NELNET INC, 10-Q filed on 8/6/2020
Quarterly Report
v3.20.2
Cover Page - shares
6 Months Ended
Jun. 30, 2020
Jul. 31, 2020
Document Information [Line Items]    
Document Type 10-Q  
Document Quarterly Report true  
Document Period End Date Jun. 30, 2020  
Document Transition Report false  
Entity File Number 001-31924  
Entity Registrant Name NELNET, INC.  
Entity Incorporation, State or Country Code NE  
Entity Tax Identification Number 84-0748903  
Entity Address, Address Line One 121 South 13th Street, Suite 100  
Entity Address, City or Town Lincoln,  
Entity Address, State or Province NE  
Entity Address, Postal Zip Code 68508  
City Area Code 402  
Local Phone Number 458-2370  
Title of 12(b) Security Class A Common Stock, Par Value $0.01 per Share  
Trading Symbol NNI  
Security Exchange Name NYSE  
Entity Current Reporting Status Yes  
Entity Interactive Data Current Yes  
Entity Filer Category Large Accelerated Filer  
Entity Small Business false  
Entity Emerging Growth Company false  
Entity Shell Company false  
Current Fiscal Year End Date --12-31  
Amendment Flag false  
Entity Central Index Key 0001258602  
Document Fiscal Year Focus 2020  
Document Fiscal Period Focus Q2  
Common Class A    
Document Information [Line Items]    
Entity Common Stock, Shares Outstanding   27,152,828
Common Class B    
Document Information [Line Items]    
Entity Common Stock, Shares Outstanding   11,171,609
v3.20.2
CONSOLIDATED BALANCE SHEETS - USD ($)
$ in Thousands
Jun. 30, 2020
Dec. 31, 2019
Assets:    
Loans and accrued interest receivable (net of allowance for loan losses of $209,445 and $61,914, respectively) $ 20,460,873 $ 21,402,868
Cash and cash equivalents:    
Cash and cash equivalents - not held at a related party 14,242 13,922
Cash and cash equivalents - held at a related party 53,298 119,984
Total cash and cash equivalents 67,540 133,906
Investments 449,700 247,099
Restricted cash 585,236 650,939
Restricted cash - due to customers 268,539 437,756
Accounts receivable (net of allowance for doubtful accounts of $3,901 and $4,455, respectively) 73,783 115,391
Goodwill 156,912 156,912
Intangible assets, net 66,733 81,532
Property and equipment, net 350,043 348,259
Other assets 131,849 134,308
Total assets 22,611,208 23,708,970
Liabilities:    
Bonds and notes payable 19,726,158 20,529,054
Accrued interest payable 32,760 47,285
Other liabilities 242,965 303,781
Due to customers 268,539 437,756
Total liabilities 20,270,422 21,317,876
Commitments and contingencies
Nelnet, Inc. shareholders' equity:    
Preferred stock, $0.01 par value. Authorized 50,000,000 shares; no shares issued or outstanding 0 0
Common stock:    
Additional paid-in capital 1,867 5,715
Retained earnings 2,331,312 2,377,627
Accumulated other comprehensive earnings 3,233 2,972
Total Nelnet, Inc. shareholders' equity 2,336,796 2,386,712
Noncontrolling interests 3,990 4,382
Total equity 2,340,786 2,391,094
Total liabilities and equity 22,611,208 23,708,970
Variable Interest Entity, Primary Beneficiary    
Assets:    
Loans and accrued interest receivable (net of allowance for loan losses of $209,445 and $61,914, respectively) 20,488,321 21,399,382
Cash and cash equivalents:    
Restricted cash 567,064 639,816
Other assets 30 31
Liabilities:    
Bonds and notes payable 19,856,362 20,742,798
Other liabilities 97,523 162,494
Common stock:    
Net assets of consolidated education and other lending variable interest entities 1,101,530 1,133,937
Class A, $0.01 par value. Authorized 600,000,000 shares; issued and outstanding 27,232,836 shares and 28,458,495 shares, respectively    
Common stock:    
Common stock 272 285
Class B, convertible, $0.01 par value. Authorized 60,000,000 shares; issued and outstanding 11,171,609 shares and 11,271,609 shares, respectively    
Common stock:    
Common stock $ 112 $ 113
v3.20.2
CONSOLIDATED BALANCE SHEETS (Parenthetical) - USD ($)
$ in Thousands
Jun. 30, 2020
Dec. 31, 2019
Allowance for loan losses $ 209,445 $ 61,914
Allowance for doubtful accounts $ 3,901 $ 4,455
Preferred stock, par value (in dollars per share) $ 0.01 $ 0.01
Preferred stock, authorized shares (in shares) 50,000,000 50,000,000
Preferred stock, issued shares (in shares) 0 0
Preferred stock, outstanding shares (in shares) 0 0
Common Class A    
Par value (in dollars per share) $ 0.01 $ 0.01
Shares authorized (in shares) 600,000,000 600,000,000
Shares issued (in shares) 27,232,836 28,458,495
Shares outstanding (in shares) 27,232,836 28,458,495
Common Class B    
Par value (in dollars per share) $ 0.01 $ 0.01
Shares authorized (in shares) 60,000,000 60,000,000
Shares issued (in shares) 11,171,609 11,271,609
Shares outstanding (in shares) 11,171,609 11,271,609
v3.20.2
CONSOLIDATED STATEMENTS OF INCOME - USD ($)
$ in Thousands
3 Months Ended 6 Months Ended
Jun. 30, 2020
Jun. 30, 2019
Jun. 30, 2020
Jun. 30, 2019
Interest income:        
Loan interest $ 146,140 $ 238,222 $ 327,933 $ 480,555
