(Management's Discussion and Analysis of Financial Condition and Results of Operations is for the years endedDecember 31, 2020 and 2019. All dollars are in thousands, except share data, 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 and analysis should be read in conjunction with the Company's consolidated financial statements and related notes included in this report. This discussion and analysis contains forward-looking statements subject to various risks and uncertainties and should be read in conjunction with the disclosures and information contained in "Forward-Looking and Cautionary Statements" and Item 1A "Risk Factors" included in this report. A discussion related to the results of operations and changes in financial condition for the year endedDecember 31, 2020 compared to the year endedDecember 31, 2019 is presented below. A discussion related to the results of operations and changes in financial condition for the year endedDecember 31, 2019 compared to the year endedDecember 31, 2018 can be found in Part II, Item 7. "Management's Discussion and Analysis of Financial Condition and Results of Operations" in the Company's 2019 Annual Report on Form 10-K, which was filed with theUnited States Securities and Exchange Commission onFebruary 27, 2020 . 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. 35 -------------------------------------------------------------------------------- GAAP Net Income and Non-GAAP Net Income, Excluding AdjustmentsThe Company prepares its financial statements and presents its financial results in accordance with 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. Year
ended
2020 2019 GAAP net income attributable to Nelnet, Inc.$ 352,443 141,803
Realized and unrealized derivative market value adjustments 28,144
76,195 Tax effect (a) (6,755) (18,287)
Net income attributable to
$ 373,832 199,711 Earnings per share: GAAP net income attributable to Nelnet, Inc.$ 9.02 3.54 Realized and unrealized derivative market value adjustments 0.72 1.90 Tax effect (a) (0.17) (0.45)
Net income attributable to
$ 9.57 4.99 (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. GAAP net income increased for the year endedDecember 31, 2020 compared to the same period in 2019 primarily due to the following factors: •The recognition of a$258.6 million ($196.5 million after tax) gain from the deconsolidation ofALLO Communications LLC ("ALLO") from the Company's consolidated financial statements; •The recognition of a$51.0 million ($38.8 million after tax) gain to adjust the carrying value of the Company's investment in Hudl to reflect Hudl'sMay 2020 equity raise transaction value; •A decrease of$48.1 million ($36.5 million after tax) in net losses related to changes in the fair values of derivative instruments that do not qualify for hedge accounting in 2020 as compared to 2019; •An increase of$30.2 million ($23.0 million after tax) in loan spread on the Company's loan portfolio and related derivative settlements in 2020 as compared to 2019, primarily from an increase in fixed rate floor income; •The recognition of$16.7 million ($12.7 million after tax) of expenses during 2019 to extinguish notes payable in certain asset-backed securitizations prior to the notes' contractual maturities; and 36 -------------------------------------------------------------------------------- •An increase of$15.8 million ($12.0 million after tax) in gains from the sale of consumer loans in 2020 as compared to 2019. These factors were partially offset by the following items: •An increase of$35.2 million ($26.8 million after tax) in non-cash losses related to the Company's solar investments in 2020 as compared to 2019; •The recognition of$24.7 million ($18.8 million after tax) of net provision and impairment charges in 2020 related to the Company's beneficial interest in consumer loan securitizations and certain venture capital investments, respectively, due to adverse economic conditions resulting from the COVID-19 pandemic; •An increase of$24.4 million ($18.5 million after tax) in the provision for loan losses in 2020 as compared to 2019. The provision for loan losses in 2020 was negatively impacted due to the COVID-19 pandemic; •A decrease of$20.4 million ($15.5 million after tax) in net income due to the decrease in the average balance of loans in 2020 as compared to 2019 as a result of the amortization of the FFELP loan portfolio; and •A decrease of$18.2 million in net income from the Company's Loan Servicing and Systems operating segment in 2020 as compared to 2019 due to a decrease in revenue as a result of the COVID-19 pandemic and incurring additional costs to meet increased service and security standards under the Department servicing contracts. 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 ofDecember 31, 2020 , AGM had a$19.6 billion loan portfolio that management anticipates will amortize over the next approximately 20 years and has a weighted average remaining life of 9.8 years. The Company actively works to maximize the amount and timing of cash flows generated by its FFELP portfolio and seeks to acquire additional loan assets to leverage its servicing scale and expertise to generate incremental earnings and cash flow. However, due to the continued amortization of the Company's FFELP loan portfolio, over time, the Company's net income generated by the AGM segment will continue to decrease. The Company currently believes that in the short-term it will most likely not be able to invest the excess cash generated from the FFELP loan portfolio into assets that immediately generate the rates of return historically realized from that portfolio. In addition, the Company earns fee-based revenue through the following reportable operating segments: •Loan Servicing and Systems ("LSS") - referred to asNelnet Diversified Services ("NDS") •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 is 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 from theFederal Deposit Insurance Corporation ("FDIC") for federal deposit insurance 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$5.9 million (pre-tax) and$1.7 million (pre-tax) in 2020 and 2019, respectively. 37 --------------------------------------------------------------------------------
The information below provides the operating results for each reportable
operating segment (excluding
