|
| | | | | | | | | | | | | | |
| Three months ended September 30, | | Nine months ended September 30, | | Additional information |
| 2017 | | 2016 | | 2017 | | 2016 | | |
Net interest income | $ | 147 |
| | 37 |
| | 361 |
| | 80 |
| |
|
Loan systems and servicing revenue | 55,950 |
| | 54,350 |
| | 167,079 |
| | 161,082 |
| | See table below for additional analysis. |
Intersegment servicing revenue | 10,563 |
| | 11,021 |
| | 30,839 |
| | 34,436 |
| | Represents revenue earned by the LSS operating segment as a result of servicing loans for the AGM operating segment. Decrease was due to a decrease in loans serviced for the AGM segment during the comparable periods due to portfolio run-off. In August 2017, the AGM operating segment converted $3.1 billion of loans from a third-party servicer to the LSS operating segment's servicing platform. |
Total other income | 66,513 |
| | 65,371 |
| | 197,918 |
| | 195,518 |
| |
|
Salaries and benefits | 38,435 |
| | 32,505 |
| | 116,932 |
| | 96,851 |
| | Increase due to contract programming related to GreatNet and an increase in personnel to support the increase in volume of loans serviced for the government entering repayment status and the increase in private education and consumer loan servicing volume. |
Depreciation and amortization | 549 |
| | 557 |
| | 1,644 |
| | 1,440 |
| |
|
Other expenses | 10,317 |
| | 8,784 |
| | 28,333 |
| | 31,635 |
| | Increase in the three months ended September 30, 2017 compared to the same period in 2016 due to increase in operating expenses related to GreatNet. Decrease in the nine months ended September 30, 2017 compared to the same period in 2016 due primarily to the elimination of FFELP guaranty collection costs directly related to the loss of FFELP guaranty collection revenue. There were no collection costs for the three and nine months ended September 30, 2017 and three months ended September 30, 2016, and $3.5 million for the nine months ended September 30, 2016. Excluding collection costs, other expenses were $28.1 million for the nine months ended September 30, 2016. See additional information below regarding the loss of FFELP guaranty collection revenue. |
Intersegment expenses, net | 7,774 |
| | 5,825 |
| | 23,496 |
| | 18,168 |
| | Intersegment expenses represent costs for certain corporate activities and services that are allocated to each operating segment based on estimated use of such activities and services. |
Total operating expenses | 57,075 |
| | 47,671 |
| | 170,405 |
| | 148,094 |
| |
|
Income before income taxes | 9,585 |
| | 17,737 |
| | 27,874 |
| | 47,504 |
| |
|
Income tax expense | (4,937 | ) | | (6,740 | ) | | (14,410 | ) | | (18,052 | ) | | Reflects income tax expense based on 38% of income before taxes and the net loss attributable to noncontrolling interest. |
Net income | 4,648 |
| | 10,997 |
| | 13,464 |
| | 29,452 |
| |
|
Net loss attributable to noncontrolling interest | 3,408 |
| | — |
| | 10,050 |
| | — |
| | Represents the net loss of GreatNet attributable to Great Lakes. See "Noncontrolling Interest" in note 1 of the notes to consolidated financial statements included under Part I, Item 1 of this report. |
Net income attributable to Nelnet, Inc. | $ | 8,056 |
| | 10,997 |
| | 23,514 |
| | 29,452 |
| | |
Before tax operating margin | 14.4 | % | | 27.1 | % | | 14.1 | % | | 24.3 | % | | Decrease in margin due to increases in salaries and benefits and other operating expenses as described above (including costs incurred related to GreatNet) and the loss of the guaranty business which had higher margin than the remaining businesses. Before tax operating margin, excluding the net loss attributable to noncontrolling interest (Great Lakes) for the three and nine months ended September 30, 2017 was 18.5% and 18.2%, respectively. |
Loan systemsservicing and servicingsystems revenue
| | | | | | | | | | | | | | | | | | | | | |
| Three months ended March 31, | | | | |
| 2021 | | 2020 | | | | | | Additional information |
Government servicing - Nelnet | $ | 34,872 | | | 38,650 | | | | | | | Represents revenue from Nelnet Servicing's Department servicing contract. Decrease in 2021 compared to 2020 was due to a decrease in revenue from the administration of the Total and Permanent Disability (TPD) Discharge program, decrease in fees earned from the Department for originating consolidation loans, and decrease in revenue earned per borrower as a result of certain provisions included in the CARES Act. |
Government servicing - Great Lakes | 43,302 | | | 46,446 | | | | | | | Represents revenue from Great Lakes' Department servicing contract. Decrease in 2021 compared to 2020 was due to a decrease in fees earned from the Department for originating consolidation loans and decrease in revenue earned per borrower as a result of certain provisions included in the CARES Act. |
Private education and consumer loan servicing | 8,548 | | | 8,609 | | | | | | | Decrease in 2021 compared to 2020 was due to a decrease in the number of legacy borrowers serviced, a decrease in origination fees, and the impact of borrower relief policies implemented by private lenders in response to the COVID-19 pandemic. The decrease was partially offset by an increase in borrowers as a result of the Wells Fargo private education loan conversion activity in March 2021. The private education loans converted in 2021 reflect revenue from the conversation date, and thus does not reflect a full quarter of revenue. See "Private Education Loan Servicing" included above under "Loan Servicing and Systems Operating Segment - Results of Operations." |
FFELP servicing | 4,670 | | | 5,614 | | | | | | | Decrease in 2021 compared to 2020 was due to a decrease in the number of borrowers serviced and the impact of borrower relief policies implemented by lenders in response to the COVID-19 pandemic. Over time, FFELP servicing revenue will continue to decrease as third-party customers' FFELP portfolios pay off. |
Software services | 8,454 | | | 11,318 | | | | | | | The decrease in revenue in 2021 as compared to 2020 was due to many of the services provided under the Company's remote hosted servicing and system support contract with Great Lakes' former parent, representing 2.3 million borrowers, decreasing and/or expiring in January 2021. This decrease in revenue was partially offset by an increase in the number of remote hosted servicing borrowers in 2021 as compared to 2020. |
Outsourced services | 11,671 | | | 2,098 | | | | | | | The majority of this revenue relates to providing contact center and back office operational outsourcing activities. Increase in 2021 compared to 2020 was due to shorter-term contracts with state agencies to process unemployment claims and conduct certain health tracing support activities (including vaccination registration support). Revenue from providing these services to state agencies was $9.7 million during the three months ended March 31, 2021. |
Loan servicing and systems revenue | $ | 111,517 | | | 112,735 | | | | | | | |
|
| | | | | | | | | | | | | | |
| Three months ended September 30, | | Nine months ended September 30, | | Additional information |
| 2017 | | 2016 | | 2017 | | 2016 | | |
Government servicing | $ | 38,594 |
| | 40,159 |
| | 117,409 |
| | 112,453 |
| | Increase for the nine months ended September 30, 2017 compared to the same period in 2016 due to an increase in application volume for the Company's administration of the Total and Permanent Disability Discharge (TPD) and Direct Loan Consolidation programs, the transfer of borrowers from a not-for-profit servicer who exited the loan servicing business in August 2016, and the shift in the portfolio of loans serviced to a greater portion of loans in higher paying repayment statuses. Decrease for the three months ended September 30, 2017 compared to the same period in 2016 due to lower TPD application volume. On August 15, 2017, the Department provided an update on its Direct Loan servicing contract with performance metrics results for the period January 1, 2017 through June 30, 2017 and new volume allocations for its student loan servicers based on these results. The new performance results had the Company ranked fourth among all TIVAS and NFP servicers, which resulted in the Company being allocated 11 percent of new student loan servicing volume for the period September 1, 2017 through February 28, 2018. The Company ranked second among the four large TIVAS, with Great Lakes ranking first. |
FFELP servicing | 3,979 |
| | 4,541 |
| | 11,693 |
| | 11,864 |
| | Decrease due to conversion revenue recognized during the third quarter of 2016. Over time, FFELP servicing revenue will decrease as third-party customers' FFELP portfolios run off. |
Private education and consumer loan servicing | 7,596 |
| | 4,142 |
| | 20,535 |
| | 10,715 |
| | Increase due to growth in loan servicing volume from existing and new clients. |
FFELP guaranty servicing | — |
| | — |
| | — |
| | 2,349 |
| | The Company’s remaining guaranty servicing client exited the FFELP guaranty business at the end of their contract term on June 30, 2016, and after this date the Company has no remaining guaranty servicing revenue. |
FFELP guaranty collection | — |
| | — |
| | — |
| | 7,211 |
| | The Company’s remaining guaranty collection client exited the FFELP guaranty business at the end of their contract term on June 30, 2016, and after this date the Company has no remaining guaranty collection revenue. The Company incurred collection costs that were directly related to guaranty collection revenue. |
Software services | 4,430 |
| | 4,491 |
| | 13,093 |
| | 13,753 |
| | The majority of software services revenue relates to providing hosted student loan servicing. The decrease in 2017 as compared to 2016 was due to (i) a not-for-profit servicer exiting the loan servicing business in August 2016, resulting in a transfer of its servicing volume to the Company that is included in the Company's government servicing volume; (ii) a shift in the composition of loans serviced by remote hosted customers from borrowers in higher paying repayment status to in-school status; and (iii) a decrease in revenue from other software service products. These decreases were partially offset by an increase in the number of remote hosted borrowers. |
Other | 1,351 |
| | 1,017 |
| | 4,349 |
| | 2,737 |
| | Increase due to growth in contact center outsourcing activities. |
Loan systems and servicing revenue | $ | 55,950 |
| | 54,350 |
| | 167,079 |
| | 161,082 |
| | |
TUITIONEDUCATION TECHNOLOGY, SERVICES, AND PAYMENT PROCESSING AND CAMPUS COMMERCE OPERATING SEGMENT – RESULTS OF OPERATIONS
ThisAs discussed further in the Company's 2020 Annual Report, this segment of the Company’s business is subject to seasonal fluctuations which correspond, or are related to, the traditional school year. Tuition management revenue is recognized over the course of the academic term, but the peak operational activities take place in summer and early fall. Higher amounts of revenue are typically recognized during the first quarter due to fees related to grant and aid applications as well as online applications and enrollment services. The Company’s operating expenses do not follow the seasonality of the revenues. This is primarily due to generally fixed year-round personnel costs and seasonal marketing costs. Based on the timing of revenue recognition and when expenses are incurred, revenue and pre-tax operating margin are higher in the first quarter as compared to the remainder of the year.
On December 31, 2020, the Company acquired HigherSchool Instructional Services, a services company that provides supplemental instructional services and educational professional development for K-12 schools in New York City, and CD2 LLC, a platform technology solution that includes learning management, collaboration/workflow, gamification, customer management/document storage, and employee boarding. The results of HigherSchool Instructional Services and CD2 LLC are reported in the Company’s consolidated financial statements from the date of acquisition. Revenue recognized by these acquisitions during the three months ended March 31, 2021 was $8.0 million.
Summary and Comparison of Operating Results
| | | | | | | | | | | | | | | | | | | | | |
| Three months ended March 31, | | | | |
| 2021 | | 2020 | | | | | | Additional information |
Net interest income | $ | 263 | | | 1,974 | | | | | | | Represents interest income on tuition funds held in custody for schools. Decrease was due to a decrease in interest rates in 2021 as compared with 2020. If interest rates remain at current levels, the Company anticipates this segment will earn minimal interest income in future periods. |
Education technology, services, and payment processing revenue | 95,258 | | | 83,675 | | | | | | | See table below for additional information. |
Intersegment revenue | 3 | | | 11 | | | | | | | |
| | | | | | | | | |
Total other income | 95,261 | | | 83,686 | | | | | | | |
Cost to provide education technology, services, and payment processing services | 27,052 | | | 22,806 | | | | | | | See table below for additional information. |
Salaries and benefits | 25,941 | | | 23,696 | | | | | | | Increase in 2021 compared to 2020 was due to an increase in headcount to support the growth of the customer base, the investment in the development of new technologies, and the acquisitions of HigherSchool Instructional Services and CD2 LLC. |
Depreciation and amortization | 3,071 | | | 2,387 | | | | | | | Represents primarily amortization of intangible assets from prior business acquisitions. Amortization of intangible assets related to business acquisitions was $2.9 million and $2.2 million for the three months ended March 31, 2021 and 2020, respectively. |
| | | | | | | | | |
Other expenses | 4,822 | | | 6,092 | | | | | | | Decrease in 2021 compared to 2020 was due to a reduction of travel expenses due to COVID-19. In addition, during the three months ended March 31, 2020, the Company recognized an additional expense to increase the allowance for doubtful accounts for the increased risk of uncollectible balances due to uncertain economic conditions resulting from the COVID-19 pandemic. |
Intersegment expenses, net | 3,664 | | | 3,327 | | | | | | | Intersegment expenses represent costs for certain corporate activities and services that are allocated to each operating segment based on estimated use of such activities and services. |
Total operating expenses | 37,498 | | | 35,502 | | | | | | | |
Income before income taxes | 30,974 | | | 27,352 | | | | | | | |
Income tax expense | (7,434) | | | (6,565) | | | | | | | Represents income tax expense at an effective tax rate of 24%. |
Net income | $ | 23,540 | | | 20,787 | | | | | | | |
|
| | | | | | | | | | | | | | |
| Three months ended September 30, | | Nine months ended September 30, | | Additional information |
| 2017 | | 2016 | | 2017 | | 2016 | | |
Net interest income | $ | 5 |
| | 2 |
| | 10 |
| | 7 |
| | |
Tuition payment processing, school information, and campus commerce revenue | 35,450 |
| | 33,071 |
| | 113,293 |
| | 102,211 |
| | Increase was due to an increase in the number of managed tuition payment plans, campus commerce customer transactions and payments volume, and new school customers. |
Salaries and benefits | 17,432 |
| | 15,979 |
| | 50,986 |
| | 45,859 |
| | Increase due to additional personnel to support the increase in payment plans and campus commerce activity and continued investments in and enhancements of payment plan and campus commerce systems and products. |
Depreciation and amortization | 2,316 |
| | 2,929 |
| | 7,053 |
| | 7,711 |
| | |
Other expenses | 4,224 |
| | 4,149 |
| | 14,072 |
| | 13,122 |
| | Increase due to additional costs to support the increase in payment plans and campus commerce activity and continued investments in and enhancements of payment plan and campus commerce systems and products. |
Intersegment expenses, net | 2,219 |
| | 1,616 |
| | 6,430 |
| | 4,690 |
| | Intersegment expenses represent costs for certain corporate activities and services that are allocated to each operating segment based on estimated use of such activities and services. |
Total operating expenses | 26,191 |
| | 24,673 |
| | 78,541 |
| | 71,382 |
| | |
Income before income taxes | 9,264 |
| | 8,400 |
| | 34,762 |
| | 30,836 |
| | |
Income tax expense | (3,520 | ) | | (3,192 | ) | | (13,210 | ) | | (11,718 | ) | | |
Net income | $ | 5,744 |
| | 5,208 |
| | 21,552 |
| | 19,118 |
| | |
Before tax operating margin | 26.1 | % | | 25.4 | % | | 30.7 | % | | 30.2 | % | | |
Education technology, services, and payment processing revenue
The following table provides disaggregated revenue by service offering and before tax operating margin for each reporting period.
| | | | | | | | | | | | | | | | | | | | | |
| Three months ended March 31, | | | | |
| 2021 | | 2020 | | | | | | Additional information |
Tuition payment plan services | $ | 29,550 | | 31,587 | | | | | | Revenue recognized during the first three months of 2021 was primarily related to payment plans for the 2020-2021 academic year for K-12 schools and the spring 2021 semester for institutions of higher education. Revenues from tuition payment plans for these terms were impacted by COVID-19 resulting in lower volumes of plans compared to historical periods. |
Payment processing | 33,038 | | 31,742 | | | | | | Payment volumes in the first quarter of 2021 increased as compared to 2020 in both the K-12 and higher education markets. The increase in volumes in the higher education market was driven primarily by growth in volumes from existing customers. |
Education technology and services | 32,322 | | 20,054 | | | | | | Increase in 2021 compared to 2020 was primarily the result of the 2020 acquisitions. Additionally, revenues from the Company’s application and enrollment products, grant and aid assessments, and FACTS Education instructional and professional development services increased compared to the prior year. |
Other | 348 | | 292 | | | | | | |
Education technology, services, and payment processing revenue | 95,258 | | 83,675 | | | | | | |
Cost to provide education technology, services, and payment processing services | 27,052 | | 22,806 | | | | | | Costs primarily relate to payment processing revenue and such costs decrease/increase in relationship to payment revenue. Costs to provide instructional services are also included as a component of this expense and were the primary driver in the increase in 2021 compared to 2020 due to the acquisition of HigherSchool Instructional Services and growth in the FACTS Education Solutions division. |
Net revenue | $ | 68,206 | | 60,869 | | | | | | |
| | | | | | | | | |
Before tax operating margin | 45.4 | % | | 44.9 | % | | | | | | Before tax operating margin is a measure of before tax operating profitability as a percentage of revenue, and for the ETS&PP segment is calculated as income before income taxes divided by net revenue. The Company uses this metric to monitor and assess the segment’s performance, manage operating costs, identify and evaluate business trends affecting the segment, and make strategic decisions, and believes that it facilitates an understanding of the operating performance of the segment and provides a meaningful comparison of the results of operations between periods. |
COMMUNICATIONS OPERATING SEGMENT – RESULTS OF OPERATIONS
Proposed Community College Legislation
Summary and ComparisonOn April 28, 2021, President Biden announced the American Families Plan, which includes a proposal for Congress to approve funding to allow students to enroll in community college at no tuition cost. If such proposal were to become effective, this segment's revenue earned from community colleges would be adversely impacted. Community colleges represented approximately 10% of Operating Resultstotal segment revenues (and net revenue) for the year ended December 31, 2020.
