Attached files
file | filename |
---|---|
EX-99.1 - Q3 2011 EARNINGS RELEASE - NELNET INC | nniq3earningsrelease.htm |
8-K - FORM 8-K - NELNET INC | nniform8-k.htm |
For Release: November 8, 2011
Media Contact: Ben Kiser, 402.458.3024
Investor Contact: Phil Morgan, 402.458.3038
Nelnet, Inc. supplemental financial information for the third quarter 2011
(All dollars are in thousands, except per share amounts, unless otherwise noted)
The following information should be read in connection with Nelnet, Inc.'s (the “Company's”) press release for third quarter 2011 earnings, dated November 8, 2011, and the Company's Quarterly Report on Form 10-Q for the quarter ended September 30, 2011.
This earnings supplement contains forward-looking statements and information that are based on management's current expectations as of the date of this document. Statements that are not historical facts, including statements about the Company's plans and expectations for future financial condition, results of operations or economic performance, or that address management's plans and objectives for future operations, and statements that assume or are dependent upon future events, are forward-looking statements. The words “may,” “should,” “could,” “would,” “predict,” “potential,” “continue,” “expect,” “anticipate,” “future,” “intend,” “plan,” “believe,” “estimate,” “assume,” “forecast,” “will,” and similar expressions, as well as statements in future tense, are intended to identify forward-looking statements.
The forward-looking statements are based on assumptions and analyses made by management in light of management's experience and its perception of historical trends, current conditions, expected future developments, and other factors that management believes are appropriate under the circumstances. These statements are subject to known and unknown risks, uncertainties, assumptions, and other factors that may cause the actual results and performance to be materially different from any future results or performance expressed or implied by such forward-looking statements. These risks and uncertainties are described in the “Risk Factors” section included in the Company's Annual Report on Form 10-K for the year ended December 31, 2010 and the discussion of risks and uncertainties set forth elsewhere in the Company's Annual Report on Form 10-K for the year ended December 31, 2010 and subsequent Quarterly Reports on Form 10-Q and include such risks and uncertainties as:
• | risks related to the Company's student loan portfolio, such as interest rate basis and repricing risk resulting from the fact that the interest rate characteristics of the Company's student loan assets do not match the interest rate characteristics of the funding for those assets, the risk of loss of floor income on certain student loans originated under the Federal Family Education Loan Program (the “FFEL Program” or “FFELP”) of the U.S. Department of Education (the “Department”), risks related to the use of derivatives to manage exposure to interest rate fluctuations, and potential losses from loan defaults, changes in prepayment rates, guaranty rates, loan floor rates, and credit spreads; |
• | risks related to the Company's liquidity and funding requirements, including the Company's ability to maintain credit facilities or obtain new facilities, the ability of lenders under the Company's credit facilities to fulfill their lending commitments under these facilities, the Company's ability to satisfy debt obligations secured by student loan assets and related collateral, and changes in the general interest rate environment and in the securitization markets for education loans which may increase the costs or limit the availability of financings necessary to purchase, refinance, or continue to carry education loans; |
• | risks from changes in the student loan and educational credit and services marketplace resulting from the implementation of, or changes in, applicable laws, regulations, and government programs, including the discontinuance of private sector student loan originations under the FFEL Program effective July 1, 2010, the uncertain nature of the potential impact of the Department's new loan consolidation program, and the Company's ability to maintain its loan servicing contract with the Department to service federally-owned student loans and to comply with servicing agreements with third party customers for the service of loans under the Federal Direct Loan and FFEL Programs; |
• | risks from changes in the demand or preferences for educational financing and related services by educational institutions, students, and their families; |
1
• | uncertainties inherent in forecasting future cash flows from student loan assets and related asset-backed securitizations; |
• | risks associated with litigation, complex government regulations, changes in general economic conditions, which have recently led to higher rates of student loan defaults, changes in credit market conditions, and related party transactions; and |
• | uncertainties inherent in the estimates and assumptions about future events that management is required to make in the preparation of the Company's consolidated financial statements. |
All forward-looking statements contained in this earnings supplement are qualified by these cautionary statements and are made only as of the date of this document. Although the Company may from time to time voluntarily update or revise its prior forward-looking statements to reflect actual results or changes in the Company's expectations, the Company disclaims any commitment to do so except as required by securities laws.
Reclassifications
Certain amounts previously reported within operating expenses have been reclassified to conform to the current period presentation. These reclassifications include:
• | Reclassifying “professional and other services,” “occupancy and communications,” “postage and distribution,” “advertising and marketing,” and “trustee and other debt related fees” to “other” operating expenses. |
• | Reclassifying student list amortization, which was previously included in “advertising and marketing,” to “depreciation and amortization.” |
The reclassifications had no effect on consolidated net income or consolidated assets and liabilities.
2
Condensed Consolidated Statements of Operations
Three months ended | Nine months ended | ||||||||||||||
September 30, 2011 | June 30, 2011 | September 30, 2010 | September 30, 2011 | September 30, 2010 | |||||||||||
(unaudited) | (unaudited) | (unaudited) | (unaudited) | (unaudited) | |||||||||||
Interest Income: | |||||||||||||||
Loan interest | $ | 158,809 | 146,827 | 171,208 | 452,983 | 490,158 | |||||||||
Amortization/accretion of loan premiums and | |||||||||||||||
deferred origination costs, net | (1,854 | ) | (7,893 | ) | (11,921 | ) | (19,736 | ) | (40,551 | ) | |||||
Investment interest | 672 | 856 | 1,169 | 2,254 | 3,474 | ||||||||||
Total interest income | 157,627 | 139,790 | 160,456 | 435,501 | 453,081 | ||||||||||
Interest expense: | |||||||||||||||
Interest on bonds and notes payable | 60,866 | 51,054 | 68,243 | 164,227 | 178,345 | ||||||||||
Net interest income | 96,761 | 88,736 | 92,213 | 271,274 | 274,736 | ||||||||||
Less provision for loan losses | 5,250 | 5,250 | 5,500 | 14,250 | 16,700 | ||||||||||
Net interest income after provision for loan losses | 91,511 | 83,486 | 86,713 | 257,024 | 258,036 | ||||||||||
Other income (expense): | |||||||||||||||
Loan and guaranty servicing revenue | 37,927 | 37,389 | 33,464 | 110,952 | 106,510 | ||||||||||
Tuition payment processing and campus | |||||||||||||||
commerce revenue | 16,774 | 14,761 | 14,527 | 50,904 | 44,704 | ||||||||||
Enrollment services revenue | 35,505 | 32,315 | 36,439 | 101,688 | 105,113 | ||||||||||
Software services revenue | 4,622 | 4,346 | 4,624 | 13,745 | 14,467 | ||||||||||
Other income | 3,931 | 6,826 | 9,432 | 17,249 | 25,188 | ||||||||||
Gain on sale of loans and debt repurchases | — | — | 9,885 | 8,307 | 28,821 | ||||||||||
Derivative market value and foreign currency | |||||||||||||||
adjustments | (13,888 | ) | (16,813 | ) | (32,805 | ) | (29,585 | ) | (35,931 | ) | |||||
Derivative settlements, net | 257 | (3,522 | ) | (2,586 | ) | (7,417 | ) | (8,386 | ) | ||||||
Total other income | 85,128 | 75,302 | 72,980 | 265,843 | 280,486 | ||||||||||
Operating expenses: | |||||||||||||||
Salaries and benefits | 44,132 | 42,881 | 41,085 | 130,925 | 122,691 | ||||||||||
Litigation settlement | — | — | 55,000 | — | 55,000 | ||||||||||
Cost to provide enrollment services | 23,825 | 22,140 | 23,709 | 68,804 | 69,845 | ||||||||||
Depreciation and amortization | 7,917 | 6,769 | 9,025 | 21,462 | 29,536 | ||||||||||
Restructure expense | — | — | 4,751 | — | 6,020 | ||||||||||
Other expenses | 28,904 | 28,767 | 26,717 | 83,776 | 89,120 | ||||||||||
Total operating expenses | 104,778 | 100,557 | 160,287 | 304,967 | 372,212 | ||||||||||
Income (loss) before income taxes | 71,861 | 58,231 | (594 | ) | 217,900 | 166,310 | |||||||||
Income tax (expense) benefit | (24,410 | ) | (21,106 | ) | 226 | (78,444 | ) | (62,363 | ) | ||||||
Net income (loss) | $ | 47,451 | 37,125 | (368 | ) | 139,456 | 103,947 | ||||||||
Earnings (loss) per common share: | |||||||||||||||
Net earnings (loss) - basic | $ | 0.98 | 0.76 | (0.01 | ) | 2.88 | 2.09 | ||||||||
Net earnings (loss) - diluted | $ | 0.98 | 0.76 | (0.01 | ) | 2.87 | 2.08 | ||||||||
Weighted average shares outstanding: | |||||||||||||||
Basic | 48,059,747 | 48,302,779 | 48,938,333 | 48,177,539 | 49,460,625 | ||||||||||
Diluted | 48,253,888 | 48,488,046 | 48,938,333 | 48,367,923 | 49,663,505 |
3
Condensed Consolidated Balance Sheets
As of | As of | As of | |||||||
September 30, 2011 | December 31, 2010 | September 30, 2010 | |||||||
(unaudited) | (unaudited) | ||||||||
Assets: | |||||||||
Student loans receivable, net | $ | 24,641,614 | 23,948,014 | 24,436,162 | |||||
Student loans receivable - held for sale | — | 84,987 | 2,109,440 | ||||||
Cash, cash equivalents, and investments (trading securities) | 141,928 | 327,037 | 349,443 | ||||||
Restricted cash and investments | 653,518 | 757,285 | 747,234 | ||||||
Goodwill | 117,118 | 117,118 | 143,717 | ||||||
Intangible assets, net | 33,074 | 38,712 | 43,352 | ||||||
Other assets | 648,975 | 620,739 | 757,231 | ||||||
Total assets | 26,236,227 | 25,893,892 | 28,586,579 | ||||||
Liabilities: | |||||||||
Bonds and notes payable | 24,926,512 | 24,672,472 | 27,391,188 | ||||||
Other liabilities | 298,232 | 314,787 | 350,777 | ||||||
Total liabilities | 25,224,744 | 24,987,259 | 27,741,965 | ||||||
Shareholders' equity | 1,011,483 | 906,633 | 844,614 | ||||||
Total liabilities and shareholders' equity | $ | 26,236,227 | 25,893,892 | 28,586,579 |
4
OVERVIEW
The Company is an innovative education services company focused primarily on providing fee-based processing services and quality education-related products and services in four core areas: loan financing, loan servicing, payment processing, and enrollment services (education planning). These products and services help students and families plan, prepare, and pay for their education and make the administrative and financial processes more efficient for schools and financial organizations. In addition, the Company earns net interest income on a portfolio of federally insured student loans.
