ý | QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 |
¨ | TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 |
NEBRASKA (State or other jurisdiction of incorporation or organization) | 84-0748903 (I.R.S. Employer Identification No.) |
121 SOUTH 13TH STREET SUITE 100 LINCOLN, NEBRASKA (Address of principal executive offices) | 68508 (Zip Code) |
Item 1. | |||
Item 2. | |||
Item 3. | |||
Item 4. | |||
Item 1. | |||
Item 1A. | |||
Item 2. | |||
Item 6. | |||
NELNET, INC. AND SUBSIDIARIES | |||||||
CONSOLIDATED BALANCE SHEETS | |||||||
(Dollars in thousands, except share data) | |||||||
(unaudited) | |||||||
As of | As of | ||||||
September 30, 2017 | December 31, 2016 | ||||||
Assets: | |||||||
Student loans receivable (net of allowance for loan losses of $51,964 and $51,842, respectively) | $ | 22,528,845 | 24,903,724 | ||||
Cash and cash equivalents: | |||||||
Cash and cash equivalents - not held at a related party | 11,313 | 7,841 | |||||
Cash and cash equivalents - held at a related party | 243,078 | 61,813 | |||||
Total cash and cash equivalents | 254,391 | 69,654 | |||||
Investments and other receivables | 276,536 | 254,144 | |||||
Restricted cash | 725,463 | 980,961 | |||||
Restricted cash - due to customers | 105,299 | 119,702 | |||||
Accrued interest receivable | 396,827 | 391,264 | |||||
Accounts receivable (net of allowance for doubtful accounts of $1,905 and $1,549, respectively) | 70,628 | 43,972 | |||||
Goodwill | 147,312 | 147,312 | |||||
Intangible assets, net | 40,742 | 47,813 | |||||
Property and equipment, net | 208,441 | 123,786 | |||||
Other assets | 13,230 | 10,245 | |||||
Fair value of derivative instruments | 996 | 87,531 | |||||
Total assets | $ | 24,768,710 | 27,180,108 | ||||
Liabilities: | |||||||
Bonds and notes payable | $ | 22,240,279 | 24,668,490 | ||||
Accrued interest payable | 47,824 | 45,677 | |||||
Other liabilities | 214,763 | 197,488 | |||||
Due to customers | 105,299 | 119,702 | |||||
Fair value of derivative instruments | 30,105 | 77,826 | |||||
Total liabilities | 22,638,270 | 25,109,183 | |||||
Commitments and contingencies | |||||||
Equity: | |||||||
Nelnet, Inc. shareholders' equity: | |||||||
Preferred stock, $0.01 par value. Authorized 50,000,000 shares; no shares issued or outstanding | — | — | |||||
Common stock: | |||||||
Class A, $0.01 par value. Authorized 600,000,000 shares; issued and outstanding 29,436,022 shares and 30,628,112 shares, respectively | 294 | 306 | |||||
Class B, convertible, $0.01 par value. Authorized 60,000,000 shares; issued and outstanding 11,476,932 shares | 115 | 115 | |||||
Additional paid-in capital | 360 | 420 | |||||
Retained earnings | 2,106,895 | 2,056,084 | |||||
Accumulated other comprehensive earnings | 4,187 | 4,730 | |||||
Total Nelnet, Inc. shareholders' equity | 2,111,851 | 2,061,655 | |||||
Noncontrolling interests | 18,589 | 9,270 | |||||
Total equity | 2,130,440 | 2,070,925 | |||||
Total liabilities and equity | $ | 24,768,710 | 27,180,108 | ||||
Supplemental information - assets and liabilities of consolidated education lending variable interest entities: | |||||||
Student loans receivable | $ | 22,704,085 | 25,090,530 | ||||
Restricted cash | 687,666 | 970,306 | |||||
Accrued interest receivable and other assets | 397,093 | 390,504 | |||||
Bonds and notes payable | (22,459,091 | ) | (25,105,704 | ) | |||
Other liabilities | (282,441 | ) | (290,996 | ) | |||
Fair value of derivative instruments, net | (22,773 | ) | (66,453 | ) | |||
Net assets of consolidated education lending variable interest entities | $ | 1,024,539 | 988,187 |
NELNET, INC. AND SUBSIDIARIES | ||||||||||||
CONSOLIDATED STATEMENTS OF INCOME | ||||||||||||
(Dollars in thousands, except share data) | ||||||||||||
(unaudited) | ||||||||||||
Three months | Nine months | |||||||||||
ended September 30, | ended September 30, | |||||||||||
2017 | 2016 | 2017 | 2016 | |||||||||
Interest income: | ||||||||||||
Loan interest | $ | 191,755 | 193,721 | 562,451 | 567,775 | |||||||
Investment interest | 5,129 | 2,460 | 11,335 | 6,674 | ||||||||
Total interest income | 196,884 | 196,181 | 573,786 | 574,449 | ||||||||
Interest expense: | ||||||||||||
Interest on bonds and notes payable | 121,650 | 96,386 | 341,787 | 280,847 | ||||||||
Net interest income | 75,234 | 99,795 | 231,999 | 293,602 | ||||||||
Less provision for loan losses | 6,000 | 6,000 | 9,000 | 10,500 | ||||||||
Net interest income after provision for loan losses | 69,234 | 93,795 | 222,999 | 283,102 | ||||||||
Other income: | ||||||||||||
Loan systems and servicing revenue | 55,950 | 54,350 | 167,079 | 161,082 | ||||||||
Tuition payment processing, school information, and campus commerce revenue | 35,450 | 33,071 | 113,293 | 102,211 | ||||||||
Communications revenue | 6,751 | 4,343 | 17,577 | 13,167 | ||||||||
Enrollment services revenue | — | — | — | 4,326 | ||||||||
Other income | 19,756 | 15,150 | 44,874 | 38,711 | ||||||||
Gain from debt repurchases | 116 | 2,160 | 5,537 | 2,260 | ||||||||
Derivative market value and foreign currency transaction adjustments and derivative settlements, net | 7,173 | 36,001 | (25,568 | ) | (33,391 | ) | ||||||
Total other income | 125,196 | 145,075 | 322,792 | 288,366 | ||||||||
Operating expenses: | ||||||||||||
Salaries and benefits | 74,193 | 63,743 | 220,684 | 187,907 | ||||||||
Depreciation and amortization | 10,051 | 8,994 | 27,687 | 24,817 | ||||||||
Loan servicing fees | 7,939 | 5,880 | 19,584 | 20,024 | ||||||||
Cost to provide communications services | 2,632 | 1,784 | 6,789 | 5,169 | ||||||||
Cost to provide enrollment services | — | — | — | 3,623 | ||||||||
Other expenses | 30,518 | 26,391 | 84,593 | 84,174 | ||||||||
Total operating expenses | 125,333 | 106,792 | 359,337 | 325,714 | ||||||||
Income before income taxes | 69,097 | 132,078 | 186,454 | 245,754 | ||||||||
Income tax expense | 25,562 | 47,715 | 70,349 | 87,184 | ||||||||
Net income | 43,535 | 84,363 | 116,105 | 158,570 | ||||||||
Net loss (income) attributable to noncontrolling interests | 2,768 | (69 | ) | 8,960 | (165 | ) | ||||||
Net income attributable to Nelnet, Inc. | $ | 46,303 | 84,294 | 125,065 | 158,405 | |||||||
Earnings per common share: | ||||||||||||
Net income attributable to Nelnet, Inc. shareholders - basic and diluted | $ | 1.11 | 1.98 | 2.97 | 3.70 | |||||||
Weighted average common shares outstanding - basic and diluted | 41,553,316 | 42,642,213 | 42,054,532 | 42,788,133 |
NELNET, INC. AND SUBSIDIARIES | ||||||||||||
CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME | ||||||||||||
(Dollars in thousands) | ||||||||||||
(unaudited) | ||||||||||||
Three months | Nine months | |||||||||||
ended September 30, | ended September 30, | |||||||||||
2017 | 2016 | 2017 | 2016 | |||||||||
Net income | $ | 43,535 | 84,363 | 116,105 | 158,570 | |||||||
Other comprehensive (loss) income: | ||||||||||||
Available-for-sale securities: | ||||||||||||
Unrealized holding gains (losses) arising during period, net | 405 | 3,431 | 383 | (4,217 | ) | |||||||
Reclassification adjustment for gains recognized in net income, net of losses | (504 | ) | (491 | ) | (1,244 | ) | (82 | ) | ||||
Income tax effect | 35 | (1,087 | ) | 318 | 1,591 | |||||||
Total other comprehensive (loss) income | (64 | ) | 1,853 | (543 | ) | (2,708 | ) | |||||
Comprehensive income | 43,471 | 86,216 | 115,562 | 155,862 | ||||||||
Comprehensive loss (income) attributable to noncontrolling interests | 2,768 | (69 | ) | 8,960 | (165 | ) | ||||||
Comprehensive income attributable to Nelnet, Inc. | $ | 46,239 | 86,147 | 124,522 | 155,697 |
NELNET, INC. AND SUBSIDIARIES | |||||||||||||||||||||||||||||||||
CONSOLIDATED STATEMENTS OF SHAREHOLDERS' EQUITY | |||||||||||||||||||||||||||||||||
(Dollars in thousands, except share data) | |||||||||||||||||||||||||||||||||
(unaudited) | |||||||||||||||||||||||||||||||||
Nelnet, Inc. Shareholders | |||||||||||||||||||||||||||||||||
Preferred stock shares | Common stock shares | Preferred stock | Class A common stock | Class B common stock | Additional paid-in capital | Retained earnings | Accumulated other comprehensive (loss) earnings | Noncontrolling interests | Total equity | ||||||||||||||||||||||||
Class A | Class B | ||||||||||||||||||||||||||||||||
Balance as of June 30, 2016 | — | 31,024,230 | 11,476,932 | $ | — | 310 | 115 | 4,601 | 1,894,551 | (2,277 | ) | 8,916 | 1,906,216 | ||||||||||||||||||||
Issuance of noncontrolling interests | — | — | — | — | — | — | — | — | — | 26 | 26 | ||||||||||||||||||||||
Net income | — | — | — | — | — | — | — | 84,294 | — | 69 | 84,363 | ||||||||||||||||||||||
Other comprehensive income | — | — | — | — | — | — | — | — | 1,853 | — | 1,853 | ||||||||||||||||||||||
Cash dividend on Class A and Class B common stock - $0.12 per share | — | — | — | — | — | — | — | (5,101 | ) | — | — | (5,101 | ) | ||||||||||||||||||||
Issuance of common stock, net of forfeitures | — | 16,662 | — | — | — | — | 282 | — | — | — | 282 | ||||||||||||||||||||||
Compensation expense for stock based awards | — | — | — | — | — | — | 1,132 | — | — | — | 1,132 | ||||||||||||||||||||||
Repurchase of common stock | — | (201,551 | ) | — | — | (2 | ) | — | (5,791 | ) | (1,882 | ) | — | — | (7,675 | ) | |||||||||||||||||
Balance as of September 30, 2016 | — | 30,839,341 | 11,476,932 | $ | — | 308 | 115 | 224 | 1,971,862 | (424 | ) | 9,011 | 1,981,096 | ||||||||||||||||||||
Balance as of June 30, 2017 | — | 30,373,691 | 11,476,932 | $ | — | 304 | 115 | 366 | 2,110,158 | 4,251 | 15,215 | 2,130,409 | |||||||||||||||||||||
Issuance of noncontrolling interests | — | — | — | — | — | — | — | — | — | 6,901 | 6,901 | ||||||||||||||||||||||
Net income (loss) | — | — | — | — | — | — | — | 46,303 | — | (2,768 | ) | 43,535 | |||||||||||||||||||||
Other comprehensive loss | — | — | — | — | — | — | — | — | (64 | ) | — | (64 | ) | ||||||||||||||||||||
Distribution to noncontrolling interests | — | — | — | — | — | — | — | — | — | (759 | ) | (759 | ) | ||||||||||||||||||||
Cash dividend on Class A and Class B common stock - $0.14 per share | — | — | — | — | — | — | — | (5,766 | ) | — | — | (5,766 | ) | ||||||||||||||||||||
Issuance of common stock, net of forfeitures | — | 10,125 | — | — | — | — | 278 | — | — | — | 278 | ||||||||||||||||||||||
Compensation expense for stock based awards | — | — | — | — | — | — | 1,042 | — | — | — | 1,042 | ||||||||||||||||||||||
Repurchase of common stock | — | (947,794 | ) | — | — | (10 | ) | — | (1,326 | ) | (43,800 | ) | — | — | (45,136 | ) | |||||||||||||||||
Balance as of September 30, 2017 | — | 29,436,022 | 11,476,932 | $ | — | 294 | 115 | 360 | 2,106,895 | 4,187 | 18,589 | 2,130,440 | |||||||||||||||||||||
Balance as of December 31, 2015 | — | 32,476,528 | 11,476,932 | $ | — | 325 | 115 | — | 1,881,708 | 2,284 | 7,726 | 1,892,158 | |||||||||||||||||||||
Issuance of noncontrolling interests | — | — | — | — | — | — | — | — | — | 1,339 | 1,339 | ||||||||||||||||||||||
Net income | — | — | — | — | — | — | — | 158,405 | — | 165 | 158,570 | ||||||||||||||||||||||
Other comprehensive loss | — | — | — | — | — | — | — | — | (2,708 | ) | — | (2,708 | ) | ||||||||||||||||||||
Distribution to noncontrolling interests | — | — | — | — | — | — | — | — | — | (219 | ) | (219 | ) | ||||||||||||||||||||
Cash dividend on Class A and Class B common stock - $0.36 per share | — | — | — | — | — | — | — | (15,293 | ) | — | — | (15,293 | ) | ||||||||||||||||||||
Issuance of common stock, net of forfeitures | — | 175,405 | — | — | 1 | — | 3,943 | — | — | — | 3,944 | ||||||||||||||||||||||
Compensation expense for stock based awards | — | — | — | — | — | — | 3,448 | — | — | — | 3,448 | ||||||||||||||||||||||
Repurchase of common stock | — | (1,812,592 | ) | — | — | (18 | ) | — | (7,167 | ) | (52,958 | ) | — | — | (60,143 | ) | |||||||||||||||||
Balance as of September 30, 2016 | — | 30,839,341 | 11,476,932 | $ | — | 308 | 115 | 224 | 1,971,862 | (424 | ) | 9,011 | 1,981,096 | ||||||||||||||||||||
Balance as of December 31, 2016 | — | 30,628,112 | 11,476,932 | $ | — | 306 | 115 | 420 | 2,056,084 | 4,730 | 9,270 | 2,070,925 | |||||||||||||||||||||
Issuance of noncontrolling interests | — | — | — | — | — | — | — | — | — | 19,553 | 19,553 | ||||||||||||||||||||||
Net income (loss) | — | — | — | — | — | — | — | 125,065 | — | (8,960 | ) | 116,105 | |||||||||||||||||||||
Other comprehensive loss | — | — | — | — | — | — | — | — | (543 | ) | — | (543 | ) | ||||||||||||||||||||
Distribution to noncontrolling interests | — | — | — | — | — | — | — | — | — | (1,274 | ) | (1,274 | ) | ||||||||||||||||||||
Cash dividend on Class A and Class B common stock - $0.42 per share | — | — | — | — | — | — | — | (17,569 | ) | — | — | (17,569 | ) | ||||||||||||||||||||
