For Release: February 27, 2020
Investor Contact: Phil Morgan, 402.458.3038
Nelnet, Inc. supplemental financial information for the fourth quarter 2019
(All dollars are in thousands, except per share amounts, unless otherwise noted)
The following information should be read in connection with Nelnet, Inc.'s (the “Company's”) press release for fourth quarter 2019 earnings, dated February 27, 2020, and the Company's Annual Report on Form 10-K for the year ended December 31, 2019.
Forward-looking and cautionary statements
This report contains forward-looking statements and information that are based on management's current expectations as of the date of this document. Statements that are not historical facts, including statements about the Company's plans and expectations for future financial condition, results of operations or economic performance, or that address management's plans and objectives for future operations, and statements that assume or are dependent upon future events, are forward-looking statements. The words “anticipate,” “assume,” “believe,” “continue,” “could,” “estimate,” “expect,” “forecast,” “future,” “intend,” “may,” “plan,” “potential,” “predict,” “scheduled,” “should,” “will,” “would,” and similar expressions, as well as statements in future tense, are intended to identify forward-looking statements.
The forward-looking statements are based on assumptions and analyses made by management in light of management's experience and its perception of historical trends, current conditions, expected future developments, and other factors that management believes are appropriate under the circumstances. These statements are subject to known and unknown risks, uncertainties, assumptions, and other factors that may cause the actual results and performance to be materially different from any future results or performance expressed or implied by such forward-looking statements. These factors include, among others, the risks and uncertainties set forth in “Risk Factors” section of the Company's Annual Report on Form 10-K for the year ended December 31, 2019 (the "2019 Annual Report"), and include such risks and uncertainties as:
•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 loan prepayment or default rates;
•financing and liquidity risks, including risks of changes in the general interest rate environment, including the availability of any relevant money market index rate such as LIBOR or the relationship between the relevant money market index rate and the rate at which the Company's assets and liabilities are priced, and in the securitization and other financing markets for loans, including adverse changes resulting from unanticipated repayment trends on student loans in FFELP securitization trusts that could accelerate or delay repayment of the associated bonds, which may increase the costs or limit the availability of financings necessary to purchase, refinance, or continue to hold student loans;
•risks from changes in the 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;
•the ability to 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"), which current contracts accounted for 30 percent of the Company's revenue in 2019, risks to the Company related to the Department's initiatives to procure new contracts for federal student loan servicing, including the risk that Company teams may not be successful in obtaining contracts, and risks related to the Company's ability to comply with agreements with third-party customers for the servicing of Federal Direct Loan Program, FFELP, 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, the potential disruption of the Company's systems or those of third-party vendors or customers, and/or the potential damage to the Company's reputation resulting from cyber-breaches;
•uncertainties inherent in forecasting future cash flows from student loan assets and related asset-backed securitizations;
•risks and uncertainties related to the ability of ALLO Communications LLC to successfully expand its fiber network and market share in existing service areas and additional communities and manage related construction risks;
•risks and uncertainties related to initiatives to pursue additional strategic investments, acquisitions, and other activities, including activities that are intended to diversify the Company both within and outside of its historical core education-related businesses, such as the risk that the Company's industrial bank charter application may not result in the grant of a charter and the uncertain nature of the expected benefits from obtaining an industrial bank charter;
•risks related to investments in solar projects, including risks of not being able to realize tax credits which remain subject to recapture by taxing authorities; 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 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.
All forward-looking statements contained in this report are qualified by these cautionary statements and are made only as of the date of this document. Although the Company may from time to time voluntarily update or revise its prior forward-looking statements to reflect actual results or changes in the Company's expectations, the Company disclaims any commitment to do so except as required by securities laws.
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Consolidated Statements of Income
(Dollars in thousands, except share data)
(unaudited)
| Three months ended | Year ended | ||||||||||||||||||||||||||||
| December 31, 2019 | September 30, 2019 | December 31, 2018 | December 31, 2019 | December 31, 2018 | |||||||||||||||||||||||||
| Interest income: | |||||||||||||||||||||||||||||
| Loan interest | $ | 204,638 | 229,063 | 244,252 | 914,256 | 897,666 | |||||||||||||||||||||||
| Investment interest | 7,720 | 9,882 | 8,019 | 34,421 | 26,600 | ||||||||||||||||||||||||
| Total interest income | 212,358 | 238,945 | 252,271 | 948,677 | 924,266 | ||||||||||||||||||||||||
| Interest expense: | |||||||||||||||||||||||||||||
| Interest on bonds and notes payable | 148,106 | 172,488 | 182,732 | 699,327 | 669,906 | ||||||||||||||||||||||||
| Net interest income | 64,252 | 66,457 | 69,539 | 249,350 | 254,360 | ||||||||||||||||||||||||
| Less provision for loan losses | 13,000 | 10,000 | 5,000 | 39,000 | 23,000 | ||||||||||||||||||||||||
Net interest income after provision for loan losses | 51,252 | 56,457 | 64,539 | 210,350 | 231,360 | ||||||||||||||||||||||||
| Other income: | |||||||||||||||||||||||||||||
| Loan servicing and systems revenue | 113,086 | 113,286 | 112,761 | 455,255 | 440,027 | ||||||||||||||||||||||||
Education technology, services, and payment processing revenue | 63,578 | 74,251 | 54,589 | 277,331 | 221,962 | ||||||||||||||||||||||||
| Communications revenue | 17,499 | 16,470 | 13,326 | 64,269 | 44,653 | ||||||||||||||||||||||||
| Other income | 26,522 | 13,439 | 9,998 | 65,179 | 54,805 | ||||||||||||||||||||||||
Derivative settlements, net | 6,100 | 7,298 | 19,052 | 45,406 | 70,071 | ||||||||||||||||||||||||
Derivative market value adjustments, net | (2,930) | (5,630) | (48,895) | (76,195) | 1,014 | ||||||||||||||||||||||||
| Total other income | 223,855 | 219,114 | 160,831 | 831,245 | 832,532 | ||||||||||||||||||||||||
| Cost of services: | |||||||||||||||||||||||||||||
Cost to provide education technology, services, and payment processing services | 19,002 | 25,671 | 15,479 | 81,603 | 59,566 | ||||||||||||||||||||||||
| Cost to provide communications services | 5,327 | 5,236 | 5,033 | 20,423 | 16,926 | ||||||||||||||||||||||||
Total cost of services | 24,329 | 30,907 | 20,512 | 102,026 | 76,492 | ||||||||||||||||||||||||
| Operating expenses: | |||||||||||||||||||||||||||||
| Salaries and benefits | 124,561 | 116,670 | 114,247 | 463,503 | 436,179 | ||||||||||||||||||||||||
| Depreciation and amortization | 28,651 | 27,701 | 23,953 | 105,049 | 86,896 | ||||||||||||||||||||||||
| Other expenses | 46,710 | 58,329 | 49,583 | 194,272 | 178,031 | ||||||||||||||||||||||||
| Total operating expenses | 199,922 | 202,700 | 187,783 | 762,824 | 701,106 | ||||||||||||||||||||||||
| Income before income taxes | 50,856 | 41,964 | 17,075 | 176,745 | 286,294 | ||||||||||||||||||||||||
| Income tax (expense) benefit | (9,022) | (8,829) | 4,599 | (35,451) | (58,770) | ||||||||||||||||||||||||
| Net income | 41,834 | 33,135 | 21,674 | 141,294 | 227,524 | ||||||||||||||||||||||||
Net loss (income) attributable to noncontrolling interests | 546 | 77 | (48) | 509 | 389 | ||||||||||||||||||||||||
| Net income attributable to Nelnet, Inc. | $ | 42,380 | 33,212 | 21,626 | 141,803 | 227,913 | |||||||||||||||||||||||
| Earnings per common share: | |||||||||||||||||||||||||||||
| Net income attributable to Nelnet, Inc. shareholders - basic and diluted | $ | 1.06 | 0.83 | 0.53 | 3.54 | 5.57 | |||||||||||||||||||||||
| Weighted average common shares outstanding - basic and diluted | 39,896,232 | 39,877,129 | 40,810,636 | 40,047,402 | 40,909,022 | ||||||||||||||||||||||||
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Condensed Consolidated Balance Sheets
(Dollars in thousands)
(unaudited)
| As of | As of | As of | |||||||||||||||
| December 31, 2019 | September 30, 2019 | December 31, 2018 | |||||||||||||||
| Assets: | |||||||||||||||||
| Loans receivable, net | $ | 20,669,371 | 21,071,441 | 22,377,142 | |||||||||||||
Cash, cash equivalents, investments, and notes receivable | 380,879 | 373,395 | 370,717 | ||||||||||||||
| Restricted cash | 1,088,695 | 977,228 | 1,071,044 | ||||||||||||||
| Goodwill and intangible assets, net | 238,444 | 246,411 | 271,202 | ||||||||||||||
| Other assets | 1,331,581 | 1,268,244 | 1,130,863 | ||||||||||||||
| Total assets | $ | 23,708,970 | 23,936,719 | 25,220,968 | |||||||||||||
| Liabilities: | |||||||||||||||||
| Bonds and notes payable | $ | 20,529,054 | 20,910,190 | 22,218,740 | |||||||||||||
| Other liabilities | 788,822 | 671,864 | 687,449 | ||||||||||||||
| Total liabilities | 21,317,876 | 21,582,054 | 22,906,189 | ||||||||||||||
| Equity: | |||||||||||||||||
| Total Nelnet, Inc. shareholders' equity | 2,386,712 | 2,350,150 | 2,304,464 | ||||||||||||||
| Noncontrolling interests | 4,382 | 4,515 | 10,315 | ||||||||||||||
| Total equity | 2,391,094 | 2,354,665 | 2,314,779 | ||||||||||||||
| Total liabilities and equity | $ | 23,708,970 | 23,936,719 | 25,220,968 | |||||||||||||
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Overview
The Company is a diverse company with a purpose to serve others and a vision to make customers' dreams possible by delivering customer focused products and services. The largest operating businesses engage in loan servicing; education technology, services, and payment processing; and communications. A significant portion of the Company's revenue is net interest income earned on a portfolio of federally insured student loans. The Company also makes investments to further diversify both within and outside of its historical core education-related businesses, including, but not limited to, investments in real estate, early-stage and emerging growth companies, and renewable energy.
