For Release: February 27, 2014
Media Contact: Ben Kiser, 402.458.3024
Investor Contact: Phil Morgan, 402.458.3038
Nelnet, Inc. supplemental financial information for the fourth quarter 2013
(All dollars are in thousands, except per share amounts, unless otherwise noted)
The following information should be read in connection with Nelnet, Inc.'s (the “Company's”) press release for fourth quarter 2013 earnings, dated February 27, 2014, and the Company's Annual Report on Form 10-K for the year ended December 31, 2013.
This earnings supplement contains forward-looking statements, 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. The words “may,” “should,” “could,” “would,” “predict,” “potential,” “continue,” “expect,” “anticipate,” “future,” “intend,” “plan,” “believe,” “estimate,” “assume,” “forecast,” “will,” and similar expressions, as well as statements in future tense, are intended to identify forward-looking statements. These statements are subject to known and unknown risks, uncertainties, and other factors that may cause actual results and performance to be materially different from any future results or performance expressed or implied by such statements. These factors include, among others, the risks and uncertainties set forth in the "Risk Factors" section of the Company's Annual Report on Form 10-K for the year ended December 31, 2013 (the "2013 Annual Report"), in particular such risks and uncertainties as:
• | student 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 Loan Program (the "FFEL Program" or "FFELP"), risks related to the use of derivatives to manage exposure to interest rate fluctuations, 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 and in the securitization and other financing markets for student loans, 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 educational credit and services markets resulting from changes in applicable laws, regulations, and government programs and budgets, such as 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 to consolidate existing FFELP loans to the Federal Direct Loan Program, risks related to the expected reduction in government payments to guaranty agencies to rehabilitate defaulted FFELP loans and services in support of those activities, risks related to the availability of government funds and actual extension of the Company's loan servicing contract with the U.S. Department of Education (the "Department"), which accounted for 23 percent of the Company's fee-based revenue in 2013, for an additional five years, and the Company's ability to maintain or increase volumes under that contract, and the Company's ability to comply with agreements with third-party customers for the servicing of FFELP and Federal Direct Loan Program loans; |
• | risks related to a breach of or failure in the Company's operational or information systems or infrastructure, or those of third-party vendors; |
• | uncertainties inherent in forecasting future cash flows from student loan assets and related asset-backed securitizations; and |
• | risks and uncertainties associated with litigation matters and with maintaining compliance with the extensive regulatory requirements applicable to the Company's business, and uncertainties inherent in the estimates and assumptions about future events that management is required to make in the preparation of the Company's consolidated financial statements. |
All forward-looking statements contained in this earnings supplement are qualified by these cautionary statements and are made only as of the date of this document. Although the Company may from time to time voluntarily update its prior forward-looking statements, it disclaims any commitment to do so except as required by securities laws.
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Consolidated Statements of Income
Three months ended | Year ended | ||||||||||||||
December 31, 2013 | September 30, 2013 | December 31, 2012 | December 31, 2013 | December 31, 2012 | |||||||||||
Interest income: | (unaudited) | (unaudited) | (unaudited) | ||||||||||||
Loan interest | $ | 165,865 | 158,675 | 154,663 | 638,142 | 609,237 | |||||||||
Investment interest | 2,006 | 1,562 | 1,326 | 6,668 | 4,616 | ||||||||||
Total interest income | 167,871 | 160,237 | 155,989 | 644,810 | 613,853 | ||||||||||
Interest expense: | |||||||||||||||
Interest on bonds and notes payable | 59,135 | 55,315 | 65,391 | 230,935 | 268,566 | ||||||||||
Net interest income | 108,736 | 104,922 | 90,598 | 413,875 | 345,287 | ||||||||||
Less provision for loan losses | 3,500 | 5,000 | 3,500 | 18,500 | 21,500 | ||||||||||
Net interest income after provision for loan losses | 105,236 | 99,922 | 87,098 | 395,375 | 323,787 | ||||||||||
Other income (expense): | |||||||||||||||
Loan and guaranty servicing revenue | 63,167 | 64,582 | 54,584 | 243,428 | 209,748 | ||||||||||
Tuition payment processing and campus commerce revenue | 18,988 | 19,927 | 17,735 | 80,682 | 74,410 | ||||||||||
Enrollment services revenue | 21,735 | 22,563 | 25,890 | 98,078 | 117,925 | ||||||||||
Other income | 15,981 | 8,613 | 7,023 | 46,298 | 39,476 | ||||||||||
Gain on sale of loans and debt repurchases | 799 | 2,138 | 3,009 | 11,699 | 4,139 | ||||||||||
Derivative settlements, net | (6,407 | ) | (6,688 | ) | (7,112 | ) | (29,636 | ) | (14,022 | ) | |||||
Derivative market value and foreign currency adjustments, net | 752 | (9,960 | ) | 13,769 | 48,593 | (47,394 | ) | ||||||||
Total other income | 115,015 | 101,175 | 114,898 | 499,142 | 384,282 | ||||||||||
Operating expenses: | |||||||||||||||
Salaries and benefits | 52,120 | 48,712 | 48,633 | 196,169 | 192,826 | ||||||||||
Cost to provide enrollment services | 13,864 | 14,668 | 16,172 | 64,961 | 78,375 | ||||||||||
Depreciation and amortization | 5,274 | 4,340 | 8,861 | 18,311 | 33,625 | ||||||||||
Other | 40,349 | 39,887 | 35,578 | 149,542 | 128,738 | ||||||||||
Total operating expenses | 111,607 | 107,607 | 109,244 | 428,983 | 433,564 | ||||||||||
Income before income taxes | 108,644 | 93,490 | 92,752 | 465,534 | 274,505 | ||||||||||
Income tax expense | 37,556 | 30,444 | 36,099 | 161,193 | 96,077 | ||||||||||
Net income | 71,088 | 63,046 | 56,653 | 304,341 | 178,428 | ||||||||||
Net income attributable to noncontrolling interest | 568 | 216 | 19 | 1,669 | 431 | ||||||||||
Net income attributable to Nelnet, Inc. | $ | 70,520 | 62,830 | 56,634 | 302,672 | 177,997 | |||||||||
Earnings per common share: | |||||||||||||||
Net income attributable to Nelnet, Inc. shareholders - basic and diluted | $ | 1.52 | 1.35 | 1.20 | 6.50 | 3.76 | |||||||||
Weighted average common shares outstanding - basic and diluted | 46,502,028 | 46,496,612 | 47,277,427 | 46,570,314 | 47,369,331 |
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Condensed Consolidated Balance Sheets
As of | As of | As of | |||||||
December 31, 2013 | September 30, 2013 | December 31, 2012 | |||||||
(unaudited) | |||||||||
Assets: | |||||||||
Student loans receivable, net | $ | 25,907,589 | 24,701,112 | 24,830,621 | |||||
Non-federally insured student loans receivable - held for sale | — | 28,480 | — | ||||||
Cash, cash equivalents, and investments | 255,307 | 284,054 | 149,343 | ||||||
Restricted cash and investments | 902,699 | 768,621 | 911,978 | ||||||
Goodwill and intangible assets, net | 123,250 | 124,050 | 126,511 | ||||||
Other assets | 582,004 | 630,611 | 589,442 | ||||||
Total assets | $ | 27,770,849 | 26,536,928 | 26,607,895 | |||||
Liabilities: | |||||||||
Bonds and notes payable | $ | 25,955,289 | 24,858,455 | 25,098,835 | |||||
Other liabilities | 371,570 | 300,560 | 343,847 | ||||||
Total liabilities | 26,326,859 | 25,159,015 | 25,442,682 | ||||||
Equity: | |||||||||
Total Nelnet, Inc. shareholders' equity | 1,443,662 | 1,377,863 | 1,165,208 | ||||||
Noncontrolling interest | 328 | 50 | 5 | ||||||
Total equity | 1,443,990 | 1,377,913 | 1,165,213 | ||||||
Total liabilities and equity | $ | 27,770,849 | 26,536,928 | 26,607,895 |
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Overview
The Company is an education services company focused primarily on providing fee-based processing services and quality education-related products and services in four core areas: asset management and finance, loan servicing, payment processing, and enrollment services (education planning). These products and services help students and families plan, prepare, and pay for their education and make the administrative and financial processes more efficient for schools and financial organizations. In addition, the Company earns interest income on a portfolio of federally insured student loans.