Issuance of common stock, net of forfeitures | — | 171,481 | — | — | 2 | — | 3,359 | — | — | — | 3,361 | ||||||||||||||||||||||
Compensation expense for stock based awards | — | — | — | — | — | — | 3,213 | — | — | — | 3,213 | ||||||||||||||||||||||
Repurchase of common stock | — | (1,363,571 | ) | — | — | (14 | ) | — | (6,632 | ) | (56,685 | ) | — | — | (63,331 | ) | |||||||||||||||||
Balance as of September 30, 2017 | — | 29,436,022 | 11,476,932 | $ | — | 294 | 115 | 360 | 2,106,895 | 4,187 | 18,589 | 2,130,440 |
NELNET, INC. AND SUBSIDIARIES | ||||||
CONSOLIDATED STATEMENTS OF CASH FLOWS | ||||||
(Dollars in thousands) | ||||||
(unaudited) | ||||||
Nine months | ||||||
ended September 30, | ||||||
2017 | 2016 | |||||
Net income attributable to Nelnet, Inc. | $ | 125,065 | 158,405 | |||
Net (loss) income attributable to noncontrolling interests | (8,960 | ) | 165 | |||
Net income | 116,105 | 158,570 | ||||
Adjustments to reconcile net income to net cash provided by operating activities: | ||||||
Depreciation and amortization, including debt discounts and student loan premiums and deferred origination costs | 99,826 | 83,988 | ||||
Student loan discount accretion | (32,820 | ) | (30,439 | ) | ||
Provision for loan losses | 9,000 | 10,500 | ||||
Derivative market value adjustment | (22,381 | ) | 1,556 | |||
Unrealized foreign currency transaction adjustment | 45,635 | 13,543 | ||||
Proceeds from termination of derivative instruments | 3,013 | 2,830 | ||||
Payments to enter into derivative instruments | (929 | ) | — | |||
Proceeds from clearinghouse to settle variation margin, net | 37,744 | — | ||||
Gain from debt repurchases | (5,537 | ) | (2,260 | ) | ||
Gain from sales of available-for-sale securities, net of losses | (1,244 | ) | (82 | ) | ||
Proceeds related to trading securities, net | 23 | 1,192 | ||||
Deferred income tax benefit | (15,012 | ) | (7,633 | ) | ||
Non-cash compensation expense | 3,370 | 3,563 | ||||
Other | 4,288 | 1,681 | ||||
(Increase) decrease in accrued interest receivable | (5,572 | ) | 2,021 | |||
Increase in accounts receivable | (26,656 | ) | (1,982 | ) | ||
Increase in other assets | (1,213 | ) | (1,141 | ) | ||
Increase in accrued interest payable | 2,147 | 11,333 | ||||
Increase in other liabilities | 20,548 | 11,587 | ||||
Net cash provided by operating activities | 230,335 | 258,827 | ||||
Cash flows from investing activities: | ||||||
Purchases of student loans | (137,158 | ) | (234,270 | ) | ||
Net proceeds from student loan repayments, claims, capitalized interest, and other | 2,515,850 | 2,908,738 | ||||
Proceeds from sale of student loans | — | 44,760 | ||||
Purchases of available-for-sale securities | (109,666 | ) | (66,733 | ) | ||
Proceeds from sales of available-for-sale securities | 141,206 | 100,423 | ||||
Purchases of investments and loans receivable and issuance of notes receivable | (68,131 | ) | (14,912 | ) | ||
Proceeds from investments and other receivables | 10,521 | 12,169 | ||||
Purchases of property and equipment | (106,656 | ) | (46,821 | ) | ||
Decrease (increase) in restricted cash, net | 276,654 | (39,400 | ) | |||
Net cash provided by investing activities | 2,522,620 | 2,663,954 | ||||
Cash flows from financing activities: | ||||||
Payments on bonds and notes payable | (3,679,592 | ) | (2,998,017 | ) | ||
Proceeds from issuance of bonds and notes payable | 1,178,027 | 154,619 | ||||
Payments of debt issuance costs | (4,411 | ) | (2,098 | ) | ||
Dividends paid | (17,569 | ) | (15,293 | ) | ||
Repurchases of common stock | (63,331 | ) | (60,143 | ) | ||
Proceeds from issuance of common stock | 457 | 656 | ||||
Issuance of noncontrolling interests | 19,475 | 1,339 | ||||
Distribution to noncontrolling interests | (1,274 | ) | (219 | ) | ||
Net cash used in financing activities | (2,568,218 | ) | (2,919,156 | ) | ||
Net increase in cash and cash equivalents | 184,737 | 3,625 | ||||
Cash and cash equivalents, beginning of period | 69,654 | 63,529 | ||||
Cash and cash equivalents, end of period | $ | 254,391 | 67,154 | |||
Cash disbursements made for: | ||||||
Interest | $ | 287,265 | 219,672 | |||
Income taxes, net of refunds | $ | 71,431 | 87,633 |
As of | As of | ||||||
September 30, 2017 | December 31, 2016 | ||||||
Federally insured loans: | |||||||
Stafford and other | $ | 4,534,588 | 5,186,047 | ||||
Consolidation | 17,952,696 | 19,643,937 | |||||
Total | 22,487,284 | 24,829,984 | |||||
Private education loans | 226,629 | 273,659 | |||||
22,713,913 | 25,103,643 | ||||||
Loan discount, net of unamortized loan premiums and deferred origination costs | (119,572 | ) | (129,507 | ) | |||
Non-accretable discount (a) | (13,532 | ) | (18,570 | ) | |||
Allowance for loan losses – federally insured loans | (39,398 | ) | (37,268 | ) | |||
Allowance for loan losses – private education loans | (12,566 | ) | (14,574 | ) | |||
$ | 22,528,845 | 24,903,724 |
(a) | For loans purchased where there is evidence of credit deterioration since the origination of the loan, the Company records a credit discount, separate from the allowance for loan losses, which is non-accretable to interest income. |
Three months ended September 30, | Nine months ended September 30, | ||||||||||||
2017 | 2016 | 2017 | 2016 | ||||||||||
Balance at beginning of period | $ | 49,708 | 48,753 | 51,842 | 50,498 | ||||||||
Provision for loan losses: | |||||||||||||
Federally insured loans | 7,000 | 7,000 | 11,000 | 11,000 | |||||||||
Private education loans | (1,000 | ) | (1,000 | ) | (2,000 | ) | (500 | ) | |||||
Total provision for loan losses | 6,000 | 6,000 | 9,000 | 10,500 | |||||||||
Charge-offs: | |||||||||||||
Federally insured loans | (3,464 | ) | (3,196 | ) | (8,870 | ) | (9,462 | ) | |||||
Private education loans | (491 | ) | (320 | ) | (861 | ) | (1,235 | ) | |||||
Total charge-offs | (3,955 | ) | (3,516 | ) | (9,731 | ) | (10,697 | ) | |||||
Recoveries - private education loans | 161 | 243 | 603 | 769 | |||||||||
Purchase of private education loans | — | 30 | — | 290 | |||||||||
Transfer from repurchase obligation related to private education loans repurchased | 50 | 60 | 250 | 210 | |||||||||
Balance at end of period | $ | 51,964 | 51,570 | 51,964 | $ | 51,570 | |||||||
Allocation of the allowance for loan losses: | |||||||||||||
Federally insured loans | $ | 39,398 | 37,028 | 39,398 | 37,028 | ||||||||
Private education loans | 12,566 | 14,542 | 12,566 | 14,542 | |||||||||
Total allowance for loan losses | $ | 51,964 | 51,570 | 51,964 | 51,570 |
As of September 30, 2017 | As of December 31, 2016 | As of September 30, 2016 | ||||||||||||||||||
Federally insured loans: | ||||||||||||||||||||
Loans in-school/grace/deferment | $ | 1,448,172 | $ | 1,606,468 | $ | 1,864,323 | ||||||||||||||
Loans in forbearance | 2,406,346 | 2,295,367 | 2,403,504 | |||||||||||||||||
Loans in repayment status: | ||||||||||||||||||||
Loans current | 16,534,795 | 88.7 | % | 18,125,768 | 86.6 | % | 18,445,728 | 86.8 | % | |||||||||||
Loans delinquent 31-60 days | 579,665 | 3.1 | 818,976 | 3.9 | 825,905 | 3.9 | ||||||||||||||
Loans delinquent 61-90 days | 334,085 | 1.8 | 487,647 | 2.3 | 491,395 | 2.3 | ||||||||||||||
Loans delinquent 91-120 days | 255,567 | 1.4 | 335,291 | 1.6 | 326,020 | 1.5 | ||||||||||||||
Loans delinquent 121-270 days | 700,319 | 3.8 | 854,432 | 4.1 | 835,250 | 3.9 | ||||||||||||||
Loans delinquent 271 days or greater | 228,335 | 1.2 | 306,035 | 1.5 | 350,808 | 1.6 | ||||||||||||||
Total loans in repayment | 18,632,766 | 100.0 | % | 20,928,149 | 100.0 | % | 21,275,106 | 100.0 | % | |||||||||||
Total federally insured loans | $ | 22,487,284 | $ | 24,829,984 | $ | 25,542,933 | ||||||||||||||
Private education loans: | ||||||||||||||||||||
Loans in-school/grace/deferment | $ | 27,188 | $ | 35,146 | $ | 51,042 | ||||||||||||||
Loans in forbearance | 2,904 | 3,448 | 1,770 | |||||||||||||||||
Loans in repayment status: | ||||||||||||||||||||
Loans current | 190,153 | 96.8 | % | 228,612 | 97.2 | % | 217,108 | 97.1 | % | |||||||||||
Loans delinquent 31-60 days | 1,200 | 0.6 | 1,677 | 0.7 | 1,357 | 0.6 | ||||||||||||||
Loans delinquent 61-90 days | 1,195 | 0.6 | 1,110 | 0.5 | 1,228 | 0.5 | ||||||||||||||
Loans delinquent 91 days or greater | 3,989 | 2.0 | 3,666 | 1.6 | 3,927 | 1.8 | ||||||||||||||
Total loans in repayment | 196,537 | 100.0 | % | 235,065 | 100.0 | % | 223,620 | 100.0 | % | |||||||||||
Total private education loans | $ | 226,629 | $ | 273,659 | $ | 276,432 |
As of September 30, 2017 | |||||||
Carrying amount | Interest rate range | Final maturity | |||||
Variable-rate bonds and notes issued in FFELP loan asset-backed securitizations: | |||||||
Bonds and notes based on indices | $ | 20,675,881 | 0.22% - 6.90% | 8/25/21 - 9/25/65 | |||
Bonds and notes based on auction | 781,276 | 1.97% - 2.61% | 3/22/32 - 11/26/46 | ||||
Total FFELP variable-rate bonds and notes | 21,457,157 | ||||||
FFELP warehouse facilities | 745,107 | 1.23% - 1.37% | 11/19/19 - 4/27/20 | ||||
Variable-rate bonds and notes issued in private education loan asset-backed securitization | 84,881 | 2.99% | 12/26/40 | ||||
Fixed-rate bonds and notes issued in private education loan asset-backed securitization | 90,896 | 3.60% / 5.35% | 12/26/40 / 12/28/43 | ||||
Unsecured line of credit | 210,000 | 2.74% | 12/12/21 | ||||
Unsecured debt - Junior Subordinated Hybrid Securities | 20,526 | 4.71% | 9/15/61 | ||||
Other borrowings | 18,355 | 3.38% | 3/31/23 / 12/15/45 | ||||
22,626,922 | |||||||
Discount on bonds and notes payable and debt issuance costs | (386,643 | ) | |||||
Total | $ | 22,240,279 |
As of December 31, 2016 | |||||||
Carrying amount | Interest rate range | Final maturity | |||||
Variable-rate bonds and notes issued in FFELP loan asset-backed securitizations: | |||||||
Bonds and notes based on indices | $ | 22,130,063 | 0.24% - 6.90% | 6/25/21 - 9/25/65 | |||
Bonds and notes based on auction | 998,415 | 1.61% - 2.28% | 3/22/32 - 11/26/46 | ||||
Total FFELP variable-rate bonds and notes | 23,128,478 | ||||||
FFELP warehouse facilities | 1,677,443 | 0.63% - 1.09% | 9/7/18 - 12/13/19 | ||||
Variable-rate bonds and notes issued in private education loan asset-backed securitization | 112,582 | 2.60% | 12/26/40 | ||||
Fixed-rate bonds and notes issued in private education loan asset-backed securitization | 113,378 | 3.60% / 5.35% | 12/26/40 / 12/28/43 | ||||
Unsecured line of credit | — | — | 12/12/21 | ||||
Unsecured debt - Junior Subordinated Hybrid Securities | 50,184 | 4.37% | 9/15/61 | ||||
Other borrowings | 18,355 | 3.38% | 3/31/23 / 12/15/45 | ||||
25,100,420 | |||||||
Discount on bonds and notes payable and debt issuance costs | (431,930 | ) | |||||
Total | $ | 24,668,490 |
NSLT 2017-1 | NSLT 2017-2 | Total | ||||||||
Date securities issued | 5/24/17 | 7/26/17 | ||||||||
Total original principal amount | $ | 535,000 | 399,390 | 934,390 | ||||||
Bond discount | — | (2,002 | ) | (2,002 | ) | |||||
Issue price | $ | 535,000 | 397,388 | 932,388 | ||||||
Cost of funds | 1-month LIBOR plus 0.78% | 1-month LIBOR plus 0.77% | ||||||||
Final maturity date | 6/25/65 | 9/25/65 |
NFSLW-I (a) | NHELP-II | NHELP-III (b) | Total | ||||||||||
Maximum financing amount | $ | 500,000 | 500,000 | 200,000 | 1,200,000 | ||||||||
Amount outstanding | 307,425 | 288,969 | 148,713 | 745,107 | |||||||||
Amount available | $ | 192,575 | 211,031 | 51,287 | 454,893 | ||||||||
Expiration of liquidity provisions | September 20, 2019 | December 15, 2017 | April 27, 2018 | ||||||||||
Final maturity date | November 19, 2019 | December 13, 2019 | April 27, 2020 | ||||||||||
Maximum advance rates | 92.0 - 98.0% | 85.0 - 95.0% | 92.2 - 95.0% | ||||||||||
Minimum advance rates | 84.0 - 90.0% | 85.0 - 95.0% | 92.2 - 95.0% | ||||||||||
Advanced as equity support | $ | 4,747 | 20,531 | 3,163 | 28,441 |
(a) | On May 25, 2017 and August 18, 2017, the Company decreased the maximum financing amount for this warehouse facility by $175.0 million and $200.0 million, respectively. As of September 30, 2017, the maximum financing amount for this warehouse facility was $500.0 million, as reflected in this table. On September 22, 2017, the Company amended the agreement for this warehouse facility, which changed the expiration date for the liquidity provisions to September 20, 2019 and changed the final maturity date to November 19, 2019. |
