Form 10-Q
UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
FORM 10-Q
(Mark One)
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þ |
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QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 |
For the quarterly period ended March 31, 2009
or
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o |
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TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 |
For the transition period from to .
COMMISSION FILE NUMBER 001-31924
NELNET, INC.
(Exact name of registrant as specified in its charter)
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NEBRASKA
(State or other jurisdiction of incorporation or organization)
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84-0748903
(I.R.S. Employer Identification No.) |
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121 SOUTH 13TH STREET, SUITE 201
LINCOLN, NEBRASKA
(Address of principal executive offices)
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68508
(Zip Code) |
(402) 458-2370
(Registrants telephone number, including area code)
Indicate by check mark whether the registrant (1) has filed all reports required to be
filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12
months (or for such shorter period that the registrant was required to file such reports),
and (2) has been subject to such filing requirements for the past 90 days. Yes þ No o
Indicate by check mark whether the registrant has submitted electronically and posted on
its corporate Web site, if any, every Interactive Data File required to be submitted and
posted pursuant to Rule 405 of Regulation S-T (§232.405 of this chapter) during the
preceding 12 months (or for such shorter period that the registrant was required to submit
and post such files). Yes o No o
Indicate by check mark whether the registrant is a large accelerated filer, an accelerated
filer, a non-accelerated filer, or a smaller reporting company. See the definitions of
large accelerated filer, accelerated filer and smaller reporting company in Rule
12b-2 of the Exchange Act.
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Large accelerated filer o
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Accelerated filer þ
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Non-accelerated filer o
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Smaller reporting company o |
Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2
of the Exchange Act). Yes o No þ
As of April 30, 2009, there were 38,281,812 and 11,495,377 shares of Class A Common Stock
and Class B Common Stock, par value $0.01 per share, outstanding, respectively (excluding
11,317,364 shares of Class A Common Stock held by a wholly owned subsidiary).
NELNET, INC.
FORM 10-Q
INDEX
March 31, 2009
PART I. FINANCIAL INFORMATION
ITEM 1. FINANCIAL STATEMENTS
NELNET, INC. AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
(Dollars in thousands, except share data)
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As of |
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As of |
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March 31, 2009 |
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December 31, 2008 |
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(unaudited) |
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Assets: |
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|
|
|
|
|
|
Student loans receivable (net of allowance for loan losses of
$48,497 and $50,922, respectively) |
|
$ |
25,624,337 |
|
|
|
25,413,008 |
|
Cash and cash equivalents: |
|
|
|
|
|
|
|
|
Cash and cash equivalents not held at a related party |
|
|
15,070 |
|
|
|
13,129 |
|
Cash and cash equivalents held at a related party |
|
|
228,635 |
|
|
|
176,718 |
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|
|
|
|
|
|
|
Total cash and cash equivalents |
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|
243,705 |
|
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|
189,847 |
|
Restricted cash and investments |
|
|
1,218,512 |
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|
997,272 |
|
Restricted cash due to customers |
|
|
55,610 |
|
|
|
160,985 |
|
Accrued interest receivable |
|
|
388,315 |
|
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|
471,878 |
|
Accounts receivable (net of allowance for doubtful accounts of
$1,180 and $1,005, respectively) |
|
|
42,575 |
|
|
|
42,088 |
|
Goodwill |
|
|
175,178 |
|
|
|
175,178 |
|
Intangible assets, net |
|
|
70,900 |
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|
77,054 |
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Property and equipment, net |
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|
34,890 |
|
|
|
38,747 |
|
Other assets |
|
|
106,105 |
|
|
|
113,666 |
|
Fair value of derivative instruments |
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|
133,010 |
|
|
|
175,174 |
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|
|
|
|
|
|
|
|
|
|
|
|
|
|
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|
Total assets |
|
$ |
28,093,137 |
|
|
|
27,854,897 |
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|
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|
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|
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|
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Liabilities: |
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Bonds and notes payable |
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$ |
27,130,406 |
|
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|
26,787,959 |
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Accrued interest payable |
|
|
48,076 |
|
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|
81,576 |
|
Other liabilities |
|
|
187,379 |
|
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|
179,336 |
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Due to customers |
|
|
55,610 |
|
|
|
160,985 |
|
Fair value of derivative instruments |
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64 |
|
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|
1,815 |
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|
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|
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Total liabilities |
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27,421,535 |
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27,211,671 |
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Shareholders equity: |
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Preferred stock, $0.01 par value. Authorized 50,000,000 shares;
no shares issued or outstanding |
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Common stock: |
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Class A, $0.01 par value. Authorized 600,000,000 shares;
issued and outstanding 38,276,870 shares as of March 31,
2009 and 37,794,067 shares as of December 31, 2008 |
|
|
383 |
|
|
|
378 |
|
Class B, convertible, $0.01 par value. Authorized 60,000,000 shares;
issued and outstanding 11,495,377 shares as of March 31,
2009 and December 31, 2008 |
|
|
115 |
|
|
|
115 |
|
Additional paid-in capital |
|
|
106,678 |
|
|
|
103,762 |
|
Retained earnings |
|
|
565,976 |
|
|
|
540,521 |
|
Employee notes receivable |
|
|
(1,550 |
) |
|
|
(1,550 |
) |
|
|
|
|
|
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Total shareholders equity |
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|
671,602 |
|
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|
643,226 |
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|
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Commitments and contingencies |
|
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Total liabilities and shareholders equity |
|
$ |
28,093,137 |
|
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|
27,854,897 |
|
|
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|
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|
See accompanying notes to consolidated financial statements.
2
NELNET, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF OPERATIONS
(Dollars in thousands, except share data)
(unaudited)
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Three months ended March 31, |
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2009 |
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2008 |
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Interest income: |
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Loan interest |
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$ |
170,919 |
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|
329,986 |
|
Investment interest |
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4,091 |
|
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|
11,680 |
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Total interest income |
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|
175,010 |
|
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|
341,666 |
|
Interest expense: |
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|
|
|
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Interest on bonds and notes payable |
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|
146,502 |
|
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|
325,141 |
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|
|
|
|
|
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Net interest income |
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|
28,508 |
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|
16,525 |
|
Less provision for loan losses |
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|
7,500 |
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|
5,000 |
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|
|
|
|
|
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|
Net interest income after provision for loan losses |
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|
21,008 |
|
|
|
11,525 |
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|
|
|
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|
|
|
|
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|
|
|
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|
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Other income (expense): |
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Loan and guaranty servicing revenue |
|
|
26,471 |
|
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|
24,661 |
|
Tuition payment processing and campus commerce revenue |
|
|
15,538 |
|
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|
13,847 |
|
Enrollment services revenue |
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|
28,771 |
|
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|
27,222 |
|
Software services revenue |
|
|
5,705 |
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|
8,204 |
|
Other income |
|
|
16,862 |
|
|
|
6,254 |
|
Loss on sale of loans |
|
|
(206 |
) |
|
|
(47,474 |
) |
Derivative market value, foreign currency,
and put option adjustments and derivative
settlements, net |
|
|
19,478 |
|
|
|
(16,598 |
) |
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|
|
|
|
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Total other income |
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112,619 |
|
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|
16,116 |
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Operating expenses: |
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Salaries and benefits |
|
|
38,226 |
|
|
|
53,843 |
|
Other operating expenses: |
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|
|
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|
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|
Cost to provide enrollment services |
|
|
17,793 |
|
|
|
15,403 |
|
Depreciation and amortization |
|
|
10,083 |
|
|
|
10,834 |
|
Professional and other services |
|
|
6,077 |
|
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|
7,195 |
|
Occupancy and communications |
|
|
5,354 |
|
|
|
5,841 |
|
Postage and distribution |
|
|
2,868 |
|
|
|
3,581 |
|
Trustee and other debt related fees |
|
|
2,656 |
|
|
|
2,390 |
|
Advertising and marketing |
|
|
1,710 |
|
|
|
1,948 |
|
Impairment expense |
|
|
|
|
|
|
18,834 |
|
Other |
|
|
7,804 |
|
|
|
8,968 |
|
|
|
|
|
|
|
|
Total other operating expenses |
|
|
54,345 |
|
|
|
74,994 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total operating expenses |
|
|
92,571 |
|
|
|
128,837 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Income (loss) before income taxes |
|
|
41,056 |
|
|
|
(101,196 |
) |
Income tax (expense) benefit |
|
|
(15,601 |
) |
|
|
31,371 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net income (loss) |
|
$ |
25,455 |
|
|
|
(69,825 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Earnings (loss) per share, basic and diluted |
|
$ |
0.52 |
|
|
|
(1.42 |
) |
|
|
|
|
|
|
|
See accompanying notes to consolidated financial statements.
3
NELNET, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF SHAREHOLDERS EQUITY AND COMPREHENSIVE INCOME (LOSS)
(Dollars in thousands, except share data)
(unaudited)
|
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|
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|
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|
|
|
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|
|
|
|
|
|
|
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|
Preferred |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Class A |
|
|
Class B |
|
|
Additional |
|
|
|
|
|
|
Employee |
|
|
Total |
|
|
|
stock |
|
|
Common stock shares |
|
|
Preferred |
|
|
common |
|
|
common |
|
|
paid-in |
|
|
Retained |
|
|
notes |
|
|
shareholders |
|
|
|
shares |
|
|
Class A |
|
|
Class B |
|
|
stock |
|
|
stock |
|
|
stock |
|
|
capital |
|
|
earnings |
|
|
receivable |
|
|
equity |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Balance as of December 31, 2007 |
|
|
|
|
|
|
37,980,617 |
|
|
|
11,495,377 |
|
|
$ |
|
|
|
|
380 |
|
|
|
115 |
|
|
|
96,185 |
|
|
|
515,317 |
|
|
|
(3,118 |
) |
|
|
608,879 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Comprehensive income: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net loss |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(69,825 |
) |
|
|
|
|
|
|
(69,825 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total comprehensive
income (loss) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(69,825 |
) |
Cash dividend on Class A and Class B
common stock $0.07 per share |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(3,458 |
) |
|
|
|
|
|
|
(3,458 |
) |
Forfeitures of common stock, net of issuances |
|
|
|
|
|
|
(19,780 |
) |
|
|
|
|
|
|
|
|
|
|
(1 |
) |
|
|
|
|
|
|
763 |
|
|
|
|
|
|
|
|
|
|
|
762 |
|
Compensation expense for stock-based awards |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
1,415 |
|
|
|
|
|
|
|
|
|
|
|
1,415 |
|
Repurchase of common stock |
|
|
|
|
|
|
(48,064 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(488 |
) |
|
|
|
|
|
|
|
|
|
|
(488 |
) |
Reduction of employee notes receivable |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
822 |
|
|
|
822 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Balance as of March 31, 2008 |
|
|
|
|
|
|
37,912,773 |
|
|
|
11,495,377 |
|
|
$ |
|
|
|
|
379 |
|
|
|
115 |
|
|
|
97,875 |
|
|
|
442,034 |
|
|
|
(2,296 |
) |
|
|
538,107 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Balance as of December 31, 2008 |
|
|
|
|
|
|
37,794,067 |
|
|
|
11,495,377 |
|
|
$ |
|
|
|
|
378 |
|
|
|
115 |
|
|
|
103,762 |
|
|
|
540,521 |
|
|
|
(1,550 |
) |
|
|
643,226 |
|
Comprehensive income: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net income |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
25,455 |
|
|
|
|
|
|
|
25,455 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total comprehensive income |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
25,455 |
|
Issuance of common stock, net of forfeitures |
|
|
|
|
|
|
486,583 |
|
|
|
|
|
|
|
|
|
|
|
5 |
|
|
|
|
|
|
|
2,345 |
|
|
|
|
|
|
|
|
|
|
|
2,350 |
|
Compensation expense for stock based awards |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
607 |
|
|
|
|
|
|
|
|
|
|
|
607 |
|
Repurchase of common stock |
|
|
|
|
|
|
(3,780 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(36 |
) |
|
|
|
|
|
|
|
|
|
|
(36 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Balance as of March 31, 2009 |
|
|
|
|
|
|
38,276,870 |
|
|
|
11,495,377 |
|
|
$ |
|
|
|
|
383 |
|
|
|
115 |
|
|
|
106,678 |
|
|
|
565,976 |
|
|
|
(1,550 |
) |
|
|
671,602 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
See accompanying notes to consolidated financial statements.
4
NELNET, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
(Dollars in thousands)
(unaudited)
|
|
|
|
|
|
|
|
|
|
|
Three months ended March 31, |
|
|
|
2009 |
|
|
2008 |
|
|
|
|
|
|
Net income (loss) |
|
$ |
25,455 |
|
|
|
(69,825 |
) |
Adjustments to reconcile income (loss) from continuing operations to net cash provided
by operating activities: |
|
|
|
|
|
|
|
|
Depreciation and amortization, including loan premiums and deferred origination costs |
|
|
30,134 |
|
|
|
38,952 |
|
Provision for loan losses |
|
|
7,500 |
|
|
|
5,000 |
|
Impairment expense |
|
|
|
|
|
|
18,834 |
|
Derivative market value adjustment |
|
|
52,122 |
|
|
|
(36,003 |
) |
Foreign currency transaction adjustment |
|
|
(47,242 |
) |
|
|
92,937 |
|
Proceeds to terminate and/or amend derivative instruments |
|
|
50 |
|
|
|
7,547 |
|
Payments to terminate and/or amend derivative instruments |
|
|
(11,760 |
) |
|
|
|
|
Gain from purchase of unsecured debt |
|
|
(8,075 |
) |
|
|
|
|
Loss on sale of loans |
|
|
206 |
|
|
|
47,474 |
|
Deferred income tax expense (benefit) |
|
|
1,323 |
|
|
|
(27,389 |
) |
Other non-cash items |
|
|
1,024 |
|
|
|
3,437 |
|
Decrease in accrued interest receivable |
|
|
83,563 |
|
|
|
66,778 |
|
(Increase) decrease in accounts receivable |
|
|
(487 |
) |
|
|
1,332 |
|
Decrease (increase) in other assets |
|
|
7,236 |
|
|
|
(11,678 |
) |
Decrease in accrued interest payable |
|
|
(33,500 |
) |
|
|
(36,706 |
) |
Increase (decrease) in other liabilities |
|
|
2,817 |
|
|
|
(26,027 |
) |
|
|
|
|
|
|
|
Net cash provided by operating activities |
|
|
110,366 |
|
|
|
74,663 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Cash flows from investing activities: |
|
|
|
|
|
|
|
|
Originations, purchases, and consolidations of student loans, including loan premiums
and deferred origination costs |
|
|
(972,450 |
) |
|
|
(1,174,366 |
) |
Purchases of student loans, including loan premiums, from a related party |
|
|
(13,803 |
) |
|
|
(177,788 |
) |
Net proceeds
from student loan repayments, claims, capitalized interest, participations, and other |
|
|
734,445 |
|
|
|
424,315 |
|
Proceeds from sale of student loans |
|
|
125 |
|
|
|
841,087 |
|
Proceeds from sale of student loans to a related party |
|
|
20,016 |
|
|
|
|
|
Purchases of property and equipment, net |
|
|
(62 |
) |
|
|
(1,350 |
) |
Increase in restricted cash and investments, net |
|
|
(221,240 |
) |
|
|
(868,391 |
) |
Purchases of equity method investments |
|
|
|
|
|
|
(1,718 |
) |
Business acquisition contingent consideration |
|
|
|
|
|
|
(18,000 |
) |
|
|
|
|
|
|
|
Net cash used in investing activities |
|
|
(452,969 |
) |
|
|
(976,211 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Cash flows from financing activities: |
|
|
|
|
|
|
|
|
Payments on bonds and notes payable |
|
|
(620,595 |
) |
|
|
(550,318 |
) |
Proceeds from issuance of bonds and notes payable |
|
|
1,039,942 |
|
|
|
1,459,422 |
|
(Payments) proceeds from issuance of notes payable due to a related party, net |
|
|
(21,520 |
) |
|
|
11,321 |
|
Payments of debt issuance costs |
|
|
(1,448 |
) |
|
|
(3,184 |
) |
Dividends paid |
|
|
|
|
|
|
(3,458 |
) |
Proceeds from issuance of common stock |
|
|
118 |
|
|
|
280 |
|
Repurchases of common stock |
|
|
(36 |
) |
|
|
(488 |
) |
Payments received on employee stock notes receivable |
|
|
|
|
|
|
398 |
|
|
|
|
|
|
|
|
Net cash provided by financing activities |
|
|
396,461 |
|
|
|
913,973 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net increase in cash and cash equivalents |
|
|
53,858 |
|
|
|
12,425 |
|
|
|
|
|
|
|
|
|
|
Cash and cash equivalents, beginning of period |
|
|
189,847 |
|
|
|
111,746 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Cash and cash equivalents, end of period |
|
$ |
243,705 |
|
|
|
124,171 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Supplemental disclosures of cash flow information: |
|
|
|
|
|
|
|
|
Interest paid |
|
$ |
177,210 |
|
|
|
354,904 |
|
|
|
|
|
|
|
|
Income taxes paid, net of refunds |
|
$ |
8,096 |
|
|
|
5,343 |
|
|
|
|
|
|
|
|
See accompanying notes to consolidated financial statements.
5
NELNET, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Information as of March 31, 2009 and for the three months ended
March 31, 2009 and 2008 is unaudited)
(Dollars in thousands, except per share amounts, unless otherwise noted)
1. Basis of Financial Reporting
The accompanying unaudited consolidated financial statements of Nelnet, Inc. and subsidiaries (the
Company) as of March 31, 2009 and for the three months ended March 31, 2009 and 2008 have been
prepared on the same basis as the audited consolidated financial statements for the year ended
December 31, 2008 and, in the opinion of the Companys management, the unaudited consolidated
financial statements reflect all adjustments, consisting of normal recurring adjustments, necessary
for a fair presentation of results of operations for the interim periods presented. The
preparation of financial statements in conformity with U.S. generally accepted accounting
principles requires management to make estimates and assumptions that affect the amounts reported
in the consolidated financial statements and accompanying notes. Actual results could differ from
those estimates. Operating results for the three months ended March 31, 2009 are not necessarily
indicative of the results for the year ending December 31, 2009. The unaudited consolidated
financial statements should be read in conjunction with the Companys Annual Report on Form 10-K
for the year ended December 31, 2008. Certain amounts from 2008 have been reclassified to conform
to the current period presentation.
2. Student Loans Receivable and Allowance for Loan Losses
Student loans receivable consisted of the following:
|
|
|
|
|
|
|
|
|
|
|
As of |
|
|
As of |
|
|
|
March 31, 2009 |
|
|
December 31, 2008 |
|
|
|
|
|
|
|
|
|
|
Federally insured loans |
|
$ |
25,055,798 |
|
|
|
24,787,941 |
|
Non-federally insured loans |
|
|
218,375 |
|
|
|
273,108 |
|
|
|
|
|
|
|
|
|
|
|
25,274,173 |
|
|
|
25,061,049 |
|
Unamortized loan premiums and deferred origination costs |
|
|
398,661 |
|
|
|
402,881 |
|
Allowance for loan losses federally insured loans |
|
|
(27,310 |
) |
|
|
(25,577 |
) |
Allowance for loan losses non-federally insured loans |
|
|
(21,187 |
) |
|
|
(25,345 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
$ |
25,624,337 |
|
|
|
25,413,008 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Federally insured allowance as a percentage of ending balance of federally insured loans |
|
|
0.11 |
% |
|
|
0.10 |
% |
Non-federally insured allowance as a percentage of ending balance of non-federally insured loans |
|
|
9.70 |
% |
|
|
9.28 |
% |
Total allowance as a percentage of ending balance of total loans |
|
|
0.19 |
% |
|
|
0.20 |
% |
The Company has provided for an allowance for loan losses related to its student loan portfolio.
Activity in the allowance for loan losses is shown below:
|
|
|
|
|
|
|
|
|
|
|
Three months ended March 31, |
|
|
|
2009 |
|
|
2008 |
|
|
|
|
|
|
|
|
|
|
Beginning balance |
|
$ |
50,922 |
|
|
|
45,592 |
|
Provision for loan losses |
|
|
7,500 |
|
|
|
5,000 |
|
Loans charged off, net of recoveries |
|
|
(3,905 |
) |
|
|
(3,705 |
) |
Sale of loans |
|
|
(6,020 |
) |
|
|
(750 |
) |
|
|
|
|
|
|
|
Ending balance |
|
$ |
48,497 |
|
|
|
46,137 |
|
|
|
|
|
|
|
|
Loan Sales
During
2008 and the three months ended March 31, 2009, the Company sold federally insured student loans to third parties in order to
reduce the amount of student loans remaining under the Companys multi-year committed financing
facility for Federal Family Education Loan Program (FFELP) loans, which reduced the Companys exposure related to certain equity support
provisions included in this facility (see note 3 for additional information related to these equity
support provisions).
6
On March 31, 2008, the Company sold $857.8 million (par value) of federally insured student loans
resulting in the recognition of a loss of $30.4 million. In addition, on April 8, 2008, the
Company sold $428.6 million (par value) of federally insured student loans. The portfolio of
student loans sold on April 8, 2008 was presented as held for sale on the March 31, 2008
consolidated balance sheet and was valued at the lower of cost or fair value. The Company
recognized a loss of $17.1 million during the three month period ended March 31, 2008 as a result
of marking these loans to fair value.
On January 29, 2009, the Company sold $20.0 million (par value) of federally insured student loans
to Union Bank & Trust Company (Union Bank), an entity under common control with the Company,
resulting in the recognition of a loss of $0.2 million.
In addition, during the three month period ended March 31, 2009, the Company participated $50.5
million of non-federally insured loans to third parties. Loans participated under these agreements
qualify as sales pursuant to the provisions of Statement of Financial Accounting Standards (SFAS)
No. 140, Accounting for Transfers and Servicing of Financial Assets and Extinguishments of
Liabilities (SFAS No. 140). Accordingly, the participation interests sold are not included on
the Companys consolidated balance sheet. The loss on the sale of these loans was not material.
Per the terms of the servicing agreements, the Companys
servicing operations are obligated to repurchase loans subject to
the participation interests when such loans become 60 or 90 days delinquent. As of March 31, 2009, the
Company has $5.5 million accrued related to this obligation which is included in other liabilities
in the accompanying consolidated balance sheet.
3. Bonds and Notes Payable
The following tables summarize outstanding bonds and notes payable by type of instrument:
|
|
|
|
|
|
|
|
|
|
|
As of March 31, 2009 |
|
|
Carrying |
|
|
Interest rate |
|
|
|
|
amount |
|
|
range |
|
Final maturity |
|
|
|
|
|
|
|
|
|
Variable-rate bonds and notes (a): |
|
|
|
|
|
|
|
|
Bonds and notes based on indices |
|
$ |
20,387,802 |
|
|
0.95% 6.90% |
|
09/25/13 06/25/41 |
Bonds and notes based on auction or remarketing |
|
|
2,667,635 |
|
|
0.92% 3.75% |
|
11/01/09 07/01/43 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total variable-rate bonds and notes |
|
|
23,055,437 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Commercial paper FFELP facility (b) |
|
|
1,369,485 |
|
|
0.41% 1.37% |
|
05/09/10 |
Fixed-rate bonds and notes (a) |
|
|
193,362 |
|
|
5.30% 6.50% |
|
11/01/09 05/01/29 |
Unsecured fixed rate debt |
|
|
440,134 |
|
|
5.125% and 7.40% |
|
06/01/10 and 09/15/61 |
Unsecured line of credit |
|
|
691,500 |
|
|
1.04% 1.10% |
|
05/08/12 |
Department of Education Participation |
|
|
1,360,159 |
|
|
3.08% |
|
09/30/09 |
Other borrowings |
|
|
20,329 |
|
|
0.50% 5.10% |
|
01/01/10 11/01/15 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
$ |
27,130,406 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
As of December 31, 2008 |
|
|
Carrying |
|
|
Interest rate |
|
|
|
|
amount |
|
|
range |
|
Final maturity |
|
|
|
|
|
|
|
|
|
Variable-rate bonds and notes (a): |
|
|
|
|
|
|
|
|
Bonds and notes based on indices |
|
$ |
20,509,073 |
|
|
0.75% 5.02% |
|
09/25/13 06/25/41 |
Bonds and notes based on auction or remarketing |
|
|
2,713,285 |
|
|
0.00% 6.00% |
|
11/01/09 07/01/43 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total variable-rate bonds and notes |
|
|
23,222,358 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Commercial paper FFELP facility (b) |
|
|
1,445,327 |
|
|
1.32% 2.94% |
|
05/09/10 |
Commercial paper private loan facility (b) |
|
|
95,020 |
|
|
2.49% |
|
03/14/09 |
Fixed-rate bonds and notes (a) |
|
|
202,096 |
|
|
5.30% 6.68% |
|
11/01/09 05/01/29 |
Unsecured fixed rate debt |
|
|
475,000 |
|
|
5.125% and 7.40% |
|
06/01/10 and 09/15/61 |
Unsecured line of credit |
|
|
691,500 |
|
|
0.98% 2.41% |
|
05/08/12 |
Department of Education Participation |
|
|
622,170 |
|
|
3.37% |
|
09/30/09 |
Other borrowings |
|
|
34,488 |
|
|
1.25% 5.47% |
|
05/22/09 11/01/15 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
$ |
26,787,959 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(a) |
|
Issued in asset-backed securitizations. |
|
(b) |
|
Loan warehouse facilities. |
7
Secured Financing Transactions
The Company has historically relied upon secured financing vehicles as its most significant source
of funding for student loans. The net cash flow the Company receives from the securitized student
loans generally represents the excess amounts, if any, generated by the underlying student loans
over the amounts required to be paid to the bondholders, after deducting servicing fees and any
other expenses relating to the securitizations. The Companys rights to cash flow from securitized
student loans are subordinate to bondholder interests and may fail to generate any cash flow beyond
what is due to bondholders. The Companys secured financing vehicles are loan warehouse
facilities, asset-backed securitizations, and the governments Participation Program (as described
below).
Most of the bonds and notes payable are primarily secured by the student loans receivable, related
accrued interest, and by the amounts on deposit in the accounts established under the respective
bond resolutions or financing agreements. The student loan interest margin notes, included in fixed
rate bonds and notes in the above tables, are secured by the rights to residual cash flows from
certain variable rate bonds and notes and fixed rate notes. Certain variable rate bonds and notes
and fixed rate bonds are secured by financial guaranty insurance policies or a letter of credit and
reimbursement agreement issued by Municipal Bond Investors Assurance Corporation, Ambac Assurance
Corporation, and State Street.
On July 31, 2008, the Company did not renew its liquidity provisions on its FFELP loan warehouse
facility. Accordingly, the facility became a term facility and no new loan originations could be
funded with this facility. In August 2008, the Company began to fund FFELP student loan
originations for the 2008-2009 academic year pursuant to the U.S. Department of Educations Loan
Participation Program (Participation Program) and an existing participation agreement with Union
Bank.
Loan warehouse facilities
Student loan warehousing has historically allowed the Company to buy and manage student loans prior
to transferring them into more permanent financing arrangements. To support its funding needs on a
short-term basis, the Company historically relied upon a multi-year committed facility for FFELP
loans and a $250.0 million private loan warehouse for non-federally insured student loans.
FFELP Warehouse Facility
The Companys multi-year committed facility for FFELP loans terminates in May 2010 and was
supported by 364-day liquidity which was up for renewal on May 9, 2008. The Company obtained an
extension on this renewal until July 31, 2008. On July 31, 2008, the Company did not renew the
liquidity provisions of this facility. Accordingly, as of July 31, 2008, the facility became a
term facility with a final maturity date of May 9, 2010. Pursuant to the terms of the agreement,
since liquidity was not renewed, the Companys cost of financing under this facility increased 10
basis points. The agreement also includes provisions which allow the banks to charge a rate equal
to LIBOR plus 128.5 basis points if they choose to finance their portion of the facility with
sources of funds other than their commercial paper conduit. As of March 31, 2009, the Company had
$1.2 billion of student loans in the facility and $1.4 billion borrowed under the facility.
The terms and conditions of the Companys warehouse facility for FFELP loans provides for formula
based advance rates based on market conditions. While the Company does not believe that the loan
valuation formula is reflective of the actual fair value of its loans, it is subject to compliance
with such mark-to-formula provisions of the warehouse facility agreement. As of March 31, 2009, the
Company had a cumulative amount of $206.7 million posted as equity funding support for this
facility.
On March 26, 2009, the Company completed a privately placed asset-backed securitization of $294.6
million. Subsequent to March 31, 2009, the Company used the proceeds from the sale of these notes
and additional funds of approximately $10 million to purchase approximately $305 million of
principal and interest on student loans, which were previously financed under the Companys FFELP
warehouse facility, which allowed the Company to withdraw cash posted
as equity funding support for the facility. As of May 8, 2009, the Company had $1.2 billion of
student loans in the FFELP warehouse facility, $1.1 billion borrowed under the facility, and $96.6
million posted as equity funding support for the facility.
The Company continues to look at various alternatives to remove loans from the warehouse facility
including other financing arrangements, using unrestricted operating cash, and/or selling loans to
third parties. In addition, in January 2009, the U.S. Department of Education (the Department)
published summary terms under which it will finance eligible FFELP Stafford and PLUS loans in a
conduit vehicle established to provide funding for student lenders (the Conduit Program). Loans
eligible for the Conduit Program must be first disbursed on or after October 1, 2003, but not later
than June 30, 2009, and fully disbursed before September 30, 2009, and meet certain other
requirements. Funding for the Conduit Program will be provided by the capital markets at a cost
based on market rates. The Conduit Program will have a term of five years. As of May 8, 2009, the
Company had approximately $845 million of loans included in its
FFELP warehouse facility that would be
eligible for the Conduit Program.
8
Private Loan Warehouse Facility
On
February 25, 2009, the Company paid $91.5 million on the outstanding debt of its private loan
warehouse facility with operating cash and terminated the facility. Beginning in January 2008, the
Company suspended private student loan originations.
Asset-backed
securitizations
As part of the Companys issuance of asset-backed securities 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 Companys consolidated balance sheet. If the credit market
conditions 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. Upon sale, these notes would be shown as bonds and notes payable on the
Companys consolidated balance sheet. Unless there is a significant market improvement, the
Company believes the market value of such notes will be less than par value. The difference
between the par value and market value would be recognized by the Company as interest expense over
the life of the bonds.
Department of Educations Loan Participation and Purchase Commitment Programs
In August 2008, the Department implemented the Loan Purchase Commitment Program (the Purchase
Program) and the Loan Participation Program pursuant to the Ensuring Continued Access to Student
Loans Act of 2008 (ECASLA). Under the Departments Purchase Program, the Department will purchase
loans at a price equal to the sum of (i) par value, (ii) accrued interest, (iii) the one percent
origination fee paid to the Department, and (iv) a fixed amount of $75 per loan. Under the
Participation Program, the Department provides interim short term liquidity to FFELP lenders by
purchasing participation interests in pools of FFELP loans. FFELP lenders are charged a rate of
commercial paper plus 50 basis points on the principal amount of participation interests
outstanding. Loans funded under the Participation Program must be either refinanced by the lender
or sold to the Department pursuant to the Purchase Program prior to its expiration on September 30,
2009. To be eligible for purchase or participation under the Departments programs, loans were
originally limited to FFELP Stafford or PLUS loans made for the academic year 2008-2009, first
disbursed between May 1, 2008 and July 1, 2009, with eligible borrower benefits.
On October 7, 2008, legislation was enacted to extend the Departments authority to address FFELP
student loans made for the 2009-2010 academic year and allowing for the extension of the
Participation Program and Purchase Program from September 30, 2009 to September 30, 2010. The
Department indicated that loans for the 2008-2009 academic year which are funded under the
Departments Participation Program will need to be refinanced or sold to the Department prior to
September 30, 2009. On November 8, 2008, the Department announced the replication of the terms of
the Participation and Purchase Program, in accordance with the
October 7, 2008 legislation,
which will include FFELP student loans made for the 2009-2010
academic year.
As of March 31, 2009, the Company had $1.4 billion of FFELP loans funded using the Participation
Program. The Company plans to continue to use the Participation Program to fund loans originated
for the 2008-2009 and 2009-2010 academic years. The Company has not yet determined if it will sell its
2008-2009 academic year loans to the Department under the Purchase
Program.