A reconciliation of the Company's GAAP net income to net income, excluding derivative market value and foreign currency adjustments, is provided below.
Three months ended | Year ended | ||||||||||||||
December 31, 2013 | September 30, 2013 | December 31, 2012 | December 31, 2013 | December 31, 2012 | |||||||||||
GAAP net income attributable to Nelnet, Inc. | $ | 70,520 | 62,830 | 56,634 | 302,672 | 177,997 | |||||||||
Derivative market value and foreign currency adjustments, net of tax | (466 | ) | 6,175 | (8,537 | ) | (30,128 | ) | 29,384 | |||||||
Net income, excluding derivative market value and foreign currency adjustments (a) | $ | 70,054 | 69,005 | 48,097 | 272,544 | 207,381 | |||||||||
Earnings per share: | |||||||||||||||
GAAP net income attributable to Nelnet, Inc. | $ | 1.52 | 1.35 | 1.20 | 6.50 | 3.76 | |||||||||
Derivative market value and foreign currency adjustments, net of tax | (0.01 | ) | 0.13 | (0.18 | ) | (0.65 | ) | 0.62 | |||||||
Net income, excluding derivative market value and foreign currency adjustments (a) | $ | 1.51 | 1.48 | 1.02 | 5.85 | 4.38 |
(a) | The Company provides non-GAAP information that reflects specific items management believes to be important in the evaluation of its financial position and performance. "Derivative market value and foreign currency adjustments" include (i) the 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. The Company believes these point-in-time estimates of asset and liability values related to these financial instruments that are subject to interest and currency rate fluctuations affect the period-to-period comparability of the results of operations. Accordingly, the Company provides operating results excluding these items for comparability purposes. |
The increase in earnings in 2013 compared to 2012 was due to an increase in net interest income earned from the Company's student loan portfolio, an increase in revenue and operating margin from the Company's fee-based operating segments, an increase in income from providing investment advisory services, and an increase in gains recognized from the repurchases of the Company's debt.
The Company earns net interest income on its FFELP student loan portfolio 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 December 31, 2013, the Company had a $25.9 billion student loan portfolio that will amortize over the next approximately 20 years. The Company actively seeks to acquire FFELP loan portfolios 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:
• | Student Loan and Guaranty Servicing ("LGS") - referred to as Nelnet Diversified Solutions ("NDS") |
• | Tuition Payment Processing and Campus Commerce ("TPP&CC") - referred to as Nelnet Business Solutions ("NBS") |
• | Enrollment Services - commonly called Nelnet Enrollment Solutions ("NES") |
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The information below provides the operating results for each reportable operating segment for the years ended December 31, 2013, 2012, and 2011 (dollars in millions).
![](https://capedge.com/proxy/8-K/0001258602-14-000022/overviewgraph1231.jpg)
(a) | Revenue includes intersegment revenue of $56.7 million, $65.4 million, and $69.0 million for the years ended December 31, 2013, 2012, and 2011, respectively, earned by LGS as a result of servicing loans for AGM. |
(b) | Revenue includes "net interest income after provision for loan losses" and "total other income" from the Company's segment statements of income, excluding the impact from changes in fair values of derivatives and foreign currency transaction adjustments, which was income of $35.3 million, an expense of $51.8 million, and income of $7.6 million for the years ended December 31, 2013, 2012, and 2011, respectively. Net income excludes changes in fair values of derivatives and foreign currency transaction adjustments, net of tax, which was income of $21.9 million, an expense of $32.1 million, and income of $4.7 million for the years ended December 31, 2013, 2012, and 2011, respectively. |
(c) | Computed as income before income taxes divided by total revenue. |
Student Loan and Guaranty Servicing
• | As of December 31, 2013, the Company was servicing $138.2 billion in FFELP, private, and government owned student loans, as compared with $97.5 billion and $76.1 billion of loans as of December 31, 2012 and 2011, respectively. The year over year increase was due to an increase in government servicing volume. |
• | Revenue increased for the year ended December 31, 2013 compared to 2012 and for the year ended December 31, 2012 compared to 2011 due to growth in servicing volume under the Company's contract with the Department and an increase in collection revenue from getting defaulted FFELP loan assets current on behalf of guaranty agencies. These increases were partially offset by decreases in traditional FFELP and guaranty servicing revenue. |
• | Before tax operating margin increased for the year ended December 31, 2013 compared to 2012, as a result of the investments made and certain costs incurred by the Company in 2012 to improve performance metrics under the Department servicing contract and to implement and comply with the Department's special direct consolidation loan initiative. In addition, intangible assets for this segment were fully amortized in 2012. |
Tuition Payment Processing and Campus Commerce
• | Revenue increased in the years ended December 31, 2013 and December 31, 2012, compared to the same periods in 2012 and 2011, respectively, due to an increase in the number of managed tuition payment plans as a result of providing more plans at existing schools and obtaining new school customers. |
• | Before tax operating margin increased for the year ended December 31, 2013 compared to 2012. The increase was the result of efficiencies gained in the operations of the business and a decrease in amortization expense related to intangible |
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assets. In addition, certain investments were made by the Company during 2012 in new products and services to meet customer needs and expand product and service offerings.