(b) | On April 3, 2017, the Company entered into a letter agreement for this warehouse facility to decrease the maximum financing amount from $750.0 million to $600.0 million. On April 28, 2017, the Company amended the agreement for this warehouse facility, which changed the expiration date for the liquidity provisions to April 27, 2018 and changed the final maturity date to April 27, 2020. On May 5, 2017, May 25, 2017, and June 2, 2017, the Company decreased the maximum financing amount for this warehouse facility by $200.0 million, $100.0 million, and $100.0 million, respectively. As of September 30, 2017, the maximum financing amount for this warehouse facility was $200.0 million, as reflected in this table. |
Par value | Purchase price | Gain | Par value | Purchase price | Gain | |||||||||||||
Three months ended | ||||||||||||||||||
September 30, 2017 | September 30, 2016 | |||||||||||||||||
Asset-backed securities | $ | 14,702 | 14,586 | 116 | 10,965 | 8,805 | 2,160 | |||||||||||
Nine months ended | ||||||||||||||||||
September 30, 2017 | September 30, 2016 | |||||||||||||||||
Unsecured debt - Hybrid Securities (a) | $ | 29,658 | 25,241 | 4,417 | — | — | — | |||||||||||
Asset-backed securities | 18,790 | 17,670 | 1,120 | 11,362 | 9,102 | 2,260 | ||||||||||||
$ | 48,448 | 42,911 | 5,537 | 11,362 | 9,102 | 2,260 |
(a) | During the three months ended March 31, 2017, the Company initiated a cash tender offer to purchase any and all of its outstanding Hybrid Securities, including a related consent solicitation to effect certain amendments to the indenture governing the notes to eliminate a provision requiring a minimum principal amount of the notes to remain outstanding after a partial redemption. After the completion of this tender offer, the Company has $20.5 million of Hybrid Securities that remain outstanding. In addition, the amendments described above have been made to the indenture. |
As of September 30, | As of December 31, | |||||||
2017 | 2016 | |||||||
Maturity | Notional amount | Notional amount | ||||||
2018 | $ | 4,000,000 | $ | — | ||||
2019 | 3,000,000 | — | ||||||
2024 | 250,000 | — | ||||||
2026 | 1,150,000 | 1,150,000 | ||||||
2027 | 375,000 | — | ||||||
2028 | 325,000 | 325,000 | ||||||
2029 | 100,000 | — | ||||||
2031 | 300,000 | 300,000 | ||||||
$ | 9,500,000 | $ | 1,775,000 |
As of September 30, 2017 | As of December 31, 2016 | |||||||||||||
Maturity | Notional amount | Weighted average fixed rate paid by the Company (a) | Notional amount | Weighted average fixed rate paid by the Company (a) | ||||||||||
2017 | $ | — | — | % | $ | 750,000 | 0.99 | % | ||||||
2018 | 1,350,000 | 1.07 | 1,350,000 | 1.07 | ||||||||||
2019 | 3,250,000 | 0.97 | 3,250,000 | 0.97 | ||||||||||
2020 | 1,500,000 | 1.01 | 1,500,000 | 1.01 | ||||||||||
2025 | 100,000 | 2.32 | 100,000 | 2.32 | ||||||||||
$ | 6,200,000 | 1.02 | % | $ | 6,950,000 | 1.02 | % |
(a) | For all interest rate derivatives, the Company receives discrete three-month LIBOR. |
Maturity | Notional amount | Weighted average fixed rate paid by the Company (a) | |||||
2036 | $ | 25,000 | 4.28 | % |
(a) | For all interest rate derivatives, the Company receives discrete three-month LIBOR. |
Three months ended September 30, | Nine months ended September 30, | |||||||||||
2017 | 2016 | 2017 | 2016 | |||||||||
Re-measurement of Euro Notes | $ | (13,683 | ) | (4,831 | ) | (45,635 | ) | (13,543 | ) | |||
Change in fair value of cross-currency interest rate swap | 16,257 | 5,501 | 44,831 | 26,194 | ||||||||
Total impact to consolidated statements of income - income (expense) (a) | $ | 2,574 | 670 | (804 | ) | 12,651 |
(a) | The financial statement impact of the above items is included in "Derivative market value and foreign currency transaction adjustments and derivative settlements, net" in the Company's consolidated statements of income. |
Fair value of asset derivatives | Fair value of liability derivatives | |||||||||||
As of | As of | As of | As of | |||||||||
September 30, 2017 | December 31, 2016 | September 30, 2017 | December 31, 2016 | |||||||||
1:3 basis swaps | $ | — | — | — | 2,624 | |||||||
Interest rate swaps - floor income hedges | — | 81,159 | — | 256 | ||||||||
Interest rate swap option - floor income hedge | 765 | 2,977 | — | — | ||||||||
Interest rate caps | 231 | 1,152 | — | — | ||||||||
Interest rate swaps - hybrid debt hedges | — | — | 7,332 | 7,341 | ||||||||
Cross-currency interest rate swap | — | — | 22,773 | 67,605 | ||||||||
Other | — | 2,243 | — | — | ||||||||
Total | $ | 996 | 87,531 | 30,105 | 77,826 |
Gross amounts not offset in the consolidated balance sheets | |||||||||||||
Derivative assets | Gross amounts of recognized assets presented in the consolidated balance sheets | Derivatives subject to enforceable master netting arrangement | Cash collateral pledged | Net asset | |||||||||
Balance as of September 30, 2017 | $ | 996 | — | — | 996 | ||||||||
Balance as of December 31, 2016 | 87,531 | (2,880 | ) | 475 | 85,126 |
Gross amounts not offset in the consolidated balance sheets | |||||||||||||
Derivative liabilities | Gross amounts of recognized liabilities presented in the consolidated balance sheets | Derivatives subject to enforceable master netting arrangement | Cash collateral pledged | Net liability | |||||||||
Balance as of September 30, 2017 | $ | (30,105 | ) | — | 8,470 | (21,635 | ) | ||||||
Balance as of December 31, 2016 | (77,826 | ) | 2,880 | 7,292 | (67,654 | ) |
Three months ended September 30, | Nine months ended September 30, | |||||||||||
2017 | 2016 | 2017 | 2016 | |||||||||
Settlements: | ||||||||||||
1:3 basis swaps | $ | (2,172 | ) | 523 | (1,836 | ) | 938 | |||||
Interest rate swaps - floor income hedges | 3,883 | (5,157 | ) | 5,877 | (15,241 | ) | ||||||
Interest rate swaps - hybrid debt hedges | (191 | ) | (233 | ) | (593 | ) | (696 | ) | ||||
Cross-currency interest rate swap | (2,093 | ) | (1,394 | ) | (5,762 | ) | (3,293 | ) | ||||
Total settlements - (expense) income | (573 | ) | (6,261 | ) | (2,314 | ) | (18,292 | ) | ||||
Change in fair value: | ||||||||||||
1:3 basis swaps | 5,916 | 140 | (5,499 | ) | 323 | |||||||
Interest rate swaps - floor income hedges | (185 | ) | 42,073 | (13,670 | ) | (17,913 | ) | |||||
Interest rate swap option - floor income hedge | (500 | ) | (269 | ) | (2,212 | ) | (2,541 | ) | ||||
Interest rate caps | (103 | ) | (68 | ) | (936 | ) | (1,283 | ) | ||||
Interest rate swaps - hybrid debt hedges | 44 | 13 | 10 | (4,000 | ) | |||||||
Cross-currency interest rate swap | 16,257 | 5,501 | 44,831 | 26,194 | ||||||||
Other | — | (297 | ) | (143 | ) | (2,336 | ) | |||||
Total change in fair value - income (expense) | 21,429 | 47,093 | 22,381 | (1,556 | ) | |||||||
Re-measurement of Euro Notes (foreign currency transaction adjustment) - (expense) income | (13,683 | ) | (4,831 | ) | (45,635 | ) | (13,543 | ) | ||||
Derivative market value and foreign currency transaction adjustments and derivative settlements, net - income (expense) | $ | 7,173 | 36,001 | (25,568 | ) | (33,391 | ) |
As of September 30, 2017 | As of December 31, 2016 | ||||||||||||||||||||||||
Amortized cost | Gross unrealized gains | Gross unrealized losses (a) | Fair value | Amortized cost | Gross unrealized gains | Gross unrealized losses | Fair value | ||||||||||||||||||
Investments (at fair value): | |||||||||||||||||||||||||
Available-for-sale investments: | |||||||||||||||||||||||||
Student loan asset-backed and other debt securities (b) | $ | 68,010 | 4,768 | (240 | ) | 72,538 | 98,260 | 6,280 | (641 | ) | 103,899 | ||||||||||||||
Equity securities | 756 | 2,140 | (21 | ) | 2,875 | 720 | 1,930 | (61 | ) | 2,589 | |||||||||||||||
Total available-for-sale investments | $ | 68,766 | 6,908 | (261 | ) | 75,413 | 98,980 | 8,210 | (702 | ) | 106,488 | ||||||||||||||
Trading investments - equity securities | — | 105 | |||||||||||||||||||||||
Total available-for-sale and trading investments | 75,413 | 106,593 | |||||||||||||||||||||||
Other Investments and Other Receivables (not measured at fair value): | |||||||||||||||||||||||||
Venture capital and funds | 84,903 | 69,789 | |||||||||||||||||||||||
Notes and loans receivable | 56,732 | 17,031 | |||||||||||||||||||||||
Real estate | 49,567 | 48,379 | |||||||||||||||||||||||
Tax liens and affordable housing | 9,921 | 12,352 | |||||||||||||||||||||||
Total investments and other receivables | $ | 276,536 | 254,144 |
(a) | As of September 30, 2017, the aggregate fair value of available-for-sale investments with unrealized losses was $2.7 million, of which $0.4 million had been in a continuous unrealized loss position for greater than 12 months. Because the Company currently has the intent and ability to retain these investments for an anticipated recovery in fair value, as of September 30, 2017, the Company considered the decline in market value of its available-for-sale investments to be temporary in nature and did not consider any of its investments other-than-temporarily impaired. |
(b) | As of September 30, 2017, the stated maturities of substantially all of the Company's student loan asset-backed and other debt securities classified as available-for-sale were greater than 10 years. |
Weighted average remaining useful life as of September 30, 2017 (months) | As of September 30, 2017 | As of December 31, 2016 | |||||||
Amortizable intangible assets, net: | |||||||||
Customer relationships (net of accumulated amortization of $11,704 and $8,548, respectively) | 162 | $ | 25,179 | 28,335 | |||||
Trade names (net of accumulated amortization of $2,287 and $1,653, respectively) | 180 | 9,285 | 9,919 | ||||||
Computer software (net of accumulated amortization of $8,929 and $5,675, respectively) | 17 | 6,042 | 9,296 | ||||||
Covenants not to compete (net of accumulated amortization of $118 and $91, respectively) | 80 | 236 | 263 | ||||||
Total - amortizable intangible assets, net | 144 | $ | 40,742 | 47,813 |
2017 (October 1 - December 31) | $ | 2,315 | |
2018 | 8,605 | ||
2019 | 5,147 | ||
2020 | 4,231 | ||
2021 | 3,480 | ||
2022 and thereafter | 16,964 | ||
$ | 40,742 |
Loan Systems and Servicing | Tuition Payment Processing and Campus Commerce | Communications | Asset Generation and Management | Corporate and Other Activities | Total | |||||||||||||
Goodwill balance | $ | 8,596 | 67,168 | 21,112 | 41,883 | 8,553 | 147,312 |
As of September 30, 2017 | As of December 31, 2016 | |||||||
Useful life | ||||||||
Non-communications: | ||||||||
Computer equipment and software | 1-5 years | $ | 108,430 | 97,317 | ||||
Building and building improvements | 5-39 years | 25,283 | 13,363 | |||||
Office furniture and equipment | 3-7 years | 14,357 | 12,344 | |||||
Leasehold improvements | 5-20 years | 6,496 | 3,579 | |||||
Transportation equipment | 4-10 years | 3,813 | 3,809 | |||||
Land | — | 2,605 | 1,682 | |||||
Construction in progress | — | 14,025 | 16,346 | |||||
175,009 | 148,440 | |||||||
Accumulated depreciation - non-communications | 104,430 | 91,285 | ||||||
Non-communications, net property and equipment | 70,579 | 57,155 | ||||||
Communications: | ||||||||
Network plant and fiber | 5-15 years | 83,870 | 40,844 | |||||
Customer located property | 5-10 years | 10,987 | 5,138 | |||||
Central office | 5-15 years | 8,476 | 6,448 | |||||
Transportation equipment | 4-10 years | 5,011 | 2,966 | |||||
Computer equipment and software | 1-5 years | 3,318 | 2,026 | |||||
Other | 1-39 years | 2,285 | 1,268 | |||||
Land | — | 70 | 70 | |||||
Construction in progress | — | 35,709 | 12,537 | |||||
149,726 | 71,297 | |||||||
Accumulated depreciation - communications | 11,864 | 4,666 | ||||||
Communications, net property and equipment | 137,862 | 66,631 | ||||||
Total property and equipment, net | $ | 208,441 | 123,786 |
Three months ended September 30, | ||||||||||||||||||
2017 | 2016 | |||||||||||||||||
Common shareholders | Unvested restricted stock shareholders | Total | Common shareholders | Unvested restricted stock shareholders | Total | |||||||||||||
Numerator: | ||||||||||||||||||
Net income attributable to Nelnet, Inc. | $ | 45,850 | 453 | 46,303 | 83,419 | 875 | 84,294 | |||||||||||
Denominator: | ||||||||||||||||||
Weighted-average common shares outstanding - basic and diluted | 41,146,424 | 406,892 | 41,553,316 | 42,199,580 | 442,633 | 42,642,213 | ||||||||||||
Earnings per share - basic and diluted | $ | 1.11 | 1.11 | 1.11 | 1.98 | 1.98 | 1.98 |
Nine months ended September 30, | ||||||||||||||||||
2017 | 2016 | |||||||||||||||||
Common shareholders | Unvested restricted stock shareholders | Total | Common shareholders | Unvested restricted stock shareholders | Total | |||||||||||||
Numerator: | ||||||||||||||||||
Net income attributable to Nelnet, Inc. | $ | 123,816 | 1,249 | 125,065 | 156,749 | 1,656 | 158,405 | |||||||||||
Denominator: | ||||||||||||||||||
Weighted-average common shares outstanding - basic and diluted | 41,634,578 | 419,954 | 42,054,532 | 42,340,867 | 447,266 | 42,788,133 | ||||||||||||