|
| | | | | | | | | | | | | | |
| Three months ended September 30, | | Nine months ended September 30, | | Additional information |
| 2017 | | 2016 | | 2017 | | 2016 | | |
Net interest income (expense) | $ | (1,550 | ) | | (318 | ) | | (3,365 | ) | | (670 | ) | | Allo has a line of credit with Nelnet, Inc. (parent company). The interest expense incurred by Allo and related interest income earned by Nelnet, Inc. is eliminated for the Company's consolidated financial statements. The average outstanding balance on this line of credit for the three months ended September 30, 2017 and 2016 was $131.4 million and $35.7 million, respectively, and $98.3 million and $24.6 million for the nine months ended September 30, 2017 and 2016, respectively. The proceeds from debt were used by Allo for network capital expenditures and related expenses. |
Communications revenue | 6,751 |
| | 4,343 |
| | 17,577 |
| | 13,167 |
| | Communications revenue is derived primarily from the sale of pure fiber optic services to residential and business customers in Nebraska, including internet, television, and telephone services. Increase was primarily due to additional residential households served. See additional financial and operating data for Allo in the tables below. |
Salaries and benefits | 4,099 |
| | 2,325 |
| | 10,489 |
| | 4,792 |
| | Since the acquisition of Allo on December 31, 2015, there has been a significant increase in personnel to support the Lincoln, Nebraska network expansion. As of December 31, 2015, September 30, 2016, December 31, 2016, and September 30, 2017, Allo had 97, 279, 318, and 464 employees, respectively, including part-time employees. Allo also uses temporary employees in the normal course of business. Certain costs qualify for capitalization as Allo builds its network. |
Depreciation and amortization | 3,145 |
| | 1,630 |
| | 7,880 |
| | 4,137 |
| | Depreciation reflects the allocation of the costs of Allo's property and equipment over the period in which such assets are used. Since the acquisition of Allo on December 31, 2015, there has been a significant amount of property and equipment purchases to support the Lincoln, Nebraska network expansion. Amortization reflects the allocation of costs related to intangible assets recorded at fair value as of the date the Company acquired Allo over their estimated useful lives. |
Cost to provide communications services | 2,632 |
| | 1,784 |
| | 6,789 |
| | 5,169 |
| | Cost of services and products primarily associated with television programming costs. |
Other expenses | 2,278 |
| | 1,545 |
| | 5,422 |
| | 3,110 |
| | Other operating expenses includes selling, general, and administrative expenses necessary for operations, such as advertising, occupancy, professional services, construction materials, personal property taxes, and provision for losses on accounts receivable. Increase was due to expansion of the Lincoln, Nebraska network and number of households served. |
Intersegment expenses, net | 470 |
| | 279 |
| | 1,472 |
| | 610 |
| | Intersegment expenses represent costs for certain corporate activities and services that are allocated to each operating segment based on estimated use of such activities and services. |
Total operating expenses | 12,624 |
| | 7,563 |
| | 32,052 |
| | 17,818 |
| | |
Loss before income taxes | (7,423 | ) | | (3,538 | ) | | (17,840 | ) | | (5,321 | ) | | |
Income tax benefit | 2,821 |
| | 1,344 |
| | 6,779 |
| | 2,022 |
| | |
Net loss | $ | (4,602 | ) | | (2,194 | ) | | (11,061 | ) | | (3,299 | ) | | The Company anticipates this operating segment will be dilutive to consolidated earnings over the next several years as it continues to build its network in Lincoln, Nebraska, due to large upfront capital expenditures and associated depreciation and upfront customer acquisition costs.
|
| | | | | | | | | |
Additional Information: | | | | | | | | | |
Net loss | $ | (4,602 | ) | | (2,194 | ) | | (11,061 | ) | | (3,299 | ) | | |
Net interest expense | 1,550 |
| | 318 |
| | 3,365 |
| | 670 |
| | |
Income tax benefit | (2,821 | ) | | (1,344 | ) | | (6,779 | ) | | (2,022 | ) | | |
Depreciation and amortization | 3,145 |
| | 1,630 |
| | 7,880 |
| | 4,137 |
| | |
Earnings (loss) before interest, income taxes, depreciation, and amortization (EBITDA) | $ | (2,728 | ) | | (1,590 | ) | | (6,595 | ) | | (514 | ) | | For additional information regarding this non-GAAP measure, see the table below. |
Certain financial and operating data for Allo is summarized in the tables below.
|
| | | | | | | | | | | | |
| Three months ended September 30, | | Nine months ended September 30, |
| 2017 | | 2016 | | 2017 | | 2016 |
Residential revenue | $ | 4,691 |
| | 2,643 |
| | 11,862 |
| | 7,695 |
|
Business revenue | 2,003 |
| | 1,565 |
| | 5,514 |
| | 4,777 |
|
Other revenue | 57 |
| | 135 |
| | 201 |
| | 695 |
|
Total revenue | $ | 6,751 |
| | 4,343 |
| | 17,577 |
| | 13,167 |
|
| | | | | | | |
Net loss | $ | (4,602 | ) | | (2,194 | ) | | (11,061 | ) | | (3,299 | ) |
EBITDA (a) | (2,728 | ) | | (1,590 | ) | | (6,595 | ) | | (514 | ) |
| | | | | | | |
Capital expenditures | 29,417 |
| | 12,610 |
| | 78,430 |
| | 24,647 |
|
| | | | | | | |
Revenue contribution: | | | | | | | |
Internet | 46.7 | % | | 40.5 | % | | 44.6 | % | | 38.5 | % |
Television | 30.8 |
| | 32.5 |
| | 30.7 |
| | 32.2 |
|
Telephone | 20.6 |
| | 27.2 |
| | 22.5 |
| | 27.1 |
|
Other | 1.9 |
| | (0.2 | ) | | 2.2 |
| | 2.2 |
|
| 100.0 | % | | 100.0 | % | | 100.0 | % | | 100.0 | % |
|
| | | | | | | | | | | | | | | | | | | | | | | |
| As of September 30, 2017 | | As of June 30, 2017 | | As of March 31, 2017 | | As of December 31, 2016 | | As of September 30, 2016 | | As of June 30, 2016 | | As of March 31, 2016 | | As of December 31, 2015 |
Residential customer information: | | | | | | | | | | | | | | | |
Households served | 16,394 |
| | 12,460 |
| | 10,524 |
| | 9,814 |
| | 8,745 |
| | 8,314 |
| | 7,909 |
| | 7,600 |
|
Households passed (b) | 54,815 |
| | 45,880 |
| | 34,925 |
| | 30,962 |
| | 22,977 |
| | 22,977 |
| | 21,274 |
| | 21,274 |
|
Total households in current markets (c) | 137,500 |
| | 137,500 |
| | 137,500 |
| | 137,500 |
| | 137,500 |
| | 137,500 |
| | 137,500 |
| | 28,874 |
|
| |
(a) | Earnings (loss) before interest, income taxes, depreciation, and amortization ("EBITDA") is a supplemental non-GAAP performance measure that is frequently used in capital-intensive industries such as telecommunications. Allo's management uses EBITDA to compare Allo's performance to that of its competitors and to eliminate certain non-cash and non-operating items in order to consistently measure performance from period to period. EBITDA excludes interest and income taxes because these items are associated with a company's particular capitalization and tax structures. EBITDA also excludes depreciation and amortization expense because these non-cash expenses primarily reflect the impact of historical capital investments, as opposed to the cash impacts of capital expenditures made in recent periods, which may be evaluated through cash flow measures. The Company reports EBITDA for Allo because the Company believes that it provides useful additional information for investors regarding a key metric used by management to assess Allo's performance. There are limitations to using EBITDA as a performance measure, including the difficulty associated with comparing companies that use similar performance measures whose calculations may differ from Allo's calculations. In addition, EBITDA should not be considered a substitute for other measures of financial performance, such as net income or any other performance measures derived in accordance with GAAP. A reconciliation of EBITDA from net income (loss) under GAAP is presented under "Summary and Comparison of Operating Results" in the table above.
|
| |
(b) | Represents the number of single residence homes, apartments, and condominiums that Allo already serves and those in which Allo has the capacity to connect to its network distribution system without further material extensions to the transmission lines, but have not been connected. |
| |
(c) | During the first quarter of 2016, Allo announced plans to expand its network to make services available to substantially all commercial and residential premises in Lincoln, Nebraska, and currently plans to expand to additional communities in Nebraska and surrounding states over the next several years. |
ASSET GENERATION AND MANAGEMENT OPERATING SEGMENT – RESULTS OF OPERATIONS
Student Loan Portfolio
As of September 30, 2017,March 31, 2021, the CompanyAGM operating segment had a $22.5$19.0 billion student loan portfolio, consisting primarily of federally insured loans, that management anticipates will amortize over the next approximately 2520 years and has a weighted average remaining life of 9.5 years. For a summary of the Company’s student loan portfolio as of September 30, 2017March 31, 2021 and December 31, 2016,2020, see note 2 of the notes to consolidated financial statements included under Part I, Item 1 of this report.
Loan Activity
The following table sets forth the activity of loans:
| | | | | | | | | | | | | | | |
| Three months ended March 31, | | |
| 2021 | | 2020 | | | | |
Beginning balance | $ | 19,559,108 | | | 20,798,719 | | | | | |
Loan acquisitions: | | | | | | | |
Federally insured student loans | 64,731 | | | 349,061 | | | | | |
Private education loans | 23,038 | | | 47,605 | | | | | |
Consumer loans | 19,456 | | | 62,831 | | | | | |
Total loan acquisitions | 107,225 | | | 459,497 | | | | | |
Repayments, claims, capitalized interest, and other | (406,565) | | | (312,579) | | | | | |
Consolidation loans lost to external parties | (229,545) | | | (216,327) | | | | | |
Consumer loans sold | — | | | (124,245) | | | | | |
| | | | | | | |
Ending balance | $ | 19,030,223 | | | 20,605,065 | | | | | |
|
| | | | | | | | | | | | |
| Three months ended September 30, | | Nine months ended September 30, |
| 2017 | | 2016 | | 2017 | | 2016 |
Beginning balance | $ | 23,390,300 |
| | 26,754,560 |
| | 25,103,643 |
| | 28,555,749 |
|
Loan acquisitions | 37,532 |
| | 52,667 |
| | 142,386 |
| | 238,595 |
|
Repayments, claims, capitalized interest, and other | (446,588 | ) | | (660,074 | ) | | (1,643,049 | ) | | (1,989,806 | ) |
Consolidation loans lost to external parties | (267,331 | ) | | (327,766 | ) | | (889,067 | ) | | (940,413 | ) |
Loans sold | — |
| | (22 | ) | | — |
| | (44,760 | ) |
Ending balance | $ | 22,713,913 |
| | 25,819,365 |
| | 22,713,913 |
| | 25,819,365 |
|
The Company has also purchased partial ownership in certain federally insured and consumer loan securitizations. As of the latest remittance reports filed by the various trusts prior to March 31, 2021, the Company’s ownership correlates to approximately $500 million and $230 million of federally insured and consumer loans, respectively, included in these securitizations.
The Company's federally insured student loan acquisitions include the purchase of rehabilitated loans purchased from guaranty agencies. After a guaranty agency rehabilitates a federally insured student loan, the agency sells the rehabilitated loan to a private lender, such as the Company. On March 30, 2021, the Department suspended collections on defaulted federally insured student loans held by guaranty agencies and reduced the interest rate on such loans to zero percent, effectively suspending interest payments. The collections pause and adjusted interest rate are both retroactive to March 13, 2020, when the President first declared a national emergency for the COVID-19 pandemic. The Company currently believes these relief efforts will negatively impact the amount of rehabilitated loans the Company will have the opportunity to purchase in future periods.
Allowance for Loan Losses and Loan Delinquencies
The Company maintains an allowance that management believes is appropriate to absorb losses, net of recoveries, inherent in the portfolio of student loans, which results in periodic expense provisions for loan losses. Delinquencies have the potential to adversely impact the Company’s earnings through increased servicing and collection costs and account charge-offs.
For a summary of the Company's activity in the allowance for loan losses for the three and nine months ended September 30, 2017March 31, 2021 and 2016,2020, and a summary of the Company's student loan status and delinquency amounts as of September 30, 2017, March 31, 2021, December 31, 2016,2020, and September 30, 2016,March 31, 2020, see note 2 of the notes to consolidated financial statements included under Part I, Item 1 of this report.
Provision for loan losses for federally insured loans was $7.0 million for the three months ended September 30, 2017. During the three months ended September 30, 2017, the Company determined an additional allowance was necessary related to a $1.6 billion (principal balance as of September 30, 2017) portfolio of federally insured loans that were purchased in 2014 and 2015, and recognized $5.0 million (pre-tax) in provision expense related to these loans.
Provision for loan losses for federally insured loans was also $7.0 million for the three months ended September 30, 2016. During the three months ended September 30, 2016, the Company determined an additional allowance was necessary related to a $1.2 billion (principal balance as of September 30, 2016) portfolio of federally insured rehabilitation loans that were purchased in 2012 and 2013, and recognized $5.0 million (pre-tax) in provision expense related to these loans.
For loans purchased where there is evidence of credit deterioration since the origination of the loan, the Company records a credit discount, separate from the allowance for loan losses, which is non-accretable to interest income. Remaining discounts and premiums for purchased loans are recognized in interest income over the remaining estimated lives of the loans. The Company continues to evaluate credit losses associated with purchased loans based on current information and changes in expectations to determine the need for any additional allowance for loan losses.
The Company recorded a negative provision for loan losses for its federally insured and consumer loan portfolios of $7.5 million and $11.4 million, respectively, for the three months ended March 31, 2021 due to management's estimate of certain continued improved economic conditions (including the improvement in certain macroeconomic variables (unemployment rates, gross domestic product, and consumer price index) used in the Company's loan loss models) as of March 31, 2021 in comparison to management's estimate of economic conditions used to determine the allowance for loan losses as of December 31, 2020. The Company recorded a $1.4 million provision expense on its private education loan losses forportfolio during the three and nine months ended September 30, 2017March 31, 2021 as a result of an increase of loans in forbearance, which was partially offset by management's estimate of certain continued improved economic conditions as of March 31, 2021 in comparison to management's estimate of economic conditions used to determine the allowance for loan losses as of December 31, 2020.
AGM's total allowance for loan losses of $156.7 million at March 31, 2021 represents reserves equal to 0.7% of AGM's federally insured loans (or 25.5% of the risk sharing component of the loans that is not covered by the federal guaranty), 6.6% of AGM's private education loans, and 2016 due to better than expected credit performance.12.8% of AGM's consumer loans.