Investment interest 5,743 8,566 13,141 16,819
Total interest income 151,883 246,788 341,074 497,374
Interest expense:        
Interest on bonds and notes payable 85,248 186,963 219,366 378,733
Net interest income 66,635 59,825 121,708 118,641
Less provision for loan losses 2,999 9,000 79,297 16,000
Net interest income after provision for loan losses 63,636 50,825 42,411 102,641
Other income/expense:        
Gain on sale of loans 0 1,712 18,206 1,712
Other income 60,127 14,440 68,408 23,507
Impairment expense (332) 0 (34,419) 0
Derivative market value adjustments and derivative settlements, net 1,910 (24,088) (14,455) (35,628)
Total other income/expense 251,049 182,149 441,676 388,276
Cost of services:        
Cost of services 21,119 20,972 49,506 46,790
Operating expenses:        
Salaries and benefits 119,247 111,214 239,125 222,272
Depreciation and amortization 29,393 24,484 57,041 48,697
Other expenses 37,052 45,417 80,439 89,233
Total operating expenses 185,692 181,115 376,605 360,202
Income before income taxes 107,874 30,887 57,976 83,925
Income tax expense 21,264 6,209 11,131 17,600
Net income 86,610 24,678 46,845 66,325
Net income attributable to noncontrolling interests (128) (59) (895) (115)
Net income attributable to Nelnet, Inc. $ 86,482 $ 24,619 $ 45,950 $ 66,210
Earnings per common share:        
Net (loss) income attributable to Nelnet, Inc. shareholders - basic and diluted (in dollars per share) $ 2.21 $ 0.61 $ 1.16 $ 1.65
Weighted average common shares outstanding - basic and diluted (in shares) 39,203,404 40,050,065 39,579,459 40,210,787
Loan servicing and systems        
Other income/expense:        
Revenue $ 111,042 $ 113,985 $ 223,778 $ 228,883
Education technology, services, and payment processing        
Other income/expense:        
Revenue 59,304 60,342 142,979 139,502
Cost of services:        
Cost of services 15,376 15,871 38,181 36,930
Communications services        
Other income/expense:        
Revenue 18,998 15,758 37,179 30,300
Cost of services:        
Cost of services $ 5,743 $ 5,101 $ 11,325 $ 9,860
v3.20.2
CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME - USD ($)
$ in Thousands
3 Months Ended 6 Months Ended
Jun. 30, 2020
Jun. 30, 2019
Jun. 30, 2020
Jun. 30, 2019
Statement of Comprehensive Income [Abstract]        
Net income $ 86,610 $ 24,678 $ 46,845 $ 66,325
Available-for-sale securities:        
Unrealized holding gains (losses) arising during period, net 3,236 (537) 221 (972)
Reclassification adjustment for (gains) losses recognized in net income, net (112) 0 123 0
Income tax effect (750) 129 (83) 233
Total other comprehensive income (loss) 2,374 (408) 261 (739)
Comprehensive income 88,984 24,270 47,106 65,586
Comprehensive income attributable to noncontrolling interests (128) (59) (895) (115)
Comprehensive income attributable to Nelnet, Inc. $ 88,856 $ 24,211 $ 46,211 $ 65,471
v3.20.2
CONSOLIDATED STATEMENTS OF SHAREHOLDERS' EQUITY - USD ($)
$ in Thousands
Total
Cumulative Effect, Period Of Adoption, Adjustment
Preferred stock
Common stock
Common Class A
Common stock
Common Class B
Additional paid-in capital
 Retained earnings
 Retained earnings
Cumulative Effect, Period Of Adoption, Adjustment
Accumulated other comprehensive (loss) earnings
Noncontrolling interests
Noncontrolling interests
Cumulative Effect, Period Of Adoption, Adjustment
Balance (in shares) at Dec. 31, 2018     0 28,798,464 11,459,641            
Balance at Dec. 31, 2018 $ 2,314,779 $ (6,077) $ 0 $ 288 $ 115 $ 622 $ 2,299,556   $ 3,883 $ 10,315 $ (6,077)
Increase (Decrease) in Stockholders' Equity [Roll Forward]                      
Issuance of noncontrolling interests 52                 52  
Net income 66,325           66,210     115  
Other comprehensive loss (739)               (739)    
Distribution to noncontrolling interests (113)                 (113)  
Cash dividend on Class A and Class B common stock (14,403)           (14,403)        
Issuance of common stock, net of forfeitures (in shares)       141,529              
Issuance of common stock, net of forfeitures 3,877     $ 1   3,876          
Compensation expense for stock based awards 2,958         2,958          
Repurchase of common stock (in shares)       (720,467)              
Repurchase of common stock (40,041)     $ (7)   (5,786) (34,248)        
Conversion of common stock (in shares)       180,000 180,000            
Conversion of common stock 0     $ 2 $ 2            
Balance (in shares) at Jun. 30, 2019     0 28,399,526 11,279,641            
Balance at Jun. 30, 2019 2,326,618   $ 0 $ 284 $ 113 1,670 2,317,115   3,144 4,292  
Balance (in shares) at Mar. 31, 2019     0 28,628,528 11,459,641            
Balance at Mar. 31, 2019 2,330,294   $ 0 $ 286 $ 115 636 2,321,407   3,552 4,298  
Increase (Decrease) in Stockholders' Equity [Roll Forward]                      
Issuance of noncontrolling interests 26                 26  
Net income 24,678           24,619     59  
