,
|
Nine months ended September 30,
|
|||||||||||||||
2010
|
2009
|
2010
|
2009
|
|||||||||||||
Beginning balance
|
$ | 12,600 | 7,600 | 10,600 | — | |||||||||||
Transfer from allowance for loan losses
|
— | 3,000 | 2,000 | 9,800 | ||||||||||||
Reserve for repurchase of delinquent loans (a)
|
— | — | — | 800 | ||||||||||||
Ending balance
|
$ | 12,600 | 10,600 | 12,600 | 10,600 |
As of September 30, 2010
|
|||||||||
Carrying
|
Interest rate
|
||||||||
amount
|
range
|
Final maturity
|
|||||||
Variable-rate bonds and notes (a):
|
|||||||||
Bonds and notes based on indices
|
$ | 20,349,202 | 0.30% - 6.90% |
5/26/14 - 7/27/48
|
|||||
Bonds and notes based on auction or remarketing
|
1,172,335 | 0.23% - 1.76% |
5/1/11 - 7/1/43
|
||||||
Total variable-rate bonds and notes
|
21,521,537 | ||||||||
Commercial paper - FFELP facility (b)
|
29,976 | 0.28% - 0.41% |
7/29/13
|
||||||
Unsecured debt - Junior Subordinated Hybrid Securities
|
163,255 | 7.40% |
9/15/61
|
||||||
Unsecured line of credit
|
691,500 | 0.79% |
5/8/12
|
||||||
Department of Education Participation
|
2,049,227 | 0.91% |
10/15/10
|
||||||
Department of Education Conduit
|
2,799,180 | 0.37% |
5/8/14
|
||||||
Related party debt
|
111,675 | 0.73% |
5/20/11
|
||||||
Other borrowings
|
24,838 | 0.26% - 5.10% |
11/14/10 - 11/1/15
|
||||||
$ | 27,391,188 |
As of December 31, 2009
|
|||||||||
Carrying
|
Interest rate
|
||||||||
amount
|
range
|
Final maturity
|
|||||||
Variable-rate bonds and notes (a):
|
|||||||||
Bonds and notes based on indices
|
$ | 20,187,356 | 0.26% - 6.90% |
5/26/14 - 4/25/42
|
|||||
Bonds and notes based on auction or remarketing
|
1,726,960 | 0.21% - 3.73% |
5/1/11 - 7/1/43
|
||||||
Total variable-rate bonds and notes
|
21,914,316 | ||||||||
Commercial paper - FFELP facility (b)
|
305,710 | 0.21% - 0.32% |
8/3/12
|
||||||
Fixed-rate bonds and notes (a)
|
8,940 | 6.15% - 6.34% |
7/2/20 - 5/1/29
|
||||||
Unsecured debt - Senior Notes
|
66,716 | 5.125% |
6/1/10
|
||||||
Unsecured debt - Junior Subordinated Hybrid Securities
|
198,250 | 7.40% |
9/15/61
|
||||||
Unsecured line of credit
|
691,500 | 0.73% |
5/8/12
|
||||||
Department of Education Participation
|
463,912 | 0.79% |
9/30/10
|
||||||
Department of Education Conduit
|
1,125,929 | 0.27% |
5/8/14
|
||||||
Other borrowings
|
30,016 | 0.24% - 5.10% |
1/1/10 - 11/1/15
|
||||||
$ | 24,805,289 |
(a)
|
Issued in asset-backed securitizations
|
(b)
|
Loan warehouse facility
|
|
·
|
A minimum consolidated net worth
|
|
·
|
A minimum adjusted EBITDA to corporate debt interest (over the last four rolling quarters)
|
|
·
|
A limitation on subsidiary indebtedness
|
|
·
|
A limitation on the percentage of non-guaranteed loans in the Company’s portfolio
|
Three months ended September 30, 2010
|
Nine months ended September 30, 2010
|
||||||||||||||||||||||
Notional amount
|
Purchase price
|
Gain
|
Notional amount
|
Purchase price
|
Gain
|
||||||||||||||||||
Unsecured debt - Junior Subordinated Hybrid Securities
|
$ | 34,995 | 30,073 | 4,922 | 34,995 | 30,073 | 4,922 | ||||||||||||||||
Asset-backed securities
|
85,675 | 80,712 | 4,963 | 477,700 | 453,801 | 23,899 | |||||||||||||||||
$ | 120,670 | 110,785 | 9,885 | 512,695 | 483,874 | 28,821 |
Three months ended September 30, 2009
|
Nine months ended September 30, 2009
|
||||||||||||||||||||||
Notional amount
|
Purchase price
|
Gain
|
Notional amount
|
Purchase price
|
Gain
|
||||||||||||||||||
Unsecured debt - Senior Notes due 2010
|
$ | 137,898 | 138,505 | (607 | ) | 208,284 | 196,376 | 11,908 | |||||||||||||||
Unsecured debt - Junior Subordinated Hybrid Securities
|
— | — | — | 1,750 | 350 | 1,400 | |||||||||||||||||
Asset-backed securities
|
44,950 | 39,095 | 5,855 | 46,050 | 40,173 | 5,877 | |||||||||||||||||
$ | 182,848 | 177,600 | 5,248 | 256,084 | 236,899 | 19,185 |
|
·
|
receives three-month LIBOR set discretely in advance and pays a daily weighted average three-month LIBOR less a spread as defined in the agreements (the “Average/Discrete Basis Swaps”)
|
|
·
|
receives three-month LIBOR set discretely in advance and pays one-month LIBOR plus or minus a spread as defined in the agreements (the “1/3 Basis Swaps”)
|
As of September 30, 2010
|
||||||||
Notional Amounts
|
||||||||
Maturity
|
1/3 Basis Swaps
|
T-Bill/LIBOR
Basis Swaps
|
||||||
2011
|
$ | — | 225,000 |
(a)
|
||||
2021
|
250,000 | — | ||||||
2023
|
1,250,000 | — | ||||||
2024
|
250,000 | — | ||||||
2028
|
100,000 | — | ||||||
2039
|
150,000 | — | ||||||
2040
|
200,000 | — | ||||||
$ | 2,200,000 | 225,000 |
As of December 31, 2009
|
||||||||
Notional Amounts
|
||||||||
Maturity
|
1/3 Basis Swaps
|
T-Bill/LIBOR
Basis Swaps
|
||||||
2010
|
$ | 1,000,000 | — | |||||
2011
|
— | 225,000 |
(a)
|
|||||
2013
|
500,000 | — | ||||||
2014
|
500,000 | — | ||||||
2018
|
1,300,000 | — | ||||||
2019
|
500,000 | — | ||||||
2021
|
250,000 | — | ||||||
2023
|
1,250,000 | — | ||||||
2024
|
250,000 | — | ||||||
2028
|
100,000 | — | ||||||
2039
|
150,000 | — | ||||||
$ | 5,800,000 | 225,000 | ||||||
(a) The effective start dates on these derivatives are in October 2010 ($75 million), November 2010 ($75 million), and December 2010 ($75 million). |
As of September 30, 2010
|
||||||||
Weighted
|
||||||||
average fixed
|
||||||||
Notional
|
rate paid by
|
|||||||
Maturity
|
Amount
|
the Company (a)
|
||||||
2010
|
$ | 3,750,000 | 0.48 | % | ||||
2011
|
5,750,000 | 0.54 | ||||||
2012
|
950,000 | 1.08 | ||||||
2013
|
650,000 | 1.07 | ||||||
2015
|
100,000 | 2.26 | ||||||
2020
|
100,000 | 3.23 | ||||||
$ | 11,300,000 | 0.64 | % |
As of December 31, 2009
|
||||||||
Weighted
|
||||||||
average fixed
|
||||||||
Notional
|
rate paid by
|
|||||||
Maturity
|
Amount
|
the Company (a)
|
||||||
2010
|
$ | 4,750,000 | 0.54 | % | ||||
2011
|
150,000 | 1.03 | ||||||
$ | 4,900,000 | 0.55 | % | |||||
(a) For all interest rate derivatives, the Company receives discrete three-month LIBOR. |
Three months ended September 30,
|
Nine months ended September 30,
|
|||||||||||||||
2010
|
2009
|
2010
|
2009
|
|||||||||||||
Re-measurement of Euro Notes | $ | (106,468 | ) | (39,356 | ) | 58,608 | (55,979 | ) | ||||||||
Change in fair value of cross currency interest rate swaps | 107,531 | 44,773 | (52,491 | ) | 28,871 | |||||||||||
Total impact to statements of operations - income (expense)
|
$ | 1,063 | 5,417 | 6,117 | (27,108 | ) |
Fair value of asset derivatives
|
Fair value of liability derivatives
|
|||||||||||||||
As of September 30, 2010
|
As of December 31, 2009
|
As of September 30, 2010
|
As of December 31, 2009
|
|||||||||||||
Average/discrete basis swaps
|
$ | — | — | — | — | |||||||||||
1/3 basis swaps
|
11,453 | 17,768 | 129 | — | ||||||||||||
T-Bill/LIBOR basis swaps
|
— | — | 86 | 259 | ||||||||||||
Interest Rate swaps - floor income hedges
|
47 | 4,497 | 32,063 | 2,230 | ||||||||||||
Interest Rate swaps - hybrid debt hedges
|
— | 1,817 | 10,390 | — | ||||||||||||
Cross-currency interest rate swaps
|
117,327 | 169,817 | — | — | ||||||||||||
Other
|
— | — | 3,694 | — | ||||||||||||
Total
|
$ | 128,827 | 193,899 | 46,362 | 2,489 |
Amount of gain (or loss) recognized
|
Amount of gain (or loss) recognized
|
|||||||||||||||
Derivatives not designated as hedging
|
in income on derivatives
|
in income on derivatives
|
||||||||||||||
Three months ended September 30,
|
Nine months ended September 30,
|
|||||||||||||||
2010
|
2009
|
2010
|
2009
|
|||||||||||||
Settlements:
|
||||||||||||||||
Average/discrete basis swaps
|
$ | — | 646 | — | 11,707 | |||||||||||
1/3 basis swaps
|
893 | 3,071 | 974 | 20,473 | ||||||||||||
T-Bill/LIBOR basis swaps
|
— | — | — | — | ||||||||||||
Interest rate swaps - floor income hedges
|
(4,040 | ) | (436 | ) | (12,183 | ) | (447 | ) | ||||||||
Interest rate swaps - hybrid debt hedges
|
(242 | ) | — | (242 | ) | — | ||||||||||
Cross-currency interest rate swaps
|
1,025 | 1,633 | 3,243 | 7,074 | ||||||||||||
Other
|
(222 | ) | — | (178 | ) | — | ||||||||||
Total settlements - (expense) income
|
(2,586 | ) | 4,914 | (8,386 | ) | 38,807 | ||||||||||
Change in fair value:
|
||||||||||||||||
Average/discrete basis swaps
|
— | 1,864 | — | (16,813 | ) | |||||||||||
1/3 basis swaps
|
1,258 | (1,115 | ) | 7,012 | 8,751 | |||||||||||
T-Bill/LIBOR basis swaps
|
(221 | ) | — | 15 | — | |||||||||||
Interest rate swaps - floor income hedges
|
(26,736 | ) | (2,822 | ) | (34,284 | ) | (1,811 | ) | ||||||||
Interest rate swaps - hybrid debt hedges
|
(6,031 | ) | — | (11,352 | ) | — | ||||||||||
Cross-currency interest rate swaps
|
107,531 | 44,773 | (52,491 | ) | 28,871 | |||||||||||
Other
|
(2,138 | ) | (518 | ) | (3,439 | ) | 914 | |||||||||
Total change in fair value - (expense) income
|
73,663 | 42,182 | (94,539 | ) | 19,912 | |||||||||||
Re-measurement of Euro Notes (foreign currency
|
||||||||||||||||
transaction adjustment) - (expense) income
|
(106,468 | ) | (39,356 | ) | 58,608 | (55,979 | ) | |||||||||
Derivative market value and foreign currency adjustments
|
||||||||||||||||
and derivative settlements - (expense) income
|
$ | (35,391 | ) | 7,740 | (44,317 | ) | 2,740 |
|
·
|
Origination and servicing of FFELP loans
|
|
·
|
Origination and servicing of non-federally insured student loans
|
|
·
|
Servicing federally-owned student loans for the Department of Education
|
|
·
|
Servicing and support outsourcing for guaranty agencies
|
|
·
|
Student loan servicing software and other information technology products and services
|
|
·
|
Income earned on certain investment activities
|
|
·
|
Interest expense incurred on unsecured debt transactions
|
|
·
|
Other products and service offerings that are not considered operating segments
|
Three months ended September 30, 2010
|
||||||||||||||||||||||||||||||||||||||||
Fee-Based
|
||||||||||||||||||||||||||||||||||||||||
|
Tuition
|
|||||||||||||||||||||||||||||||||||||||
Student
|
Payment
|
|
|
|||||||||||||||||||||||||||||||||||||
Loan
|
Processing
|
|
Asset
|
Corporate
|
|
|
|
|||||||||||||||||||||||||||||||||
and
|
and |
Total
|
Generation
|
Activity
|
Eliminations
|
Adjustments
|
GAAP
|
|||||||||||||||||||||||||||||||||
Guaranty
|
Campus
|
Enrollment
|
Fee-
|
and
|
and
|
and
|
Base net
|
to GAAP
|
Results of
|
|||||||||||||||||||||||||||||||
Servicing
|
Commerce
|
Services
|
Based
|
Management
|
Overhead
|
Reclassifications
|
income
|
Results
|
Operations
|
|||||||||||||||||||||||||||||||
Total interest income
|
$ | 13 | 12 | — | 25 | 159,752 | 1,919 | (1,240 | ) | 160,456 | — | 160,456 | ||||||||||||||||||||||||||||
Interest expense
|
— | — | — | — | 64,302 | 5,181 | (1,240 | ) | 68,243 | — | 68,243 | |||||||||||||||||||||||||||||
Net interest income (loss)
|
13 | 12 | — | 25 | 95,450 | (3,262 | ) | — | 92,213 | — | 92,213 | |||||||||||||||||||||||||||||
Less provision for loan losses
|
— | — | — | — | 5,500 | — | — | 5,500 | — | 5,500 | ||||||||||||||||||||||||||||||
Net interest income (loss) after provision for loan losses
|
13 | 12 | — | 25 | 89,950 | (3,262 | ) | — | 86,713 | — | 86,713 | |||||||||||||||||||||||||||||
Other income (expense):
|
||||||||||||||||||||||||||||||||||||||||
Loan and guaranty servicing revenue
|
33,464 | — | — | 33,464 | — | — | — | 33,464 | — | 33,464 | ||||||||||||||||||||||||||||||
Intersegment servicing revenue
|
20,045 | — | — | 20,045 | — | — | (20,045 | ) | — | — | — | |||||||||||||||||||||||||||||
Tuition payment processing and campus commerce revenue
|
— | 14,527 | — | 14,527 | — | — | — | 14,527 | — | 14,527 | ||||||||||||||||||||||||||||||
Enrollment services revenue
|
— | — | 36,439 | 36,439 | — | — | — | 36,439 | — | 36,439 | ||||||||||||||||||||||||||||||
Software services revenue
|
4,624 | — | — | 4,624 | — | — | — | 4,624 | — | 4,624 | ||||||||||||||||||||||||||||||
Other income
|
— | — | — | — | 4,710 | 4,722 | — | 9,432 | — | 9,432 | ||||||||||||||||||||||||||||||
Gain on sale of loans and
debt repurchases, net
|
— | — | — | — | 4,963 | 4,922 | — | 9,885 | — | 9,885 | ||||||||||||||||||||||||||||||
Derivative market value and foreign currency adjustments
|
— | — | — | — | — | — | — | — | (32,805 | ) | (32,805 | ) | ||||||||||||||||||||||||||||
Derivative settlements, net
|
— | — | — | — | (2,131 | ) | (455 | ) | — | (2,586 | ) | — | (2,586 | ) | ||||||||||||||||||||||||||
Total other income (expense)
|
58,133 | 14,527 | 36,439 | 109,099 | 7,542 | 9,189 | (20,045 | ) | 105,785 | (32,805 | ) | 72,980 | ||||||||||||||||||||||||||||
Operating expenses:
|
||||||||||||||||||||||||||||||||||||||||
Salaries and benefits
|
22,682 | 6,652 | 6,142 | 35,476 | 1,054 | 4,615 | (60 | ) | 41,085 | — | 41,085 | |||||||||||||||||||||||||||||
Cost to provide enrollment services
|
— | — | 23,709 | 23,709 | — | — | — | 23,709 | — | 23,709 | ||||||||||||||||||||||||||||||
Other expenses
|
18,583 | 2,383 | 4,180 | 25,146 | 2,937 | 62,055 | — | 90,138 | 5,355 | 95,493 | ||||||||||||||||||||||||||||||
Intersegment expenses, net
|
1,166 | 992 | 705 | 2,863 | 20,295 | (3,173 | ) | (19,985 | ) | — | — | — | ||||||||||||||||||||||||||||
Total operating expenses
|
42,431 | 10,027 | 34,736 | 87,194 | 24,286 | 63,497 | (20,045 | ) | 154,932 | 5,355 | 160,287 | |||||||||||||||||||||||||||||
Income (loss) before income taxes and corporate overhead allocation
|
15,715 | 4,512 | 1,703 | 21,930 | 73,206 | (57,570 | ) | — | 37,566 | (38,160 | ) | (594 | ) | |||||||||||||||||||||||||||
Corporate overhead allocation
|
(1,676 | ) | (559 | ) | (559 | ) | (2,794 | ) | (2,793 | ) | 5,587 | — | — | — | — | |||||||||||||||||||||||||
Income (loss) before income taxes
|
14,039 | 3,953 | 1,144 | 19,136 | 70,413 | (51,983 | ) | — | 37,566 | (38,160 | ) | (594 | ) | |||||||||||||||||||||||||||
Income tax (expense) benefit
|
(5,335 | ) | (1,502 | ) | (435 | ) | (7,272 | ) | (26,757 | ) | 19,754 | — | (14,275 | ) | 14,501 | 226 | ||||||||||||||||||||||||
Net income (loss)
|
$ | 8,704 | 2,451 | 709 | 11,864 | 43,656 | (32,229 | ) | — | 23,291 | (23,659 | ) | (368 | ) | ||||||||||||||||||||||||||
Additional information:
|
||||||||||||||||||||||||||||||||||||||||
Net income (loss)
|
$ | 8,704 | 2,451 | 709 | 11,864 | 43,656 | (32,229 | ) | — | 23,291 | (23,659 | ) | (368 | ) | ||||||||||||||||||||||||||
Plus: Litigation settlement (a)
|
— | — | — | — | — | 55,000 | — | 55,000 | — | 55,000 | ||||||||||||||||||||||||||||||
Plus: Restructure expense (b)
|
4,751 | — | — | 4,751 | — | — | — | 4,751 | — | 4,751 | ||||||||||||||||||||||||||||||
Less: Net tax effect
|
(1,805 | ) | — | — | (1,805 | ) | — | (20,900 | ) | — | (22,705 | ) | — | (22,705 | ) | |||||||||||||||||||||||||
Net income (loss), excluding litigation settlement
and restructure expense
|
$ | 11,650 | 2,451 | 709 | 14,810 | 43,656 | 1,871 | — | 60,337 | (23,659 | ) | 36,678 |
(a) During the third quarter of 2010, the Company recorded a $55.0 million litigation settlement charge. See note 14 for additional information related to this settlement.
|
||||||||||||||||||||||||||||||||||||||||
(b) During the third quarter of 2010, the Company recorded restructuring charges associated with previously implemented restructuring plans. See note 13 for additional information related to these charges.