Student Loan Spread Analysis
The following table analyzes the student loan spread on the Company’sAGM’s portfolio of student loans, which represents the spread between the yield earned on student loan assets and the costs of the liabilities and derivative instruments used to fund the assets. The spread amounts included in the following table are calculated by using the notional dollar values found in the table under the caption "Net interest income after provision for loan losses, net of settlements on derivatives" below, divided by the average balance of student loans or debt outstanding.
| | | | | | | | | | | | | | | |
| Three months ended March 31, | | |
| 2021 | | 2020 | | | | |
Variable loan yield, gross | 2.71 | % | | 3.98 | % | | | | |
Consolidation rebate fees | (0.84) | | | (0.83) | | | | | |
Discount accretion, net of premium and deferred origination costs amortization | 0.00 | | | 0.01 | | | | | |
Variable loan yield, net | 1.87 | | | 3.16 | | | | | |
Loan cost of funds - interest expense (a) | (1.07) | | | (2.58) | | | | | |
Loan cost of funds - derivative settlements (b) (c) | (0.00 | ) | | 0.04 | | | | | |
Variable loan spread | 0.80 | | | 0.62 | | | | | |
Fixed rate floor income, gross | 0.74 | | | 0.36 | | | | | |
Fixed rate floor income - derivative settlements (b) (d) | (0.09) | | | 0.04 | | | | | |
Fixed rate floor income, net of settlements on derivatives | 0.65 | | | 0.40 | | | | | |
Core loan spread | 1.45 | % | | 1.02 | % | | | | |
| | | | | | | |
Average balance of AGM's loans | $ | 19,494,002 | | | 20,793,758 | | | | | |
Average balance of AGM's debt outstanding | 19,156,797 | | | 20,616,771 | | | | | |
|
| | | | | | | | | | | | |
| Three months ended September 30, | | Nine months ended September 30, |
| 2017 | | 2016 | | 2017 | | 2016 |
Variable student loan yield, gross | 3.62 | % | | 2.93 | % | | 3.44 | % | | 2.87 | % |
Consolidation rebate fees | (0.85 | ) | | (0.83 | ) | | (0.84 | ) | | (0.83 | ) |
Discount accretion, net of premium and deferred origination costs amortization (a) | 0.07 |
| | 0.06 |
| | 0.07 |
| | 0.06 |
|
Variable student loan yield, net | 2.84 |
| | 2.16 |
| | 2.67 |
| | 2.10 |
|
Student loan cost of funds - interest expense | (2.09 | ) | | (1.44 | ) | | (1.91 | ) | | (1.36 | ) |
Student loan cost of funds - derivative settlements (b) (c) | (0.07 | ) | | (0.01 | ) | | (0.04 | ) | | (0.01 | ) |
Variable student loan spread | 0.68 |
| | 0.71 |
| | 0.72 |
| | 0.73 |
|
Fixed rate floor income, gross | 0.42 |
| | 0.63 |
| | 0.47 |
| | 0.64 |
|
Fixed rate floor income - derivative settlements (b) (d) | 0.07 |
| | (0.08 | ) | | 0.03 |
| | (0.07 | ) |
Fixed rate floor income, net of settlements on derivatives | 0.49 |
| | 0.55 |
| | 0.50 |
| | 0.57 |
|
Core student loan spread | 1.17 | % | | 1.26 | % | | 1.22 | % | | 1.30 | % |
| | | | | | | |
Average balance of student loans | $ | 23,188,577 |
| | 26,368,507 |
| | 23,948,108 |
| | 27,305,128 |
|
Average balance of debt outstanding | 22,892,789 |
| | 26,235,053 |
| | 23,687,067 |
| | 27,188,069 |
|
(a) In the first quarter of 2021, the Company reversed a historical accrued interest liability of $23.8 million on certain bonds, which liability the Company determined is no longer probable of being required to be paid. The liability was initially recorded when certain asset-backed securitizations were acquired in 2011 and 2013. The reduction of this liability is reflected in (a reduction of) "interest on bonds and notes payable and bank deposits" in the consolidated statements of operations and the impact of this reduction to interest expense was excluded in the table above.
| |
(a) | In the third quarter of 2016, the Company revised its policy to correct for an error in its method of applying the interest method used to amortize premiums and accrete discounts on its student loan portfolio. Under the Company's revised policy, as of September 30, 2016, the constant prepayment rate used by the Company to amortize/accrete student loan premiums/discounts was decreased. During the third quarter of 2016, the Company recorded an adjustment to reflect the net impact on prior periods for the correction of this error that resulted in an $8.2 million reduction to the Company's net loan discount balance and a corresponding increase in interest income. The impact of this adjustment was excluded from the above table. |
| |
(b) | Derivative settlements represent the cash paid or received during the current period to settle with derivative instrument counterparties the economic effect of the Company's derivative instruments based on their contractual terms. Derivative accounting requires that net settlements with respect to derivatives that do not qualify for "hedge treatment" under GAAP be recorded in a separate income statement line item below net interest income. The Company maintains an overall risk management strategy that incorporates the use of derivative instruments to reduce the economic effect of interest rate volatility. As such, management believes derivative settlements for each applicable period should be evaluated with the Company’s net interest income (student loan(b) Derivative settlements represent the cash paid or received during the current period to settle with derivative instrument counterparties the economic effect of the Company's derivative instruments based on their contractual terms. Derivative accounting requires that net settlements with respect to derivatives that do not qualify for "hedge treatment" under GAAP be recorded in a separate income statement line item below net interest income. The Company maintains an overall risk management strategy that incorporates the use of derivative instruments to reduce the economic effect of interest rate volatility. As such, management believes derivative settlements for each applicable period should be evaluated with the Company’s net interest income (loan spread) as presented in this table. The Company reports this non-GAAP information because it believes that it provides additional information regarding operational and performance indicators that are closely assessed by management. There is no comprehensive, authoritative guidance for the presentation of such non-GAAP information, which is only meant to supplement GAAP results by providing additional information that management utilizes to assess performance. See note 4 of the notes to consolidated financial statements included under Part I, Item 1 of this report for additional information on the Company's derivative instruments, including the net settlement activity recognized by the Company for each type of derivative for the periods presented in the table under the caption "Income Statement Impact" in note 4 and in this table. |
| |
(c) | Reflects the net settlements paid/received related to the Company’s 1:3 basis swaps and cross-currency interest rate swap. |
| |
(d) | Derivative settlements include the net settlements paid/received related to the Company’s floor income interest rate swaps. |
A trend analysis of the Company's core and variable student loan spreads is summarized below.
| |
(a) | The interest earned on a large portion of the Company's FFELP student loan assets is indexed to the one-month LIBOR rate. The Company funds a majority of its assets with three-month LIBOR indexed floating rate securities. The relationship between the indices in which the Company earns interest on its loans and funds such loans has a significant impact on student loan spread. This table (the right axis) shows the difference between the Company's liability base rate and the one-month LIBOR rate by quarter. See Item 3, “Quantitative and Qualitative Disclosures About Market Risk - Interest Rate Risk,” which provides additional detail on the Company’s FFELP student loan assets and related funding for those assets. |
Variable student loan spread decreased during the three months ended September 30, 2017 as compared to the same period in 2016 due to an increase in derivative settlements paid related to the Company's 1:3 basis swaps.
The primary difference between variable student loan spread and core student loan spread is fixed rate floor income. A summary of fixed rate floor income and its contribution to core student loan spread follows:
|
| | | | | | | | | | | | |
| Three months ended September 30, | | Nine months ended September 30, |
| 2017 | | 2016 | | 2017 | | 2016 |
Fixed rate floor income, gross | $ | 24,586 |
| | 41,509 |
| | 84,382 |
| | 131,720 |
|
Derivative settlements (a) | 3,883 |
| �� | (5,157 | ) | | 5,877 |
| | (15,241 | ) |
Fixed rate floor income, net | $ | 28,469 |
| | 36,352 |
| | 90,259 |
| | 116,479 |
|
Fixed rate floor income contribution to spread, net | 0.49 | % | | 0.55 | % | | 0.50 | % | | 0.57 | % |
| |
(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 2017 and 2016 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. The decrease in gross fixed rate floor income for the three and nine months ended September 30, 2017 compared to the same periods in 2016 was due to an increase in interest rates. See Item 3, “Quantitative and Qualitative Disclosures About Market Risk - Interest Rate Risk,” which provides additional detail on the Company’s portfolio earning fixed rate floor income and the derivatives used by the Company to hedge these loans.
Summary and Comparison of Operating Results
|
| | | | | | | | | | | | | | |
| Three months ended September 30, | | Nine months ended September 30, | | Additional information |
| 2017 | | 2016 | | 2017 | | 2016 | | |
Net interest income after provision for loan losses | $ | 67,894 |
| | 93,318 |
| | 218,763 |
| | 281,861 |
| | See table below for additional analysis. |
Other income | 2,753 |
| | 4,265 |
| | 9,152 |
| | 12,362 |
| | The primary component of other income is borrower late fees, which were $2.7 million and $3.2 million for the three months ended September 30, 2017 and 2016, respectively, and $9.1 million and $9.9 million for the nine months ended September 30, 2017 and 2016, respectively. |
Gain from debt repurchases | 116 |
| | 2,160 |
| | 1,097 |
| | 2,260 |
| | Gains were from the Company repurchasing its own asset-backed debt securities. |
Derivative settlements, net | (382 | ) | | (6,028 | ) | | (1,721 | ) | | (17,596 | ) | | The Company maintains an overall risk management strategy that incorporates the use of derivative instruments to reduce the economic effect of interest rate volatility. Derivative settlements for each applicable period should be evaluated with the Company's net interest income as reflected in the table below. |
Derivative market value and foreign currency transaction adjustments, net | 7,702 |
| | 42,546 |
| | (23,121 | ) | | (8,763 | ) | | Includes (i) the realized and unrealized gains and losses that are caused by changes in fair values of derivatives which do not qualify for "hedge treatment" under GAAP; and (ii) the unrealized foreign currency transaction gains or losses caused by the re-measurement of the Company's Euro-denominated bonds to U.S. dollars. |
Total other income (expense) | 10,189 |
| | 42,943 |
| | (14,593 | ) | | (11,737 | ) | | |
Salaries and benefits | 392 |
| | 486 |
| | 1,156 |
| | 1,504 |
| | |
Loan servicing fees | 7,939 |
| | 5,880 |
| | 19,584 |
| | 20,024 |
| | Increase for the three months ended September 30, 2017 compared to the same period in 2016 due to a payment of $2.8 million in conversion fees related to a transfer of loans in August 2017 from a third-party servicer to the LSS operating segment's servicing platform. Excluding the $2.8 million conversion fee paid in the third quarter of 2017, loan servicing fees paid to third parties decreased $0.7 million and $3.2 million for the three and nine months ended September 30, 2017 compared to the same periods in 2016 due to runoff of the Company's student loan portfolio and transfers of loans in August 2017 and June 2016 from third-party servicers to the LSS operating segment's servicing platform. |
Other expenses | 1,451 |
| | 1,769 |
| | 4,269 |
| | 4,766 |
| | |
Intersegment expenses, net | 10,659 |
| | 11,146 |
| | 31,114 |
| | 34,791 |
| | Amounts include fees paid to the LSS operating segment for the servicing of the Company’s student loan portfolio. These amounts exceed the actual cost of servicing the loans. Decrease due to a decrease in loans serviced by the LSS operating segment during the comparable periods due to portfolio runoff. In addition, intersegment expenses represent costs for certain corporate activities and services that are allocated to each operating segment based on estimated use of such activities and services. |
Total operating expenses | 20,441 |
| | 19,281 |
| | 56,123 |
| | 61,085 |
| | Total operating expenses were 35 basis points and 29 basis points of the average balance of student loans for the three months ended September 30, 2017 and 2016, respectively, and 31 basis points and 30 basis points for the nine months ended September 30, 2017 and 2016, respectively. When excluding the $2.8 million conversion fees paid in August 2017 to a third-party to transfer loans to the LSS operating segment's servicing platform, total operating expenses were 30, 29, 30 and 30 basis points for the three months ended September 30, 2017 and 2016 and nine months ended September 30, 2017 and 2016, respectively. |
Income before income taxes | 57,642 |
| | 116,980 |
| | 148,047 |
| | 209,039 |
| | |
Income tax expense | (21,904 | ) | | (44,571 | ) | | (56,258 | ) | | (79,434 | ) | | |
Net income | $ | 35,738 |
| | 72,409 |
| | 91,789 |
| | 129,605 |
| | |
| | | | | | | | | |
|
| | | | | | | | | | | | | | |
Additional information: | | | | | | | | | |
Net income | $ | 35,738 |
| | 72,409 |
| | 91,789 |
| | 129,605 |
| | |
Derivative market value and foreign currency transaction adjustments, net | (7,702 | ) | | (42,546 | ) | | 23,121 |
| | 8,763 |
| | See "Overview - GAAP Net Income and Non-GAAP Net Income, Excluding Adjustments" above for additional information about non-GAAP net income, excluding derivative market value and foreign currency transaction adjustments. Net income, excluding derivative market value and foreign currency transaction adjustments, decreased in 2017 as compared to 2016 due to (i) a decrease in the Company's student loan portfolio, (ii) a decrease in core student loan spread, (iii) a $2.8 million ($1.7 million after tax) expense related to conversion fees paid in August 2017 to a third-party to transfer loans to the LSS operating segment's servicing platform, and (iv) an increase in interest income of $8.2 million ($5.1 million after tax) recognized in the third quarter of 2016 related to a correction of an error as further described in note 2 of the notes to consolidated financial statements included under Part I, Item 1 of this report. |
Net tax effect | 2,927 |
| | 16,167 |
| | (8,786 | ) | | (3,330 | ) | |
Net income, excluding derivative market value and foreign currency transaction adjustments | $ | 30,963 |
| | 46,030 |
| | 106,124 |
| | 135,038 |
| |
Net interest income, net of settlements on derivatives
The following table summarizes the components of "net interest income after provision for loan losses" and "derivative settlements, net."
|
| | | | | | | | | | | | | | |
| Three months ended September 30, | | Nine months ended September 30, | | Additional information |
| 2017 | | 2016 | | 2017 | | 2016 | | |
Variable interest income, gross | $ | 211,785 |
| | 194,877 |
| | 616,474 |
| | 585,299 |
| | Increase due to an increase in the gross yield earned on student loans, partially offset by a decrease in the average balance of student loans. |
Consolidation rebate fees | (48,986 | ) | | (55,131 | ) | | (151,469 | ) | | (170,352 | ) | | Decrease due to a decrease in the average consolidation loan balance. |
Discount accretion, net of premium and deferred origination costs amortization | 4,371 |
| | 12,466 |
| | 13,064 |
| | 21,109 |
| | Net discount accretion is due to the Company's purchases of loans at a net discount over the last several years. In the third quarter of 2016, the Company revised its policy to correct for an error in its method of applying the interest method used to amortize premiums and accrete discounts on its student loan portfolio. Under the Company's revised policy, as of September 30, 2016, the constant prepayment rate used by the Company to amortize/accrete student loan premiums/discounts was decreased. During the third quarter of 2016, the Company recorded an adjustment to reflect the net impact on prior periods for the correction of this error that resulted in an $8.2 million reduction to the Company's net loan discount balance and a corresponding increase in interest income. |
Variable interest income, net | 167,170 |
| | 152,212 |
| | 478,069 |
| | 436,056 |
| | |
Interest on bonds and notes payable | (120,487 | ) | | (94,770 | ) | | (338,987 | ) | | (276,124 | ) | | Increase due to an increase in cost of funds, partially offset by a decrease in the average balance of debt outstanding. |
Derivative settlements, net (a) | (4,265 | ) | | (871 | ) | | (7,598 | ) | | (2,355 | ) | | Derivative settlements include the net settlements paid/received related to the Company’s 1:3 basis swaps and cross-currency interest rate swap. |
Variable student loan interest margin, net of settlements on derivatives (a) | 42,418 |
| | 56,571 |
| | 131,484 |
| | 157,577 |
| | |
Fixed rate floor income, gross | 24,586 |
| | 41,509 |
| | 84,382 |
| | 131,720 |
| | The high levels of fixed rate floor income earned are due to historically low interest rates. Fixed rate floor income has decreased due to the rising interest rate environment. Derivative settlements include the net settlements paid/received related to the Company’s floor income interest rate swaps. |
Derivative settlements, net (a) | 3,883 |
| | (5,157 | ) | | 5,877 |
| | (15,241 | ) | | Derivative settlements include the settlements paid/received related to the Company's floor income interest rate swaps. |
Fixed rate floor income, net of settlements on derivatives | 28,469 |
| | 36,352 |
| | 90,259 |
| | 116,479 |
| | |
Core student loan interest income | 70,887 |
| | 92,923 |
| | 221,743 |
| | 274,056 |
| | |
Investment interest | 3,213 |
| | 980 |
| | 6,210 |
| | 2,614 |
| | Increase due to a higher balance of interest-earning investments and an increase in interest rates. |
Intercompany interest | (588 | ) | | (613 | ) | | (1,911 | ) | | (1,905 | ) | | |
Provision for loan losses - federally insured loans | (7,000 | ) | | (7,000 | ) | | (11,000 | ) | | (11,000 | ) | | See "Allowance for Loan Losses and Loan Delinquencies" included above under "Asset Generation and Management Operating Segment - Results of Operations." |
Negative provision for loan losses - private education loans | 1,000 |
| | 1,000 |
| | 2,000 |
| | 500 |
| |
Net interest income after provision for loan losses (net of settlements on derivatives) (a) | $ | 67,512 |
| | 87,290 |
| | 217,042 |
| | 264,265 |
| | |
| |
(a) | Derivative settlements represent the cash paid or received during the current period to settle with derivative instrument counterparties the economic effect of the Company's derivative instruments based on their contractual terms. Derivative accounting requires that net settlements on derivatives that do not qualify for "hedge treatment" under GAAP be recorded in a separate income statement line item below net interest income. The Company maintains an overall risk management strategy that incorporates the use of derivative instruments to reduce the economic effect of interest rate volatility. As such, management believes derivative settlements for each applicable period should be evaluated with the Company’s net interest income as presented in this table. Core student loan interest income and net interest income after provision for loan losses (net of settlements on derivatives) are non-GAAP financial measures, and the Company reports this non-GAAP information because the Company believes that it provides additional information regarding operational and performance indicators that are closely assessed by management. There is no comprehensive, authoritative guidance |
for the presentation of such non-GAAP information, which is only meant to supplement GAAP results by providing additional information that management utilizes to assess performance. See note 4 of the notes to consolidated financial statements included under Part I, Item 1 of this report for additional information on the Company's derivative instruments, including the net settlement activity recognized by the Company for each type of derivative for the 2021 and 2020 periods presented in the table under the caption "Consolidated Financial Statement Impact Related to Derivatives - Statements of Operations" in note 4 and in this table.
A reconciliation of core loan spread, which includes the impact of derivative settlements on loan spread, to loan spread without
derivative settlements follows.
| | | | | | | | | | | | | | | |
| Three months ended March 31, | | |
| 2021 | | 2020 | | | | |
Core loan spread | 1.45 | % | | 1.02 | % | | | | |
Derivative settlements (1:3 basis swaps) | 0.00 | | | (0.04) | | | | | |
Derivative settlements (fixed rate floor income) | 0.09 | | | (0.04) | | | | | |
Loan spread | 1.54 | % | | 0.94 | % | | | | |
(c) Derivative settlements consist of net settlements (paid) received related to the Company’s 1:3 basis swaps.
(d) Derivative settlements consist of net settlements (paid) received related to the Company’s floor income interest rate swaps.
A trend analysis of AGM's core and variable loan spreads is summarized below.
(a) The interest earned on a large portion of AGM's FFELP student loan assets is indexed to the one-month LIBOR rate. AGM funds a portion of its assets with three-month LIBOR indexed floating rate securities. The relationship between the indices in which AGM earns interest on its loans and funds such loans has a significant impact on loan spread. This table (the right axis) shows the difference between AGM's liability base rate and the one-month LIBOR rate by quarter. See Item 3, “Quantitative and Qualitative Disclosures About Market Risk - Interest Rate Risk,” which provides additional detail on AGM’s FFELP student loan assets and related funding for those assets.