The Company has certain business objectives in place that include:
• | Continue to grow and diversify fee-based revenue |
• | Manage operating costs |
• | Maximize the value of existing portfolio |
• | Use liquidity to capitalize on market opportunities |
Achieving these business objectives, as well as significant legislation changes in the student loan industry as discussed below, has impacted and will continue to impact the financial condition and operating results of the Company.
Legislative Impact on Operating Results
The Company has a portfolio of student loans in which it earns net interest income. These loans were originated and acquired by the Company under the FFEL Program.
On March 30, 2010, President Obama signed into law the Reconciliation Act of 2010. Effective July 1, 2010, this law prohibits new loan originations under the FFEL Program and requires that all new federal loan originations be made through the Federal Direct Loan Program. The new law does not alter or affect the terms and conditions of existing FFELP loans.
As a result of the Reconciliation Act of 2010, effective July 1, 2010, the Company no longer originates new FFELP loans. In addition, as a result of this legislation, net interest income on the Company’s existing FFELP loan portfolio, as well as fee-based revenue from guarantee and third party FFELP servicing, will decline over time as the Company’s customers’ FFELP loan portfolios are paid down.
Due to the legislative changes in the student loan industry, the Company believes there will be opportunities to purchase FFELP loan portfolios and/or expand its current level of guarantee and third party FFELP servicing volume on behalf of current FFELP participants looking to adjust their FFELP businesses. For example, during the first nine months of 2011, the Company purchased $2.7 billion of FFELP student loans.
In addition, on October 25, 2011, The White House and the Department announced a short-term consolidation program to eligible student loan borrowers. The Department's program will allow student loan borrowers with at least one legacy FFELP loan and at least one federal student loan owned by the Department to convert those loans to Special Direct Consolidation Loans under the Federal Direct Loan Program. The Company currently owns approximately $3 billion of FFEL Program loans that the Company believes will be eligible for the new program. This program could reduce the Company's FFEL Program student loan portfolio and related net interest income.
Continue to Grow and Diversify Fee-Based Revenue
The Company has expanded products and services generated from businesses that are not dependent upon the FFEL Program, thereby reducing legislative and political risk related to the education lending industry. Revenues from these businesses are primarily generated from products and services offered in the Company’s Tuition Payment Processing and Campus Commerce and Enrollment Services operating segments. In addition, in September 2009, the Company began servicing federally-owned student loans for the Department. The amount of federally-owned student loans originated through the Direct Loan Program is expected to increase substantially, which will lead to an increase in servicing volume and related revenue for the Company. Revenue earned from servicing federally-owned student loans is included in the Student Loan and Guaranty Servicing operating segment. A summary of revenue from the Company’s fee-based businesses is shown below.
5
Three months ended September 30, | ||||||||||||
2011 | 2010 | $ Change | % Change | |||||||||
Student Loan and Guaranty Servicing (a) | $ | 42,564 | 38,101 | 4,463 | 11.7 | % | ||||||
Tuition Payment Processing and Campus Commerce | 16,785 | 14,539 | 2,246 | 15.4 | % | |||||||
Enrollment Services (b) | 35,505 | 36,439 | (934 | ) | (2.6 | )% | ||||||
Total revenue from fee-based businesses | $ | 94,854 | 89,079 | 5,775 | 6.5 | % | ||||||
Nine months ended September 30, | ||||||||||||
2011 | 2010 | $ Change | % Change | |||||||||
Student Loan and Guaranty Servicing (a) | $ | 124,739 | 121,793 | 2,946 | 2.4 | % | ||||||
Tuition Payment Processing and Campus Commerce | 50,923 | 44,728 | 6,195 | 13.9 | % | |||||||
Enrollment Services (b) | 101,688 | 105,113 | (3,425 | ) | (3.3 | )% | ||||||
Total revenue from fee-based businesses | $ | 277,350 | 271,634 | 5,716 | 2.1 | % |
(a) | The Student Loan and Guaranty Servicing operating segment included $8.6 million and $5.3 million of revenue earned from rehabilitation collections on defaulted loans for the three months ended September 30, 2011 and 2010, respectively, and $24.2 million and $27.6 million for the nine months ended September 30, 2011 and 2010, respectively. |
(b) | Enrollment services revenue has been negatively affected by the current regulatory uncertainty in the for-profit college industry, which has caused schools to decrease spending on marketing efforts. |
As shown below, the Company's revenue and income before taxes related to its fee-based operating segments continues to increase. The table below includes the consolidated operating results of the Company excluding the Asset Generation and Management Operating segment. Thus, the below table reflects the operating results of the Company as if it was not generating any earnings from its student loan portfolio.
Income (loss) before taxes (a) | ||||
($5 million) | $67 million | $80 million |
(a) | Excludes restructure and impairment expenses and a litigation settlement charge recognized in 2010. See the “Management’s Discussion and Analysis of Financial Condition and Results of Operations” section of the Company’s Annual Report on Form 10-K for the year ended December 31, 2010 for additional information on total operating expenses by segment and these adjustments thereto. |
The Company's revenue and income before taxes related to its fee-based operating segments for the nine months ended September 30, 2011 was $336 million and $61 million, respectively.
6
Hosted Servicing Software Revenue
The Company offers a hosted servicing software solution that can be used by third parties to service various types of student loans, including Federal Direct Loan Program and FFEL Program loans. Currently, including a contract with an incumbent Direct Loan Program service provider, the Company has agreements with third parties to add more than 12 million borrowers to its hosted servicing software solution. The Company does not provide servicing of loans as part of these agreements. In October 2011, the Company began hosting student loan servicing volume on its servicing software platforms. As of October 31, 2011, more than 9.5 million borrowers were hosted on these platforms. The Company will begin to recognize this additional software services revenue in the fourth quarter of 2011.
Manage Operating Costs
Excluding a litigation settlement and restructuring charges recognized in 2010, operating expenses increased $4.2 million (4.2%) for the three months ended September 30, 2011 and decreased $6.2 million (2.0%) for the nine months ended September 30, 2011 compared to the same periods in 2010 as shown below.
Three months ended September 30, | Change | ||||||||||||
2011 | 2010 | $ | % | ||||||||||
Salaries and benefits | $ | 44,132 | 41,085 | 3,047 | 7.4 | % | |||||||
Cost to provide enrollment services | 23,825 | 23,709 | 116 | 0.5 | |||||||||
Depreciation and amortization | 7,917 | 9,025 | (1,108 | ) | (12.3 | ) | |||||||
Other expenses | 28,904 | 26,717 | 2,187 | 8.2 | |||||||||
Total operating expenses, excluding litigation settlement and restructure expense | 104,778 | 100,536 | $ | 4,242 | 4.2 | % | |||||||
Litigation settlement | — | 55,000 | |||||||||||
Restructure expense | — | 4,751 | |||||||||||
Total operating expenses | $ | 104,778 | 160,287 | ||||||||||
Nine months ended September 30, | Change | ||||||||||||
2011 | 2010 | $ | % | ||||||||||
Salaries and benefits | $ | 130,925 | 122,691 | 8,234 | 6.7 | % | |||||||
Cost to provide enrollment services | 68,804 | 69,845 | (1,041 | ) | (1.5 | ) | |||||||
Depreciation and amortization | 21,462 | 29,536 | (8,074 | ) | (27.3 | ) | |||||||
Other expenses | 83,776 | 89,120 | (5,344 | ) | (6.0 | ) | |||||||
Total operating expenses, excluding litigation settlement and restructure expense | 304,967 | 311,192 | $ | (6,225 | ) | (2.0 | )% | ||||||
Litigation settlement | — | 55,000 | |||||||||||
Restructure expense | — | 6,020 | |||||||||||
Total operating expenses | $ | 304,967 | 372,212 |
Maximize the Value of Existing 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 the 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 indice plus a fixed spread that is dependent upon when the loan was originated, the loan’s 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 Company’s 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 earns additional spread income that it refers to as floor income. For loans where the borrower rate is fixed to term, the Company earns floor income for an extended period of time, which the Company refers to as fixed rate floor income.
7
A summary of fixed rate floor income is summarized below.
Three months ended September 30, | Nine months ended September 30, | |||||||||||
2011 | 2010 | 2011 | 2010 | |||||||||
Fixed rate floor income, gross | $ | 44,080 | 38,263 | 121,126 | 112,731 | |||||||
Derivative settlements (a) | (3,482 | ) | (4,040 | ) | (16,045 | ) | (12,183 | ) | ||||
Fixed rate floor income, net | $ | 40,598 | 34,223 | 105,081 | 100,548 | |||||||
Fixed rate floor income contribution to spread, net | 0.65 | % | 0.51 | % | 0.59 | % | 0.53 | % |
(a) | Includes settlement payments on derivatives used to hedge student loans earning fixed rate floor income. |
The high levels of fixed rate floor income earned during 2011 and 2010 are due to historically low interest rates. If interest rates remain low, the Company anticipates continuing to earn significant fixed rate floor income in future periods.
