Three Months Ended                                        Nine Months Ended
                                         September 30,                      %                      September 30,                     %
(Amounts in thousands)             2009                 2008              Change             2009                 2008             Change

                                (unaudited)          (unaudited)                          (unaudited)         (unaudited)
Revenue:
Fee and other revenue          $   294,863          $   286,021               3 %        $   841,500          $  830,699               1 %
Investment revenue                   6,849               32,231             (79 )%            26,995             128,294             (79 )%
Net securities gains
(losses)                             2,738              (13,253 )           NM                 7,027            (350,844 )           NM

Total revenue                      304,450              304,999              (0 )%           875,522             608,149              44 %
Fee commissions expense            128,352              131,397              (2 )%           368,660             377,727              (2 )%
Investment commissions
expense                                375                9,968             (96 )%             1,128             101,472             (99 )%

Total commissions
expense                            128,727              141,365              (9 )%           369,788             479,199             (23 )%

Net revenue                        175,723              163,634               7 %            505,734             128,950             292 %


Expenses:
Compensation and
benefits                            58,963               53,541              10 %            158,234             173,976              (9 )%
Transaction and
operations support                  82,573               48,530              70 %            198,223             151,894              31 %
Occupancy, equipment and
supplies                            12,254               11,069              11 %             35,517              34,682               2 %
Interest expense                    26,127               27,834              (6 )%            79,816              66,631              20 %
Depreciation and
amortization                        14,510               13,891               4 %             43,834              42,397               3 %
Valuation loss on
embedded derivatives                     -               47,233             NM                     -              16,030             NM
Debt extinguishment loss                 -                    -             NM                     -               1,499             NM

Total expenses                     194,427              202,098              (4 )%           515,624             487,109               6 %


Loss before income taxes           (18,704 )            (38,464 )            51 %             (9,890 )          (358,159 )            97 %
Income tax
(benefit) expense                     (400 )                 88            (555 )%              (110 )            26,087            (100 )%

Net loss                       $   (18,304 )        $   (38,552 )            53 %        $    (9,780 )        $ (384,246 )            97 %

NM = Not meaningful
Following are significant items affecting operating results during the third quarter of 2009 as compared to the third quarter of 2008:
• Fee and other revenue increased 3 percent in the third quarter of 2009 to $294.9 million, driven primarily by money transfer (excluding bill payment) transaction volume growth of 6 percent. While our growing volume base and the slower economic conditions in 2009 caused the rate of money transfer transaction growth to be lower in the third quarter of 2009 as compared to the third quarter of 2008, the transaction growth rate increased as compared to the second quarter of 2009.

• Investment revenue decreased $25.4 million, or 79 percent, in the third quarter of 2009 due to lower yields earned on our investment portfolio and a decline in our average investable balances from the termination of official check financial institution customers.

• We recorded $2.7 million of net securities gains in the third quarter of 2009, primarily due to a gain from the call of a trading investment. This is compared to $13.3 million of net securities losses in the third quarter of 2008 from other-than-temporary impairments and unrealized losses on trading investments.

• Total commissions expense decreased $12.6 million, or 9 percent, in the third quarter of 2009. The decline in the federal funds rate and lower average investable balances reduced investment commissions expense by $9.6 million in the third quarter of 2009. Fee and other commissions expense decreased $3.0 million from lower signing bonus amortization, the decline in the Euro exchange rate and lower average commission rates, partially offset by money transfer transaction volume growth.

• Interest expense decreased to $26.1 million in the third quarter of 2009 from $27.8 million in 2008 from the repayment of $100.0 million of debt in 2009.

• Total expenses in the third quarter of 2009 decreased $7.7 million, or 4 percent, reflecting a valuation loss of $47.2 million recorded in 2008 from changes in the fair value of embedded derivatives in our preferred stock. Total expenses in the third quarter of 2009 include a $16.5 million accrual for a patent lawsuit, asset impairments of $8.4 million, an additional $6.0 million accrual for a settlement with the Federal Trade Commission, and $3.8 million of executive severance and related costs.