Union Bank Participation Agreement
The Company maintains an agreement with Union Bank, as trustee for various grantor trusts, under
which Union Bank has agreed to purchase from the Company participation interests in student loans
(the FFELP Participation Agreement). The Company has the option to purchase the participation
interests from the grantor trusts at the end of a 364-day term upon termination of the
participation certificate. As of March 31, 2009 and December 31, 2008, $784.3 million and $548.4
million, respectively, of loans were subject to outstanding participation interests held by Union
Bank, as trustee, under this agreement. The agreement automatically renews annually and is
terminable by either party upon five business days notice. This agreement provides beneficiaries of
Union Banks grantor trusts with access to investments in interests in student loans, while
providing liquidity to the Company on a short-term basis. The Company can participate loans to
Union Bank to the extent of availability under the grantor trusts, up to $750 million or an amount
in excess of $750 million if mutually agreed to by both parties. Loans participated under this
agreement qualify as a sale pursuant to the provisions of SFAS No. 140. Accordingly, the
participation interests sold are not included on the Companys consolidated balance sheet.
Unsecured Line of Credit
The Company has a $750.0 million unsecured line of credit that terminates in May 2012. As of March
31, 2009, there was $691.5 million outstanding on this line. The weighted average interest rate on
this line of credit was 1.04% as of March 31, 2009. Upon termination in 2012, there can be no
assurance that the Company will be able to maintain this line of credit, find alternative funding,
or increase the amount outstanding under the line, if necessary. The lending commitment under the Companys
unsecured line of credit is provided by a total of thirteen banks, with no individual bank
representing more than 11% of the total lending commitment. The bank lending group includes Lehman
Brothers Bank (Lehman), a subsidiary of Lehman Brothers Holdings Inc., which represents
approximately 7% of the lending commitment under the line of credit. On September 15, 2008, Lehman
Brothers Holdings Inc. filed a voluntary petition for relief under Chapter 11 of the United States
Bankruptcy Code. Since the bankruptcy filing, the Company has experienced funding delays from
Lehman for its portion of the lending commitment under the line of credit and the Company does not
expect Lehman to fund future borrowing requests. As of March 31, 2009, excluding Lehman Banks
lending commitment, the Company has $51.2 million available for future use under its unsecured line
of credit.
9
The line of credit agreement contains certain financial covenants that, if not met, lead to an
event of default under the agreement. The covenants include maintaining:
|
|
|
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 Companys portfolio |
As of March 31, 2009, the Company was in compliance with all of these requirements. Many of these
covenants are duplicated in the Companys other lending facilities, including its FFELP warehouse
facility.
The Companys operating line of credit does not have any covenants related to unsecured debt
ratings. However, changes in the Companys ratings (as well as the amounts the Company borrows)
have modest implications on the pricing level at which the Company obtains funding.
Unsecured Fixed Rate Debt
During the first quarter of 2009, the Company purchased $34.9 million of its 5.125% unsecured fixed
rate debt with a maturity date of June 1, 2010 for $26.8 million. These transactions resulted in a
gain of $8.1 million, which is included in other income on the Companys consolidated statements
of operations. (See note 11 for additional unsecured fixed rate debt purchases made by the Company
subsequent to March 31, 2009).
4. Derivative Financial Instruments
The Company is exposed to certain risks relating to its ongoing business operations. The primary
risks managed by using derivative instruments are interest rate risk and foreign currency exchange
risk.
Interest Rate Risk
The Companys primary market risk exposure arises from fluctuations in its borrowing and lending
rates, the spread between which could impact the Company due to shifts in market interest rates.
Because the Company generates a significant portion of its earnings from its student loan spread,
the interest rate sensitivity of the balance sheet is a key profitability driver. The Company has
adopted a policy of periodically reviewing the mismatch related to the interest rate
characteristics of its assets and liabilities together with the Companys outlook as to current and
future market conditions. Based on those factors, the Company uses derivative instruments as part
of its overall risk management strategy.
The Company issues asset-backed securities, the vast majority being variable rate, to fund its
student loan assets. The variable rate debt is generally indexed to 3-month LIBOR, set by auction,
or through a remarketing process. The income generated by the Companys student loan assets is
generally driven by short term indices (treasury bills, commercial paper, and certain fixed rates)
that are different from those which affect the Companys liabilities (generally LIBOR), which
creates basis risk. Moreover, the Company also faces repricing risk due to the timing of the
interest rate resets on its liabilities, which may occur as infrequently as every quarter, and the
timing of the interest rate resets on its assets, which generally occurs daily. In a declining
interest rate environment, this may cause the Companys student loan spread to compress, while in a
rising rate environment, it may cause the spread to increase.
In using different index types and different index reset frequencies to fund assets, the Company is
exposed to interest rate risk in the form of basis risk and repricing risk, which, as noted above,
is the risk that the different indices may reset at different frequencies, or will not move in the
same direction or with the same magnitude. While these indices are short term with rate movements
that are highly correlated over a longer period of time, they have recently become less correlated.
There can be no assurance the indices will regain their high level of correlation in the future due
to capital market dislocations or other factors not within the Companys control.
The Company has used derivative instruments to hedge the repricing risk due to the timing of the
interest rate resets on its assets and liabilities. The Company has entered into basis swaps in
which the Company (i) receives three-month LIBOR set discretely in advance and pays a daily
weighted average three-month LIBOR less a spread as defined in the individual agreements (the
Average/Discrete Basis Swaps); and (ii) receives three-month LIBOR and pays one-month LIBOR less
a spread as defined in the agreements (the 1/3 Basis Swaps).
10
However, the Company does not generally hedge the basis risk due to the different interest rate
indices associated with its assets and liabilities since the derivatives needed to hedge this risk
are generally illiquid or non-existent and the relationship between the indices for most of the
Companys assets and liabilities has been highly correlated over a long period of time. Recently,
the spread has widened and may widen further, which has and may continue to have a significant
impact on the net spread of the Companys student loan portfolio.
As of March 31, 2009, the Company had approximately $23.9 billion of FFELP loans indexed to
three-month financial commercial paper rate and $20.4 billion of debt indexed to LIBOR. Due to the
unintended consequences of government intervention in the commercial paper markets and limited
issuances of qualifying financial commercial paper, the relationship between the three-month
financial CP and LIBOR rates has been distorted and volatile. To address this issue, the Department
announced that for purposes of calculating the FFELP loan index from October 27, 2008 to December
31, 2008, the Federal Reserves Commercial Paper Funding Facility rate was used for those days in
which no three-month financial commercial paper rate was available. This action partially mitigated
the volatility between CP and LIBOR during the fourth quarter of 2008. However, the Department did
not implement a similar methodology for the first quarter of 2009, which negatively impacted the
Companys interest income earned on its student loan portfolio.
The following table summarizes the Companys basis swaps outstanding as of March 31, 2009 and
December 31, 2008 used by the Company to hedge the repricing risk due to the timing of the interest
rate resets on its assets and liabilities.
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|
|
|
|
|
|
|
|
|
|
As of March 31, 2009 |
|
|
|
Notional Amount |
|
|
|
Average/Discrete |
|
|
|
|
Maturity |
|
Basis Swaps |
|
|
1/3 Basis Swaps |
|
|
|
|
|
|
|
|
|
|
2009 |
|
$ |
1,350,000 |
|
|
|
|
|
2011 (a) |
|
|
6,000,000 |
|
|
|
|
|
2018 |
|
|
|
|
|
|
1,300,000 |
|
2019 |
|
|
|
|
|
|
500,000 |
|
2021 |
|
|
|
|
|
|
250,000 |
|
2023 |
|
|
|
|
|
|
1,250,000 |
|
2024 |
|
|
|
|
|
|
250,000 |
|
2028 |
|
|
|
|
|
|
100,000 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
$ |
7,350,000 |
|
|
|
3,650,000 |
|
|
|
|
|
|
|
|
|
|
|
(a) |
|
Certain of these derivatives
have forward effective start dates of January 2010
($1.5 billion), February 2010 ($1.5 billion), and
March 2010 ($1.5 billion). |
|
|
|
|
|
|
|
|
|
|
|
As of December 31, 2008 |
|
|
|
Notional Amount |
|
|
|
Average/Discrete |
|
|
|
|
Maturity |
|
Basis Swaps |
|
|
1/3 Basis Swaps |
|
|
|
|
|
|
|
|
|
|
2010 |
|
$ |
4,500,000 |
|
|
|
|
|
2011 |
|
|
2,700,000 |
|
|
|
|
|
2012 |
|
|
2,400,000 |
|
|
|
|
|
2018 |
|
|
|
|
|
|
1,300,000 |
|
2023 |
|
|
|
|
|
|
1,250,000 |
|
2028 |
|
|
|
|
|
|
100,000 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
$ |
9,600,000 |
|
|
|
2,650,000 |
|
|
|
|
|
|
|
|
During
the three months ended March 31, 2009, the Company terminated and/or amended certain
basis swap agreements for net payments of $11.7 million.
11
Foreign Currency Exchange Risk
During 2006, the Company completed separate debt offerings of student loan asset-backed securities
that included 420.5 million and 352.7 million Euro-denominated notes (the Euro Notes) with
interest rates based on a spread to the EURIBOR index. As a result of this transaction, the Company
is exposed to market risk related to fluctuations in foreign currency exchange rates between the
U.S. dollar and Euro. The principal and accrued interest on these notes is re-measured at each
reporting period and recorded on the Companys balance sheet in U.S. dollars based on the foreign
currency exchange rate on that date. Changes in the principal and accrued interest amounts as a
result of foreign currency exchange rate fluctuations are included in the derivative market value,
foreign currency, and put option adjustments and derivative settlements, net in the Companys
consolidated statements of operations.
The Company entered into cross-currency interest rate swaps in connection with the issuance of the
Euro Notes. Under the terms of these derivative instrument agreements, the Company receives from a
counterparty a spread to the EURIBOR index based on notional amounts of 420.5 million and 352.7
million and pays a spread to the LIBOR index based on notional amounts of $500.0 million and $450.0
million, respectively. In addition, under the terms of these agreements, all principal payments on
the Euro Notes will effectively be paid at the exchange rate in effect as of the issuance of the
notes.
For the three months ended March 31, 2009, the Company recorded income of $47.2 million as a result
of re-measurement of the Euro Notes and a loss of $57.1 million for the change in the fair value of
the related derivative instruments. For the three months ended March 31, 2008, the Company
recorded a loss of $92.9 million as a result of the re-measurement of the Euro Notes and income of
$94.1 million for the change in the fair value of the related
derivative instruments.
The re-measurement of the Euro-denominated bonds correlates with the change in fair value of the
cross-currency interest rate swaps. However, the Company will experience unrealized gains or losses
related to the cross-currency interest rate swaps if the two underlying indices (and related
forward curve) do not move in parallel. Management intends to hold the cross-currency interest rate
swaps through the maturity of the Euro-denominated bonds.
Accounting for Derivative Financial Instruments
The
Company accounts for derivative instruments under SFAS No. 133,
Accounting for Derivative Instruments and Hedging Activities
(SFAS No. 133), which requires that every
derivative instrument be recorded on the balance sheet as either an asset or liability measured at
its fair value. Management has structured all of the Companys derivative transactions with the
intent that each is economically effective; however, the Companys derivative instruments do not
qualify for hedge accounting under SFAS No. 133. As a result, the change in fair value of
derivative instruments is recorded in the consolidated statements of operations at each reporting
date. Changes or shifts in the forward yield curve and fluctuations in currency rates can
significantly impact the valuation of the Companys derivatives. Accordingly, changes or shifts to
the forward yield curve and fluctuations in currency rates will impact the financial position and
results of operations of the Company. The change in fair value of the Companys derivatives are
included in derivative market value, foreign currency, and put option adjustments and derivative
settlements, net in the Companys consolidated statements of operations and resulted in an expense
of $52.1 million for the three months ended March 31, 2009 and income of $36.0 million for the
three months ended March 31, 2008.
Upon termination of a derivative instrument, any proceeds received or payments made by the Company
are included in derivative market value, foreign currency, and put option adjustments and
derivative settlements, net on the consolidated statements of
operations and are accounted for as a
change in fair value on such derivative.
The following table summarizes the fair value of the Companys derivatives not designated as
hedging instruments under SFAS No. 133:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Asset
derivatives |
|
|
Liability derivatives
|
|
|
|
Fair value as of |
|
|
Fair value as of |
|
|
Fair value as of |
|
|
Fair value as of |
|
|
|
March 31, 2009 |
|
|
December 31, 2008 |
|
|
March 31, 2009 |
|
|
December 31, 2008 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Average/discrete basis swaps |
|
$ |
761 |
|
|
|
2,817 |
|
|
|
(31 |
) |
|
|
(1,800 |
) |
1/3 basis swaps |
|
|
22,039 |
|
|
|
5,037 |
|
|
|
(33 |
) |
|
|
(15 |
) |
Cross-currency interest
rate swaps |
|
|
110,210 |
|
|
|
167,320 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total |
|
$ |
133,010 |
|
|
|
175,174 |
|
|
|
(64 |
) |
|
|
(1,815 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
12
The following table summarizes the effect of derivative instruments in the consolidated statements
of operations. All gains and losses recognized in income related to the Companys derivative
activity are included in Derivative market value, foreign currency, and put option adjustments and
derivative settlements, net, on the consolidated statements of operations.
|
|
|
|
|
|
|
|
|
|
|
Amount of gain (or loss) recognized |
|
|
|
in
income on derivatives |
|
Derivatives not designated |
|
Three months ended March 31 |
|
as hedging under SFAS No. 133 |
|
2009 |
|
|
2008 |
|
Settlements: |
|
|
|
|
|
|
|
|
Interest rate swaps |
|
$ |
|
|
|
|
(3,177 |
) |
Average/discrete basis swaps |
|
|
10,022 |
|
|
|
39,573 |
|
1/3 basis swaps |
|
|
10,744 |
|
|
|
884 |
|
Cross-currency interest rate swaps |
|
|
3,592 |
|
|
|
3,483 |
|
|
|
|
|
|
|
|
Total settlements |
|
|
24,358 |
|
|
|
40,763 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Change in fair value: |
|
|
|
|
|
|
|
|
Interest rate swaps |
|
|
|
|
|
|
(34,871 |
) |
Average/discrete basis swaps |
|
|
(286 |
) |
|
|
(26,289 |
) |
1/3 basis swaps |
|
|
5,274 |
|
|
|
2,568 |
|
Cross-currency interest rate swaps |
|
|
(57,110 |
) |
|
|
94,129 |
|
Other |
|
|
|
|
|
|
466 |
|
|
|
|
|
|
|
|
Total change in fair value |
|
|
(52,122 |
) |
|
|
36,003 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total impact
to statements of operations |
|
$ |
(27,764 |
) |
|
|
76,766 |
|
|
|
|
|
|
|
|
Derivative Instruments Credit and Market Risk
By using derivative instruments, the Company is exposed to credit and market risk.
When
the fair value of a derivative instrument is negative, the Company
would owe the counterparty if the derivative was settled and,
therefore, has no immediate credit risk. Additionally, if the negative fair value of derivatives
with a counterparty exceeds a specified threshold, the Company may have to make a collateral
deposit with the counterparty. The threshold at which the Company posts collateral may depend on
the Companys unsecured credit rating. If interest and foreign currency exchange rates move
materially, the Company could be required to deposit a significant amount of collateral with its
derivative instrument counterparties. The collateral deposits, if significant, could negatively
impact the Companys capital resources.
When the fair value of a derivative contract is positive, this generally indicates that the
counterparty would owe the Company if the derivative was settled. If the counterparty fails to perform, credit risk with such
counterparty is equal to the extent of the fair value gain in the derivative less any collateral
held by the Company.
The Company attempts to manage market and credit risks associated with interest and foreign
currency exchange rates by establishing and monitoring limits as to the types and degree of risk
that may be undertaken, and by entering into transactions with high-quality counterparties that are
reviewed periodically by the Companys risk committee. The Company also has a policy of requiring
that all derivative contracts be governed by an International Swaps and Derivatives Association,
Inc. Master Agreement.
5. Segment Reporting
The Company has five operating segments as defined in SFAS No. 131, Disclosures about Segments of
an Enterprise and Related Information (SFAS No. 131), as follows: Student Loan and Guaranty Servicing, Tuition
Payment Processing and Campus Commerce, Enrollment Services, Software and Technical Services, and
Asset Generation and Management. The Companys operating segments are defined by the products and
services they offer or the types of customers they serve, and they reflect the manner in which
financial information is currently evaluated by management. The accounting policies of the
Companys operating segments are the same as those described in the summary of significant
accounting policies. Intersegment revenues are charged by a segment to another segment that
provides the product or service. Intersegment revenues and expenses are included within each
segment consistent with the income statement presentation provided to management. Changes in
management structure or allocation methodologies and procedures may result in changes in reported
segment financial information.
13
The management reporting process measures the performance of the Companys operating segments based
on the management structure of the Company as well as the methodology used by management to
evaluate performance and allocate resources. Management, including the Companys chief operating
decision maker, evaluates the performance of the Companys operating segments based on their
profitability. As discussed further below, management measures the profitability of the Companys
operating segments based on base net income. Accordingly, information regarding the Companys
operating segments is provided based on base net income. The Companys base net income is not
a defined term within generally accepted accounting principles (GAAP) and may not be comparable
to similarly titled measures reported by other companies. Unlike financial accounting, there is no
comprehensive, authoritative guidance for management reporting.
Historically, the Company generated the majority of its revenue from net interest income earned in
its Asset Generation and Management operating segment. In recent years, the Company has made
several acquisitions that have expanded the Companys products and services and has diversified its
revenue primarily from fee-based businesses. The Company currently offers a broad range of
pre-college, in-college, and post-college products and services to students, families, schools, and
financial institutions. These products and services help students and families plan and pay for
their education and students plan their careers. The Companys products and services are designed
to simplify the education planning and financing process and are focused on providing value to
students, families, and schools throughout the education life cycle. The Company continues to
diversify its sources of revenue, including those generated from businesses that are not dependent
upon government programs, thereby reducing legislative and political risk.
Fee-Based Operating Segments
Student Loan and Guaranty Servicing
The Student Loan and Guaranty Servicing segment provides for the servicing of the Companys student
loan portfolios and the portfolios of third parties and servicing provided to guaranty agencies.
The servicing and business process outsourcing activities include loan origination activities,
application processing, borrower updates, payment processing, due diligence procedures, and claim
processing. These activities are performed internally for the Companys portfolio in addition to
generating fee revenue when performed for third-party clients. The guaranty servicing, servicing
support, and business process outsourcing activities include providing software and data center
services, borrower and loan updates, default aversion tracking services, claim processing services,
and post-default collection services to guaranty agencies. The following are the primary product
and service offerings the Company offers as part of its Student Loan and Guaranty Servicing
segment:
|
|
|
Origination and servicing of FFELP loans |
|
|
|
Origination and servicing of non-federally insured student loans |
|
|
|
Servicing and support outsourcing for guaranty agencies |
Tuition Payment Processing and Campus Commerce
The Tuition Payment Processing and Campus Commerce segment provides products and services to help
institutions and education-seeking families manage the payment of education costs during the
pre-college and college stages of the education life cycle. The Company provides actively managed
tuition payment solutions, online payment processing, detailed information reporting, financial
needs analysis, and data integration services to K-12 and higher educational institutions,
families, and students. In addition, the Company provides customer-focused electronic transactions,
information sharing, and account and bill presentment to colleges and universities.
Enrollment Services
The Enrollment Services segment offers products and services that are focused on helping (i)
students plan and prepare for life after high school (content management and publishing and editing
services) and (ii) colleges recruit and retain students (lead generation and recruitment services).
Content management products and services include online courses, admissions consulting, licensing
of scholarship data, and call center services. Publishing and editing services include test
preparation study guides and essay and resume editing services. Lead generation products and
services include vendor lead management services and admissions lead generation. Recruitment
services include pay per click marketing management, email marketing, and list marketing services.
Software and Technical Services
The Software and Technical Services segment provides information technology products and
full-service technical consulting, with core areas of business in educational loan software
solutions, business intelligence, technical consulting services, and Enterprise Content Management
solutions.
Asset Generation and Management Operating Segment
The Asset Generation and Management segment includes the acquisition, management, and ownership of
the Companys student loan assets. Revenues are primarily generated from the Companys earnings
from the spread, referred to as the Companys student loan spread, between the yield received on
the student loan portfolio and the costs associated with originating, acquiring, and financing its
student loan portfolio. The Company generates student loan assets through direct origination or
through acquisitions. The student loan assets are held in a series of education lending
subsidiaries designed specifically for this purpose. In addition to the student loan portfolio, all
costs and activity associated with the generation of assets, funding of those assets, and
maintenance of the debt transactions are included in this segment. This includes derivative
activity and the related derivative market value and foreign currency adjustments. The Company is
also able to leverage its capital market expertise by providing investment advisory services and
other related services to third parties through a licensed broker dealer subsidiary. Revenues and
expenses for those functions are also included in the Asset Generation and Management segment.
14
Segment Operating Results Base Net Income
The tables below include the operating results of each of the Companys operating segments.
Management, including the chief operating decision maker, evaluates the Company on certain non-GAAP
performance measures that the Company refers to as base net income for each operating segment.
While base net income is not a substitute for reported results under GAAP, the Company relies on
base net income to manage each operating segment because it believes this measure provides
additional information regarding the operational and performance indicators that are most closely
assessed by management.
Base net income is the primary financial performance measure used by management to develop the
Companys financial plans, track results, and establish corporate performance targets and incentive
compensation. Management believes this information provides additional insight into the financial
performance of the core business activities of the Companys operating segments. Accordingly, the
tables presented below reflect base net income, which is the operating measure reviewed and
utilized by management to manage the business. Reconciliation of the segment totals to the
Companys operating results in accordance with GAAP are also included in the tables below.
Segment Results and Reconciliations to GAAP
|
|
|
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|
Three months ended March 31, 2009 |
|
|
|
Fee-Based |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Student |
|
|
Tuition |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Base net |
|
|
|
|
|
|
Loan |
|
|
Payment |
|
|
|
|
|
|
Software |
|
|
|
|
|
|
Asset |
|
|
Corporate |
|
|
|
|
|
|
income |
|
|
|
|
|
|
and |
|
|
Processing |
|
|
|
|
|
|
and |
|
|
Total |
|
|
Generation |
|
|
Activity |
|
|
Eliminations |
|
|
Adjustments |
|
|
GAAP |
|
|
|
Guaranty |
|
|
and Campus |
|
|
Enrollment |
|
|
Technical |
|
|
Fee- |
|
|
and |
|
|
and |
|
|
and |
|
|
to GAAP |
|
|
Results of |
|
|
|
Servicing |
|
|
Commerce |
|
|
Services |
|
|
Services |
|
|
Based |
|
|
Management |
|
|
Overhead |
|
|
Reclassifications |
|
|
Results |
|
|
Operations |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total interest income |
|
$ |
66 |
|
|
|
30 |
|
|
|
|
|
|
|
|
|
|
|
96 |
|
|
|
172,587 |
|
|
|
1,427 |
|
|
|
(560 |
) |
|
|
1,460 |
|
|
|
175,010 |
|
Interest expense |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
138,594 |
|
|
|
8,468 |
|
|
|
(560 |
) |
|
|
|
|
|
|
146,502 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net interest income (loss) |
|
|
66 |
|
|
|
30 |
|
|
|
|
|
|
|
|
|
|
|
96 |
|
|
|
33,993 |
|
|
|
(7,041 |
) |
|
|
|
|
|
|
1,460 |
|
|
|
28,508 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Less provision for loan losses |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
7,500 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
7,500 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net interest income (loss) after provision
for loan losses |
|
|
66 |
|
|
|
30 |
|
|
|
|
|
|
|
|
|
|
|
96 |
|
|
|
26,493 |
|
|
|
(7,041 |
) |
|
|
|
|
|
|
1,460 |
|
|
|
21,008 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
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|
|
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|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Other income (expense): |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Loan and guaranty servicing revenue |
|
|
26,853 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
26,853 |
|
|
|
|
|
|
|
(382 |
) |
|
|
|
|
|
|
|
|
|
|
26,471 |
|
Tuition payment processing and campus commerce revenue |
|
|
|
|
|
|
15,538 |
|
|
|
|
|
|
|
|
|
|
|
15,538 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
15,538 |
|
Enrollment services revenue |
|
|
|
|
|
|
|
|
|
|
28,771 |
|
|
|
|
|
|
|
28,771 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
28,771 |
|
Software services revenue |
|
|
875 |
|
|
|
|
|
|
|
|
|
|
|
4,830 |
|
|
|
5,705 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
5,705 |
|
Other income |
|
|
112 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
112 |
|
|
|
4,651 |
|
|
|
12,099 |
|
|
|
|
|
|
|
|
|
|
|
16,862 |
|
Loss on sale of loans |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(206 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(206 |
) |
Intersegment revenue |
|
|
19,878 |
|
|
|
57 |
|
|
|
|
|
|
|
3,124 |
|
|
|
23,059 |
|
|
|
|
|
|
|
8,921 |
|
|
|
(31,980 |
) |
|
|
|
|
|
|
|
|
Derivative market value, foreign currency,
and put option adjustments |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(4,880 |
) |
|
|
(4,880 |
) |
Derivative settlements, net |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
24,358 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
24,358 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total other income (expense) |
|
|
47,718 |
|
|
|
15,595 |
|
|
|
28,771 |
|
|
|
7,954 |
|
|
|
100,038 |
|
|
|
28,803 |
|
|
|
20,638 |
|
|
|
(31,980 |
) |
|
|
(4,880 |
) |
|
|
112,619 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Operating expenses: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Salaries and benefits |
|
|
14,704 |
|
|
|
6,545 |
|
|
|
6,095 |
|
|
|
5,185 |
|
|
|
32,529 |
|
|
|
1,775 |
|
|
|
6,267 |
|
|
|
(2,504 |
) |
|
|
159 |
|
|
|
38,226 |
|
Cost to provide enrollment services |
|
|
|
|
|
|
|
|
|
|
17,793 |
|
|
|
|
|
|
|
17,793 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
17,793 |
|
Other expenses |
|
|
8,597 |
|
|
|
2,408 |
|
|
|
3,295 |
|
|
|
678 |
|
|
|
14,978 |
|
|
|
4,959 |
|
|
|
10,461 |
|
|
|
|
|
|
|
6,154 |
|
|
|
36,552 |
|
Intersegment expenses |
|
|
9,470 |
|
|
|
623 |
|
|
|
546 |
|
|
|
645 |
|
|
|
11,284 |
|
|
|
17,876 |
|
|
|
316 |
|
|
|
(29,476 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total operating expenses |
|
|
32,771 |
|
|
|
9,576 |
|
|
|
27,729 |
|
|
|
6,508 |
|
|
|
76,584 |
|
|
|
24,610 |
|
|
|
17,044 |
|
|
|
(31,980 |
) |
|
|
6,313 |
|
|
|
92,571 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Income (loss) before income taxes |
|
|
15,013 |
|
|
|
6,049 |
|
|
|
1,042 |
|
|
|
1,446 |
|
|
|
23,550 |
|
|
|
30,686 |
|
|
|
(3,447 |
) |
|
|
|
|
|
|
(9,733 |
) |
|
|
41,056 |
|
Income tax (expense) benefit (a) |
|
|
(5,705 |
) |
|
|
(2,298 |
) |
|
|
(396 |
) |
|
|
(550 |
) |
|
|
(8,949 |
) |
|
|
(11,661 |
) |
|
|
1,310 |
|
|
|
|
|
|
|
3,699 |
|
|
|
(15,601 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net income (loss) |
|
$ |
9,308 |
|
|
|
3,751 |
|
|
|
646 |
|
|
|
896 |
|
|
|
14,601 |
|
|
|
19,025 |
|
|
|
(2,137 |
) |
|
|
|
|
|
|
(6,034 |
) |
|
|
25,455 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(a) |
|
Tax effect is computed at
the Companys blended, statutory federal and state rate of 38%. |
15
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Three months ended March 31, 2008 |
|
|
|
Fee-Based |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Student |
|
|
Tuition |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Base net |
|
|
|
|
|
|
Loan |
|
|
Payment |
|
|
|
|
|
|
Software |
|
|
|
|
|
|
Asset |
|
|
Corporate |
|
|
|
|
|
|
income |
|
|
|
|
|
|
and |
|
|
Processing |
|
|
|
|
|
|
and |
|
|
Total |
|
|
Generation |
|
|
Activity |
|
|
Eliminations |
|
|
Adjustments |
|
|
GAAP |
|
|
|
Guaranty |
|
|
and Campus |
|
|
Enrollment |
|
|
Technical |
|
|
Fee- |
|
|
and |
|
|
and |
|
|
and |
|
|
to GAAP |
|
|
Results of |
|
|
|
Servicing |
|
|
Commerce |
|
|
Services |
|
|
Services |
|
|
Based |
|
|
Management |
|
|
Overhead |
|
|
Reclassifications |
|
|
Results |
|
|
Operations |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total interest income |
|
$ |
613 |
|
|
|
765 |
|
|
|
9 |
|
|
|
|
|
|
|
1,387 |
|
|
|
320,358 |
|
|
|
1,197 |
|
|
|
(94 |
) |
|
|
18,818 |
|
|
|
341,666 |
|
Interest expense |
|
|
|
|
|
|
|
|
|
|
1 |
|
|
|
|
|
|
|
1 |
|
|
|
316,015 |
|
|
|
9,219 |
|
|
|
(94 |
) |
|
|
|
|
|
|
325,141 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net interest income (loss) |
|
|
613 |
|
|
|
765 |
|
|
|
8 |
|
|
|
|
|
|
|
1,386 |
|
|
|
4,343 |
|
|
|
(8,022 |
) |
|
|
|
|
|
|
18,818 |
|
|
|
16,525 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Less provision for loan losses |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
5,000 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
5,000 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net interest income (loss) after provision
for loan losses |
|
|
613 |
|
|
|
765 |
|
|
|
8 |
|
|
|
|
|
|
|
1,386 |
|
|
|
(657 |
) |
|
|
(8,022 |
) |
|
|
|
|
|
|
18,818 |
|
|
|
11,525 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Other income (expense): |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Loan and guaranty servicing revenue |
|
|
24,656 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
24,656 |
|
|
|
5 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
24,661 |
|
Tutition payment processing and campus commerce revenue |
|
|
|
|
|
|
13,847 |
|
|
|
|
|
|
|
|
|
|
|
13,847 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
13,847 |
|
Enrollment services revenue |
|
|
|
|
|
|
|
|
|
|
27,222 |
|
|
|
|
|
|
|
27,222 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
27,222 |
|
Software services revenue |
|
|
1,452 |
|
|
|
|
|
|
|
37 |
|
|
|
6,715 |
|
|
|
8,204 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
8,204 |
|
Other income |
|
|
32 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
32 |
|
|
|
4,857 |
|
|
|
1,365 |
|
|
|
|
|
|
|
|
|
|
|
6,254 |
|
Loss on sale of loans |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(47,474 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(47,474 |
) |
Intersegment revenue |
|
|
20,224 |
|
|
|
260 |
|
|
|
|
|
|
|
1,816 |
|
|
|
22,300 |
|
|
|
|
|
|
|
17,212 |
|
|
|
(39,512 |
) |
|
|
|
|
|
|
|
|
Derivative market value, foreign currency,
and put option adjustments |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
466 |
|
|
|
|
|
|
|
|
|
|
|
(57,827 |
) |
|
|
(57,361 |
) |
Derivative settlements, net |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
43,527 |
|
|
|
|
|
|
|
|
|
|
|
(2,764 |
) |
|
|
40,763 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total other income (expense) |
|
|
46,364 |
|
|
|
14,107 |
|
|
|
27,259 |
|
|
|
8,531 |
|
|
|
96,261 |
|
|
|
1,381 |
|
|
|
18,577 |
|
|
|
(39,512 |
) |
|
|
(60,591 |
) |
|
|
16,116 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Operating expenses: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Salaries and benefits |
|
|
13,998 |
|
|
|
5,430 |
|
|
|
6,523 |
|
|
|
5,168 |
|
|
|
31,119 |
|
|
|
2,224 |
|
|
|
14,591 |
|
|
|
4,613 |
|
|
|
1,296 |
|
|
|
53,843 |
|
Restructure expense- severance and contract
termination costs |
|
|
851 |
|
|
|
|
|
|
|
297 |
|
|
|
518 |
|
|
|
1,666 |
|
|
|
1,896 |
|
|
|
3,915 |
|
|
|
(7,477 |
) |
|
|
|
|
|
|
|
|
Impairment expense |
|
|
5,074 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
5,074 |
|
|
|
9,351 |
|
|
|
4,409 |
|
|
|
|
|
|
|
|
|
|
|
18,834 |
|
Cost to provide enrollment services |
|
|
|
|
|
|
|
|
|
|
15,403 |
|
|
|
|
|
|
|
15,403 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
15,403 |
|
Other expenses |
|
|
8,487 |
|
|
|
2,060 |
|
|
|
2,760 |
|
|
|
619 |
|
|
|
13,926 |
|
|
|
5,344 |
|
|
|
13,865 |
|
|
|
1,062 |
|
|
|
6,560 |
|
|
|
40,757 |
|
Intersegment expenses |
|
|
13,278 |
|
|
|
296 |
|
|
|
1,847 |
|
|
|
394 |
|
|
|
15,815 |
|
|
|
20,602 |
|
|
|
1,293 |
|
|
|
(37,710 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total operating expenses |
|
|
41,688 |
|
|
|
7,786 |
|
|
|
26,830 |
|
|
|
6,699 |
|
|
|
83,003 |
|
|
|
39,417 |
|
|
|
38,073 |
|
|
|
(39,512 |
) |
|
|
7,856 |
|
|
|
128,837 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Income (loss) before income taxes |
|
|
5,289 |
|
|
|
7,086 |
|
|
|
437 |
|
|
|
1,832 |
|
|
|
14,644 |
|
|
|
(38,693 |
) |
|
|
(27,518 |
) |
|
|
|
|
|
|
(49,629 |
) |
|
|
(101,196 |
) |
Income tax (expense) benefit (a) |
|
|
(1,640 |
) |
|
|
(2,197 |
) |
|
|
(135 |
) |
|
|
(568 |
) |
|
|
(4,540 |
) |
|
|
11,995 |
|
|
|
8,531 |
|
|
|
|
|
|
|
15,385 |
|
|
|
31,371 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net income (loss) |
|
$ |
3,649 |
|
|
|
4,889 |
|
|
|
302 |
|
|
|
1,264 |
|
|
|
10,104 |
|
|
|
(26,698 |
) |
|
|
(18,987 |
) |
|
|
|
|
|
|
(34,244 |
) |
|
|
(69,825 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(a) |
|
For 2008, the consolidated effective tax rate for each applicable quarterly period is used to
calculate income taxes for each operating segment. |
Corporate Activity and Overhead in the previous tables primarily includes the following items:
|
|
|
Income earned on certain investment activities |
|
|
|
Interest expense incurred on unsecured debt transactions |
|
|
|
Other products and service offerings that are not considered operating segments |
|
|
|
Certain corporate activities and unallocated overhead functions related to executive
management, human resources, accounting and finance, legal, marketing, and corporate
technology support |
16
The adjustments required to reconcile from the Companys base net income measure to its GAAP
results of operations relate to differing treatments for derivatives, foreign currency transaction
adjustments, and certain other items that management does not consider in evaluating the Companys
operating results. The following tables reflect adjustments associated with these areas by
operating segment and Corporate Activity and Overhead:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Student |
|
|
Tuition |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Loan |
|
|
Payment |
|
|
|
|
|
|
Software |
|
|
Asset |
|
|
Corporate |
|
|
|
|
|
|
and |
|
|
Processing |
|
|
|
|
|
|
and |
|
|
Generation |
|
|
Activity |
|
|
|
|
|
|
Guaranty |
|
|
and Campus |
|
|
Enrollment |
|
|
Technical |
|
|
and |
|
|
and |
|
|
|
|
|
|
Servicing |
|
|
Commerce |
|
|
Services |
|
|
Services |
|
|
Management |
|
|
Overhead |
|
|
Total |
|
|
|
Three months ended March 31, 2009 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Derivative market value, foreign currency, and
put option adjustments (1) |
|
$ |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
4,880 |
|
|
|
|
|
|
|
4,880 |
|
Amortization of intangible assets (2) |
|
|
1,079 |
|
|
|
1,887 |
|
|
|
3,042 |
|
|
|
146 |
|
|
|
|
|
|
|
|
|
|
|
6,154 |
|
Compensation related to business combinations (3) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
159 |
|
|
|
159 |
|
Variable-rate floor income, net of settlements on
derivatives (4) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(1,460 |
) |
|
|
|
|
|
|
(1,460 |
) |
Net tax effect (5) |
|
|
(410 |
) |
|
|
(717 |
) |
|
|
(1,157 |
) |
|
|
(55 |
) |
|
|
(1,300 |
) |
|
|
(60 |
) |
|
|
(3,699 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total adjustments to GAAP |
|
$ |
669 |
|
|
|
1,170 |
|
|
|
1,885 |
|
|
|
91 |
|
|
|
2,120 |
|
|
|
99 |
|
|
|
6,034 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Three months ended March 31, 2008 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Derivative market value, foreign currency, and
put option adjustments (1) |
|
$ |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
57,400 |
|
|
|
427 |
|
|
|
57,827 |
|
Amortization of intangible assets (2) |
|
|
1,256 |
|
|
|
2,051 |
|
|
|
2,822 |
|
|
|
286 |
|
|
|
145 |
|
|
|
|
|
|
|
6,560 |
|
Compensation related to business combinations (3) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
1,296 |
|
|
|
1,296 |
|
Variable-rate floor income, net of settlements on
derivatives (4) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(16,054 |
) |
|
|
|
|
|
|
(16,054 |
) |
Net tax effect (5) |
|
|
(389 |
) |
|
|
(636 |
) |
|
|
(875 |
) |
|
|
(89 |
) |
|
|
(12,862 |
) |
|
|
(534 |
) |
|
|
(15,385 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total adjustments to GAAP |
|
$ |
867 |
|
|
|
1,415 |
|
|
|
1,947 |
|
|
|
197 |
|
|
|
28,629 |
|
|
|
1,189 |
|
|
|
34,244 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(1) |
|
Derivative market value, foreign currency, and put option 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 Companys 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 Companys 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 Companys
Euro-denominated bonds to U.S. dollars and the change in fair value of put options
issued by the Company for certain business acquisitions. |
|
(2) |
|
Amortization of intangible assets: Base net income excludes the amortization of
acquired intangibles. |
|
(3) |
|
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. Base net income excludes this expense. |
|
(4) |
|
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 Companys control which can affect the period-to-period
comparability of results of operations. |
|
|
|
Prior to October 1, 2008, variable rate floor income was calculated by the Company on
a statutory maximum basis. However, as a result of the disruption in the capital
markets beginning in August 2007, the full benefit of variable rate floor income
calculated on a statutory maximum basis has not been realized by the Company due to
the widening of the spread between short term interest rate indices and the Companys
actual cost of funds. As a result of the ongoing volatility of interest rates,
effective October 1, 2008, the Company changed its calculation of variable rate floor
income to better reflect the economic benefit received by the Company. For the three months ended March 31, 2009 and 2008, the economic
benefit received by the Company related to variable rate floor income was $1.5
million and $6.3 million, respectively. Variable rate floor income calculated on a
statutory maximum basis for the three months ended March 31, 2009 and 2008 was $10.8
million and $18.8 million, respectively. Beginning October 1, 2008, the economic
benefit received by the Company has been used to determine base net income. |
|
(5) |
|
In 2009, tax effect is
computed at the Companys blended, statutory federal and
state rate of 38%. In 2008, tax effect was computed using the Companys consolidated
effective tax rate for each applicable quarterly period. |
17
6. Intangible Assets and Goodwill
Intangible assets consist of the following:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Weighted |
|
|
|
|
|
|
|
|
|
average |
|
|
|
|
|
|
|
|
|
remaining |
|
|
|
|
|
|
|
|
|
useful life as of |
|
|
As of |
|
|
As of |
|
|
|
March 31, |
|
|
March 31, |
|
|
December 31, |
|
|
|
2009 |
|
|
2009 |
|
|
2008 |
|
Amortizable intangible assets: |
|
|
|
|
|
|
|
|
|
|
|
|
Customer relationships (net of accumulated amortization of $32,033
and $29,737, respectively) |
|
|
104 |
|
|
$ |
48,327 |
|
|
|
50,623 |
|
Trade names (net of accumulated amortization of $6,425 and
$5,478, respectively) |
|
|
40 |
|
|
|
10,634 |
|
|
|
11,581 |
|
Covenants not to compete (net of accumulated amortization of
$16,285 and $14,887, respectively) |
|
|
17 |
|
|
|
7,337 |
|
|
|
8,735 |
|
Database and content (net of accumulated amortization of $6,010
and $5,447, respectively) |
|
|
20 |
|
|
|
3,470 |
|
|
|
4,033 |
|
Computer software (net of accumulated amortization of $8,042
and $7,441, respectively) |
|
|
7 |
|
|
|
960 |
|
|
|
1,561 |
|
Student lists (net of accumulated amortization of $8,197 and
$7,855, respectively) |
|
|
|
|
|
|
|
|
|
|
342 |
|
Other (net of accumulated amortization of $102 and $95, respectively) |
|
|
83 |
|
|
|
172 |
|
|
|
179 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total amortizable intangible assets |
|
80 months |
|
|
$ |
70,900 |
|
|
|
77,054 |
|
|
|
|
|
|
|
|
|
|
|
The
Company recorded amortization expense on its intangible assets of
$6.2 million and $6.6 million for the three months ended March 31, 2009 and 2008, respectively. The Company will
continue to amortize intangible assets over their remaining useful lives. As of March 31, 2009,
the Company estimates it will record amortization expense as follows:
|
|
|
|
|
2009 |
|
$ |
16,169 |
|
2010 |
|
|
15,985 |
|
2011 |
|
|
10,031 |
|
2012 |
|
|
9,029 |
|
2013 |
|
|
6,168 |
|
2014 and thereafter |
|
|
13,518 |
|
|
|
|
|
|
|
$ |
70,900 |
|
|
|
|
|
The following table summarizes the Companys allocation of goodwill by operating segment as of
March 31, 2009 and December 31, 2008:
|
|
|
|
|
Tuition Payment Processing and Campus Commerce |
|
$ |
58,086 |
|
Enrollment Services |
|
|
66,613 |
|
Software and Technical Services |
|
|
8,596 |
|
Asset Generation and Management |
|
|
41,883 |
|
|
|
|
|
|
|
$ |
175,178 |
|
|
|
|
|
7. Fair Value
On January 1, 2008, the Company adopted SFAS No. 157, Fair Value Measurements (SFAS No. 157).