Variable loan spread increased during the three months ended March 31, 2021 compared to the same period in 2020 due to a narrowing of the basis between the asset and debt indices in which the Company earns interest on its loans and funds such loans (as reflected in the table above). The significant widening during the first quarter of 2020 was the result of a significant decrease in interest rates during March 2020. In a declining interest rate environment, student loan spread is compressed, due to the timing of interest rate resets on the Company's assets occurring daily in contrast to the timing of the interest resets on the Company's debt that occurs either monthly or quarterly. See Item 3, “Quantitative and Qualitative Disclosures About Market Risk - Interest Rate Risk,” which provides additional detail on the AGM’s FFELP student loan assets and related funding for those assets.
The difference between variable loan spread and core loan spread is fixed rate floor income earned on a portion of AGM's federally insured student loan portfolio. A summary of fixed rate floor income and its contribution to core loan spread follows:
| | | | | | | | | | | | | | | |
| Three months ended March 31, | | |
| 2021 | | 2020 | | | | |
Fixed rate floor income, gross | $ | 35,539 | | | 18,758 | | | | | |
Derivative settlements (a) | (4,285) | | | 2,125 | | | | | |
Fixed rate floor income, net | $ | 31,254 | | | 20,883 | | | | | |
Fixed rate floor income contribution to spread, net | 0.65 | % | | 0.40 | % | | | | |
(a) Derivative settlements consist of net settlements (paid) received related to the Company's derivatives used to hedge student loans earning fixed rate floor income.
The increase in gross fixed rate floor income for the three months ended March 31, 2021 compared to the same period in 2020 was due to lower interest rates in 2021 as compared to 2020. The Company has a portfolio of derivative instruments in which
the Company pays a fixed rate and receives a floating rate to economically hedge a portion of loans earning fixed rate floor income. The change from being in a net positive settlement position on such derivatives during the first quarter of 2020 to being in a net negative settlement position during the first quarter of 2021 was due to a decrease in interest rates. See Item 3, “Quantitative and Qualitative Disclosures About Market Risk - Interest Rate Risk,” which provides additional detail on the Company’s portfolio earning fixed rate floor income and the derivatives used by the Company to hedge these loans.
Interest Rate Risk - Replacement of LIBOR as a Benchmark Rate
On March 5, 2021, the ICE Benchmark Administration Limited (the “IBA”), which administers LIBOR, published the results of a consultation confirming its intention to cease the publication of LIBOR (i) after June 30, 2023 in the case of U.S. Dollar LIBOR rates for one-month, three-month, and certain other tenors, and (ii) after December 31, 2021 in all other cases. Also on March 5, 2021, the United Kingdom’s Financial Conduct Authority, which regulates the IBA, announced that it does not intend to sustain LIBOR by requiring panel banks to continue providing quotations of LIBOR beyond the dates for which they have notified their departure from IBA’s LIBOR quotation scheme, or to require IBA to publish LIBOR beyond such dates. As a result, immediately after the announced LIBOR discontinuation dates specified above, respectively, LIBOR will no longer be representative of the underlying market and economic reality that the rates are intended to measure. As of March 31, 2021, the interest earned on a principal amount of $17.3 billion of the Company’s FFELP student loan asset portfolio was indexed to one-month LIBOR, and the interest paid on a principal amount of $16.7 billion of the Company’s FFELP student loan asset-backed debt securities was indexed to one-month or three-month LIBOR. In addition, the Company’s derivative financial instrument transactions used to manage LIBOR interest rate risks are indexed to LIBOR. New LIBOR contracts are generally not expected to be entered into after December 31, 2021. A market transition away from the current LIBOR framework could result in significant changes to the interest rate characteristics of the Company's LIBOR-indexed assets and funding for those assets, as well as the Company’s LIBOR-indexed derivative instruments. See Item 1A, "Risk Factors - Loan Portfolio - Interest rate risk - replacement of LIBOR as a benchmark rate" in the Company's 2020 Annual Report for additional information.
Summary and Comparison of Operating Results
| | | | | | | | | | | | | | | | | | | | | |
| Three months ended March 31, | | | | |
| 2021 | | 2020 | | | | | | Additional information |
Net interest income (expense) after provision for loan losses | $ | 116,922 | | | (23,622) | | | | | | | See table below for additional analysis. |
Other income | 445 | | | 3,215 | | | | | | | Represents primarily borrower late fees. The decrease in borrower late fees in 2021 compared to 2020 was due to the Company suspending borrower late fees effective March 13, 2020 to provide borrowers relief as a result of the COVID-19 pandemic. |
Gain on sale of loans | — | | | 18,206 | | | | | | | The Company sold a portfolio of consumer loans in January 2020 and recognized a gain of $18.2 million. |
Impairment expense and provision for beneficial interests, net | 2,436 | | | (26,303) | | | | | | | In March 2020, the Company recognized a provision expense of $26.3 million related to its beneficial interest in consumer loan securitization investments as a result of the expected impacts of the COVID-19 pandemic. During the first quarter of 2021, $2.4 million of such provision was reversed due to improved economic conditions. |
Derivative settlements, net | (4,304) | | | 4,237 | | | | | | | The Company maintains an overall risk management strategy that incorporates the use of derivative instruments to reduce the economic effect of interest rate volatility. Derivative settlements for each applicable period should be evaluated with the Company's net interest income as reflected in the table below. |
Derivative market value adjustments, net | 38,809 | | | (20,602) | | | | | | | Includes the realized and unrealized gains and losses that are caused by changes in fair values of derivatives which do not qualify for "hedge treatment" under GAAP. The majority of the derivative market value adjustments related to the changes in fair value of the Company's floor income interest rate swaps. Such changes reflect that a decrease in the forward yield curve during a reporting period results in a decrease in the fair value of the Company's floor income interest rate swaps, and an increase in the forward yield curve during a reporting period results in an increase in the fair value of the Company's floor income interest rate swaps. |
Total other income/expense | 37,386 | | | (21,247) | | | | | | | |
Salaries and benefits | 495 | | | 443 | | | | | | | |
| | | | | | | | | |
Other expenses | 3,777 | | | 3,717 | | | | | | | The primary component of other expenses is servicing fees paid to third parties. |
Intersegment expenses | 8,427 | | | 11,916 | | | | | | | Amounts include fees paid to the LSS operating segment for the servicing of the Company’s loan portfolio. These amounts exceed the actual cost of servicing the loans. The decrease in servicing fees in 2021 compared to 2020 was due to the expected amortization of the Company's FFELP portfolio and a decrease in certain servicing activities due to borrower relief initiatives and policies as a result of the COVID-19 pandemic. Intersegment expenses also include costs for certain corporate activities and services that are allocated to each operating segment based on estimated use of such activities and services. |
| | | | | | | | | |
| | | | | | | | | | | | | | | | | | | | | |
Total operating expenses | 12,699 | | | 16,076 | | | | | | | Total operating expenses were 26 basis points and 31 basis points of the average balance of loans for the three months ended March 31, 2021 and 2020, respectively. The decrease in 2021 as compared to 2020 was due to a decrease in certain servicing activities due to borrower relief initiatives and policies as a result of the COVID-19 pandemic. |
Income (loss) before income taxes | 141,609 | | | (60,945) | | | | | | |
|
Income tax (expense) benefit | (33,987) | | | 14,627 | | | | | | | Represents income tax (expense) benefit at an effective tax rate of 24%. |
Net income (loss) | $ | 107,622 | | | (46,318) | | | | | | | |
| | | | | | | | | |
Additional information: | | | | | | | | | |
Net income (loss) | $ | 107,622 | | | (46,318) | | | | | | | See "Overview - GAAP Net Income and Non-GAAP Net Income, Excluding Adjustments" above for additional information about non-GAAP net income, excluding derivative market value adjustments. The increase in GAAP and non-GAAP net income was due to (i) an increase in core loan spread; (ii) a decrease in interest expense in 2021 as a result of reversing a historical accrued interest liability on certain bonds; and (iii) the recognition of a negative provision in the first quarter of 2021 related to loans and consumer loan residual investments as compared to provision expense on such assets in 2020 as a result of the COVID-19 pandemic. These items were partially offset by (i) a decrease in the average balance of loans in 2021 as compared to 2020 and (ii) a gain in 2020 from the sale of consumer loans. |
Derivative market value adjustments, net | (38,809) | | | 20,602 | | | | | | |
Tax effect | 9,314 | | | (4,944) | | | | | | |
Net income (loss), excluding derivative market value adjustments | $ | 78,127 | | | (30,660) | | | | | | |
Net interest income after provision for loan losses, net of settlements on derivatives
The following table summarizes the components of "net interest income (expense) after provision for loan losses" and "derivative settlements, net."
| | | | | | | | | | | | | | | | | | | | | |
| Three months ended March 31, | | | | |
| 2021 | | 2020 | | | | | | Additional information |
Variable interest income, gross | $ | 129,170 | | | 205,512 | | | | | | | Decrease in 2021 compared to 2020 was due to a decrease in the gross yield earned on loans and a decrease in the average balance of loans. |
Consolidation rebate fees | (41,073) | | | (43,137) | | | | | | | Decrease in 2021 compared to 2020 was due to a decrease in the average consolidation loan balance. |
Discount accretion, net of premium and deferred origination costs amortization | 118 | | | 660 | | | | | | | Net discount accretion is due to the Company's purchases of loans at a net discount over the last several years. |
Variable interest income, net | 88,215 | | | 163,035 | | | | | | | |
Interest on bonds and notes payable | (26,771) | | | (132,668) | | | | | | | Decrease in 2021 compared to 2020 was due to a decrease in cost of funds and a decrease in the average balance of debt outstanding. In addition, during the first quarter of 2021, the Company reduced interest expense by $23.8 million as a result of reversing a historical accrued interest liability on certain bonds. |
Derivative settlements, net (a) | (19) | | | 2,112 | | | | | | | Derivative settlements include the net settlements (paid) received related to the Company’s 1:3 basis swaps. |
Variable loan interest margin, net of settlements on derivatives (a) | 61,425 | | | 32,479 | | | | | | | |
Fixed rate floor income, gross | 35,539 | | | 18,758 | | | | | | | Fixed rate floor income increased in 2021 compared to 2020 due to lower interest rates in 2021 as compared to 2020. |
Derivative settlements, net (a) | (4,285) | | | 2,125 | | | | | | | Derivative settlements include the settlements (paid) received related to the Company's floor income interest rate swaps. The change from being in a net positive settlement position on such derivatives during the first quarter of 2020 to being in a net negative settlement position during the first quarter of 2021 was due to a decrease in interest rates. |
Fixed rate floor income, net of settlements on derivatives | 31,254 | | | 20,883 | | | | | | | |
Core loan interest income (a) | 92,679 | | | 53,362 | | | | | | | |
Investment interest | 2,648 | | | 4,133 | | | | | | | Decrease in 2021 compared to 2020 was due to lower interest rates and lower weighted average cash and restricted cash balances in 2021 as compared to 2020. |
Intercompany interest | (179) | | | (581) | | | | | | | Decrease in 2021 compared to 2020 was due to lower interest rates and lower weighted average debt outstanding in 2021 as compared to 2020. |
Provision for loan losses - federally insured loans | 7,483 | | | (39,323) | | | | | | | See "Allowance for Loan Losses and Loan Delinquencies" included above under "Asset Generation and Management Operating Segment - Results of Operations." |
Provision for loan losses - private education loans | (1,431) | | | (9,800) | | | | | | |
Provision for loan losses - consumer loans | 11,418 | | | (27,176) | | | | | | |
Net interest income (loss) after provision for loan losses (net of settlements on derivatives) (a) | $ | 112,618 | | | (19,385) | | | | | | | Increase in 2021 as compared to 2020 was due to (i) an increase in core loan spread; (ii) a decrease in interest expense in 2021 as a result of reversing a historical accrued interest liability on certain bonds; and (iii) the recognition of a negative provision for loan losses in 2021 as compared to provision for loan losses in 2020 as a result of the COVID-19 pandemic. These items were partially offset by a decrease in the average balance of loans. |
(a) Derivative settlements represent the cash paid or received during the current period to settle with derivative instrument counterparties the economic effect of the Company's derivative instruments based on their contractual terms. Derivative accounting requires that net settlements on derivatives that do not qualify for "hedge treatment" under GAAP be recorded in a separate income statement line item below net interest income. The Company maintains an overall risk management strategy that incorporates the use of derivative instruments to reduce the economic effect of interest rate volatility. As such, management believes derivative settlements for each applicable period should be evaluated with the Company’s net interest income as presented in this table. Core loan interest income and net interest income after provision for loan losses (net of settlements on derivatives) are non-GAAP financial measures, and the Company reports this non-GAAP information because the Company believes that it provides additional information regarding operational and performance indicators that are closely assessed by management. There is no comprehensive, authoritative guidance for the presentation of such non-GAAP information, which is only meant to supplement GAAP results by providing additional information that management utilizes to assess performance.. See note 4 of the notes to consolidated financial statements included under Part I, Item 1 of this report for additional information on the Company's derivative instruments, including the net settlement activity recognized by the Company for each type of derivative referred to in the "Additional information" column of this table, for the 2021 and 2020 periods presented in the table under the caption "Income"Consolidated Financial Statement Impact"Impact Related to Derivatives - Statements of Operations" in note 4 and in this table.
NELNET BANK OPERATING SEGMENT – RESULTS OF OPERATIONS
Loan Portfolio
As of March 31, 2021, Nelnet Bank had a $79.2 million loan portfolio, consisting of private education loans.
As of March 31, 2021, Nelnet Bank's allowance for loan losses on its portfolio was $0.7 million, which represents a reserve equal to 0.9% of Nelnet Bank's private education loan portfolio. There were no charge offs recognized by the bank during the three months ended March 31, 2021.
The following table sets forth the activity in Nelnet Bank's loan portfolio:
| | | | | |
| Three months ended |
| March 31, 2021 |
Beginning balance: | $ | 17,543 | |
Originations | 64,909 | |
Repayments | (1,995) | |
| |
Sales to AGM segment | (1,226) | |
| |
Ending balance: | $ | 79,231 | |
Deposits
As of March 31, 2021, Nelnet Bank had $190.3 million of deposits. All of Nelnet Bank’s deposits are interest-bearing deposits and consist of brokered certificates of deposit (CDs), intercompany savings deposits, and retail and other savings deposits and CDs. The intercompany deposits are deposits from Nelnet, Inc. (Parent Company) and its subsidiaries and include a pledged deposit of $40.0 million from Nelnet, Inc. (Parent Company), as required under the Capital and Liquidity Maintenance Agreement with the FDIC, deposits required for intercompany transactions, operating deposits, and Nelnet Business Services custodial deposits consisting of tuition payments collected which are subsequently remitted to the appropriate school. Retail and other deposits include savings deposits from Educational 529 College Savings and Health Savings plans and commercial and institutional CDs. Union Bank and Trust Company ("Union Bank"), a related party, is the program manager for the College Savings plans.
Average Balance Sheet
The following table reflects the rates earned on interest-earning assets and paid on interest-bearing liabilities.
| | | | | | | | | | | |
| Three months ended |
| March 31, 2021 |
| Balance | | Rate |
Average assets | | | |
Private education loans | $ | 43,746 | | | 3.37 | % |
Cash and investments | 215,613 | | | 1.91 | |
Total interest-earning assets | 259,359 | | | 2.15 | % |
Non-interest-earning assets | 6,541 | | | |
Total assets | $ | 265,900 | | | |
Average liabilities and equity | | | |
Brokered deposits | 2,984 | | | 0.55 | % |
Intercompany deposits | 56,684 | | | 0.28 | |
Retail and other deposits | 101,462 | | | 0.60 | |
Total interest-bearing liabilities | 161,130 | | | 0.49 | % |
Non-interest-bearing liabilities | 2,870 | | | |
Equity | 101,900 | | | |
Total liabilities and equity | $ | 265,900 | | | |
| | | |
Regulatory Capital Requirements
Under the regulatory framework for prompt corrective action, Nelnet Bank is subject to various regulatory capital requirements administered by the FDIC and the UDFI and must meet specific capital standards. Failure to meet minimum capital requirements can initiate certain mandatory and possibly additional discretionary actions by regulators that, if undertaken, could have a direct material adverse effect on Nelnet Bank's business, results of operations, and financial condition. On January 1, 2020, the Community Bank Leverage Ratio ("CBLR") framework, as issued jointly by the OCC, the Federal Reserve Board, and the FDIC, became effective. Any banking organization with total consolidated assets of less than $10 billion, limited amounts of certain types of assets and off-balance sheet exposures, and a community bank leverage ratio greater than 9% may opt into the CBLR framework quarterly. The CBLR framework allows banks to satisfy capital standards and be considered "well capitalized" under the prompt corrective action framework if their leverage ratio is greater than 9%, unless the banking organization's federal banking agency determines that the banking organization's risk profile warrants a more stringent leverage ratio. The FDIC has ordered Nelnet Bank to maintain at least a 12% leverage ratio. Nelnet Bank has opted into the CBLR framework for the quarter ended March 31, 2021 with a leverage ratio of 38.6%. Nelnet Bank intends to maintain at all times regulatory capital levels that meet both the minimum level necessary to be considered “well capitalized” under the FDIC’s prompt corrective action framework and the minimum level required by the FDIC.