|
Three months ended September 30, 2009
|
||||||||||||||||||||||||||||||||||||||||
Fee-Based
|
||||||||||||||||||||||||||||||||||||||||
|
Tuition
|
|||||||||||||||||||||||||||||||||||||||
Student
|
Payment
|
|
|
|||||||||||||||||||||||||||||||||||||
Loan
|
Processing
|
|
Asset
|
Corporate
|
|
|
|
|||||||||||||||||||||||||||||||||
and
|
and
|
Total
|
Generation
|
Activity
|
Eliminations
|
Adjustments
|
GAAP
|
|||||||||||||||||||||||||||||||||
Guaranty
|
Campus
|
Enrollment
|
Fee-
|
and
|
and
|
and
|
Base net
|
to GAAP
|
Results of
|
|||||||||||||||||||||||||||||||
Servicing
|
Commerce
|
Services
|
Based
|
Management
|
Overhead
|
Reclassifications
|
income
|
Results
|
Operations
|
|||||||||||||||||||||||||||||||
Total interest income
|
$ | 23 | 16 | — | 39 | 144,310 | 1,191 | (342 | ) | 145,198 | — | 145,198 | ||||||||||||||||||||||||||||
Interest expense
|
— | — | — | — | 69,914 | 6,444 | (342 | ) | 76,016 | — | 76,016 | |||||||||||||||||||||||||||||
Net interest income (loss)
|
23 | 16 | — | 39 | 74,396 | (5,253 | ) | — | 69,182 | — | 69,182 | |||||||||||||||||||||||||||||
Less provision for loan losses
|
— | — | — | — | 7,500 | — | — | 7,500 | — | 7,500 | ||||||||||||||||||||||||||||||
Net interest income (loss) after provision for loan losses
|
23 | 16 | — | 39 | 66,896 | (5,253 | ) | — | 61,682 | — | 61,682 | |||||||||||||||||||||||||||||
Other income (expense):
|
||||||||||||||||||||||||||||||||||||||||
Loan and guaranty servicing revenue
|
26,387 | — | — | 26,387 | — | (381 | ) | — | 26,006 | — | 26,006 | |||||||||||||||||||||||||||||
Intersegment servicing revenue
|
21,512 | — | — | 21,512 | — | — | (21,512 | ) | — | — | — | |||||||||||||||||||||||||||||
Tuition payment processing and campus commerce revenue
|
— | 12,987 | — | 12,987 | — | — | — | 12,987 | — | 12,987 | ||||||||||||||||||||||||||||||
Enrollment services revenue
|
— | — | 30,670 | 30,670 | — | — | — | 30,670 | — | 30,670 | ||||||||||||||||||||||||||||||
Software services revenue
|
4,600 | — | — | 4,600 | — | — | — | 4,600 | — | 4,600 | ||||||||||||||||||||||||||||||
Other income
|
137 | — | — | 137 | 4,104 | 1,605 | — | 5,846 | — | 5,846 | ||||||||||||||||||||||||||||||
Gain on sale of loans and debt repurchases, net
|
— | — | — | — | 14,643 | (607 | ) | — | 14,036 | — | 14,036 | |||||||||||||||||||||||||||||
Derivative market value and foreign currency adjustments
|
— | — | — | — | — | — | — | — | 2,826 | 2,826 | ||||||||||||||||||||||||||||||
Derivative settlements, net
|
— | — | — | — | 4,914 | — | — | 4,914 | — | 4,914 | ||||||||||||||||||||||||||||||
Total other income (expense)
|
52,636 | 12,987 | 30,670 | 96,293 | 23,661 | 617 | (21,512 | ) | 99,059 | 2,826 | 101,885 | |||||||||||||||||||||||||||||
Operating expenses:
|
||||||||||||||||||||||||||||||||||||||||
Salaries and benefits
|
20,044 | 6,399 | 5,337 | 31,780 | 1,693 | 4,099 | (1,174 | ) | 36,398 | — | 36,398 | |||||||||||||||||||||||||||||
Cost to provide enrollment services
|
— | — | 20,323 | 20,323 | — | — | — | 20,323 | — | 20,323 | ||||||||||||||||||||||||||||||
Other expenses
|
14,731 | 2,265 | 3,266 | 20,262 | 4,801 | 5,565 | 1 | 30,629 | 5,312 | 35,941 | ||||||||||||||||||||||||||||||
Intersegment expenses, net
|
1,154 | 608 | 411 | 2,173 | 20,764 | (2,598 | ) | (20,339 | ) | — | — | — | ||||||||||||||||||||||||||||
Total operating expenses
|
35,929 | 9,272 | 29,337 | 74,538 | 27,258 | 7,066 | (21,512 | ) | 87,350 | 5,312 | 92,662 | |||||||||||||||||||||||||||||
Income (loss) before income taxes
|
16,730 | 3,731 | 1,333 | 21,794 | 63,299 | (11,702 | ) | — | 73,391 | (2,486 | ) | 70,905 | ||||||||||||||||||||||||||||
Income tax (expense) benefit
|
(6,357 | ) | (1,418 | ) | (507 | ) | (8,282 | ) | (24,054 | ) | 6,976 | — | (25,360 | ) | 859 | (24,501 | ) | |||||||||||||||||||||||
Net income (loss)
|
$ | 10,373 | 2,313 | 826 | 13,512 | 39,245 | (4,726 | ) | — | 48,031 | (1,627 | ) | 46,404 | |||||||||||||||||||||||||||
Additional information:
|
||||||||||||||||||||||||||||||||||||||||
Net income (loss)
|
$ | 10,373 | 2,313 | 826 | 13,512 | 39,245 | (4,726 | ) | — | 48,031 | (1,627 | ) | 46,404 | |||||||||||||||||||||||||||
Plus: Restructure expense (a)
|
3,151 | — | — | 3,151 | — | 189 | — | 3,340 | — | 3,340 | ||||||||||||||||||||||||||||||
Less: Net tax effect
|
(1,197 | ) | — | — | (1,197 | ) | — | 43 | — | (1,154 | ) | — | (1,154 | ) | ||||||||||||||||||||||||||
Net income (loss), excluding restructure expense
|
$ | 12,327 | 2,313 | 826 | 15,466 | 39,245 | (4,494 | ) | — | 50,217 | (1,627 | ) | 48,590 |
(a) During the third quarter of 2009, the Company recorded restructuring charges associated with previously implemented restructuring plans. See note 13 for additional information related to these charges. |
Nine months ended September 30, 2010
|
||||||||||||||||||||||||||||||||||||||||
Fee-Based
|
||||||||||||||||||||||||||||||||||||||||
|
Tuition
|
|||||||||||||||||||||||||||||||||||||||
Student
|
Payment
|
|
|
|||||||||||||||||||||||||||||||||||||
Loan
|
Processing
|
|
Asset
|
Corporate
|
|
|
|
|||||||||||||||||||||||||||||||||
and
|
and |
Total
|
Generation
|
Activity
|
Eliminations
|
Adjustments
|
GAAP
|
|||||||||||||||||||||||||||||||||
Guaranty
|
Campus
|
Enrollment
|
Fee-
|
and
|
and
|
and
|
Base net
|
to GAAP
|
Results of
|
|||||||||||||||||||||||||||||||
Servicing
|
Commerce
|
Services
|
Based
|
Management
|
Overhead
|
Reclassifications
|
income
|
Results
|
Operations
|
|||||||||||||||||||||||||||||||
Total interest income
|
$ | 43 | 24 | — | 67 | 450,715 | 5,439 | (3,140 | ) | 453,081 | — | 453,081 | ||||||||||||||||||||||||||||
Interest expense
|
— | — | — | — | 164,063 | 17,422 | (3,140 | ) | 178,345 | — | 178,345 | |||||||||||||||||||||||||||||
Net interest income (loss)
|
43 | 24 | — | 67 | 286,652 | (11,983 | ) | — | 274,736 | — | 274,736 | |||||||||||||||||||||||||||||
Less provision for loan losses
|
— | — | — | — | 16,700 | — | — | 16,700 | — | 16,700 | ||||||||||||||||||||||||||||||
Net interest income (loss) after provision for loan losses
|
43 | 24 | — | 67 | 269,952 | (11,983 | ) | — | 258,036 | — | 258,036 | |||||||||||||||||||||||||||||
Other income (expense):
|
||||||||||||||||||||||||||||||||||||||||
Loan and guaranty servicing revenue
|
106,764 | — | — | 106,764 | — | (254 | ) | — | 106,510 | — | 106,510 | |||||||||||||||||||||||||||||
Intersegment servicing revenue
|
63,594 | — | — | 63,594 | — | — | (63,594 | ) | — | — | — | |||||||||||||||||||||||||||||
Tuition payment processing and campus commerce revenue
|
— | 44,704 | — | 44,704 | — | — | — | 44,704 | — | 44,704 | ||||||||||||||||||||||||||||||
Enrollment services revenue
|
— | — | 105,113 | 105,113 | — | — | — | 105,113 | — | 105,113 | ||||||||||||||||||||||||||||||
Software services revenue
|
14,467 | — | — | 14,467 | — | — | — | 14,467 | — | 14,467 | ||||||||||||||||||||||||||||||
Other income
|
519 | — | — | 519 | 14,114 | 10,555 | — | 25,188 | — | 25,188 | ||||||||||||||||||||||||||||||
Gain on sale of loans and
debt repurchases, net
|
— | — | — | — | 23,899 | 4,922 | — | 28,821 | — | 28,821 | ||||||||||||||||||||||||||||||
Derivative market value and foreign currency adjustments
|
— | — | — | — | — | — | — | — | (35,931 | ) | (35,931 | ) | ||||||||||||||||||||||||||||
Derivative settlements, net
|
— | — | — | — | (7,931 | ) | (455 | ) | — | (8,386 | ) | — | (8,386 | ) | ||||||||||||||||||||||||||
Total other income (expense)
|
185,344 | 44,704 | 105,113 | 335,161 | 30,082 | 14,768 | (63,594 | ) | 316,417 | (35,931 | ) | 280,486 | ||||||||||||||||||||||||||||
Operating expenses:
|
||||||||||||||||||||||||||||||||||||||||
Salaries and benefits
|
69,591 | 19,864 | 18,660 | 108,115 | 3,698 | 12,540 | (1,662 | ) | 122,691 | — | 122,691 | |||||||||||||||||||||||||||||
Cost to provide enrollment services
|
— | — | 69,845 | 69,845 | — | — | — | 69,845 | — | 69,845 | ||||||||||||||||||||||||||||||
Other expenses
|
55,216 | 7,435 | 13,307 | 75,958 | 10,150 | 75,465 | — | 161,573 | 18,103 | 179,676 | ||||||||||||||||||||||||||||||
Intersegment expenses, net
|
4,158 | 2,645 | 1,779 | 8,582 | 63,011 | (9,661 | ) | (61,932 | ) | — | — | — | ||||||||||||||||||||||||||||
Total operating expenses
|
128,965 | 29,944 | 103,591 | 262,500 | 76,859 | 78,344 | (63,594 | ) | 354,109 | 18,103 | 372,212 | |||||||||||||||||||||||||||||
Income (loss) before income taxes and corporate overhead allocation
|
56,422 | 14,784 | 1,522 | 72,728 | 223,175 | (75,559 | ) | — | 220,344 | (54,034 | ) | 166,310 | ||||||||||||||||||||||||||||
Corporate overhead allocation
|
(4,349 | ) | (1,450 | ) | (1,450 | ) | (7,249 | ) | (7,247 | ) | 14,496 | — | — | — | — | |||||||||||||||||||||||||
Income (loss) before income taxes
|
52,073 | 13,334 | 72 | 65,479 | 215,928 | (61,063 | ) | — | 220,344 | (54,034 | ) | 166,310 | ||||||||||||||||||||||||||||
Income tax (expense) benefit
|
(19,788 | ) | (5,068 | ) | (27 | ) | (24,883 | ) | (82,053 | ) | 24,040 | — | (82,896 | ) | 20,533 | (62,363 | ) | |||||||||||||||||||||||
Net income (loss)
|
$ | 32,285 | 8,266 | 45 | 40,596 | 133,875 | (37,023 | ) | — | 137,448 | (33,501 | ) | 103,947 | |||||||||||||||||||||||||||
Additional information:
|
||||||||||||||||||||||||||||||||||||||||
Net income (loss)
|
$ | 32,285 | 8,266 | 45 | 40,596 | 133,875 | (37,023 | ) | — | 137,448 | (33,501 | ) | 103,947 | |||||||||||||||||||||||||||
Plus: Litigation settlement (a)
|
— | — | — | — | — | 55,000 | — | 55,000 | — | 55,000 | ||||||||||||||||||||||||||||||
Plus: Restructure expense (b)
|
6,040 | — | — | 6,040 | — | (20 | ) | — | 6,020 | — | 6,020 | |||||||||||||||||||||||||||||
Less: Net tax effect
|
(2,295 | ) | — | — | (2,295 | ) | — | (20,892 | ) | — | (23,187 | ) | — | (23,187 | ) | |||||||||||||||||||||||||
Net income (loss), excluding litigation settlement
and restructure expense
|
$ | 36,030 | 8,266 | 45 | 44,341 | 133,875 | (2,935 | ) | — | 175,281 | (33,501 | ) | 141,780 |
(a) During the third quarter of 2010, the Company recorded a $55.0 million litigation settlement charge. See note 14 for additional information related to this charge.
|
|
(b) During 2010, the Company recorded restructuring charges associated with previously implemented restructuring plans. See note 13 for additional information related to these charges.
|
Nine months ended September 30, 2009
|
||||||||||||||||||||||||||||||||||||||||
Fee-Based
|
||||||||||||||||||||||||||||||||||||||||
|
Tuition
|
|||||||||||||||||||||||||||||||||||||||
Student
|
Payment
|
|
|
|||||||||||||||||||||||||||||||||||||
Loan
|
Processing
|
|
Asset
|
Corporate
|
|
|
|
|||||||||||||||||||||||||||||||||
and
|
and |
Total
|
Generation
|
Activity
|
Eliminations
|
Adjustments
|
GAAP
|
|||||||||||||||||||||||||||||||||
Guaranty
|
Campus
|
Enrollment
|
Fee-
|
and
|
and
|
and
|
Base net
|
to GAAP
|
Results of
|
|||||||||||||||||||||||||||||||
Servicing
|
Commerce
|
Services
|
Based
|
Management
|
Overhead
|
Reclassifications
|
income
|
Results
|
Operations
|
|||||||||||||||||||||||||||||||
Total interest income
|
$ | 102 | 57 | — | 159 | 473,130 | 3,930 | (1,324 | ) | 475,895 | 7,502 | 483,397 | ||||||||||||||||||||||||||||
Interest expense
|
— | — | — | — | 306,846 | 23,078 | (1,324 | ) | 328,600 | — | 328,600 | |||||||||||||||||||||||||||||
Net interest income (loss)
|
102 | 57 | — | 159 | 166,284 | (19,148 | ) | — | 147,295 | 7,502 | 154,797 | |||||||||||||||||||||||||||||
Less provision for loan losses
|
— | — | — | — | 23,000 | — | — | 23,000 | — | 23,000 | ||||||||||||||||||||||||||||||
Net interest income (loss) after provision for loan losses
|
102 | 57 | — | 159 | 143,284 | (19,148 | ) | — | 124,295 | 7,502 | 131,797 | |||||||||||||||||||||||||||||
Other income (expense):
|
||||||||||||||||||||||||||||||||||||||||
Loan and guaranty servicing revenue
|
82,424 | — | — | 82,424 | — | (1,144 | ) | — | 81,280 | — | 81,280 | |||||||||||||||||||||||||||||
Intersegment servicing revenue
|
62,246 | — | — | 62,246 | — | — | (62,246 | ) | — | — | — | |||||||||||||||||||||||||||||
Tuition payment processing and campus commerce revenue
|
— | 40,373 | — | 40,373 | — | — | — | 40,373 | — | 40,373 | ||||||||||||||||||||||||||||||
Enrollment services revenue
|
— | — | 88,188 | 88,188 | — | — | — | 88,188 | — | 88,188 | ||||||||||||||||||||||||||||||
Software services revenue
|
16,424 | — | — | 16,424 | — | — | — | 16,424 | — | 16,424 | ||||||||||||||||||||||||||||||
Other income
|
498 | — | — | 498 | 12,974 | 6,826 | — | 20,298 | — | 20,298 | ||||||||||||||||||||||||||||||
Gain (loss) on sale of loans and debt repurchases, net
|
— | — | — | — | 14,263 | 13,308 | — | 27,571 | — | 27,571 | ||||||||||||||||||||||||||||||
Derivative market value and foreign currency adjustments
|
— | — | — | — | — | — | — | — | (36,067 | ) | (36,067 | ) | ||||||||||||||||||||||||||||
Derivative settlements, net
|
— | — | — | — | 38,807 | — | — | 38,807 | — | 38,807 | ||||||||||||||||||||||||||||||
Total other income (expense)
|
161,592 | 40,373 | 88,188 | 290,153 | 66,044 | 18,990 | (62,246 | ) | 312,941 | (36,067 | ) | 276,874 | ||||||||||||||||||||||||||||
Operating expenses:
|
||||||||||||||||||||||||||||||||||||||||
Salaries and benefits
|
63,645 | 19,346 | 17,295 | 100,286 | 5,203 | 11,958 | (4,284 | ) | 113,163 | 159 | 113,322 | |||||||||||||||||||||||||||||
Cost to provide enrollment services
|
— | — | 56,208 | 56,208 | — | — | — | 56,208 | — | 56,208 | ||||||||||||||||||||||||||||||
Other expenses
|
45,965 | 7,012 | 9,602 | 62,579 | 15,635 | 17,592 | 2 | 95,808 | 17,251 | 113,059 | ||||||||||||||||||||||||||||||
Intersegment expenses, net
|
2,777 | 1,790 | 1,188 | 5,755 | 59,372 | (7,163 | ) | (57,964 | ) | — | — | — | ||||||||||||||||||||||||||||
Total operating expenses
|
112,387 | 28,148 | 84,293 | 224,828 | 80,210 | 22,387 | (62,246 | ) | 265,179 | 17,410 | 282,589 | |||||||||||||||||||||||||||||
Income (loss) before income taxes
|
49,307 | 12,282 | 3,895 | 65,484 | 129,118 | (22,545 | ) | — | 172,057 | (45,975 | ) | 126,082 | ||||||||||||||||||||||||||||
Income tax (expense) benefit
|
(18,738 | ) | (4,667 | ) | (1,480 | ) | (24,885 | ) | (49,066 | ) | 11,150 | — | (62,801 | ) | 16,781 | (46,020 | ) | |||||||||||||||||||||||
Net income (loss)
|
$ | 30,569 | 7,615 | 2,415 | 40,599 | 80,052 | (11,395 | ) | — | 109,256 | (29,194 | ) | 80,062 | |||||||||||||||||||||||||||
Additional information:
|
||||||||||||||||||||||||||||||||||||||||
Net income (loss)
|
$ | 30,569 | 7,615 | 2,415 | 40,599 | 80,052 | (11,395 | ) | — | 109,256 | (29,194 | ) | 80,062 | |||||||||||||||||||||||||||
Plus: Restructure expense (a)
|
6,408 | — | — | 6,408 | — | 220 | — | 6,628 | — | 6,628 | ||||||||||||||||||||||||||||||
Less: Net tax effect
|
(2,339 | ) | — | — | (2,339 | ) | — | (80 | ) | — | (2,419 | ) | — | (2,419 | ) | |||||||||||||||||||||||||
Net income (loss), excluding restructure expense
|
$ | 34,638 | 7,615 | 2,415 | 44,668 | 80,052 | (11,255 | ) | — | 113,465 | (29,194 | ) | 84,271 |
(a) During 2009, the Company recorded restructuring charges associated with restructuring plans. See note 13 for additional information related to these charges.
|
Student
|
Tuition
|
|||||||||||||||||||||||
Loan
|
Payment
|
Asset
|
Corporate
|
|||||||||||||||||||||
and
|
Processing
|
Generation
|
Activity
|
|||||||||||||||||||||
Guaranty
|
and Campus
|
Enrollment
|
and
|
and
|
||||||||||||||||||||
Servicing
|
Commerce
|
Services
|
Management
|
Overhead
|
Total
|
|||||||||||||||||||
Three months ended September 30, 2010
|
||||||||||||||||||||||||
Derivative market value and foreign currency adjustments (a)
|
$ | — | — | — | 24,966 | 7,839 | 32,805 | |||||||||||||||||
Amortization of intangible assets (b)
|
2,112 | 1,120 | 2,123 | — | — | 5,355 | ||||||||||||||||||
Compensation related to business combinations (c)
|
— | — | — | — | — | — | ||||||||||||||||||
Variable-rate floor income, net of settlements on derivatives (d)
|
— | — | — | — | — | — | ||||||||||||||||||
Net tax effect (e)
|
(803 | ) | (426 | ) | (807 | ) | (9,487 | ) | (2,978 | ) | (14,501 | ) | ||||||||||||
Total adjustments to GAAP
|
$ | 1,309 | 694 | 1,316 | 15,479 | 4,861 | 23,659 | |||||||||||||||||
Three months ended September 30, 2009
|
||||||||||||||||||||||||
Derivative market value and foreign currency adjustments (a)
|
$ | — | — | — | (2,826 | ) | — | (2,826 | ) | |||||||||||||||
Amortization of intangible assets (b)
|
1,219 | 1,842 | 2,251 | — | — | 5,312 | ||||||||||||||||||
Compensation related to business combinations (c)
|
— | — | — | — | — | — | ||||||||||||||||||
Variable-rate floor income, net of settlements on derivatives (d)
|
— | — | — | — | — | — | ||||||||||||||||||
Net tax effect (e)
|
(464 | ) | (700 | ) | (855 | ) | 1,074 | 86 | (859 | ) | ||||||||||||||
Total adjustments to GAAP
|
$ | 755 | 1,142 | 1,396 | (1,752 | ) | 86 | 1,627 | ||||||||||||||||
Nine months ended September 30, 2010
|
||||||||||||||||||||||||
Derivative market value and foreign currency adjustments (a)
|
$ | — | — | — | 20,955 | 14,976 | 35,931 | |||||||||||||||||
Amortization of intangible assets (b)
|
6,462 | 4,636 | 7,005 | — | — | 18,103 | ||||||||||||||||||
Compensation related to business combinations (c)
|
— | — | — | — | — | — | ||||||||||||||||||
Variable-rate floor income, net of settlements on derivatives (d)
|
— | — | — | — | — | — | ||||||||||||||||||
Net tax effect (e)
|
(2,456 | ) | (1,763 | ) | (2,665 | ) | (7,963 | ) | (5,686 | ) | (20,533 | ) | ||||||||||||
Total adjustments to GAAP
|
$ | 4,006 | 2,873 | 4,340 | 12,992 | 9,290 | 33,501 | |||||||||||||||||
Nine months ended September 30, 2009
|
||||||||||||||||||||||||
Derivative market value and foreign currency adjustments (a)
|
$ | — | — | — | 37,499 | (1,432 | ) | 36,067 | ||||||||||||||||
Amortization of intangible assets (b)
|
3,659 | 5,598 | 7,994 | — | — | 17,251 | ||||||||||||||||||
Compensation related to business combinations (c)
|
— | — | — | — | 159 | 159 | ||||||||||||||||||
Variable-rate floor income, net of settlements on derivatives (d)
|
— | — | — | (7,502 | ) | — | (7,502 | ) | ||||||||||||||||
Net tax effect (e)
|
(1,391 | ) | (2,127 | ) | (3,037 | ) | (11,399 | ) | 1,173 | (16,781 | ) | |||||||||||||
Total adjustments to GAAP
|
$ | 2,268 | 3,471 | 4,957 | 18,598 | (100 | ) | 29,194 |
|
(a)
|
Derivative market value and foreign currency adjustments: “Base net income” excludes the periodic unrealized gains and losses that are caused by the change in fair value on derivatives used in the Company’s risk management strategy in which the Company does not qualify for “hedge treatment” under GAAP. Included in “base net income” are the economic effects of the Company’s derivative instruments, which includes any cash paid or received being recognized as an expense or revenue upon actual derivative settlements. “Base net income” also excludes the foreign currency transaction gains or losses caused by the re-measurement of the Company’s Euro-denominated bonds to U.S. dollars.
|
|
(b)
|
Amortization of intangible assets: “Base net income” excludes the amortization of acquired intangibles.
|
|
(c)
|
Compensation related to business combinations: The Company has structured certain business combinations in which the consideration paid has been dependent on the sellers’ continued employment with the Company. As such, the value of the consideration paid is recognized as compensation expense by the Company over the term of the applicable employment agreement. The compensation expense related to existing agreements was fully expensed in 2009. “Base net income” excludes this expense.
|
|
(d)
|
Variable-rate floor income: Loans that reset annually on July 1 can generate excess spread income compared with the rate based on the special allowance payment formula in declining interest rate environments. The Company refers to this additional income as variable-rate floor income. The Company excludes variable-rate floor income, net of settlements paid on derivatives used to hedge student loan assets earning variable-rate floor income, from its “base net income” since the timing and amount of variable-rate floor income (if any) is uncertain, it has been eliminated by legislation for all loans originated on and after April 1, 2006, and it is in excess of expected spreads. In addition, because variable-rate floor income is subject to the underlying rate for the subject loans being reset annually on July 1, it is a factor beyond the Company’s control which can affect the period-to-period comparability of results of operations.
|
|
(e)
|
Income taxes are applied based on 38% for the individual operating segments.
|
7.
|
Intangible Assets
|
Weighted
|
|||||||||||
average
|
|||||||||||
remaining
|
|||||||||||
useful life as of
|
As of
|
As of
|
|||||||||
September 30,
|
September 30,
|
December 31,
|
|||||||||
2010 (months)
|
2010
|
2009
|
|||||||||
Amortizable intangible assets:
|
|||||||||||
Customer relationships (net of accumulated amortization of $48,162
and $38,785, respectively)
|
72 | $ | 31,613 | 40,991 | |||||||
Computer software (net of accumulated amortization of $10,490
and $8,915, respectively)
|
28 | 6,158 | 87 | ||||||||
Trade names (net of accumulated amortization of $11,265 and
$9,101, respectively)
|
27 | 5,287 | 7,452 | ||||||||
Covenants not to compete (net of accumulated amortization of
$23,491 and $20,372, respectively)
|
3 | 110 | 3,229 | ||||||||
Database and content (net of accumulated amortization of $9,296
and $7,701, respectively)
|
3 | 184 | 1,779 | ||||||||
Total - amortizable intangible assets
|
60 | $ | 43,352 | 53,538 |
2010 (October 1 - December 31)
|
$ | 4,640 | ||
2011
|
15,784 | |||
2012
|
15,269 | |||
2013
|
2,024 | |||
2014
|
1,298 | |||
2015 and thereafter
|
4,337 | |||
$ | 43,352 |
8.