Earnings per share - basic and diluted | $ | 2.97 | 2.97 | 2.97 | 3.70 | 3.70 | 3.70 |
Three months ended September 30, 2017 | |||||||||||||||||||||
Loan Systems and Servicing | Tuition Payment Processing and Campus Commerce | Communications | Asset Generation and Management | Corporate and Other Activities | Eliminations | Total | |||||||||||||||
Total interest income | $ | 147 | 5 | 1 | 194,968 | 3,903 | (2,139 | ) | 196,884 | ||||||||||||
Interest expense | — | — | 1,551 | 121,074 | 1,165 | (2,139 | ) | 121,650 | |||||||||||||
Net interest income | 147 | 5 | (1,550 | ) | 73,894 | 2,738 | — | 75,234 | |||||||||||||
Less provision for loan losses | — | — | — | 6,000 | — | — | 6,000 | ||||||||||||||
Net interest income (loss) after provision for loan losses | 147 | 5 | (1,550 | ) | 67,894 | 2,738 | — | 69,234 | |||||||||||||
Other income: | |||||||||||||||||||||
Loan systems and servicing revenue | 55,950 | — | — | — | — | — | 55,950 | ||||||||||||||
Intersegment servicing revenue | 10,563 | — | — | — | — | (10,563 | ) | — | |||||||||||||
Tuition payment processing, school information, and campus commerce revenue | — | 35,450 | — | — | — | — | 35,450 | ||||||||||||||
Communications revenue | — | — | 6,751 | — | — | — | 6,751 | ||||||||||||||
Other income | — | — | — | 2,753 | 17,003 | — | 19,756 | ||||||||||||||
Gain from debt repurchases | — | — | — | 116 | — | — | 116 | ||||||||||||||
Derivative settlements, net | — | — | — | (382 | ) | (191 | ) | — | (573 | ) | |||||||||||
Derivative market value and foreign currency transaction adjustments, net | — | — | — | 7,702 | 44 | — | 7,746 | ||||||||||||||
Total other income | 66,513 | 35,450 | 6,751 | 10,189 | 16,856 | (10,563 | ) | 125,196 | |||||||||||||
Operating expenses: | |||||||||||||||||||||
Salaries and benefits | 38,435 | 17,432 | 4,099 | 392 | 13,834 | — | 74,193 | ||||||||||||||
Depreciation and amortization | 549 | 2,316 | 3,145 | — | 4,040 | — | 10,051 | ||||||||||||||
Loan servicing fees | — | — | — | 7,939 | — | — | 7,939 | ||||||||||||||
Cost to provide communications services | — | — | 2,632 | — | — | — | 2,632 | ||||||||||||||
Other expenses | 10,317 | 4,224 | 2,278 | 1,451 | 12,248 | — | 30,518 | ||||||||||||||
Intersegment expenses, net | 7,774 | 2,219 | 470 | 10,659 | (10,559 | ) | (10,563 | ) | — | ||||||||||||
Total operating expenses | 57,075 | 26,191 | 12,624 | 20,441 | 19,563 | (10,563 | ) | 125,333 | |||||||||||||
Income (loss) before income taxes | 9,585 | 9,264 | (7,423 | ) | 57,642 | 31 | — | 69,097 | |||||||||||||
Income tax (expense) benefit | (4,937 | ) | (3,520 | ) | 2,821 | (21,904 | ) | 1,978 | — | (25,562 | ) | ||||||||||
Net income (loss) | 4,648 | 5,744 | (4,602 | ) | 35,738 | 2,009 | — | 43,535 | |||||||||||||
Net loss (income) attributable to noncontrolling interests | 3,408 | — | — | — | (640 | ) | — | 2,768 | |||||||||||||
Net income (loss) attributable to Nelnet, Inc. | $ | 8,056 | 5,744 | (4,602 | ) | 35,738 | 1,369 | — | 46,303 | ||||||||||||
Total assets as of September 30, 2017 | $ | 98,555 | 208,290 | 179,206 | 23,724,413 | 863,700 | (305,454 | ) | 24,768,710 |
Three months ended September 30, 2016 | |||||||||||||||||||||
Loan Systems and Servicing | Tuition Payment Processing and Campus Commerce | Communications | Asset Generation and Management | Corporate and Other Activities | Eliminations | Total | |||||||||||||||
Total interest income | $ | 37 | 2 | — | 194,701 | 2,370 | (930 | ) | 196,181 | ||||||||||||
Interest expense | — | — | 318 | 95,383 | 1,615 | (930 | ) | 96,386 | |||||||||||||
Net interest income | 37 | 2 | (318 | ) | 99,318 | 755 | — | 99,795 | |||||||||||||
Less provision for loan losses | — | — | — | 6,000 | — | — | 6,000 | ||||||||||||||
Net interest income (loss) after provision for loan losses | 37 | 2 | (318 | ) | 93,318 | 755 | — | 93,795 | |||||||||||||
Other income: | |||||||||||||||||||||
Loan systems and servicing revenue | 54,350 | — | — | — | — | — | 54,350 | ||||||||||||||
Intersegment servicing revenue | 11,021 | — | — | — | — | (11,021 | ) | — | |||||||||||||
Tuition payment processing, school information, and campus commerce revenue | — | 33,071 | — | — | — | — | 33,071 | ||||||||||||||
Communications revenue | — | — | 4,343 | — | — | — | 4,343 | ||||||||||||||
Enrollment services revenue | — | — | — | — | — | — | — | ||||||||||||||
Other income | — | — | — | 4,265 | 10,886 | — | 15,150 | ||||||||||||||
Gain from debt repurchases | — | — | — | 2,160 | — | — | 2,160 | ||||||||||||||
Derivative settlements, net | — | — | — | (6,028 | ) | (233 | ) | — | (6,261 | ) | |||||||||||
Derivative market value and foreign currency transaction adjustments, net | — | — | — | 42,546 | (284 | ) | — | 42,262 | |||||||||||||
Total other income | 65,371 | 33,071 | 4,343 | 42,943 | 10,369 | (11,021 | ) | 145,075 | |||||||||||||
Operating expenses: | . | ||||||||||||||||||||
Salaries and benefits | 32,505 | 15,979 | 2,325 | 486 | 12,448 | — | 63,743 | ||||||||||||||
Depreciation and amortization | 557 | 2,929 | 1,630 | — | 3,878 | — | 8,994 | ||||||||||||||
Loan servicing fees | — | — | — | 5,880 | — | — | 5,880 | ||||||||||||||
Cost to provide communications services | — | — | 1,784 | — | — | — | 1,784 | ||||||||||||||
Cost to provide enrollment services | — | — | — | — | — | — | — | ||||||||||||||
Other expenses | 8,784 | 4,149 | 1,545 | 1,769 | 10,143 | — | 26,391 | ||||||||||||||
Intersegment expenses, net | 5,825 | 1,616 | 279 | 11,146 | (7,845 | ) | (11,021 | ) | — | ||||||||||||
Total operating expenses | 47,671 | 24,673 | 7,563 | 19,281 | 18,624 | (11,021 | ) | 106,792 | |||||||||||||
Income (loss) before income taxes | 17,737 | 8,400 | (3,538 | ) | 116,980 | (7,500 | ) | — | 132,078 | ||||||||||||
Income tax (expense) benefit | (6,740 | ) | (3,192 | ) | 1,344 | (44,571 | ) | 5,443 | — | (47,715 | ) | ||||||||||
Net income (loss) | 10,997 | 5,208 | (2,194 | ) | 72,409 | (2,057 | ) | — | 84,363 | ||||||||||||
Net loss (income) attributable to noncontrolling interests | — | — | — | — | (69 | ) | — | (69 | ) | ||||||||||||
Net income (loss) attributable to Nelnet, Inc. | $ | 10,997 | 5,208 | (2,194 | ) | 72,409 | (2,126 | ) | — | 84,294 | |||||||||||
Total assets as of September 30, 2016 | $ | 79,418 | 190,682 | 90,361 | 26,888,950 | 687,347 | (267,147 | ) | 27,669,611 |
Nine months ended September 30, 2017 | |||||||||||||||||||||
Loan Systems and Servicing | Tuition Payment Processing and Campus Commerce | Communications | Asset Generation and Management | Corporate and Other Activities | Eliminations | Total | |||||||||||||||
Total interest income | $ | 361 | 10 | 2 | 568,661 | 10,026 | (5,274 | ) | 573,786 | ||||||||||||
Interest expense | — | — | 3,367 | 340,898 | 2,794 | (5,274 | ) | 341,787 | |||||||||||||
Net interest income | 361 | 10 | (3,365 | ) | 227,763 | 7,232 | — | 231,999 | |||||||||||||
Less provision for loan losses | — | — | — | 9,000 | — | — | 9,000 | ||||||||||||||
Net interest income (loss) after provision for loan losses | 361 | 10 | (3,365 | ) | 218,763 | 7,232 | — | 222,999 | |||||||||||||
Other income: | |||||||||||||||||||||
Loan systems and servicing revenue | 167,079 | — | — | — | — | — | 167,079 | ||||||||||||||
Intersegment servicing revenue | 30,839 | — | — | — | — | (30,839 | ) | — | |||||||||||||
Tuition payment processing, school information, and campus commerce revenue | — | 113,293 | — | — | — | — | 113,293 | ||||||||||||||
Communications revenue | — | — | 17,577 | — | — | — | 17,577 | ||||||||||||||
Other income | — | — | — | 9,152 | 35,722 | — | 44,874 | ||||||||||||||
Gain from debt repurchases | — | — | — | 1,097 | 4,440 | — | 5,537 | ||||||||||||||
Derivative settlements, net | — | — | — | (1,721 | ) | (593 | ) | — | (2,314 | ) | |||||||||||
Derivative market value and foreign currency transaction adjustments, net | — | — | — | (23,121 | ) | (133 | ) | — | (23,254 | ) | |||||||||||
Total other income | 197,918 | 113,293 | 17,577 | (14,593 | ) | 39,436 | (30,839 | ) | 322,792 | ||||||||||||
Operating expenses: | |||||||||||||||||||||
Salaries and benefits | 116,932 | 50,986 | 10,489 | 1,156 | 41,121 | — | 220,684 | ||||||||||||||
Depreciation and amortization | 1,644 | 7,053 | 7,880 | — | 11,109 | — | 27,687 | ||||||||||||||
Loan servicing fees | — | — | — | 19,584 | — | — | 19,584 | ||||||||||||||
Cost to provide communications services | — | — | 6,789 | — | — | — | 6,789 | ||||||||||||||
Other expenses | 28,333 | 14,072 | 5,422 | 4,269 | 32,497 | — | 84,593 | ||||||||||||||
Intersegment expenses, net | 23,496 | 6,430 | 1,472 | 31,114 | (31,673 | ) | (30,839 | ) | — | ||||||||||||
Total operating expenses | 170,405 | 78,541 | 32,052 | 56,123 | 53,054 | (30,839 | ) | 359,337 | |||||||||||||
Income (loss) before income taxes | 27,874 | 34,762 | (17,840 | ) | 148,047 | (6,386 | ) | — | 186,454 | ||||||||||||
Income tax (expense) benefit | (14,410 | ) | (13,210 | ) | 6,779 | (56,258 | ) | 6,749 | — | (70,349 | ) | ||||||||||
Net income (loss) | 13,464 | 21,552 | (11,061 | ) | 91,789 | 363 | — | 116,105 | |||||||||||||
Net loss (income) attributable to noncontrolling interests | 10,050 | — | — | — | (1,090 | ) | — | 8,960 | |||||||||||||
Net income (loss) attributable to Nelnet, Inc. | $ | 23,514 | 21,552 | (11,061 | ) | 91,789 | (727 | ) | — | 125,065 | |||||||||||
Total assets as of September 30, 2017 | $ | 98,555 | 208,290 | 179,206 | 23,724,413 | 863,700 | (305,454 | ) | 24,768,710 |
Nine months ended September 30, 2016 | |||||||||||||||||||||
Loan Systems and Servicing | Tuition Payment Processing and Campus Commerce | Communications | Asset Generation and Management | Corporate and Other Activities | Eliminations | Total | |||||||||||||||
Total interest income | $ | 80 | 7 | 1 | 570,390 | 6,527 | (2,556 | ) | 574,449 | ||||||||||||
Interest expense | — | — | 671 | 278,029 | 4,702 | (2,556 | ) | 280,847 | |||||||||||||
Net interest income | 80 | 7 | (670 | ) | 292,361 | 1,825 | — | 293,602 | |||||||||||||
Less provision for loan losses | — | — | — | 10,500 | — | — | 10,500 | ||||||||||||||
Net interest income (loss) after provision for loan losses | 80 | 7 | (670 | ) | 281,861 | 1,825 | — | 283,102 | |||||||||||||
Other income: | |||||||||||||||||||||
Loan systems and servicing revenue | 161,082 | — | — | — | — | — | 161,082 | ||||||||||||||
Intersegment servicing revenue | 34,436 | — | — | — | — | (34,436 | ) | — | |||||||||||||
Tuition payment processing, school information, and campus commerce revenue | — | 102,211 | — | — | — | — | 102,211 | ||||||||||||||
Communications revenue | — | — | 13,167 | — | — | — | 13,167 | ||||||||||||||
Enrollment services revenue | — | — | — | — | 4,326 | — | 4,326 | ||||||||||||||
Other income | — | — | — | 12,362 | 26,349 | — | 38,711 | ||||||||||||||
Gain from debt repurchases | — | — | — | 2,260 | — | — | 2,260 | ||||||||||||||
Derivative settlements, net | — | — | — | (17,596 | ) | (696 | ) | — | (18,292 | ) | |||||||||||
Derivative market value and foreign currency transaction adjustments, net | — | — | — | (8,763 | ) | (6,336 | ) | — | (15,099 | ) | |||||||||||
Total other income | 195,518 | 102,211 | 13,167 | (11,737 | ) | 23,643 | (34,436 | ) | 288,366 | ||||||||||||
Operating expenses: | |||||||||||||||||||||
Salaries and benefits | 96,851 | 45,859 | 4,792 | 1,504 | 38,902 | — | 187,907 | ||||||||||||||
Depreciation and amortization | 1,440 | 7,711 | 4,137 | — | 11,528 | — | 24,817 | ||||||||||||||
Loan servicing fees | — | — | — | 20,024 | — | — | 20,024 | ||||||||||||||
Cost to provide communications services | — | — | 5,169 | — | — | — | 5,169 | ||||||||||||||
Cost to provide enrollment services | — | — | — | — | 3,623 | — | 3,623 | ||||||||||||||
Other expenses | 31,635 | 13,122 | 3,110 | 4,766 | 31,540 | — | 84,174 | ||||||||||||||
Intersegment expenses, net | 18,168 | 4,690 | 610 | 34,791 | (23,823 | ) | (34,436 | ) | — | ||||||||||||
Total operating expenses | 148,094 | 71,382 | 17,818 | 61,085 | 61,770 | (34,436 | ) | 325,714 | |||||||||||||
Income (loss) before income taxes | 47,504 | 30,836 | (5,321 | ) | 209,039 | (36,302 | ) | — | 245,754 | ||||||||||||
Income tax (expense) benefit | (18,052 | ) | (11,718 | ) | 2,022 | (79,434 | ) | 19,998 | — | (87,184 | ) | ||||||||||
Net income (loss) | 29,452 | 19,118 | (3,299 | ) | 129,605 | (16,304 | ) | — | 158,570 | ||||||||||||
Net loss (income) attributable to noncontrolling interests | — | — | — | — | (165 | ) | — | (165 | ) | ||||||||||||
Net income (loss) attributable to Nelnet, Inc. | $ | 29,452 | 19,118 | (3,299 | ) | 129,605 | (16,469 | ) | — | 158,405 | |||||||||||
