13. Fair Value
The following tables present the Company’s financial assets and liabilities that are measured at fair value on a recurring basis. There were no transfers into or out
| As of September 30, 2021 | As of December 31, 2020 | ||||||||||||||||||||||||||||||||||||||||||||||
| Level 1 | Level 2 | Total | Level 1 | Level 2 | Total | ||||||||||||||||||||||||||||||||||||||||||
| Assets: | |||||||||||||||||||||||||||||||||||||||||||||||
| Investments: | |||||||||||||||||||||||||||||||||||||||||||||||
| FFELP loan asset-backed debt securities - available-for-sale | $ | — | 403,660 | 403,660 | — | 346,502 | 346,502 | ||||||||||||||||||||||||||||||||||||||||
| Private education loan asset-backed debt securities - available-for-sale | — | 371,724 | 371,724 | — | — | — | |||||||||||||||||||||||||||||||||||||||||
| Other debt securities - available-for-sale | 100 | 2,237 | 2,337 | 103 | 2,002 | 2,105 | |||||||||||||||||||||||||||||||||||||||||
| Equity securities (a) | 61,573 | — | 61,573 | 10,114 | — | 10,114 | |||||||||||||||||||||||||||||||||||||||||
| Equity securities measured at net asset value (b) | 8,471 | 31,927 | |||||||||||||||||||||||||||||||||||||||||||||
| Total investments | 61,673 | 777,621 | 847,765 | 10,217 | 348,504 | 390,648 | |||||||||||||||||||||||||||||||||||||||||
| Total assets | $ | 61,673 | 777,621 | 847,765 | 10,217 | 348,504 | 390,648 | ||||||||||||||||||||||||||||||||||||||||
(a) As of level 1, level 2, or level 3 for the nine months ended September 30, 2017.2021, $41.6 million and $20.0 million of equity securities were classified as trading and available-for-sale, respectively. All equity securities as of December 31, 2020 were classified as available-for-sale.
| As of September 30, 2017 | As of December 31, 2016 | |||||||||||||||||
| Level 1 | Level 2 | Total | Level 1 | Level 2 | Total | |||||||||||||
| Assets: | ||||||||||||||||||
| Investments (available-for-sale and trading): | ||||||||||||||||||
| Student loan and other asset-backed securities | $ | — | 72,427 | 72,427 | — | 103,780 | 103,780 | |||||||||||
| Equity securities | 2,875 | — | 2,875 | 2,694 | — | 2,694 | ||||||||||||
| Debt securities | 111 | — | 111 | 119 | — | 119 | ||||||||||||
| Total investments (available-for-sale and trading) | 2,986 | 72,427 | 75,413 | 2,813 | 103,780 | 106,593 | ||||||||||||
| Derivative instruments | — | 996 | 996 | — | 87,531 | 87,531 | ||||||||||||
| Total assets | $ | 2,986 | 73,423 | 76,409 | 2,813 | 191,311 | 194,124 | |||||||||||
| Liabilities: | ||||||||||||||||||
| Derivative instruments | $ | — | 30,105 | 30,105 | — | 77,826 | 77,826 | |||||||||||
| Total liabilities | $ | — | 30,105 | 30,105 | — | 77,826 | 77,826 | |||||||||||
(b) In accordance with the Fair Value Measurements Topic of the FASB Accounting Standards Codification, certain investments that are measured at fair value using the net asset value per share (or its equivalent) practical expedient have not been classified in the fair value hierarchy.
The following table summarizes the fair values of all of the Company’s financial instruments on the consolidated balance sheets:
| As of September 30, 2021 | |||||||||||||||||||||||||||||
| Fair value | Carrying value | Level 1 | Level 2 | Level 3 | |||||||||||||||||||||||||
| Financial assets: | |||||||||||||||||||||||||||||
| Loans receivable | $ | 19,690,209 | 18,469,372 | — | — | 19,690,209 | |||||||||||||||||||||||
| Accrued loan interest receivable | 834,831 | 834,831 | — | 834,831 | — | ||||||||||||||||||||||||
| Cash and cash equivalents | 191,936 | 191,936 | 191,936 | — | — | ||||||||||||||||||||||||
| Investments (at fair value) | 847,765 | 847,765 | 61,673 | 777,621 | — | ||||||||||||||||||||||||
| Beneficial interest in loan securitizations | 127,364 | 108,827 | — | — | 127,364 | ||||||||||||||||||||||||
| Restricted cash | 764,089 | 764,089 | 764,089 | — | — | ||||||||||||||||||||||||
| Restricted cash – due to customers | 295,053 | 295,053 | 295,053 | — | — | ||||||||||||||||||||||||
| Financial liabilities: | |||||||||||||||||||||||||||||
| Bonds and notes payable | 18,854,255 | 18,610,748 | — | 18,854,255 | — | ||||||||||||||||||||||||
| Accrued interest payable | 4,441 | 4,441 | — | 4,441 | — | ||||||||||||||||||||||||
| Bank deposits | 199,372 | 200,651 | 42,585 | 156,787 | — | ||||||||||||||||||||||||
| Due to customers | 354,543 | 354,543 | 354,543 | — | — | ||||||||||||||||||||||||
| As of September 30, 2017 | |||||||||||||||
| Fair value | Carrying value | Level 1 | Level 2 | Level 3 | |||||||||||
| Financial assets: | |||||||||||||||
| Student loans receivable | $ | 23,635,887 | 22,528,845 | — | — | 23,635,887 | |||||||||
| Cash and cash equivalents | 254,391 | 254,391 | 254,391 | — | — | ||||||||||
| Investments (available-for-sale) | 75,413 | 75,413 | 2,986 | 72,427 | — | ||||||||||
| Notes receivable | 16,393 | 16,393 | — | 16,393 | — | ||||||||||
| Loans receivable | 42,006 | 40,339 | — | — | 42,006 | ||||||||||
| Restricted cash | 725,463 | 725,463 | 725,463 | — | — | ||||||||||
| Restricted cash – due to customers | 105,299 | 105,299 | 105,299 | — | — | ||||||||||
| Accrued interest receivable | 396,827 | 396,827 | — | 396,827 | — | ||||||||||
| Derivative instruments | 996 | 996 | — | 996 | — | ||||||||||
| Financial liabilities: | |||||||||||||||
| Bonds and notes payable | 22,319,439 | 22,240,279 | — | 22,319,439 | — | ||||||||||
| Accrued interest payable | 47,824 | 47,824 | — | 47,824 | — | ||||||||||
| Due to customers | 105,299 | 105,299 | 105,299 | — | — | ||||||||||
| Derivative instruments | 30,105 | 30,105 | — | 30,105 | — | ||||||||||
| As of December 31, 2016 | As of December 31, 2020 | |||||||||||||||||||||||||||||||||||||||||||
| Fair value | Carrying value | Level 1 | Level 2 | Level 3 | Fair value | Carrying value | Level 1 | Level 2 | Level 3 | |||||||||||||||||||||||||||||||||||
| Financial assets: | Financial assets: | |||||||||||||||||||||||||||||||||||||||||||
| Student loans receivable | $ | 25,653,581 | 24,903,724 | — | — | 25,653,581 | ||||||||||||||||||||||||||||||||||||||
| Loans receivable | Loans receivable | $ | 20,454,132 | 19,391,045 | — | — | 20,454,132 | |||||||||||||||||||||||||||||||||||||
| Accrued loan interest receivable | Accrued loan interest receivable | 794,611 | 794,611 | — | 794,611 | — | ||||||||||||||||||||||||||||||||||||||
| Cash and cash equivalents | 69,654 | 69,654 | 69,654 | — | — | Cash and cash equivalents | 121,249 | 121,249 | 121,249 | — | — | |||||||||||||||||||||||||||||||||
| Investments (available-for-sale and trading) | 106,593 | 106,593 | 2,813 | 103,780 | — | |||||||||||||||||||||||||||||||||||||||
| Notes receivable | 17,031 | 17,031 | — | 17,031 | — | |||||||||||||||||||||||||||||||||||||||
| Investments (at fair value) | Investments (at fair value) | 390,648 | 390,648 | 10,217 | 348,504 | — | ||||||||||||||||||||||||||||||||||||||
| Beneficial interest in loan securitizations | Beneficial interest in loan securitizations | 58,709 | 58,331 | — | — | 58,709 | ||||||||||||||||||||||||||||||||||||||
| Restricted cash | 980,961 | 980,961 | 980,961 | — | — | Restricted cash | 553,175 | 553,175 | 553,175 | — | — | |||||||||||||||||||||||||||||||||
| Restricted cash – due to customers | 119,702 | 119,702 | 119,702 | — | — | Restricted cash – due to customers | 283,971 | 283,971 | 283,971 | — | — | |||||||||||||||||||||||||||||||||
| Accrued interest receivable | 391,264 | 391,264 | — | 391,264 | — | |||||||||||||||||||||||||||||||||||||||
| Derivative instruments | 87,531 | 87,531 | — | 87,531 | — | |||||||||||||||||||||||||||||||||||||||
| Financial liabilities: | Financial liabilities: | |||||||||||||||||||||||||||||||||||||||||||
| Bonds and notes payable | 24,220,996 | 24,668,490 | — | 24,220,996 | — | Bonds and notes payable | 19,270,810 | 19,320,726 | — | 19,270,810 | — | |||||||||||||||||||||||||||||||||
| Accrued interest payable | 45,677 | 45,677 | — | 45,677 | — | Accrued interest payable | 28,701 | 28,701 | — | 28,701 | — | |||||||||||||||||||||||||||||||||
| Bank deposits | Bank deposits | 54,599 | 54,633 | 48,422 | 6,177 | — | ||||||||||||||||||||||||||||||||||||||
| Due to customers | 119,702 | 119,702 | 119,702 | — | — | Due to customers | 301,471 | 301,471 | 301,471 | — | — | |||||||||||||||||||||||||||||||||
| Derivative instruments | 77,826 | 77,826 | — | 77,826 | — | |||||||||||||||||||||||||||||||||||||||
The methodologies for estimating the fair value of financial assets and liabilities are described in note 2022 of the notes to consolidated financial statements included in the 20162020 Annual Report.
ITEM 2. MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS
(Management’s Discussion and Analysis of Financial Condition and Results of Operations is for the three and nine months ended September 30, 20172021 and 2016.2020. All dollars are in thousands, except per share amounts, unless otherwise noted.)
The following discussion and analysis provides information that the Company’s management believes is relevant to an assessment and understanding of the consolidated results of operations and financial condition of the Company. The discussion should be read in conjunction with the Company’s consolidated financial statements included in the 20162020 Annual Report.
Forward-looking and cautionary statements
This report contains forward-looking statements and information that are based on management's current expectations as of the date of this document. Statements that are not historical facts, including statements about the Company's plans and expectations for future financial condition, results of operations or economic performance, or that address management's plans and objectives for future operations, and statements that assume or are dependent upon future events, are forward-looking statements. The words “may,“anticipate,” “should,“assume,” “believe,” “continue,” “could,” “would,” “predict,” “potential,” “continue,“estimate,” “expect,” “anticipate,“forecast,” “future,” “intend,” “scheduled,“may,” “plan,” “believe,“potential,” “estimate,“predict,” “assume,“scheduled,” “forecast,“should,” “will,” “would,” and similar expressions, as well as statements in future tense, are intended to identify forward-looking statements.
The forward-looking statements are based on assumptions and analyses made by management in light of management's experience and its perception of historical trends, current conditions, expected future developments, and other factors that management believes are appropriate under the circumstances. These statements are subject to known and unknown risks, uncertainties, assumptions, and other factors that may cause the actual results and performance to be materially different from any future results or performance expressed or implied by such forward-looking statements. These factors include, among others, the risks and uncertainties set forth in the “Risk Factors” section of the 20162020 Annual Report and elsewhere in this report, and include such risks and uncertainties as:
•risks and uncertainties related to the severity, magnitude, and duration of the coronavirus disease 2019 (“COVID-19”) pandemic, including changes in the macroeconomic environment and consumer behavior, restrictions on business, educational, individual, or travel activities intended to combat the pandemic, and volatility in market conditions resulting from the pandemic, including interest rates, the value of equities, and other financial assets;
•risks related to the ability to successfully maintain and increase allocated volumes of student loans serviced by the Company under existing and any future servicing contracts with the U.S. Department of Education (the "Department"), which current contracts accounted for 27 percent of the Company's revenue in 2020, risks to the Company related to the Department's initiatives to procure new contracts for federal student loan servicing, including the pending and uncertain nature of the Department's procurement process (under which awards of new contracts have been made to other service providers), risks that the Company may not be successful in obtaining any of such potential new contracts, and risks related to the Company's ability to comply with agreements with third-party customers for the servicing of Federal Direct Loan Program, Federal Family Education Loan Program (the "FFEL Program" or "FFELP"), private education, and consumer loans;
•loan portfolio risks such as interest rate basis and repricing risk resulting from the fact that the interest rate characteristics of the student loan assets do not match the interest rate characteristics of the funding for those assets, the risk of loss of floor income on certain student loans originated under the Federal Family Education LoanFFEL Program, (the "FFEL Program" or "FFELP"), risks related to the use of derivatives to manage exposure to interest rate fluctuations, uncertainties regarding the expected benefits from purchased securitized and unsecuritized FFELP, private education, and consumer loans, or investment interests therein, and initiatives to purchase additional FFELP, private education, and consumer loans, and risks from changes in levels of student loan prepayment or default rates;
•financing and liquidity risks, including risks of changes in the general interest rate environment, including the availability of any relevant money market index rate such as LIBOR or the relationship between the relevant money market index rate and the rate at which the Company's assets and liabilities are priced, and changes in the securitization and other financing markets for student loans, including adverse changes resulting from slower than expected paymentsunanticipated repayment trends on student loans in FFELPthe Company's securitization trusts that could accelerate or delay repayment of the associated bonds, which may increase the costs or limit the availability of financings necessary to purchase, refinance, or continue to hold student loans;
•risks from changes in the terms of education loans and in the educational credit and services markets resulting from changes in applicable laws, regulations, and government programs and budgets, such as changes resulting from the
32
Coronavirus Aid, Relief, and Economic Security Act (the "CARES Act") and the expected decline over time in FFELP loan interest income and fee-based revenues due to the discontinuation of new FFELP loan originations in 2010 and potential government initiatives or legislative proposals to consolidate existing FFELP loans to the Federal Direct Loan Program, otherwise encourage or otherwise allow FFELP loans to be refinanced with Federal Direct Loan Program loans;loans, and/or create additional loan forgiveness or broad debt cancellation programs;
•risks related to a breach of or failure in the Company's operational or information systems or infrastructure, or those of third-party vendors, including cybersecurity risks related to the potential disclosure of confidential student loan borrower and other customer information;information, the potential disruption of the Company's systems or those of third-party vendors or customers, and/or the potential damage to the Company's reputation resulting from cyber-breaches;
•uncertainties inherent in forecasting future cash flows from student loan assets and related asset-backed securitizations;
•risks related to the expected benefits to the Company and to ALLO Communications LLC (referred to collectively with its fiber network in existing service areasholding company ALLO Holdings, LLC as “ALLO”) from the recapitalization and additional communitiesfunding for ALLO and managethe Company’s continuing investment in ALLO, and risks related construction risks;to investments in solar projects, including risks of not being able to realize tax credits which remain subject to recapture by taxing authorities;
•risks and uncertainties related to other initiatives to pursue additional strategic investments (and anticipated income therefrom), acquisitions, and other activities, such as the completed and potential additional transactions associated with the sale by Wells Fargo of its private education loan portfolio for which the Company was selected as the new servicer (including risks associated with errors that occasionally occur in converting loan servicing portfolio acquisitions to a new servicing platform, and uncertainties associated with expected income from the joint venture that purchased the Wells Fargo portfolio), including investments and acquisitionsactivities that are intended to diversify the Company both within and outside of its historical core education-related businesses;
•risks and uncertainties associated with climate change, including extreme weather events and related natural disasters, which could result in increased loan portfolio credit risks and other asset and operational risks, as well as risks and uncertainties associated with efforts to address climate change; and
•risks and uncertainties associated with litigation matters and with maintaining compliance with the extensive regulatory requirements applicable to the Company's businesses, reputational and other risks, including the risk of increased regulatory costs resulting from the recent politicization of student loan servicing, potential changes to corporate tax rates, and uncertainties inherent in the estimates and assumptions about future events that management is required to make in the preparation of the Company's consolidated financial statements.
All forward-looking statements contained in this report are qualified by these cautionary statements and are made only as of the date of this document. Although the Company may from time to time voluntarily update or revise its prior forward-looking statements to reflect actual results or changes in the Company's expectations, the Company disclaims any commitment to do so except as required by securities laws.law.
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OVERVIEW
The Company is a diverse company with a focus onpurpose to serve others and a vision to make customers' dreams possible by delivering education-relatedcustomer focused products and services and student loan asset management.services. The largest operating businesses engage in student loan servicing tuitionand education technology, services, and payment processing, and school information systems, andthe Company also has a significant investment in communications. A significant portion of the Company's revenue is net interest income earned on a portfolio of federally insured student loans. The Company also makes investments to further diversify the Company both within and outside of its historical core education-related businesses, including, but not limited to, investments in real estate, early-stage and start-up ventures.
emerging growth companies, and renewable energy.
GAAP Net Income and Non-GAAP Net Income, Excluding Adjustments
The Company prepares its financial statements and presents its financial results in accordance with U.S. GAAP. However, it also provides additional non-GAAP financial information related to specific items management believes to be important in the evaluation of its operating results and performance. A reconciliation of the Company's GAAP net income to net income, excluding derivative market value and foreign currency transaction adjustments, and a discussion of why the Company believes providing this additional information is useful to investors, is provided below.
| Three months ended September 30, | Nine months ended September 30, | ||||||||||||||||||||||
| 2021 | 2020 | 2021 | 2020 | ||||||||||||||||||||
| GAAP net income attributable to Nelnet, Inc. | $ | 53,138 | 71,503 | 260,603 | 117,452 | ||||||||||||||||||
| Realized and unrealized derivative market value adjustments | (7,260) | (3,440) | (44,455) | 21,072 | |||||||||||||||||||
| Tax effect (a) | 1,742 | 826 | 10,669 | (5,057) | |||||||||||||||||||
| Net income attributable to Nelnet, Inc., excluding derivative market value adjustments (b) | $ | 47,620 | 68,889 | 226,817 | 133,467 | ||||||||||||||||||
| Earnings per share: | |||||||||||||||||||||||
| GAAP net income attributable to Nelnet, Inc. | $ | 1.38 | 1.86 | 6.74 | 2.99 | ||||||||||||||||||
| Realized and unrealized derivative market value adjustments | (0.19) | (0.09) | (1.15) | 0.54 | |||||||||||||||||||
| Tax effect (a) | 0.04 | 0.02 | 0.28 | (0.13) | |||||||||||||||||||
| Net income attributable to Nelnet, Inc., excluding derivative market value adjustments (b) | $ | 1.23 | 1.79 | 5.87 | 3.40 | ||||||||||||||||||
| Three months ended September 30, | Nine months ended September 30, | |||||||||||
| 2017 | 2016 | 2017 | 2016 | |||||||||
| GAAP net income attributable to Nelnet, Inc. | $ | 46,303 | 84,294 | 125,065 | 158,405 | |||||||
| Realized and unrealized derivative market value adjustments | (21,429 | ) | (47,093 | ) | (22,381 | ) | 1,556 | |||||
| Unrealized foreign currency transaction adjustments | 13,683 | 4,831 | 45,635 | 13,543 | ||||||||
| Net tax effect (a) | 2,943 | 16,060 | (8,837 | ) | (5,737 | ) | ||||||
| Net income, excluding derivative market value and foreign currency transaction adjustments (b) | $ | 41,500 | 58,092 | 139,482 | 167,767 | |||||||
| Earnings per share: | ||||||||||||
| GAAP net income attributable to Nelnet, Inc. | $ | 1.11 | 1.98 | 2.97 | 3.70 | |||||||
| Realized and unrealized derivative market value adjustments | (0.51 | ) | (1.10 | ) | (0.53 | ) | 0.03 | |||||
| Unrealized foreign currency transaction adjustments | 0.33 | 0.11 | 1.09 | 0.32 | ||||||||
| Net tax effect (a) | 0.07 | 0.37 | (0.21 | ) | (0.13 | ) | ||||||
| Net income, excluding derivative market value and foreign currency transaction adjustments (b) | $ | 1.00 | 1.36 | 3.32 | 3.92 | |||||||
The accounting for derivatives requires that changes in the fair value of derivative instruments be recognized currently in earnings, with no fair value adjustment of the hedged item, unless specific hedge accounting criteria is met. Management has structured all of the Company’s derivative transactions with the intent that each is economically effective; however, the Company’s derivative instruments do not qualify for hedge accounting. As a result, the change in fair value of derivative instruments is reported in current period earnings with no consideration for the corresponding change in fair value of the hedged item. Under GAAP, the cumulative net realized and unrealized gain or loss caused by changes in fair values of derivatives in which the Company plans to hold to maturity will equal zero over the life of the contract. However, the net realized and unrealized gain or loss during any given reporting period fluctuates significantly from period to period. In addition, the Company has incurred unrealized foreign currency transaction adjustments for periodic fluctuations in currency exchange rates between the U.S. dollar and Euro in connection with its student loan asset-backed Euro-denominated bonds with an interest rate based on a spread to the EURIBOR index.