|
Goodwill
|
Student Loan and Guaranty Servicing
|
$ | 8,596 | ||
Tuition Payment Processing and Campus Commerce
|
58,086 | |||
Enrollment Services
|
35,152 | |||
Asset Generation and Management
|
41,883 | |||
$ | 143,717 |
9.
|
Investments
|
10.
|
Fair Value of Financial Instruments
|
As of September 30, 2010
|
||||||||||||
Level 1
|
Level 2
|
Total
|
||||||||||
Assets:
|
||||||||||||
Investments (a)
|
$ | 33,082 | — | 33,082 | ||||||||
Fair value of derivative instruments (b)
|
— | 128,827 | 128,827 | |||||||||
Total assets
|
$ | 33,082 | 128,827 | 161,909 | ||||||||
Liabilities:
|
||||||||||||
Fair value of derivative instruments (b)
|
$ | — | 46,362 | 46,362 | ||||||||
Total liabilities
|
$ | — | 46,362 | 46,362 |
|
(a)
|
Investments represent investments classified by the Company as “trading securities,” which are recorded at fair value on a recurring basis. Level 1 investments are measured based upon quoted prices and include investments traded on an active exchange, such as the New York Stock Exchange, and U.S. Treasury securities.
|
|
(b)
|
All derivatives are accounted for at fair value on a recurring basis. The fair values of derivative financial instruments are determined by derivative pricing models using the stated terms of the contracts and observable yield curves, forward foreign currency exchange rates, and volatilities from active markets. Fair value of derivative instruments is comprised of market value less accrued interest and excludes collateral.
|
As of September 30, 2010
|
As of December 31, 2009
|
|||||||||||||||
Fair value
|
Carrying value
|
Fair value
|
Carrying value
|
|||||||||||||
Financial assets:
|
||||||||||||||||
Student loans receivable
|
$ | 25,394,972 | 24,436,162 | 24,387,267 | 23,926,957 | |||||||||||
Student loans receivable - held for sale
|
2,143,191 | 2,109,440 | — | — | ||||||||||||
Cash and cash equivalents
|
316,361 | 316,361 | 338,181 | 338,181 | ||||||||||||
Investments - trading securities
|
33,082 | 33,082 | — | — | ||||||||||||
Restricted cash
|
432,443 | 432,443 | 318,530 | 318,530 | ||||||||||||
Restricted cash – due to customers
|
54,532 | 54,532 | 91,741 | 91,741 | ||||||||||||
Restricted investments
|
260,259 | 260,259 | 306,962 | 306,962 | ||||||||||||
Accrued interest receivable
|
418,083 | 418,083 | 329,313 | 329,313 | ||||||||||||
Derivative instruments
|
128,827 | 128,827 | 193,899 | 193,899 | ||||||||||||
Financial liabilities:
|
||||||||||||||||
Bonds and notes payable
|
27,256,200 | 27,391,188 | 24,741,306 | 24,805,289 | ||||||||||||
Accrued interest payable
|
19,727 | 19,727 | 19,831 | 19,831 | ||||||||||||
Due to customers
|
54,532 | 54,532 | 91,741 | 91,741 | ||||||||||||
Derivative instruments
|
46,362 | 46,362 | 2,489 | 2,489 |
11.
|
Shareholders’ Equity
|
Purchase
|
Average price of
|
|||||||||||
Total shares
|
Price
|
shares repurchased
|
||||||||||
repurchased
|
(in thousands)
|
(per share)
|
||||||||||
Three months ended March 31, 2010
|
12,936 | $ | 236 | $ | 18.28 | |||||||
Three months ended June 30, 2010
|
663,443 | 12,821 | 19.33 | |||||||||
Three months ended September 30, 2010
|
1,184,261 | 26,615 | 22.47 | |||||||||
Nine months ended September 30, 2010
|
1,860,640 | $ | 39,672 | $ | 21.32 |
Three months ended September 30,
|
Nine months ended September 30,
|
|||||||||||||||
2010
|
2009
|
2010
|
2009
|
|||||||||||||
Net income (loss) attributable to Nelnet, Inc.
|
$ | (368 | ) | 46,404 | 103,947 | 80,062 | ||||||||||
Less earnings (loss) allocated to unvested restricted stockholders
|
(4 | ) | 291 | 671 | 514 | |||||||||||
Net income (loss) available to common stockholders
|
$ | (364 | ) | 46,113 | 103,276 | 79,548 | ||||||||||
Weighted average common shares outstanding - basic
|
48,938,333 | 49,611,423 | 49,460,625 | 49,432,165 | ||||||||||||
Dilutive effect of the assumed vesting of restricted stock awards
|
— | 197,433 | 202,880 | 201,125 | ||||||||||||
Weighted average common shares outstanding - diluted
|
48,938,333 | 49,808,856 | 49,663,505 | 49,633,290 | ||||||||||||
Basic earnings (loss) per common share
|
$ | (0.01 | ) | 0.93 | 2.09 | 1.60 | ||||||||||
Diluted earnings (loss) per common share
|
$ | (0.01 | ) | 0.93 | 2.08 | 1.60 |
2009 Restructuring Plan
|
||||||||||||||||
Employee
|
||||||||||||||||
termination
|
Lease
|
2007 and 2008
|
||||||||||||||
benefits
|
terminations
|
Restructuring Plans (a)
|
Total
|
|||||||||||||
Restructuring accrual as of December 31, 2008
|
$ | — | — | 3,480 | 3,480 | |||||||||||
Restructuring costs recognized during the three month period ended:
|
||||||||||||||||
June 30, 2009
|
1,482 | 1,291 | 515 | 3,288 | ||||||||||||
September 30, 2009
|
1,412 | 1,786 | 142 | 3,340 | ||||||||||||
December 31, 2009
|
1,353 | (46 | ) | 47 | 1,354 | |||||||||||
Total 2009 costs
|
4,247 | 3,031 | 704 | 7,982 | ||||||||||||
Cash payments - 2009
|
(898 | ) | (605 | ) | (900 | ) | (2,403 | ) | ||||||||
Restructuring accrual as of December 31, 2009
|
3,349 | 2,426 | 3,284 | 9,059 | ||||||||||||
Restructuring costs recognized during the
|
||||||||||||||||
three month period ended March 31, 2010
|
997 | 200 | — | 1,197 | ||||||||||||
Cash payments
|
(264 | ) | (406 | ) | (354 | ) | (1,024 | ) | ||||||||
Restructuring accrual as of March 31, 2010
|
4,082 | 2,220 | 2,930 | 9,232 | ||||||||||||
Restructuring costs recognized during the
|
||||||||||||||||
three month period ended June 30, 2010
|
72 | — | — | 72 | ||||||||||||
Cash payments
|
(1,376 | ) | (1,555 | ) | (298 | ) | (3,229 | ) | ||||||||
Restructuring accrual as of June 30, 2010
|
2,778 | 665 | 2,632 | 6,075 | ||||||||||||
Restructuring costs recognized during the
|
||||||||||||||||
three month period ended September 30, 2010
|
— | 3,160 | 1,591 | 4,751 | ||||||||||||
Cash payments
|
(1,557 | ) | (92 | ) | (282 | ) | (1,931 | ) | ||||||||
Restructuring accrual as of September 30, 2010
|
$ | 1,221 | 3,733 | 3,941 | 8,895 |
|
(a)
|
The 2009 and 2010 activity related to the 2007 and 2008 restructuring plans relate primarily to lease terminations.
|
14.
|
Legal Proceedings and Regulatory Reviews
|
15.
|
Legislation
|
|
·
|
Reclassifying the Company’s gains on debt repurchases to “gain on sale of loans and debt repurchases, net” which were previously included in “other income.”
|
|
·
|
Reclassifying costs incurred by the Company related to restructuring activities to “restructure expense,” which were previously included in “salaries and benefits” and “occupancy and communications.”
|
|
•
|
risks related to the Company’s student loan portfolio, such as interest rate basis and repricing risk resulting from the fact that the interest rate characteristics of the Company’s student loan assets do not match the interest rate characteristics of the funding for those assets, the risk of loss of floor income on certain student loans originated under the prior FFEL Program, risks related to the use of derivatives to manage exposure to interest rate fluctuations, and potential losses from loan defaults, changes in prepayment rates, guaranty rates, loan floor rates, and credit spreads;
|
|
•
|
risks related to the Company’s liquidity and funding requirements, including the Company’s ability to maintain credit facilities or obtain new facilities, the ability of lenders under the Company’s credit facilities to fulfill their lending commitments under these facilities, the Company’s ability to satisfy debt obligations secured by student loan assets and related collateral, and changes in the general interest rate environment and in the securitization markets for education loans which may increase the costs or limit the availability of financings necessary to purchase, refinance, or continue to carry education loans;
|
|
•
|
risks from changes in the student loan and educational credit marketplace resulting from the implementation of, or changes in, applicable laws and regulations, including the discontinuance of private sector student loan originations under the FFEL Program effective July 1, 2010, and the Company’s ability to maintain its loan servicing contract with the Department of Education to service federally-owned student loans;
|
|
•
|
risks from changes in the demand or preferences for educational financing and related services by educational institutions, students, and their families;
|
|
•
|
uncertainties inherent in forecasting future cash flows from student loan assets and related asset-backed securitizations;
|
|
•
|
uncertainties related to the estimation of expenses that may be incurred and cost savings that may result from restructuring plans;
|
|
•
|
risks associated with litigation, complex government regulations, and changes in general economic and credit market conditions; and
|
|
•
|
uncertainties inherent in the estimates and assumptions about future events that management is required to make in the preparation of the Company’s consolidated financial statements.
|
|
·
|
Grow and diversify revenue from fee based businesses
|
|
·
|
Manage operating costs
|
|
·
|
Maximize the value of existing portfolio
|
|
·
|
Use liquidity to capitalize on market opportunities
|
|
·
|
Three metrics measure the satisfaction among separate customer groups, including borrowers, financial aid personnel at postsecondary schools participating in the federal student loan programs, and Federal Student Aid and other federal agency personnel or contractors who work with the servicers.
|
|
·
|
Two performance metrics measure the success of default prevention efforts as reflected by the percentage of borrowers and percentage of dollars in each servicer’s portfolio that go into default.
|
Three months ended September 30,
|
||||||||||||||||
2010
|
2009
|
$ Change
|
% Change
|
|||||||||||||
Student Loan and Guaranty Servicing (a)
|
$ | 38,101 | 31,147 | 6,954 | 22.3 | % | ||||||||||
Tuition Payment Processing and Campus Commerce
|
14,539 | 13,003 | 1,536 | 11.8 | ||||||||||||
Enrollment Services
|
36,439 | 30,670 | 5,769 | 18.8 | ||||||||||||
Total revenue from fee-based businesses
|
$ | 89,079 | 74,820 | 14,259 | 19.1 | % |
Nine months ended September 30,
|
||||||||||||||||
2010
|
2009
|
$ Change
|
% Change
|
|||||||||||||
Student Loan and Guaranty Servicing (a)
|
$ | 121,793 | 99,448 | 22,345 | 22.5 | % | ||||||||||
Tuition Payment Processing and Campus Commerce
|
44,728 | 40,430 | 4,298 | 10.6 | ||||||||||||
Enrollment Services
|
105,113 | 88,188 | 16,925 | 19.2 | ||||||||||||
Total revenue from fee-based businesses
|
$ | 271,634 | 228,066 | 43,568 | 19.1 | % |
|
(a)
|
The Student Loan and Guaranty Servicing operating segment included $5.3 million and $0.6 million of revenue earned from rehabilitation collections on defaulted loans in the third quarters of 2010 and 2009, respectively, and $27.6 million and $6.9 million for the nine months ended September 30, 2010 and 2009, respectively.
|
Three months ended September 30,
|
||||||||||||||||
2010
|
2009
|
$ Change
|
% Change
|
|||||||||||||
Salaries and benefits
|
$ | 41,085 | 36,398 | 4,687 | 12.9 | % | ||||||||||
Other expenses (a)
|
32,750 | 31,933 | 817 | 2.6 | ||||||||||||
Operating expenses, excluding the litigation settlement, the cost
to provide enrollment services, restructure expense,
|
73,835 | 68,331 | $ | 5,504 | 8.1 | % | ||||||||||
Litigation settlement
|
55,000 | — | ||||||||||||||
Cost to provide enrollment services
|
23,709 | 20,323 | ||||||||||||||
Restructure expense
|
4,751 | 3,340 | ||||||||||||||
Collection costs related to loan rehabilitation revenue (b)
|
2,992 | 668 | ||||||||||||||
Total operating expenses
|
$ | 160,287 | 92,662 |
Nine months ended September 30,
|
||||||||||||||||
2010
|
2009
|
$ Change
|
% Change
|
|||||||||||||
Salaries and benefits
|
$ | 122,691 | 113,322 | 9,369 | 8.3 | % | ||||||||||
Other expenses (a)
|
102,298 | 102,886 | (588 | ) | (0.6 | ) | ||||||||||
Operating expenses, excluding the litigation settlement, the cost
to provide enrollment services, restructure expense,
|
224,989 | 216,208 | $ | 8,781 | 4.1 | % | ||||||||||
Litigation settlement
|
55,000 | — | ||||||||||||||
Cost to provide enrollment services
|
69,845 | 56,208 | ||||||||||||||
Restructure expense
|
6,020 | 6,628 | ||||||||||||||
Collection costs related to loan rehabilitation revenue (b)
|
16,358 | 3,545 | ||||||||||||||
Total operating expenses
|
$ | 372,212 | 282,589 |
|
(a)
|
Excludes the litigation settlement, the cost to provide enrollment services, restructure expense, and collection costs related to loan rehabilitation revenue.
|
|
(b)
|
The Company incurred collection costs directly related to revenue earned from rehabilitation loans. These costs are included in “professional and other services” in the consolidated statements of operations and are shown separately in the above table for comparability purposes for the periods shown.
|
|
(a)
|
The interest earned on the majority of the Company’s FFELP student loan assets is indexed to the three-month commercial paper index. The Company funds the majority of its assets with three-month LIBOR indexed floating rate securities. The relationship between these two indexes has a significant impact on student loan spread. This table (the right axis) shows the difference between the average three-month LIBOR and commercial paper indexes by quarter.
|
|
(a)
|
The Company uses various assumptions, including prepayments and future interest rates, when preparing its cash flow forecast. These assumptions are further discussed below.
|
Asset-backed securities
|
Junior Subordinated Hybrid Securities
|
|||||||||||||||||||||||
Notional amount
|
Purchase price
|
Gain
|
Notional amount
|
Purchase price
|
Gain
|
|||||||||||||||||||
Three months ended March 31, 2010
|
$ | 274,250 | 264,073 | 10,177 | — | — | — | |||||||||||||||||
Three months ended June 30, 2010
|
117,775 | 109,016 | 8,759 | — | — | — | ||||||||||||||||||
Three months ended September 30, 2010
|
85,675 | 80,712 | 4,963 | 34,995 | 30,073 | 4,922 | ||||||||||||||||||
Nine months ended September 30, 2010
|
$ | 477,700 | 453,801 | 23,899 | 34,995 | 30,073 | 4,922 |
Purchase
|
Average price of
|
|||||||||||
Total shares
|
Price
|
shares repurchased
|
||||||||||
repurchased
|
(in thousands)
|
(per share)
|
||||||||||
Three months ended March 31, 2010
|
12,936 | $ | 236 | $ | 18.28 | |||||||
Three months ended June 30, 2010
|
663,443 | 12,821 | 19.33 | |||||||||
Three months ended September 30, 2010
|
1,184,261 | 26,615 | 22.47 | |||||||||
Nine months ended September 30, 2010
|
1,860,640 | $ | 39,672 | $ | 21.32 |
|
·
|
Interactive Marketing
– Interactive marketing revenue is derived primarily from fees which are earned through the delivery of qualified leads or clicks. The Company recognizes revenue when persuasive evidence of an arrangement exists, delivery has occurred, the fee is fixed or determinable, and collectability is reasonably assured. Delivery is deemed to have occurred at the time a qualified lead or click is delivered to the customer provided that no significant obligations remain. From time to time, the Company may agree to credit certain leads or clicks if they fail to meet the contractual or other guidelines of a particular client. The Company has established a sales reserve based on historical experience. To date, such credits have been immaterial and within management’s expectations.
|
|
·
|
Publishing services -
Revenue from the sale of print products is generally earned and recognized, net of estimated returns, upon shipment or delivery.
|
|
·
|
Resource centers and list marketing –
Resource centers and list marketing services includes the sale of subscription and performance based products and services, as well as list sales. Revenues from sales of subscription and performance based products and services are recognized ratably over the term of the contract. Subscription and performance based revenues received or receivable in advance of the delivery of services is included in deferred revenue. Revenue from the sale of lists is generally earned and recognized, net of estimated returns, upon delivery.
|
Three months ended September 30,
|
Nine months ended September 30,
|
|||||||||||||||||||||||||||||||
Change
|
Change
|
|||||||||||||||||||||||||||||||
2010
|
2009
|
$ | % | 2010 | 2009 | $ | % | |||||||||||||||||||||||||
Interest income:
|
||||||||||||||||||||||||||||||||
Loan interest
|
$ | 159,287 | 143,255 | 16,032 | 11.2 | % | $ | 449,607 | 474,587 | (24,980 | ) | (5.3 | ) % | |||||||||||||||||||
Investment interest
|
1,169 | 1,943 | (774 | ) | (39.8 | ) | 3,474 | 8,810 | (5,336 | ) | (60.6 | ) | ||||||||||||||||||||
Total interest income
|
160,456 | 145,198 | 15,258 | 10.5 | 453,081 | 483,397 | (30,316 | ) | (6.3 | ) | ||||||||||||||||||||||
Interest expense:
|
||||||||||||||||||||||||||||||||
Interest on bonds and notes payable
|
68,243 | 76,016 | (7,773 | ) | (10.2 | ) | 178,345 | 328,600 | (150,255 | ) | (45.7 | ) | ||||||||||||||||||||
Net interest income
|
92,213 | 69,182 | 23,031 | 33.3 | 274,736 | 154,797 | 119,939 | 77.5 | ||||||||||||||||||||||||
Provision for loan losses
|
5,500 | 7,500 | (2,000 | ) | (26.7 | ) | 16,700 | 23,000 | (6,300 | ) | (27.4 | ) | ||||||||||||||||||||
Net interest income after
provision for loan losses
|
86,713 | 61,682 | 25,031 | 40.6 | 258,036 | 131,797 | 126,239 | 95.8 | ||||||||||||||||||||||||
Derivative settlements, net (a)
|
(2,586 | ) | 4,914 | (7,500 | ) | (152.6 | ) | (8,386 | ) | 38,807 | (47,193 | ) | (121.6 | ) | ||||||||||||||||||
Net interest income after
provision for loan losses (net of
settlements on derivatives)
|
$ | 84,127 | 66,596 | 17,531 | 26.3 | % | $ | 249,650 | 170,604 | 79,046 | 46.3 | % |
|
(a)
|
The Company maintains an overall risk management strategy that incorporates the use of derivative instruments to reduce the economic effect of interest rate volatility. Management has structured the majority of the Company’s derivative transactions with the intent that each is economically effective; however, the Company’s derivative instruments do not qualify for hedge accounting. Derivative settlements for each applicable period should be evaluated with the Company’s net interest income.
|
Three months ended September 30,
|
Nine months ended September 30,
|
|||||||||||||||||||||||||||||||
Change
|
Change
|
|||||||||||||||||||||||||||||||
2010
|
2009
|
$ | % | 2010 | 2009 | $ | % | |||||||||||||||||||||||||
Student loan interest margin, net of
settlements on derivatives (a)
|
$ | 59,416 | 39,749 | 19,667 | 49.5 | % | $ | 179,750 | 94,183 | 85,567 | 90.9 | % | ||||||||||||||||||||
Fixed rate floor income, net of
settlements on derivatives (b)
|
34,223 | 38,848 | (4,625 | ) | (11.9 | ) | 100,548 | 106,187 | (5,639 | ) | (5.3 | ) | ||||||||||||||||||||
Variable-rate floor income, net of
settlements on derivatives (c)
|
— | — | — | — | — | 7,502 | (7,502 | ) | (100.0 | ) | ||||||||||||||||||||||
Investment interest (d)
|
1,169 | 1,943 | (774 | ) | (39.8 | ) | 3,474 | 8,810 | (5,336 | ) | (60.6 | ) | ||||||||||||||||||||
Corporate debt interest expense (e)
|
(5,181 | ) | (6,444 | ) | 1,263 | (19.6 | ) | (17,422 | ) | (23,078 | ) | 5,656 | (24.5 | ) | ||||||||||||||||||
Provision for loan losses (f)
|
(5,500 | ) | (7,500 | ) | 2,000 | (26.7 | ) | (16,700 | ) | (23,000 | ) | 6,300 | (27.4 | ) | ||||||||||||||||||
Net interest income after
provision for loan losses (net of
settlements on derivatives)
|
$ | 84,127 | 66,596 | 17,531 | 26.3 | % | $ | 249,650 | 170,604 | 79,046 | 46.3 | % |
|
(a)
|
Variable student loan spread increased to 0.90% and 0.94% for the three and nine months ended September 30, 2010 compared with 0.66% and 0.54% for the same periods in 2009 as further discussed in this Item 2 under “Asset Generation and Management Operating Segment – Results of Operations – Student Loan Spread Analysis.”
|
|
(b)
|
The Company has a portfolio of student loans that are earning interest at a fixed borrower rate which exceeds the statutorily defined variable lender rate generating fixed rate floor income. See Item 3, “Quantitative and Qualitative Disclosures about Market Risk – Interest Rate Risk” for additional information.
|
|
(c)
|
Loans that reset annually on July 1 can generate excess spread income compared with the rate based on the special allowance payment formula in declining interest rate environments. The Company refers to this additional income as variable-rate floor income. A portion of the Company’s portfolio was earning variable-rate floor income during the first and second quarters of 2009. No variable-rate floor income was earned during 2010.
|
|
(d)
|
Investment interest decreased for the three and nine months ended September 30, 2010 compared with the same periods in 2009 due to lower interest rates and a decrease in average cash held.
|
|
(e)
|
Corporate debt interest expense includes interest expense incurred by the Company on its 5.125% Senior Notes due 2010 (the “Senior Notes”), Junior Subordinated Hybrid Securities, and its $750 million unsecured line of credit. Corporate debt interest expense decreased for the three and nine months ended September 30, 2010 compared with the same periods in 2009 due to a reduction in debt outstanding due to the purchase of certain Senior Notes and Junior Subordinated Hybrid Securities and the maturity of the Senior Notes on June 1, 2010. During the first, second, and third quarters of 2009, the Company purchased $34.9 million, $35.5 million, and $137.9 million, respectively, of its Senior Notes. The remaining balance outstanding on the Senior Notes, $66.7 million, was paid on June 1, 2010. In the third quarter of 2010, the Company purchased $35.0 million of its Junior Subordinated Hybrid securities.
|
|
(f)
|
The provision for loan losses represents the periodic expense of maintaining an allowance sufficient to absorb losses inherent in the Company's portfolio of loans. The provision for loan losses recognized by the Company was larger during the three and nine months ended September 30, 2009 compared with the same periods in 2010, primarily due to the provision related to the Company's non-federally insured student loan portfolio. During 2009, the Company increased its allowance for non-federally insured loans due to management's projected performance of the portfolio in light of economic conditions. As of September 30, 2010, the dollar amount of the Company's non-federally insured student loan portfolio, including those loans in repayment and loans delinquent, decreased from the same period a year ago. These decreases, as well as continued aging of the portfolio, resulted in less provision expense recognized by the Company during 2010 as compared to 2009 related to the Company's non-federally insured portfolio.
