NELNET, INC. 
(Management's Discussion and Analysis of Financial Condition and Results of Operations is for the three and nine months endedSeptember 30, 2021 and 2020. All dollars are in thousands, except per share amounts, unless otherwise noted.) The following discussion and analysis provides information that the Company's management believes is relevant to an assessment and understanding of the consolidated results of operations and financial condition of the Company. The discussion should be read in conjunction with the Company's consolidated financial statements included in the 2020 Annual Report. Forward-looking and cautionary statements This report contains forward-looking statements and information that are based on management's current expectations as of the date of this document. Statements that are not historical facts, including statements about the Company's plans and expectations for future financial condition, results of operations or economic performance, or that address management's plans and objectives for future operations, and statements that assume or are dependent upon future events, are forward-looking statements. The words "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 the "Risk Factors" section of the 2020 Annual Report and elsewhere in this report, and include such risks and uncertainties as: •risks and uncertainties related to the severity, magnitude, and duration of the coronavirus disease 2019 ("COVID-19") pandemic, including changes in the macroeconomic environment and consumer behavior, restrictions on business, educational, individual, or travel activities intended to combat the pandemic, and volatility in market conditions resulting from the pandemic, including interest rates, the value of equities, and other financial assets; •risks related to the ability to successfully maintain and increase allocated volumes of student loans serviced by the Company under existing and any future servicing contracts with theU.S. Department of Education (the "Department"), which current contracts accounted for 27 percent of the Company's revenue in 2020, risks to the Company related to the Department's initiatives to procure new contracts for federal student loan servicing, including the pending and uncertain nature of the Department's procurement process (under which awards of new contracts have been made to other service providers), risks that the Company may not be successful in obtaining any of such potential new contracts, and risks related to the Company's ability to comply with agreements with third-party customers for the servicing of Federal Direct Loan Program, Federal Family Education Loan Program (the "FFEL Program" or "FFELP"), private education, and consumer loans; •loan portfolio risks such as interest rate basis and repricing risk resulting from the fact that the interest rate characteristics of the student loan assets do not match the interest rate characteristics of the funding for those assets, the risk of loss of floor income on certain student loans originated under the FFEL Program, risks related to the use of derivatives to manage exposure to interest rate fluctuations, uncertainties regarding the expected benefits from purchased securitized and unsecuritized FFELP, private education, and consumer loans, or investment interests therein, and initiatives to purchase additional FFELP, private education, and consumer loans, and risks from changes in levels of loan prepayment or default rates; •financing and liquidity risks, including risks of changes in the general interest rate environment, including the availability of any relevant money market index rate such as LIBOR or the relationship between the relevant money market index rate and the rate at which the Company's assets and liabilities are priced, and changes in the securitization and other financing markets for loans, including adverse changes resulting from unanticipated repayment trends on student loans in the Company's securitization trusts that could accelerate or delay repayment of the associated bonds, which may increase the costs or limit the availability of financings necessary to purchase, refinance, or continue to hold student loans; •risks from changes in the terms of education loans and in the educational credit and services markets resulting from changes in applicable laws, regulations, and government programs and budgets, such as changes resulting from the 32 -------------------------------------------------------------------------------- Coronavirus Aid, Relief, and Economic Security Act (the "CARES Act") and the expected decline over time in FFELP loan interest income due to the discontinuation of new FFELP loan originations in 2010 and potential government initiatives or proposals to consolidate existing FFELP loans to the Federal Direct Loan Program, otherwise encourage or allow FFELP loans to be refinanced with Federal Direct Loan Program loans, and/or create additional loan forgiveness or broad debt cancellation programs; •risks related to a breach of or failure in the Company's operational or information systems or infrastructure, or those of third-party vendors, including cybersecurity risks related to the potential disclosure of confidential 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 of the expected benefits from theNovember 2020 launch ofNelnet Bank operations, including the ability to successfully conduct banking operations and achieve expected market penetration; •risks related to the expected benefits to the Company and toALLO Communications LLC (referred to collectively with its holding companyALLO Holdings, LLC as "ALLO") from the recapitalization and additional funding for ALLO and the Company's continuing investment in ALLO, and 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; •risks and uncertainties related to other initiatives to pursue additional strategic investments (and anticipated income therefrom), acquisitions, and other activities, such as the completed and potential additional transactions associated with the sale by Wells Fargo of its private education loan portfolio for which the Company was selected as the new servicer (including risks associated with errors that occasionally occur in converting loan servicing portfolio acquisitions to a new servicing platform, and uncertainties associated with expected income from the joint venture that purchased the Wells Fargo portfolio), including activities that are intended to diversify the Company both within and outside of its historical core education-related businesses; •risks and uncertainties associated with climate change, including extreme weather events and related natural disasters, which could result in increased loan portfolio credit risks and other asset and operational risks, as well as risks and uncertainties associated with efforts to address climate change; and •risks and uncertainties associated with litigation matters and with maintaining compliance with the extensive regulatory requirements applicable to the Company's businesses, reputational and other risks, including the risk of increased regulatory costs resulting from the politicization of student loan servicing, potential changes to corporate tax rates, and uncertainties inherent in the estimates and assumptions about future events that management is required to make in the preparation of the Company's consolidated financial statements. All forward-looking statements contained in this report are qualified by these cautionary statements and are made only as of the date of this document. Although the Company may from time to time voluntarily update or revise its prior forward-looking statements to reflect actual results or changes in the Company's expectations, the Company disclaims any commitment to do so except as required by law. 33 --------------------------------------------------------------------------------
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 and education technology, services, and payment processing, and the Company also has a significant investment in communications. A significant portion of the Company's revenue is net interest income earned on a portfolio of federally insured student loans. The Company also makes investments to further diversify 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 AdjustmentsThe Company prepares its financial statements and presents its financial results in accordance withU.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 adjustments, and a discussion of why the Company believes providing this additional information is useful to investors, is provided below. Three months ended September 30, Nine months ended September 30, 2021 2020 2021 2020 GAAP net income attributable to Nelnet, Inc.$ 53,138 71,503 260,603 117,452 Realized and unrealized derivative market value adjustments (7,260) (3,440) (44,455) 21,072 Tax effect (a) 1,742 826 10,669 (5,057) Net income attributable toNelnet, Inc. , excluding derivative market value adjustments (b)$ 47,620 68,889 226,817 133,467 Earnings per share: GAAP net income attributable to Nelnet, Inc.$ 1.38 1.86 6.74 2.99 Realized and unrealized derivative market value adjustments (0.19) (0.09) (1.15) 0.54 Tax effect (a) 0.04 0.02 0.28 (0.13) Net income attributable toNelnet, Inc. , excluding derivative market value adjustments (b)$ 1.23 1.79 5.87 3.40 (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. 34 -------------------------------------------------------------------------------- GAAP net income decreased for the three months endedSeptember 30, 2021 compared to the same period in 2020 primarily due to the following factors: •The recognition of a$14.8 million ($11.3 million after tax) gain from the sale of consumer loans in 2020; •The impairment of certain Company owned buildings and operating lease assets of$14.2 million ($10.8 million after tax) during 2021 due to continued evaluation of office space needs as employees continue to work from home due to COVID-19; •The recognition of a net loss of$8.5 million ($6.4 million after tax) during 2021 related to the Company's investments in ALLO; and •The recognition of a provision for loan losses on the Company's loan portfolio of$5.8 million ($4.4 million after tax) in the third quarter of 2021 compared to a negative provision for loan losses of$5.8 million ($4.4 million after tax) in the third quarter of 2020. These factors were partially offset by the following items: •The recognition of net investment gains and income of$16.1 million ($12.2 million after tax) on certain venture capital, real estate, and other investments during 2021; •A decrease of$8.4 million ($6.4 million after tax) in losses from solar investments in 2021 as compared to 2020; and •The recognition of a net loss by ALLO of$4.5 million ($3.5 million after tax) during 2020, prior to the deconsolidation of ALLO inDecember 2020 . GAAP net income increased for the nine months endedSeptember 30, 2021 compared to the same period in 2020 primarily due to the following factors: •The recognition of$97.1 million ($73.8 million after tax) of certain expenses during the first quarter of 2020 as a result of the COVID-19 pandemic, consisting of the recognition of an incremental provision for loan losses of$63.0 million ($47.9 million after tax), provision expense of$26.3 million ($20.0 million after tax) related to the Company's investment in certain consumer loan beneficial interest securitizations, and$7.8 million ($5.9 million after tax) impairment expense on certain venture capital investments; •Net income of$44.5 million ($33.8 million after tax) related to changes in the fair values of derivative instruments that do not qualify for hedge accounting in 2021 as compared to a net loss of$21.1 million ($16.0 million after tax) in 2020; •The recognition of net investment gains of$40.1 million ($30.5 million after tax) on certain venture capital, real estate, and other investments during 2021; •A decrease of$23.8 million ($18.1 million after tax) in interest expense during the first quarter of 2021 as a result of the Company reversing a historical accrued interest liability on certain bonds (initially recorded when certain asset-backed securitizations were acquired in 2011 and 2013), which liability the Company determined is no longer probable of being required to be paid; •The recognition of a net loss by ALLO of$18.9 million ($14.3 million after tax) during 2020, prior to the deconsolidation of ALLO inDecember 2020 ; •The recognition of$18.7 million ($14.2 million after tax) of gains from the sale of loans during 2021; •An increase of$17.5 million ($13.3 million after tax) in net interest income due to improved loan spread (including derivative settlements) on the Company's loan portfolio in 2021 as compared to 2020, including an increase in fixed rate floor income; •The recognition of a$10.8 million ($8.2 million after tax) negative provision for loan losses on the Company's loan portfolio during 2021 as a result of management's estimate of certain continued improved economic conditions as compared to a provision expense (excluding the incremental provision for loan losses related to COVID-19) of$10.4 million ($7.9 million after tax) during 2020; •An increase of$8.3 million ($6.3 million after tax) in investment interest income in 2021 as compared to 2020 primarily from AGM's beneficial interest investments; and •An increase in net income during 2021 as compared to 2020 of$8.1 million ($6.2 million after tax) from the Education Technology, Services, and Payment Processing operating segment. These factors were partially offset by the following items: •The recognition of a$51.0 million ($38.8 million after tax) gain in the second quarter of 2020 to adjust the carrying value of the Company's investment in Hudl to reflect Hudl'sMay 2020 equity raise transaction value; •The recognition of$33.0 million ($25.1 million after tax) of gains from the sale of consumer loans during 2020; 35 -------------------------------------------------------------------------------- •The recognition of a net loss of$25.2 million ($19.2 million after tax) during 2021 related to the Company's investments in ALLO; •The impairment of certain Company owned buildings and operating lease assets of$14.2 million ($10.8 million after tax) during 2021 due to continued evaluation of office space needs as employees continue to work from home due to COVID-19; and •A decrease of$6.6 million ($5.0 million after tax) in net interest income due to the decrease in the average balance of loans during 2021 as compared to 2020 as a result of the amortization of the FFELP loan portfolio. 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 ofSeptember 30, 2021 , AGM had a$18.4 billion loan portfolio that management anticipates will amortize over the next approximately 20 years and has a weighted average remaining life of 9.3 years. The Company actively works to maximize the amount and timing of cash flows generated by its FFELP portfolio and seeks to acquire additional loan assets to leverage its servicing scale and expertise to generate incremental earnings and cash flow. In addition, the Company earns fee-based revenue through the following reportable operating segments: •Loan Servicing and Systems ("LSS") - referred to asNelnet Diversified Services ("NDS"), which includes the operations ofNelnet Servicing, LLC ("Nelnet Servicing") andGreat Lakes Educational Loan Services, Inc. ("Great Lakes") •Education Technology, Services, and Payment Processing ("ETS&PP") - referred to as Nelnet Business Services ("NBS") Further, the Company earned communications revenue through ALLO, formerly a majority owned subsidiary of the Company prior to a recapitalization of ALLO resulting in the deconsolidation of ALLO from the Company's financial statements onDecember 21, 2020 . The recapitalization of ALLO was not considered a strategic shift in the Company's involvement with ALLO, and ALLO's results of operations, prior to the deconsolidation, are presented by the Company as a reportable operating segment. OnNovember 2, 2020 , the Company obtained final approval for federal deposit insurance from theFederal Deposit Insurance Corporation ("FDIC") and for a bank charter from theUtah Department of Financial Institutions ("UDFI") in connection with the establishment ofNelnet Bank , andNelnet Bank launched operations.Nelnet Bank operates as an internetUtah -chartered industrial bank franchise focused on the private education loan marketplace, with a home office inSalt Lake City, Utah .Nelnet Bank's operations are presented by the Company as a reportable operating segment. Other business activities and operating segments that are not reportable are combined and included in Corporate and Other Activities ("Corporate"). Corporate and Other Activities also includes income earned on certain investments and interest expense incurred on unsecured and other corporate related debt transactions. In addition, the Corporate segment includes direct incremental costs associated withNelnet Bank prior to the UDFI's approval for its bank charter and certain shared service and support costs incurred by the Company that will not be reflected inNelnet Bank's operating results through 2023 (the bank's de novo period).Such Nelnet Bank -related costs included in the Corporate segment totaled$0.8 million (pre-tax) and$1.3 million (pre-tax) for the three months endedSeptember 30, 2021 and 2020, respectively, and$2.5 million (pre-tax) and$3.8 million (pre-tax) for the nine months endedSeptember 30, 2021 and 2020, respectively. 36 --------------------------------------------------------------------------------
The information below provides the operating results for each reportable
operating segment for the three and nine months ended
LSS (a) ETS&PP ALLO (b) AGM (c) Bank (c)
[[Image Removed: nni-20210930_g1.jpg]]
[[Image Removed: nni-20210930_g2.jpg]]
(a) Revenue includes intersegment revenue.