Other comprehensive loss (408)               (408)    
Distribution to noncontrolling interests (91)                 (91)  
Cash dividend on Class A and Class B common stock (7,172)           (7,172)        
Issuance of common stock, net of forfeitures (in shares)       10,138              
Issuance of common stock, net of forfeitures 1,384         1,384          
Compensation expense for stock based awards 1,590         1,590          
Repurchase of common stock (in shares)       (419,140)              
Repurchase of common stock (23,683)     $ (4)   (1,940) (21,739)        
Conversion of common stock (in shares)       180,000 (180,000)            
Conversion of common stock 0     $ 2 $ (2)            
Balance (in shares) at Jun. 30, 2019     0 28,399,526 11,279,641            
Balance at Jun. 30, 2019 2,326,618   $ 0 $ 284 $ 113 1,670 2,317,115   3,144 4,292  
Balance (in shares) at Dec. 31, 2019     0 28,458,495 11,271,609            
Balance at Dec. 31, 2019 2,391,094 $ (18,867) $ 0 $ 285 $ 113 5,715 2,377,627 $ (18,867) 2,972 4,382  
Increase (Decrease) in Stockholders' Equity [Roll Forward]                      
Issuance of noncontrolling interests 52                 52  
Net income 46,845           45,950     895  
Other comprehensive loss 261               261    
Distribution to noncontrolling interests (589)                 (589)  
Cash dividend on Class A and Class B common stock (15,679)           (15,679)        
Issuance of common stock, net of forfeitures (in shares)       172,275              
Issuance of common stock, net of forfeitures 4,601     $ 1   4,600          
Compensation expense for stock based awards 3,595         3,595          
Repurchase of common stock (in shares)       (1,497,934)              
Repurchase of common stock (68,527)     $ (15)   (12,043) (56,469)        
Conversion of common stock (in shares)       100,000 100,000            
Conversion of common stock       $ 1 $ 1            
Acquisition of noncontrolling interest (2,000)           (1,250)     (750)  
Balance (in shares) at Jun. 30, 2020     0 27,232,836 11,171,609            
Balance at Jun. 30, 2020 2,340,786   $ 0 $ 272 $ 112 1,867 2,331,312   3,233 3,990  
Balance (in shares) at Mar. 31, 2020     0 28,582,032 11,271,609            
Balance at Mar. 31, 2020 2,325,800   $ 0 $ 286 $ 113 9,140 2,310,282   859 5,120  
Increase (Decrease) in Stockholders' Equity [Roll Forward]                      
Issuance of noncontrolling interests 26                 26  
Net income 86,610           86,482     128  
Other comprehensive loss 2,374               2,374    
Distribution to noncontrolling interests (534)                 (534)  
Cash dividend on Class A and Class B common stock (7,733)           (7,733)        
Issuance of common stock, net of forfeitures (in shares)       23,853              
Issuance of common stock, net of forfeitures 1,660         1,660          
Compensation expense for stock based awards 1,857         1,857          
Repurchase of common stock (in shares)       (1,473,049)              
Repurchase of common stock (67,274)     $ (15)   (10,790) (56,469)        
Conversion of common stock (in shares)       100,000 (100,000)            
Conversion of common stock 0     $ 1 $ (1)            
Acquisition of noncontrolling interest (2,000)           (1,250)     (750)  
Balance (in shares) at Jun. 30, 2020     0 27,232,836 11,171,609            
Balance at Jun. 30, 2020 $ 2,340,786   $ 0 $ 272 $ 112 $ 1,867 $ 2,331,312   $ 3,233 $ 3,990  
v3.20.2
CONSOLIDATED STATEMENTS OF SHAREHOLDERS' EQUITY (Parenthetical) - $ / shares
3 Months Ended 6 Months Ended
Jun. 30, 2020
Jun. 30, 2019
Jun. 30, 2020
Jun. 30, 2019
Common Class A        
Cash dividend on Class A and Class B common stock (in dollars per share) $ 0.20 $ 0.18 $ 0.40 $ 0.36
Common Class B        
Cash dividend on Class A and Class B common stock (in dollars per share) $ 0.20 $ 0.18 $ 0.40 $ 0.36
v3.20.2
CONSOLIDATED STATEMENTS OF CASH FLOWS - USD ($)
$ in Thousands
6 Months Ended
Jun. 30, 2020
Jun. 30, 2019
Statement of Cash Flows [Abstract]    
Net income attributable to Nelnet, Inc. $ 45,950 $ 66,210
Net income attributable to noncontrolling interests 895 115
Net income 46,845 66,325
Adjustments to reconcile net income to net cash used in operating activities:    
Depreciation and amortization, including debt discounts and loan premiums and deferred origination costs 99,282 94,121
Loan discount accretion (19,196) (18,806)
Provision for loan losses 79,297 16,000
Derivative market value adjustments 24,513 67,635
Proceeds from termination of derivative instruments 0 2,119
Payments to clearinghouse - initial and variation margin, net (24,453) (77,229)
Gain on sale of loans (18,206) (1,712)
Gain from investments, net (48,402) (2,970)
(Gain) loss on repurchases and extinguishment of debt (403) 1,801
Deferred income tax benefit (14,762) (15,023)
Non-cash compensation expense 3,581 3,138