|
Three months ended September 30,
|
Nine months ended September 30,
|
|||||||||||||||||||||||||||||||
Change
|
Change
|
|||||||||||||||||||||||||||||||
2010
|
2009
|
$ | % | 2010 | 2009 | $ | % | |||||||||||||||||||||||||
Loan and guaranty servicing revenue (a)
|
$ | 33,464 | 26,006 | 7,458 | 28.7 | % | $ | 106,510 | 81,280 | 25,230 | 31.0 | % | ||||||||||||||||||||
Tuition payment processing and campus commerce revenue (b)
|
14,527 | 12,987 | 1,540 | 11.9 | 44,704 | 40,373 | 4,331 | 10.7 | ||||||||||||||||||||||||
Enrollment services revenue (c)
|
36,439 | 30,670 | 5,769 | 18.8 | 105,113 | 88,188 | 16,925 | 19.2 | ||||||||||||||||||||||||
Software services revenue (d)
|
4,624 | 4,600 | 24 | 0.5 | 14,467 | 16,424 | (1,957 | ) | (11.9 | ) | ||||||||||||||||||||||
Other income (e)
|
9,432 | 5,846 | 3,586 | 61.3 | 25,188 | 20,298 | 4,890 | 24.1 | ||||||||||||||||||||||||
Gain on sale of loans and debt repurchases, net (f)
|
9,885 | 14,036 | (4,151 | ) | (29.6 | ) | 28,821 | 27,571 | 1,250 | 4.5 | ||||||||||||||||||||||
Derivative market value and foreign currency adjustments (g)
|
(32,805 | ) | 2,826 | (35,631 | ) | (1,260.8 | ) | (35,931 | ) | (36,067 | ) | 136 | (0.4 | ) | ||||||||||||||||||
Derivative settlements, net (h)
|
(2,586 | ) | 4,914 | (7,500 | ) | (152.6 | ) | (8,386 | ) | 38,807 | (47,193 | ) | (121.6 | ) | ||||||||||||||||||
Total other income
|
$ | 72,980 | 101,885 | (28,905 | ) | (28.4 | ) % | $ | 280,486 | 276,874 | 3,612 | 1.3 | % |
|
(a)
|
“Loan and guaranty servicing revenue” increased due to an increase in loan servicing revenue as a result of servicing loans for the Department, as well as an increase in guaranty servicing revenue as a result of recognizing $5.3 million and $27.6 million in revenue related to rehabilitation collections on defaulted loans in the three and nine months ended September 30, 2010 compared with $0.6 million and $6.9 million for the same periods in 2009. This additional revenue was offset by a decrease in external FFELP servicing revenue due to the loss of servicing volume from third party customers as a result of these customers selling their portfolios to the Company or the Department under the Purchase Program. See Item 2 under “Student Loan and Guaranty Servicing Operating Segment – Results of Operations” for additional information.
|
|
(b)
|
“Tuition payment processing and campus commerce revenue” increased due to an increase in the number of managed tuition payment plans and an increase in campus commerce transactions processed as discussed in this Item 2 under “Tuition Payment Processing and Campus Commerce Operating Segment – Results of Operations.”
|
|
(c)
|
“Enrollment services revenue” increased due to an increase in interactive marketing revenue as further discussed in this Item 2 under “Enrollment Services Operating Segment – Results of Operations.”
|
|
(d)
|
“Software services revenue” decreased due to a reduction in the number of projects for existing customers and the loss of customers due to the legislative developments in the student loan industry throughout 2009 and 2010.
|
|
(e)
|
The following table summarizes the components of “other income”.
|
Three months ended September 30,
|
Nine months ended September 30,
|
|||||||||||||||
2010
|
2009
|
2010
|
2009
|
|||||||||||||
Borrower late fee income
|
$ | 3,133 | 2,859 | 9,370 | 8,648 | |||||||||||
Gain on sale of equity method investment
|
— | — | — | 3,500 | ||||||||||||
Other
|
6,299 | 2,987 | 15,818 | 8,150 | ||||||||||||
Other income
|
$ | 9,432 | 5,846 | 25,188 | 20,298 |
(f)
|
“Gain on sale of loans and debt repurchases, net” includes the following:
|
Three months ended September 30, 2010
|
Nine months ended September 30, 2010
|
|||||||||||||||||||||||
Notional amount
|
Purchase price
|
Gain
|
Notional amount
|
Purchase price
|
Gain
|
|||||||||||||||||||
Gains on debt repurchases:
|
||||||||||||||||||||||||
Junior Subordinated Hybrid Securities
|
$ | 34,995 | 30,073 | 4,922 | 34,995 | 30,073 | 4,922 | |||||||||||||||||
Asset-backed securities
|
85,675 | 80,712 | 4,963 | 477,700 | 453,801 | 23,899 | ||||||||||||||||||
$ | 120,670 | 110,785 | 9,885 | 512,695 | 483,874 | 28,821 |
|
(g)
|
The change in “derivative market value and foreign currency adjustments” is the result of the change in the fair value of the Company’s derivative portfolio and transaction gains/losses resulting from the re-measurement of the Company’s Euro-denominated bonds to U.S. dollars. These changes are summarized below.
|
Three months ended September 30,
|
Nine months ended September 30,
|
|||||||||||||||
2010
|
2009
|
2010
|
2009
|
|||||||||||||
Change in fair value of derivatives
|
$ | 73,663 | 42,182 | (94,539 | ) | 19,912 | ||||||||||
Foreign currency transaction adjustment
|
(106,468 | ) | (39,356 | ) | 58,608 | (55,979 | ) | |||||||||
Derivative market value and foreign currency adjustments
|
$ | (32,805 | ) | 2,826 | (35,931 | ) | (36,067 | ) |
|
(h)
|
Further detail of the components of derivative settlements is included in Item 3, “Quantitative and Qualitative Disclosures about Market Risk.” The Company maintains an overall risk management strategy that incorporates the use of derivative instruments to reduce the economic effect of interest rate volatility. Management has structured the majority of the Company’s derivative transactions with the intent that each is economically effective; however, the Company’s derivative instruments do not qualify for hedge accounting. Derivative settlements for each applicable period should be evaluated with the Company’s net interest income.
|
Three months ended September 30,
|
||||||||||||||||
2010
|
2009
|
$ Change
|
% Change
|
|||||||||||||
Salaries and benefits
|
$ | 41,085 | 36,398 | 4,687 | 12.9 | % | ||||||||||
Other expenses (a)
|
32,750 | 31,933 | 817 | 2.6 | ||||||||||||
Operating expenses, excluding the litigation settlement, the cost
to provide enrollment services, restructure expense,
|
73,835 | 68,331 | $ | 5,504 | 8.1 | % | ||||||||||
Litigation settlement
|
55,000 | — | ||||||||||||||
Cost to provide enrollment services
|
23,709 | 20,323 | ||||||||||||||
Restructure expense
|
4,751 | 3,340 | ||||||||||||||
Collection costs related to loan rehabilitation revenue (b)
|
2,992 | 668 | ||||||||||||||
Total operating expenses
|
$ | 160,287 | 92,662 |
Nine months ended September 30,
|
||||||||||||||||
2010
|
2009
|
$ Change
|
% Change
|
|||||||||||||
Salaries and benefits
|
$ | 122,691 | 113,322 | 9,369 | 8.3 | % | ||||||||||
Other expenses (a)
|
102,298 | 102,886 | (588 | ) | (0.6 | ) | ||||||||||
Operating expenses, excluding the litigation settlement, the cost
to provide enrollment services, restructure expense,
|
224,989 | 216,208 | $ | 8,781 | 4.1 | % | ||||||||||
Litigation settlement
|
55,000 | — | ||||||||||||||
Cost to provide enrollment services
|
69,845 | 56,208 | ||||||||||||||
Restructure expense
|
6,020 | 6,628 | ||||||||||||||
Collection costs related to loan rehabilitation revenue (b)
|
16,358 | 3,545 | ||||||||||||||
Total operating expenses
|
$ | 372,212 | 282,589 |
|
(a)
|
Excludes the litigation settlement, the cost to provide enrollment services, restructure expenses related to lease terminations, and collection costs related to loan rehabilitation revenue.
|
|
(b)
|
The Company incurred collection costs directly related to revenue earned from rehabilitation loans. These costs are included in “professional and other services” in the consolidated statements of operations and are shown separately in the above table for comparability purposes for the periods shown.
|
As of
|
As of
|
|||||||||||||||
September 30,
|
December 31,
|
Change
|
||||||||||||||
2010
|
2009
|
Dollars
|
Percent
|
|||||||||||||
Assets:
|
||||||||||||||||
Student loans receivable, net
|
$ | 24,436,162 | 23,926,957 | 509,205 | 2.1 | % | ||||||||||
Student loans receivable - held for sale
|
2,109,440 | — | 2,109,440 | 100.0 | ||||||||||||
Cash, cash equivalents, and investments
|
1,096,677 | 1,055,414 | 41,263 | 3.9 | ||||||||||||
Goodwill
|
143,717 | 143,717 | — | — | ||||||||||||
Intangible assets, net
|
43,352 | 53,538 | (10,186 | ) | (19.0 | ) | ||||||||||
Fair value of derivative instruments
|
128,827 | 193,899 | (65,072 | ) | (33.6 | ) | ||||||||||
Other assets
|
628,404 | 502,902 | 125,502 | 25.0 | ||||||||||||
Total assets
|
$ | 28,586,579 | 25,876,427 | 2,710,152 | 10.5 | % | ||||||||||
Liabilities:
|
||||||||||||||||
Bonds and notes payable
|
$ | 27,391,188 | 24,805,289 | 2,585,899 | 10.4 | % | ||||||||||
Fair value of derivative instruments
|
46,362 | 2,489 | 43,873 | 1,762.7 | ||||||||||||
Other liabilities
|
304,415 | 284,086 | 20,329 | 7.2 | ||||||||||||
Total liabilities
|
27,741,965 | 25,091,864 | 2,650,101 | 10.6 | ||||||||||||
Shareholders' equity
|
844,614 | 784,563 | 60,051 | 7.7 | ||||||||||||
Total liabilities and shareholders' equity
|
$ | 28,586,579 | 25,876,427 | 2,710,152 | 10.5 | % |
Three months ended September 30, 2010
|
||||||||||||||||||||||||||||||||||||||||
Fee-Based
|
||||||||||||||||||||||||||||||||||||||||
|
Tuition
|
|||||||||||||||||||||||||||||||||||||||
Student
|
Payment
|
|
|
|||||||||||||||||||||||||||||||||||||
Loan
|
Processing
|
|
Asset
|
Corporate
|
|
|
|
|||||||||||||||||||||||||||||||||
and
|
and |
Total
|
Generation
|
Activity
|
Eliminations
|
Adjustments
|
GAAP
|
|||||||||||||||||||||||||||||||||
Guaranty
|
Campus
|
Enrollment
|
Fee-
|
and
|
and
|
and
|
Base net
|
to GAAP
|
Results of
|
|||||||||||||||||||||||||||||||
Servicing
|
Commerce
|
Services
|
Based
|
Management
|
Overhead
|
Reclassifications
|
income
|
Results
|
Operations
|
|||||||||||||||||||||||||||||||
Total interest income
|
$ | 13 | 12 | — | 25 | 159,752 | 1,919 | (1,240 | ) | 160,456 | — | 160,456 | ||||||||||||||||||||||||||||
Interest expense
|
— | — | — | — | 64,302 | 5,181 | (1,240 | ) | 68,243 | — | 68,243 | |||||||||||||||||||||||||||||
Net interest income (loss)
|
13 | 12 | — | 25 | 95,450 | (3,262 | ) | — | 92,213 | — | 92,213 | |||||||||||||||||||||||||||||
Less provision for loan losses
|
— | — | — | — | 5,500 | — | — | 5,500 | — | 5,500 | ||||||||||||||||||||||||||||||
Net interest income (loss) after provision for loan losses
|
13 | 12 | — | 25 | 89,950 | (3,262 | ) | — | 86,713 | — | 86,713 | |||||||||||||||||||||||||||||
Other income (expense):
|
||||||||||||||||||||||||||||||||||||||||
Loan and guaranty servicing revenue
|
33,464 | — | — | 33,464 | — | — | — | 33,464 | — | 33,464 | ||||||||||||||||||||||||||||||
Intersegment servicing revenue
|
20,045 | — | — | 20,045 | — | — | (20,045 | ) | — | — | — | |||||||||||||||||||||||||||||
Tuition payment processing and campus commerce revenue
|
— | 14,527 | — | 14,527 | — | — | — | 14,527 | — | 14,527 | ||||||||||||||||||||||||||||||
Enrollment services revenue
|
— | — | 36,439 | 36,439 | — | — | — | 36,439 | — | 36,439 | ||||||||||||||||||||||||||||||
Software services revenue
|
4,624 | — | — | 4,624 | — | — | — | 4,624 | — | 4,624 | ||||||||||||||||||||||||||||||
Other income
|
— | — | — | — | 4,710 | 4,722 | — | 9,432 | — | 9,432 | ||||||||||||||||||||||||||||||
Gain on sale of loans and debt repurchases, net
|
— | — | — | — | 4,963 | 4,922 | — | 9,885 | — | 9,885 | ||||||||||||||||||||||||||||||
Derivative market value and foreign currency adjustments
|
— | — | — | — | — | — | — | — | (32,805 | ) | (32,805 | ) | ||||||||||||||||||||||||||||
Derivative settlements, net
|
— | — | — | — | (2,131 | ) | (455 | ) | — | (2,586 | ) | — | (2,586 | ) | ||||||||||||||||||||||||||
Total other income (expense)
|
58,133 | 14,527 | 36,439 | 109,099 | 7,542 | 9,189 | (20,045 | ) | 105,785 | (32,805 | ) | 72,980 | ||||||||||||||||||||||||||||
Operating expenses:
|
||||||||||||||||||||||||||||||||||||||||
Salaries and benefits
|
22,682 | 6,652 | 6,142 | 35,476 | 1,054 | 4,615 | (60 | ) | 41,085 | — | 41,085 | |||||||||||||||||||||||||||||
Cost to provide enrollment services
|
— | — | 23,709 | 23,709 | — | — | — | 23,709 | — | 23,709 | ||||||||||||||||||||||||||||||
Other expenses
|
18,583 | 2,383 | 4,180 | 25,146 | 2,937 | 62,055 | — | 90,138 | 5,355 | 95,493 | ||||||||||||||||||||||||||||||
Intersegment expenses, net
|
1,166 | 992 | 705 | 2,863 | 20,295 | (3,173 | ) | (19,985 | ) | — | — | — | ||||||||||||||||||||||||||||
Total operating expenses
|
42,431 | 10,027 | 34,736 | 87,194 | 24,286 | 63,497 | (20,045 | ) | 154,932 | 5,355 | 160,287 | |||||||||||||||||||||||||||||
Income (loss) before income taxes and corporate overhead allocation
|
15,715 | 4,512 | 1,703 | 21,930 | 73,206 | (57,570 | ) | — | 37,566 | (38,160 | ) | (594 | ) | |||||||||||||||||||||||||||
Corporate overhead allocation
|
(1,676 | ) | (559 | ) | (559 | ) | (2,794 | ) | (2,793 | ) | 5,587 | — | — | — | — | |||||||||||||||||||||||||
Income (loss) before income taxes
|
14,039 | 3,953 | 1,144 | 19,136 | 70,413 | (51,983 | ) | — | 37,566 | (38,160 | ) | (594 | ) | |||||||||||||||||||||||||||
Income tax (expense) benefit
|
(5,335 | ) | (1,502 | ) | (435 | ) | (7,272 | ) | (26,757 | ) | 19,754 | — | (14,275 | ) | 14,501 | 226 | ||||||||||||||||||||||||
Net income (loss)
|
$ | 8,704 | 2,451 | 709 | 11,864 | 43,656 | (32,229 | ) | — | 23,291 | (23,659 | ) | (368 | ) | ||||||||||||||||||||||||||
Additional information:
|
||||||||||||||||||||||||||||||||||||||||
Net income (loss)
|
$ | 8,704 | 2,451 | 709 | 11,864 | 43,656 | (32,229 | ) | — | 23,291 | (23,659 | ) | (368 | ) | ||||||||||||||||||||||||||
Plus: Litigation settlement (a)
|
— | — | — | — | — | 55,000 | — | 55,000 | — | 55,000 | ||||||||||||||||||||||||||||||
Plus: Restructure expense (b)
|
4,751 | — | — | 4,751 | — | — | — | 4,751 | — | 4,751 | ||||||||||||||||||||||||||||||
Less: Net tax effect
|
(1,805 | ) | — | — | (1,805 | ) | — | (20,900 | ) | — | (22,705 | ) | — | (22,705 | ) | |||||||||||||||||||||||||
Net income (loss), excluding litigation settlement
and restructure expense
|
$ | 11,650 | 2,451 | 709 | 14,810 | 43,656 | 1,871 | — | 60,337 | (23,659 | ) | 36,678 |
(a)
|
During the third quarter of 2010, the Company recorded a $55.0 million litigation settlement charge. See note 14 in the accompanying consolidated financial statements included in this report for additional information related to this
settlement.
|
|||||||||||||||||||||
(b)
|
During the third quarter of 2010, the Company recorded restructuring charges associated with previously implemented restructuring plans. See note 13 in the accompanying consolidated financial statements included in this report for additional
information related to these charges.