(b) On December 21, 2020 , the Company deconsolidated ALLO from the Company's
consolidated financial statements. See note 2 of the notes to consolidated
financial statements included in the 2020 Annual Report for a description of the
transaction and a summary of the deconsolidation impact. Accordingly, there are
no operating results for the (former) Communications operating segment in 2021.
(c) Total revenue includes "net interest income" and "total other
income/expense" from the Company's segment statements of income, excluding from
AGM the impact from changes in fair values of derivatives. Net income (loss)
excludes from AGM changes in fair values of derivatives, net of tax. For
information regarding the exclusion of the impact from changes in fair values of
derivatives, see "GAAP Net Income and Non-GAAP Net Income, Excluding
Adjustments" above.
COVID-19
Beginning in March 2020 , the COVID-19 pandemic resulted in many businesses and
schools closing or reducing hours throughout the U.S. to combat the spread of
COVID-19, and states and local jurisdictions implementing various containment
efforts, including lockdowns on non-essential business and other business
restrictions, stay-at-home orders, and shelter-in-place orders. The COVID-19
pandemic caused significant disruption to the U.S. and world economies,
including significantly higher unemployment and underemployment, significantly
lower interest rates, and extreme volatility in the U.S. and world markets.
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While certain COVID-19 vaccines have been approved and have become widely
available for use in the U.S. , significant uncertainties remain, including with
respect to the effectiveness of vaccines against existing and new variant
strains of the virus which could be vaccine resistant, the potential impacts of
variations in vaccination rates among different geographical areas and
demographic segments, emerging targeted vaccine mandates, and booster vaccines,
and the potential for additional future spikes in infection rates including
through breakthrough infections among the fully vaccinated. As a result,
although the economy has improved since the pandemic began, it is still
uncertain when or if economic activity and business operations at pre-pandemic
levels for the Company's customers will resume. In addition, a significant
number of the Company's employees continue to work from home, either full-time
or dividing their work days between working from home and working in the office
as the Company has offered employees flexibility in the amount of time they work
in recently re-opened offices. During the third quarter of 2021, the Company
evaluated the use of office space due to COVID-19 and recorded an impairment
charge on certain real estate assets of $14.2 million .
The results of operations discussion below should be read in conjunction with
the Company's 2020 Annual Report, including the information included in "Risk
Factors - Operations - The COVID-19 pandemic has adversely impacted our results
of operations, and is expected to continue to adversely impact our results of
operations, as well as adversely impact our businesses, financial condition,
and/or cash flows" and "Management's Discussion and Analysis of Financial
Condition and Results of Operations - Overview - Impacts of COVID-19 Pandemic."
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CONSOLIDATED RESULTS OF OPERATIONS
An analysis of the Company's operating results for the three and nine months
ended September 30, 2021 compared to the same periods in 2020 is provided below.
The Company's operating results are primarily driven by the performance of its
existing loan portfolio and the revenues generated by its fee-based businesses
and the costs to provide such services. The performance of the Company's
portfolio is driven by net interest income (which includes financing costs) and
losses related to credit quality of the assets, along with the cost to
administer and service the assets and related debt.
The Company operates as distinct reportable operating segments as described
above. For a reconciliation of the reportable segment operating results to the
consolidated results of operations, see note 10 of the notes to consolidated
financial statements included under Part I, Item 1 of this report. Since the
Company monitors and assesses its operations and results based on these
segments, the discussion following the consolidated results of operations is
presented on a reportable segment basis (except for ALLO, which was
deconsolidated from the Company's consolidated financial statements in December
2020 ).
Three months ended Nine months ended
September 30, September 30,
2021 2020 2021 2020 Additional information
Decrease was due primarily to decreases
in the gross yield earned on loans and
the average balance of loans, partially
offset by an increase in gross fixed rate
floor income during the nine months ended
September 30, 2021 due to lower interest
Loan interest $ 124,096 134,507 370,219 462,439 rates in 2021 as compared to 2020.
Includes income from unrestricted
interest-earning deposits and investments
and funds in asset-backed
securitizations. Increase was due to
interest income earned on loan beneficial
interest investments, partially offset by
a decrease in interest rates in 2021 as
Investment interest 12,558 5,238 29,122 18,379 compared to 2020.
Total interest income 136,654 139,745 399,341 480,818
Decrease was due primarily to a decrease
in cost of funds and a decrease in the
average balance of debt outstanding. In
addition, during the first quarter of
2021, the Company reduced interest
expense by $23.8 million as a result of
reversing a historical accrued interest
liability on certain bonds, which
liability the Company determined is no
longer probable of being required to be
paid. The liability was initially
recorded when certain asset-backed
securitizations were acquired in 2011 and
Interest expense 50,176 58,423 127,939 277,788 2013.
Net interest income 86,478 81,322 271,402 203,030
During the first quarter of 2020, the
Company recognized an incremental
provision of $63.0 million as a result of
an increase in expected defaults due to
the COVID-19 pandemic. During the third
quarter of 2020, the Company recognized
negative provision of $5.8 million due to
management's estimate of improved
economic conditions. The Company
recognized a negative provision of $17.0
million in the first quarter of 2021 due
to management's estimate of improved
economic conditions as of March 31, 2021
in comparison to management's estimate of
economic conditions used to determine the
allowance for loan losses as of December
31, 2020. Provision expense recognized
for the three months ended September 30,
2021 represents provision primarily for
Less provision (negative new loans originated and acquired during
provision) for loan losses 5,827 (5,821) (10,847) 73,476 the period.
Net interest income after
provision for loan losses 80,651 87,143 282,249 129,554
Other income/expense:
See LSS operating segment - results of
LSS revenue 112,351 113,794 335,961 337,571 operations.
See ETS&PP operating segment - results of
ETS&PP revenue 85,324 74,121 257,284 217,100 operations.
As discussed above, on December 21, 2020,
the Company deconsolidated ALLO from the
Company's consolidated financial
Communications revenue - 20,211 - 57,390 statements.
See table below for the components of
Other 11,867 1,502 30,183 69,910 "other."
On May 14, 2021 and September 29, 2021,
the Company sold $77.4 million (par
value) and $18.4 million (par value) of
consumer loans, respectively, to an
unrelated third party and recognized a
gain of $15.3 million (pre-tax) and $3.2
million (pre-tax), respectively. The
Company also sold $124.2 million (par
value) and $60.8 million (par value) of
consumer loans in January 2020 and July
2020, respectively, and recognized gains
of $18.2 million and $14.8 million ,
Gain on sale of loans 3,444 14,817 18,715 33,023 respectively.
During the third quarter of 2021, the
Company evaluated the use of office space
as a large number of employees continue
to work from home due to COVID-19. As a
result of this evaluation, the Company
recorded an impairment charge during the
third quarter of 2021 of $14.2 million .
The impairment charge related primarily
to building and operating lease assets.
During the first quarter of 2020, the
Company recognized impairments of $26.3
million and $7.8 million related to
beneficial interest in consumer loan
securitization investments and several
venture capital investments,
respectively. Such impairments were the
result of estimated impacts from the
COVID-19 pandemic. During the first
quarter of 2021, the Company reversed the
remaining allowance of $2.4 million
Impairment expense and related to the beneficial interest in
provision for beneficial consumer loan securitizations due to
interests, net (14,159) -
(12,223) (34,419) continued improved economic conditions.
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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
Derivative settlements, Company's net interest income. See AGM
net (5,909) (2,391) (15,587) 7,666 operating segment - results of operations.
Includes the realized and unrealized gains
and losses that are caused by changes in
fair values of derivatives which do not
qualify for "hedge treatment" under GAAP.
The majority of the derivative market value
adjustments during the three and nine months
ended September 30, 2021 and 2020 related to
the changes in fair value of the Company's
floor income interest rate swaps. Such
changes reflect that a decrease in the
forward yield curve during a reporting
period results in a decrease in the fair
value of the Company's floor income interest
rate swaps, and an increase in the forward
yield curve during a reporting period
Derivative market value results in an increase in the fair value of
adjustments, net 7,260 3,440 44,455 (21,072) such swaps.
Total other
income/expense 200,178 225,494 658,788 667,169
Cost of services:
Represents primarily direct costs to provide
payment processing and instructional
Cost to provide services in the ETS&PP operating segment.
education technology, Increase in 2021 compared to 2020 was
services, and payment primarily due to additional instructional
processing services 31,335 25,243 80,063 63,424 services costs.
As discussed above, on December 21, 2020,
Cost to provide the Company deconsolidated ALLO from the
communications services - 5,914 - 17,240 Company's consolidated financial statements. Total cost of services 31,335
31,157 80,063 80,664
Operating expenses:
Increase in the three months ended September
30, 2021 compared to the same period in 2020
was due to an increase in headcount in the
(i) LSS operating segment as the Company
prepares for the resumption of federal
student loan payments and other activities
after the CARES Act suspension expires on
January 31, 2022; and (ii) ETS&PP operating
segment to support the growth of its
customer base, the investment in the
development of new technologies, and
businesses it acquired in December 2020.
These increases were partially offset by the
deconsolidation of ALLO from the Company's
consolidated financial statements. Decrease
in the nine months ended September 30, 2021
compared to the same period in 2020 was due
to (i) a decrease in contact center
operations and support personnel throughout
the first half of 2021 in the LSS operating
segment as a result of the suspension of
federal student loan payments under the
CARES Act; and (ii) the deconsolidation of
ALLO from the Company's consolidated
financial statements. These decreases were
partially offset by an increase in expenses
in the ETS&PP operating segment due to the
Salaries and benefits 128,592 126,096 363,351 365,220 items discussed above.
Decrease was primarily due to the
deconsolidation of ALLO from the Company's
consolidated financial statements on
December 21, 2020, resulting in no ALLO
Depreciation and depreciation expense for the Company in
amortization 15,710 30,308 56,129 87,349 2021.
Other expenses includes expenses necessary
for operations, such as postage and
distribution, consulting and professional
fees, occupancy, communications, and certain
information technology-related costs.
Increase in the three months ended September
30, 2021 as compared to the same period in
2020 was due to (i) an increase in expenses
in the ETS&PP operating segment due to
higher costs for consulting and professional
fees due to investments in new technologies,
an increase in travel and in-person
conferences, and businesses it acquired in
December 2020. These items were partially
offset by the deconsolidation of ALLO in
December 2020. Decrease in the nine months
ended September 30, 2021 compared to the
same period in 2020 was due to (i) cost
savings in the LSS segment from an increase
in the adoption of electronic borrower
statements and correspondence and a decrease
in printing and postage while loan payments
are suspended as a result of COVID-19
borrower relief efforts; and (ii) the
deconsolidation of ALLO in December 2020.
These items were partially offset by an
increase in costs in the ETS&PP operating
Other expenses 38,324 34,744 107,611 115,184 segment due to the items discussed above. Total operating expenses 182,626
191,148 527,091 567,753
Income before income
taxes 66,868 90,332 333,883 148,306
The effective tax rate was 22.75% and 21.13%
for the three months ended September 30,
2021 and 2020, respectively, and 22.75% and
20.50% for the nine months ended September
30, 2021 and 2020, respectively. The Company
currently expects its effective tax rate for
Income tax expense 15,649 19,156 76,747 30,286 2021 will range between 22 and 24 percent.
Net income 51,219 71,176 257,136 118,020
Net loss (income)
attributable to
noncontrolling interests 1,919 327 3,467 (568)
Net income attributable to Nelnet, Inc.$ 53,138 71,503 260,603 117,452 40
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The following table summarizes the components of "other" in "other income/expense" on the consolidated statements of income.
Three months ended September 30, Nine months ended September 30,
2021 2020 2021 2020
Income/gains from investments, net (a) $ 16,050 1,687 40,141 51,772
Investment advisory services (b) 2,400 4,463 6,242 8,187
ALLO preferred return (c) 2,043 - 6,384 -
Management fee revenue (d) 727 2,353 2,541 6,897
Borrower late fee income (e) 514 871 1,698 4,377
Loss from ALLO voting membership interest
investment (f) (10,495) - (31,620) -
Loss from solar investments (g) (3,393) (11,839) (7,375) (12,638)
(Loss) gain on debt repurchased (3,268) 105 (3,964) 508
Other 7,289 3,862 16,136 10,807
Other income $ 11,867 1,502 30,183 69,910
(a) During the three and nine months ended September 30, 2021, the Company
recognized (pre-tax) realized and unrealized gains from certain real estate and
venture capital investments, including realized gains from the sale of certain
real estate investments of $11.2 million and $22.2 million , respectively. During
the second quarter of 2020, the Company recognized a $51.0 million (pre-tax)
gain to adjust the carrying value of its investment in Hudl to reflect Hudl's
May 2020 equity raise transaction value.