Enrollment Services
• | Enrollment services revenue has decreased year over year due to a decrease in inquiry generation and management revenue as a result of the regulatory uncertainty regarding recruiting and marketing to potential students in the for-profit college industry, which has caused schools to decrease spending on marketing efforts. Additionally, clients are shifting marketing budgets to more efficient or lower cost channels, which has caused a reduction in volume. |
• | The Company continues to focus on improving the profitability of this segment by reducing operating expenses in reaction to the ongoing decline in revenue and gross margin. |
Asset Generation and Management
• | The Company acquired $4.1 billion of FFELP student loans during 2013, compared to $3.9 billion in 2012 and $2.8 billion in 2011. The average loan portfolio balance for the years ended December 31, 2013, 2012, and 2011 was $25.0 billion, $23.7 billion, and $24.0 billion, respectively. |
• | Core student loan spread increased to 1.54% for the year ended December 31, 2013, compared to 1.44% for the year ended December 31, 2012. This increase was due to the improved corresponding relationship between the interest rate indices governing what the Company earns on its loans and what the Company pays to fund such loans. |
• | Due to historically low interest rates, the Company continues to earn significant fixed rate floor income. During the years ended December 31, 2013, 2012, and 2011, the Company earned $148.4 million, $145.3 million, and $144.5 million, respectively, of fixed rate floor income (net of $31.0 million, $19.3 million, and $20.2 million of derivative settlements, respectively, used to hedge such loans). |
Corporate Activities
• | Whitetail Rock Capital Management, LLC ("WRCM"), the Company's SEC-registered investment advisory subsidiary, recognized revenue of $17.4 million, $9.3 million, and $5.1 million for the years ended December 31, 2013, 2012, and 2011, respectively. These amounts include performance fees earned from the sale of managed securities. |
Liquidity and Capital Resources
• | As of December 31, 2013, the Company had cash and investments of $255.3 million. |
• | For the year ended December 31, 2013, the Company generated $387.2 million in net cash provided by operating activities. |
• | Forecasted undiscounted future cash flows from the Company's FFELP student loan portfolio financed in asset-backed securitization transactions are estimated to be approximately $2.17 billion as of December 31, 2013. |
• | As of December 31, 2013, $45.0 million was outstanding on the Company's unsecured line of credit and $230.0 million was available for future use. The unsecured line of credit has a maturity date of March 28, 2018. |
• | During the year ended December 31, 2013, the Company repurchased 393,259 shares of Class A common stock for $13.1 million ($33.40 per share). |
• | During the year ended December 31, 2013, the Company repurchased $90.5 million (par value) of its own asset-backed and unsecured debt securities for a gain totaling $11.7 million. |
• | During the year ended December 31, 2013, the Company paid cash dividends of $18.6 million. |
• | The Company intends to use its liquidity position to capitalize on market opportunities, including FFELP student loan acquisitions; strategic acquisitions and investments in its core business areas of loan financing, loan servicing, payment processing, and enrollment services; and capital management initiatives, including stock repurchases, debt repurchases, and dividend distributions. |
6
Operating Segments
The Company earns fee-based revenue through its Student Loan and Guaranty Servicing, Tuition Payment Processing and Campus Commerce, and Enrollment Services operating segments. In addition, the Company earns interest income on its student loan portfolio in its Asset Generation and Management operating segment. The Company’s operating segments are defined by the products and services they offer and the types of customers they serve, and they reflect the manner in which financial information is currently evaluated by management. See note 1 of the notes to consolidated financial statements included in the 2013 Annual Report for a description of each operating segment, including the primary products and services offered.
The management reporting process measures the performance of the Company’s operating segments based on the management structure of the Company, as well as the methodology used by management to evaluate performance and allocate resources. Executive management (the "chief operating decision maker") evaluates the performance of the Company’s operating segments based on their financial results prepared in conformity with U.S. generally accepted accounting principles.
The accounting policies of the Company’s operating segments are the same as those described in the summary of significant accounting policies. Intersegment revenues are charged by a segment that provides a product or service to another segment. Intersegment revenues and expenses are included within each segment consistent with the income statement presentation provided to management. Income taxes are allocated based on 38% of income (loss) before taxes for each individual operating segment. The difference between the consolidated income tax expense and the sum of taxes calculated for each operating segment is included in income taxes in Corporate Activity and Overhead.
Corporate Activity and Overhead
Corporate Activity and Overhead includes the following items:
• | The operating results of WRCM, the Company's SEC-registered investment advisory subsidiary |
• | Income earned on certain investment activities |
• | Interest expense incurred on unsecured debt transactions |
• | Other product and service offerings that are not considered operating segments |
Corporate Activities and Overhead also includes certain corporate activities and overhead functions related to executive management, human resources, accounting, legal, occupancy, and marketing. These costs are allocated to each operating segment based on estimated use of such activities and services.
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Segment Results of Operations
The following tables include the results of each of the Company's operating segments reconciled to the consolidated financial statements.
Three months ended December 31, 2013 | ||||||||||||||||||||||||