• In the third quarter of 2009, we had tax benefit of $0.4 million on a pre-tax loss of $18.7 million, resulting in an effective income tax rate of 2.1 percent. The effective income tax rate for the three months ended September 30, 2009 reflects income tax on foreign income, the reversal of tax benefits upon forfeiture of share-based awards and other discrete tax benefits of $2.8 million.

• The decline in the Euro exchange rate (net of hedging activities) reduced total revenue by $4.0 million, commissions expense by $2.0 million and operating expenses by $1.1 million, for a net decrease to our income before taxes of $0.9 million.

Table 2 - Net Fee Revenue Analysis

                                    Three Months Ended                                    Nine Months Ended
                                      September 30,                    %                    September 30,                    %
(Amounts in thousands)           2009                2008            Change            2009                2008            Change

Fee and other revenue        $  294,863          $  286,021             3 %        $  841,500          $  830,699             1 %
Fee commissions
expense                        (128,352 )          (131,397 )           2 %          (368,660 )          (377,727 )           2 %

Net fee revenue              $  166,511          $  154,624             8 %        $  472,840          $  452,972             4 %


Fee commissions
expense as a % of fee
and other revenue                  43.5 %              45.9 %                            43.8 %              45.5 %

Fee and other revenue consists of fees on money transfer (including bill payment), money order and official check transactions. For the three and nine months ended September 30, 2009, fee and other revenue increased 3 percent and 1 percent, respectively, from 2008, driven by money transfer transaction volume growth and product mix, partially offset by lower average money transfer fees and the decline in the Euro exchange rate. Money transfer transaction volume (including bill payment) increased 4 percent and 3 percent for the three and nine months ended September 30, 2009, respectively, generating incremental revenue of $13.9 million and $35.4 million, respectively. Average money transfer fees declined from lower face values per transaction and corridor mix, reducing revenue by $5.3 million and $11.0 million during the three and nine months ended September 30, 2009, respectively. The decline in the Euro exchange rate, net of hedging activities, reduced revenue by $4.0 million and $19.1 million during the three and nine months ended September 30, 2009, respectively. See Table 6 - Global Funds Transfer Segment for further information regarding money transfer revenue and transaction volume.
Fee commissions expense consists primarily of fees paid to our third-party agents for the money transfer service as we generally do not pay fee commissions on our money order products. Fee commissions expense decreased $3.0 million and $9.1 million during the three and nine months ended September 30, 2009, respectively, from lower signing bonus amortization, the decline in the Euro exchange rate and lower average commission rates, partially offset by money transfer transaction volume growth. As certain historical signing bonuses were fully amortized in the third quarter of 2009, signing bonus amortization declined $3.4 million during both the three and nine months ended September 30, 2009. The decline in the Euro exchange rate, net of hedging activities, reduced commissions expense by $2.0 million and $11.6 million during the three and nine months ended September 30, 2009, respectively, while lower average commission rates reduced commissions expense by $1.5 million and $4.3 million, respectively. Transaction volume growth resulted in incremental commissions expense of $4.9 million and $11.8 million for the three and nine months ended September 30, 2009, respectively.

Net fee revenue increased 8 percent and 4 percent for the three and nine months ended September 30, 2009, respectively, compared to 2008 due to the money transfer transaction volume growth and product mix. Table 3 - Net Investment Revenue Analysis

                                      Three Months Ended                                       Nine Months Ended
                                        September 30,                      %                     September 30,                      %
(Amounts in thousands)            2009                 2008             Change             2009                 2008             Change

Investment revenue            $     6,849          $    32,231            (79 )%       $    26,995          $   128,294            (79 )%
Investment commissions
expense (1)                          (375 )             (9,968 )           96 %             (1,128 )           (101,472 )           99 %

Net investment revenue        $     6,474          $    22,263            (71 )%       $    25,867          $    26,822             (4 )%