See the caption "Subsequent Events" in note 5 of the notes to consolidated
financial statements included under Part I, Item 1 of this report for
information regarding investment-related events subsequent to September 30, 2021
which are expected to impact income from investments in the fourth quarter of
2021.
(b) The Company provides investment advisory services through Whitetail Rock
Capital Management, LLC ("WRCM"), the Company's SEC -registered investment
advisor subsidiary, under various arrangements. WRCM earns annual fees of 25
basis points on the majority of the outstanding balance of asset-backed
securities under management and up to 50 percent of the gains from the sale of
asset-backed securities or asset-backed securities being called prior to the
full contractual maturity for which it provides advisory services. As of
September 30, 2021 , the outstanding balance of asset-backed securities under
management subject to these arrangements was $1.9 billion . In addition, WRCM
earns annual management fees of five basis points for certain other investments
under management.
(c) Represents the Company's income on its preferred membership interests in
ALLO, which was deconsolidated from the Company's financial statements in
December 2020 . As of September 30, 2021 , the amount of preferred membership
interests held by the Company was $129.7 million , which earns a preferred annual
return of 6.25 percent.
(d) Represents revenue earned from providing administrative support and
marketing services, which primarily was to Great Lakes' former parent company
under a contract that expired in January 2021 .
(e) Represents borrower late fees earned by the AGM operating segment. The
decrease was due to the Company suspending borrower late fees effective March
13, 2020 to provide borrowers relief as a result of the COVID-19 pandemic.
(f) Represents the Company's share of loss on its voting membership interests
in ALLO. See note 5 of the notes to consolidated financial statements included
under Part I, Item 1 of this report for additional information regarding the
accounting for and income statement impact of this investment during 2021.
(g) Represents the Company's share of loss from solar investments under the
Hypothetical Liquidation at Book Value ("HLBV") method of accounting. For the
majority of the Company's solar investments, the HLBV method of accounting
results in accelerated losses in the initial years of investment.
41
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LOAN SERVICING AND SYSTEMS OPERATING SEGMENT - RESULTS OF OPERATIONS
Loan Servicing Volumes
As of
December 31 , March 31 , June 30 , September 30 , December 31 , March 31 , June 30 , September 30,
2019 2020 2020 2020 2020 2021 2021 2021
Servicing volume (dollars
in millions):
Nelnet Servicing:
Government $ 183,790 185,477 185,315 189,932 191,678 195,875 195,030 198,743
FFELP 33,185 32,326 31,392 31,122 30,763 30,084 29,361 28,244
Private and consumer 16,033 16,364 16,223 16,267 16,226 21,397 24,758 24,229
Great Lakes:
Government 239,980 243,205 243,609 249,723 251,570 257,806 257,420 262,311
Total $ 472,988 477,372 476,539 487,044 490,237 505,162 506,569 513,527
Number of servicing
borrowers:
Nelnet Servicing:
Government 5,574,001 5,498,872 5,496,662 5,604,685 5,645,946 5,664,094 5,636,781 5,791,521
FFELP 1,478,703 1,423,286 1,370,007 1,332,908 1,300,677 1,233,461 1,198,863 1,150,214
Private and consumer 682,836 670,702 653,281 649,258 636,136 882,477 1,039,537 1,097,252
Great Lakes:
Government 7,396,657 7,344,509 7,346,691 7,542,679 7,605,984 7,637,270 7,616,270 7,778,535
Total 15,132,197 14,937,369 14,866,641 15,129,530 15,188,743 15,417,302 15,491,451 15,817,522
Number of remote hosted
borrowers: 6,433,324 6,354,158 6,264,559 6,251,598 6,555,841 4,307,342 4,338,570 4,548,541
Government Loan Servicing
Nelnet Servicing's and Great Lakes' current student loan servicing contracts
with the Department are currently scheduled to expire on December 14, 2023 . In
2017, the Department initiated a contract procurement process referred to as the
Next Generation Financial Services Environment ("NextGen") for a new framework
for the servicing of all student loans owned by the Department. The Consolidated
Appropriations Act, 2021 contains provisions directing certain aspects of the
NextGen process, including that any new federal student loan servicing
environment is required to provide for the participation of multiple student
loan servicers and the allocation of borrower accounts to eligible student loan
servicers based on performance. Nelnet cannot predict the timing, nature, or
ultimate outcome of the NextGen or any other contract procurement process by the
Department.
Nelnet Servicing and Great Lakes are two of the current eight private sector
entities that have student loan servicing contracts with the Department. On July
8, 2021 and July 19, 2021 , the Pennsylvania Higher Education Assistance Agency
("PHEAA") and the New Hampshire Higher Education Association Foundation Network
("Granite State"), two of the current existing servicers for the Department,
announced that they will exit the federal student loan servicing business after
their current contracts with the Department expire in December 2021 . In
addition, in October 2021 , Maximus assumed Navient's student loan servicing
contract with the Department.
PHEAA services approximately 8.5 million borrowers under its contract. The
Department has indicated that the PHEAA servicing volume will be transitioned to
other servicers, including the Company. A portion of the PHEAA servicing volume
will be transitioned to other servicers prior to January 31, 2022 , which is the
effective date on which federal student loan payments will no longer be
suspended under the CARES Act. The remaining PHEAA volume will begin to transfer
to other servicers during the second quarter of 2022. The Company currently
anticipates up to 1 million PHEAA borrowers will be transitioned to its
servicing platform prior to January 31, 2022 .
Granite State services approximately 1.3 million borrowers under its contract.
Granite State servicing volume has been and will continue to be transitioned to
Edfinancial Services, LLC ("Edfinancial"), a current servicer for the
Department, during the third
42
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and fourth quarters of 2021. Both Granite State and Edfinancial utilize Nelnet
Servicing's platform to service their loans for the Department.
The Department currently allocates new loan volume among its servicers based on
certain performance metrics that measure the satisfaction among separate
customer groups, including borrowers and Department personnel who work with the
servicers, and that measure the success of keeping borrowers in an on-time
repayment status and helping borrowers avoid default. Under the most recent
publicly announced performance metrics used by the Department for the quarterly
periods January 1, 2021 through June 30, 2021 , Great Lakes' and Nelnet
Servicing's overall rankings among the remaining six go-forward servicers for
the Department were third and fifth, respectively. Based on these results, Great
Lakes' and Nelnet Servicing's allocation of new student loan servicing volumes
beginning September 1, 2021 are 18% and 12%, respectively.
Servicing contract amendments entered into with the Department in September 2021
to extend the contracts through December 2023 , also amended the methodology for
performance measurements and new loan volume allocations, in substantial part by
reflecting newly designed service level performance metrics under which, along
with portfolio performance metrics, the Department will evaluate each servicer
and make new loan volume allocations on a quarterly basis. The new service level
performance metrics will be a substantial driver used by the Department to
allocate new loan volume among the servicers.
The CARES Act, among other things, provides broad relief for federal student
loan borrowers through January 31, 2022 . Under the CARES Act, beginning in March
2020 , federal student loan payments and interest accruals were suspended for all
borrowers that had loans owned by the Department. As a result of the CARES Act,
the Company received less servicing revenue per borrower from the Department
based on the borrower forbearance status through September 30, 2020 than what
was earned on such accounts prior to these provisions, and the Department
further reduced the monthly rate paid to its servicers for those in forbearance
status for the period from October 1, 2020 through January 31, 2022 from $2.19
per borrower to $2.05 per borrower. The Company currently anticipates revenue
per borrower from the Department will increase to pre-CARES Act levels beginning
February 1, 2022 . In addition, during the fourth quarter of 2021 and first
quarter of 2022, the Company anticipates earning additional revenue from the
Department based on incremental work to be performed by the Company to support
the Department borrowers coming out of forbearance. Such services and activities
include extended hours of operation and outbound engagement.
Private Education Loan Servicing
In December of 2020, Wells Fargo announced the sale of its approximately $10.0
billion portfolio of private education student loans representing approximately
445,000 borrowers. In conjunction with the sale, the Company was selected as
servicer of the portfolio. During March 2021 , approximately 261,000 borrowers
were converted to the Company's servicing platform, with the vast majority of
the remaining borrowers converted in the second quarter of 2021.
Summary and Comparison of Operating Results
Three months ended September 30,
Nine months ended
2021 2020 2021 2020 Additional information
Decrease was due to lower interest rates
Net interest income $ 7 10 25 306 in 2021 as compared to 2020.
Loan servicing and systems See table below for additional
revenue 112,351 113,794 335,961 337,571 information.
Represents revenue earned by the LSS
operating segment from servicing loans
for the AGM and Nelnet Bank operating
segments. Increase in the three months
ended September 20, 2021 as compared to
the same period in 2020 was due to an
increase in private loan servicing
revenue from AGM related to AGM's partial
ownership of the former Wells Fargo
private education loan portfolio,
partially offset by the expected
amortization of AGM's FFELP portfolio.
Decrease in the nine months ended
September 30, 2021 compared to the same
period in 2020 was due to the impact of
borrower relief policies implemented in
March 2020 in response to the COVID-19
pandemic and the expected amortization of
AGM's FFELP portfolio. FFELP intersegment
servicing revenue will continue to
decrease as AGM's FFELP portfolio pays
Intersegment servicing revenue 8,621 8,287 25,369 27,878 off.
Represents revenue earned from providing
administrative support and marketing
services, which primarily was to Great
Lakes' former parent company under a
Other income 727 2,353 2,541 6,897 contract that expired in January 2021.
During the third quarter of 2021, the
Company evaluated use of office space as
a large number of employees continue to
work from home due to COVID-19. As a
result of this evaluation, the Company
recorded a non-cash impairment charge
during the third quarter of 2021. The
impairment charge recognized by the LSS
operating segment related primarily to
Impairment expense (13,243) - (13,243) - building and building improvement assets.
Total other income 108,456 124,434 350,628 372,346
43--------------------------------------------------------------------------------
Decrease in the nine months ended
September 30, 2021 compared to the same
period in 2020 was due to a decrease in
contact center operations and support
personnel as a result of the suspension of
federal student loan payments beginning in
March 2020 under the CARES Act. Increase
in the three months ended September 30,
2021 compared to the same period in 2020
was due to the Company hiring contact
center operations and support associates
to prepare for the resumption of federal
student loan payments and other activities
after the CARES Act suspension expires on
January 31, 2022. The Company currently
expects salaries and benefits to continue
to increase as it prepares for the
Salaries and benefits 75,305 72,912
210,151 211,806 provisions of the CARES Act to expire.
Includes depreciation on property and
equipment and amortization of intangibles
from the Great Lakes acquisition in
February 2018. Amortization of intangible
assets for the three months ended
September 30, 2021 and 2020 was $0.7
million and $5.6 million , respectively,
and for the nine months ended September
30, 2021 and 2020 was $11.6 million and
$15.4 million , respectively. The majority
of the Great Lakes intangible assets
became fully amortized at June 30, 2021.
Excluding amortization of intangible
assets, the decrease in 2021 compared to
2020 was due to certain purchases to
Depreciation and integrate Great Lakes and expand servicing
amortization 4,245 9,951 20,411 27,941 capacity becoming fully depreciated.
Decrease in the nine months ended
September 30, 2021 compared to the same
period in 2020 was due to cost savings as
a result of the impact of the COVID-19
pandemic and the resulting CARES Act
(which became effective March 13, 2020),
primarily through a significant reduction
of borrower statement printing and postage
costs while student loan payments are
suspended. The Company currently expects
these costs will increase when the
provisions of the CARES Act expire,
scheduled for January 31, 2022. Decrease
was also due to cost savings from an
increase in the adoption of electronic
Other expenses 12,738 12,407 39,296 43,277 borrower statements and correspondence.