Total assets as of September 30, 2016 | $ | 79,418 | 190,682 | 90,361 | 26,888,950 | 687,347 | (267,147 | ) | 27,669,611 |
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 |
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 | |||||||||||||||
Fair value | Carrying value | Level 1 | Level 2 | Level 3 | |||||||||||
Financial assets: | |||||||||||||||
Student loans receivable | $ | 25,653,581 | 24,903,724 | — | — | 25,653,581 | |||||||||
Cash and cash equivalents | 69,654 | 69,654 | 69,654 | — | — | ||||||||||
Investments (available-for-sale and trading) | 106,593 | 106,593 | 2,813 | 103,780 | — | ||||||||||
Notes receivable | 17,031 | 17,031 | — | 17,031 | — | ||||||||||
Restricted cash | 980,961 | 980,961 | 980,961 | — | — | ||||||||||
Restricted cash – due to customers | 119,702 | 119,702 | 119,702 | — | — | ||||||||||
Accrued interest receivable | 391,264 | 391,264 | — | 391,264 | — | ||||||||||
Derivative instruments | 87,531 | 87,531 | — | 87,531 | — | ||||||||||
Financial liabilities: | |||||||||||||||
Bonds and notes payable | 24,220,996 | 24,668,490 | — | 24,220,996 | — | ||||||||||
Accrued interest payable | 45,677 | 45,677 | — | 45,677 | — | ||||||||||
Due to customers | 119,702 | 119,702 | 119,702 | — | — | ||||||||||
Derivative instruments | 77,826 | 77,826 | — | 77,826 | — |
• | 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, uncertainties regarding the expected benefits from purchased securitized and unsecuritized FFELP, private education, and consumer loans 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 and in the securitization and other financing markets for student loans, including adverse changes resulting from slower than expected payments on student loans in FFELP securitization trusts, 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 or legislative proposals to consolidate existing FFELP loans to the Federal Direct Loan Program or otherwise allow FFELP loans to be refinanced with Federal Direct Loan Program loans; |
• | risks that the reported agreement to acquire Great Lakes Educational Loan Services, Inc. ("Great Lakes") may not be completed within the currently scheduled time frame or at all, the uncertain nature of the expected benefits from the acquisition and the ability to successfully integrate loan servicing operations and successfully maintain and increase allocated volumes of student loans serviced under existing and any future servicing contracts with the U.S. Department of Education (the "Department"), risks to the Company related to the Department's initiative to procure new contracts for federal student loan servicing, including the risk that the Company's joint venture with Great Lakes, or the Company on a post-Great Lakes acquisition basis, may not be awarded a contract, and risks related to the Company's ability to comply with agreements with third-party customers for the servicing of FFELP, Federal Direct Loan Program, and private education and consumer 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, including cybersecurity risks related to the potential disclosure of confidential student loan borrower and other customer information; |
• | uncertainties inherent in forecasting future cash flows from student loan assets and related asset-backed securitizations; |
• | the uncertain nature of the expected benefits from the acquisition of Allo Communications LLC on December 31, 2015 and the ability to integrate its communications operations and successfully expand its fiber network in existing service areas and additional communities and manage related construction risks; |
• | risks and uncertainties related to initiatives to pursue additional strategic investments and acquisitions, including investments and acquisitions that are intended to diversify the Company both within and outside of its historical core education-related businesses; 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, 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. |
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 |
(a) | The tax effects are calculated by multiplying the realized and unrealized derivative market value adjustments and unrealized foreign currency transaction adjustments by the applicable statutory income tax rate. |
(b) | "Derivative market value and foreign currency transaction adjustments" include (i) both the realized portion of gains and losses (corresponding to variation margin received or paid on derivative instruments that are settled daily at a central clearinghouse under new rules effective January 3, 2017) and the unrealized portion of 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. "Derivative market value and foreign currency transaction adjustments" does not include "derivative settlements" that 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. |
• | Loan Systems and Servicing ("LSS") - referred to as Nelnet Diversified Solutions ("NDS") |
• | Tuition Payment Processing and Campus Commerce ("TPP&CC") - referred to as Nelnet Business Solutions ("NBS") |
• | Communications - referred to as Allo Communications ("Allo") |
(b) | Total 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. Net income excludes changes in fair values of derivatives and foreign currency transaction adjustments, net of tax. For information regarding the exclusion of the impact from changes in fair values of derivatives and foreign currency transaction adjustments, see "GAAP Net Income and Non-GAAP Net Income, Excluding Adjustments" above. |
• | As of September 30, 2017, the Company was servicing $207.8 billion in FFELP, government owned, and private education and consumer loans, as compared with $193.2 billion of loans as of September 30, 2016. |
• | Revenue increased in the three and nine months ended September 30, 2017 compared to the same periods in 2016 due to growth in private education and consumer loan servicing volume from existing and new clients. In addition, revenue increased for the nine months ended September 30, 2017 compared to the same period in 2016 due to an increase in revenue on 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 servicing and collection revenue on June 30, 2016. |
• | Revenue from the government servicing contract decreased to $38.6 million for the three months ended September 30, 2017 compared to $40.2 million for the same period in 2016, and increased to $117.4 million for the nine months ended September 30, 2017, compared to $112.5 million for the same period in 2016. The decrease for the three months ended September 30, 2017 compared to the same period in 2016 was due to a decrease in application volume for the Company's administration of the Total and Permanent Disability Discharge (TPD) program during the third quarter of 2017. The increase for the nine months ended September 30, 2017 compared to the same period in 2016 was due to an increase in TPD and Direct Loan Consolidation program application volume, the transfer of borrowers to the Company 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. As of September 30, 2017, the Company was servicing $171.6 billion of student loans for 5.9 million borrowers under this contract. |
• | Revenue from private education and consumer loan servicing increased to $7.6 million for the three months ended September 30, 2017 compared to $4.1 million for the same period in 2016, and increased to $20.5 million for the nine months ended September 30, 2017, compared to $10.7 million for the same period in 2016. As of September 30, 2017, the Company was servicing $10.8 billion of private education and consumer loans for approximately 478,000 borrowers, as compared to $6.4 billion of private education and consumer loans for approximately 293,000 borrowers as of September 30, 2016. |
• | The Company's remaining guaranty servicing and collection client exited the FFELP guaranty business at the end of their contract term on June 30, 2016. After this customer's exit from the FFELP guaranty business effective June 30, 2016, the Company has no remaining guaranty servicing and collection revenue. Guaranty servicing and collection revenue earned from this customer in the nine months ended September 30, 2016 was $9.6 million. |
• | The Company's government servicing contract is currently set to expire on June 16, 2019. In April 2016, the Department announced a new contract procurement process for the Department to acquire a single servicing platform to manage all student loans owned by the Department. |
• | Before tax operating margin decreased in 2017 compared to 2016 due to operating expenses incurred related to GreatNet and an increase in personnel to support the increase in volume of loans serviced for the government entering repayment status. |
• | On October 18, 2017, the Company entered into an agreement to purchase 100 percent of the outstanding stock of Great Lakes for a purchase price of $150.0 million in cash. The transaction is scheduled to close on January 1, 2018, subject to customary closing conditions. After the transaction settles, Great Lakes and the Company will maintain their distinct brands, servicing operations, and operational teams, and each will continue to compete for new student loan volume under its respective existing contract with the Department. Over time, shared services teams will integrate and technology systems will be leveraged to support both the Great Lakes and the Company's servicing operations. The operating results of Great Lakes will be included in the Loan Systems and Servicing operating segment. |
• | Revenue increased in the three and nine months ended September 30, 2017 compared to the same periods in 2016 due to increases in the number of managed tuition payment plans, campus commerce customer transactions and payments volume, and new school customers. |
• | Before tax operating margin for the three months ended September 30, 2017 and 2016 was 26.1 percent and 25.4 percent, respectively, and for the nine months ended September 30, 2017 and 2016 was 30.7 percent and 30.2 percent, respectively. This segment is subject to seasonal fluctuations. Based on the timing of when revenue is recognized and when expenses are incurred, revenue and operating margin are higher in the first quarter as compared to the remainder of the year. |
• | For the three months ended September 30, 2017 and 2016, Allo recorded net losses of $4.6 million and $2.2 million, respectively, and for the nine months ended September 30, 2017 and 2016 recorded net losses of $11.1 million and $3.3 million, respectively. 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. |
• | Revenue from Allo for the three months ended September 30, 2017 and 2016 was $6.8 million and $4.3 million, respectively, and for the nine months ended September 30, 2017 and 2016 revenue was $17.6 million and $13.2 million, respectively. The increase in revenue was primarily due to additional residential households served, which increased to 16,394 as of September 30, 2017 from 8,745 as of September 30, 2016. |
• | For the three and nine months ended September 30, 2017, Allo's capital expenditures were $29.4 million and $78.4 million, respectively. The Company anticipates total network capital expenditures of approximately $30.0 million in the fourth quarter of 2017 and approximately $100.0 million in 2018; however, such amounts could change based on customer demand for Allo's services. The number of residential households passed, which represents the estimated number of single residence homes, apartments, and condominiums that Allo already serves and those in which Allo has the capacity to connect to its network distribution system without further material extensions to the transmission lines (but have not been connected) increased to 54,815 as of September 30, 2017 as compared to 30,962 as of December 31, 2016. The total households in current markets that Allo plans to expand its network to make services available is 137,500. |
• | During the three months ended September 30, 2017 compared to the same period in 2016, the average balance of student loans decreased $3.2 billion, to $23.2 billion, due primarily to the amortization of the student loan portfolio, partially offset by limited portfolio acquisitions from third parties. The Company acquired $37.5 million and $142.4 million of student loans during the three and nine months ended September 30, 2017, respectively. |
• | Core student loan spread was 1.17% for the three months ended September 30, 2017, compared to 1.26% for the same period in 2016. The decrease in core student loan spread was primarily due to a decrease in fixed rate floor income and an increase in derivative settlements paid related to the Company's 1:3 basis swaps. |