The principal and accrued interest on these bonds were remeasured at each reporting period and recorded in the Company's consolidated balance sheet in U.S. dollars based on the foreign currency exchange rate on that date.
34
•The recognition of a reduction$14.8 million ($11.3 million after tax) gain from the sale of consumer loans in 2020;
•The impairment of certain Company owned buildings and operating lease assets of $14.2 million ($10.8 million after tax) during 2021 due to continued evaluation of office space needs as employees continue to work from home due to COVID-19;
•The recognition of a net loss of $8.5 million ($6.4 million after tax) during 2021 related to the Company's investments in ALLO; and
•The recognition of a provision for loan losses on the Company's loan portfolio of $5.8 million ($4.4 million after tax) in the third quarter of 2021 compared to a negative provision for loan losses of $5.8 million ($4.4 million after tax) in the third quarter of 2020.
These factors were partially offset by the following items:
•The recognition of net investment gains and income of $16.1 million ($12.2 million after tax) on certain venture capital, real estate, and other investments during 2021;
•A decrease of $8.4 million ($6.4 million after tax) in losses from solar investments in 2021 as compared to 2020; and
•The recognition of a net loss by ALLO of $4.5 million ($3.5 million after tax) during 2020, prior to the deconsolidation of ALLO in December 2020.
GAAP net income increased for the nine months ended September 30, 2021 compared to the same period in 2020 primarily due to the following factors:
•The recognition of $97.1 million ($73.8 million after tax) of certain expenses during the first quarter of 2020 as a result of the COVID-19 pandemic, consisting of the recognition of an incremental provision for loan losses of $63.0 million ($47.9 million after tax), provision expense of $26.3 million ($20.0 million after tax) related to the Company's investment in certain consumer loan beneficial interest securitizations, and $7.8 million ($5.9 million after tax) impairment expense on certain venture capital investments;
•Net income of $44.5 million ($33.8 million after tax) related to changes in the fair values of derivative instruments that do not qualify for hedge accounting in 2021 as compared to a net loss of $21.1 million ($16.0 million after tax) in 2020;
•The recognition of net investment gains of $40.1 million ($30.5 million after tax) on certain venture capital, real estate, and other investments during 2021;
•A decrease of $23.8 million ($18.1 million after tax) in interest expense during the first quarter of 2021 as a result of the Company reversing a historical accrued interest liability on certain bonds (initially recorded when certain asset-backed securitizations were acquired in 2011 and 2013), which liability the Company determined is no longer probable of being required to be paid;
•The recognition of a net loss by ALLO of $18.9 million ($14.3 million after tax) during 2020, prior to the deconsolidation of ALLO in December 2020;
•The recognition of $18.7 million ($14.2 million after tax) of gains from the sale of loans during 2021;
•An increase of $17.5 million ($13.3 million after tax) in net interest income due to improved loan spread (including derivative settlements) on the Company's loan portfolio in 2021 as compared to 2020, including an increase in fixed rate floor income;
•The recognition of a $10.8 million ($8.2 million after tax) negative provision for loan losses on the Company's loan portfolio during 2021 as a result of management's estimate of certain continued improved economic conditions as compared to a provision expense (excluding the incremental provision for loan losses related to foreign currency transaction adjustments causedCOVID-19) of $10.4 million ($7.9 million after tax) during 2020;
•An increase of $8.3 million ($6.3 million after tax) in investment interest income in 2021 as compared to 2020 primarily from AGM's beneficial interest investments; and
•An increase in net income during 2021 as compared to 2020 of $8.1 million ($6.2 million after tax) from the Education Technology, Services, and Payment Processing operating segment.
These factors were partially offset by the re-measurementfollowing items:
•The recognition of a $51.0 million ($38.8 million after tax) gain in the second quarter of 2020 to adjust the carrying value of the Company's Euro-denominated bondsinvestment in Hudl to U.S. dollars. reflect Hudl's May 2020 equity raise transaction value;
•The recognition of $33.0 million ($25.1 million after tax) of gains from the sale of consumer loans during 2020;
35
•The decreaserecognition of a net loss of $25.2 million ($19.2 million after tax) during 2021 related to the Company's investments in GAAP net income for the nine months ended September 30, 2017, compared with the same period in 2016, was primarilyALLO;
•The impairment of certain Company owned buildings and operating lease assets of $14.2 million ($10.8 million after tax) during 2021 due to an increasecontinued evaluation of office space needs as employees continue to work from home due to COVID-19; and
•A decrease of $6.6 million ($5.0 million after tax) in losses related to foreign currency transaction adjustments caused by the re-measurement of the Company's Euro-denominated bonds to U.S. dollars, partially offset by an increase in net gains related to changes in the fair values of derivative instruments.
Operating Results
The Company earns net interest income on its FFELP student loan portfolio, consisting primarily of FFELP loans, in its Asset Generation and Management ("AGM") operating segment. This segment is expected to generate a stable net interest margin and significant amounts of cash as the FFELP portfolio amortizes. As of September 30, 2017, the Company2021, AGM had a $22.5$18.4 billion student loan portfolio that management anticipates will amortize over the next approximately 2520 years and has a weighted average remaining life of 9.3 years. The Company actively works to maximize the amount and timing of cash flows generated by its FFELP portfolio and seeks to acquire additional FFELP loan portfoliosassets to leverage its servicing scale and expertise to generate incremental earnings and cash flow.
In addition, the Company earns fee-based revenue through the following reportable operating segments:
•Loan SystemsServicing and ServicingSystems ("LSS") - referred to as Nelnet Diversified SolutionsServices ("NDS"), which includes the operations of Nelnet Servicing, LLC ("Nelnet Servicing") and Great Lakes Educational Loan Services, Inc. ("Great Lakes")
On November 2, 2020, the Company obtained final approval for federal deposit insurance from the Federal Deposit Insurance Corporation ("Allo"FDIC")
and for a bank charter from the Utah Department of Financial Institutions ("UDFI") in connection with the establishment of Nelnet Bank, and Nelnet Bank launched operations. Nelnet Bank operates as an internet Utah-chartered industrial bank franchise focused on the private education loan marketplace, with a home office in Salt Lake City, Utah. Nelnet Bank’s operations are presented by the Company as a reportable operating segment.
Other business activities and operating segments that are not reportable are combined and included in Corporate and Other Activities ("Corporate"). Corporate and Other Activities also includes income earned on certain investments and interest expense incurred on unsecured and other corporate related debt transactions. In addition, the Corporate segment includes direct incremental costs associated with Nelnet Bank prior to the UDFI’s approval for its bank charter and certain shared service and support costs incurred by the Company that will not be reflected in Nelnet Bank’s operating results through 2023 (the bank’s de novo period). Such Nelnet Bank-related costs included in the Corporate segment totaled $0.8 million (pre-tax) and $1.3 million (pre-tax) for the three months ended September 30, 2021 and 2020, respectively, and $2.5 million (pre-tax) and $3.8 million (pre-tax) for the nine months ended September 30, 2021 and 2020, respectively.
36
The information below provides the operating results for each reportable operating segment and Corporate and Other Activities for the three and nine months ended September 30, 20172021 and 20162020 (dollars in millions).
| LSS (a) | ETS&PP | ALLO (b) | AGM (c) | Bank (c) | |||||||||||||||||||||||||||||||
(b) On December 21, 2020, the Company was servicing $207.8 billion in FFELP, government owned, and private education and consumer loans, as compared with $193.2 billiondeconsolidated ALLO from the Company’s consolidated financial statements. See note 2 of loans as of September 30, 2016.
(c) Total revenue includes "net interest income" and "total other income/expense" from the Company's segment statements of income, excluding from AGM the impact from changes in fair values of derivatives. Net income (loss) excludes from AGM changes in fair values of derivatives, net of tax. For information regarding the exclusion of the impact from changes in fair values of derivatives, see "GAAP Net Income and Non-GAAP Net Income, Excluding Adjustments" above.
COVID-19
Beginning in March 2020, the COVID-19 pandemic resulted in many businesses and schools closing or reducing hours throughout the U.S. to combat the spread of COVID-19, and states and local jurisdictions implementing various containment efforts, including lockdowns on non-essential business and other business restrictions, stay-at-home orders, and shelter-in-place orders. The COVID-19 pandemic caused significant disruption to the same periodsU.S. and world economies, including significantly higher unemployment and underemployment, significantly lower interest rates, and extreme volatility in 2016 duethe U.S. and world markets.
37
While certain COVID-19 vaccines have been approved and have become widely available for use in the U.S., significant uncertainties remain, including with respect to growth in private education and consumer loan servicing volume fromthe effectiveness of vaccines against existing and new clients. In addition, revenue increasedvariant strains of the virus which could be vaccine resistant, the potential impacts of variations in vaccination rates among different geographical areas and demographic segments, emerging targeted vaccine mandates, and booster vaccines, and the potential for additional future spikes in infection rates including through breakthrough infections among the nine months ended September 30, 2017 compared tofully vaccinated. As a result, although the same period in 2016 due to an increase in revenue oneconomy has improved since the government servicing contract. The increase in revenue for the nine months ended September 30, 2017 compared to the same period in 2016 was partially offset by the loss of guaranty servicingpandemic began, it is still uncertain when or if economic activity and collection revenue on June 30, 2016.
recently re-opened offices. During the third quarter of 2017,2021, the Company incurred $2.8 million (pre-tax) in expenses relatedevaluated the use of office space due to conversion fees to transfer loans from a third-party servicer to the Company's servicing platform, which will decrease servicing costs over the remaining lifeCOVID-19 and recorded an impairment charge on certain real estate assets of this portfolio.
The Company intendsresults of operations discussion below should be read in conjunction with the Company’s 2020 Annual Report, including the information included in “Risk Factors – Operations – The COVID-19 pandemic has adversely impacted our results of operations, and is expected to use its liquidity positioncontinue to capitalize on market opportunities, including FFELPadversely impact our results of operations, as well as adversely impact our businesses, financial condition, and/or cash flows” and private education“Management’s Discussion and consumer loan acquisitions; strategic acquisitionsAnalysis of Financial Condition and investments; expansionResults of Allo's telecommunications network; and capital management initiatives, including stock repurchases, debt repurchases, and dividend distributions. The timing and sizeOperations – Overview – Impacts of these opportunities will vary and will have a direct impact on the Company's cash and investment balances.COVID-19 Pandemic.”
CONSOLIDATED RESULTS OF OPERATIONS
An analysis of the Company's operating results for the three and nine months ended September 30, 20172021 compared to the same periods in 20162020 is provided below.
The Company’s operating results are primarily driven by the performance of its existing loan portfolio and the revenues generated by its fee-based businesses and the costs to provide such services. The performance of the Company’s portfolio is driven by net interest income (which includes financing costs) and losses related to credit quality of the assets, along with the cost to administer and service the assets and related debt.
The Company operates as distinct reportable operating segments as described above. For a reconciliation of the reportable segment operating results to the consolidated results of operations, see note 10 of the notes to consolidated financial statements included under Part I, Item 1 of this report. Since the Company monitors and assesses its operations and results based on these segments, the discussion following the consolidated results of operations is presented on a reportable segment basis.basis (except for ALLO, which was deconsolidated from the Company's consolidated financial statements in December 2020).
| Three months ended | Nine months ended | ||||||||||||||||||||||||||||
| September 30, | September 30, | ||||||||||||||||||||||||||||
| 2021 | 2020 | 2021 | 2020 | Additional information | |||||||||||||||||||||||||
| Loan interest | $ | 124,096 | 134,507 | 370,219 | 462,439 | Decrease was due primarily to decreases in the gross yield earned on loans and the average balance of loans, partially offset by an increase in gross fixed rate floor income during the nine months ended September 30, 2021 due to lower interest rates in 2021 as compared to 2020. | |||||||||||||||||||||||
| Investment interest | 12,558 | 5,238 | 29,122 | 18,379 | Includes income from unrestricted interest-earning deposits and investments and funds in asset-backed securitizations. Increase was due to interest income earned on loan beneficial interest investments, partially offset by a decrease in interest rates in 2021 as compared to 2020. | ||||||||||||||||||||||||
| Total interest income | 136,654 | 139,745 | 399,341 | 480,818 | |||||||||||||||||||||||||
| Interest expense | 50,176 | 58,423 | 127,939 | 277,788 | Decrease was due primarily 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, 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. | ||||||||||||||||||||||||
| Net interest income | 86,478 | 81,322 | 271,402 | 203,030 | |||||||||||||||||||||||||
| Less provision (negative provision) for loan losses | 5,827 | (5,821) | (10,847) | 73,476 | During the first quarter of 2020, the Company recognized an incremental provision of $63.0 million as a result of an increase in expected defaults due to the COVID-19 pandemic. During the third quarter of 2020, the Company recognized negative provision of $5.8 million due to management's estimate of improved economic conditions. The Company recognized a negative provision of $17.0 million in the first quarter of 2021 due to management's estimate of 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. Provision expense recognized for the three months ended September 30, 2021 represents provision primarily for new loans originated and acquired during the period. | ||||||||||||||||||||||||
| Net interest income after provision for loan losses | 80,651 | 87,143 | 282,249 | 129,554 | |||||||||||||||||||||||||
| Other income/expense: | |||||||||||||||||||||||||||||
| LSS revenue | 112,351 | 113,794 | 335,961 | 337,571 | See LSS operating segment - results of operations. | ||||||||||||||||||||||||
| ETS&PP revenue | 85,324 | 74,121 | 257,284 | 217,100 | See ETS&PP operating segment - results of operations. | ||||||||||||||||||||||||
| Communications revenue | — | 20,211 | — | 57,390 | As discussed above, on December 21, 2020, the Company deconsolidated ALLO from the Company’s consolidated financial statements. | ||||||||||||||||||||||||
| Other | 11,867 | 1,502 | 30,183 | 69,910 | See table below for the components of "other." | ||||||||||||||||||||||||
| Gain on sale of loans | 3,444 | 14,817 | 18,715 | 33,023 | On May 14, 2021 and September 29, 2021, the Company sold $77.4 million (par value) and $18.4 million (par value) of consumer loans, respectively, to an unrelated third party and recognized a gain of $15.3 million (pre-tax) and $3.2 million (pre-tax), respectively. The Company also sold $124.2 million (par value) and $60.8 million (par value) of consumer loans in January 2020 and July 2020, respectively, and recognized gains of $18.2 million and $14.8 million, respectively. | ||||||||||||||||||||||||
| Impairment expense and provision for beneficial interests, net | (14,159) | — | (12,223) | (34,419) | During the third quarter of 2021, the Company evaluated the use of office space as a large number of employees continue to work from home due to COVID-19. As a result of this evaluation, the Company recorded an impairment charge during the third quarter of 2021 of $14.2 million. The impairment charge related primarily to building and operating lease assets. During the first quarter of 2020, the Company recognized impairments of $26.3 million and $7.8 million related to beneficial interest in consumer loan securitization investments and several venture capital investments, respectively. Such impairments were the result of estimated impacts from the COVID-19 pandemic. During the first quarter of 2021, the Company reversed the remaining allowance of $2.4 million related to the beneficial interest in consumer loan securitizations due to continued improved economic conditions. | ||||||||||||||||||||||||
39
| Three months | Nine months | |||||||||||||
| ended September 30, | ended September 30, | Additional information | ||||||||||||
| 2017 | 2016 | 2017 | 2016 | |||||||||||
| Loan interest | $ | 191,755 | 193,721 | 562,451 | 567,775 | Decrease due to a decrease in the average balance of student loans, a decrease in gross fixed rate floor income, and an adjustment recorded during the third quarter of 2016 to reflect the net impact on prior periods for a correction of an error regarding the Company's method of applying the interest method to amortize premiums and accrete discounts on its student loan portfolio, partially offset by an increase in the gross yield earned on the student loan portfolio. | ||||||||
| Investment interest | 5,129 | 2,460 | 11,335 | 6,674 | Includes income from unrestricted interest-earning deposits and investments and funds in asset-backed securitizations. The increase in 2017 compared to 2016 is due to an increase in interest-earning investments and an increase in interest rates. | |||||||||
| Total interest income | 196,884 | 196,181 | 573,786 | 574,449 | ||||||||||
| Interest expense | 121,650 | 96,386 | 341,787 | 280,847 | Increase due primarily to an increase in the Company's cost of funds, partially offset by a decrease in the average balance of debt outstanding. | |||||||||
| Net interest income | 75,234 | 99,795 | 231,999 | 293,602 | See table below for additional analysis. | |||||||||
| Less provision for loan losses | 6,000 | 6,000 | 9,000 | 10,500 | Represents the periodic expense of maintaining an allowance appropriate to absorb losses inherent in the portfolio of student loans. See AGM operating segment - results of operations. | |||||||||
| Net interest income after provision for loan losses | 69,234 | 93,795 | 222,999 | 283,102 | ||||||||||
| Other income: | ||||||||||||||
| LSS revenue | 55,950 | 54,350 | 167,079 | 161,082 | See LSS operating segment - results of operations. | |||||||||
| TPP&CC revenue | 35,450 | 33,071 | 113,293 | 102,211 | See TPP&CC operating segment - results of operations. | |||||||||
| Communications revenue | 6,751 | 4,343 | 17,577 | 13,167 | See Communications operating segment - results of operations. | |||||||||
| Enrollment services revenue | — | — | — | 4,326 | On February 1, 2016, the Company sold Sparkroom LLC. After this sale, the Company no longer earns enrollment services revenue. | |||||||||
| Other income | 19,756 | 15,150 | 44,874 | 38,711 | See table below for the components of "other income." | |||||||||