Fee-Based | ||||||||||||||||||||||||
Student Loan and Guaranty Servicing | Tuition Payment Processing and Campus Commerce | Enrollment Services | Total Fee- Based | Asset Generation and Management | Corporate Activity and Overhead | Eliminations | Total | |||||||||||||||||
Total interest income | $ | 11 | — | — | 11 | 165,982 | 2,725 | (847 | ) | 167,871 | ||||||||||||||
Interest expense | — | — | — | — | 59,031 | 951 | (847 | ) | 59,135 | |||||||||||||||
Net interest income (loss) | 11 | — | — | 11 | 106,951 | 1,774 | — | 108,736 | ||||||||||||||||
Less provision for loan losses | — | — | — | — | 3,500 | — | — | 3,500 | ||||||||||||||||
Net interest income (loss) after provision for loan losses | 11 | — | — | 11 | 103,451 | 1,774 | — | 105,236 | ||||||||||||||||
Other income (expense): | ||||||||||||||||||||||||
Loan and guaranty servicing revenue | 63,167 | — | — | 63,167 | — | — | — | 63,167 | ||||||||||||||||
Intersegment servicing revenue | 14,369 | — | — | 14,369 | — | — | (14,369 | ) | — | |||||||||||||||
Tuition payment processing and campus commerce revenue | — | 18,988 | — | 18,988 | — | — | — | 18,988 | ||||||||||||||||
Enrollment services revenue | — | — | 21,735 | 21,735 | — | — | — | 21,735 | ||||||||||||||||
Other income | — | — | — | — | 4,016 | 13,108 | (1,143 | ) | 15,981 | |||||||||||||||
Gain on sale of loans and debt repurchases | — | — | — | — | 104 | 695 | — | 799 | ||||||||||||||||
Derivative settlements, net | — | — | — | — | (6,150 | ) | (257 | ) | — | (6,407 | ) | |||||||||||||
Derivative market value and foreign currency adjustments, net | — | — | — | — | (455 | ) | 1,207 | — | 752 | |||||||||||||||
Total other income (expense) | 77,536 | 18,988 | 21,735 | 118,259 | (2,485 | ) | 14,753 | (15,512 | ) | 115,015 | ||||||||||||||
Operating expenses: | ||||||||||||||||||||||||
Salaries and benefits | 32,838 | 9,560 | 4,229 | 46,627 | 583 | 4,910 | — | 52,120 | ||||||||||||||||
Cost to provide enrollment services | — | — | 13,864 | 13,864 | — | — | — | 13,864 | ||||||||||||||||
Depreciation and amortization | 3,222 | 1,131 | 53 | 4,406 | — | 868 | — | 5,274 | ||||||||||||||||
Other | 22,943 | 2,760 | 1,634 | 27,337 | 7,570 | 6,585 | (1,143 | ) | 40,349 | |||||||||||||||
Intersegment expenses, net | 1,116 | 1,639 | 1,170 | 3,925 | 14,617 | (4,173 | ) | (14,369 | ) | — | ||||||||||||||
Total operating expenses | 60,119 | 15,090 | 20,950 | 96,159 | 22,770 | 8,190 | (15,512 | ) | 111,607 | |||||||||||||||
Income (loss) before income taxes and corporate overhead allocation | 17,428 | 3,898 | 785 | 22,111 | 78,196 | 8,337 | — | 108,644 | ||||||||||||||||
Corporate overhead allocation | (1,818 | ) | (514 | ) | (500 | ) | (2,832 | ) | (801 | ) | 3,633 | — | — | |||||||||||
Income (loss) before income taxes | 15,610 | 3,384 | 285 | 19,279 | 77,395 | 11,970 | — | 108,644 | ||||||||||||||||
Income tax (expense) benefit | (5,932 | ) | (1,286 | ) | (108 | ) | (7,326 | ) | (29,410 | ) | (820 | ) | — | (37,556 | ) | |||||||||
Net income (loss) | 9,678 | 2,098 | 177 | 11,953 | 47,985 | 11,150 | — | 71,088 | ||||||||||||||||
Net income attributable to noncontrolling interest | — | — | — | — | — | 568 | — | 568 | ||||||||||||||||
Net income attributable to Nelnet, Inc. | $ | 9,678 | 2,098 | 177 | 11,953 | 47,985 | 10,582 | — | 70,520 | |||||||||||||||
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Three months ended September 30, 2013 | ||||||||||||||||||||||||
Fee-Based | ||||||||||||||||||||||||
Student Loan and Guaranty Servicing | Tuition Payment Processing and Campus Commerce | Enrollment Services | Total Fee- Based | Asset Generation and Management | Corporate Activity and Overhead | Eliminations | Total | |||||||||||||||||
Total interest income | $ | 10 | — | — | 10 | 158,793 | 2,201 | (767 | ) | 160,237 | ||||||||||||||
Interest expense | — | — | — | — | 56,100 | (18 | ) | (767 | ) | 55,315 | ||||||||||||||
Net interest income (loss) | 10 | — | — | 10 | 102,693 | 2,219 | — | 104,922 | ||||||||||||||||
Less provision for loan losses | — | — | — | — | 5,000 | — | — | 5,000 | ||||||||||||||||
Net interest income (loss) after provision for loan losses | 10 | — | — | 10 | 97,693 | 2,219 | — | 99,922 | ||||||||||||||||
Other income (expense): | ||||||||||||||||||||||||
Loan and guaranty servicing revenue | 64,582 | — | — | 64,582 | — | — | — | 64,582 | ||||||||||||||||
Intersegment servicing revenue | 13,519 | — | — | 13,519 | — | — | (13,519 | ) | — | |||||||||||||||
Tuition payment processing and campus commerce revenue | — | 19,927 | — | 19,927 | — | — | — | 19,927 | ||||||||||||||||
Enrollment services revenue | — | — | 22,563 | 22,563 | — | — | — | 22,563 | ||||||||||||||||
Other income | — | — | — | — | 3,981 | 4,632 | — | 8,613 | ||||||||||||||||
Gain on sale of loans and debt repurchases | — | — | — | — | 2,138 | — | — | 2,138 | ||||||||||||||||
Derivative settlements, net | — | — | — | — | (6,432 | ) | (256 | ) | — | (6,688 | ) | |||||||||||||
Derivative market value and foreign currency adjustments | — | — | — | — | (12,660 | ) | 2,700 | — | (9,960 | ) | ||||||||||||||
Total other income (expense) | 78,101 | 19,927 | 22,563 | 120,591 | (12,973 | ) | 7,076 | (13,519 | ) | 101,175 | ||||||||||||||
Operating expenses: | ||||||||||||||||||||||||
Salaries and benefits | 29,719 | 9,229 | 4,491 | 43,439 | 555 | 4,718 | — | 48,712 | ||||||||||||||||
Cost to provide enrollment services | — | — | 14,668 | 14,668 | — | — | — | 14,668 | ||||||||||||||||
Depreciation and amortization | 2,677 | 1,117 | 57 | 3,851 | — | 489 | — | 4,340 | ||||||||||||||||
Other | 19,752 | 1,908 | 1,556 | 23,216 | 7,939 | 8,732 | — | 39,887 | ||||||||||||||||
Intersegment expenses, net | 1,457 | 1,431 | 1,139 | 4,027 | 13,705 | (4,213 | ) | (13,519 | ) | — | ||||||||||||||
Total operating expenses | 53,605 | 13,685 | 21,911 | 89,201 | 22,199 | 9,726 | (13,519 | ) | 107,607 | |||||||||||||||
Income (loss) before income taxes and corporate overhead allocation | 24,506 | 6,242 | 652 | 31,400 | 62,521 | (431 | ) | — | 93,490 | |||||||||||||||
Corporate overhead allocation | (1,822 | ) | (607 | ) | (607 | ) | (3,036 | ) | (1,302 | ) | 4,338 | — | — | |||||||||||
Income (loss) before income taxes | 22,684 | 5,635 | 45 | 28,364 | 61,219 | 3,907 | — | 93,490 | ||||||||||||||||
Income tax (expense) benefit | (8,620 | ) | (2,141 | ) | (17 | ) | (10,778 | ) | (23,263 | ) | 3,597 | — | (30,444 | ) | ||||||||||
Net income (loss) | 14,064 | 3,494 | 28 | 17,586 | 37,956 | 7,504 | — | 63,046 | ||||||||||||||||