Intersegment expenses represent costs for
certain corporate activities and services
that are allocated to each operating
segment based on estimated use of such
activities and services. Increase in 2021
was due to the Company hiring contact
center operations and support associates
during the third quarter of 2021 in
preparation for the provisions of the
CARES Act to expire January 31, 2022. The
Company currently expects intersegment
expenses to continue to increase as it
prepares for the provisions of the CARESIntersegment expenses 19,217 15,834 52,241 48,069 Act to expire. Total operating expenses 111,505 111,104 322,099 331,093 (Loss) income before income taxes (3,042) 13,340 28,554 41,559 Income tax benefit Represents income tax expense at an (expense) 730 (3,201) (6,853) (9,974) effective tax rate of 24%. Net (loss) income$ (2,312) 10,139 21,701 31,585 Before tax operating margin, excluding impairment expense, is a non-GAAP measure of before tax operating profitability as a percentage of revenue, and for the LSS segment is calculated as income before income taxes (excluding impairment expense) divided by the total of loan servicing and systems revenue, intersegment servicing revenue, and other income revenue. The Company uses this metric to monitor and assess the segment's performance, manage operating costs, identify and evaluate business trends affecting the segment, and make strategic decisions, and believes that it provides GAAP before tax operating additional information to facilitate an margin (2.5) % 10.7 % 7.9 % 11.2 % understanding of the operating performance of the segment and provides a meaningful comparison of the results of operations between periods. Before tax operating margin, excluding impairment expense, decreased for the three months ended September 30, 2021 as compared to the same period in 2020 due to increased operating expenses as the Impairment expense 10.9 % - 3.6 % - Company prepares for the provisions of the CARES Act to expire on January 31, 2022. Before tax operating margin, excluding impairment expense, increased for the nine months ended September 30, 2021 as compared to the same period in 2020 due to operating expenses being lower throughout Non-GAAP before tax the first half of 2021 as a result of the operating margin, suspension of federal student loan excluding impairment payments under the CARES Act as discussed expense 8.4 % 10.7 % 11.5 % 11.2 % above. 44
--------------------------------------------------------------------------------
Loan servicing and systems revenue
Three months ended September 30 ,
Nine months ended
2021 2020 2021 2020 Additional information
Represents revenue from Nelnet
Servicing's Department servicing
contract. Decrease in the nine months
ended September 30, 2021 compared to the
same period in 2020 was due to a decrease
in revenue from the administration of the
Total and Permanent Disability (TPD)
Discharge program, decrease in fees
earned from the Department for
originating consolidation loans, decrease
in revenue earned per borrower as a
result of the suspension of federal
student loan payments under the CARES
Act, and further decrease in revenue
earned per borrower (from the monthly
rate of $2.19 per borrower to $2.05 per
borrower) as a result of the Department
issuing a change request effective
October 1, 2020. These items were
partially offset by an increase in the
number of borrowers serviced. Increase in
revenue for the three months ended
September 30, 2021 compared to the same
period in 2020 was a result of an
increase in the number of borrowers
serviced, partially offset by a decrease
in revenue earned per borrower (from the
monthly rate of $2.19 per borrower to
$2.05 per borrower) as a result of the
Government servicing - Department issuing a change request
Nelnet $ 37,595 36,295 107,843 112,305 effective October 1, 2020.
Represents revenue from Great Lakes'
Department servicing contract. Changes
among the current and comparable prior
periods were due to the same factors as
discussed immediately above for Nelnet
Government servicing - Great Servicing, except that Great Lakes does
Lakes 46,489 45,350 133,654 137,010 not administer the TPD discharge program.
Increase for the three and nine months
ended September 30, 2021 compared to the
same periods in 2020 was due to the
addition of the former Wells Fargo
private education loan borrowers
converted to the Company's servicing
platform during March and the second
quarter of 2021. Excluding revenue earned
on the former Wells Fargo portfolio,
revenue for the three and nine months
ended September 30, 2021 decreased
compared to the comparable periods in
2020. The decrease in revenue was due to
a decrease in the number of legacy
borrowers serviced, a decrease in
origination fee revenue, and the impact
of borrower relief policies implemented
Private education and by private lenders in response to the
consumer loan servicing 13,198 7,928 34,563 24,733 COVID-19 pandemic.
Decrease in 2021 compared to 2020 was due
to a decrease in the number of borrowers
serviced. In addition, decrease during
the nine months ended September 30, 2021
as compared to the same period in 2020
was due to the impact of borrower relief
policies implemented by lenders in
response to the COVID-19 pandemic. Over
time, FFELP servicing revenue will
continue to decrease as third-party
FFELP servicing 4,557 4,912 13,930 15,443 customers' FFELP portfolios pay off.
Decrease in 2021 compared to 2020 was due
to many of the services provided under
the Company's remote hosted servicing and
system support contract with Great Lakes'
former parent, representing 2.3 million
borrowers, expiring in January 2021. This
decrease in revenue was partially offset
by an increase in the number of remote
hosted servicing borrowers in 2021 as
Software services 6,952 10,426 22,779 32,395 compared to 2020.
The majority of this revenue relates to
providing contact center and back office
operational outsourcing services. During
2020, the Company began providing
services to state agencies to process
unemployment claims and conduct certain
health tracing support activities
(including vaccination registration
support). Outsourcing activities provided
to state agencies are performed under
shorter-term contracts. Revenue from
providing these services to state
agencies was $1.3 million and $6.6
million for the three months ended
September 30, 2021 and 2020,
respectively, and $16.3 million and $9.7
million during the nine months ended
September 30, 2021 and 2020,
respectively. Outsourcing activities
provided to state agencies decreased
during the third quarter of 2021 as the
needs for such services have decreased
Outsourced services 3,560 8,883 23,192 15,685 from prior periods.
Loan servicing and systems
revenue $ 112,351 113,794 335,961 337,571
45-------------------------------------------------------------------------------- EDUCATION TECHNOLOGY, SERVICES, AND PAYMENT PROCESSING OPERATING SEGMENT - RESULTS OF OPERATIONS As discussed further in the Company's 2020 Annual Report, this segment of the Company's business is subject to seasonal fluctuations which correspond, or are related to, the traditional school year. Based on the timing of revenue recognition and when expenses are incurred, revenue and pre-tax operating margin are higher in the first quarter as compared to the remainder of the year. OnDecember 31, 2020 , the Company acquired HigherSchool Instructional Services ("HigherSchool"), a services company that provides supplemental instructional services and educational professional development for K-12 schools inNew York City , andCD2 LLC ("CD2"), a platform technology solution that includes learning management, collaboration/workflow, gamification, customer management/document storage, and employee boarding. The results of HigherSchool and CD2 are reported in the Company's consolidated financial statements from the date of acquisition. Revenue recognized by these acquisitions during the three and nine months endedSeptember 30, 2021 was$3.4 million and$18.5 million , respectively. Summary and Comparison of Operating Results Three months endedSeptember 30 ,
Nine months ended
2021 2020 2021 2020 Additional information
Represents interest income on tuition
funds held in custody for schools.
Decrease was due to a significant
decrease in interest rates in March 2020.
If interest rates remain at current
levels, the Company anticipates this
segment will earn minimal interest income
Net interest income $ 344 351 818 2,723 in future periods.
Education technology,
services, and payment See table below for additional
processing revenue 85,324 74,121 257,284 217,100 information.
Intersegment revenue 3 3 9 17
Other income 13 373 13 373
Total other income 85,340 74,497 257,306 217,490
Cost to provide education
technology, services, and See table below for additional
payment processing services 31,335 25,243 80,063 63,424 information.
Increase in 2021 compared to 2020 was due
to an increase in headcount to support
the growth of the customer base, the
investment in the development of new
technologies, and the acquisitions of
Salaries and benefits 29,119 25,460 82,154 73,678 HigherSchool and CD2.
Represents primarily amortization of
intangible assets from prior business
acquisitions. Amortization of intangible
assets related to business acquisitions
was $2.6 million and $2.4 million for the
three months ended September 30, 2021 and
2020, respectively, and $8.3 million and
$7.1 million for the nine months ended
September 30, 2021 and 2020,
respectively. The increase in 2021
compared to 2020 was due to the
Depreciation and amortization 2,762 2,366 8,789 7,115 acquisitions of HigherSchool and CD2.
Increase was due to higher costs for
consulting and professional fees due to
investments in new technologies, the
acquisitions of HigherSchool and CD2, and
an increase in travel and in-person
conferences during the third quarter of
Other expenses 4,804 3,126 14,063 11,544 2021.
Intersegment expenses represent costs for
certain corporate activities and services
that are allocated to each operating
segment based on estimated use of such
Intersegment expenses, net 3,672 3,610 10,856 10,366 activities and services.
Total operating expenses 40,357 34,562 115,862 102,703
Income before income taxes 13,992 15,043 62,199 54,086
Represents income tax expense at an
Income tax expense (3,358) (3,610) (14,928) (12,981) effective tax rate of 24%.
Net income $ 10,634 11,433 47,271 41,105
46--------------------------------------------------------------------------------
Education technology, services, and payment processing revenue The following table provides disaggregated revenue by service offering and before tax operating margin for each reporting period.
Three months ended September
30 ,
Nine months ended
2021 2020 2021 2020 Additional information
Revenue increased for the three and nine
months ended September 30, 2021 as compared
to the same periods in 2020 as a result of
a higher number of payment plans in the
K-12 market, partially offset due to
enrollment for institutions of higher
education decreasing as a result of
Tuition payment plan services $ 23,618 22,477 79,706 77,011 COVID-19.
Payment volumes in 2021 increased as
compared to 2020 in both the K-12 and
higher education markets. The increase in
payments volume is driven by both new
customers and an increase in volume from
Payment processing 39,852 35,420 97,898 88,329 existing customers.
Increase in 2021 compared to 2020 was
primarily the result of the HigherSchool
and CD2 acquisitions. Additionally,
revenues from the Company's school
information system software, application
and enrollment products, grant and aid
assessments, and FACTS Education Solutions
instructional and professional development
Education technology and services increased compared to the prior
services 21,098 15,840 78,153 50,820 year.
Other 756 384 1,527 940
Education technology,
services, and payment
processing revenue 85,324 74,121 257,284 217,100
Costs primarily relate to payment
processing revenue and such costs
decrease/increase in relationship to
payment volumes. Costs to provide
instructional services are also included as
a component of this expense and were a
driver in the increase in 2021 compared to
Cost to provide education 2020 due to the acquisition of HigherSchool
technology, services, and and growth in the FACTS Education Solutions
payment processing services 31,335 25,243 80,063 63,424 division.
Net revenue $ 53,989 48,878 177,221 153,676
Before tax operating margin is a measure of
before tax operating profitability as a
percentage of revenue, and for the ETS&PP
segment is calculated as income before
income taxes divided by net revenue. The
Company uses this metric to monitor and
assess the segment's performance, manage
operating costs, identify and evaluate
business trends affecting the segment, and
make strategic decisions, and believes that
it facilitates an understanding of the
operating performance of the segment and
provides a meaningful comparison of the
results of operations between periods.
The decrease in margin for the three months
ended September 30, 2021 as compared to the
same period in 2020 was due to investment
in the development of new technologies and
increase in travel and in-person
Before tax operating margin 25.9 % 30.8 % 35.1% 35.2% conferences in 2021.