LSS (a) ETS&PP ALLO (c) AGM (b) [[Image Removed: nni-20201231_g2.jpg]] [[Image Removed: nni-20201231_g3.jpg]] (a) Revenue includes intersegment revenue. (b) Total revenue includes "net interest income" and "total other income/expense" from the Company's segment statements of income, excluding the impact from changes in fair values of derivatives. Net income excludes changes in fair values of derivatives, net of tax. For information regarding the exclusion of the impact from changes in fair values of derivatives, see "GAAP Net Income and Non-GAAP Net Income, Excluding Adjustments" above. (c) OnDecember 21, 2020 , the Company deconsolidated ALLO from the Company's consolidated financial statements. Accordingly, the 2020 operating results for the Communications operating segment in the table above are for the periodJanuary 1, 2020 throughDecember 21, 2020 . Certain events and transactions from 2020, which have impacted, will impact, or could impact the operating results of the Company, are discussed below. Recapitalization and Additional Funding for ALLO OnOctober 1, 2020 , the Company entered into various agreements withSDC Allo Holdings, LLC ("SDC"), a third party global digital infrastructure investor, and ALLO, then a majority owned communications subsidiary of the Company, to recapitalize and provide additional funding for ALLO. OnOctober 15, 2020 , ALLO received proceeds of$197.0 million from SDC for the issuance of membership units of ALLO, and redeemed$160.0 million of non-voting preferred membership units of ALLO held by the Company. As a result of the receipt of required regulatory approvals onDecember 21, 2020 , 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 of ALLO, and the Company deconsolidated ALLO from the Company's consolidated financial statements. Upon the deconsolidation of ALLO, the Company recorded its 45 percent voting membership interests in ALLO at fair value, and accounts for such investment under the Hypothetical Liquidation at Book Value ("HLBV") method of accounting. In addition, the Company recorded its remaining non-voting preferred membership units in ALLO at fair value, and accounts for such investment as a separate equity investment. As a result of the deconsolidation of ALLO, the Company recognized a gain of$258.6 million in the fourth quarter of 2020. OnJanuary 19, 2021 , ALLO closed on 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, ALLO redeemed a portion of its non-voting preferred membership units held by the Company in exchange for an aggregate redemption price payment to the Company of$100.0 million . 38 -------------------------------------------------------------------------------- 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 ALLO to redeem, on or beforeApril 2024 , the remaining non-voting preferred membership units of ALLO held by the Company, plus the amount of accrued and unpaid preferred return on such units. As ofJanuary 19, 2021 , the outstanding preferred membership units of ALLO held by the Company was$129.7 million . The preferred membership units earn a preferred annual return of 6.25 percent. As discussed above, subsequent to the recapitalization and deconsolidation of ALLO, the Company will account for its investment in ALLO under the HLBV method of accounting. The HLBV method of accounting is used by the Company for equity method investments when the liquidation rights and priorities as defined by an equity investment agreement differ from what is reflected by the underlying percentage ownership or voting interests. The Company applies the HLBV method using a balance sheet approach. A calculation is prepared at each balance sheet date to determine the amount that the Company would receive if an equity investment entity were to liquidate its net assets and distribute that cash to the investors based on the contractually defined liquidation priorities. The difference between the calculated liquidation distribution amounts at the beginning and the end of the reporting period, after adjusting for capital contributions and distributions, is the Company's share of the earnings or losses from the equity investment for the period. Because the Company will be able to utilize certain tax losses related to ALLO's operations, the equity investment agreements for the Company have liquidation rights and priorities that are sufficiently different from the voting membership interests percentages such that the HLBV method of accounting was deemed appropriate. Accordingly, the recognition of earnings or losses during any reporting period related to the Company's equity investment in ALLO may or may not reflect its voting membership interests percentage and could vary substantially from those calculated based on the Company's voting membership interests in ALLO. Assuming ALLO continues its planned growth in existing and new communities, it will continue to invest substantial amounts in property and equipment to build the network and connect customers. The resulting recognition of depreciation and development costs could result in net operating losses by ALLO under generally accepted accounting principles. Applying the HLBV method of accounting, the Company will recognize a significant portion of ALLO's anticipated losses over the next several years. For additional information, see note 2, "Recent Developments - ALLO Recapitalization," of the notes to consolidated financial statements included in this report. Impacts of COVID-19 Pandemic Beginning inMarch 2020 , the coronavirus 2019 or COVID-19 ("COVID-19") pandemic resulted in many businesses and schools closing or reducing hours throughout theU.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 has caused significant disruption to theU.S. and world economies, including significantly higher unemployment and underemployment, significantly lower interest rates, and extreme volatility in theU.S. and world markets. As a result of the COVID-19 outbreak and federal, state, and local government responses to COVID-19, the Company has experienced and may in the future experience various disruptions and impacts to the Company's businesses and results of operations. The following provides a summary of how COVID-19 has impacted and may impact the Company's business and operating results. Corporate The Company has implemented adjustments to its operations designed to keep employees safe and comply with federal, state, and local guidelines, including those regarding social distancing. As ofMarch 25, 2020 , the majority of our associates were working and continue to work from home. Substantially all Company associates working from home are able to connect to their work environment virtually and continue to serve our customers. The Company has investments in real estate, early-stage and emerging growth companies (venture capital investments), and renewable energy (solar). The Company identified several venture capital investments that were negatively impacted by the distressed economic conditions resulting from the COVID-19 pandemic and recognized impairment charges on such investments of$7.8 million (pre-tax) during the first quarter of 2020. Loan Servicing and Systems The CARES Act, which was signed into law onMarch 27, 2020 , among other things, provides broad relief for federal student loan borrowers. Under the CARES Act, federal student loan payments and interest