| Gain from debt repurchases | 116 | 2,160 | 5,537 | 2,260 | Gains are from the Company repurchasing its own debt. During the first quarter of 2017, the Company initiated a cash tender offer to purchase any and all of its outstanding Hybrid Securities. The Company paid $25.3 million to redeem $29.7 million of these notes and recognized a gain of $4.4 million. Other gains are from the repurchase of the Company's asset-backed debt securities. | |||||||||
| Derivative settlements, net | (573 | ) | (6,261 | ) | (2,314 | ) | (18,292 | ) | 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. See table below for additional analysis. | |||||
| Derivative market value and foreign currency transaction adjustments, net | 7,746 | 42,262 | (23,254 | ) | (15,099 | ) | 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 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 | 125,196 | 145,075 | 322,792 | 288,366 | ||||||||||
| Operating expenses: | ||||||||||||||
| Salaries and benefits | 74,193 | 63,743 | 220,684 | 187,907 | Increase was due to an (i) increase in contract programming related to the GreatNet joint venture 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 in the LSS operating segment; (ii) increase in personnel to support the growth in revenue in the TPP&CC operating segment; and (iii) increase in personnel at Allo to support the Lincoln, Nebraska network expansion. See each individual operating segment results of operations discussion for additional information. | |||||||||
| Depreciation and amortization | 10,051 | 8,994 | 27,687 | 24,817 | Increase was due to additional depreciation expense at Allo. 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. | |||||||||
| 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's servicing platform. | |||||||||
| Cost to provide communication services | 2,632 | 1,784 | 6,789 | 5,169 | Represents costs of services and products primarily associated with television programming costs in the Communications operating segment. | |||||||||
| Cost to provide enrollment services | — | — | — | 3,623 | On February 1, 2016, the Company sold Sparkroom LLC. After this sale, the Company no longer provides enrollment services. | |||||||||
| Other expenses | 30,518 | 26,391 | 84,593 | 84,174 | Increase was a result of an increase in operating expenses due to GreatNet, additional costs to support the increase in payment plans and campus commerce activity, and an increase in operating expenses at Allo to support the Lincoln, Nebraska network expansion, partially offset by the elimination of FFELP guaranty collection costs. 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. Accordingly, there were no collection costs for the three and nine months ended September 30, 2017, compared to no collection costs and $3.5 million for the three months and nine months ended September 30, 2016, respectively. | |||||||||
| Total operating expenses | 125,333 | 106,792 | 359,337 | 325,714 | ||||||||||
| Derivative settlements, net | (5,909) | (2,391) | (15,587) | 7,666 | 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. See AGM operating segment - results of operations. | ||||||||||||||||||||||||
| Derivative market value adjustments, net | 7,260 | 3,440 | 44,455 | (21,072) | 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 during the three and nine months ended September 30, 2021 and 2020 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 such swaps. | ||||||||||||||||||||||||
| Total other income/expense | 200,178 | 225,494 | 658,788 | 667,169 | |||||||||||||||||||||||||
| Cost of services: | |||||||||||||||||||||||||||||
| Cost to provide education technology, services, and payment processing services | 31,335 | 25,243 | 80,063 | 63,424 | Represents primarily direct costs to provide payment processing and instructional services in the ETS&PP operating segment. Increase in 2021 compared to 2020 was primarily due to additional instructional services costs. | ||||||||||||||||||||||||
| Cost to provide communications services | — | 5,914 | — | 17,240 | As discussed above, on December 21, 2020, the Company deconsolidated ALLO from the Company’s consolidated financial statements. | ||||||||||||||||||||||||
| Total cost of services | 31,335 | 31,157 | 80,063 | 80,664 | |||||||||||||||||||||||||
| Operating expenses: | |||||||||||||||||||||||||||||
| Salaries and benefits | 128,592 | 126,096 | 363,351 | 365,220 | Increase in the three months ended September 30, 2021 compared to the same period in 2020 was due to an increase in headcount in the (i) LSS operating segment as the Company prepares for the resumption of federal student loan payments and other activities after the CARES Act suspension expires on January 31, 2022; and (ii) ETS&PP operating segment to support the growth of its customer base, the investment in the development of new technologies, and businesses it acquired in December 2020. These increases were partially offset by the deconsolidation of ALLO from the Company's consolidated financial statements. Decrease in the nine months ended September 30, 2021 compared to the same period in 2020 was due to (i) a decrease in contact center operations and support personnel throughout the first half of 2021 in the LSS operating segment as a result of the suspension of federal student loan payments under the CARES Act; and (ii) the deconsolidation of ALLO from the Company's consolidated financial statements. These decreases were partially offset by an increase in expenses in the ETS&PP operating segment due to the items discussed above. | ||||||||||||||||||||||||
| Depreciation and amortization | 15,710 | 30,308 | 56,129 | 87,349 | Decrease was primarily due to the deconsolidation of ALLO from the Company's consolidated financial statements on December 21, 2020, resulting in no ALLO depreciation expense for the Company in 2021. | ||||||||||||||||||||||||
| Other expenses | 38,324 | 34,744 | 107,611 | 115,184 | Other expenses includes expenses necessary for operations, such as postage and distribution, consulting and professional fees, occupancy, communications, and certain information technology-related costs. Increase in the three months ended September 30, 2021 as compared to the same period in 2020 was due to (i) an increase in expenses in the ETS&PP operating segment due to higher costs for consulting and professional fees due to investments in new technologies, an increase in travel and in-person conferences, and businesses it acquired in December 2020. These items were partially offset by the deconsolidation of ALLO in December 2020. Decrease in the nine months ended September 30, 2021 compared to the same period in 2020 was due to (i) cost savings in the LSS segment from an increase in the adoption of electronic borrower statements and correspondence and a decrease in printing and postage while loan payments are suspended as a result of COVID-19 borrower relief efforts; and (ii) the deconsolidation of ALLO in December 2020. These items were partially offset by an increase in costs in the ETS&PP operating segment due to the items discussed above. | ||||||||||||||||||||||||
| Total operating expenses | 182,626 | 191,148 | 527,091 | 567,753 | |||||||||||||||||||||||||
| Income before income taxes | 66,868 | 90,332 | 333,883 | 148,306 | |||||||||||||||||||||||||
| Income tax expense | 15,649 | 19,156 | 76,747 | 30,286 | The effective tax rate was 22.75% and 21.13% for the three months ended September 30, 2021 and 2020, respectively, and 22.75% and 20.50% for the nine months ended September 30, 2021 and 2020, respectively. The Company currently expects its effective tax rate for 2021 will range between 22 and 24 percent. | ||||||||||||||||||||||||
| Net income | 51,219 | 71,176 | 257,136 | 118,020 | |||||||||||||||||||||||||
| Net loss (income) attributable to noncontrolling interests | 1,919 | 327 | 3,467 | (568) | |||||||||||||||||||||||||
| Net income attributable to Nelnet, Inc. | $ | 53,138 | 71,503 | 260,603 | 117,452 | ||||||||||||||||||||||||
40
| Income before income taxes | 69,097 | 132,078 | 186,454 | 245,754 | ||||||||||
| Income tax expense | 25,562 | 47,715 | 70,349 | 87,184 | The effective tax rate was 35.60% and 36.15% for the three months ended September 30, 2017 and 2016, respectively, and 36.00% and 35.50% for the nine months ended September 30, 2017 and 2016, respectively. The lower effective tax rate for the nine months ended September 30, 2016 was due to the resolution of certain tax positions during the first quarter of 2016. | |||||||||
| Net income | 43,535 | 84,363 | 116,105 | 158,570 | ||||||||||
| Net loss (income) attributable to noncontrolling interest | 2,768 | (69 | ) | 8,960 | (165 | ) | In 2017, represents primarily 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. | $ | 46,303 | 84,294 | 125,065 | 158,405 | |||||||||
| Additional information: | ||||||||||||||
| Net income attributable to Nelnet, Inc. | $ | 46,303 | 84,294 | 125,065 | 158,405 | 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. | ||||||||
| Derivative market value and foreign currency transaction adjustments, net | (7,746 | ) | (42,262 | ) | 23,254 | 15,099 | ||||||||
| Net tax effect | 2,943 | 16,060 | (8,837 | ) | (5,737 | ) | ||||||||
| Net income attributable to Nelnet, Inc., excluding derivative market value and foreign currency transaction adjustments | $ | 41,500 | 58,092 | 139,482 | 167,767 | |||||||||
The following table summarizes the components of “net interest income”"other" in "other income/expense" on the consolidated statements of income.
| Three months ended September 30, | Nine months ended September 30, | ||||||||||||||||||||||
| 2021 | 2020 | 2021 | 2020 | ||||||||||||||||||||
| Income/gains from investments, net (a) | $ | 16,050 | 1,687 | 40,141 | 51,772 | ||||||||||||||||||
| Investment advisory services (b) | 2,400 | 4,463 | 6,242 | 8,187 | |||||||||||||||||||
| ALLO preferred return (c) | 2,043 | — | 6,384 | — | |||||||||||||||||||
| Management fee revenue (d) | 727 | 2,353 | 2,541 | 6,897 | |||||||||||||||||||
| Borrower late fee income (e) | 514 | 871 | 1,698 | 4,377 | |||||||||||||||||||
| Loss from ALLO voting membership interest investment (f) | (10,495) | — | (31,620) | — | |||||||||||||||||||
| Loss from solar investments (g) | (3,393) | (11,839) | (7,375) | (12,638) | |||||||||||||||||||
| (Loss) gain on debt repurchased | (3,268) | 105 | (3,964) | 508 | |||||||||||||||||||
| Other | 7,289 | 3,862 | 16,136 | 10,807 | |||||||||||||||||||
| Other income | $ | 11,867 | 1,502 | 30,183 | 69,910 | ||||||||||||||||||
(a) During the three and “derivative settlements, net.”nine months ended September 30, 2021, the Company recognized (pre-tax) realized and unrealized gains from certain real estate and venture capital investments, including realized gains from the sale of certain real estate investments of $11.2 million and $22.2 million, respectively. During the second quarter of 2020, the Company recognized a $51.0 million (pre-tax) gain to adjust the carrying value of its investment in Hudl to reflect Hudl’s May 2020 equity raise transaction value.
(b) The Company maintains an overall riskprovides investment advisory services through Whitetail Rock Capital Management, LLC ("WRCM"), the Company's SEC-registered investment advisor subsidiary, under various arrangements. WRCM earns annual fees of 25 basis points on the majority of the outstanding balance of asset-backed securities under management strategy that incorporatesand up to 50 percent of the usegains from the sale of derivative instrumentsasset-backed securities or asset-backed securities being called prior to reduce the economic effectfull contractual maturity for which it provides advisory services. As of interest rate volatility.September 30, 2021, the outstanding balance of asset-backed securities under management subject to these arrangements was $1.9 billion. In addition, WRCM earns annual management fees of five basis points for certain other investments under management.
(c) Represents the Company's income on its preferred membership interests in ALLO, which was deconsolidated from the Company's financial statements in December 2020. As such, management believes derivative settlements for each applicable period should be evaluated withof September 30, 2021, the Company’s net interest income as presented in the table below. Net interest income (netamount of settlements on derivatives) is a non-GAAP financial measure, andpreferred membership interests held by the Company reports this non-GAAP information becausewas $129.7 million, which earns a preferred annual return of 6.25 percent.
(d) Represents revenue earned from providing administrative support and marketing services, which primarily was to Great Lakes’ former parent company under a contract that expired in January 2021.
(e) Represents borrower late fees earned by the AGM operating segment. The decrease was due to 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 forsuspending borrower late fees effective March 13, 2020 to provide borrowers relief as a result of the presentationCOVID-19 pandemic.
(f) Represents the Company's share of such non-GAAP information, which is only meant to supplement GAAP results by providing additional information that management utilizes to assess performance.loss on its voting membership interests in ALLO. See note 45 of the notes to consolidated financial statements included under Part I, Item 1 of this report for additional information onregarding the accounting for and income statement impact of this investment during 2021.
(g) Represents the Company's derivative instruments, includingshare of loss from solar investments under the net settlement activity recognized byHypothetical Liquidation at Book Value ("HLBV") method of accounting. For the Company for each typemajority of derivative for the periods presentedCompany's solar investments, the HLBV method of accounting results in accelerated losses in the table under the caption "Income Statement Impact" in note 4 and in the table below. initial years of investment.
41
| Three months ended September 30, | Nine months ended September 30, | Additional information | ||||||||||||
| 2017 | 2016 | 2017 | 2016 | |||||||||||
| Variable student loan interest margin | $ | 46,683 | 57,442 | 139,082 | 159,932 | Represents the yield the Company receives on its student loan portfolio less the cost of funding these loans. Variable student loan spread is also impacted by the amortization/accretion of loan premiums and discounts and the 1.05% per year consolidation loan rebate fee paid to the Department. 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. 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. See AGM operating segment - results of operations. | ||||||||
| Settlements on associated derivatives | (4,265 | ) | (871 | ) | (7,598 | ) | (2,355 | ) | Includes 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 | 42,418 | 56,571 | 131,484 | 157,577 | ||||||||||
| Fixed rate floor income | 24,586 | 41,509 | 84,382 | 131,720 | The Company has a portfolio of student loans that are earning interest at a fixed borrower rate which exceeds the statutorily defined variable lender rates, generating fixed rate floor income. See Item 3, "Quantitative and Qualitative Disclosures About Market Risk - Interest Rate Risk" for additional information. | |||||||||
| Settlements on associated derivatives | 3,883 | (5,157 | ) | 5,877 | (15,241 | ) | Includes the net 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 | ||||||||||
| Investment interest | 5,129 | 2,460 | 11,335 | 6,674 | ||||||||||
| Corporate debt interest expense | (1,164 | ) | (1,616 | ) | (2,800 | ) | (4,724 | ) | Includes interest expense on the Junior Subordinated Hybrid Securities and unsecured line of credit. During the first quarter of 2017, the Company repurchased $29.7 million of its Hybrid Securities. In addition, the weighted average balance outstanding under the Company's unsecured line of credit was lower during 2017 as compared to 2016. These factors resulted in less corporate debt interest expense in 2017 as compared to 2016. | |||||
| Non-portfolio related derivative settlements | (191 | ) | (233 | ) | (593 | ) | (696 | ) | Includes the net settlements paid/received related to the Company’s hybrid debt hedges. | |||||
| Net interest income (net of settlements on derivatives) | $ | 74,661 | 93,534 | 229,685 | 275,310 | |||||||||
| Three months ended September 30, | Nine months ended September 30, | |||||||||||
| 2017 | 2016 | 2017 | 2016 | |||||||||
| Investment advisory fees | $ | 5,852 | 1,535 | 11,661 | 3,367 | |||||||
| Peterson's revenue | 3,402 | 4,128 | 9,282 | 10,655 | ||||||||
| Borrower late fee income | 2,731 | 3,158 | 9,098 | 9,910 | ||||||||
| Realized and unrealized gains on investments classified as available-for-sale and trading, net | 2,468 | 506 | 3,185 | 1,444 | ||||||||
| Other | 5,303 | 5,823 | 11,648 | 13,335 | ||||||||
| Other income | $ | 19,756 | 15,150 | 44,874 | 38,711 | |||||||
LOAN SYSTEMSSERVICING AND SERVICINGSYSTEMS OPERATING SEGMENT – RESULTS OF OPERATIONS
Loan Servicing Volumes (dollars
| As of | |||||||||||||||||||||||||||||||||||||||||||||||
| December 31, 2019 | March 31, 2020 | June 30, 2020 | September 30, 2020 | December 31, 2020 | March 31, 2021 | June 30, 2021 | September 30, 2021 | ||||||||||||||||||||||||||||||||||||||||
| Servicing volume (dollars in millions): | |||||||||||||||||||||||||||||||||||||||||||||||
| Nelnet Servicing: | |||||||||||||||||||||||||||||||||||||||||||||||
| Government | $ | 183,790 | 185,477 | 185,315 | 189,932 | 191,678 | 195,875 | 195,030 | 198,743 | ||||||||||||||||||||||||||||||||||||||
| FFELP | 33,185 | 32,326 | 31,392 | 31,122 | 30,763 | 30,084 | 29,361 | 28,244 | |||||||||||||||||||||||||||||||||||||||
| Private and consumer | 16,033 | 16,364 | 16,223 | 16,267 | 16,226 | 21,397 | 24,758 | 24,229 | |||||||||||||||||||||||||||||||||||||||
| Great Lakes: | |||||||||||||||||||||||||||||||||||||||||||||||
| Government | 239,980 | 243,205 | 243,609 | 249,723 | 251,570 | 257,806 | 257,420 | 262,311 | |||||||||||||||||||||||||||||||||||||||
| Total | $ | 472,988 | 477,372 | 476,539 | 487,044 | 490,237 | 505,162 | 506,569 | 513,527 | ||||||||||||||||||||||||||||||||||||||
| Number of servicing borrowers: | |||||||||||||||||||||||||||||||||||||||||||||||
| Nelnet Servicing: | |||||||||||||||||||||||||||||||||||||||||||||||
| Government | 5,574,001 | 5,498,872 | 5,496,662 | 5,604,685 | 5,645,946 | 5,664,094 | 5,636,781 | 5,791,521 | |||||||||||||||||||||||||||||||||||||||
| FFELP | 1,478,703 | 1,423,286 | 1,370,007 | 1,332,908 | 1,300,677 | 1,233,461 | 1,198,863 | 1,150,214 | |||||||||||||||||||||||||||||||||||||||
| Private and consumer | 682,836 | 670,702 | 653,281 | 649,258 | 636,136 | 882,477 | 1,039,537 | 1,097,252 | |||||||||||||||||||||||||||||||||||||||
| Great Lakes: | |||||||||||||||||||||||||||||||||||||||||||||||
| Government | 7,396,657 | 7,344,509 | 7,346,691 | 7,542,679 | 7,605,984 | 7,637,270 | 7,616,270 | 7,778,535 | |||||||||||||||||||||||||||||||||||||||
| Total | 15,132,197 | 14,937,369 | 14,866,641 | 15,129,530 | 15,188,743 | 15,417,302 | 15,491,451 | 15,817,522 | |||||||||||||||||||||||||||||||||||||||
| Number of remote hosted borrowers: | 6,433,324 | 6,354,158 | 6,264,559 | 6,251,598 | 6,555,841 | 4,307,342 | 4,338,570 | 4,548,541 | |||||||||||||||||||||||||||||||||||||||
Government Loan Servicing
Nelnet Servicing's and Great Lakes' current student loan servicing contracts with the Department are currently scheduled to expire on December 14, 2023. In 2017, the Department initiated a contract procurement process referred to as the Next Generation Financial Services Environment ("NextGen") for a new framework for the servicing of all student loans owned by the Department. The Consolidated Appropriations Act, 2021 contains provisions directing certain aspects of the NextGen process, including that any new federal student loan servicing environment is required to provide for the participation of multiple student loan servicers and the allocation of borrower accounts to eligible student loan servicers based on performance. Nelnet cannot predict the timing, nature, or ultimate outcome of the NextGen or any other contract procurement process by the Department.
Nelnet Servicing and Great Lakes are two of the current eight private sector entities that have student loan servicing contracts with the Department. On July 8, 2021 and July 19, 2021, the Pennsylvania Higher Education Assistance Agency ("PHEAA") and the New Hampshire Higher Education Association Foundation Network ("Granite State"), two of the current existing servicers for the Department, announced that they will exit the federal student loan servicing business after their current contracts with the Department expire in millions)December 2021. In addition, in October 2021, Maximus assumed Navient's student loan servicing contract with the Department.