Average balances:
Cash equivalents and
investments                   $ 4,200,229          $ 4,911,380            (14 )%       $ 4,281,802          $ 4,968,988            (14 )%
Payment service
obligations (2)               $ 3,016,491          $ 3,689,868            (18 )%       $ 3,064,993          $ 4,126,310            (26 )%

Average yields earned and
rates paid (3):
Investment yield                     0.65 %               2.61 %                              0.84 %               3.45 %
Investment commission rate           0.05 %               1.07 %                              0.05 %               3.28 %
Net investment margin                0.61 %               1.80 %                              0.81 %               0.72 %

(1) Investment commissions expense includes payments made to financial institution customers based on short-term interest rate indices on the outstanding balances of official checks sold by that financial institution.

(2) Commissions are paid to financial institution customers based upon average outstanding balances generated by the sale of official checks only. The average balance in the table reflects only the payment service obligations for which commissions are paid.

(3) Average yields/rates are calculated by dividing the applicable amount of "Net investment revenue" by the applicable amount shown in the "Average balances" section, divided by the number of days in the period presented and multiplied by the number of days in the year. The "Net investment margin" is calculated by dividing "Net investment revenue" by the "Cash equivalents and investments" average balance, divided by the number of days in the period presented and multiplied by the number of days in the year.

Investment revenue decreased $25.4 million and $101.3 million, or 79 percent, in the three and nine months ended September 30, 2009, respectively, compared to 2008 due to lower yields earned on our realigned investment portfolio and a decline in our average investable balances from the termination of official check financial institution customers. For the three and nine months ended September 30, 2009, lower interest rates earned on cash and cash equivalents resulted in decreases of $20.3 million and $84.6 million from the prior year, respectively, while the decline in average investable balances resulted in decreases of $4.7 million and a $17.6 million from the prior year, respectively. With the realignment completed in the first quarter of 2008, our portfolio is now comprised primarily of lower yielding cash equivalents and government agency securities. See Note 5 - Investment Portfolio of the Notes to Consolidated Financial Statements for further discussion of our investment portfolio. Investment commissions expense was $0.4 million and $1.1 million for the three and nine months ended September 30, 2009, respectively, compared to $10.0 million and $101.5 million in 2008, respectively. Investment commissions expense for the nine months ended September 30, 2008 includes a $27.7 million net loss due to the termination of interest rate swaps related to the official check business. See Note 6 - Derivative Financial Instruments of the Notes to Consolidated Financial Statements for further information regarding the interest rate swaps. Investment commissions paid to financial institution customers decreased in the three and nine months ended September 30, 2009 from the decline in the federal funds rate and lower average investable balances upon which commissions were paid. The federal funds rate has been so low during 2009 that most of our financial institution customers are in a "negative" commission position, meaning we do not owe any commissions to our customers. While the majority of our contracts require that the financial institution customers pay us for the negative commission amount, we have opted at this time to impose certain per-item and other fees rather than require payment of the negative commission amount. We continue to monitor the negative commissions and may decide to require payment of negative commissions at a future date. Net investment margins of 0.61 percent and 0.81 percent for the three and nine months ended September 30, 2009, respectively, reflect the lower interest rate environment and lower average investable balances discussed above. The net investment margin for the nine months ended September 30, 2008 also reflects the impact of the loss on interest rate swaps, as discussed above.

Table 4 - Summary of Gains, Losses and Impairments

                                                     Three Months Ended                   Nine Months Ended
                                                       September 30,                        September 30,
(Amounts in thousands)                            2009              2008               2009               2008

Gross realized gains                            $     -          $       -          $      -          $   34,200
Gross realized losses                                 -                  -                (2 )          (290,498 )
Other-than-temporary impairments                   (757 )           (8,327 )          (3,686 )           (62,725 )

Net securities losses from
available-for-sale investments                     (757 )           (8,327 )          (3,688 )          (319,023 )