accruals were suspended for all borrowers that have loans owned by the Department. The benefits of the law were applied retroactively toMarch 13, 2020 , when the President declared a state of emergency related to COVID-19, and these federal student loan borrower relief provisions have 39 -------------------------------------------------------------------------------- been extended throughSeptember 30, 2021 . BeginningMarch 13, 2020 , the Company received less servicing revenue per borrower from the Department based on the borrower forbearance status throughSeptember 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 a forbearance status for the period fromOctober 1, 2020 throughSeptember 30, 2021 from$2.19 per borrower to$2.05 per borrower. As a result of the extension of these CARES Act provisions throughSeptember 30, 2021 , the Company currently anticipates Department servicing revenue will be lower in 2021 from recent historical periods due to the lower rates. The Company currently anticipates revenue per borrower will return to pre-COVID levels when borrowers begin to re-enter repayment in the fourth quarter of 2021. While federal student loan payments are suspended, the Company's operating expenses have been and will continue to be lower due to a significant reduction of borrower statement printing and postage costs. In addition, revenue from the Department for originating consolidation loans was adversely impacted as a result of borrowers receiving relief on their existing loans, thus not initiating a consolidation. The Company currently anticipates this revenue will continue to be negatively impacted while student loan payments and interest accruals are suspended. During 2020, FFELP, private education, and consumer loan servicing revenue was adversely impacted by the COVID-19 pandemic due to reduced or eliminated delinquency outreach to borrowers, holds on claim filings, and reduced or eliminated late fees processing. In addition, origination fee revenue was negatively impacted as borrowers are less likely to refinance their loans when they are receiving certain relief measures from their current lender. The Company currently anticipates this trend will continue in future periods that are impacted by the COVID-19 pandemic, with the magnitude based on the extent to which existing or additional borrower relief policies and activities are implemented or extended by servicing customers. If the student loan borrower relief provisions of the CARES Act were potentially extended pastSeptember 30, 2021 and/or new legislative or regulatory student loan borrower relief measures similar to such provisions of the CARES Act were to become effective, the levels and timing of future servicing revenues could continue to be impacted in a similar manner through the extended period of time that such provisions or measures are in effect. Due to decreased servicing and transaction activity as a result of suspended payments under the CARES Act as discussed above, the Company has been able to transition associates to help state agencies process unemployment claims and conduct certain health contact tracing support activities. Revenue earned on these temporary contracts for the year endedDecember 31, 2020 was$21.9 million . These contracts were awarded to the Company as a result of the Company's technology, security, compliance, and other capabilities needed to conduct such activities. Education Technology, Services, and Payment Processing This segment has been and will continue to be impacted by COVID-19 through lower interest rate levels, which reduce earnings for this business compared to recent historical results as the tuition funds held in custody for schools produce less interest earnings. If interest rates remain at current levels, the Company anticipates this segment will earn minimal interest income in future periods. In addition, as a result of COVID-19, demand for certain of the Company's products and services has been negatively impacted. The Company currently anticipates this trend will continue through the 2020-2021 academic year and could extend longer as a result of trends and shifts in the industry that could be long term as a result of the COVID-19 pandemic. Communications As a result of COVID-19, ALLO experienced increased demand from new and existing residential customers to support connectivity needs primarily for work and learn from home applications. Along with offering 60 days free for eligible customers, ALLO partnered with school districts to provide more connectivity to students, often at discounted rates. In view of the importance of ALLO's technicians being able to connect new customers while maintaining social distance and protecting community and associate health and safety, ALLO adjusted operational procedures by implementing associate health checks, following CDC and local health official safety protocols, facilitating customer screening, and adjusting the installation process to limit the time in the home or business as much as possible. Asset Generation and Management AGM's results were adversely impacted during the first quarter of 2020 as a result of COVID-19 due to: •An incremental increase in the provision for loan losses of$63.0 million (pre-tax) resulting from an increase in expected life of loan defaults due to the COVID-19 pandemic. •A$26.3 million (pre-tax) provision charge recognized on the Company's beneficial interest in consumer loan securitizations. The Company's estimate of future cash flows from the beneficial interest in consumer loan 40 -------------------------------------------------------------------------------- securitizations was lower than originally anticipated due to the expectation of increased consumer loan defaults within such securitizations due to the distressed economic conditions resulting from the COVID-19 pandemic. As economic factors improved in the third and fourth quarters of 2020, a portion of the charges noted above were reversed. The CARES Act, among other things, provides broad relief, effectiveMarch 13, 2020 , for borrowers that have student loans owned by the Department. This relief package excluded FFELP, 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, effectiveMarch 13, 2020 throughJune 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. BeginningJuly 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 in 90 day increments to any federally insured and private education loan upon request throughSeptember 30, 2021 . As ofDecember 31, 2020 , federally insured and private education loans in forbearance were$2.0 billion (or 10.3% of the portfolio) and$2.4 million (or 0.7% of the portfolio), respectively. The amount of federally insured and private education loans in forbearance hit their peak inMay 2020 at$6.0 billion and$38.6 million , respectively. The Company anticipates that loans in