Future Cash Flow from Portfolio
The majority of the Company’s portfolio of student loans is funded in asset-backed securitizations that are structured to substantially match the maturity of the funded assets, thereby minimizing liquidity risk. In addition, due to (i) the difference between the yield the Company receives on the loans and cost of financing within these transactions, and (ii) the excess servicing and administration fees the Company earns from these transactions, the Company has created a portfolio that will generate earnings and significant cash flow over the life of these transactions.
As of September 30, 2011, based on cash flow models developed to reflect management’s current estimate of, among other factors, prepayments, defaults, deferment, forbearance, and interest rates, the Company currently expects future undiscounted cash flows from its portfolio to be approximately $1.83 billion as detailed below. The $1.83 billion includes approximately $330 million (as of September 30, 2011) of overcollateralization included in the asset-backed securitizations. These excess net asset positions are reflected variously in the following balances on the consolidated balance sheet: "student loans receivable," "restricted cash and investments," and "accrued interest receivable."
The forecasted cash flow presented below includes all loans currently funded in asset-backed securitizations. As of September 30, 2011, the Company had $21.5 billion of loans included in asset-backed securitizations, which represented 87 percent of its total FFELP student loan portfolio. The forecasted cash flow does not include cash flows that the Company expects to receive related to loans funded through the Department of Education’s Conduit Program and other warehouse facilities or loans originated and/or acquired subsequent to September 30, 2011.
(a) | The Company uses various assumptions, including prepayments and future interest rates, when preparing its cash flow forecast. These assumptions are further discussed below. |
8
Prepayments: The primary variable in establishing a life of loan estimate is the level and timing of prepayments. Prepayment rates equal the percentage of loans that prepay annually as a percentage of the beginning of period balance, net of scheduled principal payments. A number of factors can affect estimated prepayment rates, including the level of consolidation activity and default rates. Should any of these factors change, management may revise its assumptions, which in turn would impact the projected future cash flow. The Company’s cash flow forecast above assumes prepayment rates that are generally consistent with those utilized in the Company’s recent asset-backed securities transactions. If management used a prepayment rate assumption two times greater than what was used to forecast the cash flow, the cash flow forecast would be reduced by approximately $370 million to $430 million.
On October 25, 2011, The White House and the Department announced a short-term consolidation program to eligible student loan borrowers. The Department's program will allow student loan borrowers with at least one legacy FFELP loan and at least one federal student loan owned by the Department to convert those loans to Special Direct Consolidation Loans under the Federal Direct Loan Program. The Company currently owns approximately $3 billion of FFEL Program loans that the Company believes will be eligible for the new program, of which approximately $2 billion are permanently funded in asset-backed securitizations, and the forecased cash flows from these loans are included in the table above. This program could increase the prepayments on the loans eligible for this program and decrease the forecasted cash flows.
Interest rates: The Company funds the majority of its student loans with three-month LIBOR (“LIBOR”) indexed floating rate securities. Meanwhile, the interest earned on the Company’s student loan assets are indexed primarily to a commercial paper rate (“CP”). The different interest rate characteristics of the Company’s loan assets and liabilities funding these assets result in basis risk. The Company’s cash flow forecast assumes LIBOR will exceed CP by 12 basis points for the life of the portfolio, which approximates the historical relationship between these indices. If the forecast is computed assuming a spread of 24 basis points between CP and LIBOR for the life of the portfolio, the cash flow forecast would be reduced by approximately $80 million to $120 million.
The Company uses the current forward interest rate yield curve to forecast cash flows. A change in the forward interest rate curve would impact the future cash flows generated from the portfolio. An increase in future interest rates will reduce the amount of fixed rate floor income the Company is currently receiving. The Company attempts to mitigate the impact of a rise in short-term rates by hedging interest rate risks. As of September 30, 2011, the net fair value of the Company’s interest rate derivatives used to hedge loans earning fixed rate floor income was a liability of $25.8 million.
Use Liquidity to Capitalize on Market Opportunities
The Company has used and will continue to use its improved liquidity position to capitalize on market opportunities, including FFELP student loan acquisitions; strategic acquisitions and investments in its core business areas of loan financing, loan servicing, payment processing, and enrollment services (education planning); and capital management initatives, including stock repurchases, debt repurchases, and dividend distributions.
During 2011, the Company has used its improved liquidity to accomplish the following items:
• | FFELP Student Loan Acquisitions |
- | Purchased $2.7 billion of FFELP student loans through September 30, 2011 |
• | Acquisitions and Investments in Core Business Areas |
- | Purchased contracts with more than 370 K-12 schools to provide tuition payment plan services |
• | Capital Management |
- | Repurchased 1.1 million shares of common stock through September 30, 2011 for $21.1 million ($18.83 per share) |
- | Repurchased $74.8 million notional amount of debt through September 30, 2011 recognizing a gain of $7.0 million |
- | Raised the quarterly dividend paid on the Company’s common stock to $0.10 per share ($13.1 million of dividends paid through September 30, 2011) |
9
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 (“GAAP”). In addition to evaluating the Company's GAAP-based financial information, management also evaluates the Company on a non-GAAP performance measure referred to as “base net income”. While “base net income” is not a substitute for reported results under GAAP, the Company provides “base net income” as additional information regarding its financial results.
“Base net income” is the primary financial performance measure used by management to develop financial plans, establish corporate performance targets, allocate resources, track results, evaluate performance, and determine incentive compensation. The Company's board of directors utilizes “base net income” to set performance targets and evaluate management's performance. The Company also believes analysts, rating agencies, and creditors use “base net income” in their evaluation of the Company's 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 Company's 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 Company's operations.
The following table provides a reconciliation of GAAP net income to “base net income.”
Three months ended | Nine months ended | ||||||||||||||
September 30, 2011 | June 30, 2011 | September 30, 2010 | September 30, 2011 | September 30, 2010 | |||||||||||
GAAP net income (loss) | $ | 47,451 | 37,125 | (368 | ) | 139,456 | 103,947 | ||||||||
Base adjustments: | |||||||||||||||
Derivative market value and foreign currency adjustments | 13,888 | 16,813 | 32,805 | 29,585 | 35,931 | ||||||||||
Amortization of intangible assets | 4,490 | 3,959 | 5,355 | 12,425 | 18,103 | ||||||||||
Total base adjustments before income taxes | 18,378 | 20,772 | 38,160 | 42,010 | 54,034 | ||||||||||
Net tax effect | (6,984 | ) | (7,893 | ) | (14,501 | ) | (15,964 | ) | (20,533 | ) | |||||
Total base adjustments | 11,394 | 12,879 | 23,659 | 26,046 | 33,501 | ||||||||||
Base net income | $ | 58,845 | 50,004 | 23,291 | 165,502 | 137,448 | |||||||||
Earnings (loss) per share: | |||||||||||||||
GAAP net income (loss) | $ | 0.98 | 0.76 | (0.01 | ) | 2.88 | 2.09 | ||||||||
Total base adjustments before two-class method of computing earnings per share (a) | — | — | — | 0.01 | 0.01 | ||||||||||
Total base adjustments | 0.24 | 0.28 | 0.48 | 0.54 | 0.68 | ||||||||||
Base net income | $ | 1.22 | 1.04 | 0.47 | 3.43 | 2.78 |
(a) | The two-class method requires the calculation of separate earnings per share amounts for unvested share-based awards and for common stock. Unvested share-based awards that contain nonforfeitable rights to dividends are considered securities which participate in undistributed earnings with common stock. GAAP net earnings per share in the above table represents earnings per share attributable to common shareholders. The adjustment to base net income reflects the earnings allocated to holders of unvested restricted stock awards. |
10
The following table summarizes the impact to “base net income” from a litigation settlement and restructure charges recognized by the Company in 2010.
Three months ended | Nine months ended | ||||||||||||||
September 30, 2011 | June 30, 2011 | September 30, 2010 | September 30, 2011 | September 30, 2010 | |||||||||||
Base net income | $ | 58,845 | 50,004 | 23,291 | 165,502 | 137,448 | |||||||||
Adjusted base adjustments: | |||||||||||||||
Litigation settlement | — | — | 55,000 | — | 55,000 | ||||||||||
Restructure expense | — | — | 4,751 | — | 6,020 | ||||||||||
Adjusted base adjustments before income taxes | — | — | 59,751 | — | 61,020 | ||||||||||
Net tax effect | — | — | (22,705 | ) | — | (23,187 | ) | ||||||||
Total adjusted base adjustments | — | — | 37,046 | — | 37,833 | ||||||||||
Total base adjustments before settlement and restructure expense (net of tax) | $ | 58,845 | 50,004 | 60,337 | 165,502 | 175,281 | |||||||||
Earnings per share: | |||||||||||||||
Base net income | $ | 1.22 | 1.04 | 0.47 | 3.43 | 2.78 | |||||||||
Total adjusted base adjustments | — | — | 0.76 | — | 0.76 | ||||||||||
Base net income, excluding litigation settlement and restructure expense (net of tax) | $ | 1.22 | 1.04 | 1.23 | 3.43 | 3.54 |
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 Company's 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 Company's “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 Company's 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 Company's 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.
Differences between GAAP and Base Net Income
Management's 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 Company's results of operations. A more detailed discussion of the differences between GAAP and “base net income” follows.