Impairment expense 34,419 0
Increase in accrued interest receivable (123,276) (44,967)
Decrease (increase) in accounts receivable 41,608 (5,972)
Decrease (increase) in other assets, net 22,992 (6,065)
Decrease in the carrying amount of ROU asset 5,948 4,307
Decrease in accrued interest payable (14,525) (5,208)
Decrease in other liabilities (26,817) (504)
Decrease in the carrying amount of lease liability (4,829) (4,164)
Decrease in due to customers (169,217) (90,661)
Net cash used in operating activities (105,601) (17,835)
Cash flows from investing activities:    
Purchases of loans (872,987) (997,123)
Purchases of loans from a related party (75,118) (32,580)
Net proceeds from loan repayments, claims, and capitalized interest 1,800,286 1,889,084
Proceeds from sale of loans 90,465 42,215
Purchases of available-for-sale securities (112,675) (1,010)
Proceeds from sales of available-for-sale securities 23,372 192
Proceeds from beneficial interest in loan securitizations 21,765 968
Purchases of other investments (117,598) (26,314)
Proceeds from other investments 6,770 23,763
Purchases of property and equipment (46,994) (43,715)
Net cash provided by investing activities 717,286 855,480
Cash flows from financing activities:    
Payments on bonds and notes payable (2,073,710) (2,007,483)
Proceeds from issuance of bonds and notes payable 1,252,360 1,092,186
Payments of debt issuance costs (5,863) (5,515)
Payments to extinguish debt 0 (1,394)
Dividends paid (15,679) (14,403)
Repurchases of common stock (68,527) (40,041)
Proceeds from issuance of common stock 781 724
Acquisition of noncontrolling interest (2,000) 0
Distribution to noncontrolling interests (333) (113)
Net cash used in financing activities (912,971) (976,039)
Net decrease in cash, cash equivalents, and restricted cash (301,286) (138,394)
Cash, cash equivalents, and restricted cash, beginning of period 1,222,601 1,192,391
Cash, cash equivalents, and restricted cash, end of period 921,315 1,053,997
Supplemental disclosures of cash flow information:    
Cash disbursements made for interest 209,170 354,902
Cash disbursements made for income taxes, net of refunds and credits received 7,949 11,529
Cash disbursements made for operating leases 5,442 4,792
Noncash operating, investing, and financing activity:    
ROU assets obtained in exchange for lease obligations 3,265 3,298
Receipt of beneficial interest in consumer loan securitizations 38,490 7,921
Distribution to noncontrolling interest 33 0
Cash and cash equivalents:    
Cash, cash equivalents, and restricted cash $ 1,222,601 $ 1,053,997
v3.20.2
Basis of Financial Reporting
6 Months Ended
Jun. 30, 2020
Organization, Consolidation and Presentation of Financial Statements [Abstract]  
Basis of Financial Reporting Basis of Financial Reporting
The accompanying unaudited consolidated financial statements of Nelnet, Inc. and subsidiaries (the “Company”) as of June 30, 2020 and for the three and six months ended June 30, 2020 and 2019 have been prepared on the same basis as the audited consolidated financial statements for the year ended December 31, 2019 and, in the opinion of the Company’s management, the unaudited consolidated financial statements reflect all adjustments, consisting of normal recurring adjustments, necessary for a fair presentation of results of operations for the interim periods presented. The preparation of financial statements in conformity with U.S. generally accepted accounting principles requires management to make estimates and assumptions that affect the amounts reported in the consolidated financial statements and accompanying notes. Actual results could differ from those estimates. Operating results for the three and six months ended June 30, 2020 are not necessarily indicative of the results for the year ending December 31, 2020. The unaudited consolidated financial statements should be read in conjunction with the Company’s Annual Report on Form 10-K for the year ended December 31, 2019 (the "2019 Annual Report").
Reclassifications
Certain amounts previously reported have been reclassified to conform to the current period presentation. These reclassifications include:
Reclassifying the line item "accrued interest receivable" on the Company's consolidated balance sheet to "loans and accrued interest receivable" and "investments"; and
Reclassifying "gain on sale of loans" that was previously included in "other income" to a new line item on the Company's consolidated statements of income.
Accounting Standard Adopted in 2020
In June 2016, the Financial Accounting Standards Board (“FASB”) issued ASU No. 2016-13, Financial Instruments – Credit Losses (“ASC 326”), which replaces the incurred loss methodology with an expected loss methodology that is referred to as the current expected credit loss ("CECL") methodology. Since its original issuance in 2016, the FASB has issued several updates to the original ASU.