Granite State services approximately 1.3 million borrowers under its contract. Granite State servicing volume has been and will continue to be transitioned to Edfinancial Services, LLC ("Edfinancial"), a current servicer for the Department, during the third
42
| Company owned | $19,742 | $18,886 | $18,433 | $18,079 | $17,429 | $16,962 | $16,352 | $15,789 | $18,403 | ||||||||||||||||||
| % of total | 12.2% | 10.7% | 10.1% | 9.8% | 9.0% | 8.7% | 8.2% | 7.9% | 8.9% | ||||||||||||||||||
| Number of servicing borrowers: | |||||||||||||||||||||||||||
| Government servicing: | 5,915,449 | 5,842,163 | 5,786,545 | 5,726,828 | 6,009,433 | 5,972,619 | 5,924,099 | 5,849,283 | 5,906,404 | ||||||||||||||||||
| FFELP servicing: | 1,397,295 | 1,335,538 | 1,298,407 | 1,296,198 | 1,357,412 | 1,312,192 | 1,263,785 | 1,218,706 | 1,317,552 | ||||||||||||||||||
| Private education and consumer loan servicing: | 202,529 | 245,737 | 250,666 | 267,073 | 292,989 | 355,096 | 389,010 | 454,182 | 478,150 | ||||||||||||||||||
| Total: | 7,515,273 | 7,423,438 | 7,335,618 | 7,290,099 | 7,659,834 | 7,639,907 | 7,576,894 | 7,522,171 | 7,702,106 | ||||||||||||||||||
| Number of remote hosted borrowers: | 1,611,654 | 1,755,341 | 1,796,783 | 1,842,961 | 2,103,989 | 2,230,019 | 2,305,991 | 2,317,151 | 2,714,588 | ||||||||||||||||||
The Department currently allocates new loan volume among its servicers based on certain performance metrics that measure the satisfaction among separate customer groups, including borrowers and Department personnel who work with the servicers, and that measure the success of keeping borrowers in an on-time repayment status and helping borrowers avoid default. Under the most recent publicly announced performance metrics used by the Department for the quarterly periods January 1, 2021 through June 30, 2021, Great Lakes’ and Nelnet Servicing’s overall rankings among the remaining six go-forward servicers for the Department were third and fifth, respectively. Based on these results, Great Lakes’ and Nelnet Servicing’s allocation of new student loan servicing volumes beginning September 1, 2021 are 18% and 12%, respectively.
Servicing contract amendments entered into with the Department in September 2021 to extend the contracts through December 2023, also amended the methodology for performance measurements and new loan volume allocations, in substantial part by reflecting newly designed service level performance metrics under which, along with portfolio performance metrics, the Department will evaluate each servicer and make new loan volume allocations on a quarterly basis. The new service level performance metrics will be a substantial driver used by the Department to allocate new loan volume among the servicers.
The CARES Act, among other things, provides broad relief for federal student loan borrowers through January 31, 2022. Under the CARES Act, beginning in March 2020, federal student loan payments and interest accruals were suspended for all borrowers that had loans owned by the Department. As a result of the CARES Act, the Company received less servicing revenue per borrower from the Department based on the borrower forbearance status through September 30, 2020 than what was earned on such accounts prior to these provisions, and the Department further reduced the monthly rate paid to its servicers for those in forbearance status for the period from October 1, 2020 through January 31, 2022 from $2.19 per borrower to $2.05 per borrower. The Company currently anticipates revenue per borrower from the Department will increase to pre-CARES Act levels beginning February 1, 2022. In addition, during the fourth quarter of 2021 and first quarter of 2022, the Company anticipates earning additional revenue from the Department based on incremental work to be performed by the Company to support the Department borrowers coming out of forbearance. Such services and activities include extended hours of operation and outbound engagement.
Private Education Loan Servicing
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 vast majority of the remaining borrowers converted in the second quarter of 2021.
Summary and Comparison of Operating Results
| Three months ended September 30, | Nine months ended September 30, | ||||||||||||||||||||||||||||
| 2021 | 2020 | 2021 | 2020 | Additional information | |||||||||||||||||||||||||
| Net interest income | $ | 7 | 10 | 25 | 306 | Decrease was due to lower interest rates in 2021 as compared to 2020. | |||||||||||||||||||||||
| Loan servicing and systems revenue | 112,351 | 113,794 | 335,961 | 337,571 | See table below for additional information. | ||||||||||||||||||||||||
| Intersegment servicing revenue | 8,621 | 8,287 | 25,369 | 27,878 | Represents revenue earned by the LSS operating segment from servicing loans for the AGM and Nelnet Bank operating segments. Increase in the three months ended September 20, 2021 as compared to the same period in 2020 was due to an increase in private loan servicing revenue from AGM related to AGM's partial ownership of the former Wells Fargo private education loan portfolio, partially offset by the expected amortization of AGM's FFELP portfolio. Decrease in the nine months ended September 30, 2021 compared to the same period in 2020 was due to the impact of borrower relief policies implemented in March 2020 in response to the COVID-19 pandemic and the expected amortization of AGM's FFELP portfolio. FFELP intersegment servicing revenue will continue to decrease as AGM's FFELP portfolio pays off. | ||||||||||||||||||||||||
| Other income | 727 | 2,353 | 2,541 | 6,897 | Represents revenue earned from providing administrative support and marketing services, which primarily was to Great Lakes’ former parent company under a contract that expired in January 2021. | ||||||||||||||||||||||||
| Impairment expense | (13,243) | — | (13,243) | — | During the third quarter of 2021, the Company evaluated use of office space as a large number of employees continue to work from home due to COVID-19. As a result of this evaluation, the Company recorded a non-cash impairment charge during the third quarter of 2021. The impairment charge recognized by the LSS operating segment related primarily to building and building improvement assets. | ||||||||||||||||||||||||
| Total other income | 108,456 | 124,434 | 350,628 | 372,346 | |||||||||||||||||||||||||
43
| 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. | |||||
| Salaries and benefits | 75,305 | 72,912 | 210,151 | 211,806 | Decrease in the nine months ended September 30, 2021 compared to the same period in 2020 was due to a decrease in contact center operations and support personnel as a result of the suspension of federal student loan payments beginning in March 2020 under the CARES Act. Increase in the three months ended September 30, 2021 compared to the same period in 2020 was due to the Company hiring contact center operations and support associates to prepare for the resumption of federal student loan payments and other activities after the CARES Act suspension expires on January 31, 2022. The Company currently expects salaries and benefits to continue to increase as it prepares for the provisions of the CARES Act to expire. | ||||||||||||||||||||||||
| Depreciation and amortization | 4,245 | 9,951 | 20,411 | 27,941 | Includes depreciation on property and equipment and amortization of intangibles from the Great Lakes acquisition in February 2018. Amortization of intangible assets for the three months ended September 30, 2021 and 2020 was $0.7 million and $5.6 million, respectively, and for the nine months ended September 30, 2021 and 2020 was $11.6 million and $15.4 million, respectively. The majority of the Great Lakes intangible assets became fully amortized at June 30, 2021. Excluding amortization of intangible assets, the decrease in 2021 compared to 2020 was due to certain purchases to integrate Great Lakes and expand servicing capacity becoming fully depreciated. | ||||||||||||||||||||||||
| Other expenses | 12,738 | 12,407 | 39,296 | 43,277 | Decrease in the nine months ended September 30, 2021 compared to the same period in 2020 was due to cost savings as a result of the impact of the COVID-19 pandemic and the resulting CARES Act (which became effective March 13, 2020), primarily through a significant reduction of borrower statement printing and postage costs while student loan payments are suspended. The Company currently expects these costs will increase when the provisions of the CARES Act expire, scheduled for January 31, 2022. Decrease was also due to cost savings from an increase in the adoption of electronic borrower statements and correspondence. | ||||||||||||||||||||||||
| Intersegment expenses | 19,217 | 15,834 | 52,241 | 48,069 | 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. Increase in 2021 was due to the Company hiring contact center operations and support associates during the third quarter of 2021 in preparation for the provisions of the CARES Act to expire January 31, 2022. The Company currently expects intersegment expenses to continue to increase as it prepares for the provisions of the CARES Act to expire. | ||||||||||||||||||||||||
| Total operating expenses | 111,505 | 111,104 | 322,099 | 331,093 | |||||||||||||||||||||||||
| (Loss) income before income taxes | (3,042) | 13,340 | 28,554 | 41,559 | |||||||||||||||||||||||||
| Income tax benefit (expense) | 730 | (3,201) | (6,853) | (9,974) | Represents income tax expense at an effective tax rate of 24%. | ||||||||||||||||||||||||
| Net (loss) income | $ | (2,312) | 10,139 | 21,701 | 31,585 | ||||||||||||||||||||||||
| GAAP before tax operating margin | (2.5) | % | 10.7 | % | 7.9 | % | 11.2 | % | Before tax operating margin, excluding impairment expense, is a non-GAAP measure of before tax operating profitability as a percentage of revenue, and for the LSS segment is calculated as income before income taxes (excluding impairment expense) divided by the total of loan servicing and systems revenue, intersegment servicing revenue, and other income 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 provides additional information to facilitate an understanding of the operating performance of the segment and provides a meaningful comparison of the results of operations between periods. Before tax operating margin, excluding impairment expense, decreased for the three months ended September 30, 2021 as compared to the same period in 2020 due to increased operating expenses as the Company prepares for the provisions of the CARES Act to expire on January 31, 2022. Before tax operating margin, excluding impairment expense, increased for the nine months ended September 30, 2021 as compared to the same period in 2020 due to operating expenses being lower throughout the first half of 2021 as a result of the suspension of federal student loan payments under the CARES Act as discussed above. | ||||||||||||||||||||
| Impairment expense | 10.9 | % | — | 3.6 | % | — | |||||||||||||||||||||||
| Non-GAAP before tax operating margin, excluding impairment expense | 8.4 | % | 10.7 | % | 11.5 | % | 11.2 | % | |||||||||||||||||||||
44
Loan systemsservicing and servicingsystems revenue
| Three months ended September 30, | Nine months ended September 30, | ||||||||||||||||||||||||||||
| 2021 | 2020 | 2021 | 2020 | Additional information | |||||||||||||||||||||||||
| Government servicing - Nelnet | $ | 37,595 | 36,295 | 107,843 | 112,305 | Represents revenue from Nelnet Servicing's Department servicing contract. Decrease in the nine months ended September 30, 2021 compared to the same period in 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, decrease in revenue earned per borrower as a result of the suspension of federal student loan payments under the CARES Act, and further decrease in revenue earned per borrower (from the monthly rate of $2.19 per borrower to $2.05 per borrower) as a result of the Department issuing a change request effective October 1, 2020. These items were partially offset by an increase in the number of borrowers serviced. Increase in revenue for the three months ended September 30, 2021 compared to the same period in 2020 was a result of an increase in the number of borrowers serviced, partially offset by a decrease in revenue earned per borrower (from the monthly rate of $2.19 per borrower to $2.05 per borrower) as a result of the Department issuing a change request effective October 1, 2020. | |||||||||||||||||||||||
| Government servicing - Great Lakes | 46,489 | 45,350 | 133,654 | 137,010 | Represents revenue from Great Lakes' Department servicing contract. Changes among the current and comparable prior periods were due to the same factors as discussed immediately above for Nelnet Servicing, except that Great Lakes does not administer the TPD discharge program. | ||||||||||||||||||||||||
| Private education and consumer loan servicing | 13,198 | 7,928 | 34,563 | 24,733 | Increase for the three and nine months ended September 30, 2021 compared to the same periods in 2020 was due to the addition of the former Wells Fargo private education loan borrowers converted to the Company's servicing platform during March and the second quarter of 2021. Excluding revenue earned on the former Wells Fargo portfolio, revenue for the three and nine months ended September 30, 2021 decreased compared to the comparable periods in 2020. The decrease in revenue was due to a decrease in the number of legacy borrowers serviced, a decrease in origination fee revenue, and the impact of borrower relief policies implemented by private lenders in response to the COVID-19 pandemic. | ||||||||||||||||||||||||
| FFELP servicing | 4,557 | 4,912 | 13,930 | 15,443 | Decrease in 2021 compared to 2020 was due to a decrease in the number of borrowers serviced. In addition, decrease during the nine months ended September 30, 2021 as compared to the same period in 2020 was due to 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 | 6,952 | 10,426 | 22,779 | 32,395 | Decrease in 2021 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, 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 | 3,560 | 8,883 | 23,192 | 15,685 | The majority of this revenue relates to providing contact center and back office operational outsourcing services. During 2020, the Company began providing services to state agencies to process unemployment claims and conduct certain health tracing support activities (including vaccination registration support). Outsourcing activities provided to state agencies are performed under shorter-term contracts. Revenue from providing these services to state agencies was $1.3 million and $6.6 million for the three months ended September 30, 2021 and 2020, respectively, and $16.3 million and $9.7 million during the nine months ended September 30, 2021 and 2020, respectively. Outsourcing activities provided to state agencies decreased during the third quarter of 2021 as the needs for such services have decreased from prior periods. | ||||||||||||||||||||||||
| Loan servicing and systems revenue | $ | 112,351 | 113,794 | 335,961 | 337,571 | ||||||||||||||||||||||||
45
| 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 | |||||||||
On December 31, 2020, the Company acquired HigherSchool Instructional Services ("HigherSchool"), a services company that provides supplemental instructional services and educational professional development for K-12 schools in New York City, and CD2 LLC ("CD2"), a platform technology solution that includes learning management, collaboration/workflow, gamification, customer management/document storage, and employee boarding. The results of HigherSchool and CD2 are reported in the Company’s consolidated financial statements from the date of acquisition. Revenue recognized by these acquisitions during the three and nine months ended September 30, 2021 was $3.4 million and $18.5 million, respectively.
Summary and Comparison of Operating Results
| Three months ended September 30, | Nine months ended September 30, | ||||||||||||||||||||||||||||
| 2021 | 2020 | 2021 | 2020 | Additional information | |||||||||||||||||||||||||
| Net interest income | $ | 344 | 351 | 818 | 2,723 | Represents interest income on tuition funds held in custody for schools. Decrease was due to a significant decrease in interest rates in March 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 | 85,324 | 74,121 | 257,284 | 217,100 | See table below for additional information. | ||||||||||||||||||||||||
| Intersegment revenue | 3 | 3 | 9 | 17 | |||||||||||||||||||||||||
| Other income | 13 | 373 | 13 | 373 | |||||||||||||||||||||||||
| Total other income | 85,340 | 74,497 | 257,306 | 217,490 | |||||||||||||||||||||||||
| Cost to provide education technology, services, and payment processing services | 31,335 | 25,243 | 80,063 | 63,424 | See table below for additional information. | ||||||||||||||||||||||||
| Salaries and benefits | 29,119 | 25,460 | 82,154 | 73,678 | 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 and CD2. | ||||||||||||||||||||||||
| Depreciation and amortization | 2,762 | 2,366 | 8,789 | 7,115 | Represents primarily amortization of intangible assets from prior business acquisitions. Amortization of intangible assets related to business acquisitions was $2.6 million and $2.4 million for the three months ended September 30, 2021 and 2020, respectively, and $8.3 million and $7.1 million for the nine months ended September 30, 2021 and 2020, respectively. The increase in 2021 compared to 2020 was due to the acquisitions of HigherSchool and CD2. | ||||||||||||||||||||||||
| Other expenses | 4,804 | 3,126 | 14,063 | 11,544 | Increase was due to higher costs for consulting and professional fees due to investments in new technologies, the acquisitions of HigherSchool and CD2, and an increase in travel and in-person conferences during the third quarter of 2021. | ||||||||||||||||||||||||
| Intersegment expenses, net | 3,672 | 3,610 | 10,856 | 10,366 | 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 | 40,357 | 34,562 | 115,862 | 102,703 | |||||||||||||||||||||||||
| Income before income taxes | 13,992 | 15,043 | 62,199 | 54,086 | |||||||||||||||||||||||||
| Income tax expense | (3,358) | (3,610) | (14,928) | (12,981) | Represents income tax expense at an effective tax rate of 24%. | ||||||||||||||||||||||||
| Net income | $ | 10,634 | 11,433 | 47,271 | 41,105 | ||||||||||||||||||||||||
46
| 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 | % | ||||||
The following table provides disaggregated revenue by service offering and before tax operating margin for each reporting period.
| Three months ended September 30, | Nine months ended September 30, | ||||||||||||||||||||||||||||
| 2021 | 2020 | 2021 | 2020 | Additional information | |||||||||||||||||||||||||
| Tuition payment plan services | $ | 23,618 | 22,477 | 79,706 | 77,011 | Revenue increased for the three and nine months ended September 30, 2021 as compared to the same periods in 2020 as a result of a higher number of payment plans in the K-12 market, partially offset due to enrollment for institutions of higher education decreasing as a result of COVID-19. | |||||||||||||||||||||||
| Payment processing | 39,852 | 35,420 | 97,898 | 88,329 | Payment volumes in 2021 increased as compared to 2020 in both the K-12 and higher education markets. The increase in payments volume is driven by both new customers and an increase in volume from existing customers. | ||||||||||||||||||||||||
| Education technology and services | 21,098 | 15,840 | 78,153 | 50,820 | Increase in 2021 compared to 2020 was primarily the result of the HigherSchool and CD2 acquisitions. Additionally, revenues from the Company’s school information system software, application and enrollment products, grant and aid assessments, and FACTS Education Solutions instructional and professional development services increased compared to the prior year. | ||||||||||||||||||||||||
| Other | 756 | 384 | 1,527 | 940 | |||||||||||||||||||||||||
| Education technology, services, and payment processing revenue | 85,324 | 74,121 | 257,284 | 217,100 | |||||||||||||||||||||||||
| Cost to provide education technology, services, and payment processing services | 31,335 | 25,243 | 80,063 | 63,424 | Costs primarily relate to payment processing revenue and such costs decrease/increase in relationship to payment volumes. Costs to provide instructional services are also included as a component of this expense and were a driver in the increase in 2021 compared to 2020 due to the acquisition of HigherSchool and growth in the FACTS Education Solutions division. | ||||||||||||||||||||||||
| Net revenue | $ | 53,989 | 48,878 | 177,221 | 153,676 | ||||||||||||||||||||||||
| Before tax operating margin | 25.9 | % | 30.8 | % | 35.1% | 35.2% | 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. The decrease in margin for the three months ended September 30, 2021 as compared to the same period in 2020 was due to investment in the development of new technologies and increase in travel and in-person conferences in 2021. | ||||||||||||||||||||||
47
| 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. | ||||
| 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 | |||||||||||||||
ASSET GENERATION AND MANAGEMENT OPERATING SEGMENT – RESULTS OF OPERATIONS
As of September 30, 2017,2021, the CompanyAGM operating segment had a $22.5$18.4 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 9.3 years. For a summary of the Company’s student loan portfolio as of September 30, 20172021 and December 31, 2016,2020, see note 2 of the notes to consolidated financial statements included under Part I, Item 1 of this report.