GAAP Net Income and Non-GAAP Net Income, Excluding Adjustments
The Company prepares its financial statements and presents its financial results in accordance with U.S. GAAP. However, it also provides additional non-GAAP financial information related to specific items management believes to be important in the evaluation of its operating results and performance. A reconciliation of the Company's GAAP net income to net income, excluding derivative market value and foreign currency transaction adjustments, and a discussion of why the Company believes providing this additional information is useful to investors, is provided below.
| Three months ended | Year ended | ||||||||||||||||||||||||||||
| December 31, 2019 | September 30, 2019 | December 31, 2018 | December 31, 2019 | December 31, 2018 | |||||||||||||||||||||||||
| GAAP net income attributable to Nelnet, Inc. | $ | 42,380 | 33,212 | 21,626 | 141,803 | 227,913 | |||||||||||||||||||||||
Realized and unrealized derivative market value adjustments | 2,930 | 5,630 | 48,895 | 76,195 | (1,014) | ||||||||||||||||||||||||
Tax effect (a) | (703) | (1,351) | (11,735) | (18,287) | 243 | ||||||||||||||||||||||||
Net income attributable to Nelnet, Inc., excluding derivative market value adjustments (b) | $ | 44,607 | 37,491 | 58,786 | 199,711 | 227,142 | |||||||||||||||||||||||
| Earnings per share: | |||||||||||||||||||||||||||||
| GAAP net income attributable to Nelnet, Inc. | $ | 1.06 | 0.83 | 0.53 | 3.54 | 5.57 | |||||||||||||||||||||||
Realized and unrealized derivative market value adjustments | 0.07 | 0.14 | 1.20 | 1.90 | (0.02) | ||||||||||||||||||||||||
Tax effect (a) | (0.01) | (0.03) | (0.29) | (0.45) | — | ||||||||||||||||||||||||
Net income attributable to Nelnet, Inc., excluding derivative market value adjustments (b) | $ | 1.12 | 0.94 | 1.44 | 4.99 | 5.55 | |||||||||||||||||||||||
(a) The tax effects are calculated by multiplying the realized and unrealized derivative market value adjustments by the applicable statutory income tax rate.
(b) "Derivative market value adjustments" includes 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) 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. "Derivative market value 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.
The accounting for derivatives requires that changes in the fair value of derivative instruments be recognized currently in earnings, with no fair value adjustment of the hedged item, unless specific hedge accounting criteria is met. Management has structured all of the Company’s derivative transactions with the intent that each is economically effective; however, the Company’s derivative instruments do not qualify for hedge accounting. As a result, the change in fair value of derivative instruments is reported in current period earnings with no consideration for the corresponding change in fair value of the hedged item. Under GAAP, the cumulative net realized and unrealized gain or loss caused by changes in fair values of derivatives in which the Company plans to hold to maturity will equal zero over the life of the contract. However, the net realized and unrealized gain or loss during any given reporting period fluctuates significantly from period to period.
The Company believes these point-in-time estimates of asset and liability values related to its derivative instruments that are subject to interest rate fluctuations are subject to volatility mostly due to timing and market factors beyond the control of management, and affect the period-to-period comparability of the results of operations. Accordingly, the Company’s management utilizes operating results excluding these items for comparability purposes when making decisions regarding the Company’s performance and in presentations with credit rating agencies, lenders, and investors. Consequently, the Company reports this non-GAAP information because the Company believes that it provides additional information regarding operational and performance indicators that are closely assessed by management. There is no comprehensive, authoritative guidance for the presentation of such non-GAAP information, which is only meant to supplement GAAP results by providing additional information that management utilizes to assess performance.
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Operating Results
The Company earns net interest income on its loan portfolio, consisting primarily of FFELP loans, in its Asset Generation and Management ("AGM") operating segment. This segment is expected to generate a stable net interest margin and significant amounts of cash as the FFELP portfolio amortizes. As of December 31, 2019, the Company had a $20.7 billion loan portfolio that management anticipates will amortize over the next approximately 20 years and has a weighted average remaining life of 8.8 years. The Company actively works to maximize the amount and timing of cash flows generated by its FFELP portfolio and seeks to acquire additional loan assets to leverage its servicing scale and expertise to generate incremental earnings and cash flow. However, due to the continued amortization of the Company’s FFELP loan portfolio, over time, the Company's net income generated by the AGM segment will continue to decrease. The Company currently believes that in the short-term it will most likely not be able to invest the excess cash generated from the FFELP loan portfolio into assets that immediately generate the rates of return historically realized from that portfolio.
In addition, the Company earns fee-based revenue through the following reportable operating segments:
•Loan Servicing and Systems ("LSS") - referred to as Nelnet Diversified Services ("NDS")
•Education Technology, Services, and Payment Processing ("ETS&PP") - referred to as Nelnet Business Services ("NBS")
•Communications - referred to as ALLO Communications ("ALLO")
Other business activities and operating segments that are not reportable are combined and included in Corporate and Other Activities ("Corporate"). Corporate and Other Activities also includes income earned on certain investments and interest expense incurred on unsecured debt transactions.
The information below provides the operating results for each reportable operating segment and Corporate and Other Activities for the years ended December 31, 2019 and 2018 (dollars in millions).
(a) Revenue includes intersegment revenue earned by LSS as a result of servicing loans for AGM.
(b) Total revenue includes "net interest income" and "total other income" from the Company's segment statements of income, excluding the impact from changes in fair values of derivatives. Net income excludes changes in fair values of derivatives, net of tax. For information regarding the exclusion of the impact from changes in fair values of derivatives adjustments, see "GAAP Net Income and Non-GAAP Net Income, Excluding Adjustments" above.
Certain events and transactions from 2019 and 2018, which have impacted or will impact the operating results of the Company and its operating segments, are discussed below.
Loan Servicing and Systems
•On February 7, 2018, the Company acquired Great Lakes Educational Loan Services, Inc. ("Great Lakes"). The operating results of Great Lakes are reported in the Company's consolidated financial statements from the date of acquisition. Thus, there are twelve months of Great Lakes' operations included in 2019 as compared to approximately eleven months of activity in 2018.
•Nelnet Servicing, LLC ("Nelnet Servicing") and Great Lakes have student loan servicing contracts awarded by the Department in June 2009 to provide servicing for loans owned by the Department. As of December 31, 2019, Nelnet
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Servicing was servicing $183.8 billion of student loans for 5.6 million borrowers under its contract, and Great Lakes was servicing $240.0 billion of student loans for 7.4 million borrowers under its contract.
Nelnet Servicing and Great Lakes' servicing contracts with the Department previously provided for expiration on June 16, 2019. On May 15, 2019, Nelnet Servicing and Great Lakes each received a contract extension from the Department's Office of Federal Student Aid ("FSA") pursuant to which FSA extended the expiration date of the current contracts to December 15, 2019. On November 26, 2019, Nelnet Servicing and Great Lakes each received an additional extension from FSA on their contracts through December 14, 2020. The contract extensions also provide the potential for two additional six-month extensions at the Department’s discretion through December 14, 2021.
FSA is conducting a contract procurement process entitled Next Generation Financial Services Environment (“NextGen”) for a new framework for the servicing of all student loans owned by the Department. On January 15, 2019, FSA issued solicitations for three NextGen components:
•NextGen Enhanced Processing Solution ("EPS")
•NextGen Business Process Operations ("BPO")
•NextGen Optimal Processing Solution ("OPS")
On April 1, 2019 and October 4, 2019, the Company responded to the EPS component. On January 16, 2020, FSA released an amendment to the EPS component and the Company responded on February 3, 2020. In addition, on August 1, 2019, the Company responded to the BPO component. On January 10, 2020, FSA released an amendment to the BPO component and the Company responded on January 30, 2020. The Company is also part of a team that has responded and intends to respond to various aspects of the OPS component; however, on November 12, 2019, FSA put an indefinite hold on the OPS solicitation. The EPS and BPO components are essentially for the loan processing and servicing to be performed on a new single system, which the Company believes could have the most significant potential impact on the Company. The Company cannot predict the timing, nature, or outcome of these solicitations.
•The Loan Servicing and Systems segment will incur additional costs in 2020 to meet increased service and security standards under the current Department servicing contracts and to be responsive to the Department's procurement. As a result, the Company currently expects a significant decrease in this segment's operating margin and net income in 2020 from recent historical results.
Education Technology, Services, and Payment Processing
•On November 20, 2018, the Company acquired Tuition Management Systems ("TMS"), a services company that offers tuition payment plans, billing services, payment technology solutions, and refund management to educational institutions. The TMS acquisition added 380 higher education schools and 170 K-12 schools to the Company’s customer base. The results of TMS’ operations are reported in the Company’s consolidated financial statements from the date of acquisition.
•For the years ended December 31, 2019 and 2018, before tax operating margin (income before income taxes divided by net revenue) was 31.8 percent and 20.6 percent, respectively. The increase in the before tax operating margin in 2019 as compared to 2018 was due to operating leverage and cost reductions resulting from the Company's decision in October 2018 to terminate its investment in a proprietary payment processing platform.
Communications
•ALLO recognized losses of $23.5 million and $28.7 million for the years ended December 31, 2019 and 2018, respectively. The decrease in ALLO's net loss in 2019, as compared to 2018, was primarily due to a decrease in interest expense. ALLO recognized $10.0 million of interest expense to Nelnet, Inc. (parent company) during the year ended December 31, 2018. Subsequent to October 1, 2018, ALLO will not report interest expense in its income statement related to amounts contributed to ALLO from Nelnet, Inc. due to a recapitalization of ALLO. Excluding interest expense, the increase in ALLO's net loss in 2019 as compared to 2018 was due to an increase in depreciation from significant property and equipment purchases over the last several years to support the Lincoln, Nebraska network build-out that was substantially completed in 2019.