SFAS No. 157 defines fair value, establishes a consistent framework for measuring fair value, and
expands disclosure requirements about fair value measurements. SFAS No. 157 applies when other
accounting pronouncements require or permit fair value measurements; it does not require new fair
value measurements. In February 2008, the Financial Accounting Standards Board (FASB) released
FASB Staff Position SFAS No. 157-2, Effective Date of FASB Statement No. 157 (SFAS No. 157-2),
which delayed the application of SFAS No. 157 to nonfinancial assets and nonfinancial liabilities
to fiscal years beginning after November 15, 2008, and interim periods within those fiscal years.
Effective January 1, 2009, the Company adopted SFAS
No. 157-2 on certain nonfinancial assets and nonfinancial
liabilities, which are recorded at fair value only upon impairment.
18
Fair value under SFAS No. 157 is defined as the price to sell an asset or transfer a liability in
an orderly transaction between willing and able market participants. The Company determines fair
value using valuation techniques which are based upon observable and unobservable inputs.
Observable inputs reflect market data obtained from independent sources, while unobservable inputs
reflect the Companys market assumptions. Transaction costs are not included in the determination
of fair value. When possible, the Company seeks to validate the models output to market
transactions. Depending on the availability of observable inputs and prices, different valuation
models could produce materially different fair value estimates. The values presented may not
represent future fair values and may not be realizable. Additionally, there may be inherent
weaknesses in any calculation technique, and changes in the underlying assumptions used, including
discount rates and estimates of future cash flows, could significantly affect the results of
current or future values.
Under SFAS No. 157, the Company categorizes its fair value estimates based on a hierarchal
framework associated with three levels of price transparency utilized in measuring financial
instruments at fair value. Classification is based on the lowest level of input that is
significant to the fair value of the instrument. The three levels include:
|
|
Level 1: Quoted prices for identical instruments in active markets. The types of financial
instruments included in Level 1 are highly liquid instruments with quoted prices. |
|
|
Level 2: Quoted prices for similar instruments in active markets, quoted prices for
identical or similar instruments in markets that are not active; and model-derived valuations
whose inputs are observable or whose primary value drivers are observable. |
|
|
Level 3: Instruments whose primary value drivers are unobservable. Inputs are developed
based on the best information available; however, significant judgment is required by
management in developing the inputs. |
The following table presents the Companys financial assets and liabilities that are measured at
fair value on a recurring basis. All financial assets and liabilities that are measured at fair
value are categorized as Level 1 or 2 based on the above hierarchy.
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
As of March 31, 2009 |
|
|
|
Level 1 |
|
|
Level 2 |
|
|
Total |
|
Assets: |
|
|
|
|
|
|
|
|
|
|
|
|
Cash and cash equivalents (a) |
|
$ |
243,705 |
|
|
|
|
|
|
|
243,705 |
|
Restricted
cash and investments (b) |
|
|
|
|
|
|
1,218,512 |
|
|
|
1,218,512 |
|
Other assets
(c) |
|
|
4,670 |
|
|
|
4,342 |
|
|
|
9,012 |
|
Fair value
of derivative instruments (d) |
|
|
|
|
|
|
133,010 |
|
|
|
133,010 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total assets |
|
$ |
248,375 |
|
|
|
1,355,864 |
|
|
|
1,604,239 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Liabilities: |
|
|
|
|
|
|
|
|
|
|
|
|
Fair value
of derivative instruments (d) |
|
$ |
|
|
|
|
64 |
|
|
|
64 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total liabilities |
|
$ |
|
|
|
|
64 |
|
|
|
64 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(a) |
|
Cash and cash equivalents includes all operating
cash and investments with maturities when purchased of three
months or less. |
|
(b) |
|
Restricted cash and
investments are held by trustees in various accounts subject to use
restrictions imposed by the trust indenture and consist of guaranteed
investment contracts, which are classified as held-to-maturity. These
investments are purchased at par value, which equals their cost as of
March 31, 2009. |
|
(c) |
|
Other assets includes investments recorded at fair
value on a recurring basis. Fair value measurement is based upon
quoted prices. Level 1 investments include investments traded on
an active exchange, such as the New York Stock Exchange, and U.S.
Treasury securities that are traded by dealers or brokers in
active over-the-counter markets. Level 2 investments include
corporate debt securities. |
|
(d) |
|
All derivatives are accounted for at fair value in
the financial statements. 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. It is the Companys policy to compare its derivative
fair values to those received by its counterparties in order to
validate the models outputs. Fair value of derivative
instruments is comprised of market value less accrued interest and
excludes collateral. |
8. Shareholders Equity
Issuance of Class A Common Stock
In March 2009, the Companys 2008 annual performance-based incentives awarded to management were
paid in approximately 455,000 fully vested and unrestricted shares of Class A common stock issued pursuant to the
Companys Restricted Stock Plan. It is the Companys
current intention to pay future annual
performance-based incentives to management, if any, in common stock issued pursuant to the
Restricted Stock Plan.
19
9. Earnings per Common Share
Basic earnings per common share (basic EPS) is computed by dividing net income or loss by the
weighted average number of shares of common stock outstanding during each period. SFAS No. 128,
Earnings Per Share (SFAS No. 128), requires that nonvested restricted stock that vests solely
upon continued service be excluded from basic EPS but reflected in diluted earnings per common
share (diluted EPS) by application of the treasury stock method.
A reconciliation of weighted average shares outstanding follows:
|
|
|
|
|
|
|
|
|
|
|
Three months ended March 31, |
|
|
|
2009 |
|
|
2008 |
|
|
|
|
|
|
|
|
|
|
Weighted average shares outstanding |
|
|
49,473,953 |
|
|
|
49,444,415 |
|
Less: Nonvested restricted stock
vesting solely upon continued service |
|
|
331,629 |
|
|
|
392,670 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Weighted average shares outstanding used
to compute basic EPS |
|
|
49,142,324 |
|
|
|
49,051,745 |
|
Dilutive effect of nonvested restricted stock |
|
|
192,657 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Weighted average shares used to compute diluted EPS |
|
|
49,334,981 |
|
|
|
49,051,745 |
|
|
|
|
|
|
|
|
No dilutive effect of nonvested restricted stock is presented for the three months ended March 31,
2008 as the Company reported a net loss and including these shares would have been antidilutive for
the period. The dilutive effect of these shares if the Company had net income for the period was
not significant.
10. Gain from Sale of Equity Method Investment
On September 28, 2007, the Company sold its 50% membership interests in Premiere Credit of North
America, LLC (Premiere) for initial proceeds of $10.0 million. The Company recognized an initial
gain on the sale of Premiere of $3.9 million during the three month period ended September 30,
2007. In January 2009, the Company earned $3.5 million in additional consideration as a result of
the sale of Premiere. This payment represented contingent consideration that was owed to the
Company if Premiere was awarded a collections contract as defined in the purchase agreement. The
$3.5 million of contingent consideration is included in other income in the accompanying
consolidated statements of operations for the three months ended March 31, 2009.
11. Recent Developments
Debt purchases
On April 7, 2009, the Company purchased $35.5 million of its 5.125% Senior Notes due 2010 (the
2010 Notes) for a purchase price of $31.1 million which resulted in the Company recording a gain
of $4.4 million in the second quarter of 2009. Subsequent to this transaction, the Company has
$204.6 million of 2010 Notes outstanding.
Restructuring Charge
On May 5, 2009, the Company adopted a plan to further streamline its operations by continuing to
reduce its geographic footprint and consolidate servicing operations and related support services.
Management has developed a restructuring plan that will result in lower costs and provide enhanced
synergies through cross training, career development, and simplified communications. The Company
will simplify its operating structure to leverage its larger facilities and technology by closing
certain offices and downsizing its presence in certain geographic locations. Approximately 300
associates will be impacted by this restructuring plan. However, the majority of these functions
will be relocated to the Companys Lincoln headquarters and
Denver offices. Implementation of the plan will begin immediately
and is expected to be substantially complete during the second quarter of 2010.
The Company estimates that the total before-tax charge to earnings associated with this
restructuring plan will consist of $4 million to $6
million in severance costs, up to $4 million in contract termination costs, and up to $6 million in
non-cash charges related to the impairment of and/or the acceleration of depreciation on property
and equipment.
20
Industry Developments
Department of Education Review
The Department of Education periodically reviews participants in the FFELP for compliance with
program provisions. On June 28, 2007, the Department notified the Company that it would be
conducting a review of the Companys practices in connection with the prohibited inducement
provisions of the Higher Education Act and the associated regulations that allow borrowers to have
a choice of lenders. The Company understands that the Department selected several schools and
lenders for review. The Company responded to the Departments requests for information and
documentation and cooperated with their review. On May 1, 2009, the Company received the
Departments preliminary program review report, which covered the Departments review of the period
from October 1, 2002 to September 30, 2007. The preliminary program review report contains certain
initial findings of noncompliance with the Higher Education Acts prohibited inducement provisions
and requires that the Company provide within 30 days an explanation for the basis of the
arrangements noted in the preliminary program review report. After the Company provides an
explanation of the arrangements noted in the Departments initial findings and the Department
reviews such explanation and any documentation, the Department is expected to issue a final program
review determination letter and advise the Company whether it intends to take any additional
action. To the extent any findings are contained in the final letter, the additional action may
include the assessment of fines or penalties, or the limitation,
suspension, and termination of the
Companys participation in FFELP.
The Company believes that it has materially complied with the Higher Education Acts prohibited
inducement provisions and the rules, regulations, and guidance of the Department thereunder;
however, it cannot predict the ultimate outcome of the Departments review.
Legislation
On February 26, 2009, the President introduced several proposals related to the fiscal year 2010
Federal budget, including a proposal for the elimination of the FFEL Program and a recommendation
that all new student loan originations be funded through the Direct Loan Program, with loan
servicing to be provided by private sector companies through performance-based contracts with the
Department. On April 29, 2009, Congress passed a budget resolution including the Presidents proposal to eliminate the FFEL Program
using the budget reconciliation procedure. In the reconciliation instructions, both the Senate Committee on Health,
Education, Labor, and Pensions and the House Committee on Education and Labor shall report out for consideration by the
Senate and House, respectively, no later than October 15, 2009, changes to the budget which will reduce the deficit by
$1 billion for fiscal years 2009 through 2014. The resolution also includes non-binding language to maintain a
competitive private sector role in the student loan program. On May 7, 2009, the President released the detailed fiscal year 2010 Federal budget,
which the Department of Education has indicated reflects the elimination of the FFEL Program
for loans originated on or after July 1, 2010.
Elimination of the FFEL Program would impact the Companys operations and
profitability by, among other things, reducing the Companys interest revenues as a result of the
inability to add new FFELP loans to the Companys portfolio and reducing guarantee and third-party
servicing fees as a result of reduced FFELP loan servicing and origination volume. Additionally,
the elimination of the FFEL Program would reduce education loan software sales and related
consulting fees received from lenders using the Companys software products and services. The fair
value and/or recoverability of the Companys goodwill, intangible assets, and other long-lived
assets related to these activities could be adversely affected if the FFEL Program is eliminated.
In accordance with SFAS No. 142,
Goodwill and Other Intangible Assets, the Company performs goodwill
impairment testing annually in the fourth quarter as of a November 30
valuation date or more frequently if an event occurs or circumstances change
such that there is a potential that the fair value of a reporting unit or
reporting units may be below their respective carrying value.
In light of continued general downturn
in the economy, the tight credit markets, the Company’s decline in market
capitalization, and the uncertainty that the budget proposal creates in
relation to the Company’s current business model, the Company considered
its goodwill assessment as of March 31, 2009. The Company believes the
estimated fair value of the Company’s reporting units is in excess of
their carrying values. Accordingly, no goodwill impairment was recorded as of
March 31, 2009.
ITEM 2. MANAGEMENTS DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS
(Managements Discussion and Analysis of Financial Condition and Results of Operations is for the
three months ended March 31, 2009 and 2008. All dollars are in thousands, except per share
amounts, unless otherwise noted).
The following discussion and analysis provides information that the Companys management believes
is relevant to an assessment and understanding of the consolidated results of operations and
financial condition of the Company. The discussion should be read in conjunction with the
Companys consolidated financial statements included in the Companys Annual Report on Form 10-K
for the year ended December 31, 2008.
Forward-looking and cautionary statements
This report contains forward-looking statements and information that are based on managements
current expectations as of the date of this document. Statements that are not historical facts,
including statements about the Companys expectations and statements that assume or are dependent
upon future events, are forward-looking statements. These forward-looking statements are subject
to risks, uncertainties, assumptions, and other factors that may cause the actual results to be
materially different from those reflected in such forward-looking statements. These factors
include, among others, the risks and uncertainties set forth in Risk Factors and elsewhere in
this Quarterly Report on Form 10-Q and the Companys Annual Report on Form 10-K for the year ended
December 31, 2008 and changes in the terms of student loans and the educational credit marketplace
arising from the implementation of, or changes in, applicable laws
and regulations (including changes resulting from new laws, such as
any new laws enacted to implement the Administrations 2010
budget proposals as they relate to FFELP), which may
reduce the volume, average term, special allowance payments, and yields on student loans under the
FFEL Program of the Department or result in loans being originated or refinanced under non-FFEL
programs or may affect the terms upon which banks and others agree to sell FFELP loans to the
Company. The Company could also be affected by changes in the demand for educational financing or
in financing preferences of lenders, educational institutions, students, and their families; the
Companys ability to maintain its credit facilities or obtain new facilities; the ability of
lenders under the Companys credit facilities to fulfill their lending commitments under these
facilities; changes to the terms and conditions of the liquidity programs offered by the Department; 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 initiate, purchase, or carry education
loans; losses from loan defaults; changes in prepayment rates, guaranty rates, loan floor rates,
and credit spreads; the uncertain nature of estimated expenses that may be incurred and cost
savings that may result from restructuring plans; incorrect estimates or assumptions by management
in connection with the preparation of the consolidated financial statements; and changes in general
economic conditions. Additionally, financial projections may not prove to be accurate and may vary
materially. The reader should not place undue reliance on forward-looking statements, which speak
only as of the date of this Quarterly Report on Form 10-Q. The Company is not obligated to
publicly release any revisions to forward-looking statements to reflect events after the date of
this Quarterly Report on Form 10-Q or unforeseen events. Although the Company may from time to
time voluntarily update its prior forward-looking statements, it disclaims any commitment to do so
except as required by securities laws.
21
OVERVIEW
The Company is an education planning and financing company focused on providing quality products
and services to students, families, schools, and financial institutions nationwide. The Company is
a vertically-integrated organization that offers a broad range of products and services to its
customers throughout the education life cycle.
Built through a focus on long term organic growth and further enhanced by strategic acquisitions,
the Company earns its revenues from fee-based revenues related to its diversified education finance
and service operations and from net interest income on its portfolio of student loans.
The following provides certain events and operating activities that have impacted the financial
condition and operating results of the Company during the first quarter of 2009. These items
include:
|
|
|
Diversification of revenue through fee-based businesses |
|
|
|
Net interest margin and
derivative settlements related to the Companys student loan portfolio |
|
|
|
Decreases in operating expenses |
|
|
|
Reduced exposure to liquidity risk on the Companys FFELP warehouse facility |
In
addition, recent proposed legislation concerning the student loan
industry may impact the
future financial condition and operating results of the Company.
Revenue Diversification
In recent years, the Company has expanded products and services generated from businesses that are
not dependent upon government programs, thereby reducing legislative and political risk. This revenue is
primarily generated from products and services offered in the Companys Tuition Payment Processing
and Campus Commerce and Enrollment Services operating segments. The only product and service
offering in these segments that has been impacted by recent student
loan industry developments is list marketing services. The table below includes the Companys revenue from
fee-based businesses and shows the revenue earned by the Companys operating segments that are less
dependent upon government programs, excluding list marketing services.
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Three months ended March 31, |
|
|
|
2009 |
|
|
2008 |
|
|
$ Change |
|
|
% Change |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Tuition Payment Processing and Campus Commerce |
|
$ |
15,568 |
|
|
|
14,612 |
|
|
|
956 |
|
|
|
|
|
Enrollment Services Content Management and Lead
Generation |
|
|
27,366 |
|
|
|
24,990 |
|
|
|
2,376 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total revenue from fee-based businesses
less dependent upon government programs |
|
|
42,934 |
|
|
|
39,602 |
|
|
$ |
3,332 |
|
|
|
8.4 |
% |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Enrollment Services List Marketing Services |
|
|
1,405 |
|
|
|
2,277 |
|
|
|
|
|
|
|
|
|
Student Loan and Guaranty Servicing |
|
|
27,906 |
|
|
|
26,753 |
|
|
|
|
|
|
|
|
|
Software and Technical Services |
|
|
4,830 |
|
|
|
6,715 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total revenue from fee-based businesses |
|
$ |
77,075 |
|
|
|
75,347 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
22
Core Student Loan Spread
The
Companys core student loan spread for the three months ended
March 31, 2009 was 0.94% compared to 0.91% for the same period in
2008. Significant items impacting spread for the three months ended
March 31, 2009 included:
|
|
|
Derivative settlements |
|
|
|
|
CP/LIBOR distortion |
|
|
|
|
Fixed rate floor income |
Derivative
settlements
The Company issues asset-backed securities, the vast majority being variable rate, to fund its student loan assets. The
variable rate debt is generally indexed to 3-month LIBOR, set by auction, or through a remarketing process. The income
generated by the Companys student loan assets is generally driven by short term indices (treasury bills, commercial
paper, and certain fixed rates) that are different from those which affect the Companys liabilities (generally LIBOR),
which creates basis risk. Moreover, the Company also faces repricing risk due to the timing of the interest rate resets
on its liabilities, which may occur as infrequently as every quarter, and the timing of the interest rate resets on its
assets, which generally occurs daily.
The Company has used derivative instruments to hedge the repricing risk due to the timing of the
interest rate resets on its assets and liabilities. The Company has entered into basis swaps in
which the Company (i) receives three-month LIBOR set discretely in advance and pays a daily
weighted average three-month LIBOR less a spread as defined in the individual agreements; and (ii)
receives three-month LIBOR and pays one-month LIBOR less a spread as defined in the agreements.
During the three months ended March 31, 2009, the Company
received $20.8 million in settlements on
these derivatives.
CP/LIBOR
distortion
As of March 31, 2009, the Company had $23.9 billion of FFELP loans indexed to three-month financial commercial paper
rate and $20.4 billion of debt indexed to LIBOR. Due to the unintended consequences of government intervention in the commercial paper markets and
limited issuances of qualifying financial commercial paper, the relationship between the
three-month financial CP and LIBOR rates has been distorted and volatile. To address this issue,
the Department announced that for purposes of calculating the FFELP loan index from October 27,
2008 to December 31, 2008, the Federal Reserves Commercial Paper Funding Facility rate was used
for those days in which no three-month financial commercial paper rate was available. This action
partially mitigated the volatility between CP and LIBOR during the
fourth quarter of 2008. However,
the Department did not implement a similar methodology for the first
quarter of 2009, which
negatively impacted the Companys interest income earned on its student loan portfolio.
Fixed
rate floor income
Loans originated prior to April 1, 2006 generally earn interest at the higher of a floating rate based on the Special
Allowance Payment or SAP formula set by the Department and the borrower rate, which is fixed over a period of time. The
SAP formula is based on an applicable index plus a fixed spread that is dependent upon when the loan was originated,
the loans repayment status, and funding sources for the loan. The Company generally finances its student loan
portfolio with variable rate debt. In low and/or declining interest rate environments, when the fixed borrower rate is
higher than the rate produced by the SAP formula, the Companys student loans earn at a fixed rate while the interest
on the variable rate debt typically continues to decline. In these interest rate environments, the Company may earn
additional spread income that it refers to as floor income. 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.
During the three months ended March 31, 2009, loan interest income includes approximately $30.3 million of fixed rate
floor income.
Operating Expenses
Excluding restructure and impairment charges recognized in 2008, operating expenses decreased $10.0
million, or 9.7%, for the three months ended March 31, 2009 compared to the same period in 2008.
This decrease was the result of reducing costs related to the restructuring plans implemented in
September 2007 and January 2008 and a continued focus by the Company on managing costs and gaining
efficiencies.
Reduction in Liquidity Risk Exposure FFELP Warehouse Facility
The terms and conditions of the Companys multi-year committed financing facility for FFELP loans
provides for formula based advance rates based on current market conditions, which require equity
support to be posted to the facility. In order to reduce exposure related to these equity support
provisions, the Company reduced the amount of loans included in the facility in 2009 by completing
an asset-backed securities transaction of $294.6 million and selling $20.0 million in student
loan assets. As of May 8, 2009, the Company had $96.6 million posted as equity funding support for
this facility, as compared to $280.6 million as of December 31, 2008.
As of May 8, 2009, the Company had $1.2 billion of student loans in the FFELP warehouse facility
and $1.1 billion borrowed under the facility. The Company plans to remove and/or refinance the
remaining collateral in this facility by using the Departments Conduit Program, using other
financing arrangements, using unrestricted operating cash, and/or selling loans to third parties.
As of May 8, 2009, the Company had approximately $845 million of loans included in its warehouse
facility that would be eligible for the Conduit Program.
Reduction in Debt Burden
The
Company purchased $34.9 million and $35.5 million of its
5.125% Senior Notes due 2010 for
$26.8 million and $31.1 million during the first quarter of
2009 and in April 2009, respectively. These transactions resulted
in the Company recognizing gains of $8.1 million and $4.4 million in the first and second quarters
of 2009, respectively. Subsequent to these transactions, the Company
has $204.6 million of 2010
Notes outstanding.
Legislation
On February 26, 2009, the President introduced several proposals related to the fiscal year 2010
Federal budget, including a proposal for the elimination of the FFEL Program and a recommendation
that all new student loan originations be funded through the Direct Loan Program, with loan
servicing to be provided by private sector companies through performance-based contracts with the
Department. On April 29, 2009, Congress passed a budget resolution including the Presidents proposal to eliminate the FFEL Program
using the budget reconciliation procedure. In the reconciliation instructions, both the Senate Committee on Health,
Education, Labor, and Pensions and the House Committee on Education and Labor shall report out for consideration by the
Senate and House, respectively, no later than October 15, 2009, changes to the budget which will reduce the deficit by
$1 billion for fiscal years 2009 through 2014. The resolution also includes non-binding language to maintain a
competitive private sector role in the student loan program. On May 7, 2009, the President released the detailed fiscal year 2010 Federal budget,
which the Department of Education has indicated reflects the elimination of the FFEL Program
for loans originated on or after July 1, 2010.
Elimination of the FFEL Program would impact the Companys operations and profitability by, among
other things, reducing the Companys interest revenues as a result of the inability to add new
FFELP loans to the Companys portfolio and reducing guarantee and third-party servicing fees as a
result of reduced FFELP loan servicing and origination volume. Additionally, the elimination of the
FFEL Program would reduce education loan software sales and related consulting fees received from lenders using the
Companys software products and services. The fair value and/or recoverability of the Companys
goodwill, intangible assets, and other long-lived assets related to these activities could be
adversely affected if the FFEL Program is eliminated. As discussed previously, in recent years,
the Company has expanded products and services generated from businesses that are not dependent
upon the FFEL Program, thereby reducing legislative and political risk.