Summary and Comparison of Operating Results
| Three months ended September 30, | Nine months ended September 30, | ||||||||||||||||||||||||||||
| 2021 | 2020 | 2021 | 2020 | Additional information | |||||||||||||||||||||||||
| Net interest income | $ | 7 | 10 | 25 | 306 | Decrease was due to lower interest rates in 2021 as compared to 2020. | |||||||||||||||||||||||
| Loan servicing and systems revenue | 112,351 | 113,794 | 335,961 | 337,571 | See table below for additional information. | ||||||||||||||||||||||||
| Intersegment servicing revenue | 8,621 | 8,287 | 25,369 | 27,878 | Represents revenue earned by the LSS operating segment from servicing loans for the AGM and Nelnet Bank operating segments. Increase in the three months ended September 20, 2021 as compared to the same period in 2020 was due to an increase in private loan servicing revenue from AGM related to AGM's partial ownership of the former Wells Fargo private education loan portfolio, partially offset by the expected amortization of AGM's FFELP portfolio. Decrease in the nine months ended September 30, 2021 compared to the same period in 2020 was due to the impact of borrower relief policies implemented in March 2020 in response to the COVID-19 pandemic and the expected amortization of AGM's FFELP portfolio. FFELP intersegment servicing revenue will continue to decrease as AGM's FFELP portfolio pays off. | ||||||||||||||||||||||||
| Other income | 727 | 2,353 | 2,541 | 6,897 | Represents revenue earned from providing administrative support and marketing services, which primarily was to Great Lakes’ former parent company under a contract that expired in January 2021. | ||||||||||||||||||||||||
| Impairment expense | (13,243) | — | (13,243) | — | During the third quarter of 2021, the Company evaluated use of office space as a large number of employees continue to work from home due to COVID-19. As a result of this evaluation, the Company recorded a non-cash impairment charge during the third quarter of 2021. The impairment charge recognized by the LSS operating segment related primarily to building and building improvement assets. | ||||||||||||||||||||||||
| Total other income | 108,456 | 124,434 | 350,628 | 372,346 | |||||||||||||||||||||||||
43
| Salaries and benefits | 75,305 | 72,912 | 210,151 | 211,806 | Decrease in the nine months ended September 30, 2021 compared to the same period in 2020 was due to a decrease in contact center operations and support personnel as a result of the suspension of federal student loan payments beginning in March 2020 under the CARES Act. Increase in the three months ended September 30, 2021 compared to the same period in 2020 was due to the Company hiring contact center operations and support associates to prepare for the resumption of federal student loan payments and other activities after the CARES Act suspension expires on January 31, 2022. The Company currently expects salaries and benefits to continue to increase as it prepares for the provisions of the CARES Act to expire. | ||||||||||||||||||||||||
| Depreciation and amortization | 4,245 | 9,951 | 20,411 | 27,941 | Includes depreciation on property and equipment and amortization of intangibles from the Great Lakes acquisition in February 2018. Amortization of intangible assets for the three months ended September 30, 2021 and 2020 was $0.7 million and $5.6 million, respectively, and for the nine months ended September 30, 2021 and 2020 was $11.6 million and $15.4 million, respectively. The majority of the Great Lakes intangible assets became fully amortized at June 30, 2021. Excluding amortization of intangible assets, the decrease in 2021 compared to 2020 was due to certain purchases to integrate Great Lakes and expand servicing capacity becoming fully depreciated. | ||||||||||||||||||||||||
| Other expenses | 12,738 | 12,407 | 39,296 | 43,277 | Decrease in the nine months ended September 30, 2021 compared to the same period in 2020 was due to cost savings as a result of the impact of the COVID-19 pandemic and the resulting CARES Act (which became effective March 13, 2020), primarily through a significant reduction of borrower statement printing and postage costs while student loan payments are suspended. The Company currently expects these costs will increase when the provisions of the CARES Act expire, scheduled for January 31, 2022. Decrease was also due to cost savings from an increase in the adoption of electronic borrower statements and correspondence. | ||||||||||||||||||||||||
| Intersegment expenses | 19,217 | 15,834 | 52,241 | 48,069 | 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. Increase in 2021 was due to the Company hiring contact center operations and support associates during the third quarter of 2021 in preparation for the provisions of the CARES Act to expire January 31, 2022. The Company currently expects intersegment expenses to continue to increase as it prepares for the provisions of the CARES Act to expire. | ||||||||||||||||||||||||
| Total operating expenses | 111,505 | 111,104 | 322,099 | 331,093 | |||||||||||||||||||||||||
| (Loss) income before income taxes | (3,042) | 13,340 | 28,554 | 41,559 | |||||||||||||||||||||||||
| Income tax benefit (expense) | 730 | (3,201) | (6,853) | (9,974) | Represents income tax expense at an effective tax rate of 24%. | ||||||||||||||||||||||||
| Net (loss) income | $ | (2,312) | 10,139 | 21,701 | 31,585 | ||||||||||||||||||||||||
| GAAP before tax operating margin | (2.5) | % | 10.7 | % | 7.9 | % | 11.2 | % | Before tax operating margin, excluding impairment expense, is a non-GAAP measure of before tax operating profitability as a percentage of revenue, and for the LSS segment is calculated as income before income taxes (excluding impairment expense) divided by the total of loan servicing and systems revenue, intersegment servicing revenue, and other income 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 provides additional information to facilitate an understanding of the operating performance of the segment and provides a meaningful comparison of the results of operations between periods. Before tax operating margin, excluding impairment expense, decreased for the three months ended September 30, 2021 as compared to the same period in 2020 due to increased operating expenses as the Company prepares for the provisions of the CARES Act to expire on January 31, 2022. Before tax operating margin, excluding impairment expense, increased for the nine months ended September 30, 2021 as compared to the same period in 2020 due to operating expenses being lower throughout the first half of 2021 as a result of the suspension of federal student loan payments under the CARES Act as discussed above. | ||||||||||||||||||||
| Impairment expense | 10.9 | % | — | 3.6 | % | — | |||||||||||||||||||||||
| Non-GAAP before tax operating margin, excluding impairment expense | 8.4 | % | 10.7 | % | 11.5 | % | 11.2 | % | |||||||||||||||||||||
44
Loan Activityservicing and systems revenue
| Three months ended September 30, | Nine months ended September 30, | ||||||||||||||||||||||||||||
| 2021 | 2020 | 2021 | 2020 | Additional information | |||||||||||||||||||||||||
| Government servicing - Nelnet | $ | 37,595 | 36,295 | 107,843 | 112,305 | Represents revenue from Nelnet Servicing's Department servicing contract. Decrease in the nine months ended September 30, 2021 compared to the same period in 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, decrease in revenue earned per borrower as a result of the suspension of federal student loan payments under the CARES Act, and further decrease in revenue earned per borrower (from the monthly rate of $2.19 per borrower to $2.05 per borrower) as a result of the Department issuing a change request effective October 1, 2020. These items were partially offset by an increase in the number of borrowers serviced. Increase in revenue for the three months ended September 30, 2021 compared to the same period in 2020 was a result of an increase in the number of borrowers serviced, partially offset by a decrease in revenue earned per borrower (from the monthly rate of $2.19 per borrower to $2.05 per borrower) as a result of the Department issuing a change request effective October 1, 2020. | |||||||||||||||||||||||
| Government servicing - Great Lakes | 46,489 | 45,350 | 133,654 | 137,010 | Represents revenue from Great Lakes' Department servicing contract. Changes among the current and comparable prior periods were due to the same factors as discussed immediately above for Nelnet Servicing, except that Great Lakes does not administer the TPD discharge program. | ||||||||||||||||||||||||
| Private education and consumer loan servicing | 13,198 | 7,928 | 34,563 | 24,733 | Increase for the three and nine months ended September 30, 2021 compared to the same periods in 2020 was due to the addition of the former Wells Fargo private education loan borrowers converted to the Company's servicing platform during March and the second quarter of 2021. Excluding revenue earned on the former Wells Fargo portfolio, revenue for the three and nine months ended September 30, 2021 decreased compared to the comparable periods in 2020. The decrease in revenue was due to a decrease in the number of legacy borrowers serviced, a decrease in origination fee revenue, and the impact of borrower relief policies implemented by private lenders in response to the COVID-19 pandemic. | ||||||||||||||||||||||||
| FFELP servicing | 4,557 | 4,912 | 13,930 | 15,443 | Decrease in 2021 compared to 2020 was due to a decrease in the number of borrowers serviced. In addition, decrease during the nine months ended September 30, 2021 as compared to the same period in 2020 was due to 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 | 6,952 | 10,426 | 22,779 | 32,395 | Decrease in 2021 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, 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 | 3,560 | 8,883 | 23,192 | 15,685 | The majority of this revenue relates to providing contact center and back office operational outsourcing services. During 2020, the Company began providing services to state agencies to process unemployment claims and conduct certain health tracing support activities (including vaccination registration support). Outsourcing activities provided to state agencies are performed under shorter-term contracts. Revenue from providing these services to state agencies was $1.3 million and $6.6 million for the three months ended September 30, 2021 and 2020, respectively, and $16.3 million and $9.7 million during the nine months ended September 30, 2021 and 2020, respectively. Outsourcing activities provided to state agencies decreased during the third quarter of 2021 as the needs for such services have decreased from prior periods. | ||||||||||||||||||||||||
| Loan servicing and systems revenue | $ | 112,351 | 113,794 | 335,961 | 337,571 | ||||||||||||||||||||||||
45
EDUCATION TECHNOLOGY, SERVICES, AND PAYMENT PROCESSING OPERATING SEGMENT – RESULTS OF OPERATIONS
As 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. 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 ("HigherSchool"), a services company that provides supplemental instructional services and educational professional development for K-12 schools in New York City, and CD2 LLC ("CD2"), a platform technology solution that includes learning management, collaboration/workflow, gamification, customer management/document storage, and employee boarding. The results of HigherSchool and CD2 are reported in the Company’s consolidated financial statements from the date of acquisition. Revenue recognized by these acquisitions during the three and nine months ended September 30, 2021 was $3.4 million and $18.5 million, respectively.
Summary and Comparison of Operating Results
| Three months ended September 30, | Nine months ended September 30, | ||||||||||||||||||||||||||||
| 2021 | 2020 | 2021 | 2020 | Additional information | |||||||||||||||||||||||||
| Net interest income | $ | 344 | 351 | 818 | 2,723 | Represents interest income on tuition funds held in custody for schools. Decrease was due to a significant decrease in interest rates in March 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 | 85,324 | 74,121 | 257,284 | 217,100 | See table below for additional information. | ||||||||||||||||||||||||
| Intersegment revenue | 3 | 3 | 9 | 17 | |||||||||||||||||||||||||
| Other income | 13 | 373 | 13 | 373 | |||||||||||||||||||||||||
| Total other income | 85,340 | 74,497 | 257,306 | 217,490 | |||||||||||||||||||||||||
| Cost to provide education technology, services, and payment processing services | 31,335 | 25,243 | 80,063 | 63,424 | See table below for additional information. | ||||||||||||||||||||||||
| Salaries and benefits | 29,119 | 25,460 | 82,154 | 73,678 | 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 and CD2. | ||||||||||||||||||||||||
| Depreciation and amortization | 2,762 | 2,366 | 8,789 | 7,115 | Represents primarily amortization of intangible assets from prior business acquisitions. Amortization of intangible assets related to business acquisitions was $2.6 million and $2.4 million for the three months ended September 30, 2021 and 2020, respectively, and $8.3 million and $7.1 million for the nine months ended September 30, 2021 and 2020, respectively. The increase in 2021 compared to 2020 was due to the acquisitions of HigherSchool and CD2. | ||||||||||||||||||||||||
| Other expenses | 4,804 | 3,126 | 14,063 | 11,544 | Increase was due to higher costs for consulting and professional fees due to investments in new technologies, the acquisitions of HigherSchool and CD2, and an increase in travel and in-person conferences during the third quarter of 2021. | ||||||||||||||||||||||||
| Intersegment expenses, net | 3,672 | 3,610 | 10,856 | 10,366 | 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 | 40,357 | 34,562 | 115,862 | 102,703 | |||||||||||||||||||||||||
| Income before income taxes | 13,992 | 15,043 | 62,199 | 54,086 | |||||||||||||||||||||||||
| Income tax expense | (3,358) | (3,610) | (14,928) | (12,981) | Represents income tax expense at an effective tax rate of 24%. | ||||||||||||||||||||||||
| Net income | $ | 10,634 | 11,433 | 47,271 | 41,105 | ||||||||||||||||||||||||
46
Education technology, services, and payment processing revenue
The following table sets forthprovides disaggregated revenue by service offering and before tax operating margin for each reporting period.
| Three months ended September 30, | Nine months ended September 30, | ||||||||||||||||||||||||||||
| 2021 | 2020 | 2021 | 2020 | Additional information | |||||||||||||||||||||||||
| Tuition payment plan services | $ | 23,618 | 22,477 | 79,706 | 77,011 | Revenue increased for the three and nine months ended September 30, 2021 as compared to the same periods in 2020 as a result of a higher number of payment plans in the K-12 market, partially offset due to enrollment for institutions of higher education decreasing as a result of COVID-19. | |||||||||||||||||||||||
| Payment processing | 39,852 | 35,420 | 97,898 | 88,329 | Payment volumes in 2021 increased as compared to 2020 in both the K-12 and higher education markets. The increase in payments volume is driven by both new customers and an increase in volume from existing customers. | ||||||||||||||||||||||||
| Education technology and services | 21,098 | 15,840 | 78,153 | 50,820 | Increase in 2021 compared to 2020 was primarily the result of the HigherSchool and CD2 acquisitions. Additionally, revenues from the Company’s school information system software, application and enrollment products, grant and aid assessments, and FACTS Education Solutions instructional and professional development services increased compared to the prior year. | ||||||||||||||||||||||||
| Other | 756 | 384 | 1,527 | 940 | |||||||||||||||||||||||||
| Education technology, services, and payment processing revenue | 85,324 | 74,121 | 257,284 | 217,100 | |||||||||||||||||||||||||
| Cost to provide education technology, services, and payment processing services | 31,335 | 25,243 | 80,063 | 63,424 | Costs primarily relate to payment processing revenue and such costs decrease/increase in relationship to payment volumes. Costs to provide instructional services are also included as a component of this expense and were a driver in the increase in 2021 compared to 2020 due to the acquisition of HigherSchool and growth in the FACTS Education Solutions division. | ||||||||||||||||||||||||
| Net revenue | $ | 53,989 | 48,878 | 177,221 | 153,676 | ||||||||||||||||||||||||
| Before tax operating margin | 25.9 | % | 30.8 | % | 35.1% | 35.2% | 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. The decrease in margin for the three months ended September 30, 2021 as compared to the same period in 2020 was due to investment in the development of new technologies and increase in travel and in-person conferences in 2021. | ||||||||||||||||||||||
47
ASSET GENERATION AND MANAGEMENT OPERATING SEGMENT – RESULTS OF OPERATIONS
Loan Portfolio
As of September 30, 2021, the activityAGM operating segment had a $18.4 billion loan portfolio, consisting primarily of loans:
| 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 | |||||||
9.3 years. For a summary of the activity in the allowance forCompany’s loan losses for the three and nine months ended portfolio as of September 30, 20172021 and 2016, and a summary of the Company's student loan delinquency amounts as of September 30, 2017, December 31, 2016, and September 30, 2016,2020, see note 2 of the notes to consolidated financial statements included under Part I, Item 1 of this report.
| 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 | ||||||||
| 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 | % | ||||
Summary and Comparison of Operating Results
| Three months ended September 30, | Nine months ended September 30, | ||||||||||||||||||||||||||||
| 2021 | 2020 | 2021 | 2020 | Additional information | |||||||||||||||||||||||||
| Net interest income | $ | 7 | 10 | 25 | 306 | Decrease was due to lower interest rates in 2021 as compared to 2020. | |||||||||||||||||||||||
| Loan servicing and systems revenue | 112,351 | 113,794 | 335,961 | 337,571 | See table below for additional information. | ||||||||||||||||||||||||
| Intersegment servicing revenue | 8,621 | 8,287 | 25,369 | 27,878 | Represents revenue earned by the LSS operating segment from servicing loans for the AGM and Nelnet Bank operating segments. Increase in the three months ended September 20, 2021 as compared to the same period in 2020 was due to an increase in private loan servicing revenue from AGM related to AGM's partial ownership of the former Wells Fargo private education loan portfolio, partially offset by the expected amortization of AGM's FFELP portfolio. Decrease in the nine months ended September 30, 2021 compared to the same period in 2020 was due to the impact of borrower relief policies implemented in March 2020 in response to the COVID-19 pandemic and the expected amortization of AGM's FFELP portfolio. FFELP intersegment servicing revenue will continue to decrease as AGM's FFELP portfolio pays off. | ||||||||||||||||||||||||
| Other income | 727 | 2,353 | 2,541 | 6,897 | Represents revenue earned from providing administrative support and marketing services, which primarily was to Great Lakes’ former parent company under a contract that expired in January 2021. | ||||||||||||||||||||||||
| Impairment expense | (13,243) | — | (13,243) | — | During the third quarter of 2021, the Company evaluated use of office space as a large number of employees continue to work from home due to COVID-19. As a result of this evaluation, the Company recorded a non-cash impairment charge during the third quarter of 2021. The impairment charge recognized by the LSS operating segment related primarily to building and building improvement assets. | ||||||||||||||||||||||||
| Total other income | 108,456 | 124,434 | 350,628 | 372,346 | |||||||||||||||||||||||||
43
| 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 | |||||||||
| Salaries and benefits | 75,305 | 72,912 | 210,151 | 211,806 | Decrease in the nine months ended September 30, 2021 compared to the same period in 2020 was due to a decrease in contact center operations and support personnel as a result of the suspension of federal student loan payments beginning in March 2020 under the CARES Act. Increase in the three months ended September 30, 2021 compared to the same period in 2020 was due to the Company hiring contact center operations and support associates to prepare for the resumption of federal student loan payments and other activities after the CARES Act suspension expires on January 31, 2022. The Company currently expects salaries and benefits to continue to increase as it prepares for the provisions of the CARES Act to expire. | ||||||||||||||||||||||||
| Depreciation and amortization | 4,245 | 9,951 | 20,411 | 27,941 | Includes depreciation on property and equipment and amortization of intangibles from the Great Lakes acquisition in February 2018. Amortization of intangible assets for the three months ended September 30, 2021 and 2020 was $0.7 million and $5.6 million, respectively, and for the nine months ended September 30, 2021 and 2020 was $11.6 million and $15.4 million, respectively. The majority of the Great Lakes intangible assets became fully amortized at June 30, 2021. Excluding amortization of intangible assets, the decrease in 2021 compared to 2020 was due to certain purchases to integrate Great Lakes and expand servicing capacity becoming fully depreciated. | ||||||||||||||||||||||||
| Other expenses | 12,738 | 12,407 | 39,296 | 43,277 | Decrease in the nine months ended September 30, 2021 compared to the same period in 2020 was due to cost savings as a result of the impact of the COVID-19 pandemic and the resulting CARES Act (which became effective March 13, 2020), primarily through a significant reduction of borrower statement printing and postage costs while student loan payments are suspended. The Company currently expects these costs will increase when the provisions of the CARES Act expire, scheduled for January 31, 2022. Decrease was also due to cost savings from an increase in the adoption of electronic borrower statements and correspondence. | ||||||||||||||||||||||||
| Intersegment expenses | 19,217 | 15,834 | 52,241 | 48,069 | 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. Increase in 2021 was due to the Company hiring contact center operations and support associates during the third quarter of 2021 in preparation for the provisions of the CARES Act to expire January 31, 2022. The Company currently expects intersegment expenses to continue to increase as it prepares for the provisions of the CARES Act to expire. | ||||||||||||||||||||||||
| Total operating expenses | 111,505 | 111,104 | 322,099 | 331,093 | |||||||||||||||||||||||||
| (Loss) income before income taxes | (3,042) | 13,340 | 28,554 | 41,559 | |||||||||||||||||||||||||
| Income tax benefit (expense) | 730 | (3,201) | (6,853) | (9,974) | Represents income tax expense at an effective tax rate of 24%. | ||||||||||||||||||||||||
| Net (loss) income | $ | (2,312) | 10,139 | 21,701 | 31,585 | ||||||||||||||||||||||||
| GAAP before tax operating margin | (2.5) | % | 10.7 | % | 7.9 | % | 11.2 | % | Before tax operating margin, excluding impairment expense, is a non-GAAP measure of before tax operating profitability as a percentage of revenue, and for the LSS segment is calculated as income before income taxes (excluding impairment expense) divided by the total of loan servicing and systems revenue, intersegment servicing revenue, and other income 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 provides additional information to facilitate an understanding of the operating performance of the segment and provides a meaningful comparison of the results of operations between periods. Before tax operating margin, excluding impairment expense, decreased for the three months ended September 30, 2021 as compared to the same period in 2020 due to increased operating expenses as the Company prepares for the provisions of the CARES Act to expire on January 31, 2022. Before tax operating margin, excluding impairment expense, increased for the nine months ended September 30, 2021 as compared to the same period in 2020 due to operating expenses being lower throughout the first half of 2021 as a result of the suspension of federal student loan payments under the CARES Act as discussed above. | ||||||||||||||||||||
| Impairment expense | 10.9 | % | — | 3.6 | % | — | |||||||||||||||||||||||
| Non-GAAP before tax operating margin, excluding impairment expense | 8.4 | % | 10.7 | % | 11.5 | % | 11.2 | % | |||||||||||||||||||||
44
| 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 | |||||||||
| Three months ended September 30, | Nine months ended September 30, | ||||||||||||||||||||||||||||
| 2021 | 2020 | 2021 | 2020 | Additional information | |||||||||||||||||||||||||
| Government servicing - Nelnet | $ | 37,595 | 36,295 | 107,843 | 112,305 | Represents revenue from Nelnet Servicing's Department servicing contract. Decrease in the nine months ended September 30, 2021 compared to the same period in 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, decrease in revenue earned per borrower as a result of the suspension of federal student loan payments under the CARES Act, and further decrease in revenue earned per borrower (from the monthly rate of $2.19 per borrower to $2.05 per borrower) as a result of the Department issuing a change request effective October 1, 2020. These items were partially offset by an increase in the number of borrowers serviced. Increase in revenue for the three months ended September 30, 2021 compared to the same period in 2020 was a result of an increase in the number of borrowers serviced, partially offset by a decrease in revenue earned per borrower (from the monthly rate of $2.19 per borrower to $2.05 per borrower) as a result of the Department issuing a change request effective October 1, 2020. | |||||||||||||||||||||||
| Government servicing - Great Lakes | 46,489 | 45,350 | 133,654 | 137,010 | Represents revenue from Great Lakes' Department servicing contract. Changes among the current and comparable prior periods were due to the same factors as discussed immediately above for Nelnet Servicing, except that Great Lakes does not administer the TPD discharge program. | ||||||||||||||||||||||||
| Private education and consumer loan servicing | 13,198 | 7,928 | 34,563 | 24,733 | Increase for the three and nine months ended September 30, 2021 compared to the same periods in 2020 was due to the addition of the former Wells Fargo private education loan borrowers converted to the Company's servicing platform during March and the second quarter of 2021. Excluding revenue earned on the former Wells Fargo portfolio, revenue for the three and nine months ended September 30, 2021 decreased compared to the comparable periods in 2020. The decrease in revenue was due to a decrease in the number of legacy borrowers serviced, a decrease in origination fee revenue, and the impact of borrower relief policies implemented by private lenders in response to the COVID-19 pandemic. | ||||||||||||||||||||||||
| FFELP servicing | 4,557 | 4,912 | 13,930 | 15,443 | Decrease in 2021 compared to 2020 was due to a decrease in the number of borrowers serviced. In addition, decrease during the nine months ended September 30, 2021 as compared to the same period in 2020 was due to 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 | 6,952 | 10,426 | 22,779 | 32,395 | Decrease in 2021 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, 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 | 3,560 | 8,883 | 23,192 | 15,685 | The majority of this revenue relates to providing contact center and back office operational outsourcing services. During 2020, the Company began providing services to state agencies to process unemployment claims and conduct certain health tracing support activities (including vaccination registration support). Outsourcing activities provided to state agencies are performed under shorter-term contracts. Revenue from providing these services to state agencies was $1.3 million and $6.6 million for the three months ended September 30, 2021 and 2020, respectively, and $16.3 million and $9.7 million during the nine months ended September 30, 2021 and 2020, respectively. Outsourcing activities provided to state agencies decreased during the third quarter of 2021 as the needs for such services have decreased from prior periods. | ||||||||||||||||||||||||
| Loan servicing and systems revenue | $ | 112,351 | 113,794 | 335,961 | 337,571 | ||||||||||||||||||||||||
45
EDUCATION TECHNOLOGY, SERVICES, AND PAYMENT PROCESSING OPERATING SEGMENT – RESULTS OF OPERATIONS
As 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. 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 ("HigherSchool"), a services company that provides supplemental instructional services and educational professional development for K-12 schools in New York City, and CD2 LLC ("CD2"), a platform technology solution that includes learning management, collaboration/workflow, gamification, customer management/document storage, and employee boarding. The results of HigherSchool and CD2 are reported in the Company’s consolidated financial statements from the date of acquisition. Revenue recognized by these acquisitions during the three and nine months ended September 30, 2021 was $3.4 million and $18.5 million, respectively.