The CECL methodology utilizes a lifetime “expected credit loss” measurement objective for the recognition of credit losses for financial assets measured at amortized cost at the time the financial asset is originated or acquired, including, for the Company, loans receivable, accounts receivable, and held-to-maturity beneficial interests in loan securitizations. The expected credit losses are adjusted each period for changes in expected lifetime credit losses. In addition, ASC 326 made changes to the accounting for available-for-sale debt securities. For available-for-sale debt securities where fair value is less than amortized cost, credit-related impairment, if any, is recognized through an allowance for credit losses and adjusted each period for changes in credit risk.
On January 1, 2020, the Company adopted ASC 326 using the modified retrospective method for all financial assets measured at amortized cost. Results for reporting periods beginning after January 1, 2020 are presented under ASC 326 (recognizing estimated credit losses expected to occur over the asset's remaining life) while prior period amounts continue to be reported in accordance with previously applicable GAAP (recognizing estimated credit losses using an incurred loss model); therefore, the comparative information for 2019 is not comparable to the information presented for 2020. Adoption of the new guidance primarily impacted the allowance for loan losses related to the Company's loan portfolio. Upon adoption, the Company recorded an increase to the allowance for loan losses of $91.0 million, which included a reclassification of the non-accretable discount balance and premiums related to loans purchased with evidence of credit deterioration, and decreased retained earnings, net of tax, by $18.9 million. The following table illustrates the impact of the adoption of ASC 326.
Balances at
December 31, 2019
Impact of ASC 326 adoptionBalances at
January 1, 2020
Assets
Loans and accrued interest receivable, net of allowance
Loans receivable$20,798,719  —  20,798,719  
Accrued interest receivable733,497  —  733,497  
Loan discount, net(35,036) 33,790  (1,246) 
Non-accretable discount(32,398) 32,398  —  
Allowance for loan losses(61,914) (91,014) (152,928) 
Loans and accrued interest receivable, net of allowance21,402,868  (24,826) 21,378,042  
Liabilities
Other liabilities (deferred taxes)303,781  (5,958) 297,823  
Equity
Retained earnings2,377,627  (18,868) 2,358,759  

The Company adopted ASC 326 using the prospective transition approach for loans receivable purchased with credit deterioration ("PCD") that were previously classified as purchased credit impaired ("PCI"). In accordance with the standard, the Company did not reassess whether PCI assets met the criteria of PCD assets as of the date of adoption. On January 1, 2020, the unamortized cost basis of the PCD assets were adjusted to reflect the addition of $32.4 million in the allowance for loan losses (as reflected in the table above). The remaining noncredit premium on these loans as of January 1, 2020 (based on the adjusted amortized cost basis) will be amortized into interest income over the life of the loans. Changes to the allowance for loan losses on these loans after adoption are recorded through provision expense.
Summary of Significant Accounting Policies Affected by Implementation of ASC 326
Allowance for Loan Losses
The allowance for loan losses is a valuation account that is deducted from the loans’ amortized cost basis to present the net amount expected to be collected on the loans as of the balance sheet date. Such allowance is based on the credit losses expected to arise over the life of the asset which includes consideration of prepayments. Loans are charged off when management determines the loan is uncollectible. Charge-offs are recognized as a reduction to the allowance for loan losses. Expected recoveries of amounts previously charged off, not to exceed the aggregate of the amount previously charged off, are included in the estimate of the allowance for loan losses at the balance sheet date.
The Company aggregates loans with similar risk characteristics into homogeneous pools to estimate its expected credit losses. The Company continuously evaluates such pooling decisions and adjusts as needed from period to period as risk characteristics change.
The Company determines its estimated credit losses for the following financial assets as follows:
Loans receivable
Management has determined that the federally insured, private education, and consumer loan portfolios each meet the definition of a portfolio segment, which is defined as the level at which an entity develops and documents a systematic method for determining its allowance for loan losses. Accordingly, the portfolio segment disclosures are presented on this basis in note 2 for each of these portfolios. The Company does not disaggregate its portfolio segment loan portfolios into classes of financing receivables.
The Company utilizes an undiscounted cash flow methodology in determining its lifetime expected credit losses on its federally insured and private education loan portfolios and a remaining life methodology for its consumer loan portfolio. Management estimates the allowance balance using relevant available information, from internal and external sources, relating to past events, current conditions, and reasonable and supportable forecasts. The Company has determined that, for modeling current expected credit losses, in general, the Company can reasonably estimate expected losses that incorporate current and forecasted economic conditions up to a one-year period. After this "reasonable and supportable" period, the Company uses a reversion period to the Company's actual long-term historical loss experience over a full economic life cycle. Historical credit loss experience provides
the basis for the estimation of expected credit losses. Qualitative and quantitative adjustments to historical loss information are made separately on each of the Company’s federally insured, private education, and consumer loan portfolios.