|
Three months ended September 30, 2009
|
||||||||||||||||||||||||||||||||
Fee-Based
|
||||||||||||||||||||||||||||||||
|
Tuition
|
|||||||||||||||||||||||||||||||
Student
|
Payment
|
|
|
|||||||||||||||||||||||||||||
Loan
|
Processing
|
|
Asset
|
Corporate
|
|
|
||||||||||||||||||||||||||
and
|
and |
Total
|
Generation
|
Activity
|
Eliminations
|
Adjustments
|
GAAP
|
|||||||||||||||||||||||||
Guaranty
|
Campus
|
Enrollment
|
Fee-
|
and
|
and
|
and
|
Base net
|
to GAAP
|
Results of
|
|||||||||||||||||||||||
Servicing
|
Commerce
|
Services
|
Based
|
Management
|
Overhead
|
Reclassifications
|
income
|
Results
|
Operations
|
|||||||||||||||||||||||
Total interest income
|
$ | 23 | 16 | — | 39 | 144,310 | 1,191 | (342 | ) | 145,198 | — | 145,198 | ||||||||||||||||||||
Interest expense
|
— | — | — | — | 69,914 | 6,444 | (342 | ) | 76,016 | — | 76,016 | |||||||||||||||||||||
Net interest income (loss)
|
23 | 16 | — | 39 | 74,396 | (5,253 | ) | — | 69,182 | — | 69,182 | |||||||||||||||||||||
Less provision for loan losses
|
— | — | — | — | 7,500 | — | — | 7,500 | — | 7,500 | ||||||||||||||||||||||
Net interest income (loss) after provision for loan losses
|
23 | 16 | — | 39 | 66,896 | (5,253 | ) | — | 61,682 | — | 61,682 | |||||||||||||||||||||
Other income (expense):
|
||||||||||||||||||||||||||||||||
Loan and guaranty servicing revenue
|
26,387 | — | — | 26,387 | — | (381 | ) | — | 26,006 | — | 26,006 | |||||||||||||||||||||
Intersegment servicing revenue
|
21,512 | — | — | 21,512 | — | — | (21,512 | ) | — | — | — | |||||||||||||||||||||
Tuition payment processing and campus commerce revenue
|
— | 12,987 | — | 12,987 | — | — | — | 12,987 | — | 12,987 | ||||||||||||||||||||||
Enrollment services revenue
|
— | — | 30,670 | 30,670 | — | — | — | 30,670 | — | 30,670 | ||||||||||||||||||||||
Software services revenue
|
4,600 | — | — | 4,600 | — | — | — | 4,600 | — | 4,600 | ||||||||||||||||||||||
Other income
|
137 | — | — | 137 | 4,104 | 1,605 | — | 5,846 | — | 5,846 | ||||||||||||||||||||||
Gain on sale of loans and debt repurchases, net
|
— | — | — | — | 14,643 | (607 | ) | — | 14,036 | — | 14,036 | |||||||||||||||||||||
Derivative market value and foreign currency adjustments
|
— | — | — | — | — | — | — | — | 2,826 | 2,826 | ||||||||||||||||||||||
Derivative settlements, net
|
— | — | — | — | 4,914 | — | — | 4,914 | — | 4,914 | ||||||||||||||||||||||
Total other income (expense)
|
52,636 | 12,987 | 30,670 | 96,293 | 23,661 | 617 | (21,512 | ) | 99,059 | 2,826 | 101,885 | |||||||||||||||||||||
Operating expenses:
|
||||||||||||||||||||||||||||||||
Salaries and benefits
|
20,044 | 6,399 | 5,337 | 31,780 | 1,693 | 4,099 | (1,174 | ) | 36,398 | — | 36,398 | |||||||||||||||||||||
Cost to provide enrollment services
|
— | — | 20,323 | 20,323 | — | — | — | 20,323 | — | 20,323 | ||||||||||||||||||||||
Other expenses
|
14,731 | 2,265 | 3,266 | 20,262 | 4,801 | 5,565 | 1 | 30,629 | 5,312 | 35,941 | ||||||||||||||||||||||
Intersegment expenses, net
|
1,154 | 608 | 411 | 2,173 | 20,764 | (2,598 | ) | (20,339 | ) | — | — | — | ||||||||||||||||||||
Total operating expenses
|
35,929 | 9,272 | 29,337 | 74,538 | 27,258 | 7,066 | (21,512 | ) | 87,350 | 5,312 | 92,662 | |||||||||||||||||||||
Income (loss) before income taxes
|
16,730 | 3,731 | 1,333 | 21,794 | 63,299 | (11,702 | ) | — | 73,391 | (2,486 | ) | 70,905 | ||||||||||||||||||||
Income tax (expense) benefit
|
(6,357 | ) | (1,418 | ) | (507 | ) | (8,282 | ) | (24,054 | ) | 6,976 | — | (25,360 | ) | 859 | (24,501 | ) | |||||||||||||||
Net income (loss)
|
$ | 10,373 | 2,313 | 826 | 13,512 | 39,245 | (4,726 | ) | — | 48,031 | (1,627 | ) | 46,404 | |||||||||||||||||||
Additional information:
|
||||||||||||||||||||||||||||||||
Net income (loss)
|
$ | 10,373 | 2,313 | 826 | 13,512 | 39,245 | (4,726 | ) | — | 48,031 | (1,627 | ) | 46,404 | |||||||||||||||||||
Plus: Restructure expense (a)
|
3,151 | — | — | 3,151 | — | 189 | — | 3,340 | — | 3,340 | ||||||||||||||||||||||
Less: Net tax effect
|
(1,197 | ) | — | — | (1,197 | ) | — | 43 | — | (1,154 | ) | — | (1,154 | ) | ||||||||||||||||||
Net income (loss), excluding restructure expense
|
$ | 12,327 | 2,313 | 826 | 15,466 | 39,245 | (4,494 | ) | — | 50,217 | (1,627 | ) | 48,590 |
Nine months ended September 30, 2010
|
|||||||||||||||||||||||||||||||||||||||||
Fee-Based
|
|||||||||||||||||||||||||||||||||||||||||
|
Tuition
|
||||||||||||||||||||||||||||||||||||||||
Student
|
Payment
|
|
|||||||||||||||||||||||||||||||||||||||
Loan
|
Processing
|
|
Asset
|
Corporate
|
|
|
|
||||||||||||||||||||||||||||||||||
and
|
and |
Total
|
Generation
|
Activity
|
Eliminations
|
Adjustments
|
GAAP
|
||||||||||||||||||||||||||||||||||
Guaranty
|
Campus
|
Enrollment
|
Fee-
|
and
|
and
|
and
|
Base net
|
to GAAP
|
Results of
|
||||||||||||||||||||||||||||||||
Servicing
|
Commerce
|
Services
|
Based
|
Management
|
Overhead
|
Reclassifications
|
income
|
Results
|
Operations
|
||||||||||||||||||||||||||||||||
Total interest income
|
$ | 43 | 24 | — | 67 | 450,715 | 5,439 | (3,140 | ) | 453,081 | — | 453,081 | |||||||||||||||||||||||||||||
Interest expense
|
— | — | — | — | 164,063 | 17,422 | (3,140 | ) | 178,345 | — | 178,345 | ||||||||||||||||||||||||||||||
Net interest income (loss)
|
43 | 24 | — | 67 | 286,652 | (11,983 | ) | — | 274,736 | — | 274,736 | ||||||||||||||||||||||||||||||
Less provision for loan losses
|
— | — | — | — | 16,700 | — | — | 16,700 | — | 16,700 | |||||||||||||||||||||||||||||||
Net interest income (loss) after provision for loan losses
|
43 | 24 | — | 67 | 269,952 | (11,983 | ) | — | 258,036 | — | 258,036 | ||||||||||||||||||||||||||||||
Other income (expense):
|
|||||||||||||||||||||||||||||||||||||||||
Loan and guaranty servicing revenue
|
106,764 | — | — | 106,764 | — | (254 | ) | — | 106,510 | — | 106,510 | ||||||||||||||||||||||||||||||
Intersegment servicing revenue
|
63,594 | — | — | 63,594 | — | — | (63,594 | ) | — | — | — | ||||||||||||||||||||||||||||||
Tuition payment processing and campus commerce revenue
|
— | 44,704 | — | 44,704 | — | — | — | 44,704 | — | 44,704 | |||||||||||||||||||||||||||||||
Enrollment services revenue
|
— | — | 105,113 | 105,113 | — | — | — | 105,113 | — | 105,113 | |||||||||||||||||||||||||||||||
Software services revenue
|
14,467 | — | — | 14,467 | — | — | — | 14,467 | — | 14,467 | |||||||||||||||||||||||||||||||
Other income
|
519 | — | — | 519 | 14,114 | 10,555 | — | 25,188 | — | 25,188 | |||||||||||||||||||||||||||||||
Gain on sale of loans and debt repurchases, net
|
— | — | — | — | 23,899 | 4,922 | — | 28,821 | — | 28,821 | |||||||||||||||||||||||||||||||
Derivative market value and foreign currency adjustments
|
— | — | — | — | — | — | — | — | (35,931 | ) | (35,931 | ) | |||||||||||||||||||||||||||||
Derivative settlements, net
|
— | — | — | — | (7,931 | ) | (455 | ) | — | (8,386 | ) | — | (8,386 | ) | |||||||||||||||||||||||||||
Total other income (expense)
|
185,344 | 44,704 | 105,113 | 335,161 | 30,082 | 14,768 | (63,594 | ) | 316,417 | (35,931 | ) | 280,486 | |||||||||||||||||||||||||||||
Operating expenses:
|
|||||||||||||||||||||||||||||||||||||||||
Salaries and benefits
|
69,591 | 19,864 | 18,660 | 108,115 | 3,698 | 12,540 | (1,662 | ) | 122,691 | — | 122,691 | ||||||||||||||||||||||||||||||
Cost to provide enrollment services
|
— | — | 69,845 | 69,845 | — | — | — | 69,845 | — | 69,845 | |||||||||||||||||||||||||||||||
Other expenses
|
55,216 | 7,435 | 13,307 | 75,958 | 10,150 | 75,465 | — | 161,573 | 18,103 | 179,676 | |||||||||||||||||||||||||||||||
Intersegment expenses, net
|
4,158 | 2,645 | 1,779 | 8,582 | 63,011 | (9,661 | ) | (61,932 | ) | — | — | — | |||||||||||||||||||||||||||||
Total operating expenses
|
128,965 | 29,944 | 103,591 | 262,500 | 76,859 | 78,344 | (63,594 | ) | 354,109 | 18,103 | 372,212 | ||||||||||||||||||||||||||||||
Income (loss) before income taxes and corporate overhead allocation
|
56,422 | 14,784 | 1,522 | 72,728 | 223,175 | (75,559 | ) | — | 220,344 | (54,034 | ) | 166,310 | |||||||||||||||||||||||||||||
Corporate overhead allocation
|
(4,349 | ) | (1,450 | ) | (1,450 | ) | (7,249 | ) | (7,247 | ) | 14,496 | — | — | — | — | ||||||||||||||||||||||||||
Income (loss) before income taxes
|
52,073 | 13,334 | 72 | 65,479 | 215,928 | (61,063 | ) | — | 220,344 | (54,034 | ) | 166,310 | |||||||||||||||||||||||||||||
Income tax (expense) benefit
|
(19,788 | ) | (5,068 | ) | (27 | ) | (24,883 | ) | (82,053 | ) | 24,040 | — | (82,896 | ) | 20,533 | (62,363 | ) | ||||||||||||||||||||||||
Net income (loss)
|
$ | 32,285 | 8,266 | 45 | 40,596 | 133,875 | (37,023 | ) | — | 137,448 | (33,501 | ) | 103,947 | ||||||||||||||||||||||||||||
Additional information:
|
|||||||||||||||||||||||||||||||||||||||||
Net income (loss)
|
$ | 32,285 | 8,266 | 45 | 40,596 | 133,875 | (37,023 | ) | — | 137,448 | (33,501 | ) | 103,947 | ||||||||||||||||||||||||||||
Plus: Litigation settlement (a)
|
— | — | — | — | — | 55,000 | — | 55,000 | — | 55,000 | |||||||||||||||||||||||||||||||
Plus: Restructure expense (b)
|
6,040 | — | — | 6,040 | — | (20 | ) | — | 6,020 | — | 6,020 | ||||||||||||||||||||||||||||||
Less: Net tax effect
|
(2,295 | ) | — | — | (2,295 | ) | — | (20,892 | ) | — | (23,187 | ) | — | (23,187 | ) | ||||||||||||||||||||||||||
Net income (loss), excluding litigation settlement
and restructure expense
|
$ | 36,030 | 8,266 | 45 | 44,341 | 133,875 | (2,935 | ) | — | 175,281 | (33,501 | ) | 141,780 |
(a) During the third quarter of 2010, the Company recorded a $55.0 million litigation settlement charge. See note 14 in the accompanying consolidated financial statements included in this report for additional information related to this settlement. | |
(b) During 2010, the Company recorded restructuring charges associated with previously implemented restructuring plans. See note 13 in the accompanying consolidated financial statements included in this report for additional information related to these charges. |
Nine months ended September 30, 2009
|
||||||||||||||||||||||||||||||||||||||||
Fee-Based
|
||||||||||||||||||||||||||||||||||||||||
|
Tuition
|
|||||||||||||||||||||||||||||||||||||||
Student
|
Payment
|
|
|
|||||||||||||||||||||||||||||||||||||
Loan
|
Processing
|
|
Asset
|
Corporate
|
|
|
|
|||||||||||||||||||||||||||||||||
and
|
and |
Total
|
Generation
|
Activity
|
Eliminations
|
Adjustments
|
GAAP
|
|||||||||||||||||||||||||||||||||
Guaranty
|
Campus
|
Enrollment
|
Fee-
|
and
|
and
|
and
|
Base net
|
to GAAP
|
Results of
|
|||||||||||||||||||||||||||||||
Servicing
|
Commerce
|
Services
|
Based
|
Management
|
Overhead
|
Reclassifications
|
income
|
Results
|
Operations
|
|||||||||||||||||||||||||||||||
Total interest income
|
$ | 102 | 57 | — | 159 | 473,130 | 3,930 | (1,324 | ) | 475,895 | 7,502 | 483,397 | ||||||||||||||||||||||||||||
Interest expense
|
— | — | — | — | 306,846 | 23,078 | (1,324 | ) | 328,600 | — | 328,600 | |||||||||||||||||||||||||||||
Net interest income (loss)
|
102 | 57 | — | 159 | 166,284 | (19,148 | ) | — | 147,295 | 7,502 | 154,797 | |||||||||||||||||||||||||||||
Less provision for loan losses
|
— | — | — | — | 23,000 | — | — | 23,000 | — | 23,000 | ||||||||||||||||||||||||||||||
Net interest income (loss) after provision for loan losses
|
102 | 57 | — | 159 | 143,284 | (19,148 | ) | — | 124,295 | 7,502 | 131,797 | |||||||||||||||||||||||||||||
Other income (expense):
|
||||||||||||||||||||||||||||||||||||||||
Loan and guaranty servicing revenue
|
82,424 | — | — | 82,424 | — | (1,144 | ) | — | 81,280 | — | 81,280 | |||||||||||||||||||||||||||||
Intersegment servicing revenue
|
62,246 | — | — | 62,246 | — | — | (62,246 | ) | — | — | — | |||||||||||||||||||||||||||||
Tuition payment processing and campus commerce revenue
|
— | 40,373 | — | 40,373 | — | — | — | 40,373 | — | 40,373 | ||||||||||||||||||||||||||||||
Enrollment services revenue
|
— | — | 88,188 | 88,188 | — | — | — | 88,188 | — | 88,188 | ||||||||||||||||||||||||||||||
Software services revenue
|
16,424 | — | — | 16,424 | — | — | — | 16,424 | — | 16,424 | ||||||||||||||||||||||||||||||
Other income
|
498 | — | — | 498 | 12,974 | 6,826 | — | 20,298 | — | 20,298 | ||||||||||||||||||||||||||||||
Gain (loss) on sale of loans and debt repurchases, net
|
— | — | — | — | 14,263 | 13,308 | — | 27,571 | — | 27,571 | ||||||||||||||||||||||||||||||
Derivative market value and foreign currency adjustments
|
— | — | — | — | — | — | — | — | (36,067 | ) | (36,067 | ) | ||||||||||||||||||||||||||||
Derivative settlements, net
|
— | — | — | — | 38,807 | — | — | 38,807 | — | 38,807 | ||||||||||||||||||||||||||||||
Total other income (expense)
|
161,592 | 40,373 | 88,188 | 290,153 | 66,044 | 18,990 | (62,246 | ) | 312,941 | (36,067 | ) | 276,874 | ||||||||||||||||||||||||||||
Operating expenses:
|
||||||||||||||||||||||||||||||||||||||||
Salaries and benefits
|
63,645 | 19,346 | 17,295 | 100,286 | 5,203 | 11,958 | (4,284 | ) | 113,163 | 159 | 113,322 | |||||||||||||||||||||||||||||
Cost to provide enrollment services
|
— | — | 56,208 | 56,208 | — | — | — | 56,208 | — | 56,208 | ||||||||||||||||||||||||||||||
Other expenses
|
45,965 | 7,012 | 9,602 | 62,579 | 15,635 | 17,592 | 2 | 95,808 | 17,251 | 113,059 | ||||||||||||||||||||||||||||||
Intersegment expenses, net
|
2,777 | 1,790 | 1,188 | 5,755 | 59,372 | (7,163 | ) | (57,964 | ) | — | — | — | ||||||||||||||||||||||||||||
Total operating expenses
|
112,387 | 28,148 | 84,293 | 224,828 | 80,210 | 22,387 | (62,246 | ) | 265,179 | 17,410 | 282,589 | |||||||||||||||||||||||||||||
Income (loss) before income taxes
|
49,307 | 12,282 | 3,895 | 65,484 | 129,118 | (22,545 | ) | — | 172,057 | (45,975 | ) | 126,082 | ||||||||||||||||||||||||||||
Income tax (expense) benefit
|
(18,738 | ) | (4,667 | ) | (1,480 | ) | (24,885 | ) | (49,066 | ) | 11,150 | — | (62,801 | ) | 16,781 | (46,020 | ) | |||||||||||||||||||||||
Net income (loss)
|
$ | 30,569 | 7,615 | 2,415 | 40,599 | 80,052 | (11,395 | ) | — | 109,256 | (29,194 | ) | 80,062 | |||||||||||||||||||||||||||
Additional information:
|
||||||||||||||||||||||||||||||||||||||||
Net income (loss)
|
$ | 30,569 | 7,615 | 2,415 | 40,599 | 80,052 | (11,395 | ) | — | 109,256 | (29,194 | ) | 80,062 | |||||||||||||||||||||||||||
Plus: Restructure expense (a)
|
6,408 | — | — | 6,408 | — | 220 | — | 6,628 | — | 6,628 | ||||||||||||||||||||||||||||||
Less: Net tax effect
|
(2,339 | ) | — | — | (2,339 | ) | — | (80 | ) | — | (2,419 | ) | — | (2,419 | ) | |||||||||||||||||||||||||
Net income (loss), excluding restructure expense
|
$ | 34,638 | 7,615 | 2,415 | 44,668 | 80,052 | (11,255 | ) | — | 113,465 | (29,194 | ) | 84,271 |
Student
|
Tuition
|
|||||||||||||||||||||||
Loan
|
Payment
|
Asset
|
Corporate
|
|||||||||||||||||||||
and
|
Processing
|
Generation
|
Activity
|
|||||||||||||||||||||
Guaranty
|
and Campus
|
Enrollment
|
and
|
and
|
||||||||||||||||||||
Servicing
|
Commerce
|
Services
|
Management
|
Overhead
|
Total
|
|||||||||||||||||||
Three months ended September 30, 2010
|
||||||||||||||||||||||||
Derivative market value and foreign currency adjustments
|
$ | — | — | — | 24,966 | 7,839 | 32,805 | |||||||||||||||||
Amortization of intangible assets
|
2,112 | 1,120 | 2,123 | — | — | 5,355 | ||||||||||||||||||
Compensation related to business combinations
|
— | — | — | — | — | — | ||||||||||||||||||
Variable-rate floor income, net of settlements on derivatives
|
— | — | — | — | — | — | ||||||||||||||||||
Net tax effect (a)
|
(803 | ) | (426 | ) | (807 | ) | (9,487 | ) | (2,978 | ) | (14,501 | ) | ||||||||||||
Total adjustments to GAAP
|
$ | 1,309 | 694 | 1,316 | 15,479 | 4,861 | 23,659 | |||||||||||||||||
Three months ended September 30, 2009
|
||||||||||||||||||||||||
Derivative market value and foreign currency adjustments
|
$ | — | — | — | (2,826 | ) | — | (2,826 | ) | |||||||||||||||
Amortization of intangible assets
|
1,219 | 1,842 | 2,251 | — | — | 5,312 | ||||||||||||||||||
Compensation related to business combinations
|
— | — | — | — | — | — | ||||||||||||||||||
Variable-rate floor income, net of settlements on derivatives
|
— | — | — | — | — | — | ||||||||||||||||||
Net tax effect (a)
|
(464 | ) | (700 | ) | (855 | ) | 1,074 | 86 | (859 | ) | ||||||||||||||
Total adjustments to GAAP
|
$ | 755 | 1,142 | 1,396 | (1,752 | ) | 86 | 1,627 | ||||||||||||||||
Nine months ended September 30, 2010
|
||||||||||||||||||||||||
Derivative market value and foreign currency adjustments
|
$ | — | — | — | 20,955 | 14,976 | 35,931 | |||||||||||||||||
Amortization of intangible assets
|
6,462 | 4,636 | 7,005 | — | — | 18,103 | ||||||||||||||||||
Compensation related to business combinations
|
— | — | — | — | — | — | ||||||||||||||||||
Variable-rate floor income, net of settlements on derivatives
|
— | — | — | — | — | — | ||||||||||||||||||
Net tax effect (a)
|
(2,456 | ) | (1,763 | ) | (2,665 | ) | (7,963 | ) | (5,686 | ) | (20,533 | ) | ||||||||||||
Total adjustments to GAAP
|
$ | 4,006 | 2,873 | 4,340 | 12,992 | 9,290 | 33,501 | |||||||||||||||||
Nine months ended September 30, 2009
|
||||||||||||||||||||||||
Derivative market value and foreign currency adjustments
|
$ | — | — | — | 37,499 | (1,432 | ) | 36,067 | ||||||||||||||||
Amortization of intangible assets
|
3,659 | 5,598 | 7,994 | — | — | 17,251 | ||||||||||||||||||
Compensation related to business combinations
|
— | — | — | — | 159 | 159 | ||||||||||||||||||
Variable-rate floor income, net of settlements on derivatives
|
— | — | — | (7,502 | ) | — | (7,502 | ) | ||||||||||||||||
Net tax effect (a)
|
(1,391 | ) | (2,127 | ) | (3,037 | ) | (11,399 | ) | 1,173 | (16,781 | ) | |||||||||||||
Total adjustments to GAAP
|
$ | 2,268 | 3,471 | 4,957 | 18,598 | (100 | ) | 29,194 |
|
(a)
|
Income taxes are applied based on 38% for the individual operating segments.
|
|
·
|
Origination and servicing of FFELP loans
|
|
·
|
Origination and servicing of non-federally insured student loans
|
|
·
|
Servicing federally-owned student loans for the Department of Education
|
|
·
|
Servicing and support outsourcing for guaranty agencies
|
|
·
|
Student loan servicing software and other information technology products and services
|
|
·
|
$18.4 million of government servicing revenue earned in 2010, growth of number of borrowers to 2.5 million, and growth of loan volume to $21.8 billion under this contract.
|
|
·
|
$ 27.6 million of guaranty servicing revenue earned in 2010 from rehabilitation collections on defaulted loan assets.
|
Company Owned
|
$ | 24,889 | $ | 23,139 | $ | 24,378 | $ | 26,351 | $ | 26,183 | $ | 24,025 | ||||||||||||
% of total
|
70.2 | % | 61.6 | % | 56.7 | % | 55.3 | % | 47.0 | % | 42.6 | % | ||||||||||||
Number of borrowers:
|
||||||||||||||||||||||||
Government
|
||||||||||||||||||||||||
servicing:
|
22,478 | 441,913 | 1,055,896 | 1,530,308 | 2,510,630 | 2,643,398 | ||||||||||||||||||
FFELP
|
||||||||||||||||||||||||
servicing:
|
2,431,612 | 2,311,558 | 2,327,016 | 2,329,150 | 2,227,288 | 1,926,767 |
|
(a)
|
As of September 30, 2010, the Company was servicing $2.1 billion of loans owned by the Company and approximately $140 million of loans for third parties that were sold to the Department in October 2010 pursuant to the Department’s Loan Purchase Commitment Program. The Company retained servicing on these loans and, as of October 31, 2010, these loans are included in the Government Servicing volume in the above table.
|
Three months ended September 30,
|
Nine months ended September 30,
|
|||||||||||||||||||||||||||||||
Change
|
Change
|
|||||||||||||||||||||||||||||||
2010
|
2009
|
$ | % | 2010 | 2009 | $ | % | |||||||||||||||||||||||||
Net interest income
|
$ | 13 | 23 | (10 | ) | (43.5 | ) % | $ | 43 | 102 | (59 | ) | (57.8 | )% | ||||||||||||||||||
Loan and guaranty servicing revenue
|
33,464 | 26,387 | 7,077 | 26.8 | 106,764 | 82,424 | 24,340 | 29.5 | ||||||||||||||||||||||||
Intersegment servicing revenue
|
20,045 | 21,512 | (1,467 | ) | (6.8 | ) | 63,594 | 62,246 | 1,348 | 2.2 | ||||||||||||||||||||||
Software services revenue
|
4,624 | 4,600 | 24 | 0.5 | 14,467 | 16,424 | (1,957 | ) | (11.9 | ) | ||||||||||||||||||||||
Other income
|
— | 137 | (137 | ) | (100.0 | ) | 519 | 498 | 21 | 4.2 | ||||||||||||||||||||||
Total other income
|
58,133 | 52,636 | 5,497 | 10.4 | 185,344 | 161,592 | 23,752 | 14.7 | ||||||||||||||||||||||||
Salaries and benefits
|
22,682 | 20,044 | 2,638 | 13.2 | 69,591 | 63,645 | 5,946 | 9.3 | ||||||||||||||||||||||||
Other expenses
|
18,583 | 14,731 | 3,852 | 26.1 | 55,216 | 45,965 | 9,251 | 20.1 | ||||||||||||||||||||||||
Intersegment expenses
|
1,166 | 1,154 | 12 | 1.0 | 4,158 | 2,777 | 1,381 | 49.7 | ||||||||||||||||||||||||
Total operating expenses
|
42,431 | 35,929 | 6,502 | 18.1 | 128,965 | 112,387 | 16,578 | 14.8 | ||||||||||||||||||||||||
"Base net income" before income taxes and corporate overhead allocation
|
15,715 | 16,730 | (1,015 | ) | (6.1 | ) | 56,422 | 49,307 | 7,115 | 14.4 | ||||||||||||||||||||||
Corporate overhead allocation
|
(1,676 | ) | — | (1,676 | ) | (100.0 | ) | (4,349 | ) | — | (4,349 | ) | (100.0 | ) | ||||||||||||||||||
"Base net income" before income taxes
|
14,039 | 16,730 | (2,691 | ) | (16.1 | ) | 52,073 | 49,307 | 2,766 | 5.6 | ||||||||||||||||||||||
Income tax expense
|
(5,335 | ) | (6,357 | ) | 1,022 | (16.1 | ) | (19,788 | ) | (18,738 | ) | (1,050 | ) | 5.6 | ||||||||||||||||||
"Base net income"
|
$ | 8,704 | 10,373 | (1,669 | ) | (16.1 | ) % | $ | 32,285 | 30,569 | 1,716 | 5.6 | % | |||||||||||||||||||
Additional information:
|
||||||||||||||||||||||||||||||||
"Base net income"
|
$ | 8,704 | 10,373 | (1,669 | ) | (16.1 | ) % | $ | 32,285 | 30,569 | 1,716 | 5.6 | % | |||||||||||||||||||
Restructure expense (included in other expenses above)
|
4,751 | 3,151 | 1,600 | 50.8 | 6,040 | 6,408 | (368 | ) | (5.7 | ) | ||||||||||||||||||||||
Net tax effect
|
(1,805 | ) | (1,197 | ) | (608 | ) | 50.8 | (2,295 | ) | (2,339 | ) | 44 | (1.9 | ) | ||||||||||||||||||
"Base net income," excluding restructure expense
|
$ | 11,650 | 12,327 | (677 | ) | (5.5 | ) % | $ | 36,030 | 34,638 | 1,392 | 4.0 | % | |||||||||||||||||||
Before Tax Operating Margin (a)
|
27.0 | % | 31.8 | % | 30.4 | % | 30.5 | % | ||||||||||||||||||||||||
Before Tax Operating Margin (b)
|
34.3 | % | 38.3 | % | 32.4 | % | 33.8 | % |
|
(a)
|
Excludes corporate overhead allocation.