23
RESULTS OF OPERATIONS
The Companys operating results are primarily driven by the performance of its existing portfolio,
the cost necessary to generate new assets, the revenues generated by its fee based businesses, and
the cost to provide those services. The performance of the Companys portfolio is driven by net
interest income and losses related to credit quality of the assets along with the cost to
administer and service the assets and related debt.
Net Interest Income
The Company generates a significant portion of its earnings from the spread, referred to as its
student loan spread, between the yield the Company receives on its student loan portfolio and the
cost of funding these loans. This spread income is reported on the Companys consolidated
statements of operations as net interest income. The amortization of loan premiums, including
capitalized costs of origination, the 1.05% per year consolidation loan rebate fee paid to the
Department, and yield adjustments from borrower benefit programs, are netted against loan interest
income on the Companys statements of operations. The amortization of debt issuance costs is
included in interest expense on the Companys statements of operations.
The Companys portfolio of FFELP loans originated prior to April 1, 2006 earns interest at the
higher of a variable rate based on the special allowance payment (SAP) formula set by the
Department of Education and the borrower rate. The SAP formula is based on an applicable index
plus a fixed spread that is dependent upon when the loan was originated, the loans repayment
status, and funding sources for the loan. As a result of one of the provisions of the Higher
Education Reconciliation Act of 2005 (HERA), the Companys portfolio of FFELP loans originated on
or after April 1, 2006 earns interest at a variable rate based on the SAP formula. For the
portfolio of loans originated on or after April 1, 2006, when the borrower rate exceeds the
variable rate based on the SAP formula, the Company must return the excess to the Department.
In September 2007, the College Cost Reduction and Access Act of 2007 was enacted into law. This
legislation reduced the annual yield on FFELP loans originated after October 1, 2007 and should
be considered when reviewing the Companys results of operations. The Company has mitigated some
of the reduction in annual yield by creating efficiencies and lowering costs, modifying borrower
benefits, and reducing loan acquisition costs.
Because the Company generates a significant portion of its earnings from its student loan spread,
the interest rate sensitivity of the Companys balance sheet is very important to its operations.
The current and future interest rate environment can and will affect the Companys interest
earnings, net interest income, and net income. The effects of changing interest rate environments
are further outlined in Item 3, Quantitative and Qualitative Disclosures about Market Risk
Interest Rate Risk.
Investment interest income, which is a component of net interest income, includes income from
unrestricted interest-earning deposits and funds in the Companys special purpose entities which
are utilized for its asset-backed securitizations.
Net interest income also includes interest expense on unsecured debt offerings. The proceeds from
these unsecured debt offerings were used by the Company to fund general business operations,
certain asset and business acquisitions, and the repurchase of stock under the Companys stock
repurchase plan.
Provision for Loan Losses
Management estimates and establishes an allowance for loan losses through a provision charged to
expense. Losses are charged against the allowance when management believes the collectibility of
the loan principal is unlikely. Recovery of amounts previously charged off is credited to the
allowance for loan losses. Management maintains the allowance for federally insured and
non-federally insured loans at a level believed to be adequate to provide for estimated probable
credit losses inherent in the loan portfolio. This evaluation is inherently subjective because it
requires estimates that may be susceptible to significant changes. The Company analyzes the
allowance separately for its federally insured loans and its non-federally insured loans.
The allowance for the federally insured loan portfolio is based on periodic evaluations of the
Companys loan portfolios considering past experience, trends in student loan claims rejected for
payment by guarantors, changes to federal student loan programs, current economic conditions, and
other relevant factors. The federal government currently guarantees 97% of the principal of and the
interest on federally insured student loans disbursed on and after July 1, 2006 (and 98% for those
loans disbursed prior to July 1, 2006), which limits the Companys loss exposure on the outstanding
balance of the Companys federally insured portfolio. Also, in accordance with the Student Loan
Reform Act of 1993, student loans disbursed prior to October 1, 1993 are fully insured.
In determining the adequacy of the allowance for loan losses on the non-federally insured loans,
the Company considers several factors including: loans in repayment versus those in a nonpaying
status, months in repayment, delinquency status, type of program, and trends in defaults in the
portfolio based on Company and industry data. The Company places a non-federally insured loan on
nonaccrual status and charges off the loan when the collection of principal and interest is 120
days past due.
24
Other Income
The Company also earns fees and generates revenue from other sources, including loan and guaranty
servicing, enrollment services, payment management activities, and fees from providing software and
technical services.
Student Loan and Guaranty Servicing Revenue Loan servicing fees are determined according to
individual agreements with customers and are calculated based on the dollar value of loans, number
of loans, or number of borrowers serviced for each customer. Guaranty servicing fees, generally,
are calculated based on the number of loans serviced, volume of loans serviced, or amounts
collected. Revenue is recognized when earned pursuant to applicable agreements, and when ultimate
collection is assured.
Enrollment Services Revenue Enrollment services revenue includes the sale of lists and print
products, subscription-based products and services, and multiple deliverable arrangements. Revenue
from the sale of lists and printed products is generally earned and recognized, net of estimated
returns, upon shipment or delivery. Revenues from the sales of subscription-based products and
services are recognized ratably over the term of the subscription. Subscription revenue received
or receivable in advance of the delivery of services is included in deferred revenue. Revenue from
multiple deliverable arrangements is recognized separately for separate units of accounting based
on the units relative fair value.
Tuition Payment Processing and Campus Commerce Revenue - Tuition payment processing and campus
commerce revenue includes actively managed tuition payment solutions, online payment processing,
detailed information reporting, and data integration services. Fees for these payment management
services are recognized over the period in which services are provided to customers.
Software Services Revenue Software services revenue is determined from individual agreements with
customers and includes license and maintenance fees associated with student loan software products.
Computer and software consulting services are recognized over the period in which services are
provided to customers.
Operating Expenses
Operating expenses includes indirect costs incurred to generate and acquire student loans, costs
incurred to manage and administer the Companys student loan portfolio and its financing
transactions, costs incurred to service the Companys student loan portfolio and the portfolios of
third parties, the cost to provide enrollment services, costs incurred to provide tuition payment
processing, campus commerce, content management, recruitment, software and technical services to
third parties, the depreciation and amortization of capital assets and intangible assets,
investments in products, services, and technology to meet customer needs and support continued
revenue growth, and other general and administrative expenses. The cost to provide enrollment
services consists of costs incurred to provide lead generation and publishing and editing services
in the Companys Enrollment Services operating segment. Operating expenses in 2008 also includes
employee termination benefits, lease termination costs, and the write-down of certain assets
related to the Companys September 2007 and January 2008 restructuring initiatives.
Three months ended March 31, 2009 compared to the three months ended March 31, 2008
Net Interest Income
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Three months ended March 31, |
|
|
|
2009 |
|
|
2008 |
|
|
$ Change |
|
Interest income: |
|
|
|
|
|
|
|
|
|
|
|
|
Loan interest |
|
$ |
170,919 |
|
|
|
329,986 |
|
|
|
(159,067 |
) |
Investment interest |
|
|
4,091 |
|
|
|
11,680 |
|
|
|
(7,589 |
) |
|
|
|
|
|
|
|
|
|
|
Total interest income |
|
|
175,010 |
|
|
|
341,666 |
|
|
|
(166,656 |
) |
Interest expense: |
|
|
|
|
|
|
|
|
|
|
|
|
Interest on bonds and notes payable |
|
|
146,502 |
|
|
|
325,141 |
|
|
|
(178,639 |
) |
|
|
|
|
|
|
|
|
|
|
Net interest income |
|
|
28,508 |
|
|
|
16,525 |
|
|
|
11,983 |
|
Provision for loan losses |
|
|
7,500 |
|
|
|
5,000 |
|
|
|
2,500 |
|
|
|
|
|
|
|
|
|
|
|
Net interest income after
provision for loan losses |
|
$ |
21,008 |
|
|
|
11,525 |
|
|
|
9,483 |
|
|
|
|
|
|
|
|
|
|
|
25
|
|
|
Net interest income increased for the three months ended March 31, 2009 compared to 2008
as a result of an increase in the Companys core student loan spread, excluding derivative
settlements, as discussed in this Item 2 under Asset Generation and
Management Operating Segment Results of Operations. Core student loan spread, excluding
derivative settlements, was 0.56% and 0.32% for the three months ended March 31, 2009 and
2008, respectively. This increase was offset by a decrease in investment interest due to
lower interest rates in 2009. |
|
|
|
The provision for loan losses increased for the three months ended March 31, 2009
compared to 2008 primarily due to increases in delinquencies as a result of the continued
weakening of the U.S. economy. |
Other Income
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Three months ended March 31, |
|
|
|
2009 |
|
|
2008 |
|
|
$ Change |
|
Loan and guaranty servicing revenue |
|
$ |
26,471 |
|
|
|
24,661 |
|
|
|
1,810 |
|
Tuition payment processing and campus commerce
revenue |
|
|
15,538 |
|
|
|
13,847 |
|
|
|
1,691 |
|
Enrollment services revenue |
|
|
28,771 |
|
|
|
27,222 |
|
|
|
1,549 |
|
Software services revenue |
|
|
5,705 |
|
|
|
8,204 |
|
|
|
(2,499 |
) |
Other income |
|
|
16,862 |
|
|
|
6,254 |
|
|
|
10,608 |
|
Loss on sale of loans |
|
|
(206 |
) |
|
|
(47,474 |
) |
|
|
47,268 |
|
Derivative market value, foreign currency,
and put option adjustments |
|
|
(4,880 |
) |
|
|
(57,361 |
) |
|
|
52,481 |
|
Derivative settlements, net |
|
|
24,358 |
|
|
|
40,763 |
|
|
|
(16,405 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total other income |
|
$ |
112,619 |
|
|
|
16,116 |
|
|
|
96,503 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Loan and guaranty servicing revenue increased due to an increase in FFELP loan
servicing revenue as further discussed in this Item 2 under Student Loan and Guaranty
Servicing Operating Segment Results of Operations. |
|
|
|
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. |
|
|
|
Enrollment services revenue increased due to an increase in the number of lead
generation transactions processed as further discussed in this Item 2 under Enrollment
Services Operating Segment Results of Operations. |
|
|
|
Software and technical services revenue decreased as the result of 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 2008. |
|
|
|
Other income increased for the three months ended March 31, 2009 compared to 2008 due
to a gain of $8.1 million from the purchase of $34.9 million of the Companys unsecured
fixed rate debt and a $3.5 million gain related to the Company receiving a contingency
payment in the first quarter of 2009 from the sale of an equity method investment. |
|
|
|
The Company recognized a loss of $47.5 million during the first quarter of 2008 as a
result of the sale of $1.3 billion of student loans as further discussed in this Item 2
under Asset Generation and Management Operating Segment Results of Operations. |
|
|
|
The change in derivative market value, foreign currency, and put option adjustments
was caused by the change in the fair value of the Companys derivative portfolio and
foreign currency rate fluctuations which are further discussed in Item 3, Quantitative and
Qualitative Disclosures about Market Risk. |
|
|
|
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 all of
the Companys derivative transactions with the intent that each is economically effective;
however, the Companys derivative instruments do not qualify for hedge accounting under
SFAS No. 133. Derivative settlements for each applicable period should be evaluated with
the Companys net interest income. |
26
Operating Expense
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Three months ended March 31, |
|
|
|
2009 |
|
|
2008 |
|
|
$ Change |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Salaries and benefits |
|
$ |
38,226 |
|
|
|
47,939 |
|
|
|
(9,713 |
) |
Other expenses |
|
|
54,345 |
|
|
|
54,587 |
|
|
|
(242 |
) |
|
|
|
|
|
|
|
|
|
|
Operating expenses, excluding restructure
expense and impairment expense |
|
|
92,571 |
|
|
|
102,526 |
|
|
$ |
(9,955 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
Restructure expense |
|
|
|
|
|
|
7,477 |
|
|
|
|
|
Impairment expense |
|
|
|
|
|
|
18,834 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total operating expenses |
|
$ |
92,571 |
|
|
|
128,837 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Excluding restructuring and impairment charges, operating expenses decreased $10.0 million for the
three months ended March 31, 2009 compared to the same period in 2008. The decrease is the result
of cost savings from the September 2007 and January 2008 restructuring plans implemented by the
Company. These plans resulted in the net reduction of approximately 700 positions in the Companys
overall workforce, leading to decreases in salaries and benefits and other expenses. The decrease
is also a result of the Company capitalizing on the operating leverage of its business structure
and strategies.
Income Taxes
The Companys effective tax rate was 38% for the three months ended March 31, 2009, compared to 31%
for the same period in 2008. The 2009 effective tax rate is normalized in comparison with the same
period a year ago due to the loss incurred during the first quarter of 2008. The effective tax
rate during the first quarter of 2008 was reduced by various state gross receipts taxes and other
items which are not deductible for tax purposes.
Additional information on the Companys results of operations is included with the discussion of
the Companys operating segments in this Item 2 under Operating Segments.
Financial Condition as of March 31, 2009 compared to December 31, 2008
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
As of |
|
|
As of |
|
|
|
|
|
|
March 31, |
|
|
December 31, |
|
|
Change |
|
|
|
2009 |
|
|
2008 |
|
|
Dollars |
|
|
Percent |
|
Assets: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Student loans receivable, net |
|
$ |
25,624,337 |
|
|
|
25,413,008 |
|
|
|
211,329 |
|
|
|
0.8 |
% |
Cash, cash equivalents, and investments |
|
|
1,517,827 |
|
|
|
1,348,104 |
|
|
|
169,723 |
|
|
|
12.6 |
|
Goodwill |
|
|
175,178 |
|
|
|
175,178 |
|
|
|
|
|
|
|
|
|
Intangible assets, net |
|
|
70,900 |
|
|
|
77,054 |
|
|
|
(6,154 |
) |
|
|
(8.0 |
) |
Fair value of derivative instruments |
|
|
133,010 |
|
|
|
175,174 |
|
|
|
(42,164 |
) |
|
|
(24.1 |
) |
Other assets |
|
|
571,885 |
|
|
|
666,379 |
|
|
|
(94,494 |
) |
|
|
(14.2 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
Total assets |
|
$ |
28,093,137 |
|
|
|
27,854,897 |
|
|
|
238,240 |
|
|
|
0.9 |
% |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Liabilities: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Bonds and notes payable |
|
$ |
27,130,406 |
|
|
|
26,787,959 |
|
|
|
342,447 |
|
|
|
1.3 |
% |
Fair value of derivative instruments |
|
|
64 |
|
|
|
1,815 |
|
|
|
(1,751 |
) |
|
|
(96.5 |
) |
Other liabilities |
|
|
291,065 |
|
|
|
421,897 |
|
|
|
(130,832 |
) |
|
|
(31.0 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
Total liabilities |
|
|
27,421,535 |
|
|
|
27,211,671 |
|
|
|
209,864 |
|
|
|
0.8 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Shareholders equity |
|
|
671,602 |
|
|
|
643,226 |
|
|
|
28,376 |
|
|
|
4.4 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total liabilities and shareholders equity |
|
$ |
28,093,137 |
|
|
|
27,854,897 |
|
|
|
238,240 |
|
|
|
0.9 |
% |
|
|
|
|
|
|
|
|
|
|
|
|
|
The Companys total assets increased during 2009 primarily due to an increase in student loans
receivable as a result of loan originations and acquisitions, net of repayments and participations
as further discussed in this Item 2 under Asset Generation and Management Operating Segment -
Results of Operations. In addition, cash, cash equivalents, and investments increased due to
proceeds from the issuance of bonds and notes payable. Total liabilities increased primarily due
to an increase in bonds and notes payable as a result of an increase in student loan funding
obligations in order to fund the increase in the Companys student loan portfolio.
27
OPERATING SEGMENTS
The Company has five operating segments as defined in SFAS No. 131 as follows: Student Loan and
Guaranty Servicing, Tuition Payment Processing and Campus Commerce, Enrollment Services, Software
and Technical Services, and Asset Generation and Management. The Companys operating segments are
defined by the products and services they offer or the types of customers they serve, and they
reflect the manner in which financial information is currently evaluated by management. The
accounting policies of the Companys operating segments are the same as those described in the
summary of significant accounting policies included in the Companys consolidated financial
statements included in the Companys Annual Report on Form 10-K for the year ended December 31,
2008. Intersegment revenues are charged by a segment to another segment that provides the product
or service. Intersegment revenues and expenses are included within each segment consistent with
the income statement presentation provided to management. Changes in management structure or
allocation methodologies and procedures may result in changes in reported segment financial
information.
The management reporting process measures the performance of the Companys operating segments based
on the management structure of the Company as well as the methodology used by management to
evaluate performance and allocate resources. Management, including the Companys chief operating
decision maker, evaluates the performance of the Companys operating segments based on their
profitability. As discussed further below, management measures the profitability of the Companys
operating segments on the basis of base net income. Accordingly, information regarding the
Companys operating segments is provided based on base net income. The Companys base net
income is not a defined term within GAAP and may not be comparable to similarly titled measures
reported by other companies. Unlike financial accounting, there is no comprehensive, authoritative
guidance for management reporting.
Historically, the Company generated the majority of its revenue from net interest income earned in
its Asset Generation and Management operating segment. In recent years, the Company has made
several acquisitions that have expanded the Companys products and services and has diversified its
revenue primarily from fee-based businesses. The Company currently offers a broad range of
pre-college, in-college, and post-college products and services to students, families, schools, and
financial institutions. These products and services help students and families plan and pay for
their education and students plan their careers. The Companys products and services are designed
to simplify the education planning and financing process and are focused on providing value to
students, families, and schools throughout the education life cycle. The Company continues to look
for ways to diversify its sources of revenue, including those generated from businesses that are
not dependent upon government programs, reducing legislative and political risk.
Base net income is the primary financial performance measure used by management to develop the
Companys financial plans, track results, and establish corporate performance targets and incentive
compensation. While base net income is not a substitute for reported results under GAAP, the
Company relies on base net income in operating its business because base net income permits
management to make meaningful period-to-period comparisons of the operational and performance
indicators that are most closely assessed by management. Management believes this information
provides additional insight into the financial performance of the core business activities of the
Companys operating segments.
Accordingly, the tables presented below reflect base net income which is reviewed and utilized by
management to manage the business for each of the Companys operating segments. Reconciliation of
the segment totals to the Companys consolidated operating results in accordance with GAAP are also
included in the tables below. Included below under Non-GAAP Performance Measures is further
discussion regarding base net income and its limitations, including a table that details the
differences between base net income and GAAP net income by operating segment.
28
Segment Results and Reconciliations to GAAP
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Three months ended March 31, 2009 |
|
|
|
Fee-Based |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Student |
|
|
Tuition |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Base net |
|
|
|
|
|
|
Loan |
|
|
Payment |
|
|
|
|
|
|
Software |
|
|
|
|
|
|
Asset |
|
|
Corporate |
|
|
|
|
|
|
income |
|
|
|
|
|
|
and |
|
|
Processing |
|
|
|
|
|
|
and |
|
|
Total |
|
|
Generation |
|
|
Activity |
|
|
Eliminations |
|
|
Adjustments |
|
|
GAAP |
|
|
|
Guaranty |
|
|
and Campus |
|
|
Enrollment |
|
|
Technical |
|
|
Fee- |
|
|
and |
|
|
and |
|
|
and |
|
|
to GAAP |
|
|
Results of |
|
|
|
Servicing |
|
|
Commerce |
|
|
Services |
|
|
Services |
|
|
Based |
|
|
Management |
|
|
Overhead |
|
|
Reclassifications |
|
|
Results |
|
|
Operations |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total interest income |
|
$ |
66 |
|
|
|
30 |
|
|
|
|
|
|
|
|
|
|
|
96 |
|
|
|
172,587 |
|
|
|
1,427 |
|
|
|
(560 |
) |
|
|
1,460 |
|
|
|
175,010 |
|
Interest expense |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
138,594 |
|
|
|
8,468 |
|
|
|
(560 |
) |
|
|
|
|
|
|
146,502 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net interest income (loss) |
|
|
66 |
|
|
|
30 |
|
|
|
|
|
|
|
|
|
|
|
96 |
|
|
|
33,993 |
|
|
|
(7,041 |
) |
|
|
|
|
|
|
1,460 |
|
|
|
28,508 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Less provision for loan losses |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
7,500 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
7,500 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net interest income (loss) after provision
for loan losses |
|
|
66 |
|
|
|
30 |
|
|
|
|
|
|
|
|
|
|
|
96 |
|
|
|
26,493 |
|
|
|
(7,041 |
) |
|
|
|
|
|
|
1,460 |
|
|
|
21,008 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Other income (expense): |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Loan and guaranty servicing revenue |
|
|
26,853 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
26,853 |
|
|
|
|
|
|
|
(382 |
) |
|
|
|
|
|
|
|
|
|
|
26,471 |
|
Tuition payment processing and campus commerce revenue |
|
|
|
|
|
|
15,538 |
|
|
|
|
|
|
|
|
|
|
|
15,538 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
15,538 |
|
Enrollment services revenue |
|
|
|
|
|
|
|
|
|
|
28,771 |
|
|
|
|
|
|
|
28,771 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
28,771 |
|
Software services revenue |
|
|
875 |
|
|
|
|
|
|
|
|
|
|
|
4,830 |
|
|
|
5,705 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
5,705 |
|
Other income |
|
|
112 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
112 |
|
|
|
4,651 |
|
|
|
12,099 |
|
|
|
|
|
|
|
|
|
|
|
16,862 |
|
Loss on sale of loans |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(206 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(206 |
) |
Intersegment revenue |
|
|
19,878 |
|
|
|
57 |
|
|
|
|
|
|
|
3,124 |
|
|
|
23,059 |
|
|
|
|
|
|
|
8,921 |
|
|
|
(31,980 |
) |
|
|
|
|
|
|
|
|
Derivative market value, foreign currency,
and put option adjustments |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(4,880 |
) |
|
|
(4,880 |
) |
Derivative settlements, net |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
24,358 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
24,358 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total other income (expense) |
|
|
47,718 |
|
|
|
15,595 |
|
|
|
28,771 |
|
|
|
7,954 |
|
|
|
100,038 |
|
|
|
28,803 |
|
|
|
20,638 |
|
|
|
(31,980 |
) |
|
|
(4,880 |
) |
|
|
112,619 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Operating expenses: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Salaries and benefits |
|
|
14,704 |
|
|
|
6,545 |
|
|
|
6,095 |
|
|
|
5,185 |
|
|
|
32,529 |
|
|
|
1,775 |
|
|
|
6,267 |
|
|
|
(2,504 |
) |
|
|
159 |
|
|
|
38,226 |
|
Costs to provide enrollment services |
|
|
|
|
|
|
|
|
|
|
17,793 |
|
|
|
|
|
|
|
17,793 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
17,793 |
|
Other expenses |
|
|
8,597 |
|
|
|
2,408 |
|
|
|
3,295 |
|
|
|
678 |
|
|
|
14,978 |
|
|
|
4,959 |
|
|
|
10,461 |
|
|
|
|
|
|
|
6,154 |
|
|
|
36,552 |
|
Intersegment expenses |
|
|
9,470 |
|
|
|
623 |
|
|
|
546 |
|
|
|
645 |
|
|
|
11,284 |
|
|
|
17,876 |
|
|
|
316 |
|
|
|
(29,476 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total operating expenses |
|
|
32,771 |
|
|
|
9,576 |
|
|
|
27,729 |
|
|
|
6,508 |
|
|
|
76,584 |
|
|
|
24,610 |
|
|
|
17,044 |
|
|
|
(31,980 |
) |
|
|
6,313 |
|
|
|
92,571 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Income (loss) before income taxes |
|
|
15,013 |
|
|
|
6,049 |
|
|
|
1,042 |
|
|
|
1,446 |
|
|
|
23,550 |
|
|
|
30,686 |
|
|
|
(3,447 |
) |
|
|
|
|
|
|
(9,733 |
) |
|
|
41,056 |
|
Income tax (expense) benefit (a) |
|
|
(5,705 |
) |
|
|
(2,298 |
) |
|
|
(396 |
) |
|
|
(550 |
) |
|
|
(8,949 |
) |
|
|
(11,661 |
) |
|
|
1,310 |
|
|
|
|
|
|
|
3,699 |
|
|
|
(15,601 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net income (loss) |
|
$ |
9,308 |
|
|
|
3,751 |
|
|
|
646 |
|
|
|
896 |
|
|
|
14,601 |
|
|
|
19,025 |
|
|
|
(2,137 |
) |
|
|
|
|
|
|
(6,034 |
) |
|
|
25,455 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(a) Tax effect is computed at the Companys blended,
statutory federal and state rate of 38%. |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Three months ended March 31, 2009: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Before Tax Operating Margin |
|
|
31.4 |
% |
|
|
38.7 |
% |
|
|
3.6 |
% |
|
|
18.2 |
% |
|
|
23.5 |
% |
|
|
55.5 |
% |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Three months ended March 31, 2008: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Before Tax Operating Margin |
|
|
11.3 |
% |
|
|
47.6 |
% |
|
|
1.6 |
% |
|
|
21.5 |
% |
|
|
15.0 |
% |
|
|
(5,344.3 |
)% |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Before Tax Operating Margin
excluding restructure expense,
impairment expense, and the
loss on sale of loans |
|
|
23.9 |
% |
|
|
47.6 |
% |
|
|
2.7 |
% |
|
|
27.5 |
% |
|
|
21.9 |
% |
|
|
41.6 |
% |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
29
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Three months ended March 31, 2008 |
|
|
|
Fee-Based |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Student |
|
|
Tuition |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Base net |
|
|
|
|
|
|
Loan |
|
|
Payment |
|
|
|
|
|
|
Software |
|
|
|
|
|
|
Asset |
|
|
Corporate |
|
|
|
|
|
|
income |
|
|
|
|
|
|
and |
|
|
Processing |
|
|
|
|
|
|
and |
|
|
Total |
|
|
Generation |
|
|
Activity |
|
|
Eliminations |
|
|
Adjustments |
|
|
GAAP |
|
|
|
Guaranty |
|
|
and Campus |
|
|
Enrollment |
|
|
Technical |
|
|
Fee- |
|
|
and |
|
|
and |
|
|
and |
|
|
to GAAP |
|
|
Results of |
|
|
|
Servicing |
|
|
Commerce |
|
|
Services |
|
|
Services |
|
|
Based |
|
|
Management |
|
|
Overhead |
|
|
Reclassifications |
|
|
Results |
|
|
Operations |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total interest income |
|
$ |
613 |
|
|
|
765 |
|
|
|
9 |
|
|
|
|
|
|
|
1,387 |
|
|
|
320,358 |
|
|
|
1,197 |
|
|
|
(94 |
) |
|
|
18,818 |
|
|
|
341,666 |
|
Interest expense |
|
|
|
|
|
|
|
|
|
|
1 |
|
|
|
|
|
|
|
1 |
|
|
|
316,015 |
|
|
|
9,219 |
|
|
|
(94 |
) |
|
|
|
|
|
|
325,141 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net interest income (loss) |
|
|
613 |
|
|
|
765 |
|
|
|
8 |
|
|
|
|
|
|
|
1,386 |
|
|
|
4,343 |
|
|
|
(8,022 |
) |
|
|
|
|
|
|
18,818 |
|
|
|
16,525 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Less provision for loan losses |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
5,000 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
5,000 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net interest income (loss) after provision
for loan losses |
|
|
613 |
|
|
|
765 |
|
|
|
8 |
|
|
|
|
|
|
|
1,386 |
|
|
|
(657 |
) |
|
|
(8,022 |
) |
|
|
|
|
|
|
18,818 |
|
|
|
11,525 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Other income (expense): |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Loan and guaranty servicing revenue |
|
|
24,656 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
24,656 |
|
|
|
5 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
24,661 |
|
Tuition payment processing and campus commerce revenue |
|
|
|
|
|
|
13,847 |
|
|
|
|
|
|
|
|
|
|
|
13,847 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
13,847 |
|
Enrollment services revenue |
|
|
|
|
|
|
|
|
|
|
27,222 |
|
|
|
|
|
|
|
27,222 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
27,222 |
|
Software services revenue |
|
|
1,452 |
|
|
|
|
|
|
|
37 |
|
|
|
6,715 |
|
|
|
8,204 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
8,204 |
|
Other income |
|
|
32 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
32 |
|
|
|
4,857 |
|
|
|
1,365 |
|
|
|
|
|
|
|
|
|
|
|
6,254 |
|
Loss on sale of loans |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(47,474 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(47,474 |
) |
Intersegment revenue |
|
|
20,224 |
|
|
|
260 |
|
|
|
|
|
|
|
1,816 |
|
|
|
22,300 |
|
|
|
|
|
|
|
17,212 |
|
|
|
(39,512 |
) |
|
|
|
|
|
|
|
|
Derivative market value, foreign currency,
and put option adjustments |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
466 |
|
|
|
|
|
|
|
|
|
|
|
(57,827 |
) |
|
|
(57,361 |
) |
Derivative settlements, net |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
43,527 |
|
|
|
|
|
|
|
|
|
|
|
(2,764 |
) |
|
|
40,763 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total other income (expense) |
|
|
46,364 |
|
|
|
14,107 |
|
|
|
27,259 |
|
|
|
8,531 |
|
|
|
96,261 |
|
|
|
1,381 |
|
|
|
18,577 |
|
|
|
(39,512 |
) |
|
|
(60,591 |
) |
|
|
16,116 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Operating expenses: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Salaries and benefits |
|
|
13,998 |
|
|
|
5,430 |
|
|
|
6,523 |
|
|
|
5,168 |
|
|
|
31,119 |
|
|
|
2,224 |
|
|
|
14,591 |
|
|
|
4,613 |
|
|
|
1,296 |
|
|
|
53,843 |
|
Restructure expense- severance and contract
termination costs |
|
|
851 |
|
|
|
|
|
|
|
297 |
|
|
|
518 |
|
|
|
1,666 |
|
|
|
1,896 |
|
|
|
3,915 |
|
|
|
(7,477 |
) |
|
|
|
|
|
|
|
|
Impairment expense |
|
|
5,074 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
5,074 |
|
|
|
9,351 |
|
|
|
4,409 |
|
|
|
|
|
|
|
|
|
|
|
18,834 |
|
Cost to provide enrollment services |
|
|
|
|
|
|
|
|
|
|
15,403 |
|
|
|
|
|
|
|
15,403 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
15,403 |
|
Other expenses |
|
|
8,487 |
|
|
|
2,060 |
|
|
|
2,760 |
|
|
|
619 |
|
|
|
13,926 |
|
|
|
5,344 |
|
|
|
13,865 |
|
|
|
1,062 |
|
|
|
6,560 |
|
|
|
40,757 |
|
Intersegment expenses |
|
|
13,278 |
|
|
|
296 |
|
|
|
1,847 |
|
|
|
394 |
|
|
|
15,815 |
|
|
|
20,602 |
|
|
|
1,293 |
|
|
|
(37,710 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total operating expenses |
|
|
41,688 |
|
|
|
7,786 |
|
|
|
26,830 |
|
|
|
6,699 |
|
|
|
83,003 |
|
|
|
39,417 |
|
|
|
38,073 |
|
|
|
(39,512 |
) |
|
|
7,856 |
|
|
|
128,837 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Income (loss) before income taxes |
|
|
5,289 |
|
|
|
7,086 |
|
|
|
437 |
|
|
|
1,832 |
|
|
|
14,644 |
|
|
|
(38,693 |
) |
|
|
(27,518 |
) |
|
|
|
|
|
|
(49,629 |
) |
|
|
(101,196 |
) |
Income tax (expense) benefit (a) |
|
|
(1,640 |
) |
|
|
(2,197 |
) |
|
|
(135 |
) |
|
|
(568 |
) |
|
|
(4,540 |
) |
|
|
11,995 |
|
|
|
8,531 |
|
|
|
|
|
|
|
15,385 |
|
|
|
31,371 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net income (loss) |
|
$ |
3,649 |
|
|
|
4,889 |
|
|
|
302 |
|
|
|
1,264 |
|
|
|
10,104 |
|
|
|
(26,698 |
) |
|
|
(18,987 |
) |
|
|
|
|
|
|
(34,244 |
) |
|
|
(69,825 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(a) |
|
For 2008, the consolidated effective tax rate for each applicable quarterly period is used to
calculate income taxes for each operating segment. |
Non-GAAP Performance Measures
In accordance with the rules and regulations of the Securities and Exchange Commission (SEC), the
Company prepares financial statements in accordance with generally accepted accounting principles.
In addition to evaluating the Companys GAAP-based financial information, management also evaluates
the Companys operating segments on a non-GAAP performance measure referred to as base net income
for each operating segment. While base net income is not a substitute for reported results under
GAAP, the Company relies on base net income to manage each operating segment because management
believes these measures provide additional information regarding the operational and performance
indicators that are most closely assessed by management.