Summary of Operating Results
On November 2, 2020, Nelnet Bank obtained final approval for federal deposit insurance from the FDIC and for a bank charter from the UDFI and Nelnet Bank launched operations. Nelnet Bank's operations are presented by the Company as a reportable operating segment. Costs associated with Nelnet Bank prior to November 2, 2020 are included in the Corporate operating segment. In addition, certain shared service and support costs incurred by the Company are not and will not be reflected as part of the Nelnet Bank operating segment through 2023 (the bank's de novo period). The shared service and support costs incurred by the Company related to Nelnet Bank and not reflected in the bank's operating segment were $0.7 million for the three months ended March 31, 2021.
| | | | | | | | | | | | | | | | | |
| Three months ended | | | | | | |
| March 31, 2021 | | | | | | | | Additional information |
Total interest income | $ | 1,376 | | | | | | | | | Represents interest earned on Nelnet Bank's private education student loans and investments. |
Interest expense | 194 | | | | | | | | | Represents interest expense on deposits. |
Net interest income | 1,182 | | | | | | | | | |
Less: Provision for loan losses | 422 | | | | | | | | | Represents provision expense during the period, primarily related to loans originated during the current period. |
Net interest income after provision for loan losses | 760 | | | | | | | | | |
Other income | 22 | | | | | | | | | |
| | | | | | | | | |
| | | | | | | | | |
Salaries and benefits | 1,488 | | | | | | | | | Represents salaries and benefits of Nelnet Bank associates and third-party contract labor. |
| | | | | | | | | |
Other expenses | 545 | | | | | | | | | Represents various expenses such as postage, consulting and professional fees, occupancy, certain information technology-related costs, insurance, marketing, and other operating expenses. |
Intersegment expenses | 3 | | | | | | | | | Represents servicing costs paid to the LSS operating segment. |
Total operating expenses | 2,036 | | | | | | | | | |
Loss before income taxes | (1,254) | | | | | | | | | |
Income tax benefit | 286 | | | | | | | | | Represents income tax benefit at an effective tax rate of 22.8%. |
Net loss | $ | (968) | | | | | | | | | |
LIQUIDITY AND CAPITAL RESOURCES
The Company’s Loan Servicing and Systems, and ServicingEducation Technology, Services, and Tuition Payment Processing and Campus Commerce operating segments are non-capital intensive and both produce positive operating cash flows. As such, a minimal amount of debt and equity capital is allocated to these segments and any liquidity or capital needs are satisfied using cash flow from operations. Therefore, the following Liquidity and Capital Resources discussion is concentrated on the Company’s liquidity and capital needs to meet existing debt obligations in the Asset Generation and Management operating segment and capital needs to expand Allo's communications network in the Company's Communications operating segment.
Sources of Liquidity and Available Capacity
The Company has historically generated positive cash flow from operations. For the nine months ended September 30, 2017 and the year ended December 31, 2016,2020 and the Company'sthree months ended March 31, 2021, the Company’s net cash provided fromby operating activities was $230.3$212.8 million and $325.3$48.7 million, respectively.
As of September 30, 2017,March 31, 2021, the Company had cash and cash equivalents of $254.4$144.2 million. The Company also had a portfolio of available-for-sale investments, consisting primarily of student loan asset-backed securities (classified as available-for-sale) with a fair value of $75.4$379.2 million as of September 30, 2017.March 31, 2021. The Company invests excess cash in student loan asset-backed securities, and the cash proceeds from the sale of these securities could be used for operating and/or other investing opportunities.
Cash and investments held by Nelnet Bank are generally not available for Company activities outside of Nelnet Bank. Excluding Nelnet Bank, cash and cash equivalents and the fair value of student-loan asset backed securities as of March 31, 2021 was $120.5 million and $187.9 million, respectively. As of March 31, 2021, the Company had participated $113.5 million of its student-loan asset backed securities, and such participation is reflected as debt on the Company's consolidated balance sheet.
The Company also has a $350.0$455.0 million unsecured line of credit that matures on December 12, 2021.16, 2024. As of September 30, 2017,March 31, 2021, there was $210.0 millionno amount outstanding on the unsecured line of credit and $140.0$455.0 million was available for future use.
The line of credit provides that the Company may increase the aggregate financing commitments, through the existing lenders and/or through new lenders, up to a total of $550.0 million, subject to certain conditions. In addition, the Company has a $22.0 million secured line of credit agreement that matures on May 30, 2022. As of March 31, 2021, the secured line of credit had $5.0 million outstanding and $17.0 million was available for future use.
In addition, the Company has retained certain of its own asset-backed securities upon their initial issuance or repurchased certain of its own asset-backed securities (bonds and notes payable) in the secondary market. For accounting purposes, these notes are eliminated in consolidation and are not included in the Company's consolidated financial statements. However, these securities remain legally outstanding at the trust level and the Company could sell these notes to third parties or redeem the notes at par as cash is generated by the trust estate. Upon a sale of these notes to third parties, the Company would obtain cash proceeds equal to the market value of the notes on the date of such sale. As of September 30, 2017,March 31, 2021, the Company holds $81.1$24.3 million (par value) of its own asset-backed securities.
The Company intends to use its liquidity position to capitalize on market opportunities, including FFELP, private education, and consumer loan acquisitions;acquisitions (or investment interests therein); strategic acquisitions and investments; expansion of Allo's telecommunications network; and capital management initiatives, including stock repurchases, debt repurchases, and dividend distributions. The timing and size of these opportunities will vary and will have a direct impact on the Company's cash and investment balances.
On October 18, 2017, the Company entered into an agreement to purchase 100 percent of the outstanding stock of Great Lakes for a purchase price of $150.0 million in cash. The transaction is scheduled to close on January 1, 2018, subject to customary closing conditions. The Company plans to finance the acquisition with existing cash and by using its $350.0 million unsecured line of credit.
Cash Flows
During the ninethree months ended September 30, 2017,March 31, 2021, the Company generated $230.3$48.7 million fromin operating activities, compared to $258.8using $144.5 million for the same period in 2016.2020. The decreaseincrease in such cash provided byflows from operating activities reflects the decreasewas due to:
•The increase in net income, changes in the adjustmentsincome;
•Adjustments to net income from derivative market value adjustments andfor the impact of gains from the sale of loans during the three months ended March 31, 2020 and the non-cash change in deferred income taxes;
•Proceeds from the Company's clearinghouse for margin payments on derivatives for the three months ended March 31, 2021 compared to payments to the clearinghouse in 2020; and
•The impact of changes in accounts receivableto the due to customers liability account, other liabilities, and accrued interest payablereceivable during the ninethree months ended September 30, 2017March 31, 2021 as compared to the same period in 2016. 2020.
These factors were partially offset by an increase in theby:
•The adjustments to net income for depreciation and amortization, changes in adjustmentsderivative market value adjustments;
•Adjustments to net income for foreign currency transaction adjustments, the impact of the non-cash provision for loan losses, beneficial interests, and impairment charges; and
•The impact of changes to accounts receivable, other assets, and accrued interest payable during the three months ended March 31, 2021 as compared to the same period in other liabilities, and net proceeds received in 2017 from the Company's clearinghouse to settle variation margin.
2020.
The primary items included in the statement of cash flows for investing activities are the purchase and repayment of student loans. The primary items included in financing activities are the proceeds from the issuance of and payments on bonds and notes payable used to fund student loans. Cash provided by investing activities for the nine months ended September 30, 2017 and 2016 was $2.5 billion and $2.7 billion, respectively. Cash used in financing activities was $2.6 billion and $2.9 billion for the ninethree months ended September 30, 2017March 31, 2021 was $468.4 million and 2016,$528.1 million, respectively. Cash provided by investing activities and used in financing activities for the three months ended March 31, 2020 was $105.7 million and $83.5 million, respectively. Investing and financing activities are further addressed in the discussion that follows.
Liquidity Needs and Sources of Liquidity Available to Satisfy Debt Obligations Secured by Student Loan Assets and Related Collateral
The following table shows the Company's debt obligations outstanding that are secured by student loan assets and related collateral.
| | | | | | | | | | | |
| As of March 31, 2021 |
| Carrying amount | | Final maturity |
Bonds and notes issued in asset-backed securitizations | $ | 18,459,431 | | | 5/27/25 - 10/25/68 |
FFELP and private education loan warehouse facilities | 405,215 | | | 5/20/22 - 2/26/24 |
| $ | 18,864,646 | | | |
|
| | | | | |
| As of September 30, 2017 |
| Carrying amount | | Final maturity |
Bonds and notes issued in asset-backed securitizations | $ | 21,632,934 |
| | 8/25/21 - 9/25/65 |
FFELP warehouse facilities | 745,107 |
| | 11/19/19 - 4/27/20 |
| $ | 22,378,041 |
| | |
Bonds and Notes Issued in Asset-backed Securitizations
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. Cash generated from student loans funded in asset-backed securitizations provide the sources of liquidity to satisfy all obligations related to the outstanding bonds and notes issued in such securitizations. 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 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, 2017,March 31, 2021, 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 $1.93$2.17 billion as detailed below. The $1.93 billion includes approximately $821.9 million (as of September 30, 2017) of overcollateralization included in the asset-backed securitizations. These excess net asset positions are reflected variously in the following balances in the consolidated balance sheet: "student loans receivable," "restricted cash," and "accrued interest receivable."
The forecasted cash flow presented below includes all loans funded in asset-backed securitizations as of September 30, 2017.March 31, 2021. As of September 30, 2017,March 31, 2021, the Company had $21.9$18.4 billion of loans included in asset-backed securitizations, which represented 96.596.8 percent of its total FFELP and private education student loan portfolio. The forecasted cash flow does not include cash flows that the Company expects to receive related to loans funded in its warehouse facilities as of September 30, 2017,March 31, 2021, private education and consumer loans funded with operating cash, on the balance sheet, and loans acquired subsequent to September 30, 2017.March 31, 2021, and loans owned by Nelnet Bank.
Asset-backed Securitization Cash Flow Forecast
$1.932.17 billion
(dollars in millions)
The forecasted future undiscounted cash flows of approximately $2.17 billion include approximately $1.19 billion (as of March 31, 2021) of overcollateralization included in the asset-backed securitizations. These excess net asset positions are included in the consolidated balance sheets and included in the balances of "loans and accrued interest receivable" and "restricted cash." The difference between the total estimated future undiscounted cash flows and the overcollateralization of approximately $0.98 billion, or approximately $0.74 billion after income taxes based on the estimated effective tax rate, is expected to be accretive to the Company's March 31, 2021 balance of consolidated shareholders' equity.
The Company uses various assumptions, including prepayments and future interest rates, when preparing its cash flow forecast. These assumptions are further discussed below.
Prepayments: The primary variable in establishing a life of loan estimate is the level and timing of prepayments. Prepayment rates equal the amount 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, borrower default rates, and utilization of debt management options such as income-based repayment, deferments, and forbearance. 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 securitization 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 $220$140 million to $250$175 million.
Interest rates: The Company funds a majoritylarge portion of its student loans with three-month LIBOR indexed floating rate securities. Meanwhile, the interest earned on the Company’s student loan assets is indexed primarily to a one-month LIBOR rate. 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 three-month LIBOR will exceed one-month LIBOR 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 three-month and one-month LIBOR for the life of the portfolio, the cash flow forecast would be reduced by approximately $95$45 million to $115$70 million. As the percentage of the Company's outstanding debt financed by three-month LIBOR declines, the Company's basis risk will be reduced.
LIBOR is in the process of being discontinued as a benchmark rate, and any market transition away from the current LIBOR framework could result in significant changes to the forecasted cash flows from the Company's asset-backed securitizations. See "Interest Rate Risk - Replacement of LIBOR as a Benchmark Rate" above and Item 1A, "Risk Factors - Loan Portfolio -
Interest rate risk - replacement of LIBOR as a benchmark rate" in the Company's 2020 Annual Report for additional information.
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. The forecasted cash flow does not include cash flows the Company expects to pay/receive related to derivative instruments used by the Company to manage interest rate risk. See Item 3, "Quantitative and Qualitative Disclosures About Market Risk — Interest Rate Risk."
FFELP Warehouse Facilities
The Company funds a portion of its FFELP loan acquisitions using its FFELP warehouse facilities. Student loan warehousing allows the Company to buy and manage student loans prior to transferring them into more permanent financing arrangements. As of September 30, 2017,March 31, 2021, the Company had threetwo FFELP warehouse facilities with an aggregate maximum financing amount available
of $1.2 billion,$310.0 million, of which $0.7 billion$247.0 million was outstanding and $0.5 billion$63.0 million was available for additional funding. OfOne warehouse facility has a static advance rate until the three facilities, oneexpiration date of the liquidity provisions (May 20, 2021). In the event the liquidity provisions are not extended, the valuation agent has the right to perform a one-time mark to market on the underlying loans funded in this facility, provides for formula-based advance rates, depending on FFELP loan type, upsubject to a maximumfloor. The loans would then be funded at this new advance rate until the final maturity date of the principal and interest of loans financed. The advance rates for collateral may increase or decrease based on market conditions.facility (May 20, 2022). The other two FFELP warehouse facilities havefacility has a static advance ratesrate that requirerequires initial equity for loan funding but doand does not require increased equity based on market movements. As of September 30, 2017,March 31, 2021, the Company had $28.4$20.5 million advanced as equity support on these facilities. For further discussion of the Company's FFELP warehouse facilities outstanding at September 30, 2017,March 31, 2021, see note 3 of the notes to consolidated financial statements included under Part I, Item 1 of this report.
The Company has a private education loan warehouse facility that, as of March 31, 2021, had an aggregate maximum financing amount available of $175.0 million, an advance rate of 80 to 90 percent, liquidity provisions through February 13, 2022, and a final maturity date of February 13, 2023. As of March 31, 2021, $158.2 million was outstanding under this warehouse facility, $16.8 million was available for future funding, and $17.0 million was advanced as equity support.
Upon termination or expiration of the warehouse facilities, the Company would expect to access the securitization market, obtain replacement warehouse facilities, use operating cash, consider the sale of assets, or transfer collateral to satisfy any remaining obligations.
The Company had a $100.0 million consumer loan warehouse facility that was terminated on March 31, 2021. The Company used operating cash to pay off the $20.7 million outstanding balance on this facility upon its termination.
Other Uses of Liquidity
Effective July 1, 2010, no new loan originations can be made under the FFEL Program and all new federal loan originations must be made through the Federal Direct Loan Program. As a result, theThe Company no longer originates new FFELP loans, but continues to acquire FFELP loan portfolios from third parties and believes additional loan purchase opportunities exist.exist, including opportunities to purchase private education and consumer loans (or investment interests therein).
In December of 2020, Wells Fargo announced the sale of its approximately $10.0 billion portfolio of private education student loans representing approximately 445,000 borrowers. In conjunction with the sale, the Company was selected as servicer of the portfolio. During March 2021, approximately 261,000 borrowers were converted to the Company's servicing platform, with the remaining borrowers converted in April 2021. In addition, the Company has entered into agreements to participate in a joint venture to acquire the portfolio. In total (during March and April 2021), the Company has invested approximately $70 million in the joint venture for an approximate 8 percent of the interest in the loans. In addition, the Company will serve as the sponsor and administrator for loan securitizations on behalf of the purchaser group as the loans are securitized, and provide the required level of risk retention as the loans are permanently financed.
The Company plans to fund additional FFELP student loan acquisitions and related investments using current cash and investments; using its unsecured line of credit, using its Union Bank student loan participation agreement (as described below); using its FFELPUnion Bank student loan asset-backed securities participation agreement (as described below) and/or establishing similar secured borrowing facilities; using its existing warehouse facilities (as described above); increasing the capacity under existing and/or establishing new warehouse facilities; and continuing to access the asset-backed securities market.
Union Bank Participation Agreement
The Company maintains an agreement with Union Bank, a related party, as trustee for various grantor trusts, under which Union Bank has agreed to purchase from the Company participation interests in student loans. As of September 30, 2017, $461.3 March 31, 2021, $945.8
million of loans were subject to outstanding participation interests held by Union Bank, as trustee, under this agreement. The agreement automatically renews annually and is terminable by either party upon five business days' notice. This agreement provides beneficiaries of Union Bank’s grantor trusts with access to investments in interests in student loans, while providing liquidity to the Company. The Company can participate loans to Union Bank to the extent of availability under the grantor trusts, up to $750.0$900.0 million or an amount in excess of $750.0$900.0 million if mutually agreed to by both parties. Loans participated under this agreement have been accounted for by the Company as loan sales. Accordingly, the participation interests sold are not included on the Company’s consolidated balance sheets.
Asset-BackedAsset-backed Securities Transactions
On May 24, 2017 and July 26, 2017, theThe Company, completed asset-backed securitizations totaling $535.0 million (par value) and $399.4 million (par value), respectively. The proceeds from these transactions were used primarily to refinancethrough its subsidiaries, has historically funded student loans included in the Company's FFELP warehouse facilities.
by completing asset-backed securitizations. Depending on future rating agency actions and market conditions, the Company currently anticipates continuing to access the asset-backed securitization market. Such asset-backed securitization transactions would be used to refinance student loans included in its warehouse facilities, student loans purchased from third parties, and/or student loans in its existing asset-backed securitizations.
There were no asset-backed securitization transactions completed during the first three months of 2021.