• | Due to historically low interest rates, the Company continues to earn significant fixed rate floor income. During the three months ended September 30, 2017 and 2016, and nine months ended September 30, 2017 and 2016, the Company earned $24.6 million, $41.5 million, $84.4 million, and $131.7 million, respectively, of fixed rate floor income. |
• | Provision for loan losses for federally insured loans was $7.0 million for the three months ended September 30, 2017. During the three months ended September 30, 2017, the Company determined an additional allowance was necessary related to a $1.6 billion (principal balance as of September 30, 2017) portfolio of federally insured loans that were purchased in 2014 and 2015, and recognized $5.0 million (pre-tax) in provision expense related to these loans. |
• | During the third quarter of 2017, the Company incurred $2.8 million (pre-tax) in expenses related 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 life of this portfolio. |
• | Whitetail Rock Capital Management, LLC, the Company's SEC-registered investment advisor subsidiary, recognized investment advisory revenue of $5.9 million, $1.5 million, $11.7 million, and $3.4 million in the three months ended September 30, 2017 and 2016 and nine months ended September 30, 2017 and 2016, respectively. These amounts include performance fees earned from the sale of managed securities or managed securities being called prior to the full contractual maturity. |
• | As of September 30, 2017, the Company had cash and cash equivalents of $254.4 million. In addition, the Company had a portfolio of available-for-sale investments, consisting primarily of student loan asset-backed securities, with a fair value of $75.4 million as of September 30, 2017. |
• | For the nine months ended September 30, 2017, the Company generated $230.3 million in net cash from operating activities. |
• | Forecasted undiscounted future cash flows from the Company's student loan portfolio financed in asset-backed securitization transactions are estimated to be approximately $1.93 billion as of September 30, 2017. |
• | As of September 30, 2017, there was $210.0 million outstanding on the Company's $350.0 million unsecured line of credit and $140.0 million was available for future use. The unsecured line of credit has a maturity date of December 12, 2021. |
• | During the nine months ended September 30, 2017, the Company repurchased a total of 1,363,571 shares of Class A common stock for $63.3 million ($46.44 per share), including a total of 947,794 shares of Class A common stock repurchased for $45.1 million ($47.62 per share) during the three months ended September 30, 2017. 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. |
• | During the first quarter of 2017, the Company initiated a cash tender offer to purchase any and all of its outstanding unsecured Hybrid Securities. The aggregate principal amount of notes tendered to the Company was $29.7 million. The Company paid $25.3 million to redeem these notes, and recognized a $4.4 million (pre-tax) gain. In addition, during the three and nine months ended September 30, 2017, the Company repurchased $14.7 million and $18.8 million of its own asset-backed debt securities and recognized gains of $0.1 million and $1.1 million, respectively. |
• | During the nine months ended September 30, 2017, the Company paid cash dividends of $17.6 million ($0.42 per share), including $5.8 million ($0.14 per share) during the three months ended September 30, 2017. In addition, the Company's Board of Directors has declared a fourth quarter 2017 cash dividend on the Company's outstanding shares of Class A and Class B common stock of $0.16 per share. The fourth quarter cash dividend will be paid on December 15, 2017 to shareholders of record at the close of business on December 1, 2017. |
• | The Company intends to use its liquidity position to capitalize on market opportunities, including FFELP and private education and consumer loan acquisitions; 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. |
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 |
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 |
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 |
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 |
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. |
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 |
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 | % |
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 |
(a) | Earnings (loss) before interest, income taxes, depreciation, and amortization ("EBITDA") is a supplemental non-GAAP performance measure that is frequently used in capital-intensive industries such as telecommunications. Allo's management uses EBITDA to compare Allo's performance to that of its competitors and to eliminate certain non-cash and non-operating items in order to consistently measure performance from period to period. EBITDA excludes interest and income taxes because these items are associated with a company's particular capitalization and tax structures. EBITDA also excludes depreciation and amortization expense because these non-cash expenses primarily reflect the impact of historical capital investments, as opposed to the cash impacts of capital expenditures made in recent periods, which may be evaluated through cash flow measures. The Company reports EBITDA for Allo because the Company believes that it provides useful additional information for investors regarding a key metric used by management to assess Allo's performance. There are limitations to using EBITDA as a performance measure, including the difficulty associated with comparing companies that use similar performance measures whose calculations may differ from Allo's calculations. In addition, EBITDA should not be considered a substitute for other measures of financial performance, such as net income or any other performance measures derived in accordance with GAAP. A reconciliation of EBITDA from net income (loss) under GAAP is presented under "Summary and Comparison of Operating Results" in the table above. |
(b) | Represents the number of single residence homes, apartments, and condominiums that Allo already serves and those in which Allo has the capacity to connect to its network distribution system without further material extensions to the transmission lines, but have not been connected. |
(c) | During the first quarter of 2016, Allo announced plans to expand its network to make services available to substantially all commercial and residential premises in Lincoln, Nebraska, and currently plans to expand to additional communities in Nebraska and surrounding states over the next several years. |
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 |
Three months ended September 30, | Nine months ended September 30, | |||||||||||
2017 | 2016 | 2017 | 2016 | |||||||||
Variable student loan yield, gross | 3.62 | % | 2.93 | % | 3.44 | % | 2.87 | % | ||||
Consolidation rebate fees | (0.85 | ) | (0.83 | ) | (0.84 | ) | (0.83 | ) | ||||
Discount accretion, net of premium and deferred origination costs amortization (a) | 0.07 | 0.06 | 0.07 | 0.06 | ||||||||
Variable student loan yield, net | 2.84 | 2.16 | 2.67 | 2.10 | ||||||||
Student loan cost of funds - interest expense | (2.09 | ) | (1.44 | ) | (1.91 | ) | (1.36 | ) | ||||
Student loan cost of funds - derivative settlements (b) (c) | (0.07 | ) | (0.01 | ) | (0.04 | ) | (0.01 | ) | ||||
Variable student loan spread | 0.68 | 0.71 | 0.72 | 0.73 | ||||||||
Fixed rate floor income, gross | 0.42 | 0.63 | 0.47 | 0.64 | ||||||||
Fixed rate floor income - derivative settlements (b) (d) | 0.07 | (0.08 | ) | 0.03 | (0.07 | ) | ||||||
Fixed rate floor income, net of settlements on derivatives | 0.49 | 0.55 | 0.50 | 0.57 | ||||||||
Core student loan spread | 1.17 | % | 1.26 | % | 1.22 | % | 1.30 | % | ||||
Average balance of student loans | $ | 23,188,577 | 26,368,507 | 23,948,108 | 27,305,128 | |||||||
Average balance of debt outstanding | 22,892,789 | 26,235,053 | 23,687,067 | 27,188,069 |
(a) | In the third quarter of 2016, the Company revised its policy to correct for an error in its method of applying the interest method used to amortize premiums and accrete discounts on its student loan portfolio. Under the Company's revised policy, as of September 30, 2016, the constant prepayment rate used by the Company to amortize/accrete student loan premiums/discounts was decreased. During the third quarter of 2016, the Company recorded an adjustment to reflect the net impact on prior periods for the correction of this error that resulted in an $8.2 million reduction to the Company's net loan discount balance and a corresponding increase in interest income. The impact of this adjustment was excluded from the above table. |
(b) | Derivative settlements represent the cash paid or received during the current period to settle with derivative instrument counterparties the economic effect of the Company's derivative instruments based on their contractual terms. Derivative accounting requires that net settlements with respect to derivatives that do not qualify for "hedge treatment" under GAAP be recorded in a separate income statement line item below net interest income. The Company maintains an overall risk management strategy that incorporates the use of derivative instruments to reduce the economic effect of interest rate volatility. As such, management believes derivative settlements for each applicable period should be evaluated with the Company’s net interest income (student loan spread) as presented in this table. The Company reports this non-GAAP information because it believes that it provides additional information regarding operational and performance indicators that are closely assessed by management. There is no comprehensive, authoritative guidance for the presentation of such non-GAAP information, which is only meant to supplement GAAP results by providing additional information that management utilizes to assess performance. See note 4 of the notes to consolidated financial statements included under Part I, Item 1 of this report for additional information on the Company's derivative instruments, including the net settlement activity recognized by the Company for each type of derivative for the periods presented in the table under the caption "Income Statement Impact" in note 4 and in this table. |
(c) | Reflects the net settlements paid/received related to the Company’s 1:3 basis swaps and cross-currency interest rate swap. |
(d) | Derivative settlements include the net settlements paid/received related to the Company’s floor income interest rate swaps. |
(a) | The interest earned on a large portion of the Company's FFELP student loan assets is indexed to the one-month LIBOR rate. The Company funds a majority of its assets with three-month LIBOR indexed floating rate securities. The relationship between the indices in which the Company earns interest on its loans and funds such loans has a significant impact on student loan spread. This table (the right axis) shows the difference between the Company's liability base rate and the one-month LIBOR rate by quarter. See Item 3, “Quantitative and Qualitative Disclosures About Market Risk - Interest Rate Risk,” which provides additional detail on the Company’s FFELP student loan assets and related funding for those assets. |
Three months ended September 30, | Nine months ended September 30, | |||||||||||
2017 | 2016 | 2017 | 2016 | |||||||||
Fixed rate floor income, gross | $ | 24,586 | 41,509 | 84,382 | 131,720 | |||||||
Derivative settlements (a) | 3,883 | (5,157 | ) | 5,877 | (15,241 | ) | ||||||
Fixed rate floor income, net | $ | 28,469 | 36,352 | 90,259 | 116,479 | |||||||
Fixed rate floor income contribution to spread, net | 0.49 | % | 0.55 | % | 0.50 | % | 0.57 | % |
(a) | Includes settlement payments on derivatives used to hedge student loans earning fixed rate floor income. |
Three months ended September 30, | Nine months ended September 30, | Additional information | ||||||||||||
2017 | 2016 | 2017 | 2016 | |||||||||||
Net interest income after provision for loan losses | $ | 67,894 | 93,318 | 218,763 | 281,861 | See table below for additional analysis. | ||||||||
Other income | 2,753 | 4,265 | 9,152 | 12,362 | The primary component of other income is borrower late fees, which were $2.7 million and $3.2 million for the three months ended September 30, 2017 and 2016, respectively, and $9.1 million and $9.9 million for the nine months ended September 30, 2017 and 2016, respectively. | |||||||||