Summary and Comparison of Operating Results
| Three months ended September 30, | Nine months ended September 30, | ||||||||||||||||||||||||||||
| 2021 | 2020 | 2021 | 2020 | Additional information | |||||||||||||||||||||||||
| Net interest income | $ | 344 | 351 | 818 | 2,723 | Represents interest income on tuition funds held in custody for schools. Decrease was due to a significant decrease in interest rates in March 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 | 85,324 | 74,121 | 257,284 | 217,100 | See table below for additional information. | ||||||||||||||||||||||||
| Intersegment revenue | 3 | 3 | 9 | 17 | |||||||||||||||||||||||||
| Other income | 13 | 373 | 13 | 373 | |||||||||||||||||||||||||
| Total other income | 85,340 | 74,497 | 257,306 | 217,490 | |||||||||||||||||||||||||
| Cost to provide education technology, services, and payment processing services | 31,335 | 25,243 | 80,063 | 63,424 | See table below for additional information. | ||||||||||||||||||||||||
| Salaries and benefits | 29,119 | 25,460 | 82,154 | 73,678 | 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 and CD2. | ||||||||||||||||||||||||
| Depreciation and amortization | 2,762 | 2,366 | 8,789 | 7,115 | Represents primarily amortization of intangible assets from prior business acquisitions. Amortization of intangible assets related to business acquisitions was $2.6 million and $2.4 million for the three months ended September 30, 2021 and 2020, respectively, and $8.3 million and $7.1 million for the nine months ended September 30, 2021 and 2020, respectively. The increase in 2021 compared to 2020 was due to the acquisitions of HigherSchool and CD2. | ||||||||||||||||||||||||
| Other expenses | 4,804 | 3,126 | 14,063 | 11,544 | Increase was due to higher costs for consulting and professional fees due to investments in new technologies, the acquisitions of HigherSchool and CD2, and an increase in travel and in-person conferences during the third quarter of 2021. | ||||||||||||||||||||||||
| Intersegment expenses, net | 3,672 | 3,610 | 10,856 | 10,366 | 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 | 40,357 | 34,562 | 115,862 | 102,703 | |||||||||||||||||||||||||
| Income before income taxes | 13,992 | 15,043 | 62,199 | 54,086 | |||||||||||||||||||||||||
| Income tax expense | (3,358) | (3,610) | (14,928) | (12,981) | Represents income tax expense at an effective tax rate of 24%. | ||||||||||||||||||||||||
| Net income | $ | 10,634 | 11,433 | 47,271 | 41,105 | ||||||||||||||||||||||||
46
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 September 30, | Nine months ended September 30, | ||||||||||||||||||||||||||||
| 2021 | 2020 | 2021 | 2020 | Additional information | |||||||||||||||||||||||||
| Tuition payment plan services | $ | 23,618 | 22,477 | 79,706 | 77,011 | Revenue increased for the three and nine months ended September 30, 2021 as compared to the same periods in 2020 as a result of a higher number of payment plans in the K-12 market, partially offset due to enrollment for institutions of higher education decreasing as a result of COVID-19. | |||||||||||||||||||||||
| Payment processing | 39,852 | 35,420 | 97,898 | 88,329 | Payment volumes in 2021 increased as compared to 2020 in both the K-12 and higher education markets. The increase in payments volume is driven by both new customers and an increase in volume from existing customers. | ||||||||||||||||||||||||
| Education technology and services | 21,098 | 15,840 | 78,153 | 50,820 | Increase in 2021 compared to 2020 was primarily the result of the HigherSchool and CD2 acquisitions. Additionally, revenues from the Company’s school information system software, application and enrollment products, grant and aid assessments, and FACTS Education Solutions instructional and professional development services increased compared to the prior year. | ||||||||||||||||||||||||
| Other | 756 | 384 | 1,527 | 940 | |||||||||||||||||||||||||
| Education technology, services, and payment processing revenue | 85,324 | 74,121 | 257,284 | 217,100 | |||||||||||||||||||||||||
| Cost to provide education technology, services, and payment processing services | 31,335 | 25,243 | 80,063 | 63,424 | Costs primarily relate to payment processing revenue and such costs decrease/increase in relationship to payment volumes. Costs to provide instructional services are also included as a component of this expense and were a driver in the increase in 2021 compared to 2020 due to the acquisition of HigherSchool and growth in the FACTS Education Solutions division. | ||||||||||||||||||||||||
| Net revenue | $ | 53,989 | 48,878 | 177,221 | 153,676 | ||||||||||||||||||||||||
| Before tax operating margin | 25.9 | % | 30.8 | % | 35.1% | 35.2% | 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. The decrease in margin for the three months ended September 30, 2021 as compared to the same period in 2020 was due to investment in the development of new technologies and increase in travel and in-person conferences in 2021. | ||||||||||||||||||||||
47
ASSET GENERATION AND MANAGEMENT OPERATING SEGMENT – RESULTS OF OPERATIONS
Loan Portfolio
As of September 30, 2021, the AGM operating segment had a $18.4 billion loan portfolio, consisting primarily of federally insured loans, that management anticipates will amortize over the next approximately 20 years and has a weighted average remaining life of 9.3 years. For a summary of the Company’s loan portfolio as of September 30, 2021 and December 31, 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 in the AGM operating segment:
| Three months ended September 30, | Nine months ended September 30, | ||||||||||||||||||||||
| 2021 | 2020 | 2021 | 2020 | ||||||||||||||||||||
| Beginning balance | $ | 19,331,725 | 19,830,397 | 19,559,108 | 20,798,719 | ||||||||||||||||||
| Loan acquisitions: | |||||||||||||||||||||||
| Federally insured student loans | 70,844 | 137,714 | 833,313 | 947,288 | |||||||||||||||||||
| Private education loans | 1,680 | — | 88,131 | 80,908 | |||||||||||||||||||
| Consumer loans | 20,939 | 26,446 | 61,319 | 112,257 | |||||||||||||||||||
| Total loan acquisitions | 93,463 | 164,160 | 982,763 | 1,140,453 | |||||||||||||||||||
| Repayments, claims, capitalized interest, participations, and other, net | (818,554) | (277,949) | (1,415,249) | (1,715,214) | |||||||||||||||||||
| Consolidation loans lost to external parties | (145,270) | (136,263) | (587,841) | (519,364) | |||||||||||||||||||
| Consumer loans sold | (18,390) | (60,779) | (95,807) | (185,028) | |||||||||||||||||||
| Other loans sold | (5,280) | — | (5,280) | — | |||||||||||||||||||
| Ending balance | $ | 18,437,694 | 19,519,566 | 18,437,694 | 19,519,566 | ||||||||||||||||||
The Company has also purchased partial ownership in certain private education, consumer, and federally insured student loan securitizations that are accounted for as held-to-maturity beneficial interest investments and included in "investments" in the Company's consolidated financial statements. As of the latest remittance reports filed by the various trusts prior to September 30, 2021, the Company’s ownership correlates to approximately $545 million, $250 million, and $485 million of private education, consumer, and federally insured student loans, respectively, included in these securitizations. The loans held in these securitizations are not included in the above table.
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
For a summary of the Company's activity in the allowance for loan losses for the three and nine months ended September 30, 2021 and 2020, and a summary of the Company's loan status and delinquency amounts as of September 30, 2021, December 31, 2020, and September 30, 2020, see note 2 of the notes to consolidated financial statements included under Part I, Item 1 of this report.
AGM's total allowance for loan losses of $137.3 million at September 30, 2021 represents reserves equal to 0.6% of AGM's federally insured loans (or 23.6% of the risk sharing component of the loans that is not covered by the federal guaranty), 5.3% of AGM's private education loans, and 12.0% of AGM's consumer loans.
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Loan Spread Analysis
The following table analyzes the loan spread on AGM’s portfolio of loans, which represents the spread between the yield earned on 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 derivativesderivatives" below, divided by the average balance of loans or debt outstanding.
| Three months ended September 30, | Nine months ended September 30, | ||||||||||||||||||||||
| 2021 | 2020 | 2021 | 2020 | ||||||||||||||||||||
| Variable loan yield, gross | 2.61 | % | 2.77 | % | 2.65 | % | 3.29 | % | |||||||||||||||
| Consolidation rebate fees | (0.85) | (0.84) | (0.84) | (0.84) | |||||||||||||||||||
| Discount accretion, net of premium and deferred origination costs amortization | 0.03 | 0.01 | 0.01 | 0.02 | |||||||||||||||||||
| Variable loan yield, net | 1.79 | 1.94 | 1.82 | 2.47 | |||||||||||||||||||
| Loan cost of funds - interest expense (a) (b) | (0.99) | (1.16) | (1.03) | (1.82) | |||||||||||||||||||
| Loan cost of funds - derivative settlements (c) (d) | (0.02) | 0.02 | (0.01) | 0.07 | |||||||||||||||||||
| Variable loan spread | 0.78 | 0.80 | 0.78 | 0.72 | |||||||||||||||||||
| Fixed rate floor income, gross | 0.75 | 0.73 | 0.75 | 0.58 | |||||||||||||||||||
| Fixed rate floor income - derivative settlements (c) (e) | (0.11) | (0.07) | (0.10) | (0.02) | |||||||||||||||||||
| Fixed rate floor income, net of settlements on derivatives | 0.64 | 0.66 | 0.65 | 0.56 | |||||||||||||||||||
| Core loan spread | 1.42 | % | 1.46 | % | 1.43 | % | 1.28 | % | |||||||||||||||
| Average balance of AGM's loans | $ | 19,084,320 | 19,866,040 | 19,178,788 | 20,300,617 | ||||||||||||||||||
| Average balance of AGM's debt outstanding | 18,863,730 | 19,632,675 | 18,890,832 | 20,153,478 | |||||||||||||||||||
(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 income and the impact of this reduction to interest expense was excluded in the table above.
(b) In the third quarter of 2021, the Company redeemed certain asset-backed debt securities prior to their legal maturity, resulting in the recognition of $1.5 million in interest expense from the write-off of all remaining debt issuance costs related to the initial issuance of such bonds. This expense was excluded in the table above.
(c) 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 2021 and 2020 periods presented in the table under the caption "Consolidated Financial Statement Impact Related to Derivatives - Statements of Income" in note 4 and in this table.
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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 September 30, | Nine months ended September 30, | ||||||||||||||||||||||
| 2021 | 2020 | 2021 | 2020 | ||||||||||||||||||||
| Core loan spread | 1.42 | % | 1.46 | % | 1.43 | % | 1.28 | % | |||||||||||||||
| Derivative settlements (1:3 basis swaps) | 0.02 | (0.02) | 0.01 | (0.07) | |||||||||||||||||||
| Derivative settlements (fixed rate floor income) | 0.11 | 0.07 | 0.10 | 0.02 | |||||||||||||||||||
| Loan spread | 1.55 | % | 1.51 | % | 1.54 | % | 1.23 | % | |||||||||||||||
(d) Derivative settlements consist of net settlements (paid) received related to the Company’s 1:3 basis swaps.
(e) Derivative settlements consist of net settlements paid 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 - AGM Operating Segment,” which provides additional detail on AGM’s FFELP student loan assets and related funding for those assets.
Variable loan spread increased during the nine months ended September 30, 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 and second quarters of 2020 was the result of a significant decrease in interest rates during March 2020 and the first half of the second quarter of 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 - AGM Operating Segment,” which provides additional detail on AGM’s FFELP student loan assets and related funding for those assets.
50
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 September 30, | Nine months ended September 30, | ||||||||||||||||||||||
| 2021 | 2020 | 2021 | 2020 | ||||||||||||||||||||
| Fixed rate floor income, gross | $ | 35,850 | 36,633 | 108,029 | 87,258 | ||||||||||||||||||
| Derivative settlements (a) | (5,209) | (3,588) | (14,648) | (2,772) | |||||||||||||||||||
| Fixed rate floor income, net | $ | 30,641 | 33,045 | 93,381 | 84,486 | ||||||||||||||||||
| Fixed rate floor income contribution to spread, net | 0.64 | % | 0.66 | % | 0.65 | % | 0.56 | % | |||||||||||||||
(a) Derivative settlements consist of net settlements paid 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 nine months ended September 30, 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. See Item 3, “Quantitative and Qualitative Disclosures About Market Risk - Interest Rate Risk - AGM Operating Segment,” 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 September 30, 2021, the interest earned on a principal amount of $16.9 billion of AGM's FFELP student loan asset portfolio was indexed to one-month LIBOR, and the interest paid on a principal amount of $16.8 billion of AGM’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. The 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 September 30, | Nine months ended September 30, | ||||||||||||||||||||||||||||
| 2021 | 2020 | 2021 | 2020 | Additional information | |||||||||||||||||||||||||
| Net interest income after provision for loan losses | $ | 77,179 | 86,025 | 275,092 | 125,500 | See table below for additional analysis. | |||||||||||||||||||||||
| Other (expense) income | (7,275) | 1,004 | (4,514) | 4,951 | During the third quarter of 2021, the Company recognized a loss of $6.3 million and $3.4 million from an investment accounted for under the equity method and from certain repurchases of its own debt, respectively. These items were partially offset by $1.7 million in fees earned for serving as sponsor and administrator on certain non-consolidated securitizations of private education loans sold by Wells Fargo. Excluding these items, other income consists primarily of borrower late fees. Borrower late fees for the three months ended September 30, 2021 and 2020 was $0.5 million and $0.9 million, respectively, and for the nine months ended September 30, 2021 and 2020 was $1.7 million and $4.4 million, respectively. The decrease in borrower late fees in the nine months ended September 30, 2021 as compared to the same period in 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. | ||||||||||||||||||||||||
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| Gain on sale of loans | 3,444 | 14,817 | 18,715 | 33,023 | On May 14, 2021 and September 29, 2021, the Company sold $77.4 million (par value) and $18.4 million (par value) of consumer loans, respectively, to an unrelated third party and recognized a gain of $15.3 million (pre-tax) and $3.2 million (pre-tax), respectively. The Company also sold $124.2 million (par value) and $60.8 million (par value) of consumer loans in January 2020 and July 2020, respectively, and recognized gains of $18.2 million and $14.8 million, respectively. | ||||||||||||||||||||||||
| 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 estimated 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 | (5,909) | (2,391) | (15,587) | 7,666 | 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 | 7,260 | 3,440 | 44,455 | (21,072) | 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 during the three and nine months ended September 30, 2021 and 2020 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 such swaps. | ||||||||||||||||||||||||
| Total other income/expense | (2,480) | 16,870 | 45,505 | (1,735) | |||||||||||||||||||||||||
| Salaries and benefits | 542 | 438 | 1,594 | 1,301 | |||||||||||||||||||||||||
| Other expenses | 5,420 | 3,672 | 12,763 | 12,253 | The primary component of other expenses is servicing fees paid to third parties. Increase for the three and nine months ended September 30, 2021 as compared to the same periods in 2020 was due to $2.3 million of enhanced servicing costs incurred during the third quarter of 2021 on the Company's consumer loan portfolio, partially offset by a decrease of servicing fees as AGM's portfolio decreases. | ||||||||||||||||||||||||
| Intersegment expenses | 8,652 | 8,868 | 25,627 | 29,839 | Amounts include fees paid to the LSS operating segment for the servicing of AGM’s loan portfolio. These amounts exceed the actual cost of servicing the loans. The decrease in servicing fees for the nine months ended September 30, 2021 as compared to the same period in 2020 was due to the expected amortization of AGM'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. The decrease in servicing fees for the three months ended September 30, 2021 as compared to the same period in 2020 was due to the expected amortization of AGM's FFELP portfolio. 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 | 14,614 | 12,978 | 39,984 | 43,393 | Total operating expenses were 31 basis points and 26 basis points of the average balance of loans for the three months ended September 30, 2021 and 2020, respectively, and 28 basis points and 29 basis points for the nine months ended September 30, 2021 and 2020, respectively. The increase for the three months ended September 30, 2021 as compared to the same period in 2020 was due to enhanced servicing costs incurred during the third quarter of 2021 on the Company's consumer loan portfolio. The decrease for the nine months ended September 30, 2021 as compared to the same period in 2020 was due to a decrease in certain servicing activities beginning in March 2020 due to borrower relief initiatives and policies as a result of the COVID-19 pandemic, partially offset by enhanced servicing costs incurred during the third quarter of 2021 on the Company's consumer loan portfolio. | ||||||||||||||||||||||||
| Income before income taxes | 60,085 | 89,917 | 280,613 | 80,372 | |||||||||||||||||||||||||
| Income tax expense | (14,421) | (21,580) | (67,347) | (19,289) | Represents income tax expense at an effective tax rate of 24%. | ||||||||||||||||||||||||
| Net income | $ | 45,664 | 68,337 | 213,266 | 61,083 | ||||||||||||||||||||||||
| Additional information: | |||||||||||||||||||||||||||||
| Net income | $ | 45,664 | 68,337 | 213,266 | 61,083 | 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. | |||||||||||||||||||||||
| Derivative market value adjustments, net | (7,260) | (3,440) | (44,455) | 21,072 | |||||||||||||||||||||||||
| Tax effect | 1,742 | 826 | 10,669 | (5,057) | |||||||||||||||||||||||||
| Net income, excluding derivative market value adjustments | $ | 40,146 | 65,723 | 179,480 | 77,098 | ||||||||||||||||||||||||
52
Net interest income after provision for loan losses, net of settlements on derivativesThe 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, | ||||||||||||||||||||||||||||
| 2021 | 2020 | 2021 | 2020 | Additional information | |||||||||||||||||||||||||
| Variable interest income, gross | $ | 126,270 | 138,986 | 379,705 | 500,141 | 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 | (40,340) | (41,768) | (121,662) | (127,292) | 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 | 1,230 | 656 | 1,776 | 2,332 | 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 | 87,160 | 97,874 | 259,819 | 375,181 | |||||||||||||||||||||||||
| Interest on bonds and notes payable | (48,549) | (57,510) | (123,861) | (274,318) | 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) | (700) | 1,197 | (939) | 10,438 | 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) | 37,911 | 41,561 | 135,019 | 111,301 | |||||||||||||||||||||||||
| Fixed rate floor income, gross | 35,850 | 36,633 | 108,029 | 87,258 | Increase in the nine months ended September 30, 2021 compared to the same period in 2020 was due to lower interest rates in 2021 as compared to 2020. Decrease in the three months ended September 30, 2021 compared to the same period in 2020 was due to a decrease in the balance of fixed rate floor loans, partially offset by a decrease in interest rates. | ||||||||||||||||||||||||
| Derivative settlements, net (a) | (5,209) | (3,588) | (14,648) | (2,772) | Derivative settlements include the settlements paid related to the Company's floor income interest rate swaps. The increase in net settlements paid in 2021 as compared to the same periods in 2020 was due to a decrease in interest rates and an increase in the notional amount of derivatives outstanding. | ||||||||||||||||||||||||
| Fixed rate floor income, net of settlements on derivatives | 30,641 | 33,045 | 93,381 | 84,486 | |||||||||||||||||||||||||
| Core loan interest income (a) | 68,552 | 74,606 | 228,400 | 195,787 | |||||||||||||||||||||||||
| Investment interest | 8,771 | 3,452 | 20,301 | 12,029 | Increase in 2021 compared to 2020 was due to an increase in interest income on the Company's loan beneficial interest investments, partially offset by lower interest rates in 2021 as compared to 2020. | ||||||||||||||||||||||||
| Intercompany interest | (113) | (245) | (421) | (1,174) | 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) negative provision for loan losses - federally insured loans | (4,452) | 5,299 | 3,428 | (32,074) | See "Allowance for Loan Losses and Loan Delinquencies" included above under "Asset Generation and Management Operating Segment - Results of Operations." | ||||||||||||||||||||||||
| Negative provision (provision) for loan losses - private education loans | 1,208 | 5,650 | 781 | (6,471) | |||||||||||||||||||||||||
| (Provision) negative provision for loan losses - consumer loans | (2,696) | (5,128) | 7,016 | (34,931) | |||||||||||||||||||||||||
| Net interest income after provision for loan losses (net of settlements on derivatives) (a) | $ | 71,270 | 83,634 | 259,505 | 133,166 | Decrease for the three months ended September 30, 2021 as compared to the same period in 2020 was due to (i) a decrease in core loan spread; (ii) a decrease in the average balance of loans; and (iii) a net provision for loan loss recorded in 2021 compared to a net negative provision in 2020. These items were partially offset by an increase in interest income on the Company's loan beneficial interest investments. Increase for the nine months ended September 30, 2021 as compared to the same period in 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; (iii) an increase in interest income on the Company's loan beneficial interest investments; and (iv) 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. | |||||||||||||||||||||||
| 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 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 Income" in note 4 and in this table.