•ALLO's management uses earnings (loss) before interest, income taxes, depreciation, and amortization ("EBITDA") to eliminate certain non-cash and non-operating items in order to consistently measure performance from period to period. For the years ended December 31, 2019 and 2018, ALLO had positive EBITDA of $6.2 million and negative EBITDA of $4.5 million, respectively. EBITDA is a supplemental non-GAAP performance measure which the Company believes provides useful additional information regarding a key metric used by management to assess ALLO's performance. See
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"Communications Financial and Operating Data" below for additional information regarding the computation and use of EBITDA for ALLO.
•ALLO has made significant investments in its communications network and currently provides fiber directly to homes and businesses in communities in Nebraska and Colorado. ALLO plans to continue to increase market share and revenue in its existing markets and is currently evaluating opportunities to expand to other communities in the Midwest. ALLO began providing services in Lincoln, Nebraska in September 2016 as part of a multi-year project to pass substantially all commercial and residential properties in the community. As of the end of the first quarter of 2019, the build-out of the Lincoln community was substantially complete. For the year ended December 31, 2019, ALLO's capital expenditures were $45.0 million. The Company anticipates total ALLO network capital expenditures in 2020 will be approximately $35.0 million to $45.0 million. However, this amount could change based on customer demand for ALLO's services.
•The Company currently anticipates ALLO's operating results will be dilutive to the Company's consolidated earnings as it continues to develop and add customers to its network in Lincoln, Nebraska and other communities, due to large upfront capital expenditures and associated depreciation and upfront customer acquisition costs.
Asset Generation and Management
•For the year ended December 31, 2019, the AGM segment recognized net interest income of $238.6 million, compared with $249.1 million in 2018. The Company maintains an overall risk management strategy that incorporates the use of derivative instruments to reduce the economic effect of interest rate volatility. The AGM segment recognized income from derivative settlements of $45.4 million in 2019, compared with income of $70.5 million in 2018. Derivative settlements for each applicable period should be evaluated with the Company's net interest income. Net interest income and derivative settlements for the AGM segment totaled $284.0 million and $319.6 million in 2019 and 2018, respectively.
•The Company's average balance of loans decreased to $21.7 billion in 2019, compared with $22.6 billion in 2018. Loan spread decreased to 0.96 percent in 2019, compared with 0.99 percent in 2018. Core loan spread, which includes the impact of derivative settlements, decreased to 1.18 percent in 2019, compared with 1.32 percent in 2018. Management believes core loan spread is a useful supplemental non-GAAP measure that reflects adjustments for derivative settlements related to net interest income (loan spread). However, there is no comprehensive authoritative guidance for the presentation of this measure, which is only meant to supplement GAAP results by providing additional information that management utilizes to assess performance.
The Company recognized $89.9 million and $121.7 million in fixed rate floor income in 2019 and 2018, respectively (which includes $40.2 million and $64.9 million, respectively, of settlement payments received on derivatives used to hedge student loans earning fixed rate floor income). Fixed rate floor income contributed 41 basis points and 55 basis points of core loan spread in 2019 and 2018, respectively. The decrease in gross fixed rate floor income was due to higher interest rates in 2019 as compared to 2018, and the decrease in derivative settlement payments received on derivatives used to hedge student loans earning fixed rate floor income was due to a decrease in the notional amount of derivatives outstanding in 2019 as compared to 2018, partially offset by higher interest rates.
•Provision for loan losses was $39.0 million and $23.0 million for 2019 and 2018, respectively.
Provision for loan losses for federally insured loans was $8.0 million and $14.0 million for 2019 and 2018, respectively. During 2018, the Company determined an additional allowance was necessary related to portfolios of federally insured loans that were purchased in prior periods, and recognized $5.0 million in provision expense related to these loans.
Provision for loan losses for consumer loans was $31.0 million and $9.0 million for 2019 and 2018, respectively. The increase in provision was a result of the increased amount of consumer loan purchases during 2019. The Company purchased $405.7 million of consumer loans during 2019 compared to $120.5 million during 2018.
•The Company recognized $16.7 million (pre-tax) of expenses in 2019 related to the extinguishment of notes payable in certain asset-backed securitizations prior to the notes' contractual maturities (as further described below). These expenses consisted of premium payments made by the Company of $14.0 million and the write-off of $2.7 million of debt issuance costs.
•During 2019, the Company sold $227.0 million (par value) of consumer loans to an unrelated third party who securitized such loans. As partial consideration received for the consumer loans sold, the Company received a percentage interest of the residual interest of the consumer loan securitizations. The Company recognized a gain of $17.3 million (pre-tax) from the sale of these loans.
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Corporate and Other Activities
•The Company adopted a new lease accounting standard effective January 1, 2019. The most significant impact of the standard to the Company relates to (1) the recognition of new right-of-use ("ROU") assets and lease liabilities on its balance sheet primarily for office, data center, and dark fiber operating leases; (2) the deconsolidation of assets and liabilities for certain sale-leaseback transactions arising from build-to-suit lease arrangements for which construction was completed and the Company is leasing the constructed assets that did not qualify for sale accounting prior to the adoption of the new standard; and (3) significant new disclosures about the Company’s leasing activities.
Adoption of the new standard resulted in recognizing lease liabilities of $33.7 million based on the present value of the remaining minimum rental payments. In addition, the Company recognized ROU assets of $32.8 million, which corresponds to the lease liabilities reduced by deferred rent expense as of the effective date. The Company also deconsolidated total assets of $43.8 million and total liabilities of $34.8 million for entities that had been consolidated due to sale-leaseback transactions that failed to qualify for recognition as sales under the prior guidance. Deconsolidation of these entities reduced noncontrolling interests by $6.1 million.
Liquidity and Capital Resources
•As of December 31, 2019, the Company had cash and cash equivalents of $133.9 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 $52.7 million as of December 31, 2019.
•The Company has historically generated positive cash flow from operations. For the year ended December 31, 2019, the Company’s net cash provided by operating activities was $298.9 million.
•On December 16, 2019, the Company amended its unsecured line of credit to, among other things, extend the maturity date of the facility from June 22, 2023 to December 16, 2024 and increase the size of the facility from $382.5 million to $455.0 million. As of December 31, 2019, the unsecured line of credit had $50.0 million outstanding and $405.0 million was available for future use. The line of credit provides that the Company may increase the aggregate financing commitments, through the existing lenders and/or through new lenders, up to a total of $550.0 million, subject to certain conditions.
•The majority of the Company’s portfolio of student loans is funded in asset-backed securitizations that will generate significant earnings and cash flow over the life of these transactions. As of December 31, 2019, the Company currently expects future undiscounted cash flows from its securitization portfolio to be approximately $1.89 billion, of which approximately $1.28 billion will be generated over the next six years.
•Certain of the Company’s asset-backed securitizations were structured as “Turbo Transactions” which required all cash generated from the student loans (including excess spread) to be directed toward payment of interest and any outstanding principal generally until such time as all principal on the notes had been paid in full. Once the notes in such transactions were paid in full, the remaining unencumbered student loans (and other remaining assets, if any) in the securitization would be released to the Company, at which time the Company would have the option to refinance or sell these assets, or retain them on the balance sheet as unencumbered assets.
During 2019, the Company extinguished a total of $1.05 billion of notes payable in certain asset-backed securitizations, including six of the Company's eight Turbo Transactions, prior to the notes' contractual maturities, resulting in the release of $1.45 billion in student loans and accrued interest receivable that were previously encumbered in the asset-backed securitizations. Upon extinguishment of the notes payable throughout 2019, the Company refinanced the student loans in its FFELP warehouse facilities and new asset-backed securitizations, resulting in net cash proceeds of $387.1 million.
The cash proceeds generated by the debt extinguishments were used to pay down a significant portion of the outstanding balance on the Company's unsecured line of credit and provides the Company with increased liquidity and the opportunity to invest the previously underutilized capital at higher returns.
•In 2019, the Company obtained a consumer loan warehouse facility with an aggregate maximum financing amount available of $200.0 million and a final maturity date of April 23, 2022. As of December 31, 2019, $116.6 million was outstanding under this facility and $83.4 million was available for future funding.
•During the year ended December 31, 2019, the Company completed seven FFELP asset-backed securitizations totaling $2.8 billion (par value). The proceeds from these transactions were used primarily to refinance student loans included in the Company's FFELP warehouse facilities and unencumbered student loans from the extinguishment of certain asset-backed securitizations.
8
•On June 25, 2019, the Company completed a private education loan asset-backed securitization totaling $47.2 million (par value). The proceeds from this transaction were used to refinance private education loans previously funded via a private loan repurchase agreement that was terminated on June 25, 2019.
•During 2019, the Company repurchased a total of 726,273 shares of Class A common stock for $40.4 million ($55.64 per share).
•On May 8, 2019, the Board of Directors authorized a new stock repurchase program to repurchase up to a total of five million shares of the Company's Class A common stock during the three-year period ending May 7, 2022. As of December 31, 2019, 4.8 million shares remained authorized for repurchase under the Company's stock repurchase program.
•During 2019, the Company paid cash dividends totaling $29.5 million ($0.74 per share).
•The Company intends to use its liquidity position to capitalize on market opportunities, including FFELP, 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.