Gain from debt repurchases | 116 | 2,160 | 1,097 | 2,260 | Gains were from the Company repurchasing its own asset-backed debt securities. | |||||||||
Derivative settlements, net | (382 | ) | (6,028 | ) | (1,721 | ) | (17,596 | ) | The Company maintains an overall risk management strategy that incorporates the use of derivative instruments to reduce the economic effect of interest rate volatility. Derivative settlements for each applicable period should be evaluated with the Company's net interest income as reflected in the table below. | |||||
Derivative market value and foreign currency transaction adjustments, net | 7,702 | 42,546 | (23,121 | ) | (8,763 | ) | Includes (i) the realized and unrealized gains and losses that are caused by changes in fair values of derivatives which do not qualify for "hedge treatment" under GAAP; and (ii) the unrealized foreign currency transaction gains or losses caused by the re-measurement of the Company's Euro-denominated bonds to U.S. dollars. | |||||||
Total other income (expense) | 10,189 | 42,943 | (14,593 | ) | (11,737 | ) | ||||||||
Salaries and benefits | 392 | 486 | 1,156 | 1,504 | ||||||||||
Loan servicing fees | 7,939 | 5,880 | 19,584 | 20,024 | Increase for the three months ended September 30, 2017 compared to the same period in 2016 due to a payment of $2.8 million in conversion fees related to a transfer of loans in August 2017 from a third-party servicer to the LSS operating segment's servicing platform. Excluding the $2.8 million conversion fee paid in the third quarter of 2017, loan servicing fees paid to third parties decreased $0.7 million and $3.2 million for the three and nine months ended September 30, 2017 compared to the same periods in 2016 due to runoff of the Company's student loan portfolio and transfers of loans in August 2017 and June 2016 from third-party servicers to the LSS operating segment's servicing platform. | |||||||||
Other expenses | 1,451 | 1,769 | 4,269 | 4,766 | ||||||||||
Intersegment expenses, net | 10,659 | 11,146 | 31,114 | 34,791 | Amounts include fees paid to the LSS operating segment for the servicing of the Company’s student loan portfolio. These amounts exceed the actual cost of servicing the loans. Decrease due to a decrease in loans serviced by the LSS operating segment during the comparable periods due to portfolio runoff. In addition, intersegment expenses represent costs for certain corporate activities and services that are allocated to each operating segment based on estimated use of such activities and services. | |||||||||
Total operating expenses | 20,441 | 19,281 | 56,123 | 61,085 | Total operating expenses were 35 basis points and 29 basis points of the average balance of student loans for the three months ended September 30, 2017 and 2016, respectively, and 31 basis points and 30 basis points for the nine months ended September 30, 2017 and 2016, respectively. When excluding the $2.8 million conversion fees paid in August 2017 to a third-party to transfer loans to the LSS operating segment's servicing platform, total operating expenses were 30, 29, 30 and 30 basis points for the three months ended September 30, 2017 and 2016 and nine months ended September 30, 2017 and 2016, respectively. | |||||||||
Income before income taxes | 57,642 | 116,980 | 148,047 | 209,039 | ||||||||||
Income tax expense | (21,904 | ) | (44,571 | ) | (56,258 | ) | (79,434 | ) | ||||||
Net income | $ | 35,738 | 72,409 | 91,789 | 129,605 | |||||||||
Additional information: | ||||||||||||||
Net income | $ | 35,738 | 72,409 | 91,789 | 129,605 | |||||||||
Derivative market value and foreign currency transaction adjustments, net | (7,702 | ) | (42,546 | ) | 23,121 | 8,763 | See "Overview - GAAP Net Income and Non-GAAP Net Income, Excluding Adjustments" above for additional information about non-GAAP net income, excluding derivative market value and foreign currency transaction adjustments. Net income, excluding derivative market value and foreign currency transaction adjustments, decreased in 2017 as compared to 2016 due to (i) a decrease in the Company's student loan portfolio, (ii) a decrease in core student loan spread, (iii) a $2.8 million ($1.7 million after tax) expense related to conversion fees paid in August 2017 to a third-party to transfer loans to the LSS operating segment's servicing platform, and (iv) an increase in interest income of $8.2 million ($5.1 million after tax) recognized in the third quarter of 2016 related to a correction of an error as further described in note 2 of the notes to consolidated financial statements included under Part I, Item 1 of this report. | |||||||
Net tax effect | 2,927 | 16,167 | (8,786 | ) | (3,330 | ) | ||||||||
Net income, excluding derivative market value and foreign currency transaction adjustments | $ | 30,963 | 46,030 | 106,124 | 135,038 |
Three months ended September 30, | Nine months ended September 30, | Additional information | ||||||||||||
2017 | 2016 | 2017 | 2016 | |||||||||||
Variable interest income, gross | $ | 211,785 | 194,877 | 616,474 | 585,299 | Increase due to an increase in the gross yield earned on student loans, partially offset by a decrease in the average balance of student loans. | ||||||||
Consolidation rebate fees | (48,986 | ) | (55,131 | ) | (151,469 | ) | (170,352 | ) | Decrease due to a decrease in the average consolidation loan balance. | |||||
Discount accretion, net of premium and deferred origination costs amortization | 4,371 | 12,466 | 13,064 | 21,109 | Net discount accretion is due to the Company's purchases of loans at a net discount over the last several years. In the third quarter of 2016, the Company revised its policy to correct for an error in its method of applying the interest method used to amortize premiums and accrete discounts on its student loan portfolio. Under the Company's revised policy, as of September 30, 2016, the constant prepayment rate used by the Company to amortize/accrete student loan premiums/discounts was decreased. During the third quarter of 2016, the Company recorded an adjustment to reflect the net impact on prior periods for the correction of this error that resulted in an $8.2 million reduction to the Company's net loan discount balance and a corresponding increase in interest income. | |||||||||
Variable interest income, net | 167,170 | 152,212 | 478,069 | 436,056 | ||||||||||
Interest on bonds and notes payable | (120,487 | ) | (94,770 | ) | (338,987 | ) | (276,124 | ) | Increase due to an increase in cost of funds, partially offset by a decrease in the average balance of debt outstanding. | |||||
Derivative settlements, net (a) | (4,265 | ) | (871 | ) | (7,598 | ) | (2,355 | ) | Derivative settlements include the net settlements paid/received related to the Company’s 1:3 basis swaps and cross-currency interest rate swap. | |||||
Variable student loan interest margin, net of settlements on derivatives (a) | 42,418 | 56,571 | 131,484 | 157,577 | ||||||||||
Fixed rate floor income, gross | 24,586 | 41,509 | 84,382 | 131,720 | The high levels of fixed rate floor income earned are due to historically low interest rates. Fixed rate floor income has decreased due to the rising interest rate environment. Derivative settlements include the net settlements paid/received related to the Company’s floor income interest rate swaps. | |||||||||
Derivative settlements, net (a) | 3,883 | (5,157 | ) | 5,877 | (15,241 | ) | Derivative settlements include the settlements paid/received related to the Company's floor income interest rate swaps. | |||||||
Fixed rate floor income, net of settlements on derivatives | 28,469 | 36,352 | 90,259 | 116,479 | ||||||||||
Core student loan interest income | 70,887 | 92,923 | 221,743 | 274,056 | ||||||||||
Investment interest | 3,213 | 980 | 6,210 | 2,614 | Increase due to a higher balance of interest-earning investments and an increase in interest rates. | |||||||||
Intercompany interest | (588 | ) | (613 | ) | (1,911 | ) | (1,905 | ) | ||||||
Provision for loan losses - federally insured loans | (7,000 | ) | (7,000 | ) | (11,000 | ) | (11,000 | ) | See "Allowance for Loan Losses and Loan Delinquencies" included above under "Asset Generation and Management Operating Segment - Results of Operations." | |||||
Negative provision for loan losses - private education loans | 1,000 | 1,000 | 2,000 | 500 | ||||||||||
Net interest income after provision for loan losses (net of settlements on derivatives) (a) | $ | 67,512 | 87,290 | 217,042 | 264,265 |
(a) | Derivative settlements represent the cash paid or received during the current period to settle with derivative instrument counterparties the economic effect of the Company's derivative instruments based on their contractual terms. Derivative accounting requires that net settlements on derivatives that do not qualify for "hedge treatment" under GAAP be recorded in a separate income statement line item below net interest income. The Company maintains an overall risk management strategy that incorporates the use of derivative instruments to reduce the economic effect of interest rate volatility. As such, management believes derivative settlements for each applicable period should be evaluated with the Company’s net interest income as presented in this table. Core student loan interest income and net interest income after provision for loan losses (net of settlements on derivatives) are non-GAAP financial measures, and the Company reports this non-GAAP information because the Company believes that it provides additional information regarding operational and performance indicators that are closely assessed by management. There is no comprehensive, authoritative guidance |
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 |
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 |
As of September 30, 2017 | As of December 31, 2016 | ||||||||||||
Dollars | Percent | Dollars | Percent | ||||||||||
Fixed-rate loan assets | $ | 5,334,565 | 23.5 | % | $ | 8,585,283 | 34.2 | % | |||||
Variable-rate loan assets | 17,379,348 | 76.5 | 16,518,360 | 65.8 | |||||||||
Total | $ | 22,713,913 | 100.0 | % | $ | 25,103,643 | 100.0 | % | |||||
Fixed-rate debt instruments | $ | 109,251 | 0.5 | % | $ | 131,733 | 0.5 | % | |||||
Variable-rate debt instruments | 22,517,671 | 99.5 | 24,968,687 | 99.5 | |||||||||
Total | $ | 22,626,922 | 100.0 | % | $ | 25,100,420 | 100.0 | % |
Three months ended September 30, | Nine months ended September 30, | |||||||||||
2017 | 2016 | 2017 | 2016 | |||||||||
Fixed rate floor income, gross | $ | 24,586 | 41,509 | 84,382 | 131,720 | |||||||
Derivative settlements (a) | 3,883 | (5,157 | ) | 5,877 | (15,241 | ) | ||||||
Fixed rate floor income, net | $ | 28,469 | 36,352 | 90,259 | 116,479 |
(a) | Includes settlement payments on derivatives used to hedge student loans earning fixed rate floor income. |
Fixed interest rate range | Borrower/lender weighted average yield | Estimated variable conversion rate (a) | Loan balance | |||||||
3.5 - 3.99% | 3.92 | % | 1.28 | % | $ | 1,090 | ||||
4.0 - 4.49% | 4.20 | % | 1.56 | % | 1,408,663 | |||||
4.5 - 4.99% | 4.71 | % | 2.07 | % | 851,229 | |||||
5.0 - 5.49% | 5.22 | % | 2.58 | % | 539,482 | |||||
5.5 - 5.99% | 5.67 | % | 3.03 | % | 379,443 | |||||
6.0 - 6.49% | 6.19 | % | 3.55 | % | 437,761 | |||||
6.5 - 6.99% | 6.70 | % | 4.06 | % | 421,737 | |||||
7.0 - 7.49% | 7.17 | % | 4.53 | % | 150,722 | |||||
7.5 - 7.99% | 7.71 | % | 5.07 | % | 252,994 | |||||
8.0 - 8.99% | 8.18 | % | 5.54 | % | 584,749 | |||||
> 9.0% | 9.05 | % | 6.41 | % | 202,455 | |||||
$ | 5,230,325 |
(a) | The estimated variable conversion rate is the estimated short-term interest rate at which loans would convert to a variable rate. As of September 30, 2017, the weighted average estimated variable conversion rate was 3.11% and the short-term interest rate was 125 basis points. |
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, the Company receives discrete three-month LIBOR. |
Index | Frequency of variable resets | Assets | Funding of student loan assets | ||||||
1 month LIBOR (a) | Daily | $ | 20,692,662 | — | |||||
3 month H15 financial commercial paper | Daily | 1,146,947 | — | ||||||
3 month Treasury bill | Daily | 647,675 | — | ||||||
3 month LIBOR (a) (b) | Quarterly | — | 12,274,155 | ||||||
1 month LIBOR | Monthly | — | 8,550,438 | ||||||
Auction-rate (c) | Varies | — | 781,276 | ||||||
Asset-backed commercial paper (d) | Varies | — | 596,395 | ||||||
Other (e) | 1,074,851 | 1,359,871 | |||||||
$ | 23,562,135 | 23,562,135 |