11
Derivative market value and foreign currency adjustments
“Base net income” excludes the periodic unrealized gains and losses that are caused by the change in fair value on derivatives used in the Company's risk management strategy in which the Company does not qualify for “hedge treatment” under GAAP. As such, the Company recognizes changes in fair value of derivative instruments currently in earnings. 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 to manage interest rate risks include interest rate swaps and basis swaps. Management has structured the majority of the Company's derivative transactions with the intent that each is economically effective. However, the Company does not qualify its derivatives for “hedge treatment,” 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 Company's 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 settlements, net” on the attached condensed consolidated statements of operations.
“Base net income” excludes the foreign currency transaction gains or losses caused by the re-measurement of the Company's 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 between the U.S. dollar and Euro 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 settlements, net” on the attached condensed consolidated statements of income. 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 Company's business plan and affect the period-to-period comparability of the results of operations. The re-measurement of the Euro-denominated bonds generally 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.
The gains and/or losses included in “derivative market value and foreign currency adjustments” on the attached condensed consolidated statements of income are primarily caused by interest rate and currency volatility, as well as the volume and terms of derivatives not receiving hedge treatment. “Base net income” excludes these unrealized gains and losses and isolates the effect of interest rate and currency volatility related to the fair value of such instruments during the period. Under GAAP, the effects of these factors on the fair value of 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 Company's business and asset acquisitions, since the Company feels that such charges do not drive the Company's operating performance on a long-term basis and can affect the period-to-period comparability of the results of operations.
Operating Segments
The Company earns fee-based revenue through its Student Loan and Guaranty Servicing, Tuition Payment Processing and Campus Commerce, and Enrollment Services operating segments. In addition, the Company earns net interest income on its student loan portfolio in its Asset Generation and Management operating segment. The Company’s operating segments are defined by the products and services they offer and 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 Company’s operating segments are the same as those described in note 2 in the notes to the consolidated financial statements included in the Company’s Annual Report filed on Form 10-K for the year ended December 31, 2010. 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
12
segment financial information. The Company allocates certain corporate overhead expenses to the individual operating segments. These expenses include certain corporate activities related to executive management, human resources, accounting, legal, occupancy, and marketing. These costs are allocated to each operating segment based on estimated use of such activities and services.
The management reporting process measures the performance of the Company’s 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 Company’s chief operating decision maker, evaluates the performance of the Company’s operating segments based on their profitability. As discussed further below, management measures the profitability of the Company’s operating segments based on “base net income.” Accordingly, information regarding the Company’s operating segments is provided based on “base net income.” The Company’s “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.
Fee-Based Operating Segments
Student Loan and Guaranty Servicing
The following are the primary product and service offerings the Company offers as part of its Student Loan and Guaranty Servicing segment:
• | Servicing of FFELP loans |
• | Origination and servicing of non-federally insured student loans |
• | Servicing federally-owned student loans for the Department of Education |
• | Servicing and support outsourcing for guaranty agencies |
• | Student loan servicing software and other information technology products and services |
The Student Loan and Guaranty Servicing operating segment provides for the servicing of the Company’s student loan portfolios and the portfolios of third parties. The loan servicing activities include loan origination activities, loan conversion activities, application processing, borrower updates, payment processing, due diligence procedures, funds management reconciliations, and claim processing. These activities are performed internally for the Company’s portfolio in addition to generating external fee revenue when performed for third party clients.
In June 2009, the Department of Education named the Company as one of four private sector companies awarded a servicing contract to service federally-owned student loans. In September 2009, the Company began servicing loans under this contract. The contract spans five years with one five-year renewal at the option of the Department.
This operating segment also provides servicing activities for guarantee agencies. These activities include providing software and data center services, borrower and loan updates, default aversion tracking services, claim processing services, and post-default collection services.
This operating segment also develops student loan servicing software, which is used internally by the Company and also licensed to third party student loan holders and servicers. In addition, this operating segment provides information technology products and services with core areas of business in educational loan software solutions, technical consulting services, and Enterprise content management solutions.
Tuition Payment Processing and Campus Commerce
The Company’s Tuition Payment Processing and Campus Commerce operating segment provides products and services to help students and families manage the payment of education costs at all levels (K-12 and higher education). It also provides innovative education-focused technologies, services, and support solutions to help schools with the everyday challenges of collecting and processing commerce data.
In the K-12 market, the Company offers actively managed tuition payment plans as well as assistance with financial needs assessment, enrollment management, and donor management. The Company offers two principal products to the higher education market: actively managed tuition payment plans and campus commerce technologies and payment processing.
13
Enrollment Services
The Enrollment Services operating segment offers products and services that are focused on helping colleges recruit and retain students (interactive and list marketing services) and helping students plan and prepare for life after high school (publishing services and resource centers). Interactive marketing products and services include agency of record services, qualified inquiry generation, pay per click, and other marketing management, along with call center solutions. The majority of interactive marketing revenue is derived from fees which are earned through the delivery of qualified inquiries or clicks provided to colleges and universities. List marketing services include providing lists to help higher education institutions and businesses reach the middle school, high school, college bound high school, college, and young adult market places. Publishing services include test preparation study guides, school directories and databases, and career exploration guides. Resource centers include online courses, scholarship search and selection data, career planning, and on-line information about colleges and universities.
Asset Generation and Management Operating Segment
The Asset Generation and Management Operating Segment includes the acquisition, management, and ownership of the Company’s student loan assets, which has historically been the Company’s largest product and service offering. The Company generates a substantial portion of its earnings from the spread, referred to as the Company’s student loan spread, between the yield it receives on its student loan portfolio and the associated costs to finance such portfolio. The student loan assets are held in a series of education lending subsidiaries designed specifically for this purpose. In addition to the student loan spread earned on its portfolio, all costs and activity associated with managing the portfolio, such as servicing of the assets and debt maintenance are included in this segment.
As a result of legislation (the Reconciliation Act of 2010), effective July 1, 2010, all new federal loan originations are made by the Department of Education through the Direct Loan Program and the Company no longer originates FFELP loans. This legislation does not alter or affect the terms and conditions of existing FFELP loans.
Corporate Activity and Overhead
Corporate Activity and Overhead 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 |
Corporate Activities also includes certain corporate activities and overhead functions related to executive management, human resources, accounting and finance, legal, and marketing. Beginning in 2010, these costs were allocated to each operating segment based on estimated use of such activities and services.
Segment Operating Results – “Base Net Income”
The tables below include the operating results of each of the Company’s 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 Company’s 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 Company’s 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. Reconciliations of the segment totals to the Company’s operating results in accordance with GAAP are also included in the tables below.
Income Taxes
For segment reporting, income taxes are applied based on 38% of income (loss) before taxes for each individual operating segment. The difference between the consolidated income tax expense and the sum of taxes calculated for each operating segment is included in income taxes in Corporate Activity and Overhead.
14
Reclassifications
Certain amounts previously reported within operating expenses have been reclassified to conform to the current period presentation. These reclassifications had no effect on any of the segments’ net income or assets and liabilities.
