What changed in this filing

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Item 3. Quantitative and Qualitative Disclosures About Market Risk

2020-08-06 compared with 2020-05-07 · 53 added, 29 removed, 95 unchanged (46% of the section changed)

4 unchanged sentences

The following table sets forth the Company’s loan assets and debt instruments by rate characteristics:

As of March 31, 2020 As of December 31, 2019

As of June 30, 2020 As of December 31, 2019

Dollars Percent Dollars Percent

6 unchanged sentences

FFELP loans originated prior to April 1, 2006 generally earn interest at the higher of the borrower rate, which is fixed over a period of time, or a floating rate based on the special allowance payment ("SAP") formula set by the Department.

is based on an applicable index plus a fixed spread that depends on loan type, origination date, and repayment status.

The Company generally finances its student loan portfolio with variable rate debt.

The SAP rate is based on an applicable index plus a fixed spread that depends on loan type, origination date, and repayment status.

Company generally finances its student loan portfolio with variable rate debt.

In low and/or declining interest rate environments, when the fixed borrower rate is higher than the SAP rate, the Company’s student loans earn at a fixed rate while the interest on the variable rate debt typically continues to reflect the low and/or declining interest rates.

3 unchanged sentences

All FFELP loans first originated on or after April 1, 2006 effectively earn at the SAP rate, since lenders are required to rebate fixed rate floor income and variable rate floor income for those loans to the Department.

As a result of the significant drop in interest rates in March 2020, the Company earned $0.9 million of variable-rate floor income on $1.4 billion of FFELP loans during the three months ended March 31, 2020.

As a result of the significant drop in interest rates in March 2020 and the first half of the second quarter of 2020, the Company earned $3.9 million and $4.8 million of variable-rate floor income on approximately $1.4 billion of FFELP loans during the three and six months ended June 30, 2020, respectively.

The Company no longer earns such variable-rate floor income on these loans, since the borrower rate reset on July 1, 2020 to reflect the lower interest rate environment.

No variable-rate floor income was earned by the Company in 2019.

A summary of fixed rate floor income earned by the Company follows.

Three months ended March 31,

Three months ended June 30, Six months ended June 30,

2020 2019 2020 2019

Fixed rate floor income, gross $ 31,866 10,840 50,625 21,265

2 unchanged sentences

(a) Includes settlement payments on derivatives used to hedge student loans earning fixed rate floor income.

Gross fixed rate floor income increased for the three months ended March 31, 2020 as compared to the same period in 2019 due to lower interest rates in 2020 as compared to 2019.

Gross fixed rate floor income increased for the three and six months ended June 30, 2020 as compared to the same periods in 2019 due to lower interest rates in 2020 as compared to 2019.

Absent the use of derivative instruments, a rise in interest rates will reduce the amount of floor income received and has an impact on earnings due to interest margin compression caused by increasing financing costs, until such time as the federally insured loans earn interest at a variable rate in accordance with their SAP formulas.

In higher interest rate environments, where the interest rate rises above the borrower rate and fixed rate loans effectively become variable rate loans, the impact of the rate fluctuations is reduced.

The decrease in derivative settlements from the floor income interest rate swaps in 2020 as compared to 2019 was due to a decrease in the notional amount of derivatives outstanding and a decrease in interest rates.

The Company anticipates receiving increased levels of gross fixed rate floor income in future periods as a result of the significant drop in interest rates in March 2020.

This increase will be partially offset by a decrease in net settlements received on derivatives used to hedge these loans.

The decrease in net derivative settlements received from the floor income interest rate swaps for the three and six months ended June 30, 2020 as compared to the same periods in 2019 was due to a decrease in the notional amount of derivatives outstanding and a decrease in interest rates.

The Company anticipates receiving increased levels of gross fixed rate floor income in future periods as a result of the significant drop in interest rates in March 2020 and the second quarter of 2020.

This increase will be partially offset by an increase in net settlements paid on derivatives used to hedge these loans.

The following graph depicts fixed rate floor income for a borrower with a fixed rate of 6.75% and a SAP rate of 2.64%:

The following table shows the Company’s federally insured student loan assets that were earning fixed rate floor income as of March 31, 2020.

The following table shows the Company’s federally insured student loan assets that were earning fixed rate floor income as of June 30, 2020.

Fixed interest rate range Borrower/lender weighted average yield Estimated variable conversion rate (a) Loan balance

9 unchanged sentences

7.5 - 7.99% 7.71 % 5.07 % 216,190

(a) The estimated variable conversion rate is the estimated short-term interest rate at which loans would convert to a variable rate.

As of March 31, 2020, the weighted average estimated variable conversion rate was 3.29% and the short-term interest rate was 144 basis points.

The following table summarizes the outstanding derivative instruments as of March 31, 2020 used by the Company to economically hedge loans earning fixed rate floor income.

Maturity Notional amount Weighted average fixed rate paid by the Company (a)

8.0 - 8.99% 8.18 % 5.54 % 512,420

> 9.0% 9.05 % 6.41 % 195,264

2022 (b) 250,000 1.65

(a) The estimated variable conversion rate is the estimated short-term interest rate at which loans would convert to a variable rate.

As of June 30, 2020, the weighted average estimated variable conversion rate was 2.35% and the short-term interest rate was 37 basis points.

The following table summarizes the outstanding derivative instruments as of June 30, 2020 used by the Company to economically hedge loans earning fixed rate floor income.