Qualitative and quantitative adjustments related to current conditions and the reasonable and supportable forecast period consider all of the following for the Company’s federally insured loan portfolio: loans in repayment versus those in nonpaying status; delinquency status; trends in defaults in the portfolio based on Company and industry data; past experience; trends in student loan claims rejected for payment by guarantors; changes in federal student loan programs; current economic conditions, including changes in unemployment rates; and other relevant qualitative factors. The federal government guarantees 97 percent of the principal of and the interest on federally insured student loans disbursed on and after July 1, 2006 (and 98 percent for those loans disbursed on and after October 1, 1993 and prior to July 1, 2006), which limits the Company’s loss exposure on the outstanding balance of the Company’s federally insured portfolio. Student loans disbursed prior to October 1, 1993 are fully insured.
Qualitative and quantitative adjustments related to current conditions and the reasonable and supportable forecast period consider all of the following for the Company’s private education loans: loans in repayment versus those in a nonpaying status; delinquency status; type of program; trends in defaults in the portfolio based on Company and industry data; past experience; current economic conditions, including changes in unemployment rates and gross domestic product growth; and other relevant qualitative factors. The Company places private education loans on nonaccrual status when the collection of principal and interest is 90 days past due and charges off the loan when the collection of principal and interest is 120 days past due. Collections, if any, are reflected as a recovery through the allowance for loan losses.
Qualitative and quantitative adjustments related to current conditions and a reasonable and supportable forecast period consider all of the following for the Company's consumer loans: delinquency status; type of program; trends in defaults in the portfolio based on Company and industry data; past experience; current economic conditions; and other relevant qualitative factors. The Company places consumer loans on nonaccrual status when the collection of principal and interest is 90 days past due and charges off the loan when the collection of principal and interest is 120 days or 180 days past due, depending on type of loan program. Collections, if any, are reflected as a recovery through the allowance for loan losses.
Purchased Loans Receivable with Credit Deterioration (“PCD”)
The Company has purchased federally insured rehabilitation loans that have experienced more than insignificant credit deterioration since origination. Rehabilitation loans are loans that have previously defaulted, but for which the borrower has made a specified number of on-time payments. Although rehabilitation loans benefit from the same guarantees as other federally insured loans, rehabilitation loans have generally experienced redefault rates that are higher than default rates for federally insured loans that have not previously defaulted. These PCD loans are recorded at the amount paid. An allowance for loan losses is determined using the same methodology as for other loans held for investment. The sum of the loans’ purchase price and allowance for loan losses becomes its initial amortized cost basis. The difference between the initial amortized cost basis and the par value of the loan is a noncredit discount or premium, which is amortized or accreted into interest income over the life of the loan. Subsequent changes to the allowance for credit losses are recorded through provision expense.
Loan Accrued Interest Receivable
The Company has elected to present its loan accrued interest receivable balance combined in its consolidated balance sheets with the loans receivable amortized cost balance.
For the Company’s federally insured loan portfolio, the Company has elected to measure an allowance for credit losses for accrued interest receivables. For federally insured loans, accrued interest receivable is typically charged-off when the contractual payment of principal or interest has become greater than 270 days past due. Charge-offs of accrued interest receivable are recognized as a reduction to the allowance for loan losses.
For the Company’s private education and consumer loan portfolios, the Company has elected not to measure an allowance for credit losses for accrued interest receivables. For private education and consumer loans, the accrual of interest is discontinued when the contractual payment of principal or interest has become 90 days past due. Charge-offs of accrued interest receivable are recognized by reversing interest income.
v3.20.2
Loans and Accrued Interest Receivable and Allowance for Loan Losses
6 Months Ended
Jun. 30, 2020
Receivables [Abstract]  
Loans and Accrued Interest Receivable and Allowance for Loan Losses Loans and Accrued Interest Receivable and Allowance for Loan Losses
Loans and accrued interest receivable consisted of the following:
As ofAs of
 June 30, 2020December 31, 2019
Federally insured student loans:
Stafford and other$4,439,492  4,684,314  
Consolidation14,948,379  15,644,229  
Total19,387,871  20,328,543  
Private education loans293,218  244,258  
Consumer loans149,308  225,918  
 19,830,397  20,798,719  
Accrued interest receivable856,880  733,497  
Loan discount, net of unamortized loan premiums and deferred origination costs
(16,959) (35,036) 
Non-accretable discount—  (32,398) 
Allowance for loan losses:
Federally insured loans(144,829) (36,763) 
Private education loans(25,535) (9,597) 
Consumer loans(39,081) (15,554) 
 $20,460,873  21,402,868  
On January 30, 2020, the Company sold $124.2 million (par value) of consumer loans to an unrelated third party who securitized such loans. The Company recognized a $18.2 million (pre-tax) gain as part of this transaction. As partial consideration received for the consumer loans sold, the Company received a 31.4 percent residual interest in the consumer loan securitization that is included in "investments" on the Company's consolidated balance sheet.
Subsequent to June 30, 2020, the Company made the decision to sell an additional $60.8 million (par value) of consumer loans to an unrelated third party who securitized such loans. As of June 30, 2020, these loans were classified as held for investment and are included in the table above. As partial consideration received for the consumer loans sold, the Company received a 25.4 percent residual interest in the consumer loan securitization. The Company currently anticipates recognizing a gain in the third quarter of 2020 of $14.8 million (pre-tax) from the sale of those loans.