forbearance will continue to decline in 2021, absent any intervening policy change, when borrowers are currently scheduled to exit forbearance. Despite the COVID-19 pandemic, a large portion of borrowers continue to make payments according to their payment plans. In addition, for both federally insured and private education loans, effectiveMarch 13, 2020 , borrower late fees have been waived. For the majority of the Company's consumer loans, borrowers are generally being offered, upon request and/or documented evidence of financial distress, up to a two-month deferral of payments, with an option of additional deferrals if the COVID-19 pandemic continues. In addition, effectiveMarch 13, 2020 , the majority of fees (non-sufficient funds, late charges, check fees) and credit bureau reporting have been 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. The Company is not contractually committed to acquire FFELP, private education, or consumer loans, so the Company has been and will continue to be selective as to which, if any, loans it purchases during the current period of economic uncertainty. Other Risks and Uncertainties The COVID-19 pandemic is unprecedented and continues to evolve. The extent to which COVID-19 may impact the Company's businesses depends on future developments, which are highly uncertain, subject to various risks, and cannot be predicted with confidence, such as the ultimate spread, severity, and duration of the pandemic, travel restrictions, stay-at-home or other similar orders and social distancing inthe United States and other countries, business and/or school closures and disruptions, and the effectiveness of actions taken inthe United States and other countries to contain and treat the virus. For additional information on the risks and uncertainties regarding the impacts of COVID-19, see Part I, Item 1A. "Risk Factors - 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" in this report. Investment inAgile Sports Technologies, Inc. (doing business as "Hudl") OnMay 20, 2020 , the Company made an additional equity investment of approximately$26.0 million in Hudl, as one of the participants in an equity raise completed by Hudl. As a result of Hudl's equity raise, the Company recognized a$51.0 million (pre-tax) gain during the second quarter of 2020 to adjust its carrying value to reflect theMay 20, 2020 transaction value.Department of Education Servicing Contracts and Procurements for New Contracts Nelnet Servicing , a subsidiary of the Company, earns loan servicing revenue from a servicing contract with the Department. Revenue earned by Nelnet Servicing related to this contract was$146.8 million and$158.0 million for the years endedDecember 31, 2020 and 2019, respectively. In addition,Great Lakes , which was acquired by the Company onFebruary 7, 2018 , also earns loan servicing revenue from a similar servicing contract with the Department. Revenue earned byGreat Lakes related to this contract was$179.9 million and$185.7 million for the years endedDecember 31, 2020 and 2019, respectively. Nelnet Servicing andGreat Lakes' servicing contracts with the Department are currently scheduled to expire onJune 14, 2021 , but provide the potential for an additional six-month extension at the Department's discretion throughDecember 14, 2021 . The 41 -------------------------------------------------------------------------------- Department is conducting a contract procurement process for a new framework for the servicing of all student loans owned by the Department. For information regarding recent developments related to and the current status of these servicing contracts, and the Department's procurement processes for new servicing contracts, see note 17 of the notes to consolidated financial statements included in this report. Adoption of New Accounting Standard for Credit Losses OnJanuary 1, 2020 , the Company adopted 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. 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. The expected credit losses are adjusted each period for changes in expected lifetime credit losses. 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 . Results for reporting periods beginning afterJanuary 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. Solar Investments During the last three years, the Company has invested$148.6 million in tax equity investments in renewable energy solar partnerships to support the development and operations of solar projects throughout the country. The projects are currently forecasted to generate more than 214 megawatts of power each year. These investments provide a federal income tax credit under the Internal Revenue Code, currently at 26 percent (for projects commencing construction in 2020-2022) and 30 percent (for projects commencing construction prior to 2020) of the eligible project cost, with the tax credit available when the project is placed-in-service. The Company is then allowed to reduce its tax estimates paid to theU.S. Treasury based on the credits earned. In addition to the credits, the Company structures the investments to receive quarterly distributions of cash from the operating earnings of the solar project for a period of at least five years (so the tax credits are not recaptured). After that period, the contractual agreements typically provide for the Company's interest in the projects to be purchased in an exit at the fair market value of the discounted forecasted future cash flows allocable to the Company. Given the expected timing of cash flows, experience the Company has in underwriting these assets, and beneficial impact to the climate, the Company believes these investments are a great fit within its capital deployment initiatives. These investments are structured such that a significant proportion of the cash distributions and tax items (including the income tax credit) are allocated back to the Company within the first eighteen months of the investment capital contribution, in order to achieve a target after tax return. The cash distributions to the Company are then structured to flatten until exit, typically between years five and six. Given the unique arrangement in which investors share in the profits and losses of the solar investment with cash and tax benefit allocations among the partners changing over the life of the project, the accounting guidance calls for the use of the Hypothetical Liquidation at Book Value ("HLBV") method, which can result in non-linear GAAP income/loss allocation results. Under this method, a balance sheet approach is utilized to determine what each investor would hypothetically receive at each balance sheet date under the liquidation provisions of the contractual agreements, assuming the net assets of the funding structures were liquidated at their recorded amounts determined in accordance with GAAP. As the investor