Liquidity Impact Related to Nelnet Bank
On November 2, 2020, the Company obtained final approval for federal deposit insurance from the FDIC and for a bank charter from the UDFI in connection with the establishment of Nelnet Bank, and Nelnet Bank launched operations. Nelnet Bank was funded by the Company with an initial capital contribution of $100.0 million, consisting of $55.9 million of cash and $44.1 million of student loan asset-backed securities. In addition, the Company made a pledged deposit of $40.0 million with Nelnet Bank, as required under an agreement with the FDIC discussed below.
Prior to FDIC approval, Nelnet Bank, Nelnet, Inc. (the parent), and Michael S. Dunlap (Nelnet, Inc.’s controlling shareholder) entered into a Capital and Liquidity Maintenance Agreement and a Parent Company Agreement with the FDIC in connection with Nelnet, Inc.’s role as a source of financial strength for Nelnet Bank. As part of the Capital and Liquidity Maintenance Agreement, Nelnet, Inc. is obligated to (i) contribute capital to Nelnet Bank for it to maintain capital levels that meet FDIC requirements for a “well capitalized” bank, including a leverage ratio of capital to total assets of at least 12 percent; (ii) provide and maintain an irrevocable asset liquidity takeout commitment for the benefit of Nelnet Bank in an amount equal to the greater of either 10 percent of Nelnet Bank’s total assets or such additional amount as agreed to by Nelnet Bank and Nelnet, Inc.; (iii) provide additional liquidity to Nelnet Bank in such amount and duration as may be necessary for Nelnet Bank to meet its ongoing liquidity obligations; and (iv) establish and maintain a pledged deposit of $40.0 million with Nelnet Bank.
Based on the current business plan for Nelnet Bank and its strong financial condition after the first few months of operations, the Company currently believes that the initial capital contribution of $100.0 million and pledged deposit of $40.0 million should provide sufficient capital and liquidity to Nelnet Bank for the next two to three years.
Liquidity Impact Related to ALLO Communications LLC
As previously disclosed, on October 1, 2020, the Company entered into various agreements with SDC, a third party global digital infrastructure investor, and ALLO, for various transactions contemplated by the parties in connection with a recapitalization and additional funding for ALLO. After completion of the initial transactions subject to these agreements, SDC, the Company, and members of ALLO's management own approximately 48 percent, 45 percent, and 7 percent, respectively, of the outstanding voting membership interests of ALLO, and upon the receipt of regulatory approvals for the transactions on December 21, 2020 the Company deconsolidated ALLO from the Company's consolidated financial statements. In addition, on January 19, 2021, ALLO closed on certain private debt financing facilities from unrelated third-party lenders providing for aggregate financing of up to $230.0 million. With proceeds from this transaction, ALLO redeemed a portion of its non-voting preferred membership interests held by the Company in exchange for an aggregate redemption price payment to the Company of $100.0 million.
The agreements among the Company, SDC, and ALLO provide that they will use commercially reasonable efforts (which expressly excludes requiring ALLO to raise any additional equity financing or sell any assets) to cause ALLO to redeem, on or before April 2024, the remaining non-voting preferred membership interests of ALLO held by the Company, plus the amount of accrued and unpaid preferred return on such interests. As of March 31, 2021, the outstanding preferred membership interests and accrued and unpaid preferred return of ALLO held by the Company was $131.2 million. The non-voting preferred membership interests earn a preferred annual return of 6.25 percent.
If ALLO needs additional capital to support its growth in existing or new markets, the Company has the option to contribute additional capital to maintain its voting equity interest. However, ALLO has obtained third-party debt financing to support its
current growth plans, and thus the Company currently believes additional equity contributions to ALLO are not likely in the immediate future.
Liquidity Impact Related to Hedging Activities
The Company utilizes derivative instruments to manage interest rate sensitivity. By using derivative instruments, the Company is exposed to market risk which could impact its liquidity. Based on the derivative portfolio outstanding as of September 30, 2017,March 31, 2021, the Company does not currently anticipate any movement in interest rates having a material impact on its capital or liquidity profile, nor does the Company expect that any movement in interest rates would have a material impact on its ability to meet potential collateral deposits with its counterparties and/ormake variation margin payments withto its third-party clearinghouse. However, if interest rates move materially and negatively impact the fair value of the Company's derivative portfolio, the replacement of LIBOR as a benchmark rate has significant adverse impacts on the Company's derivatives, or if the Company enters into additional derivatives for which the fair value becomes negative, the Company could be required to deposit additional collateral with its derivative instrument counterparties and/or pay additionalmake variation margin payments to aits third-party clearinghouse. Derivative contracts executed through a clearinghouse require daily movement of variation margin to be exchanged based on the net fair value of the contracts. The collateral deposits or variation margin, if significant, could negatively impact the Company's liquidity and capital resources. In addition, clearing rules require the Company to post amounts of liquid collateral when executing new derivative instruments, which could prevent or limit the Company from utilizing additional derivative instruments to manage interest rate sensitivity and risks. See note 4 of the notes to consolidated financial statements included under Part I, Item 1 of this report for additional information on the Company's derivative portfolio.
Liquidity Impact Related to the Communications Operating Segment
Allo has made significant investments in its communications network and currently provides fiber directly to homes and businesses in seven Nebraska communities. In the first quarter of 2016, Allo announced plans to expand its network to make its services available to substantially all commercial and residential premises in Lincoln, Nebraska, and currently plans to expand to additional communities in Nebraska and surrounding states over the next several years. For the nine months ended September 30, 2017, Allo's capital expenditures were $78.4 million. The Company anticipates total Allo network capital expenditures of approximately $30.0 million in the fourth quarter of 2017 and approximately $100.0 million in 2018. However, such amounts could change based on customer demand for Allo's services. Allo had a $200.0 million line of credit with Nelnet, Inc. (parent company) that was increased on September 30, 2017 by $70.0 million to a total of $270.0 million, which Allo uses for its operating activities and capital expenditures. The outstanding amount owed by Allo to Nelnet, Inc. and the related interest expense incurred by Allo and the interest income recognized by Nelnet, Inc. under this line of credit is eliminated in the Company's consolidated financial statements. The Company currently plans to use cash from operating activities and its third-party unsecured line of credit to fund Allo's operating activities and capital expenditures.
Other Debt Facilities
As discussed above, the Company has a $350.0$455.0 million unsecured line of credit with a maturity date of December 12, 2021.16, 2024. As of September 30, 2017,March 31, 2021, the unsecured line of credit had $210.0 millionno amount outstanding and $140.0$455.0 million was available for future use. The Company also has a $22.0 million secured line of credit agreement with a maturity date of May 30, 2022. As of March 31, 2021, the secured line of credit had $5.0 million outstanding with $17.0 million available for future use. The line of credit is secured by several Company-owned properties. Upon the maturity date in 2021,of these facilities, there can be no assurance that the Company will be able to maintain this linethese lines of credit, increase the amount outstanding under the line,lines, or find alternative funding if necessary.
The Company has issued Junior Subordinated Hybrid Securities (the "Hybrid Securities") that have a final maturity date of September 15, 2061. The Hybrid Securities are unsecured obligations of the Company. During the first quarter of 2017,2020, the Company initiated a cash tender offerentered into an agreement with Union Bank, as trustee for various grantor trusts, under which Union Bank has agreed to purchase any and all of its outstanding Hybrid Securities, including a related consent solicitation to effect certain amendments to the indenture governing the notes to eliminate a provision requiring a minimum principal amount of the notes to remain outstanding after a partial redemption. The aggregate principal amount of notes tendered tofrom the Company was $29.7 million. The Company paid $25.3 million to redeem these notes, and the amendments described above were made to the indenture.participation interests in student loan asset-backed securities. As of September 30, 2017, the Company had $20.5 million of Hybrid Securities that remain outstanding.
The Company also has two notes payable, which were each issued by TDP Phase Three, LLC ("TDP") on December 30, 2015 in connection with the development of a commercial building in Lincoln, Nebraska that is to be the new corporate headquarters for Hudl, a related party. TDP is an entity established during 2015 for the sole purpose of developing and operating this building. The Company owns 25 percent of TDP. However, because the Company plans to be a tenant in this building once the development is complete, the operating results of TDP are included in the Company's consolidated financial statements. As of September 30, 2017, one of the TDP notes has $12.0 million outstanding with a maturity date of March 31, 2023; the other TDP note2021, $113.5 million of student loan asset-backed securities were subject to outstanding participation interests held by Union Bank, as trustee, under this agreement. This participation agreement has $6.4 million outstanding with a maturity date of December 15, 2045. Recourse to the Company on the outstanding balance of these notes is equal to its ownership percentage of TDP.
Debt Repurchases
Due to the Company's positive liquidity position and opportunities in the capital markets, the Company has repurchased its own debt over the last several years, and may continue to do so in the future. See note 4 of the notes to consolidated financial statements included in the 2016 Annual Reportbeen accounted for information on debt repurchased by the Company during the years 2014 through 2016 and note 3 of the notes to consolidated financial statements included under Part I, Item 1as a secured borrowing. Upon termination or expiration of this report for debt repurchased byagreement, the Company duringwould expect to use operating cash, consider the nine months ended September 30, 2017.
sale of assets, or transfer collateral to satisfy any remaining obligations.
Stock Repurchases
The Board of Directors has authorized a stock repurchase program to repurchase up to a total of five million shares of the Company's Class A common stock during the three-year period ending May 25, 2019.7, 2022. As of March 31, 2021, 3,246,732 shares remained authorized for repurchase under the Company's stock repurchase program. Shares may be repurchased from time to time depending on various factors, including share prices and other potential uses of liquidity.
Shares repurchased by the Company during the three months ended March 31, 2017, June 30, 2017 and September 30, 20172021 are shown below. CertainSuch shares were repurchased from employees to satisfy tax withholding obligations upon the vesting of these repurchases were made pursuant to a trading plan adopted byrestricted stock, and not as part of the Company in accordance with Rule 10b5-1 under the Securities Exchange Act of 1934. For additional information on stock repurchases during the third quarter of 2017, see "Stock Repurchases" under Part II, Item 2 of this report.
|
| | | | | | | | | |
| Total shares repurchased | | Purchase price (in thousands) | | Average price of shares repurchased (per share) |
| | |
Quarter ended March 31, 2017 | 31,716 |
| | $ | 1,369 |
| | 43.18 |
|
Quarter ended June 30, 2017 | 384,061 |
| | 16,826 |
| | 43.81 |
|
Quarter ended September 30, 2017 | 947,794 |
| | 45,136 |
| | 47.62 |
|
Total | 1,363,571 |
| | $ | 63,331 |
| | 46.44 |
|
Subsequent to September 30, 2017, from October 1, 2017 through November 7, 2017, the Company has repurchased an additional 69,541 shares of Class A common stock for $3.5 million ($50.45 per share). These purchases were made pursuant to a trading plan adopted by the Company in accordance with Rule 10b5-1 under the Securities Exchange Act of 1934. As of November 7, 2017, 3,179,339 shares remain authorized for repurchase under the Company's stock repurchase program.
| | | | | | | | | | | | | | | | | |
| Total shares repurchased | | Purchase price (in thousands) | | Average price of shares repurchased (per share) |
| | |
Quarter ended March 31, 2021 | 26,199 | | | $ | 2,009 | | | 76.70 | |
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| | | | | |
| | | | | |
Dividends
On SeptemberMarch 15, 2017,2021, the Company paid a thirdfirst quarter 20172021 cash dividend on the Company's Class A and Class B common stock of $0.14$0.22 per share. In addition, the Company's Board of Directors has declared a fourthsecond quarter 20172021 cash dividend on the Company's outstanding shares of Class A and Class B common stock of $0.16$0.22 per share. The fourthsecond quarter cash dividend will be paid on December 15, 2017June 14, 2021 to shareholders of record at the close of business on December 1, 2017.
May 31, 2021.
The Company currently plans to continue making regular quarterly dividend payments, subject to future earnings, capital requirements, financial condition, and other factors. In addition, the payment of dividends is subject to the terms of the Company’s outstanding Hybrid Securities, which generally provide that if the Company defers interest payments on those securities it cannot pay dividends on its capital stock.
Off-Balance Sheet Arrangements
The Company does not have any off-balance sheet arrangements that have or are reasonably likely to have a current or future effect on its financial condition, revenues or expenses, results of operations, liquidity, capital expenditures, or capital resources that are material to investors.
CRITICAL ACCOUNTING POLICIES AND ESTIMATES
Management's Discussion and Analysis of Financial Condition and Results of Operations addresses the Company's consolidated financial statements, which have been prepared in accordance with GAAP. A discussion of the Company's critical accounting policies, which include allowance for loan losses, revenue recognition, consolidation of Variable Interest Entities, income taxes, and accounting for derivatives can be found in the Company's 2016 Annual Report. There were no significant changes to these critical accounting policies during the first nine months of 2017.
RECENT ACCOUNTING PRONOUNCEMENTS
Revenue Recognition
In May 2014, the Financial Accounting Standards Board ("FASB") issued accounting guidance regarding the recognition of revenue from contracts with customers, which requires an entity to recognize the amount of revenue to which it expects to be entitled for the transfer of promised goods or services to customers. This guidance will replace most existing revenue recognition guidance once it becomes effective on January 1, 2018 and the standard allows the use of either the retrospective or cumulative effect transition method. The Company currently plans to use the cumulative effect transition method. The Company is evaluating the impact this pronouncement will have on its ongoing financial reporting. However, it does not currently believe the implementation will have a material impact to its financial statements. The majority of the Company's revenue earned in its Asset Generation and Management segment, including loan interest and derivative activity, is explicitly excluded from the scope of the new guidance. The Company continues to evaluate the impact to revenue earned from its fee-based operating segments and the presentation and disclosures. In regards to the Company's fee-based operating segments, the Company's implementation efforts to date include the identification of revenue and review of related contracts within these segments. Based upon this review, the Company has not yet identified nor does it anticipate material changes in the timing of revenue recognition. However, the Company's review is ongoing as it continues to evaluate both contract revenue and certain contract costs.
Classification and Measurement
In January 2016, the FASB issued accounting guidance regarding the recognition and measurement of financial assets and financial liabilities, which will change the income statement impact of equity investments, and the recognition of changes in fair value of financial liabilities when the fair value option is elected. The new guidance requires all equity investments to be measured at fair value, with changes in the fair value recognized through net income (other than those equity investments accounted for under the equity method of accounting or those that result in consolidation of the investee), and requires an entity to present separately in other comprehensive income the portion of the total change in the fair value of a liability resulting from a change in the instrument-specific credit risk when the entity has elected to measure the liability at fair value in accordance with the fair value option for financial instruments. This guidance will be effective for the Company beginning January 1, 2018 and requires a cumulative effect adjustment to retained earnings as of the beginning of the reporting period of adoption. The Company is evaluating the impact this pronouncement will have on its ongoing financial reporting. However, it does not currently believe the implementation will have a material impact to its financial statements.
Leases
In February 2016, the FASB issued accounting guidance regarding the accounting for leases. The new standard will require the identification of arrangements that should be accounted for as leases by lessees and the disclosure of key information about leasing arrangements. In general, lease arrangements exceeding a twelve-month term will be recognized as assets and liabilities on the balance sheet of the lessee. A right-of-use asset and lease obligation will be recorded for all leases, whether operating or financing, while the income statement will reflect lease expense for operating leases and amortization/interest expense for financing leases. The balance sheet amount recorded for existing leases at the date of adoption must be calculated using the applicable incremental borrowing rate at the date of adoption. The standard requires the use of the modified retrospective transition method, which will require adjustment to all comparative periods presented with certain practical expedients available. It will be effective for the Company beginning January 1, 2019 with early adoption permitted. The Company currently expects to adopt the new standard on its effective date and to elect all of the standard's available practical expedients on adoption. The Company is evaluating the impact this pronouncement will have on its ongoing financial reporting.
Allowance for Loan Losses
In June 2016, the FASB issued accounting guidance regarding the measurement of credit losses on financial instruments, which will change the way entities recognize impairment of many financial assets by requiring immediate recognition of estimated credit losses expected to occur over the asset's remaining life. The Company currently uses an incurred loss model when calculating its allowance for loan losses. As a result, the Company expects the new guidance will increase the allowance for loan losses. This guidance will be effective for the Company beginning January 1, 2020. Early application is permitted beginning January 1, 2019. This standard represents a significant departure from existing GAAP, and may result in significant changes to the Company's accounting for the allowance for loan losses. The Company is evaluating the impact this pronouncement will have on its ongoing financial reporting.
Statement of Cash Flows
In August 2016, the FASB issued accounting guidance regarding the presentation and classification of certain cash receipts and cash payments in the statement of cash flows. Among the cash flow matters addressed in the update are payments for costs related to debt prepayments or extinguishments, payments related to settlement of certain types of debt instruments, payments of contingent consideration made after a business combination, and distributions received from equity method investees, among others. This guidance will be effective for the Company beginning January 1, 2018 with early adoption permitted. The guidance will be applied using a retrospective transition method to each period presented, unless impracticable for specific cash flow matters, in which case the update would be applied prospectively as of the earliest date practicable. The Company believes the adoption of this guidance will not have a significant impact on its consolidated financial statements.
In November 2016, the FASB issued accounting guidance which provides amendments to current guidance to address the classifications and presentation of changes in restricted cash in the statement of cash flows. This guidance will be effective for the Company beginning January 1, 2018 with early adoption permitted. The amendments will be applied using a retrospective transition method to each period presented. The Company is evaluating the impact this pronouncement will have on its ongoing financial reporting.