Unrealized losses from trading
investments                                           -             (4,926 )               -             (31,821 )
Valuation gain from put options related
to trading investments                            1,100                  -             3,158                   -
Gain on call related to trading
securities                                        2,395                  -             7,557                   -

Net securities gains (losses)                   $ 2,738          $ (13,253 )        $  7,027          $ (350,844 )

Net securities gains for the three and nine months ended September 30, 2009 reflect a $2.4 million and $7.6 million gain, net of the reversal of the related put options, from the call of two trading investments in June and July 2009. The fair value of the remaining trading investment did not change during 2009. The Company recorded a valuation gain on the related put option of $1.1 million and $3.2 million in the three and nine months ended September 30, 2009, respectively, which reflects the passage of time. Other-than-temporary impairments on our other asset-backed securities were $0.8 million and $3.7 million for the three and nine months ended September 30, 2009, respectively. See Note 5 - Investment Portfolio of the Notes to Consolidated Financial Statements for further discussion.
During the first quarter of 2008, we completed the realignment of our investment portfolio, resulting in the sale of securities with a fair value of $3.2 billion (after other-than-temporary impairment charges) at December 31, 2007 for proceeds of $2.9 billion and a net realized loss of $256.3 million. This net realized loss was the result of further deterioration in the markets during the first quarter of 2008 and the short timeframe over which securities were sold. Proceeds from the sales were reinvested in cash and cash equivalents. During the three and nine months ended September 30, 2008, we recognized other-than-temporary impairment charges of $8.3 million and $62.7 million, respectively, on our available-for-sale securities and unrealized losses of $4.9 million and $31.8 million, respectively, on our trading investments as the result of further deterioration in the market and the accumulation of ratings downgrades.
Expenses
Compensation and benefits - Compensation and benefits includes salaries and benefits, management incentive programs and other employee related costs. Compensation and benefits increased $5.4 million, or 10 percent, for the three months ended September 30, 2009 and decreased $15.7 million for the nine months ended September 30, 2009. The three and nine months ended September 30, 2009 include $3.5 million and $4.6 million, respectively, of executive severance and related costs, while the nine months ended September 30, 2008 included $16.5 million of executive severance and related costs. Stock-based compensation increased $4.2 million and $4.6 million for the three and nine months ended September 30, 2009, respectively, from the issuance of stock options, partially offset by lower expense from historical grants that vested in the first quarter of 2009 and forfeitures. Compensation and benefits decreased $2.6 million and $7.7 million for the three and nine months ended September 30, 2009, respectively, from accruing annual incentives at a lower tier and the suspension of the discretionary profit sharing plan. The decline in the Euro exchange rate, which is reflected in each of the amounts discussed above, decreased compensation and benefits expense by approximately $0.6 million and $3.4 million for the three and nine months ended September 30, 2009, respectively. Transaction and operations support - Transaction and operations support expenses include marketing costs, professional fees and other outside service costs, telecommunications and forms expense related to our products and provisions for agent receivables. Transaction and operations support costs increased $34.0 million and $46.3 million for the three and nine months ended September 30, 2009, respectively, as compared to 2008. We recorded a $16.5 million accrual for a patent lawsuit during the third quarter of 2009, as well as accruals of $6.0 million and $18.0 million during the three and nine months ended September 30, 2009, respectively, related to a settlement with the Federal Trade Commission ("FTC"). In connection with a decision in the third quarter of 2009 to sell our airplane, we recorded a $7.0 million impairment charge during the third quarter of 2009. In addition, the Company recorded $1.4 million and $5.3 million of goodwill and asset impairments during the three and nine months ended September 30, 2009, respectively, related to the decision to discontinue the offering of certain bill payment products and the sale of a non-core business. The discontinued bill payment products have been replaced with new product offerings in the Global Funds Transfer segment. Our provision for agent receivables increased by $1.2 million and $10.9 million for the three and nine months ended September 30, 2009, respectively, primarily from the closure of an international agent during the second quarter of 2009. Professional fees increased $7.1 million and $11.3 million for the three and nine months ended September 30, 2009, respectively, primarily due to litigation fees and the implementation of the European Union Payment Services Directive.