Segment Reporting
The following tables include the results of each of the Company's reportable operating segments reconciled to the consolidated financial statements.
| Three months ended December 31, 2019 | |||||||||||||||||||||||||||||||||||||||||
| Loan Servicing and Systems | Education Technology, Services, and Payment Processing | Communications | Asset Generation and Management | Corporate and Other Activities | Eliminations | Total | |||||||||||||||||||||||||||||||||||
| Total interest income | $ | 452 | 2,069 | — | 208,576 | 2,062 | (801) | 212,358 | |||||||||||||||||||||||||||||||||
| Interest expense | 46 | 14 | — | 149,056 | (208) | (801) | 148,106 | ||||||||||||||||||||||||||||||||||
| Net interest income | 406 | 2,055 | — | 59,520 | 2,270 | — | 64,252 | ||||||||||||||||||||||||||||||||||
| Less provision for loan losses | — | — | — | 13,000 | — | — | 13,000 | ||||||||||||||||||||||||||||||||||
Net interest income (loss) after provision for loan losses | 406 | 2,055 | — | 46,520 | 2,270 | — | 51,252 | ||||||||||||||||||||||||||||||||||
| Other income: | |||||||||||||||||||||||||||||||||||||||||
Loan servicing and systems revenue | 113,086 | — | — | — | — | — | 113,086 | ||||||||||||||||||||||||||||||||||
Intersegment servicing revenue | 11,325 | — | — | — | — | (11,325) | — | ||||||||||||||||||||||||||||||||||
Education technology, services, and payment processing revenue | — | 63,578 | — | — | — | — | 63,578 | ||||||||||||||||||||||||||||||||||
| Communications revenue | — | — | 17,499 | — | — | — | 17,499 | ||||||||||||||||||||||||||||||||||
| Other income | 3,094 | 259 | 490 | 18,553 | 4,127 | — | 26,522 | ||||||||||||||||||||||||||||||||||
Derivative settlements, net | — | — | — | 6,100 | — | — | 6,100 | ||||||||||||||||||||||||||||||||||
Derivative market value adjustments, net | — | — | — | (2,930) | — | — | (2,930) | ||||||||||||||||||||||||||||||||||
| Total other income | 127,505 | 63,837 | 17,989 | 21,723 | 4,127 | (11,325) | 223,855 | ||||||||||||||||||||||||||||||||||
| Cost of services: | |||||||||||||||||||||||||||||||||||||||||
Cost to provide education technology, services, and payment processing services | — | 19,002 | — | — | — | — | 19,002 | ||||||||||||||||||||||||||||||||||
| Cost to provide communications services | — | — | 5,327 | — | — | — | 5,327 | ||||||||||||||||||||||||||||||||||
| Total cost of services | — | 19,002 | 5,327 | — | — | — | 24,329 | ||||||||||||||||||||||||||||||||||
| Operating expenses: | |||||||||||||||||||||||||||||||||||||||||
| Salaries and benefits | 74,212 | 25,010 | 5,312 | 392 | 19,635 | — | 124,561 | ||||||||||||||||||||||||||||||||||
| Depreciation and amortization | 8,519 | 2,988 | 11,148 | — | 5,995 | — | 28,651 | ||||||||||||||||||||||||||||||||||
| Other expenses | 18,332 | 5,587 | 3,981 | 5,346 | 13,464 | — | 46,710 | ||||||||||||||||||||||||||||||||||
| Intersegment expenses, net | 14,008 | 3,763 | 881 | 11,732 | (19,059) | (11,325) | — | ||||||||||||||||||||||||||||||||||
| Total operating expenses | 115,071 | 37,348 | 21,322 | 17,470 | 20,035 | (11,325) | 199,922 | ||||||||||||||||||||||||||||||||||
Income (loss) before income taxes | 12,840 | 9,542 | (8,660) | 50,773 | (13,638) | — | 50,856 | ||||||||||||||||||||||||||||||||||
| Income tax (expense) benefit | (3,082) | (2,290) | 2,079 | (12,186) | 6,457 | — | (9,022) | ||||||||||||||||||||||||||||||||||
| Net income (loss) | 9,758 | 7,252 | (6,581) | 38,587 | (7,181) | — | 41,834 | ||||||||||||||||||||||||||||||||||
Net income attributable to noncontrolling interests | — | — | — | — | 546 | — | 546 | ||||||||||||||||||||||||||||||||||
Net income (loss) attributable to Nelnet, Inc. | $ | 9,758 | 7,252 | (6,581) | 38,587 | (6,635) | — | 42,380 | |||||||||||||||||||||||||||||||||
9
| Three months ended September 30, 2019 | |||||||||||||||||||||||||||||||||||||||||
| Loan Servicing and Systems | Education Technology, Services, and Payment Processing | Communications | Asset Generation and Management | Corporate and Other Activities | Eliminations | Total | |||||||||||||||||||||||||||||||||||
| Total interest income | $ | 532 | 3,499 | — | 233,225 | 2,859 | (1,171) | 238,945 | |||||||||||||||||||||||||||||||||
| Interest expense | 51 | 12 | — | 171,485 | 2,110 | (1,171) | 172,488 | ||||||||||||||||||||||||||||||||||
| Net interest income | 481 | 3,487 | — | 61,740 | 749 | — | 66,457 | ||||||||||||||||||||||||||||||||||
| Less provision for loan losses | — | — | — | 10,000 | — | — | 10,000 | ||||||||||||||||||||||||||||||||||
Net interest income (loss) after provision for loan losses | 481 | 3,487 | — | 51,740 | 749 | — | 56,457 | ||||||||||||||||||||||||||||||||||
| Other income: | |||||||||||||||||||||||||||||||||||||||||
Loan servicing and systems revenue | 113,286 | — | — | — | — | — | 113,286 | ||||||||||||||||||||||||||||||||||
Intersegment servicing revenue | 11,611 | — | — | — | — | (11,611) | — | ||||||||||||||||||||||||||||||||||
Education technology, services, and payment processing revenue | — | 74,251 | — | — | — | — | 74,251 | ||||||||||||||||||||||||||||||||||
| Communications revenue | — | — | 16,470 | — | — | — | 16,470 | ||||||||||||||||||||||||||||||||||
| Other income | 2,291 | — | 532 | 3,384 | 7,231 | — | 13,439 | ||||||||||||||||||||||||||||||||||
Derivative settlements, net | — | — | — | 7,298 | — | — | 7,298 | ||||||||||||||||||||||||||||||||||
Derivative market value adjustments, net | — | — | — | (5,630) | — | — | (5,630) | ||||||||||||||||||||||||||||||||||
| Total other income | 127,188 | 74,251 | 17,002 | 5,052 | 7,231 | (11,611) | 219,114 | ||||||||||||||||||||||||||||||||||
| Cost of services: | |||||||||||||||||||||||||||||||||||||||||
Cost to provide education technology, services, and payment processing services | — | 25,671 | — | — | — | — | 25,671 | ||||||||||||||||||||||||||||||||||
| Cost to provide communications services | — | — | 5,236 | — | — | — | 5,236 | ||||||||||||||||||||||||||||||||||
| Total cost of services | — | 25,671 | 5,236 | — | — | — | 30,907 | ||||||||||||||||||||||||||||||||||
| Operating expenses: | |||||||||||||||||||||||||||||||||||||||||
| Salaries and benefits | 69,209 | 23,826 | 5,763 | 394 | 17,479 | — | 116,670 | ||||||||||||||||||||||||||||||||||
| Depreciation and amortization | 8,565 | 2,997 | 10,926 | — | 5,212 | — | 27,701 | ||||||||||||||||||||||||||||||||||
| Other expenses | 16,686 | 5,325 | 3,842 | 19,054 | 13,422 | — | 58,329 | ||||||||||||||||||||||||||||||||||
| Intersegment expenses, net | 12,955 | 3,194 | 701 | 11,678 | (16,917) | (11,611) | — | ||||||||||||||||||||||||||||||||||
| Total operating expenses | 107,415 | 35,342 | 21,232 | 31,126 | 19,196 | (11,611) | 202,700 | ||||||||||||||||||||||||||||||||||
Income (loss) before income taxes | 20,254 | 16,725 | (9,466) | 25,666 | (11,216) | — | 41,964 | ||||||||||||||||||||||||||||||||||
| Income tax (expense) benefit | (4,861) | (4,014) | 2,272 | (6,160) | 3,935 | — | (8,829) | ||||||||||||||||||||||||||||||||||
| Net income (loss) | 15,393 | 12,711 | (7,194) | 19,506 | (7,281) | — | 33,135 | ||||||||||||||||||||||||||||||||||
Net income attributable to noncontrolling interests | — | — | — | — | 77 | — | 77 | ||||||||||||||||||||||||||||||||||
Net income (loss) attributable to Nelnet, Inc. | $ | 15,393 | 12,711 | (7,194) | 19,506 | (7,204) | — | 33,212 | |||||||||||||||||||||||||||||||||
10
| Three months ended December 31, 2018 | |||||||||||||||||||||||||||||||||||||||||
| Loan Servicing and Systems | Education Technology, Services, and Payment Processing | Communications | Asset Generation and Management | Corporate and Other Activities | Eliminations | Total | |||||||||||||||||||||||||||||||||||
| Total interest income | $ | 421 | 1,526 | 2 | 248,620 | 2,271 | (569) | 252,271 | |||||||||||||||||||||||||||||||||
| Interest expense | — | 5 | — | 181,632 | 1,664 | (569) | 182,732 | ||||||||||||||||||||||||||||||||||
| Net interest income | 421 | 1,521 | 2 | 66,988 | 607 | — | 69,539 | ||||||||||||||||||||||||||||||||||
| Less provision for loan losses | — | — | — | 5,000 | — | — | 5,000 | ||||||||||||||||||||||||||||||||||
Net interest income (loss) after provision for loan losses | 421 | 1,521 | 2 | 61,988 | 607 | — | 64,539 | ||||||||||||||||||||||||||||||||||
| Other income: | |||||||||||||||||||||||||||||||||||||||||
Loan servicing and systems revenue | 112,761 | — | — | — | — | — | 112,761 | ||||||||||||||||||||||||||||||||||
| Intersegment servicing revenue | 12,412 | — | — | — | — | (12,412) | — | ||||||||||||||||||||||||||||||||||
Education technology, services, and payment processing revenue | — | 54,589 | — | — | — | — | 54,589 | ||||||||||||||||||||||||||||||||||
| Communications revenue | — | — | 13,326 | — | — | — | 13,326 | ||||||||||||||||||||||||||||||||||
| Other income | 2,088 | — | 125 | 3,333 | 4,451 | — | 9,998 | ||||||||||||||||||||||||||||||||||
Derivative settlements, net | — | — | — | 19,050 | 2 | — | 19,052 | ||||||||||||||||||||||||||||||||||
Derivative market value adjustments, net | — | — | — | (49,229) | 334 | — | (48,895) | ||||||||||||||||||||||||||||||||||
| Total other income | 127,261 | 54,589 | 13,451 | (26,846) | 4,787 | (12,412) | 160,831 | ||||||||||||||||||||||||||||||||||