Base net income is the primary financial performance measure used by management to develop
financial plans, allocate resources, track results, evaluate performance, establish corporate
performance targets, and determine incentive compensation. Accordingly, financial information is
reported to management on a base net income basis by operating segment, as these are the measures
used regularly by the Companys chief operating decision maker. The Companys board of directors
utilizes base net income to set performance targets and evaluate managements performance. The
Company also believes analysts, rating agencies, and creditors use base net income in their
evaluation of the Companys results of operations. While base net income is not a substitute for
reported results under GAAP, the Company utilizes base net income in operating its business
because base net income permits management to make meaningful period-to-period comparisons by
eliminating the temporary volatility in the Companys performance that arises from certain items
that are primarily affected by factors beyond the control of management. Management believes base
net income provides additional insight into the financial performance of the core business
activities of the Companys operations.
30
Limitations of Base Net Income
While GAAP provides a uniform, comprehensive basis of accounting, for the reasons discussed above,
management believes that base net income is an important additional tool for providing a more
complete understanding of the Companys results of operations. Nevertheless, base net income is
subject to certain general and specific limitations that investors should carefully consider. For
example, as stated above, unlike financial accounting, there is no comprehensive, authoritative
guidance for management reporting. The Companys base net income is not a defined term within
GAAP and may not be comparable to similarly titled measures reported by other companies.
Investors, therefore, may not be able to compare the Companys performance with that of other
companies based upon base net income. Base net income results are only meant to supplement
GAAP results by providing additional information regarding the operational and performance
indicators that are most closely monitored and used by the Companys management and board of
directors to assess performance and information which the Company believes is important to
analysts, rating agencies, and creditors.
Other limitations of base net income arise from the specific adjustments that management makes to
GAAP results to derive base net income results. These differences are described below.
The adjustments required to reconcile from the Companys base net income measure to its GAAP
results of operations relate to differing treatments for derivatives, foreign currency transaction
adjustments, and certain other items that management does not consider in evaluating the Companys
operating results. The following table reflects adjustments associated with these areas by
operating segment and Corporate Activity and Overhead:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Student |
|
|
Tuition |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Loan |
|
|
Payment |
|
|
|
|
|
|
Software |
|
|
Asset |
|
|
Corporate |
|
|
|
|
|
|
and |
|
|
Processing |
|
|
|
|
|
|
and |
|
|
Generation |
|
|
Activity |
|
|
|
|
|
|
Guaranty |
|
|
and Campus |
|
|
Enrollment |
|
|
Technical |
|
|
and |
|
|
and |
|
|
|
|
|
|
Servicing |
|
|
Commerce |
|
|
Services |
|
|
Services |
|
|
Management |
|
|
Overhead |
|
|
Total |
|
|
|
Three months ended March 31, 2009 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Derivative market value, foreign currency, and
put option adjustments |
|
$ |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
4,880 |
|
|
|
|
|
|
|
4,880 |
|
Amortization of intangible assets |
|
|
1,079 |
|
|
|
1,887 |
|
|
|
3,042 |
|
|
|
146 |
|
|
|
|
|
|
|
|
|
|
|
6,154 |
|
Compensation related to business combinations |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
159 |
|
|
|
159 |
|
Variable-rate floor income, net of settlements on derivatives |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(1,460 |
) |
|
|
|
|
|
|
(1,460 |
) |
Net tax effect (a) |
|
|
(410 |
) |
|
|
(717 |
) |
|
|
(1,157 |
) |
|
|
(55 |
) |
|
|
(1,300 |
) |
|
|
(60 |
) |
|
|
(3,699 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total adjustments to GAAP |
|
$ |
669 |
|
|
|
1,170 |
|
|
|
1,885 |
|
|
|
91 |
|
|
|
2,120 |
|
|
|
99 |
|
|
|
6,034 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Three months ended March 31, 2008
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Derivative market value, foreign currency, and
put option adjustments |
|
$ |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
57,400 |
|
|
|
427 |
|
|
|
57,827 |
|
Amortization of intangible assets |
|
|
1,256 |
|
|
|
2,051 |
|
|
|
2,822 |
|
|
|
286 |
|
|
|
145 |
|
|
|
|
|
|
|
6,560 |
|
Compensation related to business combinations |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
1,296 |
|
|
|
1,296 |
|
Variable-rate floor income, net of settlements on derivatives |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(16,054 |
) |
|
|
|
|
|
|
(16,054 |
) |
Net tax effect (a) |
|
|
(389 |
) |
|
|
(636 |
) |
|
|
(875 |
) |
|
|
(89 |
) |
|
|
(12,862 |
) |
|
|
(534 |
) |
|
|
(15,385 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total adjustments to GAAP |
|
$ |
867 |
|
|
|
1,415 |
|
|
|
1,947 |
|
|
|
197 |
|
|
|
28,629 |
|
|
|
1,189 |
|
|
|
34,244 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(a) |
|
In 2009, tax effect is
computed at the Companys blended, statutory federal and
state rate of 38%. In 2008, tax effect was computed using the Companys consolidated
effective tax rate for each applicable quarterly period. |
Differences between GAAP and Base Net Income
Managements financial planning and evaluation of operating results does not take into account the
following items because their volatility and/or inherent uncertainty affect the period-to-period
comparability of the Companys results of operations. A more detailed discussion of the
differences between GAAP and base net income follows.
31
Derivative market value, foreign currency, and put option 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 Companys risk management strategy in which the Company does not qualify for hedge
treatment under GAAP. SFAS No. 133, Accounting for Derivative Instruments and Hedging Activities, requires that changes in fair value of derivative instruments be recognized
currently in earnings unless specific hedge accounting criteria, as specified by SFAS No. 133, are
met. The Company maintains an overall interest rate risk management strategy that incorporates the
use of derivative instruments to reduce the economic effect of interest rate volatility. Derivative
instruments primarily used by the Company include interest rate swaps, basis swaps, and
cross-currency interest rate swaps. Management has structured all of the Companys derivative
transactions with the intent that each is economically effective. However, the Company does not
qualify its derivatives for hedge treatment as defined by SFAS No. 133, and the stand-alone
derivative must be marked-to-market in the income statement with no consideration for the
corresponding change in fair value of the hedged item. The Company believes these point-in-time
estimates of asset and liability values that are subject to interest rate fluctuations make it
difficult to evaluate the ongoing results of operations against its business plan and affect the
period-to-period comparability of the results of operations. Included in base net income are the
economic effects of the Companys derivative instruments, which includes any cash paid or received
being recognized as an expense or revenue upon actual derivative settlements. These settlements
are included in Derivative market value, foreign currency, and put option adjustments and
derivative settlements, net on the Companys consolidated statements of operations.
Base net income excludes the foreign currency transaction gains or losses caused by the
re-measurement of the Companys Euro-denominated bonds to U.S. dollars. In connection with the
issuance of the Euro-denominated bonds, the Company has entered into cross-currency interest rate
swaps. Under the terms of these agreements, the principal payments on the Euro-denominated notes
will effectively be paid at the exchange rate in effect at the issuance date of the bonds. The
cross-currency interest rate swaps also convert the floating rate paid on the Euro-denominated
bonds (EURIBOR index) to an index based on LIBOR. Included in base net income are the economic
effects of any cash paid or received being recognized as an expense or revenue upon actual
settlements of the cross-currency interest rate swaps. These settlements are included in
Derivative market value, foreign currency, and put option adjustments and derivative settlements,
net on the Companys consolidated statements of operations. However, the gains or losses caused
by the re-measurement of the Euro-denominated bonds to U.S. dollars and the change in market value
of the cross-currency interest rate swaps are excluded from base net income as the Company
believes the point-in-time estimates of value that are subject to currency rate fluctuations
related to these financial instruments make it difficult to evaluate the ongoing results of
operations against the Companys business plan and affect the period-to-period comparability of the
results of operations. The re-measurement of the Euro-denominated bonds correlates with the change
in fair value of the cross-currency interest rate swaps. However, the Company will experience
unrealized gains or losses related to the cross-currency interest rate swaps if the two underlying
indices (and related forward curve) do not move in parallel.
In 2008, base net income also excluded the change in fair value of put options issued by the
Company for certain business acquisitions. The put options were valued by the Company each
reporting period using a Black-Scholes pricing model. Therefore, the fair value of those options
were primarily affected by the strike price and term of the underlying option, the Companys stock
price, and the dividend yield and volatility of the Companys stock. The Company believed those
point-in-time estimates of value that were subject to fluctuations made it difficult to evaluate
the ongoing results of operations against the Companys business plans and affected the
period-to-period comparability of the results of operations. In 2008, the Company settled all of
its obligations related to these put options.
The gains and/or losses included in Derivative market value, foreign currency, and put option
adjustments and derivative settlements, net on the Companys consolidated statements of operations
are primarily caused by interest rate and currency volatility, changes in the value of put options
based on the inputs used in the Black-Scholes pricing model, as well as the volume and terms of put
options and of derivatives not receiving hedge treatment. Base net income excludes these
unrealized gains and losses and isolates the effect of interest rate, currency, and put option
volatility on the fair value of such instruments during the period. Under GAAP, the effects of
these factors on the fair value of the put options and the derivative instruments (but not the
underlying hedged item) tend to show more volatility in the short term.
Amortization of intangible assets: Base net income excludes the amortization of acquired
intangibles, which arises primarily from the acquisition of definite life intangible assets in
connection with the Companys acquisitions, since the Company feels that such charges do not drive
the Companys operating performance on a long-term basis and can affect the period-to-period
comparability of the results of operations.
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. Base
net income excludes this expense because the Company believes such charges do not drive its
operating performance on a long-term basis and can affect the period-to-period comparability of the
results of operations. If the Company did not enter into the employment agreements in connection
with the acquisition, the amount paid to these former shareholders of the acquired entity would
have been recorded by the Company as additional consideration of the acquired entity, thus, not
having an effect on the Companys results of operations.
Variable-rate floor income, net of settlements on derivatives: 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
Companys control which can affect the period-to-period comparability of results of operations.
32
Prior to October 1, 2008, variable rate floor income was calculated by the Company on a statutory
maximum basis. However, as a result of the disruption in the capital markets beginning in August
2007, the full benefit of variable rate floor income calculated on a statutory maximum basis has
not been realized by the Company due to the widening of the spread between short term interest rate
indices and the Companys actual cost of funds. As a result of the ongoing volatility of interest
rates, effective October 1, 2008, the Company changed its calculation of variable rate floor income
to better reflect the economic benefit received by the Company. For the three
months ended March 31, 2009 and 2008, the economic benefit received by the Company related to
variable rate floor income was $1.5 million and $6.3 million respectively. Variable rate floor
income calculated on a statutory maximum basis for the three months ended March 31, 2009 and 2008
was $10.8 million and $18.8 million, respectively. Beginning October 1, 2008, the economic benefit
received by the Company has been used to determine base net income.
STUDENT LOAN AND GUARANTY SERVICING OPERATING SEGMENT RESULTS OF OPERATIONS
The Student Loan and Guaranty Servicing operating segment provides for the servicing of the
Companys student loan portfolios and the portfolios of third parties and servicing provided to
guaranty agencies. The servicing and business process outsourcing activities include loan
origination activities, application processing, borrower updates, payment processing, due diligence
procedures, and claim processing. These activities are performed internally for the Companys
portfolio in addition to generating fee revenue when performed for third-party clients. The
guaranty servicing, servicing support, and business process outsourcing activities include
providing software and data center services, borrower and loan updates, default aversion tracking
services, claim processing services, and post-default collection services to guaranty agencies.
Loan servicing fees are determined according to individual agreements with customers and are
calculated based on the dollar value of loans, number of loans, or number of borrowers serviced for
each customer. In addition, the Company earns servicing revenue for the origination of loans.
Guaranty servicing fees, generally, are calculated based on the number of loans serviced, volume of
loans serviced, or amounts collected.
Student Loan Servicing Volumes
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
As of |
|
|
As of |
|
|
|
March 31, |
|
|
December 31, |
|
|
|
2009 |
|
|
2008 |
|
|
|
Dollar |
|
|
Percent |
|
|
Dollar |
|
|
Percent |
|
|
|
(dollars in millions) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Company |
|
$ |
25,064 |
(a) |
|
|
69.3 |
% |
|
$ |
24,596 |
|
|
|
68.5 |
% |
Third Party |
|
|
11,119 |
(b) |
|
|
30.7 |
|
|
|
11,293 |
|
|
|
31.5 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
$ |
36,183 |
|
|
|
100.0 |
% |
|
$ |
35,889 |
|
|
|
100.0 |
% |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(a) |
|
Approximately $1.5
billion of these loans were disbursed on or
after May 1, 2008 and are eligible to be sold
to the Department of Education pursuant to its
Purchase Commitment Program. The Department
obtains all rights to service loans which it
purchases as part of this program. |
|
(b) |
|
Approximately $1.0
billion of these loans were disbursed on or
after May 1, 2008 and may be eligible to be
sold to the Department of Education pursuant to
its Purchase Commitment Program. The
Department obtains all rights to service loans
which it purchases as part of this program. The Company has currently
received notification from third party servicing customers of their
intent to sell approximately $470 million to the Department
prior to the September 30, 2009 deadline. |
33
Three months ended March 31, 2009 compared to the three months ended March 31, 2008
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Three months ended March 31, |
|
|
|
2009 |
|
|
2008 |
|
|
$ Change |
|
Net interest income after the provision
for loan losses |
|
$ |
66 |
|
|
|
613 |
|
|
|
(547 |
) |
Loan and guaranty servicing revenue |
|
|
26,853 |
|
|
|
24,656 |
|
|
|
2,197 |
|
Software services revenue |
|
|
875 |
|
|
|
1,452 |
|
|
|
(577 |
) |
Other income |
|
|
112 |
|
|
|
32 |
|
|
|
80 |
|
Intersegment revenue |
|
|
19,878 |
|
|
|
20,224 |
|
|
|
(346 |
) |
|
|
|
|
|
|
|
|
|
|
Total other income |
|
|
47,718 |
|
|
|
46,364 |
|
|
|
1,354 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Salaries and benefits |
|
|
14,704 |
|
|
|
13,998 |
|
|
|
706 |
|
Restructure expense severance and contract
termination costs |
|
|
|
|
|
|
851 |
|
|
|
(851 |
) |
Impairment expense |
|
|
|
|
|
|
5,074 |
|
|
|
(5,074 |
) |
Other expenses |
|
|
8,597 |
|
|
|
8,487 |
|
|
|
110 |
|
Intersegment expenses |
|
|
9,470 |
|
|
|
13,278 |
|
|
|
(3,808 |
) |
|
|
|
|
|
|
|
|
|
|
Total operating expenses |
|
|
32,771 |
|
|
|
41,688 |
|
|
|
(8,917 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Base net income before income taxes |
|
|
15,013 |
|
|
|
5,289 |
|
|
|
9,724 |
|
Income tax expense |
|
|
(5,705 |
) |
|
|
(1,640 |
) |
|
|
(4,065 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Base net income |
|
$ |
9,308 |
|
|
|
3,649 |
|
|
|
5,659 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Before Tax Operating Margin |
|
|
31.4 |
% |
|
|
11.3 |
% |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Before Tax Operating Margin
excluding restructure and
impairment expense |
|
|
31.4 |
% |
|
|
23.9 |
% |
|
|
|
|
Net interest income after the provision for loan losses. Investment income decreased as a
result of decreases in interest rates on cash held in 2009 compared to 2008.
Loan and guaranty servicing revenue. Loan and guaranty servicing revenue for the three
months ended March 31, 2009 increased from the same period in 2008 as follows:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Three months ended March 31, |
|
|
|
2009 |
|
|
2008 |
|
|
$ Change |
|
|
% Change |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Origination and servicing of
FFEL Program loans |
|
$ |
15,786 |
|
|
|
12,279 |
|
|
|
3,507 |
|
|
|
28.6 |
% |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Origination and servicing of
non-federally insured student loans |
|
|
1,872 |
|
|
|
2,271 |
|
|
|
(399 |
) |
|
|
(17.6 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Servicing and support outsourcing for
guaranty agencies |
|
|
9,195 |
|
|
|
10,106 |
|
|
|
(911 |
) |
|
|
(9.0 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Loan and guaranty servicing income
to external parties |
|
$ |
26,853 |
|
|
|
24,656 |
|
|
|
2,197 |
|
|
|
8.9 |
% |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
FFELP loan servicing revenue
increased due to deconversion revenue recognized during the three
months ended March 31, 2009 and the favorable resolution of a
servicing contract. |
|
|
|
Non-federally insured loan servicing revenue decreased due to a significant customer
ceasing to originate non-federally insured loans. |
|
|
|
Servicing and support outsourcing for guaranty agencies decreased due to a decline in
collections revenue related to the decrease in sales of rehabilitated
loans. |
34
Operating expenses. Excluding restructure and impairment charges, operating expenses
decreased $3.0 million for the three months ended March 31, 2009 compared to the same period in
2008 as a result of ongoing cost savings from the Companys September 2007 and January 2008
restructuring plans.
TUITION PAYMENT PROCESSING AND CAMPUS COMMERCE OPERATING SEGMENT RESULTS OF OPERATIONS
The Tuition Payment Processing and Campus Commerce operating segment provides products and services
to help institutions and education seeking families manage the payment of education costs during
the pre-college and college stages of the education life cycle. The Company provides actively
managed tuition payment solutions, online payment processing, detailed information reporting,
financial needs analysis, and data integration services to K-12 and higher educational
institutions, families, and students. In addition, the Company provides customer-focused
electronic transactions, information sharing, and account and bill presentment to colleges and
universities.
Three months ended March 31, 2009 compared to the three months ended March 31, 2008
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Three months ended March 31, |
|
|
|
2009 |
|
|
2008 |
|
|
$ Change |
|
Net interest income after the provision
for loan losses |
|
$ |
30 |
|
|
|
765 |
|
|
|
(735 |
) |
Tuition payment processing and campus commerce revenue |
|
|
15,538 |
|
|
|
13,847 |
|
|
|
1,691 |
|
Intersegment revenue |
|
|
57 |
|
|
|
260 |
|
|
|
(203 |
) |
|
|
|
|
|
|
|
|
|
|
Total other income |
|
|
15,595 |
|
|
|
14,107 |
|
|
|
1,488 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Salaries and benefits |
|
|
6,545 |
|
|
|
5,430 |
|
|
|
1,115 |
|
Other expenses |
|
|
2,408 |
|
|
|
2,060 |
|
|
|
348 |
|
Intersegment expenses |
|
|
623 |
|
|
|
296 |
|
|
|
327 |
|
|
|
|
|
|
|
|
|
|
|
Total operating expenses |
|
|
9,576 |
|
|
|
7,786 |
|
|
|
1,790 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Base net income before income taxes |
|
|
6,049 |
|
|
|
7,086 |
|
|
|
(1,037 |
) |
Income tax expense |
|
|
(2,298 |
) |
|
|
(2,197 |
) |
|
|
(101 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Base net income |
|
$ |
3,751 |
|
|
|
4,889 |
|
|
|
(1,138 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Before Tax Operating Margin |
|
|
38.7 |
% |
|
|
47.6 |
% |
|
|
|
|
Net interest income after the provision for loan losses. Investment income decreased as a
result of decreases in interest rates on cash held in 2009 compared to 2008.
Tuition payment processing and campus commerce revenue. Tuition payment processing and
campus commerce revenue increased for the three months ended March 31, 2009 compared to the same
period in 2008 as a result of an increase in the number of managed tuition payment plans as well as
an increase in campus commerce transactions processed.
Operating expenses. Operating expenses increased for the three months ended March 31, 2009
compared to the same period in 2008 as a result of incurring additional costs associated with
salaries and benefits, as well as other expenses, to support the increase in the number of managed
tuition payment plans and campus commerce transactions. In addition, the Company continues to
invest in new products and services to meet customer needs and expand product and service
offerings. These investments increased operating expenses for the three months ended March 31,
2009 compared to the same period in 2008.
35
ENROLLMENT SERVICES OPERATING SEGMENT RESULTS OF OPERATIONS
The Enrollment Services segment offers products and services that are focused on helping (i)
students plan and prepare for life after high school (content management and publishing and editing
services) and (ii) colleges recruit and retain students (lead generation and recruitment services).
Content management products and services include online courses, admissions consulting, licensing
of scholarship data, and call center services. Publishing and editing services include test
preparation study guides and essay and resume editing services. Lead generation products and
services include vendor lead management services and admissions lead generation. Recruitment
services include pay per click marketing management, email marketing, and list marketing services.
Three months ended March 31, 2009 compared to the three months ended March 31, 2008
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Three months ended March 31, |
|
|
|
2009 |
|
|
2008 |
|
|
$ Change |
|
Net interest income after the provision
for loan losses |
|
$ |
|
|
|
|
8 |
|
|
|
(8 |
) |
Enrollment services revenue |
|
|
28,771 |
|
|
|
27,222 |
|
|
|
1,549 |
|
Software services revenue |
|
|
|
|
|
|
37 |
|
|
|
(37 |
) |
|
|
|
|
|
|
|
|
|
|
Total other income |
|
|
28,771 |
|
|
|
27,259 |
|
|
|
1,512 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Salaries and benefits |
|
|
6,095 |
|
|
|
6,523 |
|
|
|
(428 |
) |
Restructure expense severance and contract
termination costs |
|
|
|
|
|
|
297 |
|
|
|
(297 |
) |
Cost to provide enrollment services |
|
|
17,793 |
|
|
|
15,403 |
|
|
|
2,390 |
|
Other expenses |
|
|
3,295 |
|
|
|
2,760 |
|
|
|
535 |
|
Intersegment expenses |
|
|
546 |
|
|
|
1,847 |
|
|
|
(1,301 |
) |
|
|
|
|
|
|
|
|
|
|
Total operating expenses |
|
|
27,729 |
|
|
|
26,830 |
|
|
|
899 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Base net income before
income taxes |
|
|
1,042 |
|
|
|
437 |
|
|
|
605 |
|
Income tax expense |
|
|
(396 |
) |
|
|
(135 |
) |
|
|
(261 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Base net income |
|
$ |
646 |
|
|
|
302 |
|
|
|
344 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Before Tax Operating Margin |
|
|
3.6 |
% |
|
|
1.6 |
% |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Before Tax Operating Margin
excluding restructure expense |
|
|
3.6 |
% |
|
|
2.7 |
% |
|
|
|
|
36
Enrollment services revenue, cost to provide enrollment services, and gross profit.
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Three months ended March 31, 2009 |
|
|
|
|
|
|
|
Publishing |
|
|
|
|
|
|
Content |
|
|
|
|
|
|
|
|
|
|
and |
|
|
|
|
|
|
management |
|
|
|
|
|
|
Lead |
|
|
editing |
|
|
|
|
|
|
and recruitment |
|
|
|
|
|
|
generation (a) |
|
|
services (b) |
|
|
Subtotal |
|
|
services (c) |
|
|
Total |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Enrollment services revenue |
|
$ |
21,070 |
|
|
|
2,851 |
|
|
|
23,921 |
|
|
|
4,850 |
|
|
|
28,771 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Cost to provide enrollment services |
|
|
16,579 |
|
|
|
1,214 |
|
|
|
17,793 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Gross profit |
|
$ |
4,491 |
|
|
|
1,637 |
|
|
|
6,128 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Gross profit % |
|
|
21.3 |
% |
|
|
57.4 |
% |
|
|
25.6 |
% |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Three months ended March 31, 2008 |
|
|
|
|
|
|
|
Publishing |
|
|
|
|
|
|
Content |
|
|
|
|
|
|
|
|
|
|
and |
|
|
|
|
|
|
management |
|
|
|
|
|
|
Lead |
|
|
editing |
|
|
|
|
|
|
and recruitment |
|
|
|
|
|
|
generation (a) |
|
|
services (b) |
|
|
Subtotal |
|
|
services (c) |
|
|
Total |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Enrollment services revenue |
|
$ |
17,438 |
|
|
|
3,581 |
|
|
|
21,019 |
|
|
|
6,203 |
|
|
|
27,222 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Cost to provide enrollment services |
|
|
13,861 |
|
|
|
1,542 |
|
|
|
15,403 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Gross profit |
|
$ |
3,577 |
|
|
|
2,039 |
|
|
|
5,616 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Gross profit % |
|
|
20.5 |
% |
|
|
56.9 |
% |
|
|
26.7 |
% |
|
|
|
|
|
|
|
|
|
|
|
(a) |
|
Lead generation revenue, and the related
costs, increased for the three months ended March 31, 2009
compared to the same period in 2008 as a result of an increase
in lead generation services volume. |
|
(b) |
|
Publishing and editing services revenue, and
the related costs, decreased for the three months ended March
31, 2009 compared to the same period in 2008 due to economic
conditions. |
|
(c) |
|
Content management and recruitment services
revenue decreased for the three months ended March 31, 2009
compared to the same period in 2008 due to economic conditions,
the strategic realignment of products, and the impacts of
legislative developments in the student loan industry on list
marketing services. |
Operating
expenses. Excluding restructure charges and the cost to provide
enrollment services, operating expenses decreased $1.2 million,
or 10.7%, for the three months
ended March 31, 2009 compared to the same period in 2008, as a result of continued focus on cost
efficiencies.
37
SOFTWARE AND TECHNICAL SERVICES OPERATING SEGMENT RESULTS OF OPERATIONS
The Software and Technical Services operating segment develops student loan servicing software,
which is used internally by the Company and also licensed to third-party student loan holders and
servicers. This segment also provides information technology products and services, with core
areas of business in educational loan software solutions, business intelligence, technical
consulting services, and Enterprise Content Management solutions.
Many of the Companys external customers receiving services in this segment have been negatively
impacted as a result of the passage of the College Cost Reduction Act and the recent disruption in
the capital markets. This impact could decrease the demand for products and services and affect
this segments future revenue and profit margins.
Three months ended March 31, 2009 compared to the three months ended March 31, 2008
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Three months ended March 31, |
|
|
|
2009 |
|
|
2008 |
|
|
$ Change |
|
Software services revenue |
|
$ |
4,830 |
|
|
|
6,715 |
|
|
|
(1,885 |
) |
Intersegment revenue |
|
|
3,124 |
|
|
|
1,816 |
|
|
|
1,308 |
|
|
|
|
|
|
|
|
|
|
|
Total other income |
|
|
7,954 |
|
|
|
8,531 |
|
|
|
(577 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Salaries and benefits |
|
|
5,185 |
|
|
|
5,168 |
|
|
|
17 |
|
Restructure expense severance and contract
termination costs |
|
|
|
|
|
|
518 |
|
|
|
(518 |
) |
Other expenses |
|
|
678 |
|
|
|
619 |
|
|
|
59 |
|
Intersegment expenses |
|
|
645 |
|
|
|
394 |
|
|
|
251 |
|
|
|
|
|
|
|
|
|
|
|
Total operating expenses |
|
|
6,508 |
|
|
|
6,699 |
|
|
|
(191 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Base net income before
income taxes |
|
|
1,446 |
|
|
|
1,832 |
|
|
|
(386 |
) |
Income tax expense |
|
|
(550 |
) |
|
|
(568 |
) |
|
|
18 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Base net income |
|
$ |
896 |
|
|
|
1,264 |
|
|
|
(368 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Before Tax Operating Margin |
|
|
18.2 |
% |
|
|
21.5 |
% |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Before Tax Operating Margin
excluding restructure expense |
|
|
18.2 |
% |
|
|
27.5 |
% |
|
|
|
|
Software services revenue. Software services revenue decreased for the three months ended
March 31, 2009 compared to the same period in 2008 as the result of 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 2008 and 2009.
Intersegment revenue. Intersegment revenue increased for the three months ended March 31,
2009 compared to the same period in 2008 as a result of an increase
in the number of projects for internal customers.
Operating expenses. Excluding restructure expense, operating expenses increased $0.3
million as the Company continues to invest in new products and services to meet customer needs and
expand product and service offerings. These investments increased 2009 operating expenses compared
to 2008.
38
ASSET GENERATION AND MANAGEMENT OPERATING SEGMENT RESULTS OF OPERATIONS
The Asset Generation and Management Operating Segment includes the origination, acquisition,
management, and ownership of the Companys student loan assets, which has historically been the
Companys largest product and service offering. The Company historically generated a substantial
portion of its earnings from the spread, referred to as the Companys student loan spread, between
the yield it receives on its student loan portfolio and the costs associated with originating,
acquiring, and financing its portfolio. The Company generates student loan assets through direct
origination or through acquisitions. The student loan assets are held in a series of education
lending subsidiaries designed specifically for this purpose.
In addition to the student loan portfolio, all costs and activity associated with the generation of
assets, funding of those assets, and maintenance of the debt transactions are included in this
segment. This includes derivative activity and the related derivative market value and foreign
currency adjustments. The Company is also able to leverage its capital market expertise by
providing investment advisory services and other related services to third parties through a
licensed broker-dealer subsidiary. Revenues and expenses for those functions are also included in
the Asset Generation and Management segment.
Student Loan Portfolio
The tables below outline the components of the Companys student loan portfolio:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
As of March 31, 2009 |
|
|
|
|
|
|
|
|
|
|
|
Originated |
|
|
Originated |
|
|
Originated |
|
|
|
|
|
|
|
|
|
|
|
prior to |
|
|
between 10/1/07 |
|
|
on or after |
|
|
|
Total |
|
|
10/1/07 |
|
|
and
6/3/08 (a) |
|
|
6/4/2008
(b) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Federally insured: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Stafford |
|
$ |
8,076,074 |
|
|
|
31.5 |
% |
|
|
6,462,137 |
|
|
|
407,777 |
|
|
|
1,209,160 |
|
PLUS/SLS |
|
|
581,084 |
|
|
|
2.3 |
% |
|
|
397,058 |
|
|
|
46,893 |
|
|
|
137,133 |
|
Consolidation |
|
|
16,398,640 |
|
|
|
63.9 |
% |
|
|
16,240,696 |
|
|
|
157,944 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total federally insured |
|
|
25,055,798 |
|
|
|
97.7 |
% |
|
|
23,099,891 |
|
|
|
609,614 |
|
|
|
1,346,293 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
100.0 |
% |
|
|
|
|
|
|
92.2 |
% |
|
|
2.4 |
% |
|
|
5.4 |
% |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Non-federally insured |
|
|
218,375 |
|
|
|
0.9 |
% |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total student loans receivable (gross) |
|
|
25,274,173 |
|
|
|
98.6 |
% |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Unamortized premiums and deferred
origination costs |
|
|
398,661 |
|
|
|
1.6 |
% |
|
|
|
|
|
|
|
|
|
|
|
|
Allowance for loan losses: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Federally insured |
|
|
(27,310 |
) |
|
|
(0.1 |
%) |
|
|
|
|
|
|
|
|
|
|
|
|
Non-federally insured |
|
|
(21,187 |
) |
|
|
(0.1 |
%) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total student loans receivable (net) |
|
$ |
25,624,337 |
|
|
|
100.0 |
% |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
39
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
As of December 31, 2008 |
|
|
|
|
|
|
|
|
|
|
|
Originated |
|
|
Originated |
|
|
Originated |
|
|
|
|
|
|
|
|
|
|
|
prior to |
|
|
between 10/1/07 |
|
|
on or after |
|
|
|
Total |
|
|
10/1/07 |
|
|
and 6/3/08 (a) |
|
|
6/4/2008 (b) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Federally insured: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Stafford |
|
$ |
7,602,568 |
|
|
|
29.9 |
% |
|
|
6,641,817 |
|
|
|
390,658 |
|
|
|
570,093 |
|
PLUS/SLS |
|
|
527,670 |
|
|
|
2.1 |
% |
|
|
412,142 |
|
|
|
48,346 |
|
|
|
67,182 |
|
Consolidation |
|
|
16,657,703 |
|
|
|
65.5 |
% |
|
|
16,614,950 |
|
|
|
42,753 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total federally insured |
|
|
24,787,941 |
|
|
|
97.5 |
% |
|
|
23,668,909 |
|
|
|
481,757 |
|
|
|
637,275 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
100.0 |
% |
|
|
|
|
|
|
95.5 |
% |
|
|
1.9 |
% |
|
|
2.6 |
% |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Non-federally insured |
|
|
273,108 |
|
|
|
1.1 |
% |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total student loans receivable (gross) |
|
|
25,061,049 |
|
|
|
98.6 |
% |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Unamortized premiums and deferred
origination costs |
|
|
402,881 |
|
|
|
1.6 |
% |
|
|
|
|
|
|
|
|
|
|
|
|
Allowance for loan losses: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Federally insured |
|
|
(25,577 |
) |
|
|
(0.1 |
%) |
|
|
|
|
|
|
|
|
|
|
|
|
Non-federally insured |
|
|
(25,345 |
) |
|
|
(0.1 |
%) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total student loans receivable (net) |
|
$ |
25,413,008 |
|
|
|
100.0 |
% |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(a) |
|
Federally insured student loans originated on or after October 1, 2007
earn a reduced annual yield as a result of the enactment of the College Cost Reduction and Access Act
of 2007 in September 2007. |
|
(b) |
|
Federally insured student
loans originated by the Company on or after June 4, 2008
are eligible to be participated and sold to the Department under the
Departments Participation and Purchase Commitment Programs. |
Origination and Acquisition
The Company has historically originated and acquired loans through various methods and channels
including: (i) direct-to-consumer channel (in which the Company originates student loans directly
with student and parent borrowers), (ii) campus based origination channels, and (iii) spot
purchases.