Segment Operating Results and Reconciliations to GAAP
Three months ended September 30, 2011 | ||||||||||||||||||||||||||||||
Fee-Based | ||||||||||||||||||||||||||||||
Student Loan and Guaranty Servicing | Tuition Payment Processing and Campus Commerce | Enrollment Services | Total Fee- Based | Asset Generation and Management | Corporate Activity and Overhead | Eliminations | Base Net Income | Adjustments to GAAP Results | GAAP Results of Operations | |||||||||||||||||||||
Total interest income | $ | 15 | 11 | — | 26 | 157,071 | 1,285 | (755 | ) | 157,627 | — | 157,627 | ||||||||||||||||||
Interest expense | — | — | — | — | 59,049 | 2,572 | (755 | ) | 60,866 | — | 60,866 | |||||||||||||||||||
Net interest income (loss) | 15 | 11 | — | 26 | 98,022 | (1,287 | ) | — | 96,761 | — | 96,761 | |||||||||||||||||||
Less provision for loan losses | — | — | — | — | 5,250 | — | — | 5,250 | — | 5,250 | ||||||||||||||||||||
Net interest income (loss)after provision for loan losses | 15 | 11 | — | 26 | 92,772 | (1,287 | ) | — | 91,511 | — | 91,511 | |||||||||||||||||||
Other income (expense): | ||||||||||||||||||||||||||||||
Loan and guaranty servicing revenue | 37,927 | — | — | 37,927 | — | — | — | 37,927 | — | 37,927 | ||||||||||||||||||||
Intersegment servicing revenue | 16,622 | — | — | 16,622 | — | — | (16,622 | ) | — | — | — | |||||||||||||||||||
Tuition payment processing and campus commerce revenue | — | 16,774 | — | 16,774 | — | — | — | 16,774 | — | 16,774 | ||||||||||||||||||||
Enrollment services revenue | — | — | 35,505 | 35,505 | — | — | — | 35,505 | — | 35,505 | ||||||||||||||||||||
Software services revenue | 4,622 | — | — | 4,622 | — | — | — | 4,622 | — | 4,622 | ||||||||||||||||||||
Other income | — | — | — | — | 3,694 | 237 | — | 3,931 | — | 3,931 | ||||||||||||||||||||
Gain on sale of loans and debt repurchases | — | — | — | — | — | — | — | — | — | — | ||||||||||||||||||||
Derivative market value and foreign currency adjustments | — | — | — | — | — | — | — | — | (13,888 | ) | (13,888 | ) | ||||||||||||||||||
Derivative settlements, net | — | — | — | — | 507 | (250 | ) | — | 257 | — | 257 | |||||||||||||||||||
Total other income (expense) | 59,171 | 16,774 | 35,505 | 111,450 | 4,201 | (13 | ) | (16,622 | ) | 99,016 | (13,888 | ) | 85,128 | |||||||||||||||||
Operating expenses: | ||||||||||||||||||||||||||||||
Salaries and benefits | 25,335 | 7,594 | 6,484 | 39,413 | 694 | 4,025 | — | 44,132 | — | 44,132 | ||||||||||||||||||||
Cost to provide enrollment services | — | — | 23,825 | 23,825 | — | — | — | 23,825 | — | 23,825 | ||||||||||||||||||||
Depreciation and amortization | 2,005 | 286 | 784 | 3,075 | — | 352 | — | 3,427 | 4,490 | 7,917 | ||||||||||||||||||||
Restructure expense | — | — | — | — | — | — | — | — | — | — | ||||||||||||||||||||
Other | 14,420 | 2,302 | 2,129 | 18,851 | 3,311 | 6,742 | — | 28,904 | — | 28,904 | ||||||||||||||||||||
Intersegment expenses, net | 1,291 | 1,166 | 783 | 3,240 | 16,865 | (3,483 | ) | (16,622 | ) | — | — | — | ||||||||||||||||||
Total operating expenses | 43,051 | 11,348 | 34,005 | 88,404 | 20,870 | 7,636 | (16,622 | ) | 100,288 | 4,490 | 104,778 | |||||||||||||||||||
Income (loss) before income taxes and corporate overhead allocation | 16,135 | 5,437 | 1,500 | 23,072 | 76,103 | (8,936 | ) | — | 90,239 | (18,378 | ) | 71,861 | ||||||||||||||||||
Corporate overhead allocation | (963 | ) | (321 | ) | (321 | ) | (1,605 | ) | (1,605 | ) | 3,210 | — | — | — | — | |||||||||||||||
Income (loss) before income taxes | 15,172 | 5,116 | 1,179 | 21,467 | 74,498 | (5,726 | ) | — | 90,239 | (18,378 | ) | 71,861 | ||||||||||||||||||
Income tax (expense) benefit | (5,765 | ) | (1,944 | ) | (448 | ) | (8,157 | ) | (27,902 | ) | 4,665 | — | (31,394 | ) | 6,984 | (24,410 | ) | |||||||||||||
Net income (loss) | $ | 9,407 | 3,172 | 731 | 13,310 | 46,596 | (1,061 | ) | — | 58,845 | (11,394 | ) | 47,451 |
15
Three months ended June 30, 2011 | ||||||||||||||||||||||||||||||
Fee-Based | ||||||||||||||||||||||||||||||
Student Loan and Guaranty Servicing | Tuition Payment Processing and Campus Commerce | Enrollment Services | Total Fee- Based | Asset Generation and Management | Corporate Activity and Overhead | Eliminations | Base Net Income | Adjustments to GAAP Results | GAAP Results of Operations | |||||||||||||||||||||
Total interest income | $ | 12 | 2 | — | 14 | 139,284 | 1,147 | (655 | ) | 139,790 | — | 139,790 | ||||||||||||||||||
Interest expense | — | — | — | — | 49,269 | 2,440 | (655 | ) | 51,054 | — | 51,054 | |||||||||||||||||||
Net interest income (loss) | 12 | 2 | — | 14 | 90,015 | (1,293 | ) | — | 88,736 | — | 88,736 | |||||||||||||||||||
Less provision for loan losses | — | — | — | — | 5,250 | — | — | 5,250 | — | 5,250 | ||||||||||||||||||||
Net interest income (loss) after provision for loan losses | 12 | 2 | — | 14 | 84,765 | (1,293 | ) | — | 83,486 | — | 83,486 | |||||||||||||||||||
Other income (expense): | ||||||||||||||||||||||||||||||
Loan and guaranty servicing revenue | 37,389 | — | — | 37,389 | — | — | — | 37,389 | — | 37,389 | ||||||||||||||||||||
Intersegment servicing revenue | 16,793 | — | — | 16,793 | — | — | (16,793 | ) | — | — | — | |||||||||||||||||||
Tuition payment processing and campus commerce revenue | — | 14,761 | — | 14,761 | — | — | — | 14,761 | — | 14,761 | ||||||||||||||||||||
Enrollment services revenue | — | — | 32,315 | 32,315 | — | — | — | 32,315 | — | 32,315 | ||||||||||||||||||||
Software services revenue | 4,346 | — | — | 4,346 | — | — | — | 4,346 | — | 4,346 | ||||||||||||||||||||
Other income | — | — | — | — | 3,997 | 2,829 | — | 6,826 | — | 6,826 | ||||||||||||||||||||
Gain on sale of loans and debt repurchases | — | — | — | — | — | — | — | — | — | — | ||||||||||||||||||||
Derivative market value and foreign currency adjustments | — | — | — | — | — | — | — | — | (16,813 | ) | (16,813 | ) | ||||||||||||||||||
Derivative settlements, net | — | — | — | — | (3,274 | ) | (248 | ) | — | (3,522 | ) | — | (3,522 | ) | ||||||||||||||||
Total other income (expense) | 58,528 | 14,761 | 32,315 | 105,604 | 723 | 2,581 | (16,793 | ) | 92,115 | (16,813 | ) | 75,302 | ||||||||||||||||||
Operating expenses: | ||||||||||||||||||||||||||||||
Salaries and benefits | 24,731 | 7,249 | 5,931 | 37,911 | 709 | 4,261 | — | 42,881 | — | 42,881 | ||||||||||||||||||||
Cost to provide enrollment services | — | — | 22,140 | 22,140 | — | — | — | 22,140 | — | 22,140 | ||||||||||||||||||||
Depreciation and amortization | 1,336 | 345 | 780 | 2,461 | — | 349 | — | 2,810 | 3,959 | 6,769 | ||||||||||||||||||||
Restructure expense | — | — | — | — | — | — | — | — | — | — | ||||||||||||||||||||
Other | 14,605 | 2,327 | 2,442 | 19,374 | 5,139 | 4,254 | — | 28,767 | — | 28,767 | ||||||||||||||||||||
Intersegment expenses, net | 1,060 | 1,118 | 959 | 3,137 | 17,047 | (3,391 | ) | (16,793 | ) | — | — | — | ||||||||||||||||||
Total operating expenses | 41,732 | 11,039 | 32,252 | 85,023 | 22,895 | 5,473 | (16,793 | ) | 96,598 | 3,959 | 100,557 | |||||||||||||||||||
Income (loss) before income taxes and corporate overhead allocation | 16,808 | 3,724 | 63 | 20,595 | 62,593 | (4,185 | ) | — | 79,003 | (20,772 | ) | 58,231 | ||||||||||||||||||
Corporate overhead allocation | (1,233 | ) | (411 | ) | (411 | ) | (2,055 | ) | (2,054 | ) | 4,109 | — | — | — | — | |||||||||||||||
Income (loss) before income taxes | 15,575 | 3,313 | (348 | ) | 18,540 | 60,539 | (76 | ) | — | 79,003 | (20,772 | ) | 58,231 | |||||||||||||||||
Income tax (expense) benefit | (5,917 | ) | (1,259 | ) | 132 | (7,044 | ) | (23,412 | ) | 1,457 | — | (28,999 | ) | 7,893 | (21,106 | ) | ||||||||||||||
Net income (loss) | $ | 9,658 | 2,054 | (216 | ) | 11,496 | 37,127 | 1,381 | — | 50,004 | (12,879 | ) | 37,125 |
16
Three months ended September 30, 2010 | ||||||||||||||||||||||||||||||
Fee-Based | ||||||||||||||||||||||||||||||
Student Loan and Guaranty Servicing | Tuition Payment Processing and Campus Commerce | Enrollment Services | Total Fee-Based | Asset Generation and Management | Corporate Activity and Overhead | Eliminations | Base Net Income | Adjustments to GAAP Results | GAAP Results of Operations | |||||||||||||||||||||
Total interest income | $ | 13 | 12 | — | 25 | 159,752 | 1,919 | (1,240 | ) | 160,456 | — | 160,456 | ||||||||||||||||||