(a) | The Company has certain basis swaps outstanding in which the Company receives three-month LIBOR and pays one-month LIBOR plus or minus a spread as defined in the agreements (the "1:3 Basis Swaps"). The Company entered into these derivative instruments to better match the interest rate characteristics on its student loan assets and the debt funding such assets. The following table summarizes the 1:3 Basis Swaps outstanding as of September 30, 2017. |
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 |
(b) | As of September 30, 2017, the Company had Euro-denominated notes that repriced on the EURIBOR index. The Company had entered into a cross-currency interest rate swap that converted the EURIBOR index to three-month LIBOR. As a result, these notes are reflected in the three-month LIBOR category in the above table. See “Foreign Currency Exchange Risk” below. |
(c) | The interest rates on certain of the Company's asset-backed securities are set and periodically reset via a "dutch auction" (“Auction Rate Securities”). As of September 30, 2017, the Company was sponsor for $781.3 million of Auction Rate Securities. Since February 2008, problems in the auction rate securities market as a whole have led to failures of the auctions pursuant to which the Company's Auction Rate Securities' interest rates are set. As a result, the Auction Rate Securities generally pay interest to the holder at a maximum rate as defined by the indenture. While these rates will vary, they will generally be based on a spread to LIBOR or Treasury Securities, or the Net Loan Rate as defined in the financing documents. |
(d) | The interest rates on certain of the Company's warehouse facilities are indexed to asset-backed commercial paper rates. |
(e) | Assets include accrued interest receivable and restricted cash. Funding represents overcollateralization (equity) and other liabilities included in FFELP asset-backed securitizations and warehouse facilities. |
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 | ) |
Period | Total number of shares purchased (a) | Average price paid per share | Total number of shares purchased as part of publicly announced plans or programs (b) | Maximum number of shares that may yet be purchased under the plans or programs (b) | |||||||||
July 1 - July 31, 2017 | 318,610 | $ | 47.83 | 318,200 | 3,875,613 | ||||||||
August 1 - August 31, 2017 | 325,983 | 46.84 | 325,983 | 3,549,630 | |||||||||
September 1 - September 30, 2017 | 303,201 | 48.24 | 300,750 | 3,248,880 | |||||||||
Total | 947,794 | $ | 47.62 | 944,933 |
(a) | The total number of shares includes: (i) shares repurchased pursuant to the stock repurchase program discussed in footnote (b) below; and (ii) shares owned and tendered by employees to satisfy tax withholding obligations upon the vesting of restricted shares. Shares of Class A common stock tendered by employees to satisfy tax withholding obligations included 410 shares, 0 shares, and 2,451 shares in July, August, and September, respectively. Unless otherwise indicated, shares owned and tendered by employees to satisfy tax withholding obligations were purchased at the closing price of the Company’s shares on the date of vesting. |
(b) | On August 4, 2016, the Company announced that its Board of Directors authorized a new stock repurchase program in May 2016 to repurchase up to a total of five million shares of the Company's Class A common stock during the three-year period ending May 25, 2019. |
• | declare or pay any dividends or distributions on, or redeem, purchase, acquire or make a liquidation payment regarding, any of the Company’s capital stock. |
• | except as required in connection with the repayment of principal, and except for any partial payments of deferred interest that may be made through the alternative payment mechanism described in the Hybrid Securities indenture, make any payment of principal of, or interest or premium, if any, on, or repay, repurchase, or redeem any of the Company’s debt securities that rank pari passu with or junior to the Hybrid Securities. |
• | make any guarantee payments regarding any guarantee by the Company of the subordinated debt securities of any of the Company’s subsidiaries if the guarantee ranks pari passu with or junior in interest to the Hybrid Securities. |
• | pay dividends or distributions in additional shares of the Company’s capital stock. |
• | declare or pay a dividend in connection with the implementation of a shareholders’ rights plan, or issue stock under such a plan, or redeem or repurchase any rights distributed pursuant to such a plan. |
• | purchase common stock for issuance pursuant to any employee benefit plans. |
31.1* | |
31.2* | |
32** | |
101.INS* | XBRL Instance Document |
101.SCH* | XBRL Taxonomy Extension Schema Document |
101.CAL* | XBRL Taxonomy Extension Calculation Linkbase Document |
101.DEF* | XBRL Taxonomy Extension Definition Linkbase Document |
101.LAB* | XBRL Taxonomy Extension Label Linkbase Document |
101.PRE* | XBRL Taxonomy Extension Presentation Linkbase Document |
* Filed herewith | |
** Furnished herewith |
NELNET, INC. | ||||
Date: | November 7, 2017 | By: | /s/ JEFFREY R. NOORDHOEK | |
Name: | Jeffrey R. Noordhoek | |||
Title: | Chief Executive Officer Principal Executive Officer | |||
By: | /s/ JAMES D. KRUGER | |||
Date: | November 7, 2017 | Name: | James D. Kruger | |
Title: | Chief Financial Officer Principal Financial Officer and Principal Accounting Officer |
1. | I have reviewed this quarterly report on Form 10-Q of Nelnet, Inc. (the “Company”); |
2. | Based on my knowledge, this report does not contain any untrue statement of a material fact or omit to state a material fact necessary to make the statements made, in light of the circumstances under which such statements were made, not misleading with respect to the period covered by this report; |
3. | Based on my knowledge, the financial statements, and other financial information included in this report, fairly present in all material respects the financial condition, results of operations and cash flows of the registrant as of, and for, the periods presented in this report; |
4. | The registrant's other certifying officer and I are responsible for establishing and maintaining disclosure controls and procedures (as defined in Exchange Act Rules 13a-15(e) and 15d-15(e)) and internal control over financial reporting (as defined in Exchange Act Rules 13a-15(f) and 15d-15(f)) for the registrant and have: |
(a) | Designed such disclosure controls and procedures, or caused such disclosure controls and procedures to be designed under our supervision, to ensure that material information relating to the registrant, including its consolidated subsidiaries, is made known to us by others within those entities, particularly during the period in which this report is being prepared; |
(b) | Designed such internal control over financial reporting, or caused such internal control over financial reporting to be designed under our supervision, to provide reasonable assurance regarding the reliability of financial reporting and the preparation of financial statements for external purposes in accordance with generally accepted accounting principles; |
(c) | Evaluated the effectiveness of the registrant’s disclosure controls and procedures and presented in this report our conclusions about the effectiveness of the disclosure controls and procedures, as of the end of the period covered by this report based on such evaluation; and |
(d) | Disclosed in this report any change in the registrant's internal control over financial reporting that occurred during the registrant's most recent fiscal quarter (the registrant's fourth fiscal quarter in the case of an annual report) that has materially affected, or is reasonably likely to materially affect, the registrant's internal control over financial reporting; and |
5. | The registrant's other certifying officer and I have disclosed, based on our most recent evaluation of internal control over financial reporting, to the registrant's auditors and the audit committee of the registrant's board of directors (or persons performing the equivalent functions): |
(a) | All significant deficiencies and material weaknesses in the design or operation of internal control over financial reporting which are reasonably likely to adversely affect the registrant's ability to record, process, summarize and report financial information; and |
(b) | Any fraud, whether or not material, that involves management or other employees who have a significant role in the registrant's internal control over financial reporting. |
Date: | November 7, 2017 | /s/ JEFFREY R. NOORDHOEK |
Jeffrey R. Noordhoek Chief Executive Officer Principal Executive Officer |
1. | I have reviewed this quarterly report on Form 10-Q of Nelnet, Inc. (the “Company”); |
2. | Based on my knowledge, this report does not contain any untrue statement of a material fact or omit to state a material fact necessary to make the statements made, in light of the circumstances under which such statements were made, not misleading with respect to the period covered by this report; |
3. | Based on my knowledge, the financial statements, and other financial information included in this report, fairly present in all material respects the financial condition, results of operations and cash flows of the registrant as of, and for, the periods presented in this report; |
4. | The registrant's other certifying officer and I are responsible for establishing and maintaining disclosure controls and procedures (as defined in Exchange Act Rules 13a-15(e) and 15d-15(e)) and internal control over financial reporting (as defined in Exchange Act Rules 13a-15(f) and 15d-15(f)) for the registrant and have: |
(a) | Designed such disclosure controls and procedures, or caused such disclosure controls and procedures to be designed under our supervision, to ensure that material information relating to the registrant, including its consolidated subsidiaries, is made known to us by others within those entities, particularly during the period in which this report is being prepared; |
(b) | Designed such internal control over financial reporting, or caused such internal control over financial reporting to be designed under our supervision, to provide reasonable assurance regarding the reliability of financial reporting and the preparation of financial statements for external purposes in accordance with generally accepted accounting principles; |
(c) | Evaluated the effectiveness of the registrant’s disclosure controls and procedures and presented in this report our conclusions about the effectiveness of the disclosure controls and procedures, as of the end of the period covered by this report based on such evaluation; and |
(d) | Disclosed in this report any change in the registrant's internal control over financial reporting that occurred during the registrant's most recent fiscal quarter (the registrant's fourth fiscal quarter in the case of an annual report) that has materially affected, or is reasonably likely to materially affect, the registrant's internal control over financial reporting; and |
5. | The registrant's other certifying officer and I have disclosed, based on our most recent evaluation of internal control over financial reporting, to the registrant's auditors and the audit committee of the registrant's board of directors (or persons performing the equivalent functions): |
(a) | All significant deficiencies and material weaknesses in the design or operation of internal control over financial reporting which are reasonably likely to adversely affect the registrant's ability to record, process, summarize and report financial information; and |
(b) | Any fraud, whether or not material, that involves management or other employees who have a significant role in the registrant's internal control over financial reporting. |
Date: | November 7, 2017 | /s/ JAMES D. KRUGER |
James D. Kruger Chief Financial Officer Principal Financial Officer and Principal Accounting Officer |
1. | The Report fully complies with the requirements of Section 13(a) or 15(d) of the Securities Exchange Act of 1934; and |
2. | The information contained in the Report fairly presents, in all material respects, the financial condition and results of operations of the Company. |
Date: | November 7, 2017 | By: /s/ JEFFREY R. NOORDHOEK |
Name: Jeffrey R. Noordhoek Title: Chief Executive Officer Principal Executive Officer | ||
By: /s/ JAMES D. KRUGER | ||
Name: James D. Kruger Title: Chief Financial Officer Principal Financial Officer and Principal Accounting Officer |
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