47-------------------------------------------------------------------------------- ASSET GENERATION AND MANAGEMENT OPERATING SEGMENT - RESULTS OF OPERATIONS Loan Portfolio As ofSeptember 30, 2021 , the AGM operating segment had a$18.4 billion loan portfolio, consisting primarily of federally insured loans, that management anticipates will amortize over the next approximately 20 years and has a weighted average remaining life of 9.3 years. For a summary of the Company's loan portfolio as ofSeptember 30, 2021 andDecember 31, 2020 , see note 2 of the notes to consolidated financial statements included under Part I, Item 1 of this report. Loan Activity The following table sets forth the activity of loans in the AGM operating segment: Three months ended September 30, Nine months ended September 30, 2021 2020 2021 2020 Beginning balance$ 19,331,725 19,830,397 19,559,108 20,798,719 Loan acquisitions: Federally insured student loans 70,844 137,714 833,313 947,288 Private education loans 1,680 - 88,131 80,908 Consumer loans 20,939 26,446 61,319 112,257 Total loan acquisitions 93,463 164,160 982,763 1,140,453 Repayments, claims, capitalized interest, participations, and other, net (818,554) (277,949) (1,415,249)
(1,715,214)
Consolidation loans lost to external parties (145,270) (136,263) (587,841) (519,364) Consumer loans sold (18,390) (60,779) (95,807) (185,028) Other loans sold (5,280) - (5,280) - Ending balance$ 18,437,694 19,519,566 18,437,694 19,519,566 The Company has also purchased partial ownership in certain private education, consumer, and federally insured student loan securitizations that are accounted for as held-to-maturity beneficial interest investments and included in "investments" in the Company's consolidated financial statements. As of the latest remittance reports filed by the various trusts prior toSeptember 30, 2021 , the Company's ownership correlates to approximately$545 million ,$250 million , and$485 million of private education, consumer, and federally insured student loans, respectively, included in these securitizations. The loans held in these securitizations are not included in the above table. The Company's federally insured student loan acquisitions include the purchase of rehabilitated loans purchased from guaranty agencies. After a guaranty agency rehabilitates a federally insured student loan, the agency sells the rehabilitated loan to a private lender, such as the Company. OnMarch 30, 2021 , the Department suspended collections on defaulted federally insured student loans held by guaranty agencies and reduced the interest rate on such loans to zero percent, effectively suspending interest payments. The collections pause and adjusted interest rate are both retroactive toMarch 13, 2020 , when the President first declared a national emergency for the COVID-19 pandemic. The Company currently believes these relief efforts will negatively impact the amount of rehabilitated loans the Company will have the opportunity to purchase in future periods. Allowance for Loan Losses and Loan Delinquencies For a summary of the Company's activity in the allowance for loan losses for the three and nine months endedSeptember 30, 2021 and 2020, and a summary of the Company's loan status and delinquency amounts as ofSeptember 30, 2021 ,December 31, 2020 , andSeptember 30, 2020 , see note 2 of the notes to consolidated financial statements included under Part I, Item 1 of this report. AGM's total allowance for loan losses of$137.3 million atSeptember 30, 2021 represents reserves equal to 0.6% of AGM's federally insured loans (or 23.6% of the risk sharing component of the loans that is not covered by the federal guaranty), 5.3% of AGM's private education loans, and 12.0% of AGM's consumer loans. 48 -------------------------------------------------------------------------------- Loan Spread Analysis The following table analyzes the loan spread on AGM's portfolio of loans, which represents the spread between the yield earned on loan assets and the costs of the liabilities and derivative instruments used to fund the assets. The spread amounts included in the following table are calculated by using the notional dollar values found in the table under the caption "Net interest income after provision for loan losses, net of settlements on derivatives" below, divided by the average balance of loans or debt outstanding. Three months ended September 30, Nine months ended September 30, 2021 2020 2021 2020 Variable loan yield, gross 2.61 % 2.77 % 2.65 % 3.29 % Consolidation rebate fees (0.85) (0.84) (0.84) (0.84) Discount accretion, net of premium and deferred origination costs amortization 0.03 0.01 0.01 0.02 Variable loan yield, net 1.79 1.94 1.82 2.47 Loan cost of funds - interest expense (a) (b) (0.99) (1.16) (1.03)
(1.82)
Loan cost of funds - derivative settlements (c) (d) (0.02)
0.02 (0.01) 0.07
Variable loan spread 0.78 0.80 0.78 0.72
Fixed rate floor income, gross 0.75 0.73 0.75 0.58
Fixed rate floor income - derivative settlements (c) (e) (0.11) (0.07) (0.10)
(0.02)
Fixed rate floor income, net of settlements on derivatives 0.64 0.66 0.65 0.56 Core loan spread 1.42 % 1.46 % 1.43 % 1.28 % Average balance of AGM's loans$ 19,084,320 19,866,040 19,178,788
20,300,617
Average balance of AGM's debt outstanding 18,863,730 19,632,675 18,890,832 20,153,478 (a) In the first quarter of 2021, the Company reversed a historical accrued interest liability of$23.8 million on certain bonds, which liability the Company determined is no longer probable of being required to be paid. The liability was initially recorded when certain asset-backed securitizations were acquired in 2011 and 2013. The reduction of this liability is reflected in (a reduction of) "interest on bonds and notes payable and bank deposits" in the consolidated statements of income and the impact of this reduction to interest expense was excluded in the table above. (b) In the third quarter of 2021, the Company redeemed certain asset-backed debt securities prior to their legal maturity, resulting in the recognition of$1.5 million in interest expense from the write-off of all remaining debt issuance costs related to the initial issuance of such bonds. This expense was excluded in the table above. (c) Derivative settlements represent the cash paid or received during the current period to settle with derivative instrument counterparties the economic effect of the Company's derivative instruments based on their contractual terms. Derivative accounting requires that net settlements with respect to derivatives that do not qualify for "hedge treatment" under GAAP be recorded in a separate income statement line item below net interest income. The Company maintains an overall risk management strategy that incorporates the use of derivative instruments to reduce the economic effect of interest rate volatility. As such, management believes derivative settlements for each applicable period should be evaluated with the Company's net interest income (loan spread) as presented in this table. The Company reports this non-GAAP information because it believes that it provides additional information regarding operational and performance indicators that are closely assessed by management. There is no comprehensive, authoritative guidance for the presentation of such non-GAAP information, which is only meant to supplement GAAP results by providing additional information that management utilizes to assess performance. See note 4 of the notes to consolidated financial statements included under Part I, Item 1 of this report for additional information on the Company's derivative instruments, including the net settlement activity recognized by the Company for each type of derivative for the 2021 and 2020 periods presented in the table under the caption "Consolidated Financial Statement Impact Related to Derivatives - Statements of Income" in note 4 and in this table. 49 --------------------------------------------------------------------------------
A reconciliation of core loan spread, which includes the impact of derivative settlements on loan spread, to loan spread without derivative settlements follows.
Three months ended September 30, Nine months ended September 30,
2021 2020 2021 2020
Core loan spread 1.42 % 1.46 % 1.43 % 1.28 %
Derivative settlements (1:3 basis swaps) 0.02 (0.02) 0.01 (0.07)
Derivative settlements (fixed rate floor 0.11 0.07 0.10 0.02
income)
Loan spread 1.55 % 1.51 % 1.54 % 1.23 %
(d) Derivative settlements consist of net settlements (paid) received related
to the Company's 1:3 basis swaps.
(e) Derivative settlements consist of net settlements paid related to the
Company's floor income interest rate swaps.
A trend analysis of AGM's core and variable loan spreads is summarized below.
[[Image Removed: nni-20210930_g3.jpg]]
(a) The interest earned on a large portion of AGM's FFELP student loan assets
is indexed to the one-month LIBOR rate. AGM funds a portion of its assets with
three-month LIBOR indexed floating rate securities. The relationship between the
indices in which AGM earns interest on its loans and funds such loans has a
significant impact on loan spread. This table (the right axis) shows the
difference between AGM's liability base rate and the one-month LIBOR rate by
quarter. See Item 3, "Quantitative and Qualitative Disclosures About Market Risk
- Interest Rate Risk - AGM Operating Segment," which provides additional detail
on AGM's FFELP student loan assets and related funding for those assets.
Variable loan spread increased during the nine months ended September 30, 2021
compared to the same period in 2020 due to a narrowing of the basis between the
asset and debt indices in which the Company earns interest on its loans and
funds such loans (as reflected in the table above). The significant widening
during the first and second quarters of 2020 was the result of a significant
decrease in interest rates during March 2020 and the first half of the second
quarter of 2020. In a declining interest rate environment, student loan spread
is compressed, due to the timing of interest rate resets on the Company's assets
occurring daily in contrast to the timing of the interest resets on the
Company's debt that occurs either monthly or quarterly. See Item 3,
"Quantitative and Qualitative Disclosures About Market Risk - Interest Rate Risk
- AGM Operating Segment," which provides additional detail on AGM's FFELP
student loan assets and related funding for those assets.
50
--------------------------------------------------------------------------------
The difference between variable loan spread and core loan spread is fixed rate
floor income earned on a portion of AGM's federally insured student loan
portfolio. A summary of fixed rate floor income and its contribution to core
loan spread follows:
Three months ended September 30, Nine months ended September 30,
2021 2020 2021 2020
Fixed rate floor income, gross $ 35,850 36,633 108,029 87,258
Derivative settlements (a) (5,209) (3,588) (14,648) (2,772)
Fixed rate floor income, net $ 30,641 33,045 93,381 84,486
Fixed rate floor income contribution to spread,
net 0.64 % 0.66 % 0.65 % 0.56 %
(a) Derivative settlements consist of net settlements paid related to the
Company's derivatives used to hedge student loans earning fixed rate floor
income.
The increase in gross fixed rate floor income for the nine months ended
September 30, 2021 compared to the same period in 2020 was due to lower interest
rates in 2021 as compared to 2020. The Company has a portfolio of derivative
instruments in which the Company pays a fixed rate and receives a floating rate
to economically hedge a portion of loans earning fixed rate floor income. See
Item 3, "Quantitative and Qualitative Disclosures About Market Risk - Interest
Rate Risk - AGM Operating Segment," which provides additional detail on the
Company's portfolio earning fixed rate floor income and the derivatives used by
the Company to hedge these loans.
Interest Rate Risk - Replacement of LIBOR as a Benchmark Rate
On March 5, 2021 , the ICE Benchmark Administration Limited (the "IBA"), which
administers LIBOR, published the results of a consultation confirming its
intention to cease the publication of LIBOR (i) after June 30, 2023 in the case
of U.S. Dollar LIBOR rates for one-month, three-month, and certain other tenors,
and (ii) after December 31, 2021 in all other cases. Also on March 5, 2021 , the
United Kingdom's Financial Conduct Authority , which regulates the IBA, announced
that it does not intend to sustain LIBOR by requiring panel banks to continue
providing quotations of LIBOR beyond the dates for which they have notified
their departure from IBA's LIBOR quotation scheme, or to require IBA to publish
LIBOR beyond such dates. As a result, immediately after the announced LIBOR
discontinuation dates specified above, respectively, LIBOR will no longer be
representative of the underlying market and economic reality that the rates are
intended to measure. As of September 30, 2021 , the interest earned on a
principal amount of $16.9 billion of AGM's FFELP student loan asset portfolio
was indexed to one-month LIBOR, and the interest paid on a principal amount of
$16.8 billion of AGM's FFELP student loan asset-backed debt securities was
indexed to one-month or three-month LIBOR. In addition, the Company's derivative
financial instrument transactions used to manage LIBOR interest rate risks are
indexed to LIBOR. New LIBOR contracts are generally not expected to be entered
into after December 31, 2021 . The market transition away from the current LIBOR
framework could result in significant changes to the interest rate
characteristics of the Company's LIBOR-indexed assets and funding for those
assets, as well as the Company's LIBOR-indexed derivative instruments. See Item
1A, "Risk Factors - Loan Portfolio - Interest rate risk - replacement of LIBOR
as a benchmark rate" in the Company's 2020 Annual Report for additional
information.
Summary and Comparison of Operating Results
Three months ended September 30,
Nine months ended
2021 2020 2021 2020 Additional information
Net interest income after
provision for loan losses $ 77,179 86,025 275,092 125,500 See table below for additional analysis.
During the third quarter of 2021, the
Company recognized a loss of $6.3 million
and $3.4 million from an investment
accounted for under the equity method and
from certain repurchases of its own debt,
respectively. These items were partially
offset by $1.7 million in fees earned for
serving as sponsor and administrator on
certain non-consolidated securitizations
of private education loans sold by Wells
Fargo. Excluding these items, other income
consists primarily of borrower late fees.
Borrower late fees for the three months
ended September 30, 2021 and 2020 was $0.5
million and $0.9 million , respectively,
and for the nine months ended September
30, 2021 and 2020 was $1.7 million and
$4.4 million , respectively. The decrease
in borrower late fees in the nine months
ended September 30, 2021 as compared to
the same period in 2020 was due to the
Company suspending borrower late fees
effective March 13, 2020 to provide
borrowers relief as a result of the
Other (expense) income (7,275) 1,004 (4,514) 4,951 COVID-19 pandemic.
51--------------------------------------------------------------------------------
On May 14, 2021 and September 29, 2021,
the Company sold $77.4 million (par value)
and $18.4 million (par value) of consumer
loans, respectively, to an unrelated third
party and recognized a gain of $15.3
million (pre-tax) and $3.2 million
(pre-tax), respectively. The Company also
sold $124.2 million (par value) and $60.8
million (par value) of consumer loans in
January 2020 and July 2020, respectively,
and recognized gains of $18.2 million and
Gain on sale of loans 3,444 14,817 18,715 33,023 $14.8 million , respectively.
In March 2020, the Company recognized a
provision expense of $26.3 million related
to its beneficial interest in consumer
loan securitization investments as a
result of the estimated impacts of the
COVID-19 pandemic. During the first
Impairment expense and quarter of 2021, $2.4 million of such
provision for beneficial provision was reversed due to improved
interests, net - - 2,436 (26,303) economic conditions.
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
Derivative settlements, with the Company's net interest income as
net (5,909) (2,391) (15,587) 7,666 reflected in the table below.
Includes the realized and unrealized gains
and losses that are caused by changes in
fair values of derivatives which do not
qualify for "hedge treatment" under GAAP.
The majority of the derivative market
value adjustments during the three and
nine months ended September 30, 2021 and
2020 related to the changes in fair value
of the Company's floor income interest
rate swaps. Such changes reflect that a
decrease in the forward yield curve during
a reporting period results in a decrease
in the fair value of the Company's floor
income interest rate swaps, and an
increase in the forward yield curve during
Derivative market value a reporting period results in an increase
adjustments, net 7,260 3,440 44,455 (21,072) in the fair value of such swaps.
Total other
income/expense (2,480) 16,870 45,505 (1,735)
Salaries and benefits 542 438 1,594 1,301
The primary component of other expenses is
servicing fees paid to third parties.
Increase for the three and nine months
ended September 30, 2021 as compared to
the same periods in 2020 was due to $2.3
million of enhanced servicing costs
incurred during the third quarter of 2021
on the Company's consumer loan portfolio,
partially offset by a decrease of
servicing fees as AGM's portfolio
Other expenses 5,420 3,672 12,763 12,253 decreases.
Amounts include fees paid to the LSS
operating segment for the servicing of
AGM's loan portfolio. These amounts exceed
the actual cost of servicing the loans.
The decrease in servicing fees for the
nine months ended September 30, 2021 as
compared to the same period in 2020 was
due to the expected amortization of AGM's
FFELP portfolio and a decrease in certain
servicing activities due to borrower
relief initiatives and policies as a
result of the COVID-19 pandemic. The
decrease in servicing fees for the three
months ended September 30, 2021 as
compared to the same period in 2020 was
due to the expected amortization of AGM's
FFELP portfolio. Intersegment expenses
also include costs for certain corporate
activities and services that are allocated
to each operating segment based on
estimated use of such activities and
Intersegment expenses 8,652 8,868 25,627 29,839 services.