| Cost of services: | |||||||||||||||||||||||||||||||||||||||||
Cost to provide education technology, services, and payment processing services | — | 15,479 | — | — | — | — | 15,479 | ||||||||||||||||||||||||||||||||||
| Cost to provide communications services | — | — | 5,033 | — | — | — | 5,033 | ||||||||||||||||||||||||||||||||||
| Total cost of services | — | 15,479 | 5,033 | — | — | — | 20,512 | ||||||||||||||||||||||||||||||||||
| Operating expenses: | |||||||||||||||||||||||||||||||||||||||||
| Salaries and benefits | 69,046 | 22,528 | 5,495 | 343 | 16,834 | — | 114,247 | ||||||||||||||||||||||||||||||||||
| Depreciation and amortization | 8,837 | 3,422 | 6,792 | — | 4,902 | — | 23,953 | ||||||||||||||||||||||||||||||||||
| Other expenses | 15,746 | 13,188 | 3,089 | 3,551 | 14,010 | — | 49,583 | ||||||||||||||||||||||||||||||||||
| Intersegment expenses, net | 15,074 | 3,051 | 776 | 12,927 | (19,416) | (12,412) | — | ||||||||||||||||||||||||||||||||||
| Total operating expenses | 108,703 | 42,189 | 16,152 | 16,821 | 16,330 | (12,412) | 187,783 | ||||||||||||||||||||||||||||||||||
Income (loss) before income taxes | 18,979 | (1,558) | (7,732) | 18,321 | (10,936) | — | 17,075 | ||||||||||||||||||||||||||||||||||
| Income tax (expense) benefit | (4,555) | 374 | 1,856 | (4,397) | 11,321 | — | 4,599 | ||||||||||||||||||||||||||||||||||
| Net income (loss) | 14,424 | (1,184) | (5,876) | 13,924 | 385 | — | 21,674 | ||||||||||||||||||||||||||||||||||
Net loss (income) attributable to noncontrolling interests | — | — | — | — | (48) | — | (48) | ||||||||||||||||||||||||||||||||||
Net income (loss) attributable to Nelnet, Inc. | $ | 14,424 | (1,184) | (5,876) | 13,924 | 337 | — | 21,626 | |||||||||||||||||||||||||||||||||
11
| Year ended December 31, 2019 | |||||||||||||||||||||||||||||||||||||||||
| Loan Servicing and Systems | Education Technology, Services, and Payment Processing | Communications | Asset Generation and Management | Corporate and Other Activities | Eliminations | Total | |||||||||||||||||||||||||||||||||||
| Total interest income | $ | 2,031 | 9,244 | 3 | 931,963 | 9,232 | (3,796) | 948,677 | |||||||||||||||||||||||||||||||||
| Interest expense | 115 | 46 | — | 693,375 | 9,587 | (3,796) | 699,327 | ||||||||||||||||||||||||||||||||||
| Net interest income (expense) | 1,916 | 9,198 | 3 | 238,588 | (355) | — | 249,350 | ||||||||||||||||||||||||||||||||||
| Less provision for loan losses | — | — | — | 39,000 | — | — | 39,000 | ||||||||||||||||||||||||||||||||||
Net interest income (loss) after provision for loan losses | 1,916 | 9,198 | 3 | 199,588 | (355) | — | 210,350 | ||||||||||||||||||||||||||||||||||
| Other income: | |||||||||||||||||||||||||||||||||||||||||
Loan servicing and systems revenue | 455,255 | — | — | — | — | — | 455,255 | ||||||||||||||||||||||||||||||||||
| Intersegment servicing revenue | 46,751 | — | — | — | — | (46,751) | — | ||||||||||||||||||||||||||||||||||
Education technology, services, and payment processing revenue | — | 277,331 | — | — | — | — | 277,331 | ||||||||||||||||||||||||||||||||||
| Communications revenue | — | — | 64,269 | — | — | — | 64,269 | ||||||||||||||||||||||||||||||||||
| Other income | 9,736 | 259 | 1,509 | 30,349 | 23,327 | — | 65,179 | ||||||||||||||||||||||||||||||||||
Derivative settlements, net | — | — | — | 45,406 | — | — | 45,406 | ||||||||||||||||||||||||||||||||||
Derivative market value adjustments, net | — | — | — | (76,195) | — | — | (76,195) | ||||||||||||||||||||||||||||||||||
| Total other income | 511,742 | 277,590 | 65,778 | (440) | 23,327 | (46,751) | 831,245 | ||||||||||||||||||||||||||||||||||
| Cost of services: | |||||||||||||||||||||||||||||||||||||||||
Cost to provide education technology, services, and payment processing services | — | 81,603 | — | — | — | — | 81,603 | ||||||||||||||||||||||||||||||||||
| Cost to provide communications services | — | — | 20,423 | — | — | — | 20,423 | ||||||||||||||||||||||||||||||||||
| Total cost of services | — | 81,603 | 20,423 | — | — | — | 102,026 | ||||||||||||||||||||||||||||||||||
| Operating expenses: | |||||||||||||||||||||||||||||||||||||||||
| Salaries and benefits | 276,136 | 94,666 | 21,004 | 1,545 | 70,152 | — | 463,503 | ||||||||||||||||||||||||||||||||||
| Depreciation and amortization | 34,755 | 12,820 | 37,173 | — | 20,300 | — | 105,049 | ||||||||||||||||||||||||||||||||||
| Other expenses | 71,064 | 22,027 | 15,165 | 34,445 | 51,571 | — | 194,272 | ||||||||||||||||||||||||||||||||||
| Intersegment expenses, net | 54,325 | 13,405 | 2,962 | 47,362 | (71,303) | (46,751) | — | ||||||||||||||||||||||||||||||||||
| Total operating expenses | 436,280 | 142,918 | 76,304 | 83,352 | 70,720 | (46,751) | 762,824 | ||||||||||||||||||||||||||||||||||
Income (loss) before income taxes | 77,378 | 62,267 | (30,946) | 115,796 | (47,748) | — | 176,745 | ||||||||||||||||||||||||||||||||||
| Income tax (expense) benefit | (18,571) | (14,944) | 7,427 | (27,792) | 18,428 | — | (35,451) | ||||||||||||||||||||||||||||||||||
| Net income (loss) | 58,807 | 47,323 | (23,519) | 88,004 | (29,320) | — | 141,294 | ||||||||||||||||||||||||||||||||||
Net loss (income) attributable to noncontrolling interests | — | — | — | — | 509 | — | 509 | ||||||||||||||||||||||||||||||||||
Net income (loss) attributable to Nelnet, Inc. | $ | 58,807 | 47,323 | (23,519) | 88,004 | (28,811) | — | 141,803 | |||||||||||||||||||||||||||||||||
12
| Year ended December 31, 2018 | |||||||||||||||||||||||||||||||||||||||||
| Loan Servicing and Systems | Education Technology, Services, and Payment Processing | Communications | Asset Generation and Management | Corporate and Other Activities | Eliminations | Total | |||||||||||||||||||||||||||||||||||
| Total interest income | $ | 1,351 | 4,453 | 4 | 911,502 | 19,944 | (12,989) | 924,266 | |||||||||||||||||||||||||||||||||
| Interest expense | — | 9 | 9,987 | 662,360 | 10,540 | (12,989) | 669,906 | ||||||||||||||||||||||||||||||||||
| Net interest income (expense) | 1,351 | 4,444 | (9,983) | 249,142 | 9,404 | — | 254,360 | ||||||||||||||||||||||||||||||||||
| Less provision for loan losses | — | — | — | 23,000 | — | — | 23,000 | ||||||||||||||||||||||||||||||||||
Net interest income (loss) after provision for loan losses | 1,351 | 4,444 | (9,983) | 226,142 | 9,404 | — | 231,360 | ||||||||||||||||||||||||||||||||||
| Other income: | |||||||||||||||||||||||||||||||||||||||||
Loan servicing and systems revenue | 440,027 | — | — | — | — | — | 440,027 | ||||||||||||||||||||||||||||||||||
| Intersegment servicing revenue | 47,082 | — | — | — | — | (47,082) | — | ||||||||||||||||||||||||||||||||||
Education technology, services, and payment processing revenue | — | 221,962 | — | — | — | — | 221,962 | ||||||||||||||||||||||||||||||||||
| Communications revenue | — | — | 44,653 | — | — | — | 44,653 | ||||||||||||||||||||||||||||||||||
| Other income | 7,284 | — | 1,075 | 12,723 | 33,724 | — | 54,805 | ||||||||||||||||||||||||||||||||||
Derivative settlements, net | — | — | — | 70,478 | (407) | — | 70,071 | ||||||||||||||||||||||||||||||||||
Derivative market value adjustments, net | — | — | — | (2,159) | 3,173 | — | 1,014 | ||||||||||||||||||||||||||||||||||
| Total other income | 494,393 | 221,962 | 45,728 | 81,042 | 36,490 | (47,082) | 832,532 | ||||||||||||||||||||||||||||||||||
| Cost of services: | |||||||||||||||||||||||||||||||||||||||||
Cost to provide education technology, services, and payment processing services | — | 59,566 | — | — | — | — | 59,566 | ||||||||||||||||||||||||||||||||||
| Cost to provide communications services | — | — | 16,926 | — | — | — | 16,926 | ||||||||||||||||||||||||||||||||||
| Total cost of services | — | 59,566 | 16,926 | — | — | — | 76,492 | ||||||||||||||||||||||||||||||||||
| Operating expenses: | |||||||||||||||||||||||||||||||||||||||||
| Salaries and benefits | 267,458 | 81,080 | 18,779 | 1,526 | 67,336 | — | 436,179 | ||||||||||||||||||||||||||||||||||
| Depreciation and amortization | 32,074 | 13,484 | 23,377 | — | 17,960 | — | 86,896 | ||||||||||||||||||||||||||||||||||
| Other expenses | 67,336 | 28,137 | 11,900 | 15,961 | 54,697 | — | 178,031 | ||||||||||||||||||||||||||||||||||
| Intersegment expenses, net | 59,042 | 10,681 | 2,578 | 47,870 | (73,088) | (47,082) | — | ||||||||||||||||||||||||||||||||||
| Total operating expenses | 425,910 | 133,382 | 56,634 | 65,357 | 66,905 | (47,082) | 701,106 | ||||||||||||||||||||||||||||||||||
Income (loss) before income taxes | 69,834 | 33,458 | (37,815) | 241,827 | (21,011) | — | 286,294 | ||||||||||||||||||||||||||||||||||
| Income tax (expense) benefit | (16,954) | (8,030) | 9,075 | (58,038) | 15,177 | — | (58,770) | ||||||||||||||||||||||||||||||||||
| Net income (loss) | 52,880 | 25,428 | (28,740) | 183,789 | (5,834) | — | 227,524 | ||||||||||||||||||||||||||||||||||
Net loss (income) attributable to noncontrolling interests | 808 | — | — | — | (419) | — | 389 | ||||||||||||||||||||||||||||||||||
Net income (loss) attributable to Nelnet, Inc. | $ | 53,688 | 25,428 | (28,740) | 183,789 | (6,253) | — | 227,913 | |||||||||||||||||||||||||||||||||
13
Net Interest Income, Net of Settlements on Derivatives
The following table summarizes the components of "net interest income" and "derivative settlements, net."