Interest expense | — | — | — | — | 64,302 | 5,181 | (1,240 | ) | 68,243 | — | 68,243 | |||||||||||||||||||
Net interest income (loss) | 13 | 12 | — | 25 | 95,450 | (3,262 | ) | — | 92,213 | — | 92,213 | |||||||||||||||||||
Less provision for loan losses | — | — | — | — | 5,500 | — | — | 5,500 | — | 5,500 | ||||||||||||||||||||
Net interest income (loss) after provision for loan losses | 13 | 12 | — | 25 | 89,950 | (3,262 | ) | — | 86,713 | — | 86,713 | |||||||||||||||||||
Other income (expense): | ||||||||||||||||||||||||||||||
Loan and guaranty servicing revenue | 33,464 | — | — | 33,464 | — | — | — | 33,464 | — | 33,464 | ||||||||||||||||||||
Intersegment servicing revenue | 20,022 | — | — | 20,022 | — | — | (20,022 | ) | — | — | — | |||||||||||||||||||
Tuition payment processing and campus commerce revenue | — | 14,527 | — | 14,527 | — | — | — | 14,527 | — | 14,527 | ||||||||||||||||||||
Enrollment services revenue | — | — | 36,439 | 36,439 | — | — | — | 36,439 | — | 36,439 | ||||||||||||||||||||
Software services revenue | 4,624 | — | — | 4,624 | — | — | — | 4,624 | — | 4,624 | ||||||||||||||||||||
Other income | — | — | — | — | 4,710 | 4,722 | — | 9,432 | — | 9,432 | ||||||||||||||||||||
Gain on sale of loans and debt repurchases | — | — | — | — | 4,963 | 4,922 | — | 9,885 | — | 9,885 | ||||||||||||||||||||
Derivative market value and foreign currency adjustments | — | — | — | — | — | — | — | — | (32,805 | ) | (32,805 | ) | ||||||||||||||||||
Derivative settlements, net | — | — | — | — | (2,131 | ) | (455 | ) | — | (2,586 | ) | — | (2,586 | ) | ||||||||||||||||
Total other income (expense) | 58,110 | 14,527 | 36,439 | 109,076 | 7,542 | 9,189 | (20,022 | ) | 105,785 | (32,805 | ) | 72,980 | ||||||||||||||||||
Operating expenses: | ||||||||||||||||||||||||||||||
Salaries and benefits | 22,682 | 6,652 | 6,142 | 35,476 | 1,054 | 4,615 | (60 | ) | 41,085 | — | 41,085 | |||||||||||||||||||
Litigation settlement | — | — | — | — | — | 55,000 | — | 55,000 | — | 55,000 | ||||||||||||||||||||
Cost to provide enrollment services | — | — | 23,709 | 23,709 | — | — | — | 23,709 | — | 23,709 | ||||||||||||||||||||
Depreciation and amortization | 1,362 | 330 | 1,624 | 3,316 | — | 354 | — | 3,670 | 5,355 | 9,025 | ||||||||||||||||||||
Restructure expense | 4,751 | — | — | 4,751 | — | — | — | 4,751 | — | 4,751 | ||||||||||||||||||||
Other | 12,470 | 2,053 | 2,556 | 17,079 | 2,937 | 6,701 | — | 26,717 | — | 26,717 | ||||||||||||||||||||
Intersegment expenses, net | 1,166 | 973 | 701 | 2,840 | 20,295 | (3,173 | ) | (19,962 | ) | — | — | — | ||||||||||||||||||
Total operating expenses | 42,431 | 10,008 | 34,732 | 87,171 | 24,286 | 63,497 | (20,022 | ) | 154,932 | 5,355 | 160,287 | |||||||||||||||||||
Income (loss) before income taxes and corporate overhead allocation | 15,692 | 4,531 | 1,707 | 21,930 | 73,206 | (57,570 | ) | — | 37,566 | (38,160 | ) | (594 | ) | |||||||||||||||||
Corporate overhead allocation | (1,676 | ) | (559 | ) | (559 | ) | (2,794 | ) | (2,793 | ) | 5,587 | — | — | — | — | |||||||||||||||
Income (loss) before income taxes | 14,016 | 3,972 | 1,148 | 19,136 | 70,413 | (51,983 | ) | — | 37,566 | (38,160 | ) | (594 | ) | |||||||||||||||||
Income tax (expense) benefit | (5,326 | ) | (1,510 | ) | (436 | ) | (7,272 | ) | (26,757 | ) | 19,754 | — | (14,275 | ) | 14,501 | 226 | ||||||||||||||
Net income (loss) | $ | 8,690 | 2,462 | 712 | 11,864 | 43,656 | (32,229 | ) | — | 23,291 | (23,659 | ) | (368 | ) | ||||||||||||||||
Additional information: | ||||||||||||||||||||||||||||||
Net income (loss) | $ | 8,690 | 2,462 | 712 | 11,864 | 43,656 | (32,229 | ) | — | 23,291 | ||||||||||||||||||||
Plus: Litigation settlement (a) | — | — | — | — | — | 55,000 | — | 55,000 | ||||||||||||||||||||||
Plus: Restructure expense (b) | 4,751 | — | — | 4,751 | — | — | — | 4,751 | ||||||||||||||||||||||
Less: Net tax effect | (1,805 | ) | — | — | (1,805 | ) | — | (20,900 | ) | — | (22,705 | ) | ||||||||||||||||||
Net income (loss), excluding litigation settlement and restructure expense | $ | 11,636 | 2,462 | 712 | 14,810 | 43,656 | 1,871 | — | 60,337 | |||||||||||||||||||||
(a) During the third quarter of 2010, the Company recorded a $55.0 million litigation settlement charge. | ||||||||||||||||||||||||||||||
(b) During 2010, the Company recorded restructuring charges associated with previously implemented restructuring plans. |
17
Nine months ended September 30, 2011 | ||||||||||||||||||||||||||||||
Fee-Based | ||||||||||||||||||||||||||||||
Student Loan and Guaranty Servicing | Tuition Payment Processing and Campus Commerce | Enrollment Services | Total Fee- Based | Asset Generation and Management | Corporate Activity and Overhead | Eliminations | Base Net Income | Adjustments to GAAP Results | GAAP Results of Operations | |||||||||||||||||||||
Total interest income | $ | 42 | 19 | — | 61 | 433,994 | 3,578 | (2,132 | ) | 435,501 | — | 435,501 | ||||||||||||||||||
Interest expense | — | — | — | — | 158,034 | 8,325 | (2,132 | ) | 164,227 | — | 164,227 | |||||||||||||||||||
Net interest income (loss) | 42 | 19 | — | 61 | 275,960 | (4,747 | ) | — | 271,274 | — | 271,274 | |||||||||||||||||||
Less provision for loan losses | — | — | — | — | 14,250 | — | — | 14,250 | — | 14,250 | ||||||||||||||||||||
Net interest income (loss) after provision for loan losses | 42 | 19 | — | 61 | 261,710 | (4,747 | ) | — | 257,024 | — | 257,024 | |||||||||||||||||||
Other income (expense): | ||||||||||||||||||||||||||||||
Loan and guaranty servicing revenue | 110,952 | — | — | 110,952 | — | — | — | 110,952 | — | 110,952 | ||||||||||||||||||||
Intersegment servicing revenue | 51,272 | — | — | 51,272 | — | — | (51,272 | ) | — | — | — | |||||||||||||||||||
Tuition payment processing and campus commerce revenue | — | 50,904 | — | 50,904 | — | — | — | 50,904 | — | 50,904 | ||||||||||||||||||||
Enrollment services revenue | — | — | 101,688 | 101,688 | — | — | — | 101,688 | — | 101,688 | ||||||||||||||||||||
Software services revenue | 13,745 | — | — | 13,745 | — | — | — | 13,745 | — | 13,745 | ||||||||||||||||||||
Other income | — | — | — | — | 11,827 | 5,422 | — | 17,249 | — | 17,249 | ||||||||||||||||||||
Gain on sale of loans and debt repurchases | — | — | — | — | 1,400 | 6,907 | — | 8,307 | — | 8,307 | ||||||||||||||||||||
Derivative market value and foreign currency adjustments | — | — | — | — | — | — | — | — | (29,585 | ) | (29,585 | ) | ||||||||||||||||||
Derivative settlements, net | — | — | — | — | (6,805 | ) | (612 | ) | — | (7,417 | ) | — | (7,417 | ) | ||||||||||||||||
Total other income (expense) | 175,969 | 50,904 | 101,688 | 328,561 | 6,422 | 11,717 | (51,272 | ) | 295,428 | (29,585 | ) | 265,843 | ||||||||||||||||||
Operating expenses: | ||||||||||||||||||||||||||||||
Salaries and benefits | 75,454 | 21,995 | 18,672 | 116,121 | 2,181 | 12,623 | — | 130,925 | — | 130,925 | ||||||||||||||||||||
Cost to provide enrollment services | — | — | 68,804 | 68,804 | — | — | — | 68,804 | — | 68,804 | ||||||||||||||||||||
Depreciation and amortization | 4,647 | 967 | 2,377 | 7,991 | — | 1,046 | — | 9,037 | 12,425 | 21,462 | ||||||||||||||||||||
Restructure expense | — | — | — | — | — | — | — | — | — | — | ||||||||||||||||||||
Other | 43,604 | 7,263 | 6,889 | 57,756 | 9,988 | 16,032 | — | 83,776 | — | 83,776 | ||||||||||||||||||||
Intersegment expenses, net | 3,720 | 3,377 | 2,560 | 9,657 | 52,059 | (10,444 | ) | (51,272 | ) | — | — | — | ||||||||||||||||||
Total operating expenses | 127,425 | 33,602 | 99,302 | 260,329 | 64,228 | 19,257 | (51,272 | ) | 292,542 | 12,425 | 304,967 | |||||||||||||||||||
Income (loss) before income taxes and corporate overhead allocation | 48,586 | 17,321 | 2,386 | 68,293 | 203,904 | (12,287 | ) | — | 259,910 | (42,010 | ) | 217,900 | ||||||||||||||||||
Corporate overhead allocation | (2,949 | ) | (983 | ) | (983 | ) | (4,915 | ) | (4,914 | ) | 9,829 | — | — | — | — | |||||||||||||||
Income (loss) before income taxes | 45,637 | 16,338 | 1,403 | 63,378 | 198,990 | (2,458 | ) | — | 259,910 | (42,010 | ) | 217,900 | ||||||||||||||||||
Income tax (expense) benefit | (17,340 | ) | (6,208 | ) | (533 | ) | (24,081 | ) | (75,616 | ) | 5,289 | — | (94,408 | ) | 15,964 | (78,444 | ) | |||||||||||||
Net income (loss) | $ | 28,297 | 10,130 | 870 | 39,297 | 123,374 | 2,831 | — | 165,502 | (26,046 | ) | 139,456 |
18