Net income attributable to noncontrolling interest | — | — | — | — | — | 216 | — | 216 | ||||||||||||||||
Net income attributable to Nelnet, Inc. | $ | 14,064 | 3,494 | 28 | 17,586 | 37,956 | 7,288 | — | 62,830 | |||||||||||||||
9
Three months ended December 31, 2012 | ||||||||||||||||||||||||
Fee-Based | ||||||||||||||||||||||||
Student Loan and Guaranty Servicing | Tuition Payment Processing and Campus Commerce | Enrollment Services | Total Fee- Based | Asset Generation and Management | Corporate Activity and Overhead | Eliminations | Total | |||||||||||||||||
Total interest income | $ | 9 | — | — | 9 | 154,781 | 2,079 | (880 | ) | 155,989 | ||||||||||||||
Interest expense | — | — | — | — | 64,113 | 2,158 | (880 | ) | 65,391 | |||||||||||||||
Net interest income (loss) | 9 | — | — | 9 | 90,668 | (79 | ) | — | 90,598 | |||||||||||||||
Less provision for loan losses | — | — | — | — | 3,500 | — | — | 3,500 | ||||||||||||||||
Net interest income (loss) after provision for loan losses | 9 | — | — | 9 | 87,168 | (79 | ) | — | 87,098 | |||||||||||||||
Other income (expense): | ||||||||||||||||||||||||
Loan and guaranty servicing revenue | 54,584 | — | — | 54,584 | — | — | — | 54,584 | ||||||||||||||||
Intersegment servicing revenue | 16,166 | — | — | 16,166 | — | — | (16,166 | ) | — | |||||||||||||||
Tuition payment processing and campus commerce revenue | — | 17,735 | — | 17,735 | — | — | — | 17,735 | ||||||||||||||||
Enrollment services revenue | — | — | 25,890 | 25,890 | — | — | — | 25,890 | ||||||||||||||||
Other income | — | — | — | — | 3,804 | 3,219 | — | 7,023 | ||||||||||||||||
Gain on sale of loans and debt repurchases | — | — | — | — | 2,684 | 325 | — | 3,009 | ||||||||||||||||
Derivative settlements, net | — | — | — | — | (6,361 | ) | (751 | ) | — | (7,112 | ) | |||||||||||||
Derivative market value and foreign currency adjustments, net | — | — | — | — | 10,542 | 3,227 | — | 13,769 | ||||||||||||||||
Total other income (expense) | 70,750 | 17,735 | 25,890 | 114,375 | 10,669 | 6,020 | (16,166 | ) | 114,898 | |||||||||||||||
Operating expenses: | ||||||||||||||||||||||||
Salaries and benefits | 29,463 | 8,543 | 5,229 | 43,235 | 529 | 4,869 | — | 48,633 | ||||||||||||||||
Cost to provide enrollment services | — | — | 16,172 | 16,172 | — | — | — | 16,172 | ||||||||||||||||
Depreciation and amortization | 4,786 | 2,066 | 1,624 | 8,476 | — | 385 | — | 8,861 | ||||||||||||||||
Other | 17,525 | 2,882 | 4,933 | 25,340 | 6,232 | 4,006 | — | 35,578 | ||||||||||||||||
Intersegment expenses, net | 1,448 | 1,341 | 944 | 3,733 | 16,373 | (3,940 | ) | (16,166 | ) | — | ||||||||||||||
Total operating expenses | 53,222 | 14,832 | 28,902 | 96,956 | 23,134 | 5,320 | (16,166 | ) | 109,244 | |||||||||||||||
Income (loss) before income taxes and corporate overhead allocation | 17,537 | 2,903 | (3,012 | ) | 17,428 | 74,703 | 621 | — | 92,752 | |||||||||||||||
Corporate overhead allocation | (1,789 | ) | (596 | ) | (596 | ) | (2,981 | ) | (1,605 | ) | 4,586 | — | — | |||||||||||
Income (loss) before income taxes | 15,748 | 2,307 | (3,608 | ) | 14,447 | 73,098 | 5,207 | — | 92,752 | |||||||||||||||
Income tax (expense) benefit | (5,984 | ) | (877 | ) | 1,370 | (5,491 | ) | (27,777 | ) | (2,831 | ) | — | (36,099 | ) | ||||||||||
Net income (loss) | 9,764 | 1,430 | (2,238 | ) | 8,956 | 45,321 | 2,376 | — | 56,653 | |||||||||||||||
Net income attributable to noncontrolling interest | — | — | — | — | — | 19 | — | 19 | ||||||||||||||||
Net income (loss) attributable to Nelnet, Inc. | $ | 9,764 | 1,430 | (2,238 | ) | 8,956 | 45,321 | 2,357 | — | 56,634 | ||||||||||||||
10
Year ended December 31, 2013 | ||||||||||||||||||||||||
Fee-Based | ||||||||||||||||||||||||
Student Loan and Guaranty Servicing | Tuition Payment Processing and Campus Commerce | Enrollment Services | Total Fee- Based | Asset Generation and Management | Corporate Activity and Overhead | Eliminations | Total | |||||||||||||||||
Total interest income | $ | 40 | — | — | 40 | 638,604 | 9,433 | (3,267 | ) | 644,810 | ||||||||||||||
Interest expense | — | — | — | — | 229,533 | 4,669 | (3,267 | ) | 230,935 | |||||||||||||||
Net interest income (loss) | 40 | — | — | 40 | 409,071 | 4,764 | — | 413,875 | ||||||||||||||||
Less provision for loan losses | — | — | — | — | 18,500 | — | — | 18,500 | ||||||||||||||||
Net interest income (loss) after provision for loan losses | 40 | — | — | 40 | 390,571 | 4,764 | — | 395,375 | ||||||||||||||||
Other income (expense): | ||||||||||||||||||||||||
Loan and guaranty servicing revenue | 243,428 | — | — | 243,428 | — | — | — | 243,428 | ||||||||||||||||
Intersegment servicing revenue | 56,744 | — | — | 56,744 | — | — | (56,744 | ) | — | |||||||||||||||
Tuition payment processing and campus commerce revenue | — | 80,682 | — | 80,682 | — | — | — | 80,682 | ||||||||||||||||
Enrollment services revenue | — | — | 98,078 | 98,078 | — | — | — | 98,078 | ||||||||||||||||
Other income | — | — | — | — | 15,223 | 32,218 | (1,143 | ) | 46,298 | |||||||||||||||
Gain on sale of loans and debt repurchases | — | — | — | — | 11,004 | 695 | — | 11,699 | ||||||||||||||||
Derivative settlements, net | — | — | — | — | (27,966 | ) | (1,670 | ) | — | (29,636 | ) | |||||||||||||
Derivative market value and foreign currency adjustments, net | — | — | — | — | 35,256 | 13,337 | — | 48,593 | ||||||||||||||||
Total other income (expense) | 300,172 | 80,682 | 98,078 | 478,932 | 33,517 | 44,580 | (57,887 | ) | 499,142 | |||||||||||||||
Operating expenses: | ||||||||||||||||||||||||
Salaries and benefits | 119,092 | 37,575 | 19,296 | 175,963 | 2,292 | 17,914 | — | 196,169 | ||||||||||||||||
Cost to provide enrollment services | — | — | 64,961 | 64,961 | — | — | — | 64,961 | ||||||||||||||||
Depreciation and amortization | 11,419 | 4,518 | 232 | 16,169 | — | 2,142 | — | 18,311 | ||||||||||||||||
Other | 79,116 | 9,147 | 6,084 | 94,347 | 30,945 | 25,393 | (1,143 | ) | 149,542 | |||||||||||||||
Intersegment expenses, net | 4,359 | 5,989 | 4,588 | 14,936 | 57,572 | (15,764 | ) | (56,744 | ) | — | ||||||||||||||
Total operating expenses | 213,986 | 57,229 | 95,161 | 366,376 | 90,809 | 29,685 | (57,887 | ) | 428,983 | |||||||||||||||
Income (loss) before income taxes and corporate overhead allocation | 86,226 | 23,453 | 2,917 | 112,596 | 333,279 | 19,659 | — | 465,534 | ||||||||||||||||
Corporate overhead allocation | (6,150 | ) | (1,957 | ) | (1,943 | ) | (10,050 | ) | (3,896 | ) | 13,946 | — | — | |||||||||||