|
|
(b)
|
Excludes corporate overhead allocation, restructure expense, and the revenue and collection fees paid related to rehabilitation collections
|
Three months ended September 30,
|
||||||||||||||||||||||||
2010
|
2009
|
|||||||||||||||||||||||
Origination
|
Servicing
|
Total
|
Origination
|
Servicing
|
Total
|
|||||||||||||||||||
revenue
|
revenue
|
revenue
|
revenue
|
revenue
|
revenue
|
|||||||||||||||||||
FFELP Servicing (a)
|
$ | — | 9,492 | 9,492 | $ | 857 | 13,556 | 14,413 | ||||||||||||||||
Private Servicing
|
742 | 1,921 | 2,663 | 514 | 1,760 | 2,274 | ||||||||||||||||||
Government Servicing (b)
|
— | 8,689 | 8,689 | — | 31 | 31 | ||||||||||||||||||
Guaranty Servicing (c)
|
12 | 12,608 | 12,620 | 82 | 9,587 | 9,669 | ||||||||||||||||||
Loan and guaranty servicing revenue
|
$ | 754 | 32,710 | 33,464 | $ | 1,453 | 24,934 | 26,387 |
|
a)
|
FFELP origination revenue decreased in 2010 compared with 2009 due to legislative changes and market disruptions causing lenders to exit the FFELP marketplace. In addition, effective July 1, 2010, the Reconciliation Act of 2010 prohibits new loan originations under the FFEL Program. FFELP servicing revenue decreased in 2010 due to the loss of servicing volume from third party customers as a result of these customers selling their portfolios to the Company and/or the Department under the Purchase Program.
|
|
b)
|
The Company began servicing loans for the Department in September 2009.
|
|
c)
|
Guaranty servicing revenue increased in 2010 due to $5.3 million in revenue earned from rehabilitation collections on defaulted loan assets in the third quarter of 2010. In the third quarter of 2009, revenue from rehabilitation collections on defaulted loans was $0.6 million.
|
Nine months ended September 30,
|
||||||||||||||||||||||||
2010
|
2009
|
|||||||||||||||||||||||
Origination revenue
|
Servicing revenue
|
Total revenue
|
Origination revenue
|
Servicing revenue
|
Total revenue
|
|||||||||||||||||||
FFELP Servicing (a)
|
$ | 254 | 30,712 | 30,966 | $ | 1,632 | 42,877 | 44,509 | ||||||||||||||||
Private Servicing
|
1,046 | 5,776 | 6,822 | 618 | 5,523 | 6,141 | ||||||||||||||||||
Government Servicing (b)
|
— | 18,376 | 18,376 | — | 31 | 31 | ||||||||||||||||||
Guaranty Servicing (c)
|
131 | 50,469 | 50,600 | 296 | 31,447 | 31,743 | ||||||||||||||||||
Loan and guaranty servicing revenue
|
$ | 1,431 | 105,333 | 106,764 | $ | 2,546 | 79,878 | 82,424 |
|
(a)
|
FFELP origination revenue decreased in 2010 compared with 2009 due to legislative changes and market disruptions causing lenders to exit the FFELP marketplace. In addition, effective July 1, 2010, the Reconciliation Act of 2010 prohibits new loan originations under the FFEL Program. FFELP servicing revenue decreased in 2010 due to the loss of servicing volume from third party customers as a result of these customers selling their portfolios to the Company and/or the Department under the Purchase Program.
|
|
(b)
|
The Company began servicing loans for the Department in September 2009.
|
|
(c)
|
Guaranty servicing revenue increased in 2010 due to $27.6 million in revenue earned from rehabilitation collections on defaulted loan assets in 2010. In 2009, revenue from rehabilitation collections on defaulted loans was $6.9 million.
|
|
·
|
$4.3 million (10.7%) increase in revenue from 2009 as a result of an increase in the number of managed tuition payment plans and campus commerce transactions processed.
|
Three months ended September 30,
|
Nine months ended September 30,
|
|||||||||||||||||||||||||||||||
Change
|
Change
|
|||||||||||||||||||||||||||||||
2010
|
2009
|
$ | % | 2010 | 2009 | $ | % | |||||||||||||||||||||||||
Net interest income
|
$ | 12 | 16 | (4 | ) | (25.0 | )% | $ | 24 | 57 | (33 | ) | (57.9 | )% | ||||||||||||||||||
Tuition payment processing and campus commerce revenue
|
14,527 | 12,987 | 1,540 | 11.9 | 44,704 | 40,373 | 4,331 | 10.7 | ||||||||||||||||||||||||
Salaries and benefits
|
6,652 | 6,399 | 253 | 4.0 | 19,864 | 19,346 | 518 | 2.7 | ||||||||||||||||||||||||
Other expenses
|
2,383 | 2,265 | 118 | 5.2 | 7,435 | 7,012 | 423 | 6.0 | ||||||||||||||||||||||||
Intersegment expenses
|
992 | 608 | 384 | 63.2 | 2,645 | 1,790 | 855 | 47.8 | ||||||||||||||||||||||||
Total operating expenses
|
10,027 | 9,272 | 755 | 8.1 | 29,944 | 28,148 | 1,796 | 6.4 | ||||||||||||||||||||||||
"Base net income" before income taxes and corporate overhead allocation
|
4,512 | 3,731 | 781 | 20.9 | 14,784 | 12,282 | 2,502 | 20.4 | ||||||||||||||||||||||||
Corporate overhead allocation
|
(559 | ) | — | (559 | ) | (100.0 | ) | (1,450 | ) | — | (1,450 | ) | (100.0 | ) | ||||||||||||||||||
"Base net income" before income taxes
|
3,953 | 3,731 | 222 | 6.0 | 13,334 | 12,282 | 1,052 | 8.6 | ||||||||||||||||||||||||
Income tax expense
|
(1,502 | ) | (1,418 | ) | (84 | ) | 5.9 | (5,068 | ) | (4,667 | ) | (401 | ) | 8.6 | ||||||||||||||||||
"Base net income"
|
$ | 2,451 | 2,313 | 138 | 6.0 | % | $ | 8,266 | 7,615 | 651 | 8.5 | % | ||||||||||||||||||||
Before Tax Operating Margin (a)
|
31.0 | % | 28.7 | % | 33.1 | % | 30.4 | % |
|
·
|
$16.9 million (19.2%) increase in revenue as a result of an increase in interactive marketing services volume.
|
|
·
|
$3.1 million increase in operating expenses due to accelerating the amortization of student list costs in 2010.
|
Three months ended September 30,
|
Nine months ended September 30,
|
|||||||||||||||||||||||||||||||
Change
|
Change
|
|||||||||||||||||||||||||||||||
2010
|
2009
|
$ | % | 2010 | 2009 | $ | % | |||||||||||||||||||||||||
Enrollment services revenue
|
$ | 36,439 | 30,670 | 5,769 | 18.8 | % | $ | 105,113 | 88,188 | 16,925 | 19.2 | % | ||||||||||||||||||||
Salaries and benefits
|
6,142 | 5,337 | 805 | 15.1 | 18,660 | 17,295 | 1,365 | 7.9 | ||||||||||||||||||||||||
Cost to provide enrollment services
|
23,709 | 20,323 | 3,386 | 16.7 | 69,845 | 56,208 | 13,637 | 24.3 | ||||||||||||||||||||||||
Other expenses
|
4,180 | 3,266 | 914 | 28.0 | 13,307 | 9,602 | 3,705 | 38.6 | ||||||||||||||||||||||||
Intersegment expenses
|
705 | 411 | 294 | 71.5 | 1,779 | 1,188 | 591 | 49.7 | ||||||||||||||||||||||||
Total operating expenses
|
34,736 | 29,337 | 5,399 | 18.4 | 103,591 | 84,293 | 19,298 | 22.9 | ||||||||||||||||||||||||
"Base net income" before income taxes and corporate overhead allocation
|
1,703 | 1,333 | 370 | 27.8 | 1,522 | 3,895 | (2,373 | ) | (60.9 | ) | ||||||||||||||||||||||
Corporate overhead allocation
|
(559 | ) | — | (559 | ) | (100.0 | ) | (1,450 | ) | — | (1,450 | ) | (100.0 | ) | ||||||||||||||||||
"Base net income" before income taxes
|
1,144 | 1,333 | (189 | ) | (14.2 | ) | 72 | 3,895 | (3,823 | ) | (98.2 | ) | ||||||||||||||||||||
Income tax expense
|
(435 | ) | (507 | ) | 72 | (14.2 | ) | (27 | ) | (1,480 | ) | 1,453 | (98.2 | ) | ||||||||||||||||||
"Base net income"
|
$ | 709 | 826 | (117 | ) | (14.2 | ) % | $ | 45 | 2,415 | (2,370 | ) | (98.1 | ) % | ||||||||||||||||||
Before Tax Operating Margin (a)
|
4.7 | % | 4.3 | % | 1.4 | % | 4.4 | % | ||||||||||||||||||||||||
Before Tax Operating Margin (b)
|
8.6 | % | 6.8 | % | 6.4 | % | 6.8 | % |
Three months ended September 30, 2010
|
||||||||||||||||||||
Resource
|
||||||||||||||||||||
centers
|
||||||||||||||||||||
Interactive
|
Publishing
|
and list
|
||||||||||||||||||
marketing (b)
|
services (c)
|
Subtotal
|
marketing (d)
|
Total
|
||||||||||||||||
Enrollment services revenue
|
$ | 30,135 | 3,617 | 33,752 | 2,687 | 36,439 | ||||||||||||||
Cost to provide enrollment services
|
22,827 | 882 | 23,709 | |||||||||||||||||
Gross profit
|
$ | 7,308 | 2,735 | 10,043 | ||||||||||||||||
Gross profit %
|
24.3 | % | 75.6 | % | 29.8 | % |
Three months ended September 30, 2009 (a)
|
||||||||||||||||||||
Resource
|
||||||||||||||||||||
centers
|
||||||||||||||||||||
Interactive
|
Publishing
|
and list
|
||||||||||||||||||
marketing (b)
|
services (c)
|
Subtotal
|
marketing (d)
|
Total
|
||||||||||||||||
Enrollment services revenue
|
$ | 24,778 | 3,437 | 28,215 | 2,455 | 30,670 | ||||||||||||||
Cost to provide enrollment services
|
19,141 | 1,182 | 20,323 | |||||||||||||||||
Gross profit
|
$ | 5,637 | 2,255 | 7,892 | ||||||||||||||||
Gross profit %
|
22.8 | % | 65.6 | % | 28.0 | % | ||||||||||||||
Nine months ended September 30, 2010
|
||||||||||||||||||||
Resource
|
||||||||||||||||||||
centers
|
||||||||||||||||||||
Interactive
|
Publishing
|
and list
|
||||||||||||||||||
marketing (b)
|
services (c)
|
Subtotal
|
marketing (d)
|
Total
|
||||||||||||||||
Enrollment services revenue
|
$ | 88,409 | 7,803 | 96,212 | 8,901 | 105,113 | ||||||||||||||
Cost to provide enrollment services
|
67,464 | 2,381 | 69,845 | |||||||||||||||||
Gross profit
|
$ | 20,945 | 5,422 | 26,367 | ||||||||||||||||
Gross profit %
|
23.7 | % | 69.5 | % | 27.4 | % | ||||||||||||||
Nine months ended September 30, 2009 (a)
|
||||||||||||||||||||
Resource
|
||||||||||||||||||||
centers
|
||||||||||||||||||||
Interactive
|
Publishing
|
and list
|
||||||||||||||||||
marketing (b)
|
services (c)
|
Subtotal
|
marketing (d)
|
Total
|
||||||||||||||||
Enrollment services revenue
|
$ | 71,024 | 8,885 | 79,909 | 8,279 | 88,188 | ||||||||||||||
Cost to provide enrollment services
|
52,891 | 3,317 | 56,208 | |||||||||||||||||
Gross profit
|
$ | 18,133 | 5,568 | 23,701 | ||||||||||||||||
Gross profit %
|
25.5 | % | 62.7 | % | 29.7 | % |
|
(a)
|
Certain amounts from 2009 have been reclassified to conform to the current period presentation.
|
|
(b)
|
Interactive marketing revenue increased $5.4 million (21.6%) and $17.4 million (24.5%) for the three and nine months ended September 30, 2010 compared with the same periods in 2009 as a result of an increase in interactive marketing services volume. The gross profit margin for the three months ended September 30, 2010 compared to 2009 increased as a result of an increase in revenue for products with a higher gross profit margin. This increase in gross profit for the quarter was offset by a decrease due to more competitive pricing, leading to a decrease in the gross profit margin for the nine months ended September 30, 2010 compared to 2009.
|
|
(c)
|
Publishing services revenue increased $0.2 million (5.2%) and decreased $1.1 million (12.2%) for the three and nine months ended September 30, 2010 compared with the same periods in 2009. The increase for the quarter is due to an increase in the quantity of products sold. This increase was offset by a decrease due to competition related to online delivery of similar products, which lead to a decrease in revenue year over year. The gross profit margin for publishing and editing services increased as a result of a shift in the mix of products sold.
|
|
(d)
|
Resource centers and list marketing revenue increased $0.2 million (9.5%) and $0.6 million (7.5%) for the three and nine months ended September 30, 2010 compared with the same periods in 2009. Resource centers and list marketing revenue increased due to an increase in contracts for new customers and pricing increases for existing customers, offset by a decrease in list sales.
|
|
·
|
Continued recognition of significant fixed rate floor income of $100.5 million (net of settlement payments on derivatives used to hedge student loans earning floor income of $12.2 million) due to historically low interest rates.
|
|
·
|
A gain of $23.9 million in 2010 from the purchase of $477.7 million of the Company’s asset-backed securities.
|
|
·
|
Improved student loan spread compared to 2009 as a result of significant tightening of the CP/LIBOR spread.
|
|
·
|
The purchase of $2.5 billion of FFELP student loans during the first nine months of 2010 from various third-parties.
|
As of September 30, 2010
|
As of December 31, 2009
|
|||||||||||
Held for investment
|
Held for sale (a)
|
Held for investment
|
||||||||||
Federally insured loans:
|
||||||||||||
Stafford and other
|
$ | 8,108,425 | 2,081,827 | 7,620,792 | ||||||||
Consolidation
|
16,023,820 | — | 15,851,761 | |||||||||
Total
|
24,132,245 | 2,081,827 | 23,472,553 | |||||||||
Non-federally insured loans
|
126,923 | — | 163,321 | |||||||||
24,259,168 | 2,081,827 | 23,635,874 | ||||||||||
Unamortized loan discount/premiums and deferred origination costs, net
|
227,206 | 27,613 | 341,970 | |||||||||
Allowance for loan losses – federally insured loans
|
(32,962 | ) | — | (30,102 | ) | |||||||
Allowance for loan losses – non-federally insured loans
|
(17,250 | ) | — | (20,785 | ) | |||||||
$ | 24,436,162 | 2,109,440 | 23,926,957 |
|
(a)
|
2009-2010 Academic Year loans were eligible to be participated and sold to the Department under the Department’s Participation and Purchase Programs. As of September 30, 2010, these loans were classified as held for sale. During October 2010, the Company sold these loans to the Department under the Department’s Purchase Program.
|
Three months ended September 30,
|
Nine months ended September 30,
|
|||||||||||||||
2010
|
2009
|
2010
|
2009
|
|||||||||||||
Beginning balance
|
$ | 26,515,788 | 25,299,539 | 23,635,874 | 25,061,049 | |||||||||||
Direct channel - Stafford/PLUS loan originations
|
42,074 | 496,720 | 831,048 | 1,295,156 | ||||||||||||
Branding partner channel
|
48,183 | 70,217 | 587,703 | 665,788 | ||||||||||||
Forward flow channel
|
3,934 | 75,260 | 111,240 | 126,304 | ||||||||||||
Spot purchases
|
30,423 | 19,257 | 2,545,284 | 39,627 | ||||||||||||
Total channel acquisitions
|
124,614 | 661,454 | 4,075,275 | 2,126,875 | ||||||||||||
Repayments, claims, capitalized interest, participations, and other
|
(105,591 | ) | (261,922 | ) | (906,400 | ) | (1,198,890 | ) | ||||||||
Consolidation loans lost to external parties
|
(187,661 | ) | (149,984 | ) | (436,563 | ) | (322,573 | ) | ||||||||
Loans sold
|
(6,155 | ) | (479,601 | ) | (27,191 | ) | (596,975 | ) | ||||||||
Ending balance
|
$ | 26,340,995 | 25,069,486 | 26,340,995 | 25,069,486 |
Three months ended September 30,
|
Nine months ended September 30,
|
|||||||||||||||
2010
|
2009
|
2010
|
2009
|
|||||||||||||
Balance at beginning of period
|
$ | 50,797 | 50,000 | 50,887 | 50,922 | |||||||||||
Provision for loan losses:
|
||||||||||||||||
Federally insured loans
|
4,500 | 4,500 | 13,700 | 15,000 | ||||||||||||
Non-federally insured loans
|
1,000 | 3,000 | 3,000 | 8,000 | ||||||||||||
Total provision for loan losses
|
5,500 | 7,500 | 16,700 | 23,000 | ||||||||||||
Charge-offs, net of recoveries:
|
||||||||||||||||
Federally insured loans
|
(4,510 | ) | (3,578 | ) | (13,549 | ) | (11,042 | ) | ||||||||
Non-federally insured loans
|
(1,575 | ) | (802 | ) | (4,756 | ) | (2,440 | ) | ||||||||
Net charge-offs
|
(6,085 | ) | (4,380 | ) | (18,305 | ) | (13,482 | ) | ||||||||
Purchase (sale) of federally insured loans
|
— | — | 2,710 | (520 | ) | |||||||||||
Purchase (sale) of non-federally insured loans
|
— | (3,000 | ) | (1,780 | ) | (9,800 | ) | |||||||||
Balance at end of period
|
$ | 50,212 | 50,120 | 50,212 | 50,120 | |||||||||||
Allocation of the allowance for loan losses:
|
||||||||||||||||
Federally insured loans
|
$ | 32,962 | 29,015 | 32,962 | 29,015 | |||||||||||
Non-federally insured loans
|
17,250 | 21,105 | 17,250 | 21,105 | ||||||||||||
Total allowance for loan losses
|
$ | 50,212 | 50,120 | 50,212 | 50,120 | |||||||||||
As of September 30,
|
||||||||||||||||
2010 | 2009 | |||||||||||||||
Allowance for federally insured loans as a percentage of
|
||||||||||||||||
such loans (excluding loans held-for-sale)
|
0.14 | % | 0.12 | % | ||||||||||||
Allowance for non-federally insured loans as a percentage of such loans
|
13.59 | % | 12.63 | % |
Three months ended September 30,
|
Nine months ended September 30,
|
|||||||||||||||
2010
|
2009
|
2010
|
2009
|
|||||||||||||
Beginning balance
|
$ | 12,600 | 7,600 | 10,600 | — | |||||||||||
Transfer from allowance for loan losses
|
— | 3,000 | 2,000 | 9,800 | ||||||||||||
Reserve for repurchase of delinquent loans (a)
|
— | — | — | 800 | ||||||||||||
Ending balance
|
$ | 12,600 | 10,600 | 12,600 | 10,600 |
|
(a)
|
The reserve for repurchase of delinquent loans is included in “other” under other operating expenses in the consolidated statements of operations.
|
As of September 30, 2010
|
As of December 31, 2009
|
|||||||||||||||
Dollars
|
Percent
|
Dollars
|
Percent
|
|||||||||||||
Federally Insured Loans:
|
||||||||||||||||
Loans in-school/grace/deferment (a)
|
$ | 7,035,714 | $ | 5,783,648 | ||||||||||||
Loans in forebearance (b)
|
3,340,975 | 2,495,672 | ||||||||||||||
Loans in repayment status:
|
||||||||||||||||
Loans current
|
13,832,782 | 87.3 | % | 13,038,428 | 85.8 | % | ||||||||||
Loans delinquent 31-60 days (c)
|
578,579 | 3.7 | 691,232 | 4.5 | ||||||||||||
Loans delinquent 61-90 days (c)
|
260,337 | 1.6 | 314,265 | 2.1 | ||||||||||||
Loans delinquent 91 days or greater (d)
|
1,165,685 | 7.4 | 1,149,308 | 7.6 | ||||||||||||
Total loans in repayment
|
15,837,383 | 100.0 | % | 15,193,233 | 100.0 | % | ||||||||||
Total federally insured loans
|
$ | 26,214,072 | $ | 23,472,553 | ||||||||||||
Non-Federally Insured Loans:
|
||||||||||||||||
Loans in-school/grace/deferment (a)
|
$ | 22,184 | $ | 34,815 | ||||||||||||
Loans in forebearance (b)
|
1,174 | 1,919 | ||||||||||||||
Loans in repayment status:
|
||||||||||||||||
Loans current
|
96,954 | 93.5 | % | 118,761 | 93.8 | % | ||||||||||
Loans delinquent 31-60 days (c)
|
2,127 | 2.1 | 3,023 | 2.4 | ||||||||||||
Loans delinquent 61-90 days (c)
|
1,220 | 1.2 | 1,559 | 1.2 | ||||||||||||
Loans delinquent 91 days or greater (d)
|
3,264 | 3.2 | 3,244 | 2.6 | ||||||||||||
Total loans in repayment
|
103,565 | 100.0 | % | 126,587 | 100.0 | % | ||||||||||
Total non-federally insured loans
|
$ | 126,923 | $ | 163,321 |
|
(a)
|
Loans for borrowers who still may be attending school or engaging in other permitted educational activities and are not yet required to make payments on the loans,
e.g.