Total operating expenses were 31 basis
points and 26 basis points of the average
balance of loans for the three months
ended September 30, 2021 and 2020,
respectively, and 28 basis points and 29
basis points for the nine months ended
September 30, 2021 and 2020, respectively.
The increase for the three months ended
September 30, 2021 as compared to the same
period in 2020 was due to enhanced
servicing costs incurred during the third
quarter of 2021 on the Company's consumer
loan portfolio. The decrease for the nine
months ended September 30, 2021 as
compared to the same period in 2020 was
due to a decrease in certain servicing
activities beginning in March 2020 due to
borrower relief initiatives and policies
as a result of the COVID-19 pandemic,
partially offset by enhanced servicing
costs incurred during the third quarter of
2021 on the Company's consumer loan
Total operating expenses 14,614 12,978 39,984 43,393 portfolio.
Income before income
taxes 60,085 89,917 280,613 80,372
Represents income tax expense at an
Income tax expense (14,421) (21,580) (67,347) (19,289) effective tax rate of 24%.
Net income $ 45,664 68,337 213,266 61,083Additional information:
See "Overview - GAAP Net Income and
Net income $ 45,664 68,337 213,266 61,083 Non-GAAP Net Income, Excluding Derivative market value
Adjustments" above for additional
adjustments, net (7,260) (3,440) (44,455) 21,072 information about non-GAAP net income,
excluding derivative market value
Tax effect 1,742 826 10,669 (5,057) adjustments.Net income, excluding derivative market value adjustments$ 40,146 65,723 179,480 77,098 52
--------------------------------------------------------------------------------
Net interest income after provision for loan losses, net of settlements on derivatives The following table summarizes the components of "net interest income after provision for loan losses" and "derivative settlements, net."
Three months ended September 30 ,
Nine months ended
2021 2020 2021 2020 Additional information
Decrease in 2021 compared to 2020 was due
to a decrease in the gross yield earned on
loans and a decrease in the average
Variable interest income, gross $ 126,270 138,986 379,705 500,141 balance of loans.
Decrease in 2021 compared to 2020 was due
to a decrease in the average consolidation
Consolidation rebate fees (40,340) (41,768) (121,662) (127,292) loan balance.
Discount accretion, net of
premium and deferred Net discount accretion is due to the
origination costs Company's purchases of loans at a net
amortization 1,230 656 1,776 2,332 discount over the last several years.
Variable interest income, net 87,160 97,874 259,819 375,181
Decrease in 2021 compared to 2020 was due
to a decrease in cost of funds and a
decrease in the average balance of debt
outstanding. In addition, during the first
quarter of 2021, the Company reduced
interest expense by $23.8 million as a
Interest on bonds and notes result of reversing a historical accrued
payable (48,549) (57,510) (123,861) (274,318) interest liability on certain bonds.
Derivative settlements include the net
settlements (paid) received related to the
Derivative settlements, net (a) (700) 1,197 (939) 10,438 Company's 1:3 basis swaps.
Variable loan interest margin,
net of settlements on
derivatives (a) 37,911 41,561 135,019 111,301
Increase in the nine months ended
September 30, 2021 compared to the same
period in 2020 was due to lower interest
rates in 2021 as compared to 2020.
Decrease in the three months ended
September 30, 2021 compared to the same
period in 2020 was due to a decrease in
the balance of fixed rate floor loans,
partially offset by a decrease in interest
Fixed rate floor income, gross 35,850 36,633 108,029 87,258 rates.
Derivative settlements include the
settlements paid related to the Company's
floor income interest rate swaps. The
increase in net settlements paid in 2021
as compared to the same periods in 2020
was due to a decrease in interest rates
and an increase in the notional amount of
Derivative settlements, net (a) (5,209) (3,588) (14,648) (2,772) derivatives outstanding.
Fixed rate floor income, net of
settlements on derivatives 30,641 33,045 93,381 84,486
Core loan interest income (a) 68,552 74,606 228,400 195,787
Increase in 2021 compared to 2020 was due
to an increase in interest income on the
Company's loan beneficial interest
investments, partially offset by lower
interest rates in 2021 as compared to
Investment interest 8,771 3,452 20,301 12,029 2020.
Decrease in 2021 compared to 2020 was due
to lower interest rates and lower weighted
average debt outstanding in 2021 as
Intercompany interest (113) (245) (421) (1,174) compared to 2020.
(Provision) negative provision
for loan losses - federally
insured loans (4,452) 5,299 3,428 (32,074) See "Allowance for Loan Losses and Loan
Negative provision (provision) Delinquencies" included above under "Asset
for loan losses - private Generation and Management Operating
education loans 1,208 5,650 781 (6,471) Segment - Results of Operations."
(Provision) negative provision
for loan losses - consumer loans (2,696) (5,128) 7,016 (34,931)
Decrease for the three months ended
September 30, 2021 as compared to the same
period in 2020 was due to (i) a decrease
in core loan spread; (ii) a decrease in
the average balance of loans; and (iii) a
net provision for loan loss recorded in
2021 compared to a net negative provision
in 2020. These items were partially offset
by an increase in interest income on the
Company's loan beneficial interest
investments. Increase for the nine months
ended September 30, 2021 as compared to
the same period in 2020 was due to (i) an
increase in core loan spread; (ii) a
decrease in interest expense in 2021 as a
result of reversing a historical accrued
interest liability on certain bonds; (iii)
an increase in interest income on the
Company's loan beneficial interest
investments; and (iv) the recognition of a
negative provision for loan losses in 2021
as compared to provision for loan losses
Net interest income after in 2020 as a result of the COVID-19
provision for loan losses (net pandemic. These items were partially
of settlements on derivatives) offset by a decrease in the average (a)$ 71,270 83,634 259,505 133,166 balance of loans. (a) Derivative settlements represent the cash paid or received during the current period to settle with derivative instrument counterparties the economic effect of the Company's derivative instruments based on their contractual terms. Derivative accounting requires that net settlements on derivatives that do not qualify for "hedge treatment" under GAAP be recorded in a separate income statement line item below net interest income. The Company maintains an overall risk management strategy that incorporates the use of derivative instruments to reduce the economic effect of interest rate volatility. As such, management believes derivative settlements for each applicable period should be evaluated with the Company's net interest income as presented in this table. Core loan interest income and net interest income after provision for loan losses (net of settlements on derivatives) are non-GAAP financial measures, and the Company reports this non-GAAP information because the Company believes that it provides additional information regarding operational and performance indicators that are closely assessed by management. There is no comprehensive, authoritative guidance for the presentation of such non-GAAP information, which is only meant to supplement GAAP results by providing additional information that management utilizes to assess performance. See note 4 of the notes to consolidated financial statements included under Part I, Item 1 of this report for additional information on the Company's derivative instruments, including the net settlement activity recognized by the Company for each type of derivative referred to in the "Additional information" column of this table, for the 2021 and 2020 periods presented in the table under the caption "Consolidated Financial Statement Impact Related to Derivatives - Statements of Income" in note 4 and in this table. 53 -------------------------------------------------------------------------------- NELNET BANK OPERATING SEGMENT - RESULTS OF OPERATIONS Loan Portfolio As ofSeptember 30, 2021 ,Nelnet Bank had a$192.3 million loan portfolio, consisting of$98.4 million of private education loans and$93.9 million of FFELP loans. As ofSeptember 30, 2021 ,Nelnet Bank's allowance for loan losses on its portfolio was$0.7 million , which represents reserves equal to 0.3% ofNelnet Bank's federally insured loans (or 12.2% of the risk sharing component of the loans that is not covered by the federal guaranty), and 0.4% ofNelnet Bank's private education loans. For a summary ofNelnet Bank's activity in the allowance for loan losses for the three and nine months endedSeptember 30, 2021 , and a summary ofNelnet Bank's loan status and delinquency amounts as ofSeptember 30, 2021 andDecember 31, 2020 , see note 2 of the notes to consolidated financial statements included under Part I, Item 1 of this report. The following table sets forth the activity inNelnet Bank's loan portfolio: Three months ended Nine months ended September 30, 2021 September 30, 2021 Beginning balance: $ 190,571 17,543 Federally insured student loan acquisitions -
99,973
Private education loan originations 13,006 99,161 Repayments (10,865) (21,863) Sales to AGM segment (387) (2,489) Ending balance: $ 192,325 192,325 Deposits As ofSeptember 30, 2021 ,Nelnet Bank had$302.2 million of deposits. All ofNelnet Bank's deposits are interest-bearing deposits and consist of brokered certificates of deposit (CDs), intercompany savings deposits, and retail and other savings deposits and CDs. The intercompany deposits are deposits fromNelnet, Inc. (the parent company) and its subsidiaries and include a pledged deposit of$40.0 million fromNelnet, Inc. as required under the Capital and Liquidity Maintenance Agreement with theFDIC , deposits required for intercompany transactions, operating deposits, and Nelnet Business Services custodial deposits consisting of collected tuition payments which are subsequently remitted to the appropriate school. Retail and other deposits include savings deposits from Educational 529 College Savings and Health Savings plans and commercial and institutional CDs.Union Bank and Trust Company ("Union Bank "), a related party, is the program manager for the College Savings plans. Average Balance Sheet The following table reflects the rates earned on interest-earning assets and paid on interest-bearing liabilities. Three months ended Nine months ended September 30, 2021 September 30, 2021 Balance Rate Balance Rate Average assets Federally insured student loans$ 95,510 1.36 % 56,000 1.36 % Private education loans 95,752 3.14 75,522 3.19 Cash and investments 206,802 1.87 215,213 1.93 Total interest-earning assets 398,064 2.05 % 346,735 2.11 % Non-interest-earning assets 10,452 8,758 Total assets$ 408,516 355,493 Average liabilities and equity Brokered deposits 84,175 0.84 % 53,459 0.84 % Intercompany deposits 98,436 0.24 83,004 0.25 Retail and other deposits 117,360 0.62 112,255 0.61 Total interest-bearing liabilities 299,971 0.56 % 248,718 0.54 % Non-interest-bearing liabilities 5,340 4,178 Equity 103,205 102,597 Total liabilities and equity$ 408,516 355,493 54
-------------------------------------------------------------------------------- Regulatory Capital Requirements Under the regulatory framework for prompt corrective action,Nelnet Bank is subject to various regulatory capital requirements administered by theFDIC and the UDFI and must meet specific capital standards. Failure to meet minimum capital requirements can initiate certain mandatory and possibly additional discretionary actions by regulators that, if undertaken, could have a direct material adverse effect onNelnet Bank's business, results of operations, and financial condition. OnJanuary 1, 2020 , the Community Bank Leverage Ratio ("CBLR") framework, as issued jointly by theOffice of the Comptroller of the Currency , theFederal Reserve Board , and theFDIC , became effective. Any banking organization with total consolidated assets of less than$10 billion , limited amounts of certain types of assets and off-balance sheet exposures, and a community bank leverage ratio greater than 9% may opt into the CBLR framework quarterly. The CBLR framework allows banks to satisfy capital standards and be considered "well capitalized" under the prompt corrective action framework if their leverage ratio is greater than 9%, unless the banking organization's federal banking agency determines that the banking organization's risk profile warrants a more stringent leverage ratio. TheFDIC has orderedNelnet Bank to maintain at least a 12% leverage ratio.Nelnet Bank has opted into the CBLR framework for the quarter endedSeptember 30, 2021 with a leverage ratio of 25.5%.Nelnet Bank intends to maintain at all times regulatory capital levels that meet both the minimum level necessary to be considered "well capitalized" under theFDIC's prompt corrective action framework and the minimum level required by theFDIC . Summary of Operating Results OnNovember 2, 2020 ,Nelnet Bank obtained final approval for federal deposit insurance from theFDIC and for a bank charter from theUDFI and Nelnet Bank launched operations.Nelnet Bank's operations are presented by the Company as a reportable operating segment. Costs associated withNelnet Bank prior toNovember 2, 2020 are included in the Corporate operating segment. In addition, certain shared service and support costs incurred by the Company are not and will not be reflected as part of theNelnet Bank operating segment through 2023 (the bank's de novo period). The shared service and support costs incurred by the Company related toNelnet Bank and not reflected in the bank's operating segment were$0.8 million and$2.5 million for the three and nine months endedSeptember 30, 2021 , respectively. Three months ended Nine months ended September 30, 2021 September 30, 2021 Additional information Represents interest earned on Nelnet Bank's
FFELP and private education student loans, Total interest income
$ 2,061 5,479 cash, and investments. Interest expense 421 1,007
Represents interest expense on deposits. Net interest income
1,640 4,472
(Negative provision) provision
for loan losses (113) 378
Net interest income after
provision for loan losses 1,753 4,094
Other income 450 475
Represents salaries and benefits of
Bank associates and third-party contract Salaries and benefits
890 3,956 labor.
Represents various expenses such as postage,
consulting and professional fees, Nelnet Bank
director fees, occupancy, certain information
technology-related costs, insurance,
Other expenses 445 1,227 marketing, and other operating expenses.
Represents primarily servicing costs paid to Intersegment expenses
32 72 the LSS operating segment.