Income (loss) before income taxes | 80,076 | 21,496 | 974 | 102,546 | 329,383 | 33,605 | — | 465,534 | ||||||||||||||||
Income tax (expense) benefit | (30,430 | ) | (8,168 | ) | (369 | ) | (38,967 | ) | (125,165 | ) | 2,939 | — | (161,193 | ) | ||||||||||
Net income (loss) | 49,646 | 13,328 | 605 | 63,579 | 204,218 | 36,544 | — | 304,341 | ||||||||||||||||
Net income attributable to noncontrolling interest | — | — | — | — | — | 1,669 | — | 1,669 | ||||||||||||||||
Net income attributable to Nelnet, Inc. | $ | 49,646 | 13,328 | 605 | 63,579 | 204,218 | 34,875 | — | 302,672 | |||||||||||||||
11
Year ended December 31, 2012 | ||||||||||||||||||||||||
Fee-Based | ||||||||||||||||||||||||
Student Loan and Guaranty Servicing | Tuition Payment Processing and Campus Commerce | Enrollment Services | Total Fee- Based | Asset Generation and Management | Corporate Activity and Overhead | Eliminations | Total | |||||||||||||||||
Total interest income | $ | 53 | 8 | — | 61 | 610,194 | 7,305 | (3,707 | ) | 613,853 | ||||||||||||||
Interest expense | — | — | — | — | 263,788 | 8,485 | (3,707 | ) | 268,566 | |||||||||||||||
Net interest income (loss) | 53 | 8 | — | 61 | 346,406 | (1,180 | ) | — | 345,287 | |||||||||||||||
Less provision for loan losses | — | — | — | — | 21,500 | — | — | 21,500 | ||||||||||||||||
Net interest income (loss) after provision for loan losses | 53 | 8 | — | 61 | 324,906 | (1,180 | ) | — | 323,787 | |||||||||||||||
Other income (expense): | ||||||||||||||||||||||||
Loan and guaranty servicing revenue | 209,748 | — | — | 209,748 | — | — | — | 209,748 | ||||||||||||||||
Intersegment servicing revenue | 65,376 | — | — | 65,376 | — | — | (65,376 | ) | — | |||||||||||||||
Tuition payment processing and campus commerce revenue | — | 74,410 | — | 74,410 | — | — | — | 74,410 | ||||||||||||||||
Enrollment services revenue | — | — | 117,925 | 117,925 | — | — | — | 117,925 | ||||||||||||||||
Other income | — | — | — | — | 18,219 | 21,257 | — | 39,476 | ||||||||||||||||
Gain on sale of loans and debt repurchases | — | — | — | — | 3,814 | 325 | — | 4,139 | ||||||||||||||||
Derivative settlements, net | — | — | — | — | (11,792 | ) | (2,230 | ) | — | (14,022 | ) | |||||||||||||
Derivative market value and foreign currency adjustments, net | — | — | — | — | (51,809 | ) | 4,415 | — | (47,394 | ) | ||||||||||||||
Total other income (expense) | 275,124 | 74,410 | 117,925 | 467,459 | (41,568 | ) | 23,767 | (65,376 | ) | 384,282 | ||||||||||||||
Operating expenses: | ||||||||||||||||||||||||
Salaries and benefits | 115,126 | 34,314 | 22,816 | 172,256 | 2,252 | 18,318 | — | 192,826 | ||||||||||||||||
Cost to provide enrollment services | — | — | 78,375 | 78,375 | — | — | — | 78,375 | ||||||||||||||||
Depreciation and amortization | 18,415 | 7,240 | 6,491 | 32,146 | — | 1,479 | — | 33,625 | ||||||||||||||||
Other | 70,505 | 10,439 | 10,416 | 91,360 | 16,435 | 20,943 | — | 128,738 | ||||||||||||||||
Intersegment expenses, net | 5,280 | 5,383 | 3,768 | 14,431 | 66,215 | (15,270 | ) | (65,376 | ) | — | ||||||||||||||
Total operating expenses | 209,326 | 57,376 | 121,866 | 388,568 | 84,902 | 25,470 | (65,376 | ) | 433,564 | |||||||||||||||
Income (loss) before income taxes and corporate overhead allocation | 65,851 | 17,042 | (3,941 | ) | 78,952 | 198,436 | (2,883 | ) | — | 274,505 | ||||||||||||||
Corporate overhead allocation | (5,904 | ) | (1,968 | ) | (1,968 | ) | (9,840 | ) | (5,306 | ) | 15,146 | — | — | |||||||||||
Income (loss) before income taxes | 59,947 | 15,074 | (5,909 | ) | 69,112 | 193,130 | 12,263 | — | 274,505 | |||||||||||||||
Income tax (expense) benefit | (22,780 | ) | (5,728 | ) | 2,244 | (26,264 | ) | (73,387 | ) | 3,574 | — | (96,077 | ) | |||||||||||
Net income (loss) | 37,167 | 9,346 | (3,665 | ) | 42,848 | 119,743 | 15,837 | — | 178,428 | |||||||||||||||
Net income attributable to noncontrolling interest | — | — | — | — | — | 431 | — | 431 | ||||||||||||||||
Net income (loss) attributable to Nelnet, Inc. | $ | 37,167 | 9,346 | (3,665 | ) | 42,848 | 119,743 | 15,406 | — | 177,997 | ||||||||||||||
12
Net Interest Income, Net of Settlements on Derivatives
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.
The following table summarizes the components of “net interest income” and “derivative settlements, net” included in the attached consolidated statements of income.
Three months ended | Year ended | ||||||||||||||
December 31, 2013 | September 30, 2013 | December 31, 2012 | December 31, 2013 | December 31, 2012 | |||||||||||
Variable student loan interest margin, net of settlements on derivatives | $ | 62,683 | 59,100 | 49,537 | 235,480 | 192,021 | |||||||||
Fixed rate floor income, net of settlements on derivatives | 38,849 | 37,810 | 35,533 | 148,431 | 145,345 | ||||||||||
Investment interest | 2,006 | 1,562 | 1,326 | 6,668 | 4,616 | ||||||||||
Non-portfolio related derivative settlements | (258 | ) | (256 | ) | (752 | ) | (1,671 | ) | (2,232 | ) | |||||
Corporate debt interest expense | (951 | ) | 18 | (2,158 | ) | (4,669 | ) | (8,485 | ) | ||||||
Net interest income (net of settlements on derivatives) | $ | 102,329 | 98,234 | 83,486 | 384,239 | 331,265 |
13
Student Loan Servicing Volumes (dollars in millions)
![](https://capedge.com/proxy/8-K/0001258602-14-000022/lgsmda2013.jpg)
Company owned | $23,727 | $22,650 | $22,277 | $21,926 | $21,504 | $21,237 | $20,820 | $20,629 | $20,715 | $21,397 | ||||||||||||||||||||
% of total | 38.6% | 29.8% | 27.1% | 25.6% | 23.2% | 21.8% | 18.5% | 17.7% | 15.3% | 15.5% | ||||||||||||||||||||
Number of servicing borrowers: | ||||||||||||||||||||||||||||||
Government servicing | 2,804,502 | 3,036,534 | 3,096,026 | 3,137,583 | 3,588,412 | 3,892,929 | 4,261,637 | 4,396,341 | 5,145,901 | 5,305,498 | ||||||||||||||||||||
FFELP servicing | 1,912,748 | 1,799,484 | 1,779,245 | 1,724,087 | 1,659,020 | 1,626,146 | 1,586,312 | 1,529,203 | 1,507,452 | 1,462,122 | ||||||||||||||||||||
Private servicing | 155,947 | 164,554 | 163,135 | 161,763 | 175,070 | 173,948 | 170,224 | 173,588 | 178,935 | 195,580 | ||||||||||||||||||||
Total: | 4,873,197 | 5,000,572 | 5,038,406 | 5,023,433 | 5,422,502 | 5,693,023 | 6,018,173 | 6,099,132 | 6,832,288 | 6,963,200 | ||||||||||||||||||||
Number of remote hosted borrowers | 545,456 | 9,566,296 | 8,645,463 | 7,909,300 | 7,505,693 | 6,912,204 | 5,001,695 | 3,218,896 | 1,986,866 | 1,915,203 |
14
Other Income
The following table summarizes the components of "other income" included in the attached consolidated statements of income.