, residency periods for medical students or a grace period for bar exam preparation for law students.
|
|
(b)
|
Loans for borrowers who have temporarily ceased making full payments due to hardship or other factors, according to a schedule approved by the servicer consistent with the established loan program servicing procedures and policies.
|
|
(c)
|
The period of delinquency is based on the number of days scheduled payments are contractually past due and relate to repayment loans, that is, receivables not charged off, and not in school, grace, deferment, or forbearance.
|
|
(d)
|
Loans delinquent 91 days or greater include loans in claim status, which are loans that have gone into default and have been submitted to the guaranty agency for FFELP loans, or, if applicable, the insurer for non-federally insured loans, to process the claim for payment.
|
Three months ended
|
Nine months endedd
|
|||||||||||||||||||
September 30,
|
June 30,
|
September 30,
|
September 30,
|
September 30,
|
||||||||||||||||
2010
|
2010
|
2009
|
2010
|
2009
|
||||||||||||||||
Variable student loan yield
|
2.63 | % | 2.72 | % | 2.64 | % | 2.64 | % | 2.95 | |||||||||||
Consolidation rebate fees
|
(0.64 | ) | (0.67 | ) | (0.68 | ) | (0.68 | ) | (0.70 | ) | ||||||||||
Premium/discount and deferred origination costs amortization
|
(0.18 | ) | (0.19 | ) | (0.31 | ) | (0.21 | ) | (0.29 | ) | ||||||||||
Variable student loan net yield
|
1.81 | 1.86 | 1.65 | 1.75 | 1.96 | |||||||||||||||
Student loan cost of funds - interest expense
|
(0.94 | ) | (0.81 | ) | (1.07 | ) | (0.83 | ) | (1.58 | ) | ||||||||||
Student loan cost of funds - derivative settlements
|
0.03 | 0.01 | 0.08 | 0.02 | 0.20 | |||||||||||||||
Variable student loan spread
|
0.90 | 1.06 | 0.66 | 0.94 | 0.58 | |||||||||||||||
Variable rate floor income,
net of settlements on derivatives
|
— | — | — | — | (0.04 | ) | ||||||||||||||
Fixed rate floor income,
net of settlements on derivatives
|
0.51 | 0.48 | 0.61 | 0.53 | 0.56 | |||||||||||||||
Core student loan spread
|
1.41 | % | 1.54 | % | 1.27 | % | 1.47 | % | 1.10 | |||||||||||
Average balance of student loans
|
$ | 26,548,957 | 25,931,220 | 25,056,836 | 25,520,327 | 25,148,707 | ||||||||||||||
Average balance of debt outstanding
|
26,636,184 | 26,124,574 | 25,677,213 | 25,661,594 | 25,704,825 |
|
(a)
|
The interest earned on the majority of the Company’s FFELP student loan assets is indexed to the three-month commercial paper index. The Company funds the majority of its assets with three-month LIBOR indexed floating rate securities. The relationship between these two indexes has a significant impact on student loan spread. This table shows the difference between the average three-month LIBOR and commercial paper indexes by quarter.
|
|
·
|
The tightening/widening of the CP/LIBOR spread increases/decreases variable student loan spread. Historically, the movement of the various interest rate indices received on the Company’s student loan assets, primarily three-month commercial paper, and paid on the debt to fund such loans, primarily LIBOR, was highly correlated. The short-term movement of these indices was dislocated beginning in August 2007 which negatively impacted the Company’s net interest income during the first six months of 2009. Beginning in the third quarter of 2009, the CP/LIBOR spread began to tighten to more historical levels, as shown in the graph above, which has had a positive impact on spread. In the third quarter of 2010, the CP/LIBOR spread widened, resulting in a decrease to spread.
|
|
·
|
A decrease in the amortization of loan premiums/discounts and deferred origination costs as a result of loans purchased at a discount, which has reduced the net costs being amortized.
|
Three months ended September 30,
|
Nine months ended September 30,
|
|||||||||||||||
2010
|
2009
|
2010
|
2009
|
|||||||||||||
Fixed rate floor income, gross
|
$ | 38,263 | 39,284 | 112,731 | 106,623 | |||||||||||
Derivative settlements (a)
|
(4,040 | ) | (436 | ) | (12,183 | ) | (436 | ) | ||||||||
Fixed rate floor income, net
|
$ | 34,223 | 38,848 | 100,548 | 106,187 | |||||||||||
Fixed rate floor income
contribution to spread, net
|
0.51 | % | 0.61 | % | 0.53 | % | 0.56 | % |
|
(a)
|
Includes settlement payments on derivatives used to hedge student loans earning fixed rate floor income.
|
Three months ended September 30,
|
Nine months ended September 30,
|
|||||||||||||||||||||||||||||||
Change
|
Change
|
|||||||||||||||||||||||||||||||
2010
|
2009
|
$ | % | 2010 | 2009 | $ | % | |||||||||||||||||||||||||
Net interest income after provision
|
||||||||||||||||||||||||||||||||
for loan losses
|
$ | 89,950 | 66,896 | 23,054 | 34.5 | % | $ | 269,952 | 143,284 | 126,668 | 88.4 | % | ||||||||||||||||||||
Other income
|
4,710 | 4,104 | 606 | 14.8 | 14,114 | 12,974 | 1,140 | 8.8 | ||||||||||||||||||||||||
Gain (loss) on sale of loans and debt repurchases, net
|
4,963 | 14,643 | (9,680 | ) | (66.1 | ) | 23,899 | 14,263 | 9,636 | 67.6 | ||||||||||||||||||||||
Derivative settlements, net
|
(2,131 | ) | 4,914 | (7,045 | ) | (143.4 | ) | (7,931 | ) | 38,807 | (46,738 | ) | (120.4 | ) | ||||||||||||||||||
Total other income
|
7,542 | 23,661 | (16,119 | ) | (68.1 | ) | 30,082 | 66,044 | (35,962 | ) | (54.5 | ) | ||||||||||||||||||||
Salaries and benefits
|
1,054 | 1,693 | (639 | ) | (37.7 | ) | 3,698 | 5,203 | (1,505 | ) | (28.9 | ) | ||||||||||||||||||||
Other expenses
|
2,937 | 4,801 | (1,864 | ) | (38.8 | ) | 10,150 | 15,635 | (5,485 | ) | (35.1 | ) | ||||||||||||||||||||
Intersegment expenses
|
20,295 | 20,764 | (469 | ) | (2.3 | ) | 63,011 | 59,372 | 3,639 | 6.1 | ||||||||||||||||||||||
Total operating expenses
|
24,286 | 27,258 | (2,972 | ) | (10.9 | ) | 76,859 | 80,210 | (3,351 | ) | (4.2 | ) | ||||||||||||||||||||
"Base net income" before income taxes
and corporate overhead allocation
|
73,206 | 63,299 | 9,907 | 15.7 | 223,175 | 129,118 | 94,057 | 72.8 | ||||||||||||||||||||||||
Corporate overhead allocation
|
(2,793 | ) | — | (2,793 | ) | (100.0 | ) | (7,247 | ) | — | (7,247 | ) | (100.0 | ) | ||||||||||||||||||
"Base net income" before income taxes
|
70,413 | 63,299 | 7,114 | 11.2 | 215,928 | 129,118 | 86,810 | 67.2 | ||||||||||||||||||||||||
Income tax expense
|
(26,757 | ) | (24,054 | ) | (2,703 | ) | 11.2 | (82,053 | ) | (49,066 | ) | (32,987 | ) | 67.2 | ||||||||||||||||||
"Base net income"
|
$ | 43,656 | 39,245 | 4,411 | 11.2 | % | $ | 133,875 | 80,052 | 53,823 | 67.2 | % |
Three months ended September 30,
|
Nine months ended September 30,
|
|||||||||||||||||||||||||||||||
Change
|
Change
|
|||||||||||||||||||||||||||||||
2010
|
2009
|
$ | % | 2010 | 2009 | $ | % | |||||||||||||||||||||||||
Student loan interest, net of settlements
on derivatives (a)
|
$ | 177,847 | 172,044 | 5,803 | 3.4 | % | $ | 510,336 | 586,173 | (75,837 | ) | (12.9 | ) % | |||||||||||||||||||
Consolidation rebate fees (b)
|
(42,993 | ) | (43,191 | ) | 198 | (0.5 | ) | (128,658 | ) | (131,496 | ) | 2,838 | (2.2 | ) | ||||||||||||||||||
Amortization of loan premiums/discounts and
deferred origination costs (c)
|
(11,921 | ) | (19,532 | ) | 7,611 | (39.0 | ) | (40,550 | ) | (54,972 | ) | 14,422 | (26.2 | ) | ||||||||||||||||||
Interest on bonds and notes payable (d)
|
(63,062 | ) | (69,572 | ) | 6,510 | (9.4 | ) | (160,922 | ) | (305,522 | ) | 144,600 | (47.3 | ) | ||||||||||||||||||
Student loan interest margin, net of
settlements on derivatives
|
59,871 | 39,749 | 20,122 | 50.6 | 180,206 | 94,183 | 86,023 | 91.3 | ||||||||||||||||||||||||
Fixed rate floor income, net of settlements
on derivatives (e)
|
34,223 | 38,848 | (4,625 | ) | (11.9 | ) | 100,548 | 106,187 | (5,639 | ) | (5.3 | ) | ||||||||||||||||||||
Investment interest (f)
|
465 | 1,055 | (590 | ) | (55.9 | ) | 1,107 | 6,045 | (4,938 | ) | (81.7 | ) | ||||||||||||||||||||
Intercompany interest
|
(1,240 | ) | (342 | ) | (898 | ) | 262.6 | (3,140 | ) | (1,324 | ) | (1,816 | ) | 137.2 | ||||||||||||||||||
Provision for loan losses (g)
|
(5,500 | ) | (7,500 | ) | 2,000 | (26.7 | ) | (16,700 | ) | (23,000 | ) | 6,300 | (27.4 | ) | ||||||||||||||||||
Net interest income after provision for loan
losses (net of settlements on derivatives (h) )
|
$ | 87,819 | 71,810 | 16,009 | 22.3 | % | $ | 262,021 | 182,091 | 79,930 | 43.9 | % |
|
(a)
|
Student loan interest, net of settlements on derivatives, increased as a result of an increase in the average student loan portfolio of $1.5 billion (6.0%) for the three months ended September 30, 2010 compared to the same period in 2009. This increase was offset by a decrease in the yield earned on student loans, net of settlements on derivatives, to 2.66% for the three months ended September 30, 2010, from 2.72% compared to the same period in 2009.
|
|
(b)
|
Consolidation rebate fees decreased due to a decrease in the average consolidation loan portfolio for which these fees are paid in 2010, compared with the same periods in 2009.
|
|
(c)
|
The amortization of loan premiums/discounts and deferred origination costs decreased as a result of loans purchased at a discount which has reduced the net costs being amortized.
|
|
(d)
|
Interest expense decreased as a result of a decrease in interest rates on the Company’s variable rate debt which lowered the Company’s cost of funds (excluding net derivative settlements) to 0.94% and 0.83% for the three and nine months ended September 30, 2010, respectively, compared with 1.07% and 1.58 % for the same periods in 2009.
|
|
(e)
|
Depending on the type of loan and when it was originated, the borrower rate on student loans is either fixed to term or is reset to an annual rate each July 1. As a result, for loans where the borrower rate is fixed to term, the Company may earn floor income for an extended period of time, which the Company refers to as fixed rate floor income. A summary of fixed rate floor income follows.
|
|
(f)
|
Investment income decreased as a result of lower interest rates earned on cash held and a decrease in average cash held for the three and nine months ended September 30, 2010 compared with the same periods in 2009.
|
|
(g)
|
The provision for loan losses represents the periodic expense of maintaining an allowance sufficient to absorb losses inherent in the Company's portfolio of loans. The provision for loan losses recognized by the Company was larger during the three and nine months ended September 30, 2009 compared with the same periods in 2010, primarily due to the provision related to the Company's non-federally insured student loan portfolio. During 2009, the Company increased its allowance for non-federally insured loans due to management's projected performance of the portfolio in light of economic conditions. As of September 30, 2010, the dollar amount of the Company's non-federally insured student loan portfolio, including those loans in repayment and loans delinquent, decreased from the same period a year ago. These decreases, as well as continued aging of the portfolio, resulted in less provision expense recognized by the Company during 2010 as compared to 2009 related to the Company's non-federally insured portfolio.
|
|
(h)
|
The Company maintains an overall risk management strategy that incorporates the use of derivative instruments to reduce the economic effect of interest rate volatility. Management has structured the majority of the Company’s derivative transactions with the intent that each is economically effective; however, the Company’s derivative instruments do not qualify for hedge accounting. Derivative settlements for each applicable period should be evaluated with the Company’s net interest income.
|
Three months ended September 30,
|
Nine months ended September 30,
|
|||||||||||||||
2010
|
2009
|
2010
|
2009
|
|||||||||||||
Borrower late fee income
|
$ | 3,133 | 2,859 | 9,370 | 8,648 | |||||||||||
Other
|
1,577 | 1,245 | 4,744 | 4,326 | ||||||||||||
Other income
|
$ | 4,710 | 4,104 | 14,114 | 12,974 |
Three months ended September 30,
|
Nine months ended September 30,
|
|||||||||||||||
2010
|
2009
|
2010
|
2009
|
|||||||||||||
Gain (loss) on sale of loans, net (a)
|
$ | — | 8,788 | — | 8,386 | |||||||||||
Gain on debt repurchases - asset-backed securities
|
4,963 | 5,855 | 23,899 | 5,877 | ||||||||||||
Gain (loss) on sale of loans and debt repurchases, net
|
$ | 4,963 | 14,643 | 23,899 | 14,263 |
|
(a)
|
Gain (loss) on sale of loans includes a gain of $9.7 million related to the sale of $427.7 million of student loans to the Department under the Purchase Program during the three months ended September 30, 2009.
|
Carrying
|
Interest rate
|
|||||||
amount
|
range
|
Final maturity
|
||||||
Asset Generation and Management:
|
||||||||
Bonds and notes issued in asset-backed securitizations
|
$ | 21,521,537 | 0.23% - 6.90% |
5/1/11 - 7/27/48
|
||||
Department of Education Participation
|
2,049,227 | 0.91% |
10/15/10
|
|||||
FFELP warehouse facility
|
29,976 | 0.28% - 0.41% |
7/29/13
|
|||||
Department of Education Conduit
|
2,799,180 | 0.37% |
5/8/14
|
|||||
Related party debt
|
111,675 | 0.73% |
5/20/11
|
|||||
Other borrowings
|
24,838 | 0.26% - 5.10% |
11/14/10 - 11/1/15
|
|||||
26,536,433 | ||||||||
Unsecured Corporate Debt:
|
||||||||
Unsecured line of credit
|
691,500 | 0.79% |
5/8/12
|
|||||
Junior Subordinated Hybrid securities
|
163,255 | 7.40% |
9/15/61
|
|||||
854,755 | ||||||||
$ | 27,391,188 |
·
|
Satisfy unsecured debt obligations, specifically its unsecured line of credit
|
·
|
Satisfy debt obligations secured by student loan assets and related collateral
|
Balance outstanding
|
Balance outstanding
|
|||||||
as of September 30, 2010
|
as of October 31, 2010
|
|||||||
Unsecured Corporate Debt:
|
||||||||
Unsecured line of credit - due May 2012
|
$ | 691,500 | 691,500 |
As of September 30, 2010
|
As of October 31, 2010 (c)
|
|||||||
Sources of primary liquidity:
|
||||||||
Cash and cash equivalents
|
$ | 316,361 | 335,000 | (d) | ||||
Investments - trading securities
|
33,082 | 31,000 | ||||||
Unencumbered FFELP student loan assets
|
1,877 | 1,745 | ||||||
Unencumbered private student loan assets
|
126,923 | 120,575 | ||||||
Asset-backed security investments - Class B subordinated notes (a)
|
77,000 | 77,000 | ||||||
Asset-backed security investments (b)
|
207,700 | 315,500 | ||||||
Total sources of primary liquidity
|
$ | 762,943 | 880,820 |
|
(a)
|
As part of the Company’s issuance of asset-backed securitizations in March 2008 and May 2008, due to credit market conditions when these notes were issued, the Company purchased the Class B subordinated notes of $36 million (par value) and $41 million (par value), respectively. These notes are not included on the Company’s consolidated balance sheet. If the credit market conditions continue to improve, the Company anticipates selling these notes to third parties. Upon a sale to third parties, the Company would obtain cash proceeds equal to the market value of the notes on the date of such sale. The amount included in the table above is the par value of these subordinated notes and may not represent market value upon sale of the notes.
|
|
(b)
|
The Company has repurchased its own asset-backed securities (bonds and notes payable). For accounting purposes, these notes are effectively retired and are not included on the Company’s consolidated balance sheet. However, as of September 30, 2010 and October 31, 2010, $207.7 million and $315.5 million, respectively, of these securities are legally outstanding at the trust level and the Company could sell these notes to third parties or redeem the notes at par as cash is generated by the trust estate. Upon a sale to third parties, the Company would obtain cash proceeds equal to the market value of the notes on the date of such sale. The amount included in the table above is the par value of these notes and may not represent market value upon sale of the notes.
|
|
(c)
|
The Company generated significant cash during October 2010 when it sold loans to the Department. As of September 30, 2010, the Company had $2.1 billion of FFELP loans classified as held for sale. These loans were funded using the Department’s Participation Program and were sold to the Department under the Purchase Program. Upon selling the $2.1 billion in loans held for sale, the Company received net cash proceeds of $125.9 million resulting in a pre-tax gain of $33.8 million. The table above represents the Company’s cash position after selling these loans.
|
|
(d)
|
On November 3, 2010, the Company paid $55.0 million related to a litigation settlement. See “Overview – Recent Developments – Litigation Settlement” in this Item 2 for additional information related to this settlement. The cash and cash equivalents balance as of October 31, 2010 in the above table excludes $55.0 million related to the cash paid in November for this settlement.
|
As of September 30, 2010
|
|||||
Carrying
|
|||||
amount
|
Final maturity
|
||||
Asset Generation and Management:
|
|||||
Bonds and notes issued in asset-backed securitizations
|
$ | 21,521,537 |
5/1/11 - 7/27/48
|
||
Department of Education Participation
|
2,049,227 |
10/15/10
|
|||
FFELP warehouse facility
|
29,976 |
7/29/13
|
|||
Department of Education Conduit
|
2,799,180 |
5/8/14
|
|||
Related party debt
|
111,675 |
5/20/11
|
|||
Other borrowings
|
24,838 |
11/14/10 - 11/1/15
|
|||
$ | 26,536,433 |
|
(a)
|
The Company uses various assumptions, including prepayments and future interest rates, when preparing its cash flow forecast. These assumptions are further discussed below.
|
|
·
|
A minimum consolidated net worth
|
|
·
|
A minimum adjusted EBITDA to corporate debt interest (over the last four rolling quarters)
|
|
·
|
A limitation on subsidiary indebtedness
|
|
·
|
A limitation on the percentage of non-guaranteed loans in the Company’s portfolio
|
Three months ended September 30, 2010
|
Nine months ended September 30, 2010
|
|||||||||||||||||||||||
Notional amount
|
Purchase price
|
Gain
|
Notional amount
|
Purchase price
|
Gain
|
|||||||||||||||||||
Unsecured debt - Junior Subordinated Hybrid Securities
|
$ | 34,995 | 30,073 | 4,922 | 34,995 | 30,073 | 4,922 | |||||||||||||||||
Asset-backed securities
|
85,675 | 80,712 | 4,963 | 477,700 | 453,801 | 23,899 | ||||||||||||||||||
$ | 120,670 | 110,785 | 9,885 | 512,695 | 483,874 | 28,821 |
Purchase
|
Average price of
|
|||||||||||
Total shares
|
price
|
shares repurchased
|
||||||||||
repurchased
|
(in thousands)
|
(per share)
|
||||||||||
Three months ended March 31, 2010
|
12,936 | $ | 236 | $ | 18.28 | |||||||
Three months ended June 30, 2010
|
663,443 | 12,821 | 19.33 | |||||||||
Three months ended September 30, 2010
|
1,184,261 | 26,615 | 22.47 | |||||||||
Nine months ended September 30, 2010
|
1,860,640 | $ | 39,672 | $ | 21.32 |
As of September 30, 2010
|
||||||||||||||||||||
Total
|
Less than 1 year
|
1 to 3 years
|
3 to 5 years
|
More than 5 years
|
||||||||||||||||
Bonds and notes payable
|
$ | 27,391,188 | 2,227,622 | 721,476 | 2,970,340 | 21,471,750 | ||||||||||||||
Operating lease obligations (a)
|
19,446 | 6,544 | 10,295 | 2,607 | — | |||||||||||||||
Total
|
$ | 27,410,634 | 2,234,166 | 731,771 | 2,972,947 | 21,471,750 |
|
(a)
|
The Company is committed under noncancelable operating leases for certain office and warehouse space and equipment. Operating lease obligations are presented net of approximately $3.2 million in sublease arrangements.
|
|
·
|
Interactive marketing
– Interactive marketing services revenue is derived primarily from fees which are earned through the delivery of qualified leads or clicks. The Company recognizes revenue when persuasive evidence of an arrangement exists, delivery has occurred, the fee is fixed or determinable, and collectability is reasonably assured. Delivery is deemed to have occurred at the time a qualified lead or click is delivered to the customer provided that no significant obligations remain. From time to time, the Company may agree to credit certain leads or clicks if they fail to meet the contractual or other guidelines of a particular client. The Company has established a sales reserve based on historical experience. To date, such credits have been immaterial and within management’s expectations.
|
|
·
|
Publishing services -
Revenue from the sale of print products is generally earned and recognized, net of estimated returns, upon shipment or delivery.
|
|
·
|
Resource centers and list marketing –
Resource centers and list marketing services includes the sale of subscription and performance based products and services, as well as list sales. Revenues from sales of subscription and performance based products and services are recognized ratably over the term of the contract. Subscription and performance based revenues received or receivable in advance of the delivery of services is included in deferred revenue. Revenue from the sale of lists is generally earned and recognized, net of estimated returns, upon delivery.
|
|
1.
|
A rollforward schedule of the allowance for credit losses from the beginning of the reporting period to the end of the reporting period on a portfolio segment basis, with the ending balance further disaggregated on the basis of the impairment method
|
|
2.
|
For each disaggregated ending balance in item (1) above, the related recorded investment in financing receivables
|
|
3.
|
The nonaccrual status of financing receivables by class of financing receivables
|
|
4.
|
Impaired financing receivables by class of financing receivables.
|
|
1.
|
Credit quality indicators of financing receivables at the end of the reporting period by class of financing receivables
|
|
2.
|
The aging of past due financing receivables at the end of the reporting period by class of financing receivables
|
|
3.
|
The nature and extent of troubled debt restructurings that occurred during the period by class of financing receivables and their effect on the allowance for credit losses
|
|
4.
|
The nature and extent of financing receivables modified as troubled debt restructurings within the previous twelve months that defaulted during the reporting period by class of financing receivables and their effect on the allowance for credit losses
|
|
5.
|
Significant purchases and sales of financing receivables during the reporting period disaggregated by portfolio segment.
|
As of September 30, 2010
|
As of December 31, 2009
|
|||||||||||||||
Dollars
|
Percent
|
Dollars
|
Percent
|
|||||||||||||
Fixed-rate loan assets
|
$ | 8,621,337 | 32.7 | % | $ | 10,305,622 | 43.6 | % | ||||||||
Variable-rate loan assets
|
17,719,658 | 67.3 | 13,330,252 | 56.4 | ||||||||||||
Total
|
$ | 26,340,995 | 100.0 | % | $ | 23,635,874 | 100.0 | % | ||||||||
Fixed-rate debt instruments
|
$ | 163,255 | 0.6 | % | $ | 273,906 | 1.1 | % | ||||||||
Variable-rate debt instruments
|
27,227,933 | 99.4 | 24,531,383 | 98.9 | ||||||||||||
Total
|
$ | 27,391,188 | 100.0 | % | $ | 24,805,289 | 100.0 | % |
Maturity |
Notional
Amount
|
Weighted
average fixed
rate paid by
the Company (a)
|
||||||
2012 | $ | 3,000,000 | 0.54 | % | ||||
(a) For all interest rate derivatives, the Company receives discrete three-month LIBOR. |
Index
|
Frequency of Variable Resets
|
Assets
|
Debt outstanding that funded student loan assets (a)
|
|||||||
3 month H15 financial commercial paper (b)
|
Daily
|
$ | 25,181,140 | 2,049,227 | ||||||
3 month Treasury bill (c)
|
Varies
|
1,032,932 | — | |||||||
3 month LIBOR (d)
|
Quarterly
|
— | 20,349,202 | |||||||
Auction-rate or remarketing (e)
|
Varies
|
— | 1,172,335 | |||||||
Asset-backed commercial paper (f)
|
Varies
|
— | 2,829,156 | |||||||
Other (g)
|
322,361 | 136,513 | ||||||||
$ | 26,536,433 | 26,536,433 |
|
(a)
|
The Company has certain basis swaps outstanding in which the Company receives three-month LIBOR and pays one-month LIBOR plus or minus a spread as defined in the agreements. The Company entered into these derivative instruments to better match the interest rate characteristics on its student loan assets and the debt funding such assets. The following table summarizes these derivatives as of September 30, 2010:
|
Maturity
|
Notional Amounts
|
|||
2021
|
$ | 250,000 | ||
2023
|
1,250,000 | |||
2024
|
250,000 | |||
2028
|
100,000 | |||
2039
|
150,000 | |||
2040
|
200,000 | |||
$ | 2,200,000 |
|
(b)
|
The Company’s FFELP student loans earn interest based on the daily average H15 financial commercial paper index calculated on a fiscal quarter. The Company’s funding includes FFELP student loans under the Department’s Participation Program. The interest rate on the principal amount of participation interests outstanding under the Department’s Participation Program is based on a rate of commercial paper plus 50 basis points, which is set a quarter in arrears, while the earnings on the student loans is based primarily on the daily average H15 financial commercial paper index calculated on the current fiscal quarter.