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 as presented in the table below. Net interest income (net of settlements on derivatives) is a non-GAAP financial measure, and the Company reports this non-GAAP information because the Company believes that it provides additional information regarding operational and performance indicators that are closely assessed by management. There is no comprehensive, authoritative guidance for the presentation of such non-GAAP information, which is only meant to supplement GAAP results by providing additional information that management utilizes to assess performance. See "Derivative Settlements" included in this supplement for the net settlement activity recognized by the Company for each type of derivative for the periods presented in the table below.
| Three months ended | Year ended | ||||||||||||||||||||||||||||
| December 31, 2019 | September 30, 2019 | December 31, 2018 | December 31, 2019 | December 31, 2018 | |||||||||||||||||||||||||
Variable loan interest margin | $ | 40,643 | 46,051 | 51,732 | 174,954 | 181,488 | |||||||||||||||||||||||
Settlements on associated derivatives (a) | 1,839 | 234 | 901 | 5,214 | 5,577 | ||||||||||||||||||||||||
Variable loan interest margin, net of settlements on derivatives | 42,482 | 46,285 | 52,633 | 180,168 | 187,065 | ||||||||||||||||||||||||
Fixed rate floor income | 15,727 | 12,685 | 11,452 | 49,677 | 56,811 | ||||||||||||||||||||||||
Settlements on associated derivatives (b) | 4,261 | 7,064 | 18,148 | 40,192 | 64,901 | ||||||||||||||||||||||||
Fixed rate floor income, net of settlements on derivatives | 19,988 | 19,749 | 29,600 | 89,869 | 121,712 | ||||||||||||||||||||||||
| Investment interest | 7,720 | 9,882 | 8,019 | 34,421 | 26,600 | ||||||||||||||||||||||||
| Corporate debt interest expense | 162 | (2,161) | (1,664) | (9,702) | (10,539) | ||||||||||||||||||||||||
| Non-portfolio related derivative settlements (c) | — | — | 3 | — | (407) | ||||||||||||||||||||||||
Net interest income (net of settlements on derivatives) | $ | 70,352 | 73,755 | 88,591 | 294,756 | 324,431 | |||||||||||||||||||||||
(a) Includes the net settlements received related to the Company’s 1:3 basis swaps.
(b) Includes the net settlements received related to the Company’s floor income interest rate swaps.
(c) Includes the net settlements received related to the Company’s hybrid debt hedges.
14
Loan Servicing and Systems Revenue
The following table provides disaggregated revenue by service offering for the Loan Servicing and Systems Revenue operating segment.
| Three months ended | Year ended | ||||||||||||||||||||||||||||
| December 31, 2019 | September 30, 2019 | December 31, 2018 | December 31, 2019 | December 31, 2018 | |||||||||||||||||||||||||
| Government servicing - Nelnet | $ | 39,247 | 38,645 | 39,076 | 157,991 | 157,091 | |||||||||||||||||||||||
| Government servicing - Great Lakes | 46,371 | 46,234 | 46,191 | 185,656 | 168,298 | ||||||||||||||||||||||||
| Private education and consumer loan servicing | 8,762 | 9,561 | 9,484 | 36,788 | 41,474 | ||||||||||||||||||||||||
| FFELP servicing | 5,835 | 6,089 | 7,283 | 25,043 | 31,542 | ||||||||||||||||||||||||
| Software services | 10,822 | 10,493 | 8,468 | 41,077 | 32,929 | ||||||||||||||||||||||||
| Outsourced services and other | 2,049 | 2,264 | 2,260 | 8,700 | 8,693 | ||||||||||||||||||||||||
| Loan servicing and systems revenue | $ | 113,086 | 113,286 | 112,762 | 455,255 | 440,027 | |||||||||||||||||||||||
Loan Servicing Volumes
| As of | |||||||||||||||||||||||||||||||||||||||||||||||||||||
| December 31, 2017 | March 31, 2018 | June 30, 2018 | September 30, 2018 | December 31, 2018 | March 31, 2019 | June 30, 2019 | September 30, 2019 | December 31, 2019 | |||||||||||||||||||||||||||||||||||||||||||||
| Servicing volume (dollars in millions): | |||||||||||||||||||||||||||||||||||||||||||||||||||||
| Nelnet: | |||||||||||||||||||||||||||||||||||||||||||||||||||||
| Government | $ | 172,669 | 176,605 | 176,179 | 179,283 | 179,507 | 183,093 | 181,682 | 184,399 | 183,790 | |||||||||||||||||||||||||||||||||||||||||||
| FFELP | 27,262 | 26,969 | 37,599 | 37,459 | 36,748 | 35,917 | 35,003 | 33,981 | 33,185 | ||||||||||||||||||||||||||||||||||||||||||||
| Private and consumer | 11,483 | 12,116 | 15,016 | 15,466 | 15,666 | 16,065 | 16,025 | 16,286 | 16,033 | ||||||||||||||||||||||||||||||||||||||||||||
| Great Lakes: | |||||||||||||||||||||||||||||||||||||||||||||||||||||
| Government | — | 242,063 | 241,902 | 232,741 | 232,694 | 237,050 | 236,500 | 240,268 | 239,980 | ||||||||||||||||||||||||||||||||||||||||||||
| FFELP (a) | — | 11,136 | — | — | — | — | — | — | — | ||||||||||||||||||||||||||||||||||||||||||||
| Private and consumer (a) | — | 1,927 | 31 | — | — | — | — | — | — | ||||||||||||||||||||||||||||||||||||||||||||
| Total | $ | 211,414 | 470,816 | 470,727 | 464,949 | 464,615 | 472,125 | 469,210 | 474,934 | 472,988 | |||||||||||||||||||||||||||||||||||||||||||
| Number of servicing borrowers: | |||||||||||||||||||||||||||||||||||||||||||||||||||||
| Nelnet: | |||||||||||||||||||||||||||||||||||||||||||||||||||||
| Government | 5,877,414 | 5,819,286 | 5,745,181 | 5,805,307 | 5,771,923 | 5,708,582 | 5,592,989 | 5,635,653 | 5,574,001 | ||||||||||||||||||||||||||||||||||||||||||||
| FFELP | 1,420,311 | 1,399,280 | 1,787,419 | 1,754,247 | 1,709,853 | 1,650,785 | 1,588,530 | 1,529,392 | 1,478,703 | ||||||||||||||||||||||||||||||||||||||||||||
| Private and consumer | 502,114 | 508,750 | 672,520 | 692,763 | 696,933 | 699,768 | 693,410 | 701,299 | 682,836 | ||||||||||||||||||||||||||||||||||||||||||||
| Great Lakes: | |||||||||||||||||||||||||||||||||||||||||||||||||||||
| Government | — | 7,456,830 | 7,378,875 | 7,486,311 | 7,458,684 | 7,385,284 | 7,300,691 | 7,430,165 | 7,396,657 | ||||||||||||||||||||||||||||||||||||||||||||
| FFELP (a) | — | 461,553 | — | — | — | — | — | — | — | ||||||||||||||||||||||||||||||||||||||||||||
| Private and consumer (a) | — | 118,609 | 3,987 | — | — | — | — | — | — | ||||||||||||||||||||||||||||||||||||||||||||
| Total | 7,799,839 | 15,764,308 | 15,587,982 | 15,738,628 | 15,637,393 | 15,444,419 | 15,175,620 | 15,296,509 | 15,132,197 | ||||||||||||||||||||||||||||||||||||||||||||
Number of remote hosted borrowers: | 2,812,713 | 6,207,747 | 6,145,981 | 6,406,923 | 6,393,151 | 6,332,261 | 6,211,132 | 6,457,296 | 6,433,324 | ||||||||||||||||||||||||||||||||||||||||||||
(a) During the second quarter of 2018, the Company converted Great Lakes' FFELP and private education servicing volume to Nelnet Servicing's platform to leverage the efficiencies of supporting more volume on fewer systems.