The Company will originate or acquire loans through its campus based channel either directly under
one of its brand names or through other originating lenders. In addition to its brands, the Company
acquires student loans from lenders to whom the Company provides marketing and/or origination
services established through various contracts. Branding partners are lenders for which the Company
acts as a marketing agent in specified geographic areas. A forward flow lender is one for whom the
Company provides origination services but provides no marketing services or whom simply agrees to
sell loans to the Company under forward sale commitments.
40
The following table sets forth the activity of loans originated or acquired through each of the
Companys channels:
|
|
|
|
|
|
|
|
|
|
|
Three months ended March 31, |
|
|
|
2009 |
|
|
2008 |
|
|
|
|
|
|
|
|
|
|
Beginning balance |
|
$ |
25,061,049 |
|
|
|
26,329,213 |
|
Direct channel: |
|
|
|
|
|
|
|
|
Consolidation loan originations |
|
|
|
|
|
|
65,745 |
|
Less consolidation of existing portfolio |
|
|
|
|
|
|
(27,459 |
) |
|
|
|
|
|
|
|
Net consolidation loan originations |
|
|
|
|
|
|
38,286 |
|
Stafford/PLUS loan originations |
|
|
541,592 |
|
|
|
421,101 |
|
Branding partner channel |
|
|
412,313 |
|
|
|
473,378 |
|
Forward flow channel |
|
|
|
|
|
|
318,844 |
|
Other channels |
|
|
13,805 |
|
|
|
55,922 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total channel acquisitions |
|
|
967,710 |
|
|
|
1,307,531 |
|
|
|
|
|
|
Repayments, claims, capitalized interest, participations, and other |
|
|
(628,927 |
) |
|
|
(299,800 |
) |
Consolidation loans lost to external parties |
|
|
(105,518 |
) |
|
|
(129,418 |
) |
Loans sold |
|
|
(20,141 |
) |
|
|
(860,172 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Ending balance |
|
$ |
25,274,173 |
|
|
|
26,347,354 |
|
|
|
|
|
|
|
|
The Company has significant financing needs that it meets through the capital markets. Since August
2007, the capital markets have experienced unprecedented disruptions, which have had an adverse
impact on the Companys earnings and financial condition. Since the Company could not determine nor
control the length of time or extent to which the capital markets would remain disrupted, it
reduced its direct and indirect costs related to its asset generation activities and was more
selective in pursuing origination activity in the direct to consumer channel. Accordingly,
beginning in January 2008, the Company suspended Consolidation and private student loan
originations and exercised contractual rights to discontinue, suspend, or defer the acquisition of
student loans in connection with substantially all of its branding and forward flow relationships.
Prior to and in conjunction with exercising this right, during the first quarter of 2008, the
Company accelerated the purchase of loans from certain branding partner and forward flow lenders of
approximately $511 million.
Historically, the Company funded new loan originations using loan warehouse facilities and
asset-backed securitizations. Student loan warehousing has historically allowed the Company to buy
and manage student loans prior to transferring them into more permanent financing arrangements. In
July 2008, the Company did not renew its liquidity provisions on its FFELP warehouse facility.
Accordingly, the facility became a term facility and no new loan originations could be funded with
this facility. In August 2008, the Company began funding FFELP Stafford and PLUS student loan
originations for the 2008-2009 academic year pursuant to the Departments Loan Participation
Program (as discussed below).
In August 2008, the Department implemented the Loan Purchase Commitment Program and the Loan
Participation Program pursuant to the ECASLA. Under the Departments Purchase Program, the
Department will purchase loans at a price equal to the sum of (i) par value, (ii) accrued interest,
(iii) the one percent origination fee paid to the Department, and (iv) a fixed amount of $75 per
loan. Under the Participation Program, the Department provides interim short term liquidity to
FFELP lenders by purchasing participation interests in pools of FFELP loans. FFELP lenders are
charged a rate of commercial paper plus 50 basis points on the principal amount of participation
interests outstanding. Loans funded under the Participation Program must be either refinanced by
the lender or sold to the Department pursuant to the Purchase Program prior to its expiration on
September 30, 2009. To be eligible for purchase or participation under the Departments programs,
loans were originally limited to FFELP Stafford or PLUS loans made for the academic year 2008-2009,
first disbursed between May 1, 2008 and July 1, 2009, with eligible borrower benefits.
On October 7, 2008, legislation was enacted to extend the Departments authority to address FFELP
student loans made for the 2009-2010 academic year and allowing for the extension of the
Participation Program and Purchase Program from September 30, 2009 to September 30, 2010. The
Department indicated that loans for the 2008-2009 academic year which are funded under the
Departments Participation Program will need to be refinanced or sold to the Department prior to
September 30, 2009. On November 8, 2008, the Department announced the replication of the terms of
the Participation and Purchase Program, in accordance with the October 7, 2008 legislation, which
will include FFELP student loans made for the 2009-2010 academic year.
The Company plans to continue to use the Participation Program to fund loans originated for the
2008-2009 and 2009-2010 academic years. These programs are allowing the Company to continue
originating new federal student loans to all students regardless of the school they attend.
41
Activity in the Allowance for Loan Losses
The provision for loan losses represents the periodic expense of maintaining an allowance
sufficient to absorb losses, net of recoveries, inherent in the portfolio of student loans. An
analysis of the Companys allowance for loan losses is presented in the following table:
|
|
|
|
|
|
|
|
|
|
|
Three months ended March 31, |
|
|
|
2009 |
|
|
2008 |
|
|
|
|
|
|
|
|
|
|
Balance at beginning of period |
|
$ |
50,922 |
|
|
|
45,592 |
|
Provision for loan losses: |
|
|
|
|
|
|
|
|
Federally insured loans |
|
|
5,500 |
|
|
|
3,500 |
|
Non-federally insured loans |
|
|
2,000 |
|
|
|
1,500 |
|
|
|
|
|
|
|
|
Total provision for loan losses |
|
|
7,500 |
|
|
|
5,000 |
|
Charge-offs, net of recoveries: |
|
|
|
|
|
|
|
|
Federally insured loans |
|
|
(3,247 |
) |
|
|
(3,322 |
) |
Non-federally insured loans |
|
|
(658 |
) |
|
|
(383 |
) |
|
|
|
|
|
|
|
Net charge-offs |
|
|
(3,905 |
) |
|
|
(3,705 |
) |
Sale of federally insured loans |
|
|
(520 |
) |
|
|
(750 |
) |
Sale of non-federally insured loans |
|
|
(5,500 |
) |
|
|
|
|
|
|
|
|
|
|
|
Balance at end of period |
|
$ |
48,497 |
|
|
|
46,137 |
|
|
|
|
|
|
|
|
Allocation of the allowance for loan losses: |
|
|
|
|
|
|
|
|
Federally insured loans |
|
$ |
27,310 |
|
|
|
23,962 |
|
Non-federally insured loans |
|
|
21,187 |
|
|
|
22,175 |
|
|
|
|
|
|
|
|
Total allowance for loan losses |
|
$ |
48,497 |
|
|
|
46,137 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net loan charge-offs as a percentage of average student loans |
|
|
0.062 |
% |
|
|
0.055 |
% |
Total allowance as a percentage of average student loans |
|
|
0.192 |
% |
|
|
0.172 |
% |
Total allowance as a percentage of ending balance of student loans |
|
|
0.192 |
% |
|
|
0.175 |
% |
Non-federally insured allowance as a percentage of the ending
balance of non-federally insured loans |
|
|
9.702 |
% |
|
|
7.827 |
% |
Average student loans |
|
$ |
25,265,903 |
|
|
|
26,859,328 |
|
Ending balance of student loans |
|
|
25,274,173 |
|
|
|
26,347,354 |
|
Ending balance of non-federally insured loans |
|
|
218,375 |
|
|
|
283,308 |
|
Delinquencies have the potential to adversely impact the Companys earnings through increased
servicing and collection costs and account charge-offs. The table below shows the Companys
student loan delinquency amounts:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
As of March 31, 2009 |
|
|
As of December 31, 2008 |
|
|
|
Dollars |
|
|
Percent |
|
|
Dollars |
|
|
Percent |
|
Federally Insured Loans: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Loans in-school/grace/deferment(1) |
|
$ |
8,003,584 |
|
|
|
|
|
|
$ |
7,374,602 |
|
|
|
|
|
Loans in forebearance(2) |
|
|
2,351,413 |
|
|
|
|
|
|
|
2,484,478 |
|
|
|
|
|
Loans in repayment status: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Loans current |
|
|
12,877,869 |
|
|
|
87.6 |
% |
|
|
13,169,101 |
|
|
|
88.2 |
% |
Loans delinquent 31-60 days(3) |
|
|
522,221 |
|
|
|
3.6 |
|
|
|
536,112 |
|
|
|
3.6 |
|
Loans delinquent 61-90 days(3) |
|
|
337,362 |
|
|
|
2.3 |
|
|
|
240,549 |
|
|
|
1.6 |
|
Loans delinquent 91 days or greater(4) |
|
|
963,349 |
|
|
|
6.6 |
|
|
|
983,099 |
|
|
|
6.6 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total loans in repayment |
|
|
14,700,801 |
|
|
|
100.0 |
% |
|
|
14,928,861 |
|
|
|
100.0 |
% |
|
|
|
|
|
|
|
|
|
|
|
|
|
Total federally insured loans |
|
$ |
25,055,798 |
|
|
|
|
|
|
$ |
24,787,941 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Non-Federally Insured Loans: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Loans in-school/grace/deferment(1) |
|
$ |
66,520 |
|
|
|
|
|
|
$ |
84,237 |
|
|
|
|
|
Loans in forebearance(2) |
|
|
7,172 |
|
|
|
|
|
|
|
9,540 |
|
|
|
|
|
Loans in repayment status: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Loans current |
|
|
136,056 |
|
|
|
94.0 |
% |
|
|
169,865 |
|
|
|
94.7 |
% |
Loans delinquent 31-60 days(3) |
|
|
3,455 |
|
|
|
2.4 |
|
|
|
3,315 |
|
|
|
1.8 |
|
Loans delinquent 61-90 days(3) |
|
|
2,135 |
|
|
|
1.5 |
|
|
|
1,743 |
|
|
|
1.0 |
|
Loans delinquent 91 days or greater(4) |
|
|
3,037 |
|
|
|
2.1 |
|
|
|
4,408 |
|
|
|
2.5 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total loans in repayment |
|
|
144,683 |
|
|
|
100.0 |
% |
|
|
179,331 |
|
|
|
100.0 |
% |
|
|
|
|
|
|
|
|
|
|
|
|
|
Total non-federally insured loans |
|
$ |
218,375 |
|
|
|
|
|
|
$ |
273,108 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(1) |
|
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. |
|
(2) |
|
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. |
|
(3) |
|
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. |
|
(4) |
|
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. |
42
Student Loan Spread Analysis
The following table analyzes the student loan spread on the Companys portfolio of student loans
and represents the spread on assets earned in conjunction with the liabilities and derivative
instruments used to fund the assets:
|
|
|
|
|
|
|
|
|
|
|
Three months ended March 31, |
|
|
|
2009 |
|
|
2008 |
|
Variable student loan yield |
|
|
3.26 |
% |
|
|
5.92 |
% |
Consolidation rebate fees |
|
|
(0.71 |
) |
|
|
(0.74 |
) |
Premium and deferred origination costs amortization |
|
|
(0.30 |
) |
|
|
(0.38 |
) |
|
|
|
|
|
|
|
Variable student loan net yield |
|
|
2.25 |
|
|
|
4.80 |
|
Student loan cost of funds interest expense |
|
|
(2.16 |
) |
|
|
(4.55 |
) |
Student loan cost of funds derivative settlements |
|
|
0.38 |
|
|
|
0.59 |
|
|
|
|
|
|
|
|
Variable student loan spread |
|
|
0.47 |
|
|
|
0.84 |
|
Variable-rate floor income,
net of settlements on derivatives (a) |
|
|
(0.02 |
) |
|
|
(0.06 |
) |
Fixed rate floor contribution |
|
|
0.49 |
|
|
|
0.13 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Core student loan spread |
|
|
0.94 |
% |
|
|
0.91 |
% |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Average balance of student loans |
|
$ |
25,265,903 |
|
|
|
26,859,328 |
|
Average balance of debt outstanding |
|
|
25,764,285 |
|
|
|
27,828,890 |
|
|
|
|
(a) |
|
As a result of the ongoing volatility of
interest rates, effective October 1, 2008, the Company
changed its calculation of variable rate floor income to
better reflect the economic benefit received by the Company.
For the three months ended March 31, 2009 and
2008, the economic benefit received by the Company related
to variable rate floor income was $1.5 million and $6.3
million, respectively. Variable rate floor income
calculated on a statutory maximum basis for the three months
ended March 31, 2009 and 2008 was $10.8 million and $18.8
million, respectively. Beginning October 1, 2008, and for presentation of prior periods, the
economic benefit received by the Company has been used to
determine core student loan spread. For
the student loan spread analysis shown above, variable-rate
floor income for prior periods was changed to reflect the
economic benefit to conform to the current period
presentation. |
The increase in the Companys core student loan spread during the three months ended March 31, 2009
compared to 2008 was the result of the following items:
|
|
|
The amortization of loan premiums and deferred origination costs, which is a reduction
to core student loan spread, decreased as a result of reduced costs to acquire or
originate loans and a decrease in the yield earned on student loans. |
|
|
|
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
creating fixed rate floor income which is included in its
core student loan spread. Due to lower interest rates in the three-month period ended March 31, 2009 compared to
the same period in 2008, the Company received additional fixed rate floor income on a
portion of its student loan portfolio. See Item 3, Quantitative
and Qualitative Disclosures about Market Risk Interest Rate
Risk for additional information. |
The increases in the Companys core student loan spread were offset by the following items:
|
|
|
The passage of the College Cost Reduction Act has reduced the yield on all FFELP loans
originated after October 1, 2007. As of March 31, 2009,
7.8% of the Companys federally insured student
loan portfolio was originated after October 1, 2007 as compared to 2.4% as of March 31,
2008. |
|
|
|
Historically, the movement of the various interest rate indices received on the
Companys student loan assets and paid on the debt to fund such loans was highly
correlated. The short term movement of the indices was dislocated beginning in August
2007. This dislocation had a negative impact on the Companys student loan net interest
income during the first quarter of 2008. Due to the unintended consequences of government
intervention in the commercial paper markets and limited issuances of qualifying financial
commercial paper, the relationship between the three-month financial CP and LIBOR rates
has continued to widen. To address this issue, the Department announced that for purposes
of calculating the FFELP loan index from October 27, 2008 to December 31, 2008, the
Federal Reserves Commercial Paper Funding Facility rate was used for those days in which
no three-month financial commercial paper rate was available. This action partially
mitigated the volatility between CP and LIBOR for the three-month period ended on December
31, 2008. However, the Department of Education did not make a similar adjustment for the
first quarter of 2009 which negatively impacted the Companys net interest income for
the three month period ended March 31, 2009. |
43
|
|
|
The spread to LIBOR on asset-backed securities transactions has increased significantly
since August 2007. The Company issued $4.4 billion of notes in asset-backed securities
transactions ($1.2 billion in March 2008, $1.9 billion in April 2008, and $1.3 billion in
May 2008) in 2008 and an additional $0.3 billion in March 2009. Prior to completing these
asset-backed securities transactions, these loans were funded in the Companys FFELP
warehouse facility in which the cost of funds were lower than the asset-backed securities
transactions. |
|
|
|
The interest rate on the principal amount of participation interests outstanding under
the Departments 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 financial commercial paper index calculated on the
current fiscal quarter. Due to a declining interest rate environment during the three
months ended March 31, 2009, the Companys core student loan spread was compressed due to
the mismatch in the timing of these rate resets. |
|
|
|
The Company has used derivative instruments to hedge the repricing risk due to the
timing of the interest rate resets on its assets and liabilities. The Company has entered
into basis swaps in which the Company (i) receives three-month LIBOR set discretely in
advance and pays a daily weighted average three-month LIBOR less a spread as defined in
the individual agreements; and (ii) receives three-month LIBOR and pays one-month LIBOR
less a spread as defined in the agreements. Due to the significant drop in interest
during the first quarter of 2008, the Company received more settlements on its
Average/Discrete Basis Swaps in the first quarter of 2008 compared to the same period in
2009. |
Three months ended March 31, 2009 compared to the three months ended March 31, 2008
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Three months ended March 31, |
|
|
|
2009 |
|
|
2008 |
|
|
$ Change |
|
Net interest income (loss) after provision
for loan losses |
|
$ |
26,493 |
|
|
|
(657 |
) |
|
|
27,150 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Loan and guaranty servicing revenue |
|
|
|
|
|
|
5 |
|
|
|
(5 |
) |
Other income |
|
|
4,651 |
|
|
|
4,857 |
|
|
|
(206 |
) |
Loss on sale of loans |
|
|
(206 |
) |
|
|
(47,474 |
) |
|
|
47,268 |
|
Derivative market value, foreign currency,
and put option adjustments |
|
|
|
|
|
|
466 |
|
|
|
(466 |
) |
Derivative settlements, net |
|
|
24,358 |
|
|
|
43,527 |
|
|
|
(19,169 |
) |
|
|
|
|
|
|
|
|
|
|
Total other income |
|
|
28,803 |
|
|
|
1,381 |
|
|
|
27,422 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Salaries and benefits |
|
|
1,775 |
|
|
|
2,224 |
|
|
|
(449 |
) |
Restructure expense severance and contract
termination costs |
|
|
|
|
|
|
1,896 |
|
|
|
(1,896 |
) |
Impairment expense |
|
|
|
|
|
|
9,351 |
|
|
|
(9,351 |
) |
Other expenses |
|
|
4,959 |
|
|
|
5,344 |
|
|
|
(385 |
) |
Intersegment expenses |
|
|
17,876 |
|
|
|
20,602 |
|
|
|
(2,726 |
) |
|
|
|
|
|
|
|
|
|
|
Total operating expenses |
|
|
24,610 |
|
|
|
39,417 |
|
|
|
(14,807 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Base net income (loss) before income taxes |
|
|
30,686 |
|
|
|
(38,693 |
) |
|
|
69,379 |
|
Income tax (expense) benefit |
|
|
(11,661 |
) |
|
|
11,995 |
|
|
|
(23,656 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Base net income (loss) |
|
$ |
19,025 |
|
|
|
(26,698 |
) |
|
|
45,723 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Before Tax Operating Margin |
|
|
55.5 |
% |
|
|
(5,344.3 |
%) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Before Tax Operating Margin
excluding restructure expense,
impairment expense, and loss on sale
of loans |
|
|
55.5 |
% |
|
|
41.6 |
% |
|
|
|
|
44
Net interest income (loss) after provision for loan losses
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Three months ended March 31, |
|
|
Change |
|
|
|
2009 |
|
|
2008 |
|
|
Dollars |
|
|
Percent |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Loan interest |
|
$ |
232,589 |
|
|
|
386,426 |
|
|
|
(153,837 |
) |
|
|
(39.8) |
% |
Consolidation rebate fees |
|
|
(44,478 |
) |
|
|
(49,854 |
) |
|
|
5,376 |
|
|
|
10.8 |
|
Amortization of loan premiums and
deferred origination costs |
|
|
(18,651 |
) |
|
|
(25,404 |
) |
|
|
6,753 |
|
|
|
26.6 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total loan interest |
|
|
169,460 |
|
|
|
311,168 |
|
|
|
(141,708 |
) |
|
|
(45.5 |
) |
Investment interest |
|
|
3,128 |
|
|
|
9,190 |
|
|
|
(6,062 |
) |
|
|
(66.0 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
Total interest income |
|
|
172,588 |
|
|
|
320,358 |
|
|
|
(147,770 |
) |
|
|
(46.1 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
Interest on bonds and notes payable |
|
|
138,034 |
|
|
|
315,921 |
|
|
|
(177,887 |
) |
|
|
(56.3 |
) |
Intercompany interest |
|
|
561 |
|
|
|
94 |
|
|
|
467 |
|
|
|
496.8 |
|
Provision for loan losses |
|
|
7,500 |
|
|
|
5,000 |
|
|
|
2,500 |
|
|
|
50.0 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net interest income (loss) after provision
for loan losses |
|
$ |
26,493 |
|
|
|
(657 |
) |
|
|
27,150 |
|
|
|
4,132.4 |
% |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Loan interest income
decreased $153.8 million as a result of a decrease in the average
student loan portfolio of $1.6 billion, or 5.9%, and a decrease in the yield earned on
student loans due to a decrease in interest rates for the three months ended March 31, 2009
compared to the same period in 2008. |
|
|
|
|
Consolidation rebate fees decreased due to the $1.9 billion, or 10.4%, decrease in the
average consolidation portfolio. |
|
|
|
The amortization of loan premiums and deferred origination costs decreased as a result
of reduced costs to acquire or originate loans and a decrease in the yield earned on
student loans. |
|
|
|
Investment income decreased as a result of lower interest rates in the first quarter of
2009 as compared to the same period in 2008. |
|
|
|
Interest expense decreased as a result of a decrease in interest rates on the Companys
variable rate debt which lowered the Companys cost of funds (excluding net derivative
settlements) to 2.16% for the three months ended March 31, 2009
compared to 4.55% for the
same period a year ago. In addition, average debt decreased by $2.1 billion, or 7.4%, for
the three months ended March 31, 2009 compared to the same period in 2008. |
|
|
|
The provision for loan losses increased for the three months ended March 31, 2009
compared to the same period in 2008 primarily due to increases in delinquencies as a result
of the continued weakening of the U.S. economy. |
Loss on sale of loans. The Company sold student loan portfolios to third parties in 2008
and 2009 in order to reduce the amount of student loans remaining under the Companys multi-year
committed financing facility for FFELP loans, which reduced the Companys exposure related to
certain equity support provisions included in this facility. On January 29, 2009, the Company sold
$20.0 million (par value) of federally insured student loans resulting in the recognition of a loss
of $0.2 million. On March 31, 2008, the Company sold $857.8 million (par value) of federally
insured student loans resulting in the recognition of a loss of $30.4 million. In addition, on
April 8, 2008, the Company sold $428.6 million (par value) of federally insured student loans. The
portfolio of student loans sold on April 8, 2008 was presented as held for
sale on the March 31, 2008 consolidated balance sheet and was valued at the lower of cost or fair
value. The Company recognized a loss of $17.1 million during the three month period ended March
31, 2008 as a result of marking these loans to fair value.
Derivative settlements, net. 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 all of the Companys derivative transactions with the intent
that each is economically effective; however, the Companys derivative instruments do not qualify
for hedge accounting under SFAS No. 133. Derivative settlements for each applicable period should
be evaluated with the Companys net interest income. For more information on the Companys
derivatives, see note 4 in the notes to the consolidated financial statements included in this
Quarterly Report on Form 10-Q.
Operating expenses. Excluding restructure and impairment charges, operating expenses
decreased $3.6 million, or 12.6%, for the three months ended March 31, 2009 compared to same period
in 2008. This decrease is a result of the September 2007 and January 2008 restructuring plans.
45
LIQUIDITY AND CAPITAL RESOURCES
The Companys fee-based businesses are not capital intensive businesses and all of these businesses
produce positive operating cash flows. As such, a minimal amount of debt and equity capital is
allocated to these segments. Therefore, the majority of the Liquidity and Capital Resources
discussion is concentrated on the Companys Asset Generation and Management operating segment. The
Company has historically utilized operating cash flow, secured financing transactions (which
include warehouse facilities and asset-backed securitizations), operating lines of credit, and
other borrowing arrangements to fund its Asset Generation and Management operations and student
loan acquisitions. In addition, the Company uses operating cash flow, borrowings on its unsecured
line of credit, and unsecured debt offerings to fund corporate activities, business acquisitions,
and repurchases of common stock. The Company has also used its common stock to partially fund
certain business acquisitions. The Company has a universal shelf registration statement with the
SEC which allows the Company to sell up to $825.0 million of securities that may consist of common
stock, preferred stock, unsecured debt securities, warrants, stock purchase contracts, and stock
purchase units. The terms of any securities are established at the time of the offering.
The Company may issue equity and debt securities in the future in order to improve capital,
increase liquidity, refinance upcoming maturities, or provide for general corporate purposes.
Moreover, the Company may from time-to-time repurchase certain amounts of its outstanding debt
securities, including debt securities which the Company may issue in the future, for cash and/or
through exchanges for other securities. Such repurchases or exchanges may be made in open market
transactions, privately negotiated transactions, or otherwise. Any such repurchases or exchanges
will depend on prevailing market conditions, the Companys liquidity requirements, contractual
restrictions, compliance with securities laws, and other factors. The amounts involved in any such
transactions may be material.
The following table summarizes the Companys bonds and notes outstanding as of March 31, 2009:
|
|
|
|
|
|
|
|
|
|
|
Carrying |
|
|
Interest rate |
|
|
|
|
amount |
|
|
range |
|
Final maturity |
|
|
|
|
|
|
|
|
|
Variable-rate bonds and notes (a): |
|
|
|
|
|
|
|
|
Bonds and notes based on indices |
|
$ |
20,387,802 |
|
|
0.95% 6.90% |
|
09/25/13 6/25/41 |
Bonds and notes based on auction or remarketing |
|
|
2,667,635 |
|
|
0.92% 3.75% |
|
11/01/09 07/01/43 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total variable-rate
bonds and notes |
|
|
23,055,437 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Commercial paper FFELP facility (b) |
|
|
1,369,485 |
|
|
0.41% 1.37% |
|
05/09/10 |
Fixed-rate bonds and notes (a) |
|
|
193,362 |
|
|
5.30% 6.50% |
|
11/01/09 05/01/29 |
Unsecured fixed rate debt |
|
|
440,134 |
|
|
5.125% and 7.40% |
|
06/01/10 and 09/15/61 |
Unsecured line of credit |
|
|
691,500 |
|
|
1.04% 1.10% |
|
05/08/12 |
Department of Education Participation |
|
|
1,360,159 |
|
|
3.08% |
|
09/30/09 |
Other borrowings |
|
|
20,329 |
|
|
0.50% 5.10% |
|
01/10/10 11/01/15 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
$ |
27,130,406 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(a) |
|
Issued in asset-backed securitizations. |
|
(b) |
|
Loan warehouse facilities. |
Secured Financing Transactions
The Company has historically relied upon secured financing vehicles as its most significant source
of funding for student loans. The net cash flow the Company receives from the securitized student
loans generally represents the excess amounts, if any, generated by the underlying student loans
over the amounts required to be paid to the bondholders, after deducting servicing fees and any
other expenses relating to the securitizations. The Companys rights to cash flow from securitized
student loans are subordinate to bondholder interests and may fail to generate any cash flow beyond
what is due to bondholders. The Companys secured financing vehicles are loan warehouse
facilities, asset-backed securitizations, and the governments Participation Program (as described
below).
Historically, the Company funded new loan originations using loan warehouse facilities and
asset-backed securitizations. Student loan warehousing has historically allowed the Company to buy
and manage student loans prior to transferring them into more permanent financing arrangements. In
July 2008, the Company did not renew its liquidity provisions on its FFELP warehouse facility.
Accordingly, the facility became a term facility and no new loan originations could be funded with
this facility. In August 2008, the Company began funding FFELP Stafford and PLUS student loan
originations for the 2008-2009 academic year pursuant to the Departments Loan Participation
Program and a participation agreement with Union Bank.
46
Loan warehouse facilities
Student loan warehousing has historically allowed the Company to buy and manage student loans prior
to transferring them into more permanent financing arrangements. The Company has historically
relied upon two conduit warehouse loan financing vehicles to support its funding needs on a
short-term basis: a multi-year committed facility for FFELP loans and a $250.0 million private loan
warehouse for non-federally insured student loans.
FFELP Warehouse Facility
The Companys multi-year committed facility for FFELP loans terminates in May 2010 and was
supported by 364-day liquidity which was up for renewal on May 9, 2008. The Company obtained an
extension on this renewal until July 31, 2008. On July 31, 2008, the Company did not renew the
liquidity provisions of this facility. Accordingly, as of July 31, 2008, the facility became a
term facility with a final maturity date of May 9, 2010. Pursuant to the terms of the agreement,
since liquidity was not renewed, the Companys cost of financing under this facility increased 10
basis points. The agreement also includes provisions which allow the banks to charge a rate equal
to LIBOR plus 128.5 basis points if they choose to finance their portion of the facility with
sources of funds other than their commercial paper conduit. As of March 31, 2009, the Company had
$1.2 billion of student loans in the facility and $1.4 billion borrowed under the facility.
The terms and conditions of the Companys warehouse facility for FFELP loans provides for formula
based advance rates based on market conditions. While the Company does not believe that the loan
valuation formula is reflective of the actual fair value of its loans, it is subject to compliance
with such mark-to-formula provisions of the warehouse facility agreement. As of March 31, 2009, the
Company had a cumulative amount of $206.7 million posted as equity funding support for this
facility.
On March 26, 2009, the Company completed a privately placed asset-backed securitization of $294.6
million. Subsequent to March 31, 2009, the Company used the proceeds from the sale of these notes
and additional funds of approximately $10 million to purchase approximately $305 million of
principal and interest on student loans, which were previously financed under the Companys FFELP
warehouse facility, which allowed the Company to withdraw cash posted
as equity funding support for the facility. As of May 8, 2009, the Company had $1.2 billion of
student loans in the FFELP warehouse facility, $1.1 billion borrowed under the facility, and $96.6
million posted as equity funding support for the facility.
The Company continues to look at various alternatives to remove loans from the warehouse facility
including other financing arrangements, using unrestricted operating cash, and/or selling loans to
third parties. In addition, in January 2009, the Department published summary terms under which it
will finance eligible FFELP Stafford and PLUS loans in a conduit vehicle established to provide
funding for student lenders (the Conduit Program). Loans eligible for the Conduit Program must be
first disbursed on or after October 1, 2003, but not later than June 30, 2009, and fully disbursed
before September 30, 2009, and meet certain other requirements. Funding for the Conduit Program
will be provided by the capital markets at a cost based on market rates. The Conduit Program will
have a term of five years. As of May 8, 2009, the Company had
approximately $845 million of loans
included in its FFELP warehouse facility that would be eligible for the Conduit Program.
Private Loan Warehouse Facility
On
February 25, 2009, the Company paid $91.5 million on the debt of its private loan warehouse
facility with operating cash and terminated the facility. Beginning in January 2008, the Company
suspended private student loan originations.
Asset-backed
securitizations
Of the $27.1 billion of debt outstanding as of March 31, 2009, $23.2 billion was issued under term
asset-backed securitizations. Depending on market conditions, the Company anticipates continuing to
access the asset-backed securities market. As a result of the disruptions in the credit markets,
the Company may not be able to issue asset-backed financings at rates historically achieved by the
Company, at levels equal to or less than other financing agreements, or at levels otherwise
considered beneficial to the Company. Accordingly, the Companys operational and financial results
may be negatively impacted. Securities issued in the securitization transactions are generally
priced based upon a spread to LIBOR or set under an auction or remarketing procedure.
LIBOR based notes
As of
March 31, 2009, the Company had $20.4 billion of notes issued under asset-backed
securitizations that primarily reprice at a fixed spread to three month LIBOR and are structured to
substantially match the maturity of the funded assets. These notes fund FFELP student loans that
are predominantly set based on a spread to three month commercial paper. The three month LIBOR and
three month commercial paper indexes have historically been highly correlated. Based on cash flows
developed to reflect managements current estimate of, among other factors, prepayments, defaults,
deferment, forbearance, and interest rates, the Company currently expects future undiscounted cash
flows from these transactions will be approximately $1.4 billion. These cash flows consist of net
spread and servicing and administrative revenue in excess of estimated cost. However, due to the
unintended consequences of government intervention in the commercial paper markets and limited
issuances of qualifying financial commercial paper, the relationship between the three-month
financial commercial paper and LIBOR rates has
been distorted and volatile. Such distortion has had and may continue to have a significant impact
on the earnings and cash flows of this portfolio.