|
|
(c)
|
The Company has used derivative instruments to hedge both the basis and repricing risk on certain student loans in which the Company earns interest based on a treasury bill rate that resets daily and are funded with debt indexed to primarily three-month LIBOR. To hedge these loans, the Company has entered into basis swaps in which the Company receives three-month LIBOR set discretely in advance and pays a weekly treasury bill rate plus a spread as defined in the agreement. The following table summarizes these derivatives as of September 30, 2010:
|
Maturity
|
Notional Amount
|
|||
2011
|
$ | 225,000 | (1) | |
(1) The effective start dates on these derivatives are in October 2010 ($75 million), November 2010 ($75 million), and December 2010 ($75 million). |
|
(d)
|
The Company has Euro-denominated notes that reprice on the EURIBOR index. The Company has entered into derivative instruments (cross-currency interest rate swaps) that convert the EURIBOR index to three-month LIBOR. As a result, these notes are reflected in the three-month LIBOR category in the above table. See “Foreign Currency Exchange Risk.”
|
|
(e)
|
The interest rates on certain of the Company's asset-backed securities are set and periodically reset via a "dutch auction" (“Auction Rate Securities”) or through a remarketing utilizing remarketing agents (“Variable Rate Demand Notes”). As of September 30, 2010, the Company is sponsor on $0.9 billion of Auction Rate Securities and $0.3 billion of Variable Rate Demand Notes.
|
|
(f)
|
Asset-backed commercial paper consists of $30.0 million funded in the Company’s FFELP warehouse facility and $2.8 billion funded through the Department’s Conduit Program. Funding for the Conduit Program is provided by the capital markets at a cost based on market rates.
|
|
(g)
|
Assets include restricted cash and investments and other assets. Debt outstanding includes other debt obligations secured by student loan assets and related collateral.
|
Three months ended September 30,
|
Nine months ended September 30,
|
|||||||||||||||
2010
|
2009
|
2010
|
2009
|
|||||||||||||
Settlements:
|
||||||||||||||||
Average/discrete basis swaps
|
$ | — | 646 | — | 11,707 | |||||||||||
1/3 basis swaps
|
893 | 3,071 | 974 | 20,473 | ||||||||||||
Interest rate swaps - floor income hedges
|
(4,040 | ) | (436 | ) | (12,183 | ) | (447 | ) | ||||||||
Interest rate swaps - unsecured debt hedges
|
(242 | ) | — | (242 | ) | — | ||||||||||
Cross-currency interest rate swaps
|
1,025 | 1,633 | 3,243 | 7,074 | ||||||||||||
Other
|
(222 | ) | — | (178 | ) | — | ||||||||||
Total settlements - (expense) income
|
$ | (2,586 | ) | 4,914 | (8,386 | ) | 38,807 |
Three months ended September 30, 2010
|
||||||||||||||||||||||||||||||||
Interest Rates
|
Asset and funding index mismatches
|
|||||||||||||||||||||||||||||||
Change from increase of 100 basis points
|
Change from increase of 300 basis points
|
|||||||||||||||||||||||||||||||
Increase of 10 basis points
|
Increase of 30 basis points
|
|||||||||||||||||||||||||||||||
Dollar
|
Percent
|
Dollar
|
Percent
|
Dollar
|
Percent
|
Dollar
|
Percent
|
|||||||||||||||||||||||||
Effect on earnings:
|
||||||||||||||||||||||||||||||||
Increase (decrease) in pre-tax net income before
impact of derivative settlements
|
$ | (17,036 | ) | (2,867.8 | )% | $ | (31,616 | ) | (5,322.6 | )% | $ | (6,714 | ) | (1,130.3 | )% | $ | (20,141 | ) | (3,390.8 | )% | ||||||||||||
Impact of derivative settlements
|
19,810 | 3,334.9 | 59,429 | 10,004.8 | — | — | — | — | ||||||||||||||||||||||||
Increase (decrease) in net income before taxes
|
$ | 2,774 | 467.1 | % | $ | 27,813 | 4,682.2 | % | $ | (6,714 | ) | (1,130.3 | )% | $ | (20,141 | ) | (3,390.8 | )% | ||||||||||||||
Increase (decrease) in basic and diluted
earnings per share
|
$ | 0.04 | $ | 0.35 | $ | (0.09 | ) | $ | (0.26 | ) | ||||||||||||||||||||||
Three months ended September 30, 2009
|
||||||||||||||||||||||||||||||||
Interest Rates
|
||||||||||||||||||||||||||||||||
Change from increase of | Change from increase of |
Asset and funding index mismatches
|
||||||||||||||||||||||||||||||
100 basis points
|
300 basis points
|
Increase of 10 basis points
|
Increase of 30 basis points
|
|||||||||||||||||||||||||||||
Dollar
|
Percent
|
Dollar
|
Percent
|
Dollar
|
Percent
|
Dollar
|
Percent
|
|||||||||||||||||||||||||
Effect on earnings:
|
||||||||||||||||||||||||||||||||
Increase (decrease) in pre-tax net income before
impact of derivative settlements
|
$ | (19,343 | ) | (137.0 | ) % | $ | (35,660 | ) | (252.5 | ) % | $ | (6,472 | ) | (45.8 | ) % | $ | (19,416 | ) | (137.5 | ) % | ||||||||||||
Impact of derivative settlements
|
41 | 0.3 | 123 | 0.9 | — | — | — | — | ||||||||||||||||||||||||
Increase (decrease) in net income before taxes
|
$ | (19,302 | ) | (136.7 | ) % | $ | (35,537 | ) | (251.6 | ) % | $ | (6,472 | ) | (45.8 | ) % | $ | (19,416 | ) | (137.5 | ) % | ||||||||||||
Increase (decrease) in basic and diluted
earnings per share
|
$ | (0.23 | ) | $ | (0.42 | ) | $ | (0.08 | ) | $ | (0.23 | ) | ||||||||||||||||||||
Nine months ended September 30, 2010
|
||||||||||||||||||||||||||||||||
Change from increase of
100 basis points
|
Change from increase of
300 basis points
|
Asset and funding index mismatches
|
||||||||||||||||||||||||||||||
Dollar
|
Percent
|
Dollar
|
Percent
|
Increase of 10 basis points
|
Increase of 30 basis points
|
|||||||||||||||||||||||||||
Effect on earnings:
|
||||||||||||||||||||||||||||||||
Increase (decrease) in pre-tax net income before
impact of derivative settlements
|
$ | (50,582 | ) | (30.5 | ) % | $ | (93,219 | ) | (56.1 | ) % | $ | (19,193 | ) | (11.5 | ) % | $ | (57,580 | ) | (34.6 | ) % | ||||||||||||
Impact of derivative settlements
|
48,163 | 29.0 | 144,489 | 86.9 | — | — | — | — | ||||||||||||||||||||||||
Increase (decrease) in net income before taxes
|
$ | (2,419 | ) | (1.5 | ) % | $ | 51,270 | 30.8 | % | $ | (19,193 | ) | (11.5 | ) % | $ | (57,580 | ) | (34.6 | ) % | |||||||||||||
Increase (decrease) in basic and diluted earning per share
|
$ | (0.03 | ) | $ | 0.65 | $ | (0.24 | ) | $ | (0.73 | ) | |||||||||||||||||||||
Nine months ended September 30, 2009
|
||||||||||||||||||||||||||||||||
Change from increase of
100 basis points
|
Change from increase of
300 basis points
|
Asset and funding index mismatches
|
||||||||||||||||||||||||||||||
Dollar
|
Percent
|
Dollar
|
Percent
|
Increase of 10 basis points
|
Increase of 30 basis points
|
|||||||||||||||||||||||||||
Effect on earnings:
|
||||||||||||||||||||||||||||||||
Increase (decrease) in pre-tax net income before
impact of derivative settlements
|
$ | (67,504 | ) | (122.3 | ) % | $ | (116,630 | ) | (211.4 | ) % | $ | (19,228 | ) | (34.8 | ) % | $ | (57,685 | ) | (104.5 | ) % | ||||||||||||
Impact of derivative settlements
|
80 | 0.1 | 247 | 0.2 | — | — | — | — | ||||||||||||||||||||||||
Increase (decrease) in net income before taxes
|
$ | (67,424 | ) | (122.2 | ) % | $ | (116,383 | ) | (211.2 | ) % | $ | (19,228 | ) | (34.8 | ) % | $ | (57,685 | ) | (104.5 | ) % | ||||||||||||
Increase (decrease) in basic and diluted
earning per share
|
$ | (0.83 | ) | $ | (1.44 | ) | $ | (0.24 | ) | $ | (0.71 | ) |
Three Months Ended September 30,
|
Nine Months Ended September 30,
|
|||||||||||||||
2010
|
2009
|
2010
|
2009
|
|||||||||||||
Re-measurement of Euro Notes
|
$ | (106,468 | ) | (39,356 | ) | 58,608 | (55,979 | ) | ||||||||
Change in fair value of
cross-currency derivatives
|
107,531 | 44,773 | (52,491 | ) | 28,871 | |||||||||||
Total impact to statements of
operations - income (expense)
|
$ | 1,063 | 5,417 | 6,117 | (27,108 | ) |
Three Months Ended September 30,
|
Nine Months Ended September 30,
|
|||||||||||||||
2010
|
2009
|
2010
|
2009
|
|||||||||||||
Change in fair value of derivatives
|
$ | 73,663 | 42,182 | (94,539 | ) | 19,912 | ||||||||||
Foreign currency transaction adjustment (Euro Notes)
|
(106,468 | ) | (39,356 | ) | 58,608 | (55,979 | ) | |||||||||
Derivative settlements, net
|
(2,586 | ) | 4,914 | (8,386 | ) | 38,807 | ||||||||||
Derivative market value and foreign currency
adjustments and derivative settlements, net
|
$ | (35,391 | ) | 7,740 | (44,317 | ) | 2,740 |
Total number of
|
Maximum number
|
|||||||||||||||
shares purchased
|
of shares that may
|
|||||||||||||||
Total number
|
Average
|
as part of publicly
|
yet be purchased
|
|||||||||||||
of shares
|
price paid
|
announced plans
|
under the plans
|
|||||||||||||
Period
|
purchased (1)
|
per share
|
or programs (2) (3)
|
or programs (4)
|
||||||||||||
July 1 - July 31, 2010
|
4,349 | $ | 19.03 | 3,905 | 5,975,273 | |||||||||||
August 1 - August 31, 2010
|
391,762 | 21.11 | 391,762 | 5,439,099 | ||||||||||||
September 1 - September 30, 2010
|
788,150 | 23.17 | 787,165 | 4,581,404 | ||||||||||||
Total
|
1,184,261 | $ | 22.47 | 1,182,832 |
|
(1)
|
The total number of shares includes: (i) shares purchased pursuant to the 2006 Plan discussed in footnote (2) below; (ii) shares owned and tendered by employees to satisfy tax withholding obligations upon the vesting of restricted shares; and (iii) shares purchased pursuant to the 2006 ESLP discussed in footnote (3) below, of which there were none for the months of July, August, and September 2010, respectively. Shares of Class A common stock purchased pursuant to the 2006 Plan were 3,905 shares, 391,762 shares, and 787,165 shares in July, August, and September 2010, respectively, including (a) 785 shares, 1,762 shares, and 565 shares purchased in July, August, and September 2010, respectively, that had been issued to the Company’s 401(k) plan and allocated to employee participant accounts pursuant to the plan’s provisions for Company matching contributions in shares of Company stock, and were purchased by the Company from the plan pursuant to employee participant instructions to dispose of such shares; and (b) 3,120 shares, 0 shares, and 0 shares purchased in July, August, and September 2010, respectively, upon the cancellation of certain employee stock purchase loans under the 2006 ESLP. Shares of Class A common stock tendered by employees to satisfy tax withholding obligations included 444 shares, 0 shares, and 985 shares in July, August, and September 2010, respectively. Unless otherwise indicated, shares owned and tendered by employees to satisfy tax withholding obligations were purchased at the closing price of the Company’s shares on the date of vesting.
|
|
(2)
|
The Company’s Board of Directors authorized a stock repurchase program to repurchase up to a total of ten million shares of the Company’s Class A common stock (the “2006 Plan”). The 2006 Plan has an expiration date of May 24, 2012.
|
|
(3)
|
On May 25, 2006, the Company publicly announced that the shareholders of the Company approved an Employee Stock Purchase Loan Plan (the “2006 ESLP”) to allow the Company to make loans to employees for the purchase of shares of the Company's Class A common stock either in the open market or directly from the Company. A total of $40 million in loans may be made under the 2006 ESLP, and a total of one million shares of Class A common stock are reserved for issuance under the 2006 ESLP. Shares may be purchased directly from the Company or in the open market through a broker at prevailing market prices at the time of purchase, subject to any conditions or restrictions on the timing, volume, or prices of purchases as determined by the Compensation Committee of the Board of Directors and set forth in the Stock Purchase Loan Agreement with the participant. The 2006 ESLP shall terminate May 25, 2016.
|
|
(4)
|
The maximum number of shares that may yet be purchased under the plans is calculated below. There are no assurances that any additional shares will be repurchased under either the 2006 Plan or the 2006 ESLP. Shares under the 2006 ESLP may be issued by the Company rather than purchased in open market transactions.
|
As of
|
Maximum number of shares that may yet be purchased under the 2006 Plan
(A)
|
Approximate dollar value of shares that may yet be purchased under the 2006 ESLP
(B)
|
Closing price on the last trading day of the Company's Class A Common Stock
(C)
|
(B / C)
Approximate number of shares that may yet be purchased under the 2006 ESLP
(D)
|
(A + D)
Approximate number of shares that may yet be purchased under the 2006 Plan and 2006 ESLP
|
|||||||||||||||
July 31, 2010
|
4,167,237 | 36,450,000 | 20.16 | 1,808,036 | 5,975,273 | |||||||||||||||
August 31, 2010
|
3,775,475 | 36,450,000 | 21.91 | 1,663,624 | 5,439,099 | |||||||||||||||
September 30, 2010
|
2,988,310 | 36,450,000 | 22.88 | 1,593,094 | 4,581,404 |
|
·
|
declare or pay any dividends or distributions on, or redeem, purchase, acquire or make a liquidation payment regarding, any of the Company’s capital stock
|
|
·
|
except as required in connection with the repayment of principal, and except for any partial payments of deferred interest that may be made through the alternative payment mechanism described in the Hybrid Securities indenture, make any payment of principal of, or interest or premium, if any, on, or repay, repurchase, or redeem any of the Company’s debt securities that rank
pari passu
with or junior to the Hybrid Securities
|
|
·
|
make any guarantee payments regarding any guarantee by the Company of the subordinated debt securities of any of the Company’s subsidiaries if the guarantee ranks
pari passu
with or junior in interest to the Hybrid Securities
|
|
·
|
pay dividends or distributions in additional shares of the Company’s capital stock
|
|
·
|
declare or pay a dividend in connection with the implementation of a shareholders’ rights plan, or issue stock under such a plan, or redeem or repurchase any rights distributed pursuant to such a plan
|
|
·
|
purchase common stock for issuance pursuant to any employee benefit plans
|
|
10.1
|
Settlement Agreement, made and entered into by and between the United States of America, acting through to Commercial Litigation Branch of the United States Department of Justice and on behalf of the United States Department of Education, Nelnet, Inc., Nelnet Education Loan Funding, Inc., and Jon H. Oberg, filed as Exhibit 10.1 to the registrant’s Current Report on Form 8-K filed on October 29, 2010 and incorporated herein by reference.
|
|
10.2*
|
Thirteenth Amendment of Amended and Restated Participation Agreement, dated as of September 1, 2010, by and between Union Bank and Trust Company and National Education Loan Network, Inc.
|
|
10.3*
|
Guaranteed Purchase Agreement, dated as of September 1, 2010, by and between Nelnet, Inc. and Union Bank and Trust Company.
|
|
31.1*
|
Certification Pursuant to Section 302 of the Sarbanes-Oxley Act of 2002 of Chief Executive Officer Michael S. Dunlap.
|
|
31.2*
|
Certification Pursuant to Section 302 of the Sarbanes-Oxley Act of 2002 of Chief Financial Officer Terry J. Heimes.
|
|
32**
|
Certification Pursuant to 18 U.S.C. Section 1350, as Adopted Pursuant to Section 906 of the Sarbanes-Oxley Act of 2002.
|
* | Filed herewith |
** | Furnished herewith |
NELNET, INC.
|
|||
Date: November 9, 2010
|
By:
|
/s/ MICHAEL S. DUNLAP | |
Name: |
Michael S. Dunlap
|
||
Title: | Chairman and Chief Executive Officer | ||
By:
|
/s/ TERRY J. HEIMES | ||
Name: | Terry J. Heimes | ||
Title: | Chief Financial Officer |
Union Bank and Trust Company, as Trustee | National Education Loan Network, Inc. | ||||
By: |
/s/ Tom Sullivan
|
By: |
/s/ Terry Heimes
|
||
Title: | Vice President | Chief Financial Officer |
|
1.
|
I
have reviewed this quarterly report on Form 10-Q of Nelnet, Inc. and
subsidiaries (the “Company”);
|
|
2.
|
Based
on my knowledge, this report does not contain any untrue statement of a
material fact or omit to state a material fact necessary to make the
statements made, in light of the circumstances under which such statements
were made, not misleading with respect to the period covered by this
report;
|
|
3.
|
Based
on my knowledge, the financial statements, and other financial information
included in this report, fairly present in all material respects the
financial condition, results of operations and cash flows of the
registrant as of, and for, the periods presented in this
report;
|
|
4.
|
The
registrant’s other certifying officers and I are responsible for
establishing and maintaining disclosure controls and procedures (as
defined in Exchange Act Rules 13a-15(e) and 15d-15(e)) and internal
control over financial reporting (as defined in Exchange Act Rules
13a-15(f) and 15d-15(f)) for the registrant and
have:
|
|
(a)
|
Designed
such disclosure controls and procedures, or caused such disclosure
controls and procedures to be designed under our supervision, to ensure
that material information relating to the registrant, including its
consolidated subsidiaries, is made known to us by others within those
entities, particularly during the period in which this report is being
prepared;
|
|
(b)
|
Designed
such internal control over financial reporting, or caused such internal
control over financial reporting to be designed under our supervision, 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;
|
|
(c)
|
Evaluated
the effectiveness of the registrant’s disclosure controls and procedures
and presented in this report our conclusions about the effectiveness of
the disclosure controls and procedures, as of the end of the period
covered by this report based on such evaluation;
and
|
(d)
|
Disclosed
in this report any change in the registrant’s internal control over
financial reporting that occurred during the registrant’s most recent
fiscal quarter (the registrant’s fourth fiscal quarter in the case of an
annual report) that has materially affected, or is reasonably likely to
materially affect, the registrant’s internal control over financial
reporting; and
|
|
5.
|
The
registrant’s other certifying officers and I have disclosed, based on our
most recent evaluation of internal control over financial reporting, to
the registrant’s auditors and the audit committee of the registrant’s
board of directors (or persons performing the equivalent
functions):
|
|
(a)
|
All
significant deficiencies and material weaknesses in the design or
operation of internal control over financial reporting which are
reasonably likely to adversely affect the registrant’s ability to record,
process, summarize and report financial information;
and
|
|
(b)
|
Any
fraud, whether or not material, that involves management or other
employees who have a significant role in the registrant’s internal control
over financial reporting.
|
|
1.
|
I
have reviewed the quarterly report on Form 10-Q of Nelnet, Inc. and
subsidiaries (the “Company”);
|
|
2.
|
Based
on my knowledge, this report does not contain any untrue statement of a
material fact or omit to state a material fact necessary to make the
statements made, in light of the circumstances under which such statements
were made, not misleading with respect to the period covered by this
report;
|
|
3.
|
Based
on my knowledge, the financial statements, and other financial information
included in this report, fairly present in all material respects the
financial condition, results of operations and cash flows of the
registrant as of, and for, the periods presented in this
report;
|
|
4.
|
The
registrant’s other certifying officers and I are responsible for
establishing and maintaining disclosure controls and procedures (as
defined in Exchange Act Rules 13a-15(e) and 15d-15(e)) and internal
control over financial reporting (as defined in Exchange Act Rules
13a-15(f) and 15d-15(f)) for the registrant and
have:
|
|
(a)
|
Designed
such disclosure controls and procedures, or caused such disclosure
controls and procedures to be designed under our supervision, to ensure
that material information relating to the registrant, including its
consolidated subsidiaries, is made known to us by others within those
entities, particularly during the period in which this report is being
prepared;
|
|
(b)
|
Designed
such internal control over financial reporting, or caused such internal
control over financial reporting to be designed under our supervision, 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;
|
|
(c)
|
Evaluated
the effectiveness of the registrant’s disclosure controls and procedures
and presented in this report our conclusions about the effectiveness of
the disclosure controls and procedures, as of the end of the period
covered by this report based on such evaluation;
and
|
|
(d)
|
Disclosed
in this report any change in the registrant’s internal control over
financial reporting that occurred during the registrant’s most recent
fiscal quarter (the registrant’s fourth fiscal quarter in the case of an
annual report) that has materially affected, or is reasonably likely to
materially affect, the registrant’s internal control over financial
reporting; and
|
|
5.
|
The
registrant’s other certifying officers and I have disclosed, based on our
most recent evaluation of internal control over financial reporting, to
the registrant’s auditors and the audit committee of the registrant’s
board of directors (or persons performing the equivalent
functions):
|
|
(a)
|
All
significant deficiencies and material weaknesses in the design or
operation of internal control over financial reporting which are
reasonably likely to adversely affect the registrant’s ability to record,
process, summarize and report financial information;
and
|
|
(b)
|
Any
fraud, whether or not material, that involves management or other
employees who have a significant role in the registrant’s internal control
over financial reporting.
|
|
1.
|
The
Report fully complies with the requirements of Section 13(a) or 15(d)
of the Securities Exchange Act of 1934;
and
|
|
2.
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The
information contained in the Report fairly presents, in all material
respects, the financial condition and results of operations of the
Company.
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