Total operating expenses 1,367 5,255
Income (loss) before income
taxes 836 (686)
Represents income tax (expense) benefit at an
effective tax rate of 24.0% and 22.0% for the
three and nine months ended September 30,
Income tax (expense) benefit (200) 151 2021, respectively.
Net income (loss) $ 636 (535)
55-------------------------------------------------------------------------------- LIQUIDITY AND CAPITAL RESOURCES The Company's Loan Servicing and Systems, and Education Technology, Services, and Payment Processing operating segments are non-capital intensive and both produce positive operating cash flows. As such, a minimal amount of debt and equity capital is allocated to these segments and any liquidity or capital needs are satisfied using cash flow from operations. Therefore, the Liquidity and Capital Resources discussion is concentrated on the Company's liquidity and capital needs to meet existing debt obligations in the Asset Generation and Management operating segment and the Company's other initiatives to pursue additional strategic investments. Sources of Liquidity The Company has historically generated positive cash flow from operations. For the year endedDecember 31, 2020 and the nine months endedSeptember 30, 2021 , the Company's net cash provided by operating activities was$212.8 million and$389.7 million , respectively. As ofSeptember 30, 2021 , the Company had cash and cash equivalents of$191.9 million . Cash held byNelnet Bank is generally not available for Company activities outside ofNelnet Bank . Excluding Nelnet Bank, cash and cash equivalents as ofSeptember 30, 2021 was$170.9 million . The Company invests excess cash in federally insured student loan asset-backed securities, and the cash proceeds from the sale of these securities could be used for operating and/or other investing opportunities. The Company had a portfolio of federally insured student loan asset-backed securities (classified as available-for-sale) with a fair value of$403.7 million as ofSeptember 30, 2021 . Investments held byNelnet Bank are generally not available for Company activities outside ofNelnet Bank . Excluding Nelnet Bank, the fair value of federally insured student loan asset-backed securities as ofSeptember 30, 2021 was$210.9 million . As ofSeptember 30, 2021 , the Company had participated$194.2 million of its non-Nelnet Bank federally insured student loan asset-backed securities, and such participation is reflected as debt on the Company's consolidated balance sheet. The Company also has a$495.0 million unsecured line of credit that matures onSeptember 22, 2026 . As ofSeptember 30, 2021 , there was no amount outstanding on the unsecured line of credit and$495.0 million was available for future use. The line of credit provides that the Company may increase the aggregate financing commitments, through the existing lenders and/or through new lenders, up to a total of$737.5 million , subject to certain conditions. In addition, the Company has a$22.0 million secured line of credit agreement that matures onMay 30, 2022 . As ofSeptember 30, 2021 , the secured line of credit had$5.0 million outstanding and$17.0 million was available for future use. In addition, the Company has retained certain of its own asset-backed securities upon their initial issuance or repurchased certain of its own asset-backed securities (bonds and notes payable) in the secondary market. For accounting purposes, these notes are eliminated in consolidation and are not included in the Company's consolidated financial statements. However, these securities remain legally outstanding at the trust level and the Company could sell these notes to third parties or redeem the notes at par as cash is generated by the trust estate. Upon a sale of these notes to third parties, the Company would obtain cash proceeds equal to the market value of the notes on the date of such sale. As ofSeptember 30, 2021 , the Company holds$179.7 million (par value) of its own asset-backed securities. The Company intends to use its liquidity position to capitalize on market opportunities, including FFELP, private education, and consumer loan acquisitions (or investment interests therein); strategic acquisitions and investments; and capital management initiatives, including stock repurchases, debt repurchases, and dividend distributions. The timing and size of these opportunities will vary and will have a direct impact on the Company's cash and investment balances. Cash Flows During the nine months endedSeptember 30, 2021 , the Company generated$389.7 million in operating activities, compared to generating$173.0 million for the same period in 2020. The increase in such cash flows from operating activities was due to: •An increase in net income; •Adjustments to net income for the impact of reduced gains from investments and sale of loans during the nine months endedSeptember 30, 2021 , as compared to the same period in 2020, and the non-cash change in deferred income taxes; •Proceeds from the Company's clearinghouse for margin payments on derivatives for the nine months endedSeptember 30, 2021 compared to payments to the clearinghouse in 2020; and •The impact of changes to the due to customers liability account and other assets during the nine months endedSeptember 30, 2021 as compared to the same period in 2020. 56 -------------------------------------------------------------------------------- These factors were partially offset by: •The adjustments to net income for derivative market value adjustments; •Adjustments to net income for the impact of the non-cash provision for loan losses, beneficial interests, and impairment charges (a significant portion of which during the nine months endedSeptember 30, 2020 were related to COVID-19), and depreciation and amortization; •Purchases of equity securities classified as trading; and •The impact of changes to accrued interest receivable, accounts receivable, and accrued interest payable during the nine months endedSeptember 30, 2021 as compared to the same period in 2020. The primary items included in the statement of cash flows for investing activities are the purchase and repayment of loans. The primary items included in financing activities are the proceeds from the issuance of and payments on bonds and notes payable used to fund loans. Cash provided by investing activities and used in financing activities for the nine months endedSeptember 30, 2021 was$543.4 million and$640.3 million , respectively. Cash provided by investing activities and used in financing activities for the nine months endedSeptember 30, 2020 was$953.6 million and$1.4 billion , respectively. Investing and financing activities are further addressed in the discussion that follows. Liquidity Needs and Sources of Liquidity Available to Satisfy Debt Obligations Secured by Loan Assets and Related Collateral The following table shows AGM's debt obligations outstanding that are secured by loan assets and related collateral.
As of
Carrying amount Final maturity
Bonds and notes issued in asset-backed securitizations
5/27/25 - 9/25/69
FFELP and private education loan warehouse facilities 123,745 11/22/22 - 2/26/24
$ 18,285,518
Bonds and Notes Issued in Asset-backed Securitizations
The majority of AGM's portfolio of student loans is funded in asset-backed
securitizations that are structured to substantially match the maturity of the
funded assets, thereby minimizing liquidity risk. Cash generated from student
loans funded in asset-backed securitizations provide the sources of liquidity to
satisfy all obligations related to the outstanding bonds and notes issued in
such securitizations. In addition, due to (i) the difference between the yield
AGM receives on the loans and cost of financing within these transactions, and
(ii) the servicing and administration fees AGM earns from these transactions,
AGM has created a portfolio that will generate earnings and significant cash
flow over the life of these transactions.
As of September 30, 2021 , based on cash flow models developed to reflect
management's current estimate of, among other factors, prepayments, defaults,
deferment, forbearance, and interest rates, AGM currently expects future
undiscounted cash flows from its portfolio to be approximately $2.10 billion as
detailed below.
The forecasted cash flow presented below includes all loans funded in
asset-backed securitizations as of September 30, 2021 . As of September 30, 2021 ,
AGM had $18.2 billion of loans included in asset-backed securitizations, which
represented 98.4 percent of its total loan portfolio. The forecasted cash flow
does not include cash flows that the Company expects to receive related to loans
funded in its warehouse facilities as of September 30, 2021 , private education
and consumer loans funded with operating cash, loans acquired subsequent to
September 30, 2021 , loans owned by Nelnet Bank , and cash flows relating to the
Company's ownership of beneficial interest in loan securitizations (such
beneficial interest investments are classified as "investments" on the Company's
consolidated balance sheets).
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Asset-backed Securitization Cash Flow Forecast
$2.10 billion
(dollars in millions)
[[Image Removed: nni-20210930_g4.jpg]]
The forecasted future undiscounted cash flows of approximately $2.10 billion
include approximately $1.21 billion (as of September 30, 2021 ) of
overcollateralization included in the asset-backed securitizations. These excess
net asset positions are included in the consolidated balance sheets and included
in the balances of "loans and accrued interest receivable" and "restricted
cash." The difference between the total estimated future undiscounted cash flows
and the overcollateralization of approximately $0.89 billion , or approximately
$0.68 billion after income taxes based on the estimated effective tax rate, is
expected to be accretive to the Company's September 30, 2021 balance of
consolidated shareholders' equity.
The Company uses various assumptions, including prepayments and future interest
rates, when preparing its cash flow forecast. These assumptions are further
discussed below.
Prepayments: The primary variable in establishing a life of loan estimate is the
level and timing of prepayments. Prepayment rates equal the amount of loans that
prepay annually as a percentage of the beginning of period balance, net of
scheduled principal payments. A number of factors can affect estimated
prepayment rates, including the level of consolidation activity, borrower
default rates, and utilization of debt management options such as income-based
repayment, deferments, and forbearance. Should any of these factors change,
management may revise its assumptions, which in turn would impact the projected
future cash flow. The Company's cash flow forecast above assumes prepayment
rates that are generally consistent with those utilized in the Company's recent
asset-backed securitization transactions. If management used a prepayment rate
assumption two times greater than what was used to forecast the cash flow, the
cash flow forecast would be reduced by approximately $115 million to $150
million .
Interest rates: The Company funds a large portion of its student loans with
three-month LIBOR indexed floating rate securities. Meanwhile, the interest
earned on the Company's student loan assets is indexed primarily to a one-month
LIBOR rate. The different interest rate characteristics of the Company's loan
assets and liabilities funding these assets result in basis risk. The Company's
cash flow forecast assumes three-month LIBOR will exceed one-month LIBOR by 12
basis points for the life of the portfolio, which approximates the historical
relationship between these indices. If the forecast is computed assuming a
spread of 24 basis points between three-month and one-month LIBOR for the life
of the portfolio, the cash flow forecast would be reduced by approximately $50
million to $75 million . As the percentage of the Company's outstanding debt
financed by three-month LIBOR declines, the Company's basis risk will be
reduced. In addition, the Company attempts to mitigate the impact of this basis
risk by entering into certain derivative instruments. See Item 3, "Quantitative
and Qualitative Disclosures About Market Risk - Interest Rate Risk - AGM
Operating Segment."
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LIBOR is in the process of being discontinued as a benchmark rate, and the
market transition away from the current LIBOR framework could result in
significant changes to the forecasted cash flows from the Company's asset-backed
securitizations. See "Interest Rate Risk - Replacement of LIBOR as a Benchmark
Rate" above and Item 1A, "Risk Factors - Loan Portfolio - Interest rate risk -
replacement of LIBOR as a benchmark rate" in the Company's 2020 Annual Report
for additional information.
The Company uses the current forward interest rate yield curve to forecast cash
flows. A change in the forward interest rate curve would impact the future cash
flows generated from the portfolio. An increase in future interest rates will
reduce the amount of fixed rate floor income the Company is currently receiving.
The Company attempts to mitigate the impact of a rise in short-term rates by
hedging interest rate risks. The forecasted cash flow does not include cash
flows the Company expects to pay/receive related to derivative instruments used
by the Company to manage interest rate risk. See Item 3, "Quantitative and
Qualitative Disclosures About Market Risk - Interest Rate Risk - AGM Operating
Segment."
Warehouse Facilities
The Company funds a portion of its FFELP loan acquisitions using its FFELP
warehouse facilities. Student loan warehousing allows the Company to buy and
manage student loans prior to transferring them into more permanent financing
arrangements. As of September 30, 2021 , the Company had two FFELP warehouse
facilities with an aggregate maximum financing amount available of $110.0
million , of which $5.4 million was outstanding and $104.6 million was available
for additional funding. On October 14, 2021 , the Company terminated one of the
FFELP warehouse facilities. The remaining FFELP warehouse facility has an
aggregate maximum financing amount of $60.0 million and a static advance rate
until the expiration date of the liquidity provisions (November 22, 2021 ). In
the event the liquidity provisions are not extended, the valuation agent has the
right to perform a one-time mark to market on the underlying loans funded in
this facility, subject to a floor. The loans would then be funded at this new
advance rate until the final maturity date of the facility (November 22, 2022 ).
For further discussion of the Company's FFELP warehouse facilities, see note 3
of the notes to consolidated financial statements included under Part I, Item 1
of this report.
The Company has a private education loan warehouse facility that, as of
September 30, 2021 , had an aggregate maximum financing amount available of
$175.0 million , an advance rate of 80 to 90 percent, liquidity provisions
through February 13, 2022 , and a final maturity date of February 13, 2023 . As of
September 30, 2021 , $118.3 million was outstanding under this warehouse
facility, $56.7 million was available for future funding, and $12.9 million was
advanced as equity support.
Upon termination or expiration of the warehouse facilities, the Company would
expect to access the securitization market, obtain replacement warehouse
facilities, use operating cash, consider the sale of assets, or transfer
collateral to satisfy any remaining obligations.
The Company had a $100.0 million consumer loan warehouse facility that was
terminated on March 31, 2021 . The Company used operating cash to pay off the
$20.7 million outstanding balance on this facility upon its termination.
Other Uses of Liquidity
The Company no longer originates new FFELP loans, but continues to acquire FFELP
loan portfolios from third parties and believes additional loan purchase
opportunities exist, including opportunities to purchase private education and
consumer loans (or investment interests therein).
The Company plans to fund additional loan acquisitions and related investments
using current cash and investments; using its unsecured line of credit, Union
Bank student loan participation agreement, Union Bank student loan asset-backed
securities participation agreement, and third-party repurchase agreements (each
as described below), and/or establishing similar secured and unsecured borrowing
facilities; using its existing warehouse facilities (as described above);
increasing the capacity under existing and/or establishing new warehouse
facilities; and continuing to access the asset-backed securities market.