Three months ended | Year ended | ||||||||||||||
December 31, 2013 | September 30, 2013 | December 31, 2012 | December 31, 2013 | December 31, 2012 | |||||||||||
Borrower late fee income | $ | 3,021 | 2,927 | 3,211 | 12,686 | 13,876 | |||||||||
Investment advisory fees | 5,907 | 2,352 | 553 | 17,422 | 9,347 | ||||||||||
Realized and unrealized gains/(losses) on investments, net | 3,944 | 1,096 | 936 | 6,094 | 6,914 | ||||||||||
Other | 3,109 | 2,238 | 2,323 | 10,096 | 9,339 | ||||||||||
Other income | $ | 15,981 | 8,613 | 7,023 | 46,298 | 39,476 |
Derivative Settlements
The following table summarizes the components of "derivative settlements, net" included in the attached consolidated statements of income.
Three months ended | Year ended | ||||||||||||||
December 31, 2013 | September 30, 2013 | December 31, 2012 | December 31, 2013 | December 31, 2012 | |||||||||||
Settlements: | |||||||||||||||
1:3 basis swaps | $ | 827 | 781 | 844 | 3,301 | 4,495 | |||||||||
Interest rate swaps - floor income hedges | (7,005 | ) | (7,178 | ) | (7,033 | ) | (31,022 | ) | (19,270 | ) | |||||
Interest rate swaps - hybrid debt hedges | (257 | ) | (256 | ) | (752 | ) | (1,670 | ) | (2,231 | ) | |||||
Cross-currency interest rate swaps | 28 | (35 | ) | (162 | ) | (245 | ) | 3,228 | |||||||
Other | — | — | (9 | ) | — | (244 | ) | ||||||||
Total settlements - income (expense) | $ | (6,407 | ) | (6,688 | ) | (7,112 | ) | (29,636 | ) | (14,022 | ) |
Derivative Market Value and Foreign Currency Adjustments
"Derivative market value and foreign currency adjustments" include (i) the 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.
The following table summarizes the components of “derivative market value and foreign currency adjustments” included in the attached consolidated statements of income.
Three months ended | Year ended | ||||||||||||||
December 31, 2013 | September 30, 2013 | December 31, 2012 | December 31, 2013 | December 31, 2012 | |||||||||||
Change in fair value of derivatives - income (expense) | $ | 10,135 | 30,014 | 39,516 | 83,878 | (27,833 | ) | ||||||||
Foreign currency transaction adjustment - income (expense) | (9,383 | ) | (39,974 | ) | (25,747 | ) | (35,285 | ) | (19,561 | ) | |||||
Derivative market value and foreign currency adjustments - income (expense) | $ | 752 | (9,960 | ) | 13,769 | 48,593 | (47,394 | ) |
15
Student Loans Receivable
The table below outlines the components of the Company’s student loan portfolio:
As of | As of | As of | ||||||||||
December 31, 2013 | September 30, 2013 | December 31, 2012 | ||||||||||
Held for investment | Held for investment | Held for sale | Held for investment | |||||||||
Federally insured loans | ||||||||||||
Stafford and other | $ | 6,686,626 | 6,884,348 | — | 7,261,114 | |||||||
Consolidation | 19,363,577 | 17,908,229 | — | 17,708,732 | ||||||||
Total | 26,050,203 | 24,792,577 | — | 24,969,846 | ||||||||
Non-federally insured loans | 71,103 | 66,283 | 28,480 | 26,034 | ||||||||
26,121,306 | 24,858,860 | 28,480 | 24,995,880 | |||||||||
Loan discount, net of unamortized loan premiums and deferred origination costs | (158,595 | ) | (103,551 | ) | — | (113,357 | ) | |||||
Allowance for loan losses – federally insured loans | (43,440 | ) | (42,406 | ) | — | (40,120 | ) | |||||
Allowance for loan losses – non-federally insured loans | (11,682 | ) | (11,791 | ) | — | (11,782 | ) | |||||
$ | 25,907,589 | 24,701,112 | 28,480 | 24,830,621 | ||||||||
Loan Activity
The following table sets forth the activity of loans:
Three months ended December 31, | Year ended December 31, | |||||||||||
2013 | 2012 | 2013 | 2012 | |||||||||
Beginning balance | $ | 24,887,340 | 22,644,880 | 24,995,880 | 24,359,625 | |||||||
Loan acquisitions | 1,858,241 | 2,986,532 | 4,058,997 | 3,885,138 | ||||||||
Repayments, claims, capitalized interest, participations, and other | (479,035 | ) | (461,261 | ) | (2,375,806 | ) | (1,807,144 | ) | ||||
Consolidation loans lost to external parties | (113,234 | ) | (158,847 | ) | (514,108 | ) | (1,331,163 | ) | ||||
Loans sold | (32,006 | ) | (15,424 | ) | (43,657 | ) | (110,576 | ) | ||||
Ending balance | $ | 26,121,306 | 24,995,880 | 26,121,306 | 24,995,880 |
16
Student Loan Spread
The following table analyzes the student loan spread on the Company’s portfolio of student loans, which represents the spread between the yield earned on student loan assets and the costs of the liabilities and derivative instruments used to fund those assets.
Three months ended | Year ended | ||||||||||||||
December 31, 2013 | September 30, 2013 | December 31, 2012 | December 31, 2013 | December 31, 2012 | |||||||||||
Variable student loan yield, gross | 2.58 | % | 2.58 | % | 2.61 | % | 2.58 | % | 2.63 | % | |||||
Consolidation rebate fees | (0.78 | ) | (0.76 | ) | (0.76 | ) | (0.77 | ) | (0.75 | ) | |||||
Discount accretion, net of premium and deferred origination costs amortization | 0.05 | 0.02 | 0.03 | 0.03 | — | ||||||||||
Variable student loan yield, net | 1.85 | 1.84 | 1.88 | 1.84 | 1.88 | ||||||||||
Student loan cost of funds - interest expense | (0.90 | ) | (0.89 | ) | (1.05 | ) | (0.91 | ) | (1.09 | ) | |||||
Student loan cost of funds - derivative settlements | 0.01 | 0.01 | 0.01 | 0.01 | 0.03 | ||||||||||
Variable student loan spread | 0.96 | 0.96 | 0.84 | 0.94 | 0.82 | ||||||||||
Fixed rate floor income, net of settlements on derivatives | 0.60 | 0.61 | 0.60 | 0.60 | 0.62 | ||||||||||
Core student loan spread | 1.56 | % | 1.57 | % | 1.44 | % | 1.54 | % | 1.44 | % | |||||
Average balance of student loans | $ | 25,770,607 | 24,491,516 | 23,766,653 | 24,960,521 | 23,694,388 | |||||||||
Average balance of debt outstanding | 25,687,958 | 24,470,096 | 24,086,770 | 24,954,546 | 23,932,304 |
A trend analysis of the Company's core and variable student loan spreads is summarized below.