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NELNET BANK OPERATING SEGMENT – RESULTS OF OPERATIONS
Loan Portfolio
As of September 30, 2021, Nelnet Bank had a $192.3 million loan portfolio, consisting of $98.4 million of private education loans and $93.9 million of FFELP loans.
As of September 30, 2021, Nelnet Bank's allowance for loan losses on its portfolio was $0.7 million, which represents reserves equal to 0.3% of Nelnet Bank's federally insured loans (or 12.2% of the risk sharing component of the loans that is not covered by the federal guaranty), and 0.4% of Nelnet Bank's private education loans.
For a summary of Nelnet Bank's activity in the allowance for loan losses for the three and nine months ended September 30, 2021, and a summary of Nelnet Bank's loan status and delinquency amounts as of September 30, 2021 and December 31, 2020, see note 2 of the notes to consolidated financial statements included under Part I, Item 1 of this report.
The following table sets forth the activity in Nelnet Bank's loan portfolio:
| Three months ended | Nine months ended | ||||||||||
| September 30, 2021 | September 30, 2021 | ||||||||||
| Beginning balance: | $ | 190,571 | 17,543 | ||||||||
| Federally insured student loan acquisitions | — | 99,973 | |||||||||
| Private education loan originations | 13,006 | 99,161 | |||||||||
| Repayments | (10,865) | (21,863) | |||||||||
| Sales to AGM segment | (387) | (2,489) | |||||||||
| Ending balance: | $ | 192,325 | 192,325 | ||||||||
Deposits
As of September 30, 2021, Nelnet Bank had $302.2 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. (the parent company) and its subsidiaries and include a pledged deposit of $40.0 million from Nelnet, Inc. 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 collected tuition payments 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 | Nine months ended | ||||||||||||||||||||||
| September 30, 2021 | September 30, 2021 | ||||||||||||||||||||||
| Balance | Rate | Balance | Rate | ||||||||||||||||||||
| Average assets | |||||||||||||||||||||||
| Federally insured student loans | $ | 95,510 | 1.36 | % | 56,000 | 1.36 | % | ||||||||||||||||
| Private education loans | 95,752 | 3.14 | 75,522 | 3.19 | |||||||||||||||||||
| Cash and investments | 206,802 | 1.87 | 215,213 | 1.93 | |||||||||||||||||||
| Total interest-earning assets | 398,064 | 2.05 | % | 346,735 | 2.11 | % | |||||||||||||||||
| Non-interest-earning assets | 10,452 | 8,758 | |||||||||||||||||||||
| Total assets | $ | 408,516 | 355,493 | ||||||||||||||||||||
| Average liabilities and equity | |||||||||||||||||||||||
| Brokered deposits | 84,175 | 0.84 | % | 53,459 | 0.84 | % | |||||||||||||||||
| Intercompany deposits | 98,436 | 0.24 | 83,004 | 0.25 | |||||||||||||||||||
| Retail and other deposits | 117,360 | 0.62 | 112,255 | 0.61 | |||||||||||||||||||
| Total interest-bearing liabilities | 299,971 | 0.56 | % | 248,718 | 0.54 | % | |||||||||||||||||
| Non-interest-bearing liabilities | 5,340 | 4,178 | |||||||||||||||||||||
| Equity | 103,205 | 102,597 | |||||||||||||||||||||
| Total liabilities and equity | $ | 408,516 | 355,493 | ||||||||||||||||||||
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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 Office of the Comptroller of the Currency, 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 September 30, 2021 with a leverage ratio of 25.5%. 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 $0.8 million and $2.5 million for the three and nine months ended September 30, 2021, respectively.
| Three months ended | Nine months ended | ||||||||||||||||
| September 30, 2021 | September 30, 2021 | Additional information | |||||||||||||||
| Total interest income | $ | 2,061 | 5,479 | Represents interest earned on Nelnet Bank's FFELP and private education student loans, cash, and investments. | |||||||||||||
| Interest expense | 421 | 1,007 | Represents interest expense on deposits. | ||||||||||||||
| Net interest income | 1,640 | 4,472 | |||||||||||||||
| (Negative provision) provision for loan losses | (113) | 378 | |||||||||||||||
| Net interest income after provision for loan losses | 1,753 | 4,094 | |||||||||||||||
| Other income | 450 | 475 | |||||||||||||||
| Salaries and benefits | 890 | 3,956 | Represents salaries and benefits of Nelnet Bank associates and third-party contract labor. | ||||||||||||||
| Other expenses | 445 | 1,227 | Represents various expenses such as postage, consulting and professional fees, Nelnet Bank director fees, occupancy, certain information technology-related costs, insurance, marketing, and other operating expenses. | ||||||||||||||
| Intersegment expenses | 32 | 72 | Represents primarily servicing costs paid to the LSS operating segment. | ||||||||||||||
| Total operating expenses | 1,367 | 5,255 | |||||||||||||||
| Income (loss) before income taxes | 836 | (686) | |||||||||||||||
| Income tax (expense) benefit | (200) | 151 | Represents income tax (expense) benefit at an effective tax rate of 24.0% and 22.0% for the three and nine months ended September 30, 2021, respectively. | ||||||||||||||
| Net income (loss) | $ | 636 | (535) | ||||||||||||||
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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.
other initiatives to pursue additional strategic investments.
Sources of Liquidity and Available Capacity
The Company has historically generated positive cash flow from operations. For the year ended December 31, 2020 and the nine months ended September 30, 2017 and2021, the year ended December 31, 2016, the Company'sCompany’s net cash provided fromby operating activities was $230.3$212.8 million and $325.3$389.7 million, respectively.
As of September 30, 2017,2021, the Company had cash and cash equivalents of $254.4$191.9 million. Cash held by Nelnet Bank is generally not available for Company activities outside of Nelnet Bank. Excluding Nelnet Bank, cash and cash equivalents as of September 30, 2021 was $170.9 million.
The Company alsoinvests excess cash in federally insured 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. The Company had a portfolio of available-for-sale investments, consisting primarily offederally insured student loan asset-backed securities (classified as available-for-sale) with a fair value of $75.4$403.7 million as of September 30, 2017.2021. Investments held by Nelnet Bank are generally not available for Company activities outside of Nelnet Bank. Excluding Nelnet Bank, the fair value of federally insured student loan asset-backed securities as of September 30, 2021 was $210.9 million. As of September 30, 2021, the Company had participated $194.2 million of its non-Nelnet Bank federally insured 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$495.0 million unsecured line of credit that matures on December 12, 2021.September 22, 2026. As of September 30, 2017,2021, there was $210.0 millionno amount outstanding on the unsecured line of credit and $140.0$495.0 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 $737.5 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 September 30, 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, 2017,2021, the Company holds $81.1$179.7 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.
Cash Flows
During the nine months ended September 30, 2017,2021, the Company generated $230.3$389.7 million fromin operating activities, compared to $258.8generating $173.0 million for the same period in 2016.2020. The decreaseincrease in such cash provided byflows from operating activities reflects the decreasewas due to:
•An increase in net income;
•Adjustments to net income for the impact of reduced gains from investments and sale of loans during the nine months ended September 30, 2021, as compared to the same period in 2020, and the non-cash change in deferred income taxes;
•Proceeds from the Company's clearinghouse for margin payments on derivatives for the nine months ended September 30, 2021 compared to payments to the clearinghouse in 2020; and
•The impact of changes to the due to customers liability account and other assets during the nine months ended September 30, 2021 as compared to the same period in the2020.
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These factors were partially offset by:
•The adjustments to net income fromfor derivative market value adjustments andadjustments;
•Adjustments to net income for the impact of the non-cash provision for loan losses, beneficial interests, and impairment charges (a significant portion of which during the nine months ended September 30, 2020 were related to COVID-19), and depreciation and amortization;
•Purchases of equity securities classified as trading; and
•The impact of changes into accrued interest receivable, accounts receivable, and accrued interest payable during the nine months ended September 30, 20172021 as compared to the same period in 2016. These factors were partially offset by an increase in the adjustments to net income for depreciation and amortization, changes in adjustments for foreign currency transaction adjustments, the impact of changes 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 and used in financing activities for the nine months ended September 30, 20172021 was $543.4 million and 2016 was $2.5 billion and $2.7 billion,$640.3 million, respectively. Cash provided by investing activities and used in financing activities was $2.6 billion and $2.9 billion for the nine months ended September 30, 20172020 was $953.6 million and 2016,$1.4 billion, 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'sAGM's debt obligations outstanding that are secured by student loan assets and related collateral.
| As of September 30, 2021 | |||||||||||
| Carrying amount | Final maturity | ||||||||||
| Bonds and notes issued in asset-backed securitizations | $ | 18,161,773 | 5/27/25 - 9/25/69 | ||||||||
| FFELP and private education loan warehouse facilities | 123,745 | 11/22/22 - 2/26/24 | |||||||||
| $ | 18,285,518 | ||||||||||
| 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’sAGM’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 CompanyAGM receives on the loans and cost of financing within these transactions, and (ii) the servicing and administration fees the CompanyAGM earns from these transactions, the CompanyAGM has created a portfolio that will generate earnings and significant cash flow over the life of these transactions.
As of September 30, 2017,2021, based on cash flow models developed to reflect management’s current estimate of, among other factors, prepayments, defaults, deferment, forbearance, and interest rates, the CompanyAGM currently expects future undiscounted cash flows from its portfolio to be approximately $1.93$2.10 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, 2017.2021. As of September 30, 2017, the Company2021, AGM had $21.9$18.2 billion of loans included in asset-backed securitizations, which represented 96.598.4 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, 2017,2021, private education and consumer loans funded with operating cash, on the balance sheet, and loans acquired subsequent to September 30, 20172021, loans owned by Nelnet Bank, and cash flows relating to the Company's ownership of beneficial interest in loan securitizations (such beneficial interest investments are classified as "investments" on the Company's consolidated balance sheets).
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Asset-backed Securitization Cash Flow Forecast
$1.932.10 billion
(dollars in millions)
The forecasted future undiscounted cash flows of approximately $2.10 billion include approximately $1.21 billion (as of September 30, 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 $0.89 billion, or approximately $0.68 billion after income taxes based on the estimated effective tax rate, is expected to be accretive to the Company's September 30, 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$115 million to $250$150 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$50 million to $115$75 million. As the percentage of the Company's outstanding debt financed by three-month LIBOR declines, the Company's basis risk will be reduced. In addition, the Company attempts to mitigate the impact of this basis risk by entering into certain derivative instruments. See Item 3, "Quantitative and Qualitative Disclosures About Market Risk — Interest Rate Risk - AGM Operating Segment."
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LIBOR is in the process of being discontinued as a benchmark rate, and the 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.Risk - AGM Operating Segment."
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, 2017,2021, the Company had threetwo FFELP warehouse facilities with an aggregate maximum financing amount available
of $1.2 billion,$110.0 million, of which $0.7 billion$5.4 million was outstanding and $0.5 billion$104.6 million was available for additional funding. OfOn October 14, 2021, the three facilities,Company terminated one of the FFELP warehouse facilities. The remaining FFELP warehouse facility provides for formula-basedhas an aggregate maximum financing amount of $60.0 million and a static advance rates, dependingrate until the expiration date of the liquidity provisions (November 22, 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 FFELP loan type, upthe underlying loans funded in this facility, subject 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. The other two FFELP warehouse facilities have static advance rates that require initial equity for loan funding, but do not require increased equity based on market movements. As of September 30, 2017, the Company had $28.4 million advanced as equity support on these facilities.facility (November 22, 2022). For further discussion of the Company's FFELP warehouse facilities, outstanding at September 30, 2017, 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 September 30, 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 September 30, 2021, $118.3 million was outstanding under this warehouse facility, $56.7 million was available for future funding, and $12.9 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
exist, including opportunities to purchase private education and consumer loans (or investment interests therein).
The Company plans to fund additional FFELP student loan acquisitions and related investments using current cash and investments; using its unsecured line of credit, Union Bank student loan participation agreement, (asUnion Bank student loan asset-backed securities participation agreement, and third-party repurchase agreements (each as described below);, and/or establishing similar secured and unsecured borrowing facilities; using its FFELPexisting 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.
Private Education Loan Investment
In December of 2020, Wells Fargo announced the sale of its approximately $10.0 billion portfolio of private education loans representing approximately 445,000 borrowers. The Company has entered into a joint venture with other investors to acquire the loans, and under the joint venture, the Company has an approximately 8 percent interest in the loans and in residual interests in subsequent securitizations of the loans. In conjunction with the sale, the Company was selected as servicer of the portfolio. During March and throughout the second quarter of 2021, the vast majority of the borrowers were converted to the Company's servicing platform. The joint venture established a limited partnership that purchased the private education loans and funded such loans with a temporary warehouse facility.
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On May 20, 2021, June 30, 2021, and August 18, 2021, the joint venture completed asset-backed securitization transactions to permanently finance a total of $7.4 billion of the private education loans purchased by the joint venture. The Company is accounting for its approximately 8 percent residual interest in these securitizations as held-to-maturity beneficial interest investments. These investments are reflected on the Company's consolidated balance sheet as "investments." On behalf of the joint venture, the Company is the sponsor and administrator for these loan securitizations. As sponsor, the Company is required to provide a certain level of risk retention, and has purchased bonds issued in such securitizations to satisfy this requirement. The bonds purchased to satisfy the risk retention requirement are reflected on the Company's consolidated balance sheet as "investments" and as of September 30, 2021, the fair value of these bonds was $371.7 million. The Company must retain these investment securities until the latest of (i) two years from the closing date of the securitization, (ii) the date the aggregate outstanding principal balance of the loans in the securitization is 33% or less of the initial loan balance, and (iii) the date the aggregate outstanding principal balance of the bonds is 33% or less of the aggregate initial outstanding principal balance of the bonds, at which time the Company can sell its investment securities (bonds) to a third-party. The Company entered into repurchase agreements with third-parties, the proceeds of which were used to purchase a portion of the asset-backed investments, and such investments serve as collateral on the repurchase obligations.
As of September 30, 2021, $334.5 million was outstanding on the repurchase agreements. The maturity dates on the repurchase agreements are various dates between November 15, 2021 and December 20, 2023, but are subject to early termination upon required notice provided by the Company or the applicable counterparty prior to the maturity dates. The Company pays interest on amounts outstanding on the repurchase agreements based on LIBOR plus an applicable spread, and is also required to pay additional cash in the event the fair value of the securities subject to a repurchase agreement becomes less than the original purchase price of such securities.
Upon termination or expiration of the repurchase agreements, the Company would use cash and/or cash proceeds from its unsecured line of credit to satisfy any outstanding obligations subject to the repurchase agreements.
On October 27, 2021, the joint venture completed a final asset-backed securitization of $1.2 billion of private education loans that permanently financed all remaining eligible loans temporarily funded in the joint venture limited partnership's warehouse facility.
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, $461.32021, $878.3 million of loans were subject to outstanding participation interests held by Union Bank, as trustee, under this agreement. The agreement automatically renews annually and is terminable by either party upon five business days' notice. This agreement provides beneficiaries of Union 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.
The Company, through its subsidiaries, has historically funded student loans 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.
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.
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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 Nelnet Bank's business plan and current financial condition, 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
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 in 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 obtained 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, a portion of the non-voting preferred membership interests in ALLO held by the Company were redeemed 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 the redemption, on or before April 2024, of the remaining non-voting preferred membership interests in ALLO held by the Company, plus the amount of accrued and unpaid preferred return on such interests. As of September 30, 2021, such outstanding preferred membership interests and accrued and unpaid preferred return held by the Company was $129.7 million and $5.6 million, respectively. 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, 2017,2021, 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.