47
The Company has certain LIBOR-indexed notes that match the maturity of the funded assets, however,
must periodically be remarketed by the Company. Upon remarketing, the interest rates on the notes
are reset. The Company also has the option to repurchase the notes prior to a failed remarketing
and hold the notes as an investment until such time they can be remarketed. In the event the notes
cannot be remarketed and they are not repurchased by the Company, the interest rate increases to
and remains at 3-month LIBOR plus 75 basis points until such time as they can be successfully
remarketed or purchased by the Company. The Company has $200 million of notes due to be remarketed
on May 26, 2009 and an additional $950 million and $115 million to be remarketed in 2016 and 2018,
respectively.
Auction or remarketing based notes
The interest rates on certain of the Companys 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). The Company is currently sponsor on
approximately $1.9 billion of Auction Rate Securities and $0.8 billion of Variable Rate Demand
Notes.
For Auction Rate Securities, investors and potential investors submit orders through a
broker-dealer as to the principal amount of notes they wish to buy, hold, or sell at various
interest rates. The broker-dealers submit their clients orders to the auction agent, who then
determines the clearing interest rate for the upcoming period. Interest rates on these Auction Rate
Securities are reset periodically, generally every 7 to 35 days, by the auction agent or agents.
During the first quarter of 2008, as part of the credit market crisis, auction rate securities from
various issuers failed to receive sufficient order interest from potential investors to clear
successfully, resulting in failed auction status. Since February 8, 2008, the Companys Auction
Rate Securities have failed in this manner. Under normal conditions, banks have historically
purchased these securities when investor demand is weak. However, since February 2008, banks have
been allowing auctions to fail. Currently, all of the Companys Auction Rate Securities are in a
failed auction status and the Company believes they will remain in a failed status for an extended
period of time and possibly permanently.
As a result of a failed auction, the Auction Rate Securities will generally pay interest to the
holder at a maximum rate as defined by the indenture. While these rates will vary, they will
generally be based on a spread to LIBOR or Treasury Securities. Due to the failed auctions related
to these securities, the Company could be subject to interest costs substantially above the
anticipated and historical rates paid on these types of securities.
The Company cannot predict whether future auctions related to its Auction Rate Securities will be
successful, but management believes it is likely auctions will continue to fail indefinitely. The
Company is currently seeking alternatives for reducing its exposure to the auction rate market, but
may not be able to achieve alternate financing for some or all of its Auction Rate Securities.
For Variable Rate Demand Notes, the remarketing agents set the price, which is then offered to
investors. If there are insufficient potential bid orders to purchase all of the notes offered for
sale, the Company could be subject to interest costs substantially above the anticipated and
historical rates paid on these types of securities.
Funding New FFELP Student Loan Originations
As previously discussed, in July 2008, the Company did not renew its liquidity provisions on its
FFELP warehouse facility. Accordingly, the facility became a term facility and no new loan
originations could be funded with this facility. In August 2008, the Company began funding FFELP
Stafford and PLUS student loan originations for 2008-2009 academic year pursuant to a participation
agreement with Union Bank and the Departments Loan Participation Program.
Union Bank Participation Agreement
The Company maintains an agreement with Union Bank, as trustee for various grantor trusts, under
which Union Bank has agreed to purchase from the Company participation interests in student loans
(the FFELP Participation Agreement). The Company has the option to purchase the participation
interests from the grantor trusts at the end of a 364-day period upon termination of the
participation certificate. As of March 31, 2009, $784.3 million of loans were subject to
outstanding participation interests held by Union Bank, as trustee, under this agreement. The
agreement automatically renews annually and is terminable by either party upon five business days
notice. This agreement provides beneficiaries of Union Banks grantor trusts with access to
investments in interests in student loans, while providing liquidity to the Company on a short term
basis. The Company can participate loans to Union Bank to the extent of availability under the
grantor trusts, up to $750 million or an amount in excess of $750 million if mutually agreed to by
both parties. Loans participated under this agreement qualify as a sale pursuant to the provisions
of SFAS No. 140. Accordingly, the participation interests sold are not included on the Companys
consolidated balance sheet.
48
Department of Educations Loan Participation and Purchase Commitment Programs
In August 2008, the Department implemented the Loan Purchase Commitment Program and the Loan
Participation Program pursuant to the ECASLA. Under the Departments Purchase Program, the
Department will purchase loans at a price equal to the sum of (i) par value, (ii) accrued interest,
(iii) the one percent origination fee paid to the Department, and (iv) a fixed amount of $75 per
loan. Under the Participation Program, the Department provides interim short term liquidity to
FFELP lenders by purchasing participation interests in pools of FFELP loans. FFELP lenders are
charged a rate of commercial paper plus 50 basis points on the principal amount of participation
interests outstanding. Loans funded under the Participation Program must be either refinanced by
the lender or sold to the Department pursuant to the Purchase Program prior to its expiration on
September 30, 2009. To be eligible for purchase or participation under the Departments programs,
loans were originally limited to FFELP Stafford or PLUS loans made for the academic year 2008-2009,
first disbursed between May 1, 2008 and July 1, 2009, with eligible borrower benefits.
On October 7, 2008, legislation was enacted to extend the Departments authority to address FFELP
student loans made for the 2009-2010 academic year and allowing for the extension of the
Participation Program and Purchase Program from September 30, 2009 to September 30, 2010. The
Department indicated that loans for the 2008-2009 academic year which are funded under the
Departments Participation Program will need to be refinanced or sold to the Department prior to
September 30, 2009. On November 8, 2008, the Department announced the replication of the terms of
the Participation and Purchase Program, in accordance with the October 7, 2008 legislation, which
will include FFELP student loans made for the 2009-2010 academic year.
As of March 31, 2009, the Company had $1.4 billion of FFELP loans funded using the Participation
Program. The Company plans to continue to use the Participation Program to fund loans originated
for the 2008-2009 and 2009-2010 academic years. These programs are allowing the Company to continue
originating new federal student loans to all students regardless of the school they attend.
The Company has not yet determined if it will sell its 2008-2009 academic year loans to the
Department under the Purchase Program. However, based on the number of 2008-2009 academic year
loans held by the Company that are eligible for this program as of March 31, 2009, the Company
would recognize a gain of approximately $13 million to
$16 million if it chose to sell these loans under this program.
Unsecured Line of Credit
The Company has a $750.0 million unsecured line of credit that terminates in May 2012. As of March
31, 2009, there was $691.5 million outstanding on this line and $58.5 million available for future
use. The weighted average interest rate on this line of credit was 1.04% as of March 31, 2009. Upon
termination in 2012, there can be no assurance that the Company will be able to maintain this line
of credit, find alternative funding, or increase the amount outstanding under the line, if
necessary. The lending commitment under the Companys unsecured line of credit is provided by a
total of thirteen banks, with no individual bank representing more than 11% of the total lending
commitment. The bank lending group includes Lehman Brothers Bank, a subsidiary of Lehman Brothers
Holdings Inc., which represents approximately 7% of the lending commitment under the line of
credit. On September 15, 2008, Lehman Brothers Holdings Inc. filed a voluntary petition for relief
under Chapter 11 of the United States Bankruptcy Code. Since the bankruptcy filing, the Company has
experienced funding delays from Lehman and does not expect Lehman to fund future borrowing
requests. As of March 31, 2009, excluding Lehman Banks lending commitment, the Company had $51.2
million available for future use under its unsecured line of credit.
The line of credit agreement contains certain financial covenants that, if not met, lead to an
event of default under the agreement. The covenants include maintaining:
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A minimum consolidated net worth |
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A minimum adjusted EBITDA to corporate debt interest (over the last four rolling quarters) |
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|
A limitation on subsidiary indebtedness |
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|
A limitation on the percentage of non-guaranteed loans in the Companys portfolio |
As of March 31, 2009, the Company was in compliance with all of these requirements. Many of these
covenants are duplicated in the Companys other lending facilities, including its FFELP and private
loan warehouses.
The Companys operating line of credit does not have any covenants related to unsecured debt
ratings. However, changes in the Companys ratings (as well as the amounts the Company borrows)
have modest implications on the pricing level at which the Company obtains funding.
49
Unsecured Debt Offerings
In May 2005, the Company issued $275.0 million in aggregate principal amount of Senior Notes due
June 1, 2010 (the 2010 Notes). The 2010 Notes are unsecured obligations of the Company. The interest rate
on the 2010 Notes is 5.125%, payable semiannually. At the
Companys option, the 2010 Notes are redeemable in
whole at any time or in part from time to time at the redemption price described in the Companys
prospectus supplement.
During the first quarter of 2009 and April of 2009, the Company purchased $34.9 million and $35.5
million, respectively, of its 2010 Notes for a purchase price of $26.8 million and $31.1 million,
respectively. These transactions resulted in the Company recording a gain of $8.1 million in the
first quarter of 2009 and $4.4 million in the second quarter of 2009. Subsequent to these
transactions, the Company has $204.6 million of Notes outstanding.
In September 2006, the Company issued $200.0 million aggregate principal amount of Junior
Subordinated Hybrid Securities (Hybrid Securities). The Hybrid Securities are unsecured
obligations of the Company. The interest rate on the Hybrid Securities from the date they were
issued through the optional redemption date, September 28, 2011, is 7.40%, payable semi-annually.
Beginning September 29, 2011 through September 29, 2036, the scheduled maturity date, the
interest rate on the Hybrid Securities will be equal to three-month LIBOR plus 3.375%, payable
quarterly. The principal amount of the Hybrid Securities will become due on the scheduled maturity
date only to the extent that the Company has received proceeds from the sale of certain qualifying
capital securities prior to such date (as defined in the Hybrid Securities prospectus). If any
amount is not paid on the scheduled maturity date, it will remain outstanding and bear interest at
a floating rate as defined in the prospectus, payable monthly. On September 15, 2061, the Company
must pay any remaining principal and interest on the Hybrid Securities in full whether or not the
Company has sold qualifying capital securities. At the Companys option, the Hybrid Securities are
redeemable in whole at any time or in part from time to time at the redemption price described in
the prospectus supplement.
Non-Federally Insured Loans
During the three month period ended March 31, 2009, the Company participated $50.5 million of non-federally insured
loans to third parties. Loans participated under these agreements qualify as sales pursuant to the provisions of SFAS
No. 140. Accordingly, the participation interests sold are not included on the Companys consolidated balance sheet.
As of May 8, 2009, the Company had approximately $178 million of unencumbered non-federally insured loans on its
balance sheet. The Company plans to continue to find alternatives to fund these loans, including additional
participation agreements.
Contractual Obligations
The Company is committed under noncancelable operating leases for certain office and warehouse
space and equipment. The Companys contractual obligations as of March 31, 2009 were as follows:
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Less than |
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1 to 3 |
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More than |
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Total |
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|
1 year |
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|
years |
|
|
3 to 5 years |
|
|
5 years |
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Bonds and notes payable |
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$ |
27,130,406 |
|
|
|
1,419,735 |
|
|
|
1,726,940 |
|
|
|
769,373 |
|
|
|
23,214,358 |
|
Operating lease obligations (a) |
|
|
32,425 |
|
|
|
7,886 |
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|
13,515 |
|
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|
9,143 |
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|
1,881 |
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Other |
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|
41,792 |
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|
|
20,000 |
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|
21,792 |
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Total |
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$ |
27,204,623 |
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1,447,621 |
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1,762,247 |
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778,516 |
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23,216,239 |
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(a) |
|
Operating lease obligations are presented net of
approximately $2.4 million in sublease arrangements. |
As of
March 31, 2009, the Company had a reserve of $6.5 million for uncertain income tax positions
per the provisions of FIN 48 (including the federal benefit received from state positions and
accrued interest). This obligation is not included in the above table as the timing and resolution
of the income tax positions cannot be reasonably estimated at this time.
The Company has an obligation to purchase $41.8 million of private loans from an unrelated
financial institution in quarterly installments of approximately $5.0 million through the third
quarter of 2010 with any remaining amount to be purchased at that time. This obligation is
included in other in the above table.
As discussed previously, during the three month period ended March 31, 2009, the Company participated $50.5 million of
non-federally insured loans to third parties. Loans participated under these agreements qualify as sales pursuant to
the provisions of SFAS No. 140. Accordingly, the participation interests sold are not included on the Companys
consolidated balance sheet. Per the terms of the servicing agreements, the Companys servicing operations is obligated
to repurchase loans subject to the participation interests when such loans become 60 days delinquent. As of March 31,
2009, the Company has $5.5 million accrued related to this obligation which is included in other liabilities in the
Companys consolidated balance sheet. This obligation is not included in the above table.
The Company has commitments with its branding partners and forward flow lenders which obligate the
Company to purchase loans originated under specific criteria, although the branding partners and
forward flow lenders are typically not obligated to provide the Company with a minimum amount of
loans. These commitments generally run for periods ranging from one to five years and are
generally renewable. The Company has significant financing needs that it meets through the capital
markets, including the debt and secondary markets. Since August 2007, these markets have
experienced unprecedented disruptions, which are having an adverse impact on the Companys earnings
and financial condition. The Company cannot determine nor control the length of time or extent to
which the capital markets will remain disrupted. Accordingly, the Company has the ability to
exercise contractual rights to discontinue, suspend, or defer the acquisition of student loans in
connection with its branding and forward flow relationships. Commitments to purchase loans under
these arrangements are not included in the table above.
As a result of the Companys previous acquisitions, the Company has certain contractual obligations
or commitments as follows:
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LoanSTAR Funding Group, Inc. (LoanSTAR) As part of the agreement for the acquisition
of the capital stock of LoanSTAR from the Greater Texas Foundation (Texas Foundation),
the Company agreed to sell student loans in an aggregate amount sufficient to permit the
Texas Foundation to maintain a portfolio of loans equal to no less than $200 million
through October 2010. The sales price for such loans is the fair value mutually agreed
upon between the Company and the Texas Foundation. To satisfy this obligation, the Company
is obligated to sell loans to the Texas Foundation on a quarterly basis; however, the
Foundation recently has chosen not to purchase such loans. |
50
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infiNET Integrated Solutions, Inc. (infiNET) Stock price guarantee of $104.8375 per
share on 95,380 shares of Class A Common Stock (less the greater of $41.9335 or the gross
sales price such seller obtains from a sale of the shares occurring prior to February 28,
2011 as defined in the agreement) issued as part of the original purchase price. The
obligation to pay this guaranteed stock price is due February 28, 2011 and is not included
in the table above. Based upon the closing sale price of the Companys Class A Common
Stock as of March 31, 2009 of $8.84 per share, the Companys obligation under this stock
price guarantee would have been $6.0 million (($104.8375 $41.9335) x 95,380 shares). Any
cash paid by the Company in consideration of satisfying the guaranteed value of stock
issued for this acquisition would be recorded by the Company as a reduction to additional
paid-in capital. |
Sources of Liquidity
Sources of Liquidity Available for New FFELP Stafford and PLUS Loans
The Company has unlimited sources of primary liquidity available for new FFELP Stafford and PLUS
loan originations for the 2008-2009 and 2009-2010 academic years under the Departments
Participation and Purchase Programs. In addition, the Company maintains an agreement with Union
Bank, as trustee for various grantor trusts, under which Union Bank has agreed to purchase from the
Company participation interests in student loans. See Union Bank Participation Agreement
discussed earlier in this section.
Sources of Liquidity Available for General Corporate Purposes
The following table details the Companys primary sources of liquidity and the available capacity
at May 8, 2009 for general corporate purposes:
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Sources of primary liquidity: (a) |
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Cash and cash equivalents (b) |
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$ |
300,000 |
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Unencumbered FFELP student loan assets |
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11,000 |
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Unencumbered private student loan assets |
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178,000 |
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Unused unsecured line of credit (c) |
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51,000 |
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Total sources of primary liquidity |
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$ |
540,000 |
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(a) |
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The sources of primary liquidity table above does not include asset-backed
security investments. As part of the Companys 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 Companys consolidated balance sheet. If the credit market conditions 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. Upon sale, these notes would be shown as bonds and notes
payable on the Companys consolidated balance sheet. Unless there is a significant
market improvement, the Company believes the market value of such notes will be less
than par value. The difference between the par value and market value would be
recognized by the Company as interest expense over the life of the bonds. |
|
(b) |
|
The Company also has restricted cash and investments; however, the Company is
limited in the amounts of funds that can be transferred from its subsidiaries through
intercompany loans, advances, or cash dividends. These limitations result from the
restrictions contained in trust indentures under debt financing arrangements to which
the Companys education lending subsidiaries are parties. The Company does not believe
these limitations will significantly affect its operating cash needs. The amounts of
cash and investments restricted in the respective reserve accounts of the education
lending subsidiaries are shown on the balance sheets as restricted cash and
investments. |
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(c) |
|
The lending commitment under the Companys unsecured line of credit is
provided by a total of thirteen banks, with no individual bank representing more than
11% of the total lending commitment. The bank lending group includes Lehman Brothers
Bank, a subsidiary of Lehman Brothers Holdings Inc., which represents approximately 7%
of the lending commitment under the line of credit. On September 15, 2008, Lehman
Brothers Holdings Inc. filed a voluntary petition for relief under Chapter 11 of the
United States Bankruptcy Code. Since the bankruptcy filing, the Company has
experienced funding delays from Lehman and does not expect Lehman to fund future
borrowing requests. The amount included in the table above excludes Lehmans
commitment. |
Dividends
In the first quarter of 2007, the Company began paying dividends of $0.07 per share on the
Companys Class A and Class B Common Stock which were paid quarterly through the first quarter of
2008. On May 21, 2008, the Company announced that it was temporarily suspending its quarterly
dividend program. The Company will continue to evaluate its dividend policy, which is subject to
future earnings, capital requirements, financial condition, and other factors.
51
CRITICAL ACCOUNTING POLICIES
This Managements Discussion and Analysis of Financial Condition and Results of Operations
discusses the Companys consolidated financial statements, which have been prepared in accordance
with accounting principles generally accepted in the United States. The preparation of these
financial statements requires management to make estimates and assumptions that affect the reported
amounts of assets and liabilities and the reported amounts of income and expenses during the
reporting periods. The Company bases its estimates and judgments on historical experience and on
various other factors that the Company believes are reasonable under the circumstances. Actual
results may differ from these estimates under varying assumptions or conditions. Note 3 of the
consolidated financial statements, which are included in the Companys Annual Report on Form 10-K
for the year ended December 31, 2008, includes a summary of the significant accounting policies and
methods used in the preparation of the consolidated financial statements.
On an on-going basis, management evaluates its estimates and judgments, particularly as they relate
to accounting policies that management believes are most critical that is, they are most
important to the portrayal of the Companys financial condition and results of operations and they
require managements most difficult, subjective, or complex judgments, often as a result of the
need to make estimates about the effect of matters that are inherently uncertain. Management has
identified the following critical accounting policies that are discussed in more detail below:
allowance for loan losses, revenue recognition, impairment assessments related to goodwill and
intangible assets, income taxes, and accounting for derivatives.
Allowance for Loan Losses
The allowance for loan losses represents managements estimate of probable losses on student loans.
This evaluation process is subject to numerous estimates and judgments. The Company evaluates the
adequacy of the allowance for loan losses on its federally insured loan portfolio separately from
its non-federally insured loan portfolio.
The allowance for the federally insured loan portfolio is based on periodic evaluations of the
Companys loan portfolios considering past experience, trends in student loan claims rejected for
payment by guarantors, changes to federal student loan programs, current economic conditions, and
other relevant factors. Should any of these factors change, the estimates made by management would
also change, which in turn would impact the level of the Companys future provision for loan
losses.
In determining the adequacy of the allowance for loan losses on the non-federally insured loans,
the Company considers several factors including: loans in repayment versus those in a nonpaying
status, months in repayment, delinquency status, type of program, and trends in defaults in the
portfolio based on Company and industry data. Should any of these factors change, the estimates
made by management would also change, which in turn would impact the level of the Companys future
provision for loan losses. The Company places a non-federally insured loan on nonaccrual status and
charges off the loan when the collection of principal and interest is 120 days past due.
The allowance for federally insured and non-federally insured loans is maintained at a level
management believes is adequate to provide for estimated probable credit losses inherent in the
loan portfolio. This evaluation is inherently subjective because it requires estimates that may be
susceptible to significant changes.
Revenue Recognition
Student Loan Income The Company recognizes student loan income as earned, net of amortization of
loan premiums and deferred origination costs. Loan income is recognized based upon the expected
yield of the loan after giving effect to borrower utilization of incentives such as principal
reductions for timely payments (borrower benefits) and other yield adjustments. The estimate of
the borrower benefits discount is dependent on the estimate of the number of borrowers who will
eventually qualify for these benefits. For competitive and liquidity purposes, the Company
frequently changes the borrower benefit programs in both amount and qualification factors. These
programmatic changes must be reflected in the estimate of the borrower benefit discount. Loan
premiums, deferred origination costs, and borrower benefits are included in the carrying value of
the student loan on the consolidated balance sheet and are amortized over the estimated life of the
loan in accordance with SFAS No. 91, Accounting for Non-Refundable Fees and Costs Associated with
Originating or Acquiring Loans and Initial Direct Costs of Leases. The most sensitive estimate for
loan premiums, deferred origination costs, and borrower benefits is the estimate of the constant
prepayment rate (CPR). CPR is a variable in the life of loan estimate that measures the rate at
which loans in a portfolio pay before their stated maturity. The CPR is directly correlated to the
average life of the portfolio. CPR equals the percentage of loans that prepay annually as a
percentage of the beginning of period balance. A number of factors can affect the CPR estimate such
as the rate of consolidation activity and default rates. Should any of these factors change, the
estimates made by management would also change, which in turn would impact the amount of loan
premium and deferred origination cost amortization recognized by the Company in a particular
period.
Other Income Other income is primarily attributable to fees for providing services and the sale
of lists and print products. Fees associated with services are recognized in the period services
are rendered and earned under service arrangements with clients where service fees are fixed or
determinable and collectability is reasonably assured. The Companys service fees are determined
based on written price quotations or service agreements having stipulated terms and conditions that
do not require management to make any significant judgments or assumptions regarding any potential
uncertainties. Revenue from the sale of lists and print products is generally earned and
recognized, net of estimated returns, upon shipment or delivery.
52
The Company assesses collectability of revenues and its allowance for doubtful accounts based on a
number of factors, including past transaction history with the customer and the credit-worthiness
of the customer. An allowance for doubtful accounts is established to record accounts receivable at
estimated net realizable value. If the Company determines that collection of revenues is not
reasonably assured at or prior to delivery of the Companys services, revenue is recognized upon
the receipt of cash.
Goodwill and Intangible Assets Impairment Assessments
The Company reviews goodwill for impairment annually and whenever triggering events or changes in
circumstances indicate its carrying value may not be recoverable in accordance with SFAS No. 142,
Goodwill and Other Intangible Assets (SFAS No. 142). The provisions of SFAS No. 142 require that
a two-step impairment test be performed on goodwill. In the first step, the Company compares the
fair value of each reporting unit to its carrying value. If the fair value of the reporting unit
exceeds the carrying value of the net assets assigned to that unit, goodwill is considered not
impaired and the Company is not required to perform further testing. If the carrying value of the
net assets assigned to the reporting unit exceeds the fair value of the reporting unit, then the
Company must perform the second step of the impairment test in order to determine the implied fair
value of the reporting units goodwill. If the carrying value of a reporting units goodwill
exceeds its implied fair value, then the Company would record an impairment loss equal to the
difference.
Determining the fair value of a reporting unit involves the use of significant estimates and
assumptions. These estimates and assumptions include revenue growth rates and operating margins
used to calculate projected future cash flows, risk-adjusted discount rates, future economic and
market conditions, and determination of appropriate market comparables. Actual future results may
differ from those estimates.
The Company makes judgments about the recoverability of purchased intangible assets annually and
whenever triggering events or changes in circumstances indicate that an other than temporary
impairment may exist. Each quarter the Company evaluates the estimated remaining useful lives of
purchased intangible assets and whether events or changes in circumstances warrant a revision to
the remaining periods of amortization. In accordance with FASB Statement No. 144, Accounting for
the Impairment or Disposal of Long-Lived Assets, recoverability of these assets is measured by
comparison of the carrying amount of the asset to the future undiscounted cash flows the asset is
expected to generate. If the asset is considered to be impaired, the amount of any impairment is
measured as the difference between the carrying value and the fair value of the impaired asset.
Assumptions and estimates about future values and remaining useful lives of the Companys
intangible and other long-lived assets are complex and subjective. They can be affected by a
variety of factors, including external factors such as industry and economic trends, and internal
factors such as changes in the Companys business strategy and internal forecasts. Although the
Company believes the historical assumptions and estimates used are reasonable and appropriate,
different assumptions and estimates could materially impact the reported financial results.
Income Taxes
The Company is subject to the income tax laws of the U.S and its states and municipalities in which
the Company operates. These tax laws are complex and subject to different interpretations by the
taxpayer and the relevant government taxing authorities. In establishing a provision for income tax
expense, the Company must make judgments and interpretations about the application of these
inherently complex tax laws. The Company must also make estimates about when in the future certain
items will affect taxable income in the various tax jurisdictions. Disputes over interpretations of
the tax laws may be subject to review/adjudication by the court systems of the various tax
jurisdictions or may be settled with the taxing authority upon examination or audit. The Company
reviews these balances quarterly and as new information becomes available, the balances are
adjusted, as appropriate.
Derivative Accounting
The Company accounts for its derivatives in accordance with SFAS No. 133, Accounting for Derivative
Instruments and Hedging Activities, as amended by SFAS No. 138, Accounting for Certain Derivative
Instruments and Certain Hedging Activities, an Amendment of FASB Statement No. 133. SFAS No. 133 requires that every derivative instrument, including certain derivative
instruments embedded in other contracts, be recorded at fair value on the balance sheet as either
an asset or liability. The Company determines the fair value for its derivative contracts using
either (i) pricing models that consider current market conditions and the contractual terms of the
derivative contract or (ii) counterparty valuations. These factors include interest rates, time
value, forward interest rate curve, and volatility factors, as well as foreign exchange rates.
Pricing models and their underlying assumptions impact the amount and timing of unrealized gains
and losses recognized, and the use of different pricing models or assumptions could produce
different financial results. Management has structured all of the Companys derivative transactions
with the intent that each is economically effective. However, the Companys derivative instruments
do not qualify for hedge accounting under SFAS No. 133. Accordingly, changes in the fair value of
derivative instruments are reported in current period earnings. Net settlements on derivatives are
included in derivative market value, foreign currency, and put option adjustments and derivative
settlements, net on the consolidated statements of operations.
53
RECENT ACCOUNTING PRONOUNCEMENTS
In September 2006, the FASB issued SFAS No. 157, Fair Value Measurements. This Statement defines
fair value, establishes a framework for measuring fair value in generally accepted accounting
principles, and expands disclosures about fair value measurements. The provisions of SFAS No. 157
are effective as of the beginning of the first fiscal year that begins after November 15, 2007
(January 1, 2008 for the Company) and is to be applied prospectively. The Company adopted SFAS No.
157 on January 1, 2008.
In February 2008, the FASB released FSP SFAS No. 157-2, Effective Date of FASB Statement No. 157,
which delayed the application of SFAS No. 157 to nonfinancial assets and nonfinancial liabilities
to fiscal years beginning after November 15, 2008, and interim periods within those fiscal years.
For the Company, SFAS No. 157-2 was effective January 1,
2009. As of January 1, 2009, the Company adopted SFAS 157 on
certain nonfinancial assets and nonfinancial liabilities, which are
recorded at fair value only upon impairment.
In light of the recent economic turmoil occurring in the United States, the FASB released FSP
SFAS No. 157-3, Determining the Fair Value of a Financial Asset When the Market for That Asset is
Not Active (SFAS No. 157-3), on October 10, 2008. SFAS No. 157-3 clarified, among other things,
that quotes and other market inputs need not be solely used to determine fair value if they do not
relate to an active market. SFAS No. 157-3 points out that when relevant observable market
information is not available, an approach that incorporates managements judgments about the
assumptions that market participants would use in pricing the asset in a current sale transaction
would be acceptable (such as a discounted cash flow analysis). Regardless of the valuation
technique applied, entities must include appropriate risk adjustments that market participants
would make, including adjustments for nonperformance risk (credit risk) and liquidity risk. SFAS
No. 157-3 does not have a material impact on the preparation of the Companys consolidated
financial statements.
In April 2009, the FASB released FSP SFAS 157-4, Determining Fair Value When Volume and Level of
Activity for the Asset or Liability Have Significantly Decreased and Identifying Transactions That
Are Not Orderly (SFAS No. 157-4). SFAS No. 157-4 provides guidance on how to determine the fair
value of assets and liabilities when the volume and level of activity for the asset/liability has
significantly decreased. SFAS No. 157-4 also provides guidance on identifying circumstances that
indicate a transaction is not orderly. In addition, SFAS No. 157-4 requires disclosure in interim
and annual periods of the inputs and valuation techniques used to measure fair value and a
discussion of changes in valuation techniques. SFAS No. 157-4 is effective for fiscal periods
ending after June 15, 2009 (December 31, 2009 for the Company) and shall be applied prospectively. The Company is currently evaluating
the impacts and disclosures related to SFAS No. 157-4.
In December 2007, the FASB issued SFAS No. 160, Noncontrolling Interests in Consolidated Financial
Statements, an amendment of ARB No. 51 (SFAS No. 160), which establishes new standards governing
the accounting for and reporting of noncontrolling interests (NCIs) in partially owned
consolidated subsidiaries and the loss of control of subsidiaries. Certain provisions of this
standard indicate, among other things, that NCIs (previously referred to as minority interests) be
treated as a separate component of equity, not as a liability; that increases and decreases in the
parents ownership interest that leave control intact be treated as equity transactions, rather
than as step acquisitions or dilution gains or losses; and that losses of a partially owned
consolidated subsidiary be allocated to the NCI even when such allocation might result in a deficit
balance. This standard also requires changes to certain presentation and disclosure requirements.
For the Company, SFAS No. 160 was effective January 1, 2009. SFAS No. 160 does not have a material
impact on the preparation of the Companys consolidated financial statements. The provisions of
the standard are to be applied to all NCIs prospectively, except for the presentation and
disclosure requirements, which are to be applied retrospectively to
all periods presented.
In March 2008, the FASB issued SFAS No. 161, Disclosures about Derivative Instruments and Hedging
Activities, which is intended to improve financial reporting about derivative instruments and
hedging activities by requiring enhanced disclosures to enable investors to better understand the
effects of derivative instruments and hedging activities on an entitys financial position,
financial performance, and cash flows. The new standard also improves transparency about the
location and amounts of derivative instruments in an entitys financial statements, how derivative
instruments and related hedged items are accounted for under SFAS No. 133, and how derivative
instruments and related hedged items affect its financial position, financial performance, and cash
flows. The standard is effective for financial statements issued for fiscal years and interim
periods beginning after November 15, 2008, with early application encouraged. The Company adopted
SFAS No. 161 on January 1, 2009 (see note 4 in the notes to
the consolidated financial statements included in this Quarterly
Report on Form 10-Q for disclosures related to SFAS No. 161).
In April 2009, the FASB released FSP SFAS No. 115-2 and SFAS No. 124-2, Recognition and
Presentation of Other-Than-Temporary Impairment (SFAS No. 115-2/SFAS No. 124-2). SFAS No.
115-2/SFAS No. 124-2 amends the requirements for the recognition and measurement of
other-than-temporary impairments for debt securities by modifying the pre-existing intent and
ability indicator. Under SFAS No. 115-2/SFAS No. 124-2, an other-than-temporary impairment is
triggered when there is an intent to sell the security, it is more likely than not that the
security will be required to be sold before recovery, or the security is not expected to recover
the entire amortized cost basis of the security. Additionally, SFAS No. 115-2/SFAS No. 124-2
changes the presentation of an other-than-temporary impairment in the income statement for those
impairments involving credit losses. The credit loss component will be recognized in earnings and
the remainder of the impairment will be recorded in other comprehensive income. SFAS No. 115-2/SFAS
No. 124-2 is effective for fiscal periods ending after
June 15, 2009 (December 31, 2009 for the Company). The Company is currently
evaluating the impacts and disclosures related to SFAS No. 115-2/SFAS No. 124-2.
In April 2009, the FASB released FSP SFAS No. 107-1 and APB 28-1, Interim Disclosure about Fair
Value of Financial Instruments (SFAS No. 107-1). SFAS No. 107-1 requires interim disclosures
regarding the fair values of financial instruments that are within the scope of SFAS No. 107,
Disclosures about the Fair Value of Financial Instruments. Additionally, SFAS No. 107-1 requires
disclosure of the methods and significant assumptions used to estimate the fair value of financial
instruments on an interim basis as well as changes of the methods and significant assumptions from
prior periods. SFAS No. 107-1 does not change the accounting treatment for these financial
instruments and is effective for fiscal periods ending after June 15, 2009 (December 31, 2009 for the Company). The Company is
currently evaluating the impacts and disclosures related to SFAS No. 107-1.