Partially offsetting these increases are reductions of $3.1 million and $12.3 million in marketing costs during the three and nine months ended September 30, 2009, respectively, due to controlled spending and the timing of marketing initiatives. In addition, the nine months ended September 30, 2008 included $9.5 million of costs relating to the recapitalization and the restructuring of the official check business. Foreign exchange rate movements on our foreign denominated assets and liabilities, net of hedging activities, decreased expenses by $2.5 million during the three months ended September 30, 2009 and increased expenses by $1.7 million during the nine months ended September 30, 2009. The decline in the Euro exchange rate, which is reflected in each of the amounts discussed above, decreased transaction and operations support by approximately $0.3 million and $4.5 million for the three and nine months ended September 30, 2009, respectively.
Occupancy, equipment and supplies - Occupancy, equipment and supplies includes facilities rent and maintenance costs, software and equipment maintenance costs, freight and delivery costs and supplies. Occupancy, equipment and supplies expense increased $1.2 million and $0.8 million for the three and nine months ended September 30, 2009, respectively, as compared to 2008 to support the growth of the business, partially offset by controlled spending and the timing of the roll-out of new agents and locations. The decline in the Euro exchange rate, which is reflected in each of the amounts discussed above, decreased occupancy, equipment and supplies by approximately $0.1 million and $0.8 million for the three and nine months ended September 30, 2009, respectively. Interest expense - As the result of $100.0 million of debt repayment in 2009, interest expense decreased by $1.7 million during the three months ended September 30, 2009 as compared to 2008. Interest expense for the nine months ended September 30, 2009 increased $13.2 million from 2008 due to the higher outstanding debt and higher interest rates resulting from the recapitalization. Interest expense for the nine months ended September 30, 2008 included a $2.2 million net loss due to the termination of interest rate swaps related to the official check business. See Note 6 - Derivative Financial Instruments of the Notes to Consolidated Financial Statements for further information regarding the interest rate swaps.
Depreciation and amortization - Depreciation and amortization relates to our point of sale equipment, agent signage, computer hardware, purchased software, capitalized software development costs, office furniture and equipment, leasehold improvements and intangible assets. Depreciation and amortization expense increased $0.6 million and $1.4 million for the three and nine months ended September 30, 2009, respectively, as compared to 2008, primarily from capital investments in point of sale equipment, purchased software and other fixed assets to support the growth of the business. The decline in the Euro exchange rate, which is reflected in each of the amounts discussed above, decreased depreciation and amortization by approximately $0.2 million and $1.1 million for the three and nine months ended September 30, 2009, respectively.
Income taxes - For the three months ended September 30, 2009, the Company had $0.4 million of tax benefit on a pre-tax loss of $18.7 million, resulting in an effective income tax rate of 2.1 percent. For the nine months ended September 30, 2009, the Company had $0.1 million of tax benefit on a pre-tax loss of $9.9 million, resulting in an effective income tax rate of 1.1 percent. The effective income tax rate for the three and nine months ended September 30, 2009 reflects income tax on foreign income, the reversal of tax benefits upon forfeiture of share-based awards and discrete tax benefits of $2.8 million and $3.2 million, respectively. The Company is continuing to evaluate additional available tax positions related to the net securities losses, which may result in future tax benefits. The Company received a federal income tax refund of $43.5 million during the nine months ended September 30, 2009 and paid $0.2 million of federal and state income taxes in both the three and nine months ended September 30, 2009.
For the three and nine months ended September 30, 2008, the Company had a negative effective income tax rate of 0.2 percent and 7.3 percent, respectively. The effective income tax rate for the three and nine months ended September 30, 2008 reflects non-taxable unrealized losses of $47.2 million and $16.0 million from embedded derivatives, respectively. Additionally, the effective income tax rate for the nine months ended September 30, 2008 reflects $6.1 million of . . .