Other Debt Facilities
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credit had no amount outstanding and $495.0 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 September 30, 2021, the secured line of credit had $5.0 million outstanding with $17.0 million available for future use. The secured line of credit is secured by several Company-owned properties. Upon the maturity date of the line of credit facilities, there can be no assurance that the Company will be able to maintain these lines of credit, increase the amount outstanding under the lines, or find alternative funding if necessary.
During 2020, the Company entered into an agreement with Union Bank, as trustee for various grantor trusts, under which Union Bank has agreed to purchase from the Company participation interests in federally insured student loan asset-backed securities. As of September 30, 2021, $194.2 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 been accounted for by the Company duringas a secured borrowing. Upon termination or expiration of this agreement, the nine months ended September 30, 2017.
Company would expect to use operating cash, consider the 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 September 30, 2021, 2,909,015 shares remained authorized for repurchase under the Company's stock repurchase program. Shares may be repurchased from time to time on the open market, in private transactions (including with related parties), or otherwise, 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, 2017,2021, June 30, 20172021, and September 30, 20172021 are shown below. Certain of these repurchases were made pursuant to a trading plan adopted by 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 2017,2021, 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, 2021 | 26,199 | $ | 2,009 | 76.70 | |||||||||||||
| Quarter ended June 30, 2021 | 5,368 | 399 | 74.25 | ||||||||||||||
| Quarter ended September 30, 2021 | 341,094 | 25,078 | 73.52 | ||||||||||||||
| Total | 372,661 | $ | 27,486 | 73.76 | |||||||||||||
| 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 | |||||
that were converted to shares of Class A common stock.
Dividends
On September 15, 2017,2021, the Company paid a third 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 fourth quarter 20172021 cash dividend on the Company's outstanding shares of Class A and Class B common stock of $0.16$0.24 per share. The fourth quarter cash dividend will be paid on December 15, 20172021 to shareholders of record at the close of business on December 1, 2017.
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.
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ITEM 3. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
(All dollars are in thousands, except share amounts, unless otherwise noted)
Interest Rate Risk - AGM Operating Segment
The following table sets forth the Company’sAGM’s loan assets and debt instruments by rate characteristics:
| As of September 30, 2017 | As of December 31, 2016 | As of September 30, 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 | $ | 7,866,098 | 42.7 | % | $ | 8,720,480 | 44.6 | % | |||||||||||||||||||
| Variable-rate loan assets | 17,379,348 | 76.5 | 16,518,360 | 65.8 | Variable-rate loan assets | 10,571,596 | 57.3 | 10,838,628 | 55.4 | |||||||||||||||||||||||||||
| Total | $ | 22,713,913 | 100.0 | % | $ | 25,103,643 | 100.0 | % | Total | $ | 18,437,694 | 100.0 | % | $ | 19,559,108 | 100.0 | % | |||||||||||||||||||
| Fixed-rate debt instruments | $ | 109,251 | 0.5 | % | $ | 131,733 | 0.5 | % | Fixed-rate debt instruments | $ | 890,843 | 4.9 | % | $ | 960,327 | 5.0 | % | |||||||||||||||||||
| Variable-rate debt instruments | 22,517,671 | 99.5 | 24,968,687 | 99.5 | Variable-rate debt instruments | 17,394,675 | 95.1 | 18,354,964 | 95.0 | |||||||||||||||||||||||||||
| Total | $ | 22,626,922 | 100.0 | % | $ | 25,100,420 | 100.0 | % | Total | $ | 18,285,518 | 100.0 | % | $ | 19,315,291 | 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.
A summary of fixed rate floor income earned by the CompanyAGM operating segment follows.
| Three months ended September 30, | Nine months ended September 30, | ||||||||||||||||||||||
| 2021 | 2020 | 2021 | 2020 | ||||||||||||||||||||
| Fixed rate floor income, gross | $ | 35,850 | 36,633 | 108,029 | 87,258 | ||||||||||||||||||
| Derivative settlements (a) | (5,209) | (3,588) | (14,648) | (2,772) | |||||||||||||||||||
| Fixed rate floor income, net | $ | 30,641 | 33,045 | 93,381 | 84,486 | ||||||||||||||||||
| 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 | |||||||
Gross fixed rate floor income decreasedincreased for the three and nine months ended September 30, 20172021 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.
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The Company enters into derivative instruments to hedge student loans earning fixed rate floor income. The increase in net settlements paid on these derivatives in 2021 as compared to the same periods in 2020 was due to a decrease in interest rates and an increase in the notional amount of derivatives outstanding.
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’sAGM’s federally insured student loan assets that were earning fixed rate floor income as of September 30, 2017.2021.
| Fixed interest rate range | Borrower/lender weighted average yield | Estimated variable conversion rate (a) | Loan balance | |||||||||||||||||
| < 3.0% | 2.87% | 0.23% | $ | 1,097,529 | ||||||||||||||||
| 3.0 - 3.49% | 3.19% | 0.55% | 1,384,287 | |||||||||||||||||
| 3.5 - 3.99% | 3.65% | 1.01% | 1,311,190 | |||||||||||||||||
| 4.0 - 4.49% | 4.20% | 1.56% | 979,349 | |||||||||||||||||
| 4.5 - 4.99% | 4.71% | 2.07% | 612,533 | |||||||||||||||||
| 5.0 - 5.49% | 5.22% | 2.58% | 409,149 | |||||||||||||||||
| 5.5 - 5.99% | 5.67% | 3.03% | 272,253 | |||||||||||||||||
| 6.0 - 6.49% | 6.19% | 3.55% | 311,004 | |||||||||||||||||
| 6.5 - 6.99% | 6.70% | 4.06% | 304,230 | |||||||||||||||||
| 7.0 - 7.49% | 7.17% | 4.53% | 114,190 | |||||||||||||||||
| 7.5 - 7.99% | 7.71% | 5.07% | 206,858 | |||||||||||||||||
| 8.0 - 8.99% | 8.18% | 5.54% | 486,961 | |||||||||||||||||
| > 9.0% | 9.05% | 6.41% | 186,168 | |||||||||||||||||
| $ | 7,675,701 | |||||||||||||||||||
(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, 2021, the weighted average estimated variable conversion rate was 1.93% and the short-term interest rate was 9 basis points.
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| 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 | |||||||||
The following table summarizes the outstanding derivative instruments as of September 30, 20172021 used by the CompanyAGM to economically hedge loans earning fixed rate floor income.
| Maturity | Notional amount | Weighted average fixed rate paid by the Company (a) | ||||||||||||
| 2021 | $ | 100,000 | 2.95 | % | ||||||||||
| 2022 | 500,000 | 0.94 | ||||||||||||
| 2023 | 900,000 | 0.62 | ||||||||||||
| 2024 | 2,500,000 | 0.35 | ||||||||||||
| 2025 | 500,000 | 0.35 | ||||||||||||
| 2026 | 300,000 | 0.81 | ||||||||||||
| 2031 | 100,000 | 1.53 | ||||||||||||
| $ | 4,900,000 | 0.56 | % | |||||||||||
| 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) For all interest rate derivatives, |
| Index | Frequency of variable resets | Assets | Funding of student loan assets | |||||||||||||||||
| 1 month LIBOR (a) | Daily | $ | 16,867,459 | — | ||||||||||||||||
| 3 month H15 financial commercial paper | Daily | 656,099 | — | |||||||||||||||||
| 3 month Treasury bill | Daily | 557,930 | — | |||||||||||||||||
| 1 month LIBOR | Monthly | — | 11,147,340 | |||||||||||||||||
| 3 month LIBOR (a) | Quarterly | — | 5,637,642 | |||||||||||||||||
| Fixed rate | — | — | 860,434 | |||||||||||||||||
| Auction-rate (b) | Varies | — | 450,300 | |||||||||||||||||
| Asset-backed commercial paper (c) | Varies | — | 5,446 | |||||||||||||||||
| Other (d) | — | 1,526,469 | 1,506,795 | |||||||||||||||||
| $ | 19,607,957 | 19,607,957 | ||||||||||||||||||
| 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 | |||||||
| Maturity | Notional amount (i) | |||||||
| 2022 | $ | 2,000,000 | ||||||
| 2023 | 750,000 | |||||||
| 2024 | 1,750,000 | |||||||
| 2026 | 1,150,000 | |||||||
| 2027 | 250,000 | |||||||
| $ | 5,900,000 | |||||||
| 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 | |||
(i) The weighted average rate paid by the Company on the 1:3 Basis Swaps as of September 30, 20172021 was one-month LIBOR plus 13.49.1 basis points.
(b) As of September 30, 2021, the Company was sponsor for $450.3 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.
| (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 the 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.
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Sensitivity Analysis
The following tables summarize the effect on the Company’s consolidated earnings, based upon a sensitivity analysis performed by the Companyon AGM's assets and liabilities 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’sAGM’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 swapsAGM’s derivative instruments in existence during these periods.
| 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, 2021 | |||||||||||||||||||||||||||||||||||||||||||||||
| Effect on earnings: | |||||||||||||||||||||||||||||||||||||||||||||||
| Decrease in pre-tax net income before impact of derivative settlements | $ | (14,394) | (21.5) | % | $ | (27,280) | (40.8) | % | $ | (1,484) | (2.2) | % | $ | (4,453) | (6.7) | % | |||||||||||||||||||||||||||||||
| Impact of derivative settlements | 12,252 | 18.3 | 36,756 | 55.0 | 1,487 | 2.2 | 4,461 | 6.7 | |||||||||||||||||||||||||||||||||||||||
| Increase (decrease) in net income before taxes | $ | (2,142) | (3.2) | % | $ | 9,476 | 14.2 | % | $ | 3 | 0.0 | % | $ | 8 | 0.0 | % | |||||||||||||||||||||||||||||||
| Increase (decrease) in basic and diluted earnings per share | $ | (0.04) | $ | 0.19 | $ | 0.00 | $ | 0.00 | |||||||||||||||||||||||||||||||||||||||
| Three months ended September 30, 2020 | |||||||||||||||||||||||||||||||||||||||||||||||
| Effect on earnings: | |||||||||||||||||||||||||||||||||||||||||||||||
| Decrease in pre-tax net income before impact of derivative settlements | $ | (16,328) | (18.1) | % | $ | (31,947) | (35.4) | % | $ | (1,737) | (1.9) | % | $ | (5,212) | (5.7) | % | |||||||||||||||||||||||||||||||
| Impact of derivative settlements | 2,643 | 2.9 | 7,930 | 8.8 | 1,546 | 1.7 | 4,638 | 5.1 | |||||||||||||||||||||||||||||||||||||||
| Increase (decrease) in net income before taxes | $ | (13,685) | (15.2) | % | $ | (24,017) | (26.6) | % | $ | (191) | (0.2) | % | $ | (574) | (0.6) | % | |||||||||||||||||||||||||||||||
| Increase (decrease) in basic and diluted earnings per share | $ | (0.27) | $ | (0.47) | (0.00 | ) | $ | (0.01) | |||||||||||||||||||||||||||||||||||||||
| Nine months ended September 30, 2021 | |||||||||||||||||||||||||||||||||||||||||||||||
| Effect on earnings: | |||||||||||||||||||||||||||||||||||||||||||||||
| Decrease in pre-tax net income before impact of derivative settlements | $ | (42,749) | (12.8) | % | $ | (79,285) | (23.7) | % | $ | (4,659) | (1.4) | % | $ | (13,980) | (4.2) | % | |||||||||||||||||||||||||||||||
| Impact of derivative settlements | 30,944 | 9.3 | 92,831 | 27.8 | 4,474 | 1.3 | 13,423 | 4.0 | |||||||||||||||||||||||||||||||||||||||
| Increase (decrease) in net income before taxes | $ | (11,805) | (3.5) | % | $ | 13,546 | 4.1 | % | $ | (185) | (0.1) | % | $ | (557) | (0.2) | % | |||||||||||||||||||||||||||||||
| Increase (decrease) in basic and diluted earnings per share | $ | (0.23) | $ | 0.27 | (0.00 | ) | $ | (0.01) | |||||||||||||||||||||||||||||||||||||||
| Nine months ended September 30, 2020 | |||||||||||||||||||||||||||||||||||||||||||||||
| Effect on earnings: | |||||||||||||||||||||||||||||||||||||||||||||||
| Decrease in pre-tax net income before impact of derivative settlements | $ | (42,577) | (28.7) | % | $ | (79,919) | (53.9) | % | $ | (5,491) | (3.7) | % | $ | (16,479) | (11.1) | % | |||||||||||||||||||||||||||||||
| Impact of derivative settlements | 8,859 | 6.0 | 26,577 | 17.9 | 4,566 | 3.1 | 13,698 | 9.2 | |||||||||||||||||||||||||||||||||||||||
| Increase (decrease) in net income before taxes | $ | (33,718) | (22.7) | % | $ | (53,342) | (36.0) | % | $ | (925) | (0.6) | % | $ | (2,781) | (1.9) | % | |||||||||||||||||||||||||||||||
| Increase (decrease) in basic and diluted earnings per share | $ | (0.65) | $ | (1.03) | $ | (0.02) | $ | (0.05) | |||||||||||||||||||||||||||||||||||||||
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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 | ) | ||||||||||||||||
The Company entered into a cross-currency interestfollowing table presents Nelnet Bank's loan assets and deposits by 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.characteristics:
| As of September 30, 2021 | As of December 31, 2020 | ||||||||||||||||||||||
| Dollars | Percent | Dollars | Percent | ||||||||||||||||||||
| Fixed-rate loan assets | $ | 126,633 | 65.8 | % | $ | 16,866 | 96.1 | % | |||||||||||||||
| Variable-rate loan assets | 65,692 | 34.2 | 677 | 3.9 | |||||||||||||||||||
| Total | $ | 192,325 | 100.0 | % | $ | 17,543 | 100.0 | % | |||||||||||||||
| Fixed-rate deposits | $ | 200,651 | 66.4 | % | $ | 54,633 | 48.3 | % | |||||||||||||||
| Variable-rate deposits | 101,564 | 33.6 | 58,413 | 51.7 | |||||||||||||||||||
| Total | $ | 302,215 | 100.0 | % | $ | 113,046 | 100.0 | % | |||||||||||||||
ITEM 4. CONTROLS AND PROCEDURES
Disclosure Controls and Procedures
September 30, 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 September 30, 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
Prepayment risk
Higher rates of prepayments of student loans, including consolidations by the Department through the Federal Direct Loan Program or private refinancing programs, would reduce our interest income.
Pursuant to the Higher Education Act, borrowers may prepay loans made under the FFEL Program at any time without penalty. Prepayments may result from consolidations of student loans by the Department through the Federal Direct Loan Program or by a lending institution through a private education or unsecured consumer loan, which historically tend to occur more frequently in low interest rate environments; from borrower defaults, which will result in the receipt of a guaranty payment; and from voluntary full or partial prepayments; among other things.
Legislative and executive action risk exists as Congress and the President evaluate economic stimulus packages and proposals to reauthorize the Higher Education Act. If the federal government and the Department initiate additional loan forgiveness or cancellation, other repayment options or plans, or consolidation loan programs, such initiatives could further increase prepayments and reduce interest income, and could also reduce servicing fees. Future laws, executive actions, or other policy statements may encourage or force consolidation, create additional income-based repayment or debt forgiveness programs, create broad debt cancellation programs, or establish other policies and programs that impact prepayments on education loans. Even if a broad debt cancellation program only applied to student loans held by the Department, such program could result in a significant increase in consolidations of FFELP loans to Federal Direct Loan Program loans and a corresponding increase in prepayments with respect to our FFELP loan portfolio. For example, the Department recently announced a set of policy changes and released proposed negotiated rulemaking materials relating to the Public Service Loan Forgiveness program under its Federal Direct Loan Program, which may result in an increase in consolidations of FFELP loans into Federal Direct Loan Program loans held by the Department (which results in the loans no longer being on our balance sheet). While implementation of the policy changes and final new regulations are unknown at this time, individually or collectively, they may cause higher than anticipated prepayment rates on our portfolio of loans. Some variability in prepayment levels is expected, although extraordinary or extended increases in prepayment rates could have a materially adverse effect on our revenues, cash flows, profitability, and business outlook, and, as a result, could materially, adversely affect our business, financial condition, and results of operations.
We cannot predict how or what programs or policies will be impacted by any actions that the Administration, Congress, or the federal government may take.
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 third 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 the table below were made
| 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, 2021 | — | $ | — | — | 3,246,732 | |||||||||||||||||||||
| August 1 - August 31, 2021 | 337,717 | 73.46 | 337,717 | 2,909,015 | ||||||||||||||||||||||
| September 1 - September 30, 2021 | 3,377 | 80.04 | — | 2,909,015 | ||||||||||||||||||||||
| Total | 341,094 | $ | 73.52 | 337,717 | ||||||||||||||||||||||
(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 purchased pursuant to the applicable stock repurchase program discussed in footnote (b) below during August consisted of a trading plan adoptedtotal of 337,717 shares of Class A common stock purchased from a certain significant shareholder in a privately negotiated transaction on August 10, 2021. Shares of Class A common stock tendered by employees to satisfy tax withholding obligations included 3,377 shares in September 2021. 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 May 8, 2019, the Company in accordance with Rule 10b5-1 underannounced that its Board of Directors authorized a stock repurchase program to repurchase up to a total of five million shares of 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 | |||||||||
Company's Class A common stock during the three-year period ending May 7, 2022.
Working capital and dividend restrictions/limitations
The Company’s credit facilities, including its revolvingCompany's $495.0 million unsecured line of credit, which is available through December 12, 2021, imposeSeptember 22, 2026, 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.
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ITEM 6. EXHIBITS
Third Amended and Restated Credit Agreement dated as of September 22, 2021, among Nelnet, Inc., U.S. Bank National Association, as Administrative Agent; Wells Fargo Bank, National Association, as Syndication Agent, Royal Bank of Canada, as Documentation Agent, U.S. Bank National Association and Wells Fargo Securities, LLC, as Joint Lead Arrangers and Joint Book Runners; and various lender parties thereto, filed as Exhibit 10.1 to the registrant's Current Report on Form 8-K filed on September 22, 2021 and incorporated herein by reference. | |||||
| 10.2 | |||||
| 10.3 | |||||
| 10.4 | |||||
| 31.1* | |||||
| 31.2* | |||||
| 32** | |||||
| 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. | ||||
| 101.SCH* | Inline XBRL Taxonomy Extension Schema Document | ||||
| 101.CAL* | Inline XBRL Taxonomy Extension Calculation Linkbase Document | ||||
| 101.DEF* | Inline XBRL Taxonomy Extension Definition Linkbase Document | ||||
| 101.LAB* | Inline XBRL Taxonomy Extension Label Linkbase Document | ||||
| 101.PRE* | Inline XBRL Taxonomy Extension Presentation Linkbase Document | ||||
| 104* | Cover Page Interactive Data File (formatted as Inline XBRL and contained in Exhibit 101). | ||||
| * | Filed herewith | ||||
| ** | Furnished herewith | ||||
| # | Certain schedules to this exhibit have been omitted pursuant to Item 601(a)(5) of Regulation S-K | ||||
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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.
| NELNET, INC. | ||||||||||||||
| Date: | November | By: | /s/ JEFFREY R. NOORDHOEK | |||||||||||
| Name: | Jeffrey R. Noordhoek | |||||||||||||
| Title: | Chief Executive Officer Principal Executive Officer | |||||||||||||
| Date: | November 8, 2021 | By: | /s/ JAMES D. KRUGER | |||||||||||
| Name: | James D. Kruger | |||||||||||||
| Title: | Chief Financial Officer Principal Financial Officer and Principal Accounting Officer | |||||||||||||
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