receives a majority of this return through the income tax credit and higher cash distributions at the beginning of the investment, as of the first period of the hypothetical liquidation, the investor's remaining net claim on assets is relatively low compared to the initial cash contributed. This difference between the initial cash contributions and the first period's ending net claim on assets through the hypothetical liquidation causes significant GAAP losses on the investment to be recognized through the income statement within the initial periods of the investment. After the carrying value of the investment on the balance sheet is written down to the hypothetical liquidation amount, subsequent year's earnings are expected to align with and reflect the operating profits or losses of the investment. The Company realizes that application of the HLBV method to its solar investments has a variable impact on its periodic earnings that in the early years is not reflective of the expected long-term economics of the investments. Given the significant amount of investments made in the last couple of years and the associated ramp-up period, the negative impact to earnings in 2020 was significant as the Company recognized a$37.4 million pre-tax loss from these investments under the HLBV method. However, as these investments mature and perform as forecasted, the Company expects to recoup that loss and realize additional income between now and the sale of each of its interests, likely 60 to 72 months from the date the project is placed in service. Thus, the Company expects the economic gain from these investments to be realized in its future earnings, but, due to the hypothetical liquidation valuations as of the balance sheet dates 42 -------------------------------------------------------------------------------- during the intended investment horizon, the HLBV method results in some volatility in the Company's consolidated periodic earnings results. Private Loan Servicing and Acquisition In December of 2020, Wells Fargo announced the sale of its approximately$10 billion portfolio of private education student loans representing approximately 475,000 borrowers. In conjunction with the sale, the Company was selected as servicer of the portfolio and will begin servicing the portfolio following a series of loan transfers during the first half of 2021. In addition, the Company has entered into agreements to participate in a joint venture to acquire the portfolio. The Company expects to own approximately 8 percent of the interest in the loans and, dependent upon financing, currently expects to invest approximately$100 million as part of the acquisition. In addition, the Company will serve as the sponsor and administrator for loan securitizations on behalf of the purchaser group as the loans are securitized, and provide the required level of risk retention as the loans are permanently financed. This transaction is expected to close during the first half of 2021, with the securitizations occurring subsequent to closing. Liquidity and Capital Resources •As ofDecember 31, 2020 , the Company had cash and cash equivalents of$121.2 million . In addition, the Company had a portfolio of available-for-sale investments, consisting primarily of student loan asset-backed securities, with a fair value of$348.6 million as ofDecember 31, 2020 . As ofDecember 31, 2020 , the Company has participated$118.6 million of these securities, and such participation is reflected as debt on the Company's consolidated balance sheet. •The Company has historically generated positive cash flow from operations. For the year endedDecember 31, 2020 , the Company's net cash provided by operating activities was$212.8 million . •The Company has a$455.0 million unsecured line of credit with a maturity date ofDecember 16, 2024 . As ofDecember 31, 2020 , the unsecured line of credit had$120.0 million outstanding. Subsequent toDecember 31, 2020 , the Company paid down the full balance outstanding on the line of credit, and as ofFebruary 25, 2021 ,$455.0 million was available for future use. The line of credit provides that the Company may increase the aggregate financing commitments, through the existing lenders and/or through new lenders, up to a total of$550.0 million , subject to certain conditions. •OnNovember 2, 2020 ,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 withNelnet Bank , as required under an agreement with theFDIC . •The majority of the Company's portfolio of student loans is funded in asset-backed securitizations that will generate significant earnings and cash flow over the life of these transactions. As ofDecember 31, 2020 , the Company currently expects future undiscounted cash flows from its securitization portfolio to be approximately$2.30 billion , of which approximately$1.51 billion will be generated over the next five years. •The Company has a stock repurchase program to purchase up to a total of five million shares of the Company's Class A common stock during the three-year period endingMay 7, 2022 . During 2020, the Company repurchased a total of 1,594,394 shares of stock for$73.4 million ($46.01 per share). As ofDecember 31, 2020 , 3,246,732 shares remained authorized for repurchase under the Company's stock repurchase program. •During 2020, the Company paid cash dividends totaling$31.8 million ($0.82 per share). The Company intends to use its strong liquidity position to capitalize on market opportunities, including FFELP, private education, and consumer loan acquisitions; 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. CONSOLIDATED RESULTS OF OPERATIONS An analysis of the Company's operating results for the year endedDecember 31, 2020 compared to 2019 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. 43 -------------------------------------------------------------------------------- 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 15 of the notes to consolidated financial statements included in 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 thatNelnet Bank's results of operations are not discussed since such operations were launched inNovember 2020 and were not material to the Company's 2020 consolidated results of operations). Year ended December 31, 2020 2019 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 due to lower interest rates in 2020 Loan interest
$ 595,113 914,256
as compared to 2019.
Includes income from unrestricted interest-earning
deposits and investments and funds in asset-backed
securitizations. Decrease was due to a decrease in Investment interest
24,543 34,421 interest rates. Total interest income 619,656 948,677
Decrease was due primarily to a decrease in cost of
funds and a decrease in the average balance of debt Interest expense
330,071 699,327
outstanding.
Net interest income 289,585 249,350
See table below for additional analysis.