Nine months ended September 30, 2010 | ||||||||||||||||||||||||||||||
Fee-Based | ||||||||||||||||||||||||||||||
Student Loan and Guaranty Servicing | Tuition Payment Processing and Campus Commerce | Enrollment Services | Total Fee-Based | Asset Generation and Management | Corporate Activity and Overhead | Eliminations | Base Net Income | Adjustments to GAAP Results | GAAP Results of Operations | |||||||||||||||||||||
Total interest income | $ | 43 | 24 | — | 67 | 450,715 | 5,439 | (3,140 | ) | 453,081 | — | 453,081 | ||||||||||||||||||
Interest expense | — | — | — | — | 164,063 | 17,422 | (3,140 | ) | 178,345 | — | 178,345 | |||||||||||||||||||
Net interest income (loss) | 43 | 24 | — | 67 | 286,652 | (11,983 | ) | — | 274,736 | — | 274,736 | |||||||||||||||||||
Less provision for loan losses | — | — | — | — | 16,700 | — | — | 16,700 | — | 16,700 | ||||||||||||||||||||
Net interest income (loss) after provision for loan losses | 43 | 24 | — | 67 | 269,952 | (11,983 | ) | — | 258,036 | — | 258,036 | |||||||||||||||||||
Other income (expense): | ||||||||||||||||||||||||||||||
Loan and guaranty servicing revenue | 106,764 | — | — | 106,764 | — | (254 | ) | — | 106,510 | — | 106,510 | |||||||||||||||||||
Intersegment servicing revenue | 63,571 | — | — | 63,571 | — | — | (63,571 | ) | — | — | — | |||||||||||||||||||
Tuition payment processing and campus commerce revenue | — | 44,704 | — | 44,704 | — | — | — | 44,704 | — | 44,704 | ||||||||||||||||||||
Enrollment services revenue | — | — | 105,113 | 105,113 | — | — | — | 105,113 | — | 105,113 | ||||||||||||||||||||
Software services revenue | 14,467 | — | — | 14,467 | — | — | — | 14,467 | — | 14,467 | ||||||||||||||||||||
Other income | 519 | — | — | 519 | 14,114 | 10,555 | — | 25,188 | — | 25,188 | ||||||||||||||||||||
Gain on sale of loans and debt repurchases | — | — | — | — | 23,899 | 4,922 | — | 28,821 | — | 28,821 | ||||||||||||||||||||
Derivative market value and foreign currency adjustments | — | — | — | — | — | — | — | — | (35,931 | ) | (35,931 | ) | ||||||||||||||||||
Derivative settlements, net | — | — | — | — | (7,931 | ) | (455 | ) | — | (8,386 | ) | — | (8,386 | ) | ||||||||||||||||
Total other income (expense) | 185,321 | 44,704 | 105,113 | 335,138 | 30,082 | 14,768 | (63,571 | ) | 316,417 | (35,931 | ) | 280,486 | ||||||||||||||||||
Operating expenses: | ||||||||||||||||||||||||||||||
Salaries and benefits | 69,591 | 19,864 | 18,660 | 108,115 | 3,698 | 12,540 | (1,662 | ) | 122,691 | — | 122,691 | |||||||||||||||||||
Litigation settlement | — | — | — | — | — | 55,000 | — | 55,000 | — | 55,000 | ||||||||||||||||||||
Cost to provide enrollment services | — | — | 69,845 | 69,845 | — | — | — | 69,845 | — | 69,845 | ||||||||||||||||||||
Depreciation and amortization | 3,538 | 1,002 | 5,744 | 10,284 | 3 | 1,146 | — | 11,433 | 18,103 | 29,536 | ||||||||||||||||||||
Restructure expense | 6,040 | — | — | 6,040 | — | (20 | ) | — | 6,020 | — | 6,020 | |||||||||||||||||||
Other | 45,638 | 6,433 | 7,563 | 59,634 | 10,147 | 19,339 | — | 89,120 | — | 89,120 | ||||||||||||||||||||
Intersegment expenses, net | 4,158 | 2,626 | 1,775 | 8,559 | 63,011 | (9,661 | ) | (61,909 | ) | — | — | — | ||||||||||||||||||
Total operating expenses | 128,965 | 29,925 | 103,587 | 262,477 | 76,859 | 78,344 | (63,571 | ) | 354,109 | 18,103 | 372,212 | |||||||||||||||||||
Income (loss) before income taxes and corporate overhead allocation | 56,399 | 14,803 | 1,526 | 72,728 | 223,175 | (75,559 | ) | — | 220,344 | (54,034 | ) | 166,310 | ||||||||||||||||||
Corporate overhead allocation | (4,349 | ) | (1,450 | ) | (1,450 | ) | (7,249 | ) | (7,247 | ) | 14,496 | — | — | — | — | |||||||||||||||
Income (loss) before income taxes | 52,050 | 13,353 | 76 | 65,479 | 215,928 | (61,063 | ) | — | 220,344 | (54,034 | ) | 166,310 | ||||||||||||||||||
Income tax (expense) benefit | (19,779 | ) | (5,076 | ) | (28 | ) | (24,883 | ) | (82,053 | ) | 24,040 | — | (82,896 | ) | 20,533 | (62,363 | ) | |||||||||||||
Net income (loss) | $ | 32,271 | 8,277 | 48 | 40,596 | 133,875 | (37,023 | ) | — | 137,448 | (33,501 | ) | 103,947 | |||||||||||||||||
Additional information: | ||||||||||||||||||||||||||||||
Net income (loss) | $ | 32,271 | 8,277 | 48 | 40,596 | 133,875 | (37,023 | ) | — | 137,448 | ||||||||||||||||||||
Plus: Litigation settlement (a) | — | — | — | — | — | 55,000 | — | 55,000 | ||||||||||||||||||||||
Plus: Restructure expense (b) | 6,040 | — | — | 6,040 | — | (20 | ) | — | 6,020 | |||||||||||||||||||||
Less: Net tax effect | (2,295 | ) | — | — | (2,295 | ) | — | (20,892 | ) | — | (23,187 | ) | ||||||||||||||||||
Net income (loss), excluding litigation settlement and restructure expense | $ | 36,016 | 8,277 | 48 | 44,341 | 133,875 | (2,935 | ) | — | 175,281 | ||||||||||||||||||||
(a) During the third quarter of 2010, the Company recorded a $55.0 million litigation settlement charge. | ||||||||||||||||||||||||||||||
(b) During 2010, the Company recorded restructuring charges associated with previously implemented restructuring plans. |
19
The adjustments required to reconcile from the Company's “base net income” measure to its GAAP results of operations relate to differing treatments for derivatives, foreign currency transaction adjustments, and amortization of intangible assets. These items are excluded from management's evaluation of the Company's operating results. The following tables reflect adjustments associated with these areas by operating segment and Corporate Activity and Overhead:
Student Loan and Guaranty Servicing | Tuition Payment Processing and Campus Commerce | Enrollment Services | Asset Generation and Management | Corporate Activity and Overhead | Total | |||||||||||||
Three months ended September 30, 2011 | ||||||||||||||||||
Derivative market value and foreign currency adjustments | $ | — | — | — | (6,677 | ) | 20,565 | 13,888 | ||||||||||
Amortization of intangible assets | 2,099 | 1,513 | 878 | — | — | 4,490 | ||||||||||||
Net tax effect (a) | (798 | ) | (575 | ) | (334 | ) | 2,537 | (7,814 | ) | (6,984 | ) | |||||||
Total adjustments to GAAP | $ | 1,301 | 938 | 544 | (4,140 | ) | 12,751 | 11,394 | ||||||||||
Three months ended June 30, 2011 | ||||||||||||||||||
Derivative market value and foreign currency adjustments | $ | — | — | — | 12,531 | 4,282 | 16,813 | |||||||||||
Amortization of intangible assets | 2,100 | 981 | 878 | — | — | 3,959 | ||||||||||||
Net tax effect (a) | (798 | ) | (373 | ) | (334 | ) | (4,762 | ) | (1,626 | ) | (7,893 | ) | ||||||
Total adjustments to GAAP | $ | 1,302 | 608 | 544 | 7,769 | 2,656 | 12,879 | |||||||||||
Three months ended September 30, 2010 | ||||||||||||||||||
Derivative market value and foreign currency adjustments | $ | — | — | — | 24,966 | 7,839 | 32,805 | |||||||||||
Amortization of intangible assets | 2,112 | 1,120 | 2,123 | — | — | 5,355 | ||||||||||||
Net tax effect (a) | (803 | ) | (426 | ) | (807 | ) | (9,487 | ) | (2,978 | ) | (14,501 | ) | ||||||
Total adjustments to GAAP | $ | 1,309 | 694 | 1,316 | 15,479 | 4,861 | 23,659 | |||||||||||
Nine months ended September 30, 2011 | ||||||||||||||||||
Derivative market value and foreign currency adjustments | $ | — | — | — | 6,443 | 23,142 | 29,585 | |||||||||||
Amortization of intangible assets | 6,299 | 3,492 | 2,634 | — | — | 12,425 | ||||||||||||
Net tax effect (a) | (2,394 | ) | (1,327 | ) | (1,001 | ) | (2,448 | ) | (8,794 | ) | (15,964 | ) | ||||||
Total adjustments to GAAP | $ | 3,905 | 2,165 | 1,633 | 3,995 | 14,348 | 26,046 | |||||||||||
Nine months ended September 30, 2010 | ||||||||||||||||||
Derivative market value and foreign currency adjustments | $ | — | — | — | 20,955 | 14,976 | 35,931 | |||||||||||
Amortization of intangible assets | 6,462 | 4,636 | 7,005 | — | — | 18,103 | ||||||||||||
Net tax effect (a) | (2,456 | ) | (1,763 | ) | (2,665 | ) | (7,963 | ) | (5,686 | ) | (20,533 | ) | ||||||
Total adjustments to GAAP | $ | 4,006 | 2,873 | 4,340 | 12,992 | 9,290 | 33,501 |
(a) Income taxes are based on 38% for the individual operating segments.
Net interest income after provision for loan losses (net of settlements on derivatives)
The following table summarizes the components of “net interest income after provision for loan losses,” net of “derivative settlements, net” included in the attached condensed consolidated statements of income.