15
Education Technology, Services, and Payment Processing
The following table provides disaggregated revenue by servicing offering for the Education Technology, Services, and Payment Processing operating segment.
| Three months ended | Year ended | ||||||||||||||||||||||||||||
| December 31, 2019 | September 30, 2019 | December 31, 2018 | December 31, 2019 | December 31, 2018 | |||||||||||||||||||||||||
| Tuition payment plan services | $ | 26,093 | 25,760 | 22,172 | 106,682 | 85,381 | |||||||||||||||||||||||
| Payment processing | 25,420 | 35,138 | 21,381 | 110,848 | 84,289 | ||||||||||||||||||||||||
| Education technology and services | 11,706 | 13,067 | 10,744 | 58,578 | 51,155 | ||||||||||||||||||||||||
| Other | 359 | 286 | 292 | 1,223 | 1,137 | ||||||||||||||||||||||||
| Education technology, services, and payment processing revenue | $ | 63,578 | 74,251 | 54,589 | 277,331 | 221,962 | |||||||||||||||||||||||
Communications Financial and Operating Data
Certain financial and operating data for ALLO is summarized in the tables below.
| Three months ended | Year ended | ||||||||||||||||||||||||||||||||||||||||||||||||||||||||||
| December 31, 2019 | September 30, 2019 | December 31, 2018 | December 31, 2019 | December 31, 2018 | |||||||||||||||||||||||||||||||||||||||||||||||||||||||
| Residential revenue | $ | 12,993 | 74.3 | % | 12,397 | 75.3 | % | 10,067 | 75.5 | % | 48,344 | 75.2 | % | 33,434 | 74.9 | % | |||||||||||||||||||||||||||||||||||||||||||
| Business revenue | 4,433 | 25.3 | 4,025 | 24.4 | 3,197 | 24.0 | 15,689 | 24.4 | 10,976 | 24.6 | |||||||||||||||||||||||||||||||||||||||||||||||||
| Other revenue | 73 | 0.4 | 48 | 0.3 | 62 | 0.5 | 236 | 0.4 | 243 | 0.5 | |||||||||||||||||||||||||||||||||||||||||||||||||
| Communications revenue | $ | 17,499 | 100.0 | % | 16,470 | 100.0 | % | 13,326 | 100.0 | % | 64,269 | 100.0 | % | 44,653 | 100.0 | % | |||||||||||||||||||||||||||||||||||||||||||
| Revenue contribution: | |||||||||||||||||||||||||||||||||||||||||||||||||||||||||||
| Internet | $ | 10,598 | 60.5 | % | $ | 9,899 | 60.1 | % | $ | 7,528 | 56.5 | % | $ | 38,239 | 59.5 | % | $ | 24,069 | 53.9 | % | |||||||||||||||||||||||||||||||||||||||
| Television | 4,176 | 23.9 | 4,068 | 24.7 | 3,708 | 27.8 | 16,196 | 25.2 | 12,949 | 29.0 | |||||||||||||||||||||||||||||||||||||||||||||||||
| Telephone | 2,643 | 15.1 | 2,487 | 15.1 | 2,064 | 15.5 | 9,705 | 15.1 | 7,546 | 16.9 | |||||||||||||||||||||||||||||||||||||||||||||||||
| Other | 82 | 0.5 | 16 | 0.1 | 26 | 0.2 | 129 | 0.2 | 89 | 0.2 | |||||||||||||||||||||||||||||||||||||||||||||||||
| Communications revenue | $ | 17,499 | 100.0 | % | $ | 16,470 | 100.0 | % | $ | 13,326 | 100.0 | % | $ | 64,269 | 100.0 | % | $ | 44,653 | 100.0 | % | |||||||||||||||||||||||||||||||||||||||
| Net loss | $ | (6,581) | (7,194) | (5,876) | (23,519) | (28,740) | |||||||||||||||||||||||||||||||||||||||||||||||||||||
| EBITDA (a) | 2,488 | 1,460 | (942) | 6,224 | (4,455) | ||||||||||||||||||||||||||||||||||||||||||||||||||||||
| Capital expenditures | 7,803 | 10,187 | 20,650 | 44,988 | 87,466 | ||||||||||||||||||||||||||||||||||||||||||||||||||||||
| As of December 31, 2019 | As of September 30, 2019 | As of June 30, 2019 | As of March 31, 2019 | As of December 31, 2018 | As of September 30, 2018 | As of June 30, 2018 | As of March 31, 2018 | As of December 31, 2017 | |||||||||||||||||||||||||||||||||||||||||||||
| Residential customer information: | |||||||||||||||||||||||||||||||||||||||||||||||||||||
| Households served | 47,744 | 45,228 | 42,760 | 40,338 | 37,351 | 32,529 | 27,643 | 23,541 | 20,428 | ||||||||||||||||||||||||||||||||||||||||||||
| Households passed (b) | 140,986 | 137,269 | 132,984 | 127,253 | 122,396 | 110,687 | 98,538 | 84,475 | 71,426 | ||||||||||||||||||||||||||||||||||||||||||||
| Households served/passed | 33.9 | % | 32.9 | % | 32.2 | % | 31.7 | % | 30.5 | % | 29.4 | % | 28.1 | % | 27.9 | % | 28.6 | % | |||||||||||||||||||||||||||||||||||
| Total households in current markets and new markets announced (c) | 160,884 | 159,974 | 159,974 | 152,840 | 152,840 | 142,602 | 137,500 | 137,500 | 137,500 | ||||||||||||||||||||||||||||||||||||||||||||
(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
16
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 ALLO's net loss under GAAP is presented below.
| Three months ended | Year ended | ||||||||||||||||||||||||||||
| December 31, 2019 | September 30, 2019 | December 31, 2018 | December 31, 2019 | December 31, 2018 | |||||||||||||||||||||||||
| Net loss | $ | (6,581) | (7,194) | (5,876) | (23,519) | (28,740) | |||||||||||||||||||||||
| Net interest (income) expense | — | — | (2) | (3) | 9,983 | ||||||||||||||||||||||||
| Income tax benefit | (2,079) | (2,272) | (1,856) | (7,427) | (9,075) | ||||||||||||||||||||||||
| Depreciation and amortization | 11,148 | 10,926 | 6,792 | 37,173 | 23,377 | ||||||||||||||||||||||||
| Earnings (loss) before interest, income taxes, depreciation, and amortization (EBITDA) | $ | 2,488 | 1,460 | (942) | 6,224 | (4,455) | |||||||||||||||||||||||
(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 third quarter of 2018, ALLO began providing services in Fort Morgan, Colorado. During the fourth quarter of 2018, ALLO began providing services in Hastings, Nebraska. During the second quarter of 2019, ALLO announced plans to expand its network to make services available in Breckenridge, Colorado. During the fourth quarter of 2019, ALLO announced plans to expand its network to make services available in Imperial, Nebraska. ALLO is now in eleven communities, including nine in Nebraska and two in Colorado.
Other Income
The following table summarizes the components of "other income."
| Three months ended | Year ended | ||||||||||||||||||||||||||||
| December 31, 2019 | September 30, 2019 | December 31, 2018 | December 31, 2019 | December 31, 2018 | |||||||||||||||||||||||||
| Gain on sale of loans | $ | 15,549 | — | — | 17,261 | — | |||||||||||||||||||||||
| Borrower late fee income | 3,014 | 3,196 | 3,308 | 12,884 | 12,302 | ||||||||||||||||||||||||
| Management fee revenue | 2,831 | 2,084 | 1,824 | 8,838 | 6,497 | ||||||||||||||||||||||||
| Gain (loss) on investments and notes receivable, net | 3,680 | 1,948 | (707) | 6,136 | 9,579 | ||||||||||||||||||||||||
| Investment advisory services | 747 | 753 | 1,840 | 2,941 | 6,009 | ||||||||||||||||||||||||
| Other | 701 | 5,458 | 3,733 | 17,119 | 20,418 | ||||||||||||||||||||||||
| Other income | $ | 26,522 | 13,439 | 9,998 | 65,179 | 54,805 | |||||||||||||||||||||||
Derivative Settlements
The following table summarizes the components of "derivative settlements, net" included in the attached consolidated statements of income.