Increase was due to provision expense recognized in
the first quarter of 2020 as a result of an increase
in expected defaults due to the COVID-19 pandemic and
an increased provision for loan losses on loans
acquired in 2020 to reflect life of loan expected
losses as compared to loans acquired in 2019 for
which the provision for loan losses was recognized
based upon an incurred loss methodology. See AGM Less provision for loan losses 63,360 39,000 operating segment - results of operations. Net interest income after provision for loan losses 226,225 210,350 Other income/expense: LSS revenue 451,561 455,255
See LSS operating segment - results of operations. ETS&PP revenue
282,196 277,331
See ETS&PP operating segment - results of operations.
76,643 64,269
operations.
Other 57,561 47,918
See table below for components of "other income."
Gain on sale of loans is from the sale of consumer Gain on sale of loans
33,023 17,261
loans.
On
from the Company's consolidated financial statements
as a result of ALLO's recapitalization. See "Overview
- Recapitalization and Additional Funding for ALLO" Gain from deconsolidation of ALLO 258,588
-
above for additional information.
During the first quarter of 2020, the Company
recognized a provision expense of
an impairment charge of
beneficial interest in consumer loan securitization
investments and several venture capital investments,
respectively. Such charges were the result of impacts
from the COVID-19 pandemic. During the fourth quarter
of 2020, the Company reversed
provision related to beneficial interest in consumer Impairment expense and provision for
loan securitization investments due to improved beneficial interests (24,723) -
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 with the
Company's net interest income. See table below for Derivative settlements, net
3,679 45,406
additional analysis.
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 were 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 results in an increase in the fair Derivative market value adjustments,
value of the Company's floor income interest rate net (28,144) (76,195) swaps. Total other income/expense 1,110,384 831,245 Cost of services: Cost to provide education technology, services, and payment
Represents primarily direct costs to provide payment processing services
82,206 81,603
processing services in the ETS&PP operating segment.
Represents costs of services primarily associated Cost to provide communications
with television programming costs in the services 22,812 20,423 Communications operating segment. Total cost of services 105,018 102,026
Operating expenses:
Increase was due to (i) increases in personnel in the
LSS and corporate operating segments to meet
increased service and security standards under the
Department servicing contracts; (ii) increases in
personnel in the LSS operating segment to develop a
new private education and consumer loan servicing
system; and (iii) increases in personnel to support
the growth in the customer base and the development
of new technologies in the ETS&PP operating segment.
In addition, on
deconsolidation of ALLO), ALLO recognized
compensation expense of
modification of certain equity awards previously Salaries and benefits 501,832 463,503
granted to members of ALLO's management.
44 --------------------------------------------------------------------------------
Increase was primarily due to additional depreciation
expense
in the corporate operating segment due to
recent
infrastructure capital expenditures to support
the
Company's operating segments, as well as an
increase in depreciation expense at ALLO as it
continues to develop its network in existing and new Depreciation and amortization 118,699
105,049
markets..
Other
expenses includes expenses necessary for
operations, such as postage and distribution,
consulting and professional fees, occupancy,
communications, and certain information
technology-related costs. Decrease 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; (ii) reduction of
travel
expenses and the cancellation of on-site
conferences in the ETS&PP segment; and (iii) a
decrease in servicing fees paid by the AGM segment to
third
parties. In addition, the AGM segment recognized
$16.7
million of expense during 2019 to extinguish
asset-backed notes from certain securitizations prior
to
their contractual maturity. See each individual
operating segment results of operations discussion for Other expenses 160,574 194,272 additional information. Total operating expenses 781,105 762,824 Income before income taxes 450,486 176,745 The
effective tax rate was 22.3% and 20.0% for 2020
and
2019, respectively. The increase in the effective
tax
rate in 2020 as compared to 2019 was due to the
recognition of normal tax credit amounts relative to a
much
higher pre-tax book income in 2020. The Company
expects its future effective tax rate will range Income tax expense 100,860 35,451 between 21 and 24 percent. Net income 349,626 141,294 Net loss attributable to noncontrolling interests 2,817 509 Net income attributable to Nelnet, Inc.$ 352,443 141,803 Additional information: Net income attributable to See "Overview - GAAP Net Income and Non-GAAP Net Nelnet, Inc.$ 352,443 141,803 Income, Excluding Adjustments" above for additional Derivative market value information about non-GAAP net income, excluding adjustments, net 28,144 76,195 derivative market value adjustments. Tax effect (6,755) (18,287) Net income attributable toNelnet, Inc. , excluding derivative market value adjustments$ 373,832 199,711 The following table summarizes the components of "net interest income" and "derivative settlements, net." Derivative settlements represent the cash paid or received during the current period to settle with derivative instrument counterparties the economic effect of the Company's derivative instruments based on their contractual terms. Derivative accounting requires that net settlements with respect to derivatives that do not qualify for "hedge treatment" under GAAP be recorded in a separate income statement line item below net interest income. The Company maintains an overall risk management strategy that incorporates the use of derivative instruments to reduce the economic effect of interest rate volatility. As such, management believes derivative settlements for each applicable period should be evaluated with the Company's net interest income as presented in the table below. Net interest income (net of settlements on derivatives) is a non-GAAP financial measure, and the Company reports this non-GAAP information because the Company believes that it provides additional information regarding operational and performance indicators that are closely assessed by management. There is no comprehensive, authoritative guidance for the presentation of such non-GAAP information, which is only meant to supplement GAAP results by providing additional information that management utilizes to assess performance. See note 6 of the notes to consolidated financial statements included in 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 2020 and 2019 periods presented in the table under the caption "Consolidated Financial Statement Impact Related to Derivatives - Statements of Income" in note 6 and in the table below. 45 -------------------------------------------------------------------------------- Year ended December 31, 2020 2019 Additional information
Represents the yield the Company receives on its loan
portfolio less the cost of funding these loans. Variable
loan spread is also impacted by the
amortization/accretion of loan premiums and discounts and
the 1.05% per year consolidation loan rebate fee paid to
the Department. See AGM operating segment - results of
Variable loan interest margin
174,954
operations.