Activity in the Allowance for Loan Losses
The following table presents the activity in the allowance for loan losses by portfolio segment.
Balance at beginning of periodImpact of ASC 326 adoptionProvision for loan lossesCharge-offsRecoveriesInitial allowance on loans purchased with credit deterioration (a)Loan saleBalance at end of period
 Three months ended June 30, 2020
Federally insured loans$146,759  —  (1,950) (6,080) —  6,100  —  144,829  
Private education loans23,056  —  2,322  (26) 183  —  —  25,535  
Consumer loans39,053  —  2,627  (2,820) 221  —  —  39,081  
$208,868  —  2,999  (8,926) 404  6,100  —  209,445  
Three months ended June 30, 2019
Federally insured loans$40,934  —  2,000  (3,878) —  —  —  39,056  
Private education loans10,587  —  —  (588) 158  —  —  10,157  
Consumer loans10,257  —  7,000  (2,652) 273  —  (1,500) 13,378  
$61,778  —  9,000  (7,118) 431  —  (1,500) 62,591  
Six months ended June 30, 2020
Federally insured loans$36,763  72,291  37,373  (12,398) —  10,800  —  144,829  
Private education loans9,597  4,797  12,121  (1,355) 375  —  —  25,535  
Consumer loans15,554  13,926  29,803  (7,170) 468  —  (13,500) 39,081  
$61,914  91,014  79,297  (20,923) 843  10,800  (13,500) 209,445  
Six months ended June 30, 2019
Federally insured loans$42,310  —  4,000  (7,254) —  —  —  39,056  
Private education loans10,838  —  —  (1,070) 389  —  —  10,157  
Consumer loans7,240  —  12,000  (4,658) 296  —  (1,500) 13,378  
$60,388  —  16,000  (12,982) 685  —  (1,500) 62,591  
a) During the three and six months ended June 30, 2020, the Company acquired $292.7 million (par value) and $583.9 million (par value), respectively, of federally insured rehabilitation loans. These loans met the definition of PCD loans when they were purchased by the Company. The Company estimated that the expected credit losses relating to these loans was $6.1 million and $10.8 million, respectively, at the time of purchase. The noncredit discount recorded as part of these acquisitions will be recognized into interest income using an effective yield over the life of the loans.
In March 2020, the rapid outbreak of the respiratory disease caused by a novel strain of coronavirus, coronavirus 2019 or COVID-19 ("COVID-19"), was declared a global pandemic by the World Health Organization and a national emergency by the President, and caused significant disruptions in the U.S. and world economies. Apart from the impact of the adoption of ASC 326 effective January 1, 2020, the Company’s allowance for loan losses increased during the first quarter of 2020 primarily as a result of the COVID-19 pandemic and its effects on current and forecasted economic conditions.
The Company's provision expense for the three months ended June 30, 2020 was also impacted by the Company's estimate of certain improved economic conditions as of June 30, 2020 than what was used by the Company to determine the allowance for loan losses as of March 31, 2020. These improved economic conditions were partially offset by the Company extending its reversion period (to the Company's actual long-term historical loss experience) as of June 30, 2020, as the Company currently believes the economy will take longer to recover from the COVID-19 pandemic than what was originally estimated as of March 31, 2020.
The Company's total allowance for loan losses of $209.4 million at June 30, 2020 represents reserves equal to 0.7% of the Company's federally insured loans (or 29.1% of the risk sharing component of the loans that is not covered by the federal guaranty), 8.7% of the Company's private education loans, and 26.2% of the Company's consumer loans.
Loan Status and Delinquencies
The key credit quality indicators for the Company's federally insured, private education, and consumer loan portfolios are loan status, including delinquencies. The impact of changes in loan status is incorporated into the allowance for loan losses calculation. Delinquencies have the potential to adversely impact the Company’s earnings through increased servicing and collection costs and account charge-offs. The table below shows the Company’s loan status and delinquency amounts.