Private Education Loan Investment
In December of 2020, Wells Fargo announced the sale of its approximately $10.0
billion portfolio of private education loans representing approximately 445,000
borrowers. The Company has entered into a joint venture with other investors to
acquire the loans, and under the joint venture, the Company has an approximately
8 percent interest in the loans and in residual interests in subsequent
securitizations of the loans. In conjunction with the sale, the Company was
selected as servicer of the portfolio. During March and throughout the second
quarter of 2021, the vast majority of the borrowers were converted to the
Company's servicing platform. The joint venture established a limited
partnership that purchased the private education loans and funded such loans
with a temporary warehouse facility.
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On May 20, 2021 , June 30, 2021 , and August 18, 2021 , the joint venture completed
asset-backed securitization transactions to permanently finance a total of $7.4
billion of the private education loans purchased by the joint venture. The
Company is accounting for its approximately 8 percent residual interest in these
securitizations as held-to-maturity beneficial interest investments. These
investments are reflected on the Company's consolidated balance sheet as
"investments." On behalf of the joint venture, the Company is the sponsor and
administrator for these loan securitizations. As sponsor, the Company is
required to provide a certain level of risk retention, and has purchased bonds
issued in such securitizations to satisfy this requirement. The bonds purchased
to satisfy the risk retention requirement are reflected on the Company's
consolidated balance sheet as "investments" and as of September 30, 2021 , the
fair value of these bonds was $371.7 million . The Company must retain these
investment securities until the latest of (i) two years from the closing date of
the securitization, (ii) the date the aggregate outstanding principal balance of
the loans in the securitization is 33% or less of the initial loan balance, and
(iii) the date the aggregate outstanding principal balance of the bonds is 33%
or less of the aggregate initial outstanding principal balance of the bonds, at
which time the Company can sell its investment securities (bonds) to a
third-party. The Company entered into repurchase agreements with third-parties,
the proceeds of which were used to purchase a portion of the asset-backed
investments, and such investments serve as collateral on the repurchase
obligations.
As of September 30, 2021 , $334.5 million was outstanding on the repurchase
agreements. The maturity dates on the repurchase agreements are various dates
between November 15, 2021 and December 20, 2023 , but are subject to early
termination upon required notice provided by the Company or the applicable
counterparty prior to the maturity dates. The Company pays interest on amounts
outstanding on the repurchase agreements based on LIBOR plus an applicable
spread, and is also required to pay additional cash in the event the fair value
of the securities subject to a repurchase agreement becomes less than the
original purchase price of such securities.
Upon termination or expiration of the repurchase agreements, the Company would
use cash and/or cash proceeds from its unsecured line of credit to satisfy any
outstanding obligations subject to the repurchase agreements.
On October 27, 2021 , the joint venture completed a final asset-backed
securitization of $1.2 billion of private education loans that permanently
financed all remaining eligible loans temporarily funded in the joint venture
limited partnership's warehouse facility.
Union Bank Participation Agreement
The Company maintains an agreement with Union Bank, a related party, as trustee
for various grantor trusts, under which Union Bank has agreed to purchase from
the Company participation interests in student loans. As of September 30, 2021 ,
$878.3 million of loans were subject to outstanding participation interests held
by Union Bank, as trustee, under this agreement. The agreement automatically
renews annually and is terminable by either party upon five business days'
notice. This agreement provides beneficiaries of Union Bank's grantor trusts
with access to investments in interests in student loans, while providing
liquidity to the Company. The Company can participate loans to Union Bank to the
extent of availability under the grantor trusts, up to $900.0 million or an
amount in excess of $900.0 million if mutually agreed to by both parties. Loans
participated under this agreement have been accounted for by the Company as loan
sales. Accordingly, the participation interests sold are not included on the
Company's consolidated balance sheets.
Asset-backed Securities Transactions
During the first nine months of 2021, the Company completed two FFELP
asset-backed securitization totaling $1.3 billion (par value). The proceeds from
these transactions were used primarily to finance student loans purchased during
the period and refinance student loans included in the Company's FFELP warehouse
facilities. See note 3 of the notes to consolidated financial statements
included under Part I, Item 1 of this report for additional information on these
securitizations.
The Company, through its subsidiaries, has historically funded student loans by
completing asset-backed securitizations. Depending on market conditions, the
Company currently anticipates continuing to access the asset-backed
securitization market. Such asset-backed securitization transactions would be
used to refinance student loans included in its warehouse facilities, loans
purchased from third parties, and/or student loans in its existing asset-backed
securitizations.
Liquidity Impact Related to Nelnet Bank
On November 2, 2020 , the Company obtained final approval for federal deposit
insurance from the FDIC and for a bank charter from the UDFI in connection with
the establishment of Nelnet Bank , and Nelnet Bank launched operations. Nelnet
Bank was funded by the Company with an initial capital contribution of $100.0
million , consisting of $55.9 million of cash and $44.1 million of student loan
asset-backed securities. In addition, the Company made a pledged deposit of
$40.0 million with Nelnet Bank , as required under an agreement with the FDIC
discussed below.
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Prior to FDIC approval, Nelnet Bank , Nelnet, Inc. (the parent), and Michael S.
Dunlap (Nelnet, Inc.'s controlling shareholder) entered into a Capital and
Liquidity Maintenance Agreement and a Parent Company Agreement with the FDIC in
connection with Nelnet, Inc.'s role as a source of financial strength for Nelnet
Bank . As part of the Capital and Liquidity Maintenance Agreement, Nelnet, Inc.
is obligated to (i) contribute capital to Nelnet Bank for it to maintain capital
levels that meet FDIC requirements for a "well capitalized" bank, including a
leverage ratio of capital to total assets of at least 12 percent; (ii) provide
and maintain an irrevocable asset liquidity takeout commitment for the benefit
of Nelnet Bank in an amount equal to the greater of either 10 percent of Nelnet
Bank's total assets or such additional amount as agreed to by Nelnet Bank and
Nelnet, Inc. ; (iii) provide additional liquidity to Nelnet Bank in such amount
and duration as may be necessary for Nelnet Bank to meet its ongoing liquidity
obligations; and (iv) establish and maintain a pledged deposit of $40.0 million
with Nelnet Bank .
Based on Nelnet Bank's business plan and current financial condition, the
Company currently believes that the initial capital contribution of $100.0
million and pledged deposit of $40.0 million should provide sufficient capital
and liquidity to Nelnet Bank for the next two to three years.
Liquidity Impact Related to ALLO
As previously disclosed, on October 1, 2020 , the Company entered into various
agreements with SDC, a third party global digital infrastructure investor, and
ALLO, for various transactions contemplated by the parties in connection with a
recapitalization and additional funding for ALLO. After completion of the
initial transactions subject to these agreements, SDC, the Company, and members
of ALLO's management own approximately 48 percent, 45 percent, and 7 percent,
respectively, of the outstanding voting membership interests in ALLO, and upon
the receipt of regulatory approvals for the transactions on December 21, 2020 ,
the Company deconsolidated ALLO from the Company's consolidated financial
statements. In addition, on January 19, 2021 , ALLO obtained certain private debt
financing facilities from unrelated third-party lenders providing for aggregate
financing of up to $230.0 million . With proceeds from this transaction, a
portion of the non-voting preferred membership interests in ALLO held by the
Company were redeemed in exchange for an aggregate redemption price payment to
the Company of $100.0 million .
The agreements among the Company, SDC, and ALLO provide that they will use
commercially reasonable efforts (which expressly excludes requiring ALLO to
raise any additional equity financing or sell any assets) to cause the
redemption, on or before April 2024 , of the remaining non-voting preferred
membership interests in ALLO held by the Company, plus the amount of accrued and
unpaid preferred return on such interests. As of September 30, 2021 , such
outstanding preferred membership interests and accrued and unpaid preferred
return held by the Company was $129.7 million and $5.6 million , respectively.
The non-voting preferred membership interests earn a preferred annual return of
6.25 percent.
If ALLO needs additional capital to support its growth in existing or new
markets, the Company has the option to contribute additional capital to maintain
its voting equity interest. However, ALLO has obtained third-party debt
financing to support its current growth plans, and thus the Company currently
believes additional equity contributions to ALLO are not likely in the immediate
future.
Liquidity Impact Related to Hedging Activities
The Company utilizes derivative instruments to manage interest rate sensitivity.
By using derivative instruments, the Company is exposed to market risk which
could impact its liquidity. Based on the derivative portfolio outstanding as of
September 30, 2021 , the Company does not currently anticipate any movement in
interest rates having a material impact on its capital or liquidity profile, nor
does the Company expect that any movement in interest rates would have a
material impact on its ability to make variation margin payments to its
third-party clearinghouse. However, if interest rates move materially and
negatively impact the fair value of the Company's derivative portfolio, the
replacement of LIBOR as a benchmark rate has significant adverse impacts on the
Company's derivatives, or if the Company enters into additional derivatives for
which the fair value becomes negative, the Company could be required to make
variation margin payments to its third-party clearinghouse. The variation
margin, if significant, could negatively impact the Company's liquidity and
capital resources. In addition, clearing rules require the Company to post
amounts of liquid collateral when executing new derivative instruments, which
could prevent or limit the Company from utilizing additional derivative
instruments to manage interest rate sensitivity and risks. See note 4 of the
notes to consolidated financial statements included under Part I, Item 1 of this
report for additional information on the Company's derivative portfolio.
Other Debt Facilities
The Company's unsecured line of credit, discussed above, was amended on
September 22, 2021 . As part of the amendment, the facility size increased from
$455.0 million to $495.0 million and the maturity date was extended from
December 16, 2024 to September 22, 2026 . See note 3 of the notes to consolidated
financial statements included under Part I, Item 1 of this report for a summary
of additional terms that were modified as part of the amendment. As of September
30, 2021 , the unsecured line of
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credit had no amount outstanding and $495.0 million was available for future
use. The Company also has a $22.0 million secured line of credit agreement with
a maturity date of May 30, 2022 . As of September 30, 2021 , the secured line of
credit had $5.0 million outstanding with $17.0 million available for future use.
The secured line of credit is secured by several Company-owned properties. Upon
the maturity date of the line of credit facilities, there can be no assurance
that the Company will be able to maintain these lines of credit, increase the
amount outstanding under the lines, or find alternative funding if necessary.
During 2020, the Company entered into an agreement with Union Bank, as trustee
for various grantor trusts, under which Union Bank has agreed to purchase from
the Company participation interests in federally insured student loan
asset-backed securities. As of September 30, 2021 , $194.2 million of student
loan asset-backed securities were subject to outstanding participation interests
held by Union Bank, as trustee, under this agreement. This participation
agreement has been accounted for by the Company as a secured borrowing. Upon
termination or expiration of this agreement, the Company would expect to use
operating cash, consider the sale of assets, or transfer collateral to satisfy
any remaining obligations.
Stock Repurchases
The Board of Directors has authorized a stock repurchase program to repurchase
up to a total of five million shares of the Company's Class A common stock
during the three-year period ending May 7, 2022 . As of September 30, 2021 ,
2,909,015 shares remained authorized for repurchase under the Company's stock
repurchase program. Shares may be repurchased from time to time on the open
market, in private transactions (including with related parties), or otherwise,
depending on various factors, including share prices and other potential uses of
liquidity.
Shares repurchased by the Company during the three months ended March 31, 2021 ,
June 30, 2021 , and September 30, 2021 are shown below. For additional
information on stock repurchases during the third quarter of 2021, see "Stock
Repurchases" under Part II, Item 2 of this report.
Purchase price Average price of shares
Total shares repurchased (in thousands) repurchased (per share)
Quarter ended March 31, 2021 26,199 $ 2,009 76.70
Quarter ended June 30, 2021 5,368 399 74.25
Quarter ended September 30, 2021 341,094 25,078 73.52
Total 372,661 $ 27,486 73.76
Included in the shares repurchased during the quarter ended September 30, 2021
in the table above are a total of 337,717 shares of Class A common stock the
Company purchased on August 10, 2021 from various estate planning trusts
associated with Shelby J. Butterfield , a significant shareholder of the Company.
The shares were purchased at a discount to the closing market price of the
Company's Class A common stock as of August 9, 2021 , and the transaction was
separately approved by the Company's Board of Directors and its Nominating and
Corporate Governance Committee . Immediately prior to the Company's repurchase of
such shares, certain of the repurchased shares were shares of the Company's
Class B common stock that were converted to shares of Class A common stock.
Dividends
On September 15, 2021 , the Company paid a third quarter 2021 cash dividend on
the Company's Class A and Class B common stock of $0.22 per share. In addition,
the Company's Board of Directors has declared a fourth quarter 2021 cash
dividend on the Company's outstanding shares of Class A and Class B common stock
of $0.24 per share. The fourth quarter cash dividend will be paid on
December 15, 2021 to shareholders of record at the close of business on
December 1, 2021 .
The Company currently plans to continue making regular quarterly dividend
payments, subject to future earnings, capital requirements, financial condition,
and other factors.
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