Settlements on associated
Represents the net settlements received related to the derivatives
10,378 5,214 Company's 1:3 basis swaps. Variable loan interest margin, net of settlements on derivatives 155,249 180,168
The Company has a portfolio of student loans that are
earning interest at a fixed borrower rate which exceeds
the statutorily defined variable lender rates, generating
fixed rate floor income. See Item 7A, "Quantitative and
Qualitative Disclosures About Market Risk - Interest Rate Fixed rate floor income
123,460 49,677 Risk" for additional information. Settlements on associated
Represents the net settlements (paid) received related to derivatives
(6,699) 40,192 the Company's floor income interest rate swaps. Fixed rate floor income, net of settlements on derivatives 116,761 89,869 Investment interest 24,543 34,421
Includes interest expense on the Junior Subordinated
asset-backed securities participation agreement. Decrease
was due to a decrease in interest rates and in the
average balance outstanding on the Company's unsecured
line of credit, partially offset by interest expense
incurred on the asset-backed securities participation Corporate debt interest expense (3,289)
(9,702)
agreement that was executed in May of 2020.
Net interest income (net of settlements on derivatives)$ 293,264 294,756
The following table summarizes the components of "other income."
Year ended
2020 2019 Gain on remeasurement of HUDL investment (a) $ 51,018 - Investment advisory services (b) 10,875 2,941 Management fee revenue (c) 9,421 9,736 Borrower late fee income (d) 5,194 12,884 Income/gains from investments, net 2,205 8,356 Loss from solar investments (e) (37,423) (2,220) Other 16,271 16,221 Other income $ 57,561 47,918 (a) 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'sMay 2020 equity raise transaction value. (b) The Company provides investment advisory services through Whitetail RockCapital Management, LLC ("WRCM"), the Company'sSEC -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 ofDecember 31, 2020 , the outstanding balance of asset-backed securities under management subject to these arrangements was$1.4 billion . In addition, WRCM earns annual management fees of five basis points for certain other investments under management. The increase in advisory fees in 2020 as compared to 2019 was the result of an increase in assets under management and performance fees earned. The Company currently anticipates that assets under management will decrease from current levels and that opportunities to earn meaningful performance fees in future periods will be more limited. (c) Represents revenue earned from providing administrative support and marketing services primarily toGreat Lakes' former parent company in accordance with a contract that expired inJanuary 2021 . (d) Represents borrower late fees earned by the AGM operating segment. The decrease in borrower late fees in 2020 as compared to 2019 was due to the Company suspending borrower late fees effectiveMarch 13, 2020 to provide borrowers relief as a result of the COVID-19 pandemic. (e) Represents the Company's share of income or loss from solar investments accounted for using the Hypothetical Liquidation at Book Value ("HLBV") method of accounting. For the majority of the Company's solar investments, the HLBV method of accounting results in accelerated losses in the initial years of investment. 46 -------------------------------------------------------------------------------- LOAN SERVICING AND SYSTEMS OPERATING SEGMENT - RESULTS OF OPERATIONS Loan Servicing Volumes As ofDecember 31 ,March 31 ,June 30 ,September 30 ,December 31 ,March 31 ,June 30 ,September 30 ,December 31, 2018 2019 2019 2019 2019 2020 2020 2020 2020 Servicing volume (dollars in millions): Nelnet: Government$ 179,507 183,093 181,682 184,399 183,790 185,477 185,315 189,932 191,678 FFELP 36,748 35,917 35,003 33,981 33,185 32,326 31,392 31,122 30,763 Private and consumer 15,666 16,065 16,025 16,286 16,033 16,364 16,223 16,267 16,226Great Lakes : Government 232,694 237,050 236,500 240,268 239,980 243,205 243,609 249,723 251,570 Total$ 464,615 472,125 469,210 474,934 472,988 477,372 476,539 487,044 490,237 Number of servicing borrowers: Nelnet: Government 5,771,923 5,708,582 5,592,989 5,635,653 5,574,001 5,498,872 5,496,662 5,604,685 5,645,946 FFELP 1,709,853 1,650,785 1,588,530 1,529,392 1,478,703 1,423,286 1,370,007 1,332,908 1,300,677 Private and consumer 696,933 699,768 693,410 701,299 682,836 670,702 653,281 649,258 636,136Great Lakes : Government 7,458,684 7,385,284 7,300,691 7,430,165 7,396,657 7,344,509 7,346,691 7,542,679 7,605,984 Total 15,637,393 15,444,419 15,175,620 15,296,509 15,132,197 14,937,369 14,866,641 15,129,530 15,188,743 Number of remote hosted borrowers: 6,393,151 6,332,261 6,211,132 6,457,296 6,433,324 6,354,158 6,264,559 6,251,598 6,555,841 Nelnet Servicing andGreat Lakes' servicing contracts with the Department are currently scheduled to expire onJune 14, 2021 , but provide the potential for an additional six-month extension at the Department's discretion throughDecember 14, 2021 . The Consolidated Appropriations Act, 2021, signed into law onDecember 27, 2020 , provides that the Department may extend the period of performance for the servicing contracts scheduled to expire onDecember 14, 2021 for up to two additional years toDecember 14, 2023 . The Department is conducting a contract procurement process for a new framework for the servicing of all student loans owned by the Department. See note 17 of the notes to consolidated financial statements included in this report for additional information. 