As of June 30, 2020As of December 31, 2019As of June 30, 2019
Federally insured loans:
    
Loans in-school/grace/deferment $936,746  4.8 % $1,074,678  5.3 % $1,222,021  5.8 %
Loans in forbearance 5,370,466  27.7   1,339,821  6.6   1,420,120  6.7  
Loans in repayment status:  
Loans current12,984,175  99.3 %15,410,993  86.0 %16,055,368  86.7 %
Loans delinquent 31-60 days2,057  —  650,796  3.6  677,113  3.7  
Loans delinquent 61-90 days165  —  428,879  2.4  443,988  2.4  
Loans delinquent 91-120 days23  —  310,851  1.7  269,688  1.5  
Loans delinquent 121-270 days
101  —  812,107  4.5  755,093  4.1  
Loans delinquent 271 days or greater
94,138  0.7  300,418  1.8  310,741  1.6  
Total loans in repayment13,080,659  67.5  100.0 %17,914,044  88.1  100.0 %18,511,991  87.5  100.0 %
Total federally insured loans19,387,871  100.0 % 20,328,543  100.0 % 21,154,132  100.0 %
Accrued interest receivable853,473  730,059  720,887  
Loan discount, net of unamortized premiums and deferred origination costs(19,116) (35,822) (38,808) 
Non-accretable discount (a)—  (28,036) (28,527) 
Allowance for loan losses(144,829) (36,763) (39,056) 
Total federally insured loans and accrued interest receivable, net of allowance for loan losses$20,077,399  $20,957,981  $21,768,628  
Private education loans:
Loans in-school/grace/deferment $3,971  1.3 %$4,493  1.8 %$3,912  2.0 %
Loans in forbearance 21,890  7.5  3,108  1.3  1,143  0.6  
Loans in repayment status:
Loans current265,720  99.4 %227,013  95.9 %183,414  94.7 %
Loans delinquent 31-60 days680  0.2  2,814  1.2  3,491  1.8  
Loans delinquent 61-90 days244  0.1  1,694  0.7  1,658  0.9  
Loans delinquent 91 days or greater713  0.3  5,136  2.2  5,134  2.6  
Total loans in repayment267,357  91.2  100.0 %236,657  96.9  100.0 %193,697  97.4  100.0 %
Total private education loans293,218  100.0 % 244,258  100.0 % 198,752  100.0 %
Accrued interest receivable1,961  1,558  1,113  
Loan premium, net of unaccreted discount813  46  (880) 
Non-accretable discount (a)—  (4,362) (5,008) 
Allowance for loan losses(25,535) (9,597) (10,157) 
Total private education loans and accrued interest receivable, net of allowance for loan losses$270,457  $231,903  $183,820  
Consumer loans:
Loans in deferment$3,274  2.2 %$—  $—  
Loans in repayment status:
Loans current142,540  97.6 %220,404  97.5 %234,944  98.8 %
Loans delinquent 31-60 days938  0.7  2,046  0.9  1,254  0.5  
Loans delinquent 61-90 days1,078  0.7  1,545  0.7  824  0.3  
Loans delinquent 91 days or greater1,478  1.0  1,923  0.9  930  0.4  
Total loans in repayment146,034  97.8  100.0 %225,918  100.0 %237,952  100.0 %
Total consumer loans149,308  100.0 %225,918  237,952  
Accrued interest receivable1,446  1,880  1,846  
Loan premium1,344  740  736  
Allowance for loan losses(39,081) (15,554) (13,378) 
Total consumer loans and accrued interest receivable, net of allowance for loan losses$113,017  $212,984  $227,156  
(a) Upon adoption of ASC 326 on January 1, 2020, the Company reclassified the non-accretable discount balance related to loans purchased with evidence of credit deterioration to allowance for loan losses.
On March 27, 2020, the Coronavirus Aid, Relief, and Economic Security Act (the "CARES Act") was signed into law. The CARES Act, among other things, provides broad relief, effective March 13, 2020 through September 30, 2020, for borrowers that have student loans owned by the Department of Education (the "Department"). This relief package excluded Federal Family Education Loan Program ("FFELP" or "FFEL Program"), private education, and consumer loans. Although the Company's loans are excluded from the provisions of the CARES Act, the Company is providing relief for its borrowers.
For the Company's federally insured and private education loans, effective March 13, 2020 through June 30, 2020, the Company proactively applied a 90 day natural disaster forbearance to any loan that was 31-269 days past due (for federally insured loans) and 80 days past due (for private education loans), and to any current loan upon request. Beginning July 1, 2020, the Company discontinued proactively applying 90 day natural disaster forbearances on past due loans. However, the Company will continue to apply a natural disaster forbearance with an end date of September 30, 2020, to any federally insured and private education loan upon request.
In addition, for private education loans, effective March 13, 2020 through September 30, 2020, the Company is delaying final demand letters and default activity, while replacing collection calls with borrower outreach on relief options. For both federally insured and private education loans, effective March 13, 2020 through September 30, 2020, borrower late fees are being waived and borrower payments made after March 13, 2020 are refunded upon a borrower's request.
For the majority of the Company's consumer loans, borrowers are generally being offered, upon request and/or documented evidence of financial distress, a two-month deferral of payments, with an option of additional deferrals if the COVID-19 pandemic continues. In addition, effective March 13, 2020 through September 30, 2020, the majority of fees (non-sufficient funds, late charges, check fees) and credit bureau reporting are currently suspended. The specific relief terms on the Company's consumer loan portfolio vary depending on the loan program and servicer of such loans.
The Company will continue to review whether additional and/or extended borrower relief policies and activities are needed.
Nonaccrual Status
The Company does not place federally insured loans on nonaccrual status due to the government guaranty. The amortized cost of private and consumer loans on nonaccrual status, as well as the allowance for loan losses related to such loans, as of December 31, 2019 and June 30, 2020, was not material.
Amortized Cost Basis by Origination Year
The following table presents the amortized cost of the Company's private education and consumer loans by loan status and delinquency amount as of June 30, 2020 based on year of origination. Effective July 1, 2010, no new loan originations can be made under the FFEL Program and all new federal loan originations must be made under the Federal Direct Loan Program. As such, all the Company’s federally insured loans were originated prior to July 1, 2010.
Six months ended June 30, 20202019201820172016Prior YearsTotal
Private education loans:
Loans in school/grace/deferment$—  386  —  —  405  3,180  3,971  
Loans in forbearance—  6,947  169  —