| Three months ended | Year ended | ||||||||||||||||||||||||||||
| December 31, 2019 | September 30, 2019 | December 31, 2018 | December 31, 2019 | December 31, 2018 | |||||||||||||||||||||||||
| 1:3 basis swaps | $ | 1,839 | 234 | 901 | 5,214 | 5,577 | |||||||||||||||||||||||
Interest rate swaps - floor income hedges | 4,261 | 7,064 | 18,148 | 40,192 | 64,901 | ||||||||||||||||||||||||
Interest rate swaps - hybrid debt hedges | — | — | 3 | — | (407) | ||||||||||||||||||||||||
Total derivative settlements - income | $ | 6,100 | 7,298 | 19,052 | 45,406 | 70,071 | |||||||||||||||||||||||
17
Loans Receivable
Loans receivable consisted of the following:
| As of | As of | As of | |||||||||||||||
| December 31, 2019 | September 30, 2019 | December 31, 2018 | |||||||||||||||
| Federally insured student loans: | |||||||||||||||||
| Stafford and other | $ | 4,684,314 | 4,720,338 | 4,969,667 | |||||||||||||
| Consolidation | 15,644,229 | 15,975,499 | 17,186,229 | ||||||||||||||
| Total | 20,328,543 | 20,695,837 | 22,155,896 | ||||||||||||||
| Private education loans | 244,258 | 189,912 | 225,975 | ||||||||||||||
| Consumer loans | 225,918 | 321,199 | 138,627 | ||||||||||||||
| 20,798,719 | 21,206,948 | 22,520,498 | |||||||||||||||
Loan discount, net of unamortized loan premiums and deferred origination costs | (35,036) | (36,483) | (53,572) | ||||||||||||||
| Non-accretable discount | (32,398) | (32,607) | (29,396) | ||||||||||||||
| Allowance for loan losses: | |||||||||||||||||
| Federally insured loans | (36,763) | (37,676) | (42,310) | ||||||||||||||
| Private education loans | (9,597) | (9,882) | (10,838) | ||||||||||||||
| Consumer loans | (15,554) | (18,859) | (7,240) | ||||||||||||||
| $ | 20,669,371 | 21,071,441 | 22,377,142 | ||||||||||||||
Loan Activity
The following table sets forth the activity of loans:
| Three months ended December 31, | Year ended December 31, | ||||||||||||||||||||||
| 2019 | 2018 | 2019 | 2018 | ||||||||||||||||||||
| Beginning balance | $ | 21,206,948 | 22,672,757 | 22,520,498 | 21,995,877 | ||||||||||||||||||
| Loan acquisitions: | |||||||||||||||||||||||
| Federally insured student loans | 441,645 | 584,034 | 1,530,294 | 3,708,188 | |||||||||||||||||||
| Private education loans | 67,739 | 68,143 | 71,543 | 68,337 | |||||||||||||||||||
| Consumer loans | 107,634 | 40,097 | 405,726 | 120,482 | |||||||||||||||||||
| Total loan acquisitions | 617,018 | 692,274 | 2,007,563 | 3,897,007 | |||||||||||||||||||
Repayments, claims, capitalized interest, and other | (635,693) | (567,811) | (2,511,641) | (2,282,631) | |||||||||||||||||||
| Consolidation loans lost to external parties | (210,253) | (276,722) | (990,720) | (1,066,043) | |||||||||||||||||||
| Consumer loans sold | (179,301) | — | (226,981) | — | |||||||||||||||||||
| Other loans sold | — | — | — | (23,712) | |||||||||||||||||||
| Ending balance | $ | 20,798,719 | 22,520,498 | 20,798,719 | 22,520,498 | ||||||||||||||||||
18
Loan Spread Analysis
The following table analyzes the loan spread on the Company’s portfolio of loans, which represents the spread between the yield earned on loan assets and the costs of the liabilities and derivative instruments used to fund the assets.
| Three months ended | Year ended | ||||||||||||||||||||||||||||
| December 31, 2019 | September 30, 2019 | December 31, 2018 | December 31, 2019 | December 31, 2018 | |||||||||||||||||||||||||
| Variable loan yield, gross | 4.36 | % | 4.78 | % | 4.89 | % | 4.80 | % | 4.52 | % | |||||||||||||||||||
| Consolidation rebate fees | (0.83) | (0.83) | (0.84) | (0.83) | (0.84) | ||||||||||||||||||||||||
Discount accretion, net of premium and deferred origination costs amortization | 0.02 | 0.02 | 0.03 | 0.02 | 0.04 | ||||||||||||||||||||||||
| Variable loan yield, net | 3.55 | 3.97 | 4.08 | 3.99 | 3.72 | ||||||||||||||||||||||||
| Loan cost of funds - interest expense | (2.83) | (3.16) | (3.24) | (3.25) | (2.98) | ||||||||||||||||||||||||
| Loan cost of funds - derivative settlements (a) (b) | 0.04 | — | 0.02 | 0.03 | 0.03 | ||||||||||||||||||||||||
| Variable loan spread | 0.76 | 0.81 | 0.86 | 0.77 | 0.77 | ||||||||||||||||||||||||
Fixed rate floor income, gross | 0.30 | 0.23 | 0.21 | 0.22 | 0.25 | ||||||||||||||||||||||||
Fixed rate floor income - derivative settlements (a) (c) | 0.08 | 0.13 | 0.32 | 0.19 | 0.30 | ||||||||||||||||||||||||
Fixed rate floor income, net of settlements on derivatives | 0.38 | 0.36 | 0.53 | 0.41 | 0.55 | ||||||||||||||||||||||||
| Core loan spread (d) | 1.14 | % | 1.17 | % | 1.39 | % | 1.18 | % | 1.32 | % | |||||||||||||||||||
| Average balance of loans | $ | 21,040,484 | 21,600,850 | 22,583,222 | 21,698,094 | 22,596,436 | |||||||||||||||||||||||
| Average balance of debt outstanding | 20,850,214 | 21,371,482 | 22,232,428 | 21,259,309 | 22,181,932 | ||||||||||||||||||||||||
A reconciliation of core loan spread, which includes the impact of derivative settlements on loan spread, to loan spread without derivative settlements follows.
| Three months ended | Year ended | ||||||||||||||||||||||||||||
| December 31, 2019 | September 30, 2019 | December 31, 2018 | December 31, 2019 | December 31, 2018 | |||||||||||||||||||||||||
| Core loan spread | 1.14 | % | 1.17 | % | 1.39 | % | 1.18 | % | 1.32 | % | |||||||||||||||||||
| Derivative settlements (1:3 basis swaps) | (0.04) | — | (0.02) | (0.03) | (0.03) | ||||||||||||||||||||||||
| Derivative settlements (fixed rate floor income) | (0.08) | (0.13) | (0.32) | (0.19) | (0.30) | ||||||||||||||||||||||||
| Loan spread | 1.02 | % | 1.04 | % | 1.05 | % | 0.96 | % | 0.99 | % | |||||||||||||||||||
(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 with respect to derivatives that do not qualify for "hedge treatment" under GAAP be recorded in a separate income statement line item below net interest income. The Company maintains an overall risk management strategy that incorporates the use of derivative instruments to reduce the economic effect of interest rate volatility. As such, management believes derivative settlements for each applicable period should be evaluated with the Company’s net interest income (loan spread) as presented in this table. The Company reports this non-GAAP information because it believes that it provides additional information regarding operational and performance indicators that are closely assessed by management. There is no comprehensive, authoritative guidance for the presentation of such non-GAAP information, which is only meant to supplement GAAP results by providing additional information that management utilizes to assess performance. See "Derivative Settlements" included in this supplement 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.
(b) Derivative settlements consist of net settlements received related to the Company’s 1:3 basis swaps.
(c) Derivative settlements consist of net settlements received related to the Company’s floor income interest rate swaps.
(d) Variable loan spread, excluding consumer loans, would have been 0.67%, 0.67%, and 0.80% for the three months ended December 31, 2019, September 30, 2019, and December 31, 2018, respectively, and 0.67% and 0.71% for the years ended December 31, 2019 and 2018, respectively. Core loan spread, excluding consumer loans, would have been 1.05%, 1.03%, and 1.33% for the three months ended December 31, 2019, September 30, 2019, and December 31, 2018, respectively, and 1.09% and 1.27% for the years ended December 31, 2019 and 2018, respectively.
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A trend analysis of the Company's core and variable student loan spreads by calendar year quarter is summarized below.
(a) The interest earned on a large portion of the Company's FFELP student loan assets is indexed to the one-month LIBOR rate. The Company funds a portion 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 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.
The difference between variable loan spread and core loan spread is fixed rate floor income earned on a portion of the Company's federally insured student loan portfolio. A summary of fixed rate floor income and its contribution to core loan spread follows:
| Three months ended | Year ended | ||||||||||||||||||||||||||||
| December 31, 2019 | September 30, 2019 | December 31, 2018 | December 31, 2019 | December 31, 2018 | |||||||||||||||||||||||||
| Fixed rate floor income, gross | $ | 15,727 | 12,685 | 11,452 | 49,677 | 56,811 | |||||||||||||||||||||||
| Derivative settlements (a) | 4,261 | 7,064 | 18,148 | 40,192 | 64,901 | ||||||||||||||||||||||||
| Fixed rate floor income, net | $ | 19,988 | 19,749 | 29,600 | 89,869 | 121,712 | |||||||||||||||||||||||
Fixed rate floor income contribution to spread, net | 0.38 | % | 0.36 | % | 0.53 | % | 0.41 | % | 0.55 | % | |||||||||||||||||||
(a) Includes settlement payments on derivatives used to hedge student loans earning fixed rate floor income.
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Fixed Rate Floor Income
The following table shows the Company’s federally insured student loan assets that were earning fixed rate floor income as of December 31, 2019.
| Fixed interest rate range | Borrower/lender weighted average yield | Estimated variable conversion rate (a) | Loan balance | |||||||||||||||||
| 4.5 - 4.99% | 4.72% | 2.08% | $ | 727,086 | ||||||||||||||||
| 5.0 - 5.49% | 5.22% | 2.58% | 470,843 | |||||||||||||||||
| 5.5 - 5.99% | 5.67% | 3.03% | 320,031 | |||||||||||||||||
| 6.0 - 6.49% | 6.19% | 3.55% | 367,409 | |||||||||||||||||
| 6.5 - 6.99% | 6.70% | 4.06% | 357,842 | |||||||||||||||||
| 7.0 - 7.49% | 7.17% | 4.53% | 125,674 | |||||||||||||||||
| 7.5 - 7.99% | 7.71% | 5.07% | 224,635 | |||||||||||||||||
| 8.0 - 8.99% | 8.18% | 5.54% | 525,108 | |||||||||||||||||
| > 9.0% | 9.05% | 6.41% | 197,829 | |||||||||||||||||
| $ | 3,316,457 | |||||||||||||||||||
(a) The estimated variable conversion rate is the estimated short-term interest rate at which loans would convert to a variable rate. As of December 31, 2019, the weighted average estimated variable conversion rate was 3.72% and the short-term interest rate was 182 basis points.
The following table summarizes the outstanding derivative instruments as of December 31, 2019 used by the Company to economically hedge loans earning fixed rate floor income.
| Maturity | Notional amount | Weighted average fixed rate paid by the Company (a) | ||||||||||||
| 2020 | $ | 1,500,000 | 1.01 | % | ||||||||||
| 2021 | 600,000 | 2.15 | ||||||||||||
| 2022 (b) | 250,000 | 1.65 | ||||||||||||
| 2023 | 150,000 | 2.25 | ||||||||||||
| $ | 2,500,000 | 1.42 | % | |||||||||||
(a) For all interest rate derivatives, the Company receives discrete three-month LIBOR.
(b) These derivatives have forward effective start dates in June 2021.
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