Goodwill
In January 2017, the FASB issued accounting guidance which will eliminate the two-step process that requires identification of potential impairment and a separate measure of the actual impairment. The annual assessment of goodwill impairment will be determined by using the difference between the carrying amount and the fair value of the reporting unit. The new standard will be effective for the Company beginning January 1, 2020 with early adoption permitted. The Company is evaluating the impact this pronouncement will have on its ongoing financial reporting.
ITEM 3. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
(All dollars are in thousands, except share amounts, unless otherwise noted)
Interest Rate Risk
The Company’s primary market risk exposure arises from fluctuations in its borrowing and lending rates, the spread between which could impact the Company due to shifts in market interest rates.
The following table sets forth the Company’s loan assets and debt instruments by rate characteristics:
| | | As of September 30, 2017 | | As of December 31, 2016 | | As of March 31, 2021 | | As of December 31, 2020 |
| Dollars | | Percent | | Dollars | | Percent | | Dollars | | Percent | | Dollars | | Percent |
Fixed-rate loan assets | $ | 5,334,565 |
| | 23.5 | % | | $ | 8,585,283 |
| | 34.2 | % | Fixed-rate loan assets | $ | 8,470,975 | | | 44.3 | % | | $ | 8,737,346 | | | 44.6 | % |
Variable-rate loan assets | 17,379,348 |
| | 76.5 |
| | 16,518,360 |
| | 65.8 |
| Variable-rate loan assets | 10,638,479 | | | 55.7 | | | 10,839,305 | | | 55.4 | |
Total | $ | 22,713,913 |
| | 100.0 | % | | $ | 25,103,643 |
| | 100.0 | % | Total | $ | 19,109,454 | | | 100.0 | % | | $ | 19,576,651 | | | 100.0 | % |
| | | | | | | | | | | | | | | |
Fixed-rate debt instruments | $ | 109,251 |
| | 0.5 | % | | $ | 131,733 |
| | 0.5 | % | Fixed-rate debt instruments | $ | 951,143 | | | 5.0 | % | | $ | 960,327 | | | 4.9 | % |
Variable-rate debt instruments | 22,517,671 |
| | 99.5 |
| | 24,968,687 |
| | 99.5 |
| Variable-rate debt instruments | 18,032,040 | | | 95.0 | | | 18,598,522 | | | 95.1 | |
Total | $ | 22,626,922 |
| | 100.0 | % | | $ | 25,100,420 |
| | 100.0 | % | Total | $ | 18,983,183 | | | 100.0 | % | | $ | 19,558,849 | | | 100.0 | % |
FFELP loans originated prior to April 1, 2006 generally earn interest at the higher of the borrower rate, which is fixed over a period of time, or a floating rate based on the special allowance payment ("SAP") formula set by the Department. The SAP rate is based on an applicable index plus a fixed spread that depends on loan type, origination date, and repayment status. The Company generally finances its FFELP student loan portfolio with variable rate debt. In low and/or declining interest rate environments, when the fixed borrower rate is higher than the SAP rate, the Company’s FFELP student loans earn at a fixed rate while the interest on the variable rate debt typically continues to reflect the low and/or declining interest rates. In these interest rate environments, the Company may earn additional spread income that it refers to as floor income.
Depending on the type of loan and when it was originated, the borrower rate is either fixed to term or is reset to an annual rate each July 1. As a result, for loans where the borrower rate is fixed to term, the Company may earn floor income for an extended period of time, which the Company refers to as fixed rate floor income, and for those loans where the borrower rate is reset annually on July 1, the Company may earn floor income to the next reset date, which the Company refers to as variable rate floor income. All FFELP loans first originated on or after April 1, 2006 effectively earn at the SAP rate, since lenders are required to rebate fixed rate floor income and variable rate floor income for those loans to the Department.
NoAs a result of the significant drop in interest rates in March 2020, the Company earned $0.9 million of variable-rate floor income was earned byon $1.4 billion of FFELP loans during the three months ended March 31, 2020. Since the borrower rate reset on July 1, 2020, the Company duringno longer earns such variable-rate floor income on these loans, reflecting the nine months ended September 30, 2017 and 2016. lower interest rate environment.
A summary of fixed rate floor income earned by the Company follows.
| | | | | | | | | | | | | | | |
| Three months ended March 31, | | |
| 2021 | | 2020 | | | | |
Fixed rate floor income, gross | $ | 35,539 | | | 18,758 | | | | | |
Derivative settlements (a) | (4,285) | | | 2,125 | | | | | |
Fixed rate floor income, net | $ | 31,254 | | | 20,883 | | | | | |
|
| | | | | | | | | | | | |
| Three months ended September 30, | | Nine months ended September 30, |
| 2017 | | 2016 | | 2017 | | 2016 |
Fixed rate floor income, gross | $ | 24,586 |
| | 41,509 |
| | 84,382 |
| | 131,720 |
|
Derivative settlements (a) | 3,883 |
| | (5,157 | ) | | 5,877 |
| | (15,241 | ) |
Fixed rate floor income, net | $ | 28,469 |
| | 36,352 |
| | 90,259 |
| | 116,479 |
|
| |
(a) | Includes settlement payments on(a) Derivative settlements consist of settlements (paid) received related to the Company's derivatives used to hedge student loans earning fixed rate floor income. |
The high levels of gross fixed rate floor income earned during 2017 and 2016 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. income.
Gross fixed rate floor income decreasedincreased for the three and nine months ended September 30, 2017March 31, 2021 as compared to the same periodsperiod in 20162020 due to an increaselower interest rates in interest rates.
2021 as compared to 2020.
Absent the use of derivative instruments, a rise in interest rates maywill reduce the amount of floor income received and this may havehas an impact on earnings due to interest margin compression caused by increasing financing costs, until such time as the federally insured loans earn interest at a variable rate in accordance with their special allowance paymentSAP formulas. In higher interest rate environments, where the interest rate rises above the borrower rate and fixed rate loans effectively become variable rate loans, the impact of the rate fluctuations is reduced.
The change from being in a net positive settlement position on such derivatives during the first quarter of 2020 to being in a net negative settlement position during the first quarter of 2021 was due to a decrease in interest rates.
The following graph depicts fixed rate floor income for a borrower with a fixed rate of 6.75% and a SAP rate of 2.64%.:
The following table shows the Company’s federally insured student loan assets that were earning fixed rate floor income as of September 30, 2017.March 31, 2021.
| | | | | | | | | | | | | | | | | | | | |
Fixed interest rate range | | Borrower/lender weighted average yield | | Estimated variable conversion rate (a) | | Loan balance |
< 3.0% | | 2.88% | | 0.24% | | $ | 1,148,014 | |
3.0 - 3.49% | | 3.19% | | 0.55% | | 1,457,170 | |
3.5 - 3.99% | | 3.65% | | 1.01% | | 1,399,853 | |
4.0 - 4.49% | | 4.20% | | 1.56% | | 1,048,179 | |
4.5 - 4.99% | | 4.71% | | 2.07% | | 652,729 | |
5.0 - 5.49% | | 5.22% | | 2.58% | | 435,515 | |
5.5 - 5.99% | | 5.67% | | 3.03% | | 292,332 | |
6.0 - 6.49% | | 6.19% | | 3.55% | | 335,607 | |
6.5 - 6.99% | | 6.70% | | 4.06% | | 328,879 | |
7.0 - 7.49% | | 7.17% | | 4.53% | | 121,487 | |
7.5 - 7.99% | | 7.71% | | 5.07% | | 221,019 | |
8.0 - 8.99% | | 8.18% | | 5.54% | | 525,096 | |
> 9.0% | | 9.05% | | 6.41% | | 198,084 | |
| | | | | | $ | 8,163,964 | |
(a) The estimated variable conversion rate is the estimated short-term interest rate at which loans would convert to a variable rate. As of March 31, 2021, the weighted average estimated variable conversion rate was 1.94% and the short-term interest rate was 12 basis points.
|
| | | | | | | | | | |
Fixed interest rate range | | Borrower/lender weighted average yield | | Estimated variable conversion rate (a) | | Loan balance |
3.5 - 3.99% | | 3.92 | % | | 1.28 | % | | $ | 1,090 |
|
4.0 - 4.49% | | 4.20 | % | | 1.56 | % | | 1,408,663 |
|
4.5 - 4.99% | | 4.71 | % | | 2.07 | % | | 851,229 |
|
5.0 - 5.49% | | 5.22 | % | | 2.58 | % | | 539,482 |
|
5.5 - 5.99% | | 5.67 | % | | 3.03 | % | | 379,443 |
|
6.0 - 6.49% | | 6.19 | % | | 3.55 | % | | 437,761 |
|
6.5 - 6.99% | | 6.70 | % | | 4.06 | % | | 421,737 |
|
7.0 - 7.49% | | 7.17 | % | | 4.53 | % | | 150,722 |
|
7.5 - 7.99% | | 7.71 | % | | 5.07 | % | | 252,994 |
|
8.0 - 8.99% | | 8.18 | % | | 5.54 | % | | 584,749 |
|
> 9.0% | | 9.05 | % | | 6.41 | % | | 202,455 |
|
| | | | | | $ | 5,230,325 |
|
| |
(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, 2017, the weighted average estimated variable conversion rate was 3.11% and the short-term interest rate was 125 basis points. |
The following table summarizes the outstanding derivative instruments as of September 30, 2017March 31, 2021 used by the Company to economically hedge loans earning fixed rate floor income.
| | | | | | | | | | | | | | |
Maturity | | Notional amount | | Weighted average fixed rate paid by the Company (a) |
| |
2021 | | $ | 600,000 | | | 2.15 | % |
2022 (b) | | 500,000 | | | 0.94 | |
2023 | | 900,000 | | | 0.62 | |
2024 (c) | | 2,500,000 | | | 0.35 | |
2025 | | 500,000 | | | 0.35 | |
| | | | |
| | | | |
| | | | |
| | $ | 5,000,000 | | | 0.67 | % |
|
| | | | | | | |
Maturity | | Notional amount | | Weighted average fixed rate paid by the Company (a) |
| |
2018 | | $ | 1,350,000 |
| | 1.07 | % |
2019 | | 3,250,000 |
| | 0.97 |
|
2020 | | 1,500,000 |
| | 1.01 |
|
2025 | | 100,000 |
| | 2.32 |
|
| | $ | 6,200,000 |
| | 1.02 | % |
| |
(a) | (a) For all interest rate derivatives, the Company receives discrete three-month LIBOR. |
In addition, on August 20, 2014, the Company paid $9.1 million for an interest rate swap option to economically hedge loans earning fixed rate floor income. The interest rate swap option gives the Company the right, but not the obligation, to enter into areceives discrete three-month LIBOR.
(b) $250.0 million notional interest rate swapof these derivatives have forward effective start dates in which the Company would pay a fixed amountJune 2021.
(c) $500.0 million of 3.30% and receive discrete one-month LIBOR. If the interest rate swap option is exercised, the swap would becomethese derivatives have forward effective start dates in 2019 and mature in 2024.
June 2021.
The Company is also exposed to interest rate risk in the form of basis risk and repricing risk because the interest rate characteristics of the Company’s assets do not match the interest rate characteristics of the funding for those assets. The following table presents the Company’s FFELP student loan assets and related funding for those assets arranged by underlying indices as of September 30, 2017.March 31, 2021.
| | | | | | | | | | | | | | | | | | | | |
Index | | Frequency of variable resets | | Assets | | Funding of student loan assets |
1 month LIBOR (a) | | Daily | | $ | 17,313,992 | | | — | |
3 month H15 financial commercial paper | | Daily | | 710,549 | | | — | |
3 month Treasury bill | | Daily | | 580,842 | | | — | |
1 month LIBOR | | Monthly | | — | | | 10,446,455 | |
3 month LIBOR (a) | | Quarterly | | — | | | 6,269,914 | |
Fixed rate | | — | | — | | | 915,947 | |
Auction-rate (b) | | Varies | | — | | | 747,075 | |
Asset-backed commercial paper (c) | | Varies | | — | | | 247,018 | |
Other (d) | | — | | 1,332,125 | | | 1,311,099 | |
| | | | $ | 19,937,508 | | | 19,937,508 | |
|
| | | | | | | | | |
Index | | Frequency of variable resets | | Assets | | Funding of student loan assets |
1 month LIBOR (a) | | Daily | | $ | 20,692,662 |
| | — |
|
3 month H15 financial commercial paper | | Daily | | 1,146,947 |
| | — |
|
3 month Treasury bill | | Daily | | 647,675 |
| | — |
|
3 month LIBOR (a) (b) | | Quarterly | | — |
| | 12,274,155 |
|
1 month LIBOR | | Monthly | | — |
| | 8,550,438 |
|
Auction-rate (c) | | Varies | | — |
| | 781,276 |
|
Asset-backed commercial paper (d) | | Varies | | — |
| | 596,395 |
|
Other (e) | | | | 1,074,851 |
| | 1,359,871 |
|
| | | | $ | 23,562,135 |
| | 23,562,135 |
|
| |
(a) | The Company has certain basis swaps outstanding in which the Company receives three-month LIBOR and pays one-month LIBOR plus or minus a spread as defined in the agreements (the "1:3 Basis Swaps"). The Company entered into these derivative instruments to better match the interest rate characteristics on its student loan assets and the debt funding such assets. The following table summarizes the 1:3 Basis Swaps outstanding as of September 30, 2017. |
(a) The Company has certain basis swaps outstanding in which the Company receives three-month LIBOR and pays one-month LIBOR plus or minus a spread as defined in the agreements (the "1:3 Basis Swaps"). The Company entered into these derivative instruments to better match the interest rate characteristics on its student loan assets and the debt funding such assets. The following table summarizes the 1:3 Basis Swaps outstanding as of March 31, 2021. |
| | | | |
Maturity | | Notional amount |
2018 | | $ | 4,000,000 |
|
2019 | | 3,000,000 |
|
2024 | | 250,000 |
|
2026 | | 1,150,000 |
|
2027 | | 375,000 |
|
2028 | | 325,000 |
|
2029 | | 100,000 |
|
2031 | | 300,000 |
|
| | $ | 9,500,000 |
|
| | | | | | | | |
Maturity | | Notional amount (i) |
2021 | | $ | 250,000 | |
2022 | | 2,000,000 | |
2023 | | 750,000 | |
2024 | | 1,750,000 | |
2026 | | 1,150,000 | |
2027 | | 250,000 | |
| | |
| | |
| | |
| | |
| | |
| | |
| | $ | 6,150,000 | |
(i) The weighted average rate paid by the Company on the 1:3 Basis Swaps as of September 30, 2017March 31, 2021 was one-month LIBOR plus 13.49.1 basis points.
(b) As of March 31, 2021, the Company was sponsor for $747.1 million of outstanding asset-backed securities that were set and provide for interest rates to be periodically reset via a "dutch auction" (“Auction Rate Securities”). Since the auction feature has essentially been inoperable for substantially all auction rate securities since 2008, the Auction Rate Securities generally pay interest to the holder at a maximum rate as defined by the indenture. While these rates will vary, they will generally be based on a spread to LIBOR or Treasury Securities, or the Net Loan Rate as defined in the financing documents.
(c) The interest rates on the Company's warehouse facilities are indexed to asset-backed commercial paper rates.
| |
(b) | As of September 30, 2017, the Company had Euro-denominated notes that repriced on the EURIBOR index. The Company had entered into a cross-currency interest rate swap that converted the EURIBOR index to three-month LIBOR. As a result, these notes are reflected in the three-month LIBOR category in the above table. See “Foreign Currency Exchange Risk” below. |
| |
(c) | The interest rates on certain of the Company's asset-backed securities are set and periodically reset via a "dutch auction" (“Auction Rate Securities”). As of September 30, 2017, the Company was sponsor for $781.3 million of Auction Rate Securities. Since February 2008, problems in the auction rate securities market as a whole have led to failures of the auctions pursuant to which the Company's Auction Rate Securities' interest rates are set. As a result, the Auction Rate Securities generally pay interest to the holder at a maximum rate as defined by the indenture. While these rates will vary, they will generally be based on a spread to LIBOR or Treasury Securities, or the Net Loan Rate as defined in the financing documents. |
| |
(d) | The interest rates on certain of the Company's warehouse facilities are indexed to asset-backed commercial paper rates. |
| |
(e) | (d) Assets include accrued interest receivable and restricted cash. Funding represents overcollateralization (equity) and other liabilities included in FFELP asset-backed securitizations and warehouse facilities. |
LIBOR is in the process of being discontinued as a benchmark rate, and any market transition away from the current LIBOR framework could result in significant changes to the interest rate characteristics of the Company's LIBOR-indexed assets and funding for those assets. See "Interest Rate Risk - Replacement of LIBOR as a Benchmark Rate" under Item 2 above and Item 1A, "Risk Factors - Loan Portfolio - Interest rate risk - replacement of LIBOR as a benchmark rate" in the Company's 2020 Annual Report for additional information.