Three months ended | Nine months ended | ||||||||||||||
September 30, 2011 | June 30, 2011 | September 30, 2010 | September 30, 2011 | September 30, 2010 | |||||||||||
Variable student loan interest margin, net of settlements on derivatives | $ | 58,320 | 53,997 | 59,416 | 164,847 | 179,750 | |||||||||
Fixed rate floor income, net of settlements on derivatives | 40,598 | 32,801 | 34,223 | 105,081 | 100,548 | ||||||||||
Investment interest | 672 | 856 | 1,169 | 2,254 | 3,474 | ||||||||||
Corporate debt interest expense | (2,572 | ) | (2,440 | ) | (5,181 | ) | (8,325 | ) | (17,422 | ) | |||||
Provision for loan losses | (5,250 | ) | (5,250 | ) | (5,500 | ) | (14,250 | ) | (16,700 | ) | |||||
Net interest income after provision for loan losses (net of settlements on derivatives) | $ | 91,768 | 79.964 | 84,127 | 249,607 | 249,650 |
20
Student Loan Servicing Volumes (dollars in millions)
Company Owned | $23,139 | $24,378 | $26,351 | $26,183 | $23,727 | $23,249 | $22,757 | $22,503 |
% of Total | 61.6% | 56.7% | 55.3% | 47.0% | 38.6% | 34.2% | 33.0% | 30.2% |
Number of borrowers: | ||||||||
Government Servicing: | 441,913 | 1,055,896 | 1,530,308 | 2,510,630 | 2,804,502 | 2,814,142 | 2,666,183 | 2,966,706 |
FFELP servicing: | 2,311,558 | 2,327,016 | 2,329,150 | 2,227,288 | 1,912,748 | 1,870,538 | 1,837,272 | 1,812,582 |
Total: | 2,753,471 | 3,382,912 | 3,859,458 | 4,737,918 | 4,717,250 | 4,684,680 | 4,503,455 | 4,779,288 |
Derivative Market Value and Foreign Currency Adjustments
The following table summarizes the components of “derivative market value and foreign currency adjustments” included in the attached condensed consolidated statements of income.
Three months ended | Nine months ended | ||||||||||||||
September 30, 2011 | June 30, 2011 | September 30, 2010 | September 30, 2011 | September 30, 2010 | |||||||||||
Change in fair value of derivatives - income (expense) | $ | (87,341 | ) | 2,207 | 73,663 | (18,683 | ) | (94,539 | ) | ||||||
Foreign currency transaction adjustment - income (expense) | 73,453 | (19,020 | ) | (106,468 | ) | (10,902 | ) | 58,608 | |||||||
Derivative market value and foreign currency adjustments - income (expense) | $ | (13,888 | ) | (16,813 | ) | (32,805 | ) | (29,585 | ) | (35,931 | ) |
Derivative Settlements, net
The following table summarizes the components of "derivative settlements, net" included in the attached condensed consolidated statements of income.
Three months ended | Nine months ended | ||||||||||||||
September 30, 2011 | June 30, 2011 | September 30, 2010 | September 30, 2011 | September 30, 2010 | |||||||||||
Settlements: | |||||||||||||||
1:3 basis swaps | $ | 321 | 373 | 893 | 902 | 974 | |||||||||
T-Bill/LIBOR basis swaps | (69 | ) | (64 | ) | — | (263 | ) | — | |||||||
Interest rate swaps - floor income hedges | (3,482 | ) | (6,345 | ) | (4,040 | ) | (16,045 | ) | (12,183 | ) | |||||
Interest rate swaps - hybrid debt hedges | (250 | ) | (248 | ) | (242 | ) | (744 | ) | (242 | ) | |||||
Cross-currency interest rate swaps | 3,745 | 2,770 | 1,025 | 8,625 | 3,243 | ||||||||||
Other | (8 | ) | (8 | ) | (222 | ) | 108 | (178 | ) | ||||||
Total settlements - (expense) income | $ | 257 | (3,522 | ) | (2,586 | ) | (7,417 | ) | (8,386 | ) |
21
Student Loans Receivable
The tables below outline the components of the Company’s student loan portfolio:
As of | As of | ||||||||
September 30, 2011 | December 31, 2010 | ||||||||
Held for investment | Held for investment | Held for sale (a) | |||||||
Federally insured loans: | |||||||||
Stafford and other | $ | 7,573,717 | 7,927,525 | — | |||||
Consolidation | 17,081,935 | 15,830,174 | — | ||||||
Total | 24,655,652 | 23,757,699 | — | ||||||
Non-federally insured loans | 29,061 | 26,370 | 84,987 | ||||||
24,684,713 | 23,784,069 | 84,987 | |||||||
Unamortized loan discount/premiums and deferred origination costs, net | 2,674 | 207,571 | — | ||||||
Allowance for loan losses – federally insured loans | (35,190 | ) | (32,908 | ) | — | ||||
Allowance for loan losses – non-federally insured loans | (10,583 | ) | (10,718 | ) | — | ||||
$ | 24,641,614 | 23,948,014 | 84,987 | ||||||
Allowance for federally insured loans as a percentage of such loans | 0.14 | % | 0.14 | % | |||||
Allowance for non-federally insured loans as a percentage of such loans | 36.42 | % | 40.64 | % |
(a) | On January 13, 2011, the Company sold a portfolio of non-federally insured loans for proceeds of $91.3 million (100% of par value). The Company retained credit risk related to this portfolio and will pay cash to purchase back any loans which become 60 days delinquent. As of December 31, 2010, the Company classified this portfolio as held-for-sale and the loans were carried at fair value. |
Student Loan Spread
The following table analyzes the student loan spread on the Company’s 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 | Nine months ended | ||||||||||||||
September 30, 2011 | June 30, 2011 | September 30, 2010 | September 30, 2011 | September 30, 2010 | |||||||||||
Variable student loan yield, gross | 2.57 | % | 2.57 | % | 2.63 | % | 2.58 | % | 2.64 | % | |||||
Consolidation rebate fees | (0.73 | ) | (0.71 | ) | (0.64 | ) | (0.72 | ) | (0.68 | ) | |||||
Premium/discount and deferred origination costs amortization/accretion (a) | (0.03 | ) | (0.14 | ) | (0.18 | ) | (0.11 | ) | (0.21 | ) | |||||
Variable student loan yield, net | 1.81 | 1.72 | 1.81 | 1.75 | 1.75 | ||||||||||
Student loan cost of funds - interest expense | (0.82 | ) | (0.83 | ) | (0.94 | ) | (0.83 | ) | (0.83 | ) | |||||
Student loan cost of funds - bonds and notes payable discount accretion (a) | (0.11 | ) | — | — | (0.04 | ) | — | ||||||||
Student loan cost of funds - derivative settlements | 0.06 | 0.05 | 0.03 | 0.05 | 0.02 | ||||||||||
Variable student loan spread | 0.94 | 0.94 | 0.90 | 0.93 | 0.94 | ||||||||||
Fixed rate floor income, net of settlements on derivatives | 0.65 | 0.57 | 0.51 | 0.59 | 0.53 | ||||||||||
Core student loan spread | 1.59 | % | 1.51 | % | 1.41 | % | 1.52 | % | 1.47 | % | |||||
Average balance of student loans | $ | 24,794,416 | 23,298,870 | 26,548,957 | 23,891,512 | 25,520,327 | |||||||||
Average balance of debt outstanding | 24,979,332 | 23,510,072 | 26,636,184 | 24,118,465 | 25,661,594 |
(a) | On July 8, 2011, the Company purchased the residual interest in $1.9 billion of consolidation loans and recorded the loans and related debt at fair value resulting in the recognition of a significant student loan discount and bonds and notes payable discount. These discounts are being accreted using the effective interest method over the lives of the underlying assets/liabilities. |
22
Fixed Rate Floor Income
The following table shows the Company’s student loan assets that are earning fixed rate floor income as of September 30, 2011:
Borrower/ | Estimated | Balance of | |||||||
Fixed | lender | variable | assets earning fixed-rate | ||||||
interest | weighted | conversion | floor income as of | ||||||
rate range | average yield | rate (a) | September 30, 2011 | ||||||
< 3.0% | 2.88% | 0.24% | $ | 1,748,492 | |||||
3.0 - 3.49% | 3.20% | 0.56% | 2,031,640 | ||||||
3.5 - 3.99% | 3.65% | 1.01% | 1,993,143 | ||||||
4.0 - 4.49% | 4.20% | 1.56% | 1,527,216 | ||||||
4.5 - 4.99% | 4.72% | 2.08% | 866,947 | ||||||
5.0 - 5.49% | 5.24% | 2.60% | 578,132 | ||||||
5.5 - 5.99% | 5.67% | 3.03% | 351,143 | ||||||
6.0 - 6.49% | 6.18% | 3.54% | 410,195 | ||||||
6.5 - 6.99% | 6.70% | 4.06% | 365,508 | ||||||
7.0 - 7.49% | 7.17% | 4.53% | 143,939 | ||||||
7.5 - 7.99% | 7.70% | 5.06% | 241,515 | ||||||
8.0 - 8.99% | 8.17% | 5.53% | 546,593 | ||||||
> 9.0% | 9.04% | 6.40% | 258,840 | ||||||
$ | 11,063,303 |
(a) | The estimated variable conversion rate is the estimated short-term interest rate at which loans would convert to a variable rate. As of September 30, 2011, the short-term interest rate was 20 basis points. |
The following table summarizes the outstanding derivative instruments as of September 30, 2011 used by the Company to hedge loans earning fixed rate floor income.
Notional | Weighted average fixed rate paid by the Company (a) | |||||||
Maturity | amount | |||||||
2013 | $ | 2,150,000 | 0.85 | % | ||||
2014 | 750,000 | 0.85 | ||||||
2015 | 100,000 | 2.26 | ||||||
2020 | 50,000 | 3.23 | ||||||
$ | 3,050,000 | 0.87 | % |
(a) | For all interest rate derivatives, the Company receives discrete three-month LIBOR. |
23