54
|
|
|
ITEM 3. |
|
QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK |
Interest Rate Risk
The Companys primary market risk exposure arises from fluctuations in its borrowing and lending
rates, the spread between which could impact the Company due to shifts in market interest rates.
Because the Company generates a significant portion of its earnings from its student loan spread,
the interest sensitivity of the balance sheet is a key profitability driver.
The following table sets forth the Companys loan assets and debt instruments by rate
characteristics:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
As of March 31, 2009 |
|
|
As of December 31, 2008 |
|
|
|
Dollars |
|
|
Percent |
|
|
Dollars |
|
|
Percent |
|
Fixed-rate loan assets |
|
$ |
7,231,373 |
|
|
|
28.6 |
% |
|
$ |
2,532,609 |
|
|
|
10.1 |
% |
Variable-rate loan assets |
|
|
18,042,800 |
|
|
|
71.4 |
|
|
|
22,528,440 |
|
|
|
89.9 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total |
|
$ |
25,274,173 |
|
|
|
100.0 |
% |
|
$ |
25,061,049 |
|
|
|
100.0 |
% |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Fixed-rate debt instruments |
|
$ |
633,496 |
|
|
|
2.3 |
% |
|
$ |
677,096 |
|
|
|
2.5 |
% |
Variable-rate debt instruments |
|
|
26,496,910 |
|
|
|
97.7 |
|
|
|
26,110,863 |
|
|
|
97.5 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total |
|
$ |
27,130,406 |
|
|
|
100.0 |
% |
|
$ |
26,787,959 |
|
|
|
100.0 |
% |
|
|
|
|
|
|
|
|
|
|
|
|
|
Loans originated prior to April 1, 2006 generally earn interest at the higher of a floating rate
based on the Special Allowance Payment or SAP formula set by the Department and the borrower rate,
which is fixed over a period of time. The SAP formula is based on an applicable index plus a fixed
spread that is dependent upon when the loan was originated, the loans repayment status, and
funding sources for the loan. The Company generally finances its student loan portfolio with
variable rate debt. In low and/or declining interest rate environments, when the fixed borrower
rate is higher than the rate produced by the SAP formula, the Companys student loans earn at a
fixed rate while the interest on the variable rate debt typically continues to decline. In these
interest rate environments, the Company may earn additional spread income that it refers to as
floor income.
Depending on the type of loan and when it was originated, the borrower rate 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, and for those loans where the borrower rate is reset annually on
July 1, the Company may earn floor income to the next reset date, which the Company refers to as
variable rate floor income. In accordance with new legislation enacted in 2006, lenders are
required to rebate fixed rate floor income and variable rate floor income to the Department for all
new FFELP loans first originated on or after April 1, 2006.
For the three months ended March 31, 2009 and 2008, loan interest income includes approximately
$30.3 million and $8.5 million of fixed rate floor income, respectively. As a result of the
ongoing volatility of interest rates, effective October 1, 2008, the Company changed its
calculation of variable rate floor income to better reflect the economic benefit received by the
Company related to this income taking into consideration the volatility of certain rate indices
which offset the value received. For the three months ended March 31, 2009 and 2008, the economic
benefit received by the Company related to variable rate floor income was $1.5 million and $6.3
million, respectively. Variable rate floor income calculated on a statutory maximum basis for the
three months ended March 31, 2009 and 2008 was $10.8 million and $18.8 million, respectively.
Absent the use of derivative instruments, a rise in interest rates may reduce the amount of floor
income received and this may have an impact on earnings due to interest margin compression caused
by increasing financing costs, until such time as the federally insured loans earn interest at a
variable rate in accordance with their special allowance payment formulas. In higher interest rate
environments, where the interest rate rises above the borrower rate and fixed rate loans
effectively become variable rate loans, the impact of the rate fluctuations is reduced.
55
The following graph depicts fixed rate floor income for a borrower with a fixed rate of 6.75% and a
SAP rate of 2.64%:
The following table shows the Companys student loan assets that are earning fixed rate floor
income as of March 31, 2009:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Borrower/ |
|
|
Estimated |
|
|
Balance of |
|
Fixed |
|
lender |
|
|
variable |
|
|
assets earning fixed-rate |
|
interest |
|
weighted |
|
|
conversion |
|
|
floor income as of |
|
rate range |
|
average yield |
|
|
rate (a) |
|
|
March 31, 2009 |
|
|
|
|
|
|
Less than 4.0% |
|
|
3.65 |
% |
|
|
1.01 |
% |
|
$ |
1,997,784 |
|
4.0 4.49% |
|
|
4.20 |
% |
|
|
1.56 |
% |
|
|
1,590,910 |
|
4.5 4.99% |
|
|
4.72 |
% |
|
|
2.08 |
% |
|
|
871,431 |
|
5.0 5.49% |
|
|
5.24 |
% |
|
|
2.60 |
% |
|
|
572,395 |
|
5.5 5.99% |
|
|
5.67 |
% |
|
|
3.03 |
% |
|
|
339,180 |
|
6.0 6.49% |
|
|
6.19 |
% |
|
|
3.55 |
% |
|
|
400,041 |
|
6.5 6.99% |
|
|
6.70 |
% |
|
|
4.06 |
% |
|
|
355,750 |
|
7.0 7.49% |
|
|
7.17 |
% |
|
|
4.53 |
% |
|
|
121,730 |
|
7.5 7.99% |
|
|
7.71 |
% |
|
|
5.07 |
% |
|
|
209,402 |
|
8.0 8.99% |
|
|
8.16 |
% |
|
|
5.52 |
% |
|
|
478,762 |
|
> 9.0% |
|
|
9.04 |
% |
|
|
6.40 |
% |
|
|
293,988 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
$ |
7,231,373 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(a) |
|
The estimated variable
conversion rate is the estimated short-term
interest rate at which loans would convert to
variable rate. |
As of March 31, 2009, the Company had $3.6 billion of student loan assets that were eligible to
earn variable-rate floor income.
The Company is exposed to interest rate risk in the form of basis risk and repricing risk because
the interest rate characteristics of the Companys assets do not match the interest rate
characteristics of the funding. The Company attempts to match the interest rate characteristics of
certain pools of loan assets with debt instruments of substantially similar characteristics. Due to
the variability in duration of the Companys assets and varying market conditions, the Company does
not attempt to perfectly match the interest rate characteristics of the entire loan portfolio with
the underlying debt instruments. The Company has adopted a policy of periodically reviewing the
mismatch related to the interest rate characteristics of its assets and liabilities together with
the Companys outlook as to current and future market conditions. Based on those factors, the
Company uses derivative instruments as part of its overall risk management strategy. Derivative
instruments used as part of the Companys interest rate risk management strategy currently include
basis swaps and cross-currency swaps.
56
The following table presents the Companys FFELP student loan assets and related funding arranged
by underlying indices as of March 31, 2009:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Debt |
|
|
|
|
|
|
|
|
|
outstanding |
|
|
|
|
|
|
|
|
|
that funded |
|
|
|
Frequency of |
|
|
|
|
|
student loan |
|
Index (e) |
|
Variable Resets |
|
Assets |
|
|
assets (a) |
|
|
|
|
|
|
|
|
|
|
|
|
3 month H15 financial commercial paper (b) |
|
Daily |
|
$ |
23,884,206 |
|
|
|
1,360,159 |
|
3 month Treasury bill |
|
Varies |
|
|
1,171,592 |
|
|
|
|
|
3 month LIBOR (c) |
|
Quarterly |
|
|
|
|
|
|
20,387,802 |
|
Auction-rate or remarketing |
|
Varies |
|
|
|
|
|
|
2,667,635 |
|
Asset-backed commercial paper |
|
Varies |
|
|
|
|
|
|
1,369,485 |
|
Fixed rate |
|
|
|
|
|
|
|
|
193,362 |
|
Other (d) |
|
|
|
|
922,645 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
$ |
25,978,443 |
|
|
|
25,978,443 |
|
|
|
|
|
|
|
|
|
|
|
|
|
(a) |
|
The Company has certain basis swaps outstanding in which the Company (i) receives
three-month LIBOR set discretely in advance and pays a daily weighted average three-month
LIBOR less a spread as defined in the individual agreements; and (ii) receives three-month
LIBOR and pays one-month LIBOR. 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 March 31, 2009: |
|
|
|
|
|
|
|
|
|
|
|
Notional Amount |
|
|
|
Average/Discrete |
|
|
1/3 Basis |
|
Maturity |
|
Basis Swaps |
|
|
Swaps |
|
2009 |
|
$ |
1,350,000 |
|
|
|
|
|
2011 (a) |
|
|
6,000,000 |
|
|
|
|
|
2018 |
|
|
|
|
|
|
1,300,000 |
|
2019 |
|
|
|
|
|
|
500,000 |
|
2021 |
|
|
|
|
|
|
250,000 |
|
2023 |
|
|
|
|
|
|
1,250,000 |
|
2024 |
|
|
|
|
|
|
250,000 |
|
2028 |
|
|
|
|
|
|
100,000 |
|
|
|
|
|
|
|
|
|
|
$ |
7,350,000 |
|
|
|
3,650,000 |
|
|
|
|
|
|
|
|
|
|
|
(a) |
|
Certain of these derivatives
have forward effective start
dates of January 2010 ($1.5 billion), February 2010
($1.5 billion), and March 2010 ($1.5 billion). |
|
|
|
(b) |
|
The Companys FFELP student loans earn interest based on the daily average H15 financial
commercial paper index calculated on a fiscal quarter. The Companys funding includes FFELP
student loans under the Departments Participation Program. The interest rate on the
principal amount of participation interests outstanding under the Departments 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. Due to a
declining interest rate environment during the three months ended March 31, 2009, the
Companys core student loan spread was compressed due to the mismatch in the timing of these
rate resets. |
|
|
|
Due to the unintended consequences of government intervention in the commercial paper markets
and limited issuances of qualifying financial commercial paper, the relationship between the
three-month financial CP and LIBOR rates has been distorted and volatile. To address this
issue, the Department announced that for purposes of calculating the FFELP loan index from
October 27, 2008 to December 31, 2008, the Federal Reserves Commercial Paper Funding Facility
rate was used for those days in which no three-month financial commercial paper rate was
available. This action partially mitigated the volatility between CP and LIBOR during the
fourth quarter of 2008, However, the Department did not implement a similar methodology for
the first quarter of 2009 which negatively impacted the Companys interest income earned on
its student loan portfolio. |
57
|
|
|
(c) |
|
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 3 month LIBOR. As a result, these notes are reflected in the 3 month LIBOR
category in the above table. See Foreign Currency Exchange Risk. |
|
(d) |
|
Assets include restricted cash and investments and other assets. |
|
(e) |
|
Historically, the movement of the various interest rate indices received on the Companys
student loan assets and paid on the debt to fund such loans was highly correlated. The short
term movement of the indices was dislocated beginning in August 2007. This dislocation has
had a negative impact on the Companys student loan net interest income. |
Financial Statement Impact of Derivative Instruments
The Company accounts for its derivative instruments in accordance with SFAS No. 133. SFAS No. 133
requires that changes in the fair value of derivative instruments be recognized currently in
earnings unless specific hedge accounting criteria as specified by SFAS No. 133 are met. Management
has structured all of the Companys derivative transactions with the intent that each is
economically effective. However, the Companys derivative instruments do not qualify for hedge
accounting under SFAS No. 133; consequently, the change in fair value of these derivative
instruments is included in the Companys operating results. Changes or shifts in the forward yield
curve and fluctuations in currency rates can significantly impact the valuation of the Companys
derivatives. Accordingly, changes or shifts to the forward yield curve and fluctuations in currency
rates will impact the financial position and results of operations of the Company. The change in
fair value of the Companys derivatives are included in derivative market value, foreign currency,
and put option adjustments and derivative settlements, net in the Companys consolidated
statements of operations and resulted in an expense of $52.1 million and income of $36.0 million for
the three months ended March 31, 2009 and 2008, respectively.
The following summarizes the derivative settlements included in derivative market value, foreign
currency, and put option adjustments and derivative settlements, net on the consolidated
statements of operations:
|
|
|
|
|
|
|
|
|
|
|
Three months ended March 31, |
|
|
|
2009 |
|
|
2008 |
|
|
|
|
|
|
|
|
|
|
Interest rate swaps |
|
$ |
|
|
|
|
(3,177 |
) |
Average/discrete basis swaps |
|
|
10,022 |
|
|
|
39,573 |
|
1/3 Basis swaps |
|
|
10,744 |
|
|
|
884 |
|
Cross-currency interest rate swaps |
|
|
3,592 |
|
|
|
3,483 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Derivative settlements received (paid), net |
|
$ |
24,358 |
|
|
|
40,763 |
|
|
|
|
|
|
|
|
58
Sensitivity Analysis
The following tables summarize the effect on the Companys earnings, based upon a sensitivity
analysis performed by the Company assuming a hypothetical increase and decrease in interest rates
of 100 basis points while funding spreads remain constant. In addition, as it relates to the effect
on earnings, a sensitivity analysis was performed assuming the funding index increases 10 basis
points while holding the asset index constant, if the funding index is different than the asset
index. The effect on earnings was performed on the Companys variable rate assets and liabilities.
The analysis includes the effects of the Companys interest rate and basis swaps in existence
during these periods.
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Three months ended March 31, 2009 |
|
|
|
Interest Rates |
|
|
Asset and funding index |
|
|
|
Change from decrease of 100 |
|
|
Change from increase of 100 |
|
|
mismatches |
|
|
|
basis points |
|
|
basis points |
|
|
Increase of 10 basis points |
|
|
|
Dollar |
|
|
Percent |
|
|
Dollar |
|
|
Percent |
|
|
Dollar |
|
|
Percent |
|
Effect on earnings: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Increase (decrease) in pre-tax net income before
impact of derivative settlements |
|
$ |
34,356 |
|
|
|
83.7 |
% |
|
|
(29,030 |
) |
|
|
(70.7 |
)% |
|
|
(6,354 |
) |
|
|
(15.5 |
)% |
Impact of derivative settlements |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Increase (decrease) in net income before taxes |
|
$ |
34,356 |
|
|
|
83.7 |
% |
|
|
(29,030 |
) |
|
|
(70.7 |
)% |
|
|
(6,354 |
) |
|
|
(15.5 |
)% |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Increase (decrease) in basic and diluted
earnings per share |
|
$ |
0.43 |
|
|
|
|
|
|
|
(0.37 |
) |
|
|
|
|
|
|
(0.08 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Three months ended March 31, 2008 |
|
|
|
Interest Rates |
|
|
Asset and funding index |
|
|
|
Change from decrease of 100 |
|
|
Change from increase of 100 |
|
|
mismatches |
|
|
|
basis points |
|
|
basis points |
|
|
Increase of 10 basis points |
|
|
|
Dollar |
|
|
Percent |
|
|
Dollar |
|
|
Percent |
|
|
Dollar |
|
|
Percent |
|
Effect on earnings: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Increase (decrease) in pre-tax net income before
impact of derivative settlements |
|
$ |
11,839 |
|
|
|
11.7 |
% |
|
|
(11,839 |
) |
|
|
(11.7 |
)% |
|
|
(6,938 |
) |
|
|
(6.9 |
)% |
Impact of derivative settlements |
|
|
(6,225 |
) |
|
|
(6.2 |
) |
|
|
6,225 |
|
|
|
6.2 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Increase (decrease) in net income before taxes |
|
$ |
5,614 |
|
|
|
5.5 |
% |
|
|
(5,614 |
) |
|
|
(5.5 |
)% |
|
|
(6,938 |
) |
|
|
(6.9 |
)% |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Increase (decrease) in basic and diluted
earnings per share |
|
$ |
0.08 |
|
|
|
|
|
|
|
(0.08 |
) |
|
|
|
|
|
|
(0.10 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Foreign Currency Exchange Risk
During 2006, the Company completed separate debt offerings of student loan asset-backed securities
that included 420.5 million and 352.7 million Euro-denominated notes with interest rates based on a
spread to the EURIBOR index. As a result of this transaction, the Company is exposed to market risk
related to fluctuations in foreign currency exchange rates between the U.S. dollar and Euro. The
principal and accrued interest on these notes is re-measured at each reporting period and recorded
on the Companys balance sheet in U.S. dollars based on the foreign currency exchange rate on that
date. Changes in the principal and accrued interest amounts as a result of foreign currency
exchange rate fluctuations are included in the derivative market value, foreign currency, and put
option adjustments and derivative settlements, net in the Companys consolidated statements of
operations.
The Company entered into cross-currency interest rate swaps in connection with the issuance of the
Euro Notes. Under the terms of these derivative instrument agreements, the Company receives from a
counterparty a spread to the EURIBOR index based on notional amounts of 420.5 million and 352.7
million and pays a spread to the LIBOR index based on notional amounts of $500.0 million and $450.0
million, respectively. In addition, under the terms of these agreements, all principal payments on
the Euro Notes will effectively be paid at the exchange rate in effect as of the issuance of the
notes. The Company did not qualify these derivative instruments as hedges under SFAS No. 133;
consequently, the change in fair value is included in the Companys operating results.
For the three months ended March 31, 2009, the Company recorded income of $47.2 million as a result
of re-measurement of the Euro Notes and a loss of $57.1 million for the change in the fair value of
the related derivative instruments. For the three months ended March 31, 2008, the Company recorded
an expense of $92.9 million as a result of the re-measurement of the Euro Notes and income of $94.1
million for the change in the fair value of the related derivative instruments. These amounts are
included in derivative market value, foreign currency, and put option adjustments and derivative
settlements, net on the Companys consolidated statements of operations.
The re-measurement of the Euro-denominated bonds correlates with the change in fair value of the
cross-currency interest rate swaps. However, the Company will experience unrealized gains or losses
related to the cross-currency interest rate swaps if the two underlying indices (and related
forward curve) do not move in parallel. Management intends to hold the cross-currency interest rate
swaps through the maturity of the Euro-denominated bonds.
59
ITEM 4. CONTROLS AND PROCEDURES
Disclosure Controls and Procedures
Under supervision and with the participation of certain members of the Companys management,
including the chief executive and the chief financial officers, the Company completed an evaluation
of the effectiveness of the design and operation of its disclosure controls and procedures (as
defined in SEC Rules 13a-15(e) and 15d-15(e) under the Securities Exchange Act of 1934). Based on
this evaluation, the Companys chief executive and chief financial officers believe that the
disclosure controls and procedures were effective as of the end of the period covered by this
Quarterly Report on Form 10-Q with respect to timely communication to them and other members of
management responsible for preparing periodic reports and material information required to be
disclosed in this Quarterly Report on Form 10-Q as it relates to the Company and its consolidated
subsidiaries.
The effectiveness of the Companys or any system of disclosure controls and procedures is subject
to certain limitations, including the exercise of judgment in designing, implementing, and
evaluating the controls and procedures, the assumptions used in identifying the likelihood of
future events, and the inability to eliminate misconduct completely. As a result, there can be no
assurance that the Companys disclosure controls and procedures will prevent all errors or fraud or
ensure that all material information will be made known to appropriate management in a timely
fashion. By their nature, the Companys or any system of disclosure controls and procedures can
provide only reasonable assurance regarding managements control objectives.
Changes in Internal Control over Financial Reporting
There was no change in the Companys internal control over financial reporting during the Companys
last fiscal quarter that has materially affected, or is reasonably likely to materially affect, the
Companys internal control over financial reporting.
PART II. OTHER INFORMATION
ITEM 1. LEGAL PROCEEDINGS
General
The Company is subject to various claims, lawsuits, and proceedings that arise in the normal course
of business. These matters principally consist of claims by student loan borrowers disputing the
manner in which their student loans have been processed and disputes with other business entities.
In addition, from time to time the Company receives information and document requests from state or
federal regulators concerning its business practices. The Company cooperates with these inquiries
and responds to the requests. While the Company cannot predict the ultimate outcome of any inquiry
or investigation, the Company believes its activities have materially complied with applicable law,
including the Higher Education Act, the rules and regulations adopted by the Department of
Education thereunder, and the Departments guidance regarding those rules and regulations. On the
basis of present information, anticipated insurance coverage, and advice received from counsel, it
is the opinion of the Companys management that the disposition or ultimate determination of these
claims, lawsuits, and proceedings will not have a material adverse effect on the Companys
business, financial position, or results of operations.
Municipal Derivative Bid Practices Investigation
As previously disclosed, on February 8, 2008, Shockley Financial Corp. (SFC), an indirect,
wholly-owned subsidiary of the Company that provides investment advisory services for the
investment of proceeds from the issuance of municipal and corporate bonds, received a grand jury
subpoena issued by the U.S. District Court for the Southern District of New York upon application
of the Antitrust Division of the U.S. Department of Justice (DOJ). The subpoena seeks certain
information and documents from SFC in connection with DOJs criminal investigation of the bond
industry with respect to possible anti-competitive practices related to awards of guaranteed
investment contracts and other products for the investment of proceeds from bond issuances. SFC
currently has one employee. The Company and SFC are cooperating with the investigation.
On March 5, 2008, SFC received a subpoena from the SEC related to a similar investigation. In
addition, on June 6, 2008 and June 12, 2008, SFC received subpoenas from the New York Attorney
General and the Florida Attorney General, respectively, relating to their similar investigations.
Each of the subpoenas seeks information similar to that of the DOJ. The Company and SFC are
cooperating with these investigations.
SFC was also named as a defendant in a number of substantially identical purported class action
lawsuits, which as of June 16, 2008 have been consolidated before the U.S. District Court for the
Southern District of New York, under the caption In re Municipal Derivatives Antitrust Litigation.
The consolidated suit (the Suit) alleges several financial institutions and financial service
provider defendants engaged in a conspiracy not to compete and to fix prices and rig bids for
municipal derivatives (including GICs) sold to issuers of municipal bonds. The Suit also asserts
claims for violations of Section 1 of the Sherman Act, fraudulent concealment, unfair competition
and violation of the California Cartwright Act.
60
On January 30, 2009, SFC entered into a Tolling and Cooperation Agreement (Tolling Agreement)
with a number of the plaintiffs involved in the Suit. In connection with the Tolling Agreement, on
February 5, 2009 SFC was voluntarily dismissed from the Suit, without prejudice, on motion of the
plaintiffs who are parties to the Tolling Agreement. On March 2, 2009, SFC entered into a second
Tolling Agreement with the remainder of the plaintiffs involved in the Suit, and on March 3, 2009,
SFC was voluntarily dismissed from the Suit without prejudice, on motion of the plaintiffs who are
parties to the second Tolling Agreement. On April 30, 2009, the court granted a motion by several
defendants, including SFC, to dismiss the class action complaint, with the plaintiffs granted the
opportunity to file an amended complaint to replead claims.
SFC, the Company, or other subsidiaries of the Company may receive subpoenas from other regulatory
agencies. Due to the preliminary nature of these matters as to SFC, the Company is unable to
predict the ultimate outcome of the investigations or the Suit.
Regulatory Reviews
In connection with the Companys settlement with the Department of Education in January 2007 to
resolve the Office of Inspector General of the Department of Education (the OIG) audit report
with respect to the Companys student loan portfolio receiving special allowance payments at a
minimum 9.5% interest rate, the Company was informed in February 2007 by the Department of
Education that a civil attorney with the Department of Justice had opened a file regarding the
issues set forth in the OIG report, which the Company understands is common procedure following an
OIG audit report. The Company has engaged in discussions with and provided information to the DOJ
in connection with the review.
By letter dated November 18, 2008, the DOJ requested that the Company provide the DOJ certain
documents and information related to the Companys compliance with the prohibited inducement
provisions of the Higher Education Act and associated regulations. The Company responded to the
DOJs requests and is cooperating with their review.
The Department of Education periodically reviews participants in the FFELP for compliance with
program provisions. On June 28, 2007, the Department notified the Company that it would be
conducting a review of the Companys practices in connection with the prohibited inducement
provisions of the Higher Education Act and the associated regulations that allow borrowers to have
a choice of lenders. The Company understands that the Department selected several schools and
lenders for review. The Company responded to the Departments requests for information and
documentation and cooperated with their review. On May 1, 2009, the Company received the
Departments preliminary program review report, which covered the Departments review of the period
from October 1, 2002 to September 30, 2007. The preliminary program review report contains certain
initial findings of noncompliance with the Higher Education Acts prohibited inducement provisions
and requires that the Company provide within 30 days an explanation for the basis of the
arrangements noted in the preliminary program review report. After the Company provides an
explanation of the arrangements noted in the Departments initial findings and the Department
reviews such explanation and any documentation, the Department is expected to issue a final program
review determination letter and advise the Company whether it intends to take any additional
action. To the extent any findings are contained in a final letter, the additional action may
include the assessment of fines or penalties, or the limitation, suspension, and termination of the
Companys participation in FFELP.
While the Company is unable to predict the ultimate outcome of these reviews, the Company believes
its practices complied with applicable law, including the provisions of the Higher Education Act,
the rules and regulations adopted by the Department of Education thereunder, and the Departments
guidance regarding those rules and regulations.
ITEM 1A. RISK FACTORS
There have been no material changes from the risk factors described in the Companys Annual Report
on Form 10-K for the year ended December 31, 2008 in response to Item 1A of Part I of such Form
10-K.
61
|
|
|
ITEM 2. |
|
UNREGISTERED SALES OF EQUITY SECURITIES AND USE OF PROCEEDS |
Stock Repurchases
The following table summarizes the repurchases of Class A common stock during the first quarter of
2009 by the Company or any affiliated purchaser of the Company, as defined in Rule 10b-18(a)(3)
under the Securities Exchange Act of 1934.
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
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) |
|
|
|
|
|
|
January 1 January 31, 2009 |
|
|
1,241 |
|
|
$ |
13.86 |
|
|
|
1,241 |
|
|
|
7,487,575 |
|
February 1 February 28, 2009 |
|
|
928 |
|
|
|
8.95 |
|
|
|
928 |
|
|
|
11,996,224 |
|
March 1 March 31, 2009 |
|
|
1,611 |
|
|
|
6.71 |
|
|
|
1,611 |
|
|
|
8,970,857 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total |
|
|
3,780 |
|
|
$ |
9.61 |
|
|
|
3,780 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(1) |
|
The total number of shares includes: (i) shares purchased pursuant to the 2006
Plan discussed in footnote (2) below; and (ii) shares purchased pursuant to the 2006
ESLP discussed in footnote (3) below, of which there were none for the months of
January, February, or March 2009. Shares of Class A common stock purchased pursuant to
the 2006 Plan included (i) 1,241 shares, 928 shares, and 1,611 shares in January,
February, and March, respectively, that had been issued to the Companys 401(k) plan and
allocated to employee participant accounts pursuant to the plans 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. |
|
(2) |
|
On May 25, 2006, the Company publicly announced that its Board of Directors had
authorized a stock repurchase program to repurchase up to a total of five million shares
of the Companys Class A common stock (the 2006 Plan). On February 7, 2007, the
Companys Board of Directors increased the total shares the Company is allowed to
repurchase to 10 million. The 2006 Plan had an initial expiration date of May 24, 2008,
which was extended until May 24, 2010 by the Companys Board of Directors on January 30,
2008. |
|
(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 Companys 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. |
62
(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. The number
of shares available to be purchased under the 2006 Plan reflects an addition of 238,237
shares purchased by the Company in connection with the previously reported settlement in
July 2007 of the Companys obligations under outstanding put options issued by the
Company, which shares were previously deducted but not intended to reduce the number of
shares authorized for repurchase under the 2006 Plan. |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(B / C) |
|
|
(A + D) |
|
|
|
|
|
|
Approximate dollar |
|
|
Closing price on |
|
|
Approximate |
|
|
Approximate |
|
|
|
Maximum number of |
|
|
value of shares that |
|
|
the last trading |
|
|
number of shares |
|
|
number of shares |
|
|
|
shares that may yet be |
|
|
may yet be |
|
|
day of the |
|
|
that may yet be |
|
|
that may yet be |
|
|
|
purchased under the |
|
|
purchased under |
|
|
Companys Class |
|
|
purchased under |
|
|
purchased under |
|
|
|
2006 Plan |
|
|
the 2006 ESLP |
|
|
A Common Stock |
|
|
the 2006 ESLP |
|
|
the 2006 Plan and |
|
As of |
|
(A) |
|
|
(B) |
|
|
(C) |
|
|
(D) |
|
|
2006 ESLP |
|
January 31, 2009 |
|
|
4,850,093 |
|
|
|
36,450,000 |
|
|
|
13.82 |
|
|
|
2,637,482 |
|
|
|
7,487,575 |
|
February 28, 2009 |
|
|
4,849,165 |
|
|
|
36,450,000 |
|
|
|
5.10 |
|
|
|
7,147,059 |
|
|
|
11,996,224 |
|
March 31, 2009 |
|
|
4,847,554 |
|
|
|
36,450,000 |
|
|
|
8.84 |
|
|
|
4,123,303 |
|
|
|
8,970,857 |
|
Working capital and dividend restrictions/limitations
The Companys credit facilities, including its revolving line of credit which is available through
May of 2012, impose restrictions on the Companys minimum consolidated net worth, the ratio of the
Companys Adjusted EBITDA to corporate debt interest, the indebtedness of the Companys
subsidiaries, and the ratio of Non-FFELP loans to all loans in the Companys portfolio. In
addition, trust indentures and other financing agreements governing debt issued by the Companys
education lending subsidiaries may have general limitations on the amounts of funds that can be
transferred to the Company by its subsidiaries through cash dividends.
On September 27, 2006 the Company consummated a debt offering of $200.0 million aggregate principal
amount of Hybrid Securities. So long as any Hybrid Securities remain outstanding, if the Company
gives notice of its election to defer interest payments but the related deferral period has not yet
commenced or a deferral period is continuing, then the Company will not, and will not permit any of
its subsidiaries to:
|
|
|
declare or pay any dividends or distributions on, or redeem, purchase, acquire or make a
liquidation payment regarding, any of the Companys 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 Companys
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 Companys subsidiaries if the guarantee ranks pari passu with
or junior in interest to the Hybrid Securities |
In addition, if any deferral period lasts longer than one year, the limitation on the Companys
ability to redeem or repurchase any of its securities that rank pari passu with or junior in
interest to the Hybrid Securities will continue until the first anniversary of the date on which
all deferred interest has been paid or cancelled.
If the Company is involved in a business combination where immediately after its consummation more
than 50% of the surviving entitys voting stock is owned by the shareholders of the other party to
the business combination, then the immediately preceding sentence will not apply to any deferral
period that is terminated on the next interest payment date following the date of consummation of
the business combination.
However, at any time, including during a deferral period, the Company will be permitted to:
|
|
|
pay dividends or distributions in additional shares of the Companys 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 |
63
ITEM 5. OTHER INFORMATION
The Company has elected to include the following information in this Quarterly Report on Form 10-Q
in lieu of reporting it in a separately filed Form 8-K. This information would otherwise have been
reported in a Form 8-K under the heading Item 2.05 Costs Associated with Exit or Disposal
Activities.
Restructuring Charge
On May 5, 2009, the Company adopted a plan to further streamline its operations by continuing to
reduce its geographic footprint and consolidate servicing operations and related support services.
Management has developed a restructuring plan that will result in lower costs and provide enhanced
synergies through cross training, career development, and simplified communications. The Company
will simplify its operating structure to leverage its larger facilities and technology by closing
certain offices and downsizing its presence in certain geographic locations. Approximately 300
associates will be impacted by this restructuring plan. However, the majority of these functions
will be relocated to the Companys Lincoln headquarters and Denver offices. Implementation of the plan will begin immediately
and is expected to be substantially complete during the second quarter of 2010.
The Company estimates that the total before-tax charge to earnings associated with this
restructuring plan will consist of $4 million to $6
million in severance costs, up to $4 million in contract termination costs, and up to $6 million in
non-cash charges related to the impairment of and/or the acceleration of depreciation on property
and equipment.
ITEM 6. EXHIBITS
|
|
|
10.1+*
|
|
Second Amended Executive Officers Bonus Plan |
|
|
|
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. |
|
+ |
|
Indicates a compensatory plan or arrangement. |
64
SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934, the registrant has duly caused
this report to be signed on its behalf by the undersigned thereunto duly authorized.
|
|
|
|
|
|
NELNET, INC.
|
|
Date: May 11, 2009 |
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 |
|
65
EXHIBIT INDEX
|
|
|
10.1+*
|
|
Second Amended Executive Officers Bonus Plan |
|
|
|
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. |
|
+ |
|
Indicates a compensatory plan or arrangement. |
66