Sensitivity Analysis
The following tables summarize the effect on the Company’s earnings, based upon a sensitivity analysis performed by the Company assuming hypothetical increases in interest rates of 100 basis points and 300 basis points while funding spreads remain constant. In addition, a sensitivity analysis was performed assuming the funding index increases 10 basis points and 30 basis points while holding the asset index constant, if the funding index is different than the asset index. The sensitivity analysis was performed on the Company’s variable rate assets (including loans earning fixed rate floor income) and liabilities. The analysis includes the effects of the Company’s interest rate and basis swapsderivative instruments in existence during these periods.
|
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| Interest rates | | Asset and funding index mismatches |
| Change from increase of 100 basis points | | Change from increase of 300 basis points | | Increase of 10 basis points | | Increase of 30 basis points |
| | |
| Dollars | | Percent | | Dollars | | Percent | | Dollars | | Percent | | Dollars | | Percent |
| Three months ended September 30, 2017 |
Effect on earnings: | | | | | | | | | | | | | | | |
Decrease in pre-tax net income before impact of derivative settlements | $ | (9,044 | ) | | (13.1 | )% | | $ | (16,828 | ) | | (24.4 | )% | | $ | (3,296 | ) | | (4.8 | )% | | $ | (9,889 | ) | | (14.3 | )% |
Impact of derivative settlements | 14,179 |
| | 20.5 |
| | 42,534 |
| | 61.6 |
| | 1,890 |
| | 2.7 |
| | 5,671 |
| | 8.2 |
|
Increase (decrease) in net income before taxes | $ | 5,135 |
| | 7.4 | % | | $ | 25,706 |
| | 37.2 | % | | $ | (1,406 | ) | | (2.1 | )% | | $ | (4,218 | ) | | (6.1 | )% |
Increase (decrease) in basic and diluted earnings per share | $ | 0.08 |
| | | | $ | 0.38 |
| | | | $ | (0.02 | ) | | | | $ | (0.06 | ) | | |
| | | | | | | | | | | | | | | |
| Three months ended September 30, 2016 |
Effect on earnings: | | | | | | | | | | | | | |
| | |
|
Decrease in pre-tax net income before impact of derivative settlements | $ | (16,758 | ) | | (12.6 | )% | | $ | (31,121 | ) | | (23.6 | )% | | $ | (3,987 | ) | | (3.0 | )% | | $ | (11,960 | ) | | (9.1 | )% |
Impact of derivative settlements | 15,775 |
| | 11.9 |
| | 47,324 |
| | 35.9 |
| | 436 |
| | 0.3 |
| | 1,307 |
| | 1.0 |
|
Increase (decrease) in net income before taxes | $ | (983 | ) | | (0.7 | )% | | $ | 16,203 |
| | 12.3 | % | | $ | (3,551 | ) | | (2.7 | )% | | $ | (10,653 | ) | | (8.1 | )% |
Increase (decrease) in basic and diluted earnings per share | $ | (0.01 | ) | | | | $ | 0.24 |
| | | | $ | (0.05 | ) | | | | $ | (0.15 | ) | | |
| | | | | | | | | | | | | | | |
| Nine months ended September 30, 2017 |
Effect on earnings: | | | | | | | | | | | | | |
| | |
|
Decrease in pre-tax net income before impact of derivative settlements | $ | (30,205 | ) | | (16.2 | )% | | $ | (54,221 | ) | | (29.1 | )% | | $ | (10,314 | ) | | (5.5 | )% | | $ | (30,943 | ) | | (16.6 | )% |
Impact of derivative settlements | 45,396 |
| | 24.3 |
| | 136,182 |
| | 73.1 |
| | 4,368 |
| | 2.3 |
| | 13,105 |
| | 7.0 |
|
Increase (decrease) in net income before taxes | $ | 15,191 |
| | 8.1 | % | | $ | 81,961 |
| | 44.0 | % | | $ | (5,946 | ) | | (3.2 | )% | | $ | (17,838 | ) | | (9.6 | )% |
Increase (decrease) in basic and diluted earnings per share | $ | 0.23 |
| | | | $ | 1.20 |
| | | | $ | (0.08 | ) | | | | $ | (0.25 | ) | | |
| | | | | | | | | | | | | | | |
| Nine months ended September 30, 2016 |
Effect on earnings: | |
| | |
| | |
| | |
| | |
| | |
| | |
| | |
|
Decrease in pre-tax net income before impact of derivative settlements | $ | (52,798 | ) | | (21.5 | )% | | $ | (97,144 | ) | | (39.4 | )% | | $ | (12,235 | ) | | (4.9 | )% | | $ | (36,705 | ) | | (14.9 | )% |
Impact of derivative settlements | 45,025 |
| | 18.3 |
| | 135,074 |
| | 55.0 |
| | 2,776 |
| | 1.1 |
| | 8,327 |
| | 3.4 |
|
Increase (decrease) in net income before taxes | $ | (7,773 | ) | | (3.2 | )% |
| $ | 37,930 |
| | 15.6 | % | | $ | (9,459 | ) | | (3.8 | )% | | $ | (28,378 | ) | | (11.5 | )% |
Increase (decrease) in basic and diluted earnings per share | $ | (0.11 | ) | | | | $ | 0.55 |
| | | | $ | (0.14 | ) | | | | $ | (0.41 | ) | | |
Foreign Currency Exchange Risk
In 2006, the Company issued €352.7 million of student loan asset-backed Euro Notes (the "Euro Notes") with an interest rate based on a spread to the EURIBOR index. As a result, the Company was exposed to market risk related to fluctuations in foreign currency exchange rates between the U.S. dollar and Euro. The Company entered into a cross-currency interest rate swap in connection with the issuance of the Euro Notes. See note 4 of the notes to consolidated financial statements included under Part I, Item 1 of this report for additional information, including a summary of the terms of the cross-currency interest rate swap associated with the Euro Notes and the related financial statement impact.
On October 25, 2017, the Company completed a remarketing of the Euro Notes which reset the principal amount outstanding on the Euro Notes to $450.0 million U.S. dollars, with an interest rate based on the 3-month LIBOR index, and resulted in the termination of the cross-currency interest rate swap. See note 14 of the notes to consolidated financial statements included under Part I, Item 1 of this report for additional information on this remarketing.
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| Interest rates | | Asset and funding index mismatches |
| Change from increase of 100 basis points | | Change from increase of 300 basis points | | Increase of 10 basis points | | Increase of 30 basis points |
| | |
| Dollars | | Percent | | Dollars | | Percent | | Dollars | | Percent | | Dollars | | Percent |
| Three months ended March 31, 2021 |
Effect on earnings: | | | | | | | | | | | | | | | |
Decrease in pre-tax net income before impact of derivative settlements | $ | (14,282) | | | (9.1) | % | | $ | (26,218) | | | (16.6) | % | | $ | (1,605) | | | (1.0) | % | | $ | (4,814) | | | (3.1) | % |
Impact of derivative settlements | 9,130 | | | 5.8 | | | 27,390 | | | 17.3 | | | 1,516 | | | 1.0 | | | 4,549 | | | 2.9 | |
Increase (decrease) in net income before taxes | $ | (5,152) | | | (3.3) | % | | $ | 1,172 | | | 0.7 | % | | $ | (89) | | | — | % | | $ | (265) | | | (0.2) | % |
Increase (decrease) in basic and diluted earnings per share | $ | (0.10) | | | | | $ | 0.02 | | | | | $ | — | | | | | $ | (0.01) | | | |
| Three months ended March 31, 2020 |
Effect on earnings: | | | | | | | | | | | | | | | |
Decrease in pre-tax net income before impact of derivative settlements | $ | (9,915) | | | (19.9) | % | | $ | (16,552) | | | (33.2) | % | | $ | (1,974) | | | (4.0) | % | | $ | (5,924) | | | (11.9) | % |
Impact of derivative settlements | 4,351 | | | 8.7 | | | 13,053 | | | 26.2 | | | 1,591 | | | 3.2 | | | 4,774 | | | 9.6 | |
Increase (decrease) in net income before taxes | $ | (5,564) | | | (11.2) | % | | $ | (3,499) | | | (7.0) | % | | $ | (383) | | | (0.8) | % | | $ | (1,150) | | | (2.3) | % |
Increase (decrease) in basic and diluted earnings per share | $ | (0.11) | | | | | $ | (0.07) | | | | | $ | (0.01) | | | | | $ | (0.02) | | | |
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Financial Statement Impact – Derivatives and Foreign Currency Transaction Adjustments
For a table summarizing the effect of derivative instruments in the consolidated statements of income,operations, including the components of "derivative market value and foreign currency transaction adjustments and derivative settlements, net" included in the consolidated statements of income,operations, see note 4 of the notes to consolidated financial statements included under Part I, Item 1 of this report.
ITEM 4. CONTROLS AND PROCEDURES
Disclosure Controls and Procedures
Under supervision andThe Company’s management, with the participation of certain members of the Company’s management, including the chiefCompany's principal executive and chiefprincipal financial officers, the Company completed an evaluation ofevaluated the effectiveness of the design and operation of itsCompany’s disclosure controls and procedures (as defined in SEC Rules 13a-15(e) and 15d-15(e) under the Securities Exchange Act of 1934). as of March 31, 2021. Based on this evaluation, the Company’s principal executive and principal financial officers concluded that the Company's disclosure controls and procedures were effective as of the end of the period covered by this report to provide reasonable assurance that information required to be disclosed in reports the Company files or submits under the Securities Exchange Act of 1934 is recorded, processed, summarized, and reported, within the time periods specified in the SEC's rules and forms, and is accumulated and communicated to the Company's management, including the chief executive and chief financial officers, as appropriate to allow timely decisions regarding required disclosure.
March 31, 2021.
Changes in Internal Control over Financial Reporting
There waswere no changechanges in the Company’s internal control over financial reporting during the Company’s last fiscal quarter ended March 31, 2021 that hashave materially affected, or isare reasonably likely to materially affect, the Company’s internal control over financial reporting.
PART II. OTHER INFORMATION
ITEM 1. LEGAL PROCEEDINGS
There have been no material changes from the information set forthreferred to in the Legal Proceedings section of the Company's Annual Report on Form 10-K for the year ended December 31, 20162020 under Item 3 of Part I of such Form 10-K.
ITEM 1A. RISK FACTORS
There have been no material changes from the risk factors described in the Company’s Annual Report on Form 10-K for the year ended December 31, 20162020 in response to Item 1A of Part I of such Form 10-K.
ITEM 2. UNREGISTERED SALES OF EQUITY SECURITIES AND USE OF PROCEEDS
Stock Repurchases
The following table summarizes the repurchases of Class A common stock during the thirdfirst quarter of 20172021 by the Company or any “affiliated purchaser” of the Company, as defined in Rule 10b-18(a)(3) under the Securities Exchange Act of 1934. Certain share repurchases included in
| | | | | | | | | | | | | | | | | | | | | | | | | | |
Period | | Total number of shares purchased (a) | | Average price paid per share | | Total number of shares purchased as part of publicly announced plans or programs (b) | | Maximum number of shares that may yet be purchased under the plans or programs (b) |
January 1 - January 31, 2021 | | 18 | | | $ | 71.22 | | | — | | | 3,246,732 | |
February 1 - February 28, 2021 | | — | | | — | | | — | | | 3,246,732 | |
March 1 - March 31, 2021 | | 26,181 | | | 76.70 | | | — | | | 3,246,732 | |
Total | | 26,199 | | | $ | 76.70 | | | — | | | |
(a) The total number of shares consist of shares owned and tendered by employees to satisfy tax withholding obligations upon the table belowvesting of restricted shares. Unless otherwise indicated, shares owned and tendered by employees to satisfy tax withholding obligations were made pursuantpurchased at the closing price of the Company's shares on the date of vesting.
(b) On May 8, 2019, the Company announced that its Board of Directors authorized a stock repurchase program to repurchase up to a trading plan adopted bytotal of five million shares of the Company in accordance with Rule 10b5-1 underCompany's Class A common stock during the Securities Exchange Act of 1934.
|
| | | | | | | | | | | | | |
Period | | Total number of shares purchased (a) | | Average price paid per share | | Total number of shares purchased as part of publicly announced plans or programs (b) | | Maximum number of shares that may yet be purchased under the plans or programs (b) |
July 1 - July 31, 2017 | | 318,610 |
| | $ | 47.83 |
| | 318,200 |
| | 3,875,613 |
|
August 1 - August 31, 2017 | | 325,983 |
| | 46.84 |
| | 325,983 |
| | 3,549,630 |
|
September 1 - September 30, 2017 | | 303,201 |
| | 48.24 |
| | 300,750 |
| | 3,248,880 |
|
Total | | 947,794 |
| | $ | 47.62 |
| | 944,933 |
| | |
|
| |
(a) | The total number of shares includes: (i) shares repurchased pursuant to the stock repurchase program discussed in footnote (b) below; and (ii) shares owned and tendered by employees to satisfy tax withholding obligations upon the vesting of restricted shares. Shares of Class A common stock tendered by employees to satisfy tax withholding obligations included 410 shares, 0 shares, and 2,451 shares in July, August, and September, respectively. Unless otherwise indicated, shares owned and tendered by employees to satisfy tax withholding obligations were purchased at the closing price of the Company’s shares on the date of vesting. |
| |
(b) | On August 4, 2016, the Company announced that its Board of Directors authorized a new stock repurchase program in May 2016 to repurchase up to a total of five million shares of the Company's Class A common stock during the three-year period ending May 25, 2019. |
three-year period ending May 7, 2022.
Working capital and dividend restrictions/limitations
The Company’s credit facilities, including its revolvingCompany's $455.0 million unsecured line of credit, which is available through December 12, 2021, impose16, 2024, imposes restrictions with respect toon the Company’spayment of dividends through covenants requiring a minimum consolidated net worth the ratioand a minimum level of the Company’s adjusted EBITDA to corporate debt interest, the amount of recourse indebtedness, the amount and nature ofunencumbered cash, cash equivalent investments, and business acquisitions, andavailable borrowing capacity under the amountline of private education loans held by the Company.credit. In addition, trust indentures and other financing agreements governing debt issued by the Company's education lending subsidiaries maygenerally have general limitations on the amounts of funds that can be transferred to the Company by its subsidiaries through cash dividends.
The supplemental indenture fordividends at certain times. Further, Nelnet Bank is subject to laws and regulations that restrict the Company’s Hybrid Securities issued in September 2006 provides that so long as any Hybrid Securities remain outstanding, ifability of Nelnet Bank to pay dividends to the Company, gives noticeand authorize regulatory authorities to prohibit or limit the payment of its electiondividends by Nelnet Bank to defer interest payments but the related deferral period hasCompany. These provisions do not yet commenced or a deferral period is continuing, thencurrently materially limit the Company's ability to pay dividends, and, based on the Company's current financial condition and recent results of operations, the Company does not currently anticipate that these provisions will not, and will not permit any of its subsidiaries to:
declare or pay any dividends or distributions on, or redeem, purchase, acquire or make a liquidation payment regarding, any ofmaterially limit the Company’s capital stock.
except as required in connection with the repayment of principal, and except for any partial payments of deferred interest that may be made through the alternative payment mechanism described in the Hybrid Securities indenture, make anyfuture payment of principal of, or interest or premium, if any, on, or repay, repurchase, or redeem any of the Company’s debt securities that rank pari passu with or junior to the Hybrid Securities.
dividends.
make any guarantee payments regarding any guarantee by the Company of the subordinated debt securities of any of the Company’s subsidiaries if the guarantee ranks pari passu with or junior in interest to the Hybrid Securities.
In addition, if any deferral period lasts longer than one year, the limitation on the Company’s ability to redeem or repurchase any of its securities that rank pari passu with or junior in interest to the Hybrid Securities will continue until the first anniversary of the date on which all deferred interest has been paid or canceled.
If the Company is involved in a business combination where immediately after its consummation more than 50% of the surviving entity’s voting stock is owned by the shareholders of the other party to the business combination, then the immediately preceding sentence will not apply to any deferral period that is terminated on the next interest payment date following the date of consummation of the business combination.
However, at any time, including during a deferral period, the Company will be permitted to:
pay dividends or distributions in additional shares of the Company’s capital stock.
declare or pay a dividend in connection with the implementation of a shareholders’ rights plan, or issue stock under such a plan, or redeem or repurchase any rights distributed pursuant to such a plan.
purchase common stock for issuance pursuant to any employee benefit plans.
ITEM 6. EXHIBITS
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31.1*10.1 | |
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10.2*+ | |
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31.1* | |
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31.2* | |
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32** | |
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101.INS* | Inline XBRL Instance Document - the instance document does not appear in the Interactive Data File because its XBRL tags are embedded within the Inline XBRL document. |
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101.SCH* | Inline XBRL Taxonomy Extension Schema Document |
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101.CAL* | Inline XBRL Taxonomy Extension Calculation Linkbase Document |
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101.DEF* | Inline XBRL Taxonomy Extension Definition Linkbase Document |
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101.LAB* | Inline XBRL Taxonomy Extension Label Linkbase Document |
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101.PRE* | Inline XBRL Taxonomy Extension Presentation Linkbase Document |
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104* | Cover Page Interactive Data File (formatted as Inline XBRL and contained in Exhibit 101). |
* Filed herewith
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* | Filed herewith |
** | Furnished herewith |
+ | Filed herewith for purposes of providing a complete set of all amendment documents to the Second Amended and Restated Credit Agreement with U.S. Bank National Association and various Lenders signatory thereto. The Second Amended and Restated Credit Agreement and all prior amendment documents thereto have been previously filed. |
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SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934, the registrant has duly caused this report to be signed on its behalf by the undersigned thereunto duly authorized.
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| | NELNET, INC. | |
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Date: | November 7, 2017May 10, 2021 | By: | /s/ JEFFREY R. NOORDHOEK | |
| | Name: | Jeffrey R. Noordhoek | |
| | Title: | Chief Executive Officer Principal Executive Officer | |
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Date: | May 10, 2021 | By: | /s/ JAMES D. KRUGER | |
Date: | November 7, 2017 | Name: | James D. Kruger | |
| | Title: | Chief Financial Officer Principal Financial Officer and Principal Accounting Officer | |