![](https://capedge.com/proxy/8-K/0001258602-14-000022/spreadchart21814.jpg)
(a) | Prior to April 1, 2012, the interest earned on the majority of the Company's FFELP student loan assets was indexed to the three-month commercial paper rate. As allowed by legislation, effective April 1, 2012, the Company elected to change the index on which the Special Allowance Payments are calculated for FFELP loans from the commercial paper rate to the one-month LIBOR rate. The Company funds the majority of its assets with three-month LIBOR indexed floating rate securities. The relationship between the indices in which the Company earns interest on its loans and funds such loans has a significant impact on student loan spread. This table (the right axis) shows the difference between the Company's liability base rate and the one-month LIBOR (Q2 2012 - Q4 2013) or commercial paper rate indices (Q1 2011 - Q1 2012) by quarter. |
17
Variable student loan spread increased during the year ended December 31, 2013 as compared to 2012 as a result of the tightening of the Asset/Liability Base Rate spread as reflected in the previous table.
The primary difference between variable student loan spread and core student loan spread is fixed rate floor income. A summary of fixed rate floor income and its contribution to core student loan spread follows:
Three months ended | Year ended | ||||||||||||||
December 31, 2013 | September 30, 2013 | December 31, 2012 | December 31, 2013 | December 31, 2012 | |||||||||||
Fixed rate floor income, gross | $ | 45,854 | 44,988 | 42,566 | 179,453 | 164,615 | |||||||||
Derivative settlements (a) | (7,005 | ) | (7,178 | ) | (7,033 | ) | (31,022 | ) | (19,270 | ) | |||||
Fixed rate floor income, net | $ | 38,849 | 37,810 | 35,533 | 148,431 | 145,345 | |||||||||
Fixed rate floor income contribution to spread, net | 0.60 | % | 0.61 | % | 0.60 | % | 0.60 | % | 0.62 | % |
(a) | Includes settlement payments on derivatives used to hedge student loans earning fixed rate floor income. |
Fixed Rate Floor Income
The following table shows the Company’s student loan assets that are earning fixed rate floor income as of December 31, 2013:
Fixed interest range | Borrower/lender weighted average yield | Estimated variable conversion rate (a) | Loan balance | |||||
< 3.0% | 2.87% | 0.23% | $ | 1,753,639 | ||||
3.0 - 3.49% | 3.20% | 0.56% | 2,101,999 | |||||
3.5 - 3.99% | 3.65% | 1.01% | 1,919,895 | |||||
4.0 - 4.49% | 4.20% | 1.56% | 1,448,691 | |||||
4.5 - 4.99% | 4.72% | 2.08% | 845,296 | |||||
5.0 - 5.49% | 5.24% | 2.60% | 578,336 | |||||
5.5 - 5.99% | 5.67% | 3.03% | 350,308 | |||||
6.0 - 6.49% | 6.18% | 3.54% | 405,238 | |||||
6.5 - 6.99% | 6.70% | 4.06% | 367,927 | |||||
7.0 - 7.49% | 7.16% | 4.52% | 151,774 | |||||
7.5 - 7.99% | 7.71% | 5.07% | 259,141 | |||||
8.0 - 8.99% | 8.17% | 5.53% | 612,919 | |||||
> 9.0% | 9.04% | 6.40% | 295,420 | |||||
$ | 11,090,583 |
(a) | The estimated variable conversion rate is the estimated short-term interest rate at which loans would convert to a variable rate. As of December 31, 2013, the weighted average estimated variable conversion rate was 1.83%. As of December 31, 2013, the short-term interest rate was 17 basis points. |
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The following table summarizes the outstanding derivative instruments as of December 31, 2013 used by the Company to economically hedge loans earning fixed rate floor income.
Maturity | Notional amount | Weighted average fixed rate paid by the Company (a) | |||||
2014 | $ | 1,750,000 | 0.71 | % | |||
2015 | 1,100,000 | 0.89 | |||||
2016 | 750,000 | 0.85 | |||||
2017 | 1,250,000 | 0.86 | |||||
$ | 4,850,000 | 0.81 | % |
(a) | For all interest rate derivatives, the Company receives discrete three-month LIBOR. |
Future Cash Flow from Portfolio
The majority of the Company’s portfolio of student loans is funded in asset-backed securitizations that are structured to substantially match the maturity of the funded assets, thereby minimizing liquidity risk. In addition, due to (i) the difference between the yield the Company receives on the loans and cost of financing within these transactions, and (ii) the servicing and administration fees the Company earns from these transactions, the Company has created a portfolio that will generate earnings and significant cash flow over the life of these transactions.
As of December 31, 2013, based on cash flow models developed to reflect management’s current estimate of, among other factors, prepayments, defaults, deferment, forbearance, and interest rates, the Company currently expects future undiscounted cash flows from its portfolio to be approximately $2.17 billion as detailed below. The $2.17 billion includes approximately $432.5 million (as of December 31, 2013) of overcollateralization included in the asset-backed securitizations. These excess net asset positions are reflected variously in the following balances on the consolidated balance sheet: "student loans receivable," "restricted cash and investments," and "accrued interest receivable."
The forecasted cash flow presented below includes all loans funded in asset-backed securitizations as of December 31, 2013. As of December 31, 2013, the Company had $24.6 billion of loans included in asset-backed securitizations, which represented 94.6 percent of its total FFELP student loan portfolio. The forecasted cash flow does not include cash flows that the Company expects to receive related to loans funded in its warehouse facilities or loans acquired subsequent to December 31, 2013.
![](https://capedge.com/proxy/8-K/0001258602-14-000022/cashflowforecast.jpg)
The Company uses various assumptions, including prepayments and future interest rates, when preparing its cash flow forecast. These assumptions are further discussed below.
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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 loan consolidation activity, borrower default rates, and utilization of FFEL Program 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 securities transactions. If management used a prepayment rate assumption two times greater than what was used to forecast the cash flow, the cash flow forecast would be reduced by approximately $240 million to $300 million.
Interest rates: The Company funds the majority 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 $100 million to $140 million.
The Company uses the current forward interest rate yield curve to forecast cash flows. A change in the forward interest rate curve would impact the future cash flows generated from the portfolio. An increase in future interest rates will reduce the amount of fixed rate floor income the Company is currently receiving. The Company attempts to mitigate the impact of a rise in short-term rates by hedging interest rate risks. As of December 31, 2013, the net fair value of the Company’s interest rate derivatives used to hedge loans earning fixed rate floor income was a net liability of $8.7 million.
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