Maturity Notional amount Weighted average fixed rate paid by the Company (a)(d)

2021 $ 600,000 2.15 %

2022 (b) 500,000 0.94

2023 (c) 400,000 1.00

$ 1,500,000 1.44 %

(a) For all interest rate derivatives, the Company receives discrete three-month LIBOR.

(b) These derivatives have forward effective start dates in June 2021.

Excluding these derivatives, the weighted

average fixed rate paid by the Company on its floor income derivative portfolio was 1.50% as of March 31,

(b) $250.0 million of these derivatives have forward effective start dates in each of August 2020 and June 2021.

(d) Excluding the derivatives with forward effective start dates, the weighted average fixed rate paid by the Company as of June 30, 2020 on its $750 million floor income derivative portfolio was 2.17%.

The Company is also exposed to interest rate risk in the form of basis risk and repricing risk because the interest rate characteristics of the Company’s assets do not match the interest rate characteristics of the funding for those assets.

The following table presents the Company’s FFELP student loan assets and related funding for those assets arranged by underlying indices as of March 31, 2020.

The following table presents the Company’s FFELP student loan assets and related funding for those assets arranged by underlying indices as of June 30, 2020.

Index Frequency of variable resets Assets Funding of student loan assets

11 unchanged sentences

The Company entered into these derivative instruments to better match the interest rate characteristics on its student loan assets and the debt funding such assets.

The following table summarizes the 1:3 Basis Swaps outstanding as of March 31, 2020.

The following table summarizes the 1:3 Basis Swaps outstanding as of June 30, 2020.

Maturity Notional amount (i)

2021 $ 250,000

2022 (ii) 2,000,000

2022 2,000,000

2024 1,750,000

(i) The weighted average rate paid by the Company on the 1:3 Basis Swaps as of March 31, 2020 was one-month LIBOR plus 9.7 basis points.

(ii) $750 million of the notional amount of these derivatives have forward effective start dates in May 2020.

(b) As of March 31, 2020, the Company was sponsor for $763.5 million of outstanding asset-backed securities that were set and provide for interest rates to be periodically reset via a "dutch auction" (“Auction Rate Securities”).

2026 1,150,000

(i) The weighted average rate paid by the Company on the 1:3 Basis Swaps as of June 30, 2020 was one-month LIBOR plus 9.1 basis points.

(b) As of June 30, 2020, the Company was sponsor for $757.9 million of outstanding asset-backed securities that were set and provide for interest rates to be periodically reset via a "dutch auction" (“Auction Rate Securities”).

Since the auction feature has essentially been inoperable for substantially all auction rate securities since 2008, the Auction Rate Securities generally pay interest to the holder at a maximum rate as defined by the indenture.

17 unchanged sentences

Dollars Percent Dollars Percent Dollars Percent Dollars Percent

Three months ended March 31, 2020

Three months ended June 30, 2020

Effect on earnings:

4 unchanged sentences

before taxes $ (14,469) (13.4) % $ (25,826) (23.9) % $ (351) (0.3) % $ (1,057) (1.0) %

Increase (decrease) in basic and diluted

earnings per share $ (0.11) $ (0.07) $ (0.01) $ (0.02)

Three months ended March 31, 2019

Increase (decrease) in basic and

diluted earnings per share $ (0.28) $ (0.50) $ (0.01) $ (0.02)

Three months ended June 30, 2019

Effect on earnings:

6 unchanged sentences

diluted earnings per share $ 0.05 $ 0.25 $ (0.01) $ (0.04)

Six months ended June 30, 2020

Effect on earnings:

Decrease in pre-tax net income before impact of derivative settlements

$ (26,249) (45.3) % $ (47,972) (82.7) % $ (3,754) (6.5) % $ (11,267) (19.4) %

Impact of derivative settlements

6,216 10.7 18,647 32.2 3,020 5.2 9,060 15.6

Increase (decrease) in net income before taxes

$ (20,033) (34.6) % $ (29,325) (50.5) % $ (734) (1.3) % $ (2,207) (3.8) %

Increase (decrease) in basic and

diluted earnings per share

$ (0.38) $ (0.56) $ (0.01) $ (0.04)

Six months ended June 30, 2019

Effect on earnings:

Decrease in pre-tax net income before impact of derivative settlements

$ (7,822) (9.3) % $ (13,246) (15.8) % $ (5,000) (6.0) % $ (14,999) (17.9) %

Impact of derivative settlements

16,190 19.3 48,571 57.9 3,554 4.2 10,662 12.6

Increase (decrease) in net income before taxes

$ 8,368 10.0 % $ 35,325 42.1 % $ (1,446) (1.8) % $ (4,337) (5.2) %

Increase (decrease) in basic and

diluted earnings per share

$ 0.16 $ 0.67 $ (0.03) $ (0.08)

Financial Statement Impact – Derivatives

For a table summarizing the effect of derivative instruments in the consolidated statements of operations, including the components of "derivative market value adjustments and derivative settlements, net" included in the consolidated statements of operations, see note 4 of the notes to consolidated financial statements included under Part I, Item 1 of this report.

For a table summarizing the effect of derivative instruments in the consolidated statements of income, including the components of "derivative market value adjustments and derivative settlements, net" included in the consolidated statements of income, see note 4 of the notes to consolidated financial statements included under Part I, Item 1 of this report.

Compared sentence by sentence after normalising whitespace, quotation marks, case and digits, so re-formatting and restated figures do not read as changed language. Wording changes appear as one removal and one addition. The current filing and the prior one are authoritative.

What changed 10-Q

Item 3. Quantitative and Qualitative Disclosures About Market Risk