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 recently publicly announced performance metric measurements used by the Department for the quarterly periodsJanuary 1, 2020 throughJune 30, 2020 ,Great Lakes' and Nelnet Servicing's overall rankings among the nine then-current servicers for the Department at that time were first and tied for fifth, respectively. Based on these results,Great Lakes' and Nelnet Servicing's allocation of new student loan servicing volumes for the periodSeptember 1, 2020 throughFebruary 28, 2021 are 20 percent and 10 percent, respectively. InOctober 2020 , the Department communicated to its servicers that a not-for-profit servicer requested to end its contract with the Department. EffectiveOctober 23, 2020 , the percent of allocated new student loan servicing volume that previously was awarded to this servicer will be split among the remaining servicers, resulting inGreat Lakes' allocation to increase by two percent and each remaining servicer to obtain an additional one percent allocation. 47 --------------------------------------------------------------------------------
Summary and Comparison of Operating Results
Year ended December 31, 2020 2019 Additional information
Decrease was due to lower interest rates in 2020 Net interest income
$ 315 1,916 as compared to 2019. Loan servicing and systems revenue 451,561 455,255 See table below for additional analysis. Represents revenue earned by the LSS operating segment as a result of servicing loans for the AGM and Nelnet Bank operating segments. Decrease in 2020 compared to 2019 was due to the impact of borrower relief policies implemented by AGM in response to the COVID-19 pandemic and the expected amortization of AGM's FFELP portfolio. FFELP
intersegment servicing revenue will continue to Intersegment servicing revenue 36,520
46,751 decrease as AGM's FFELP portfolio pays off. Represents revenue earned from providing administrative support and marketing services primarily toGreat Lakes' former parent company in
accordance with a contract that expired in January Other income
9,421 9,736
2021.
Total other income 497,502 511,742 Increase was due to an increase in headcount to provide enhanced service levels to borrowers under the Department servicing contracts, and to develop a new private education and consumer loan Salaries and benefits 285,526 276,136 servicing system. Increase was due to capital expenditures to
support the recent extension of the government Depreciation and amortization 37,610
34,755 servicing contracts. Decrease was due to cost savings as a result of the impact of the COVID-19 pandemic and the resulting CARES Act, primarily associated with the fact that while student loan payments are suspended there is a significant reduction of borrower statement printing and postage costs. See "Overview - Impacts of COVID-19 Pandemic - Loan Servicing and Systems" above for additional information. Decrease was also due to cost savings from an increase in the adoption of electronic borrower statements and correspondence, and a
decrease in expenses related to travel and the Other expenses
57,420 71,064 provision for servicing losses. 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 2020 as compared to 2019 was due to an
increase in security service levels related to the Intersegment expenses
63,886 54,325 Department servicing contracts. Total operating expenses 444,442 436,280 Income before income taxes 53,375 77,378 Reflects income tax expense at an effective tax Income tax expense (12,810) (18,571) rate of 24%. Net income 40,565 58,807 Before tax operating margin is a measure of before tax operating profitability as a percentage of revenue, and for the LSS segment is calculated as income before income taxes 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 facilitates an understanding of the operating performance of the segment and provides a meaningful comparison of the results of operations between periods. The LSS segment incurred additional costs during 2020 to meet increased service and security standards under the Department servicing contracts. In addition, servicing revenue in 2020 has been negatively impacted as a result of the COVID-19 pandemic. As a result, the segment's net income and operating margin decreased in 2020 as Before tax operating margin 10.7 % 15.1 % compared to 2019. 48
--------------------------------------------------------------------------------
Loan servicing and systems revenue
Year endedDecember 31, 2020 2019
Additional information
Represents revenue from Nelnet Servicing's
Department servicing contract. Decrease in 2020
compared to 2019 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, and decrease in
revenue earned per borrower as a result of
certain provisions included in the CARES Act. See
"Overview - Impacts of COVID-19 Pandemic - Loan
Servicing and Systems" above for additional Government servicing - Nelnet$ 146,798 157,991
information.
Represents revenue from the
Department servicing contract. Decrease in 2020
compared to 2019 was due to a decrease in fees
earned from the Department for originating
consolidation loans and decrease in revenue
earned per borrower as a result of certain
provisions included in the CARES Act. See
"Overview - Impacts of COVID-19 Pandemic - Loan Government servicing - Great Servicing and Systems" above for additional Lakes 179,872 185,656
information.
Decrease was due to a decrease in the number of
borrowers serviced, a decrease in origination
fees, and the impact of borrower relief policies
implemented by private lenders in response to the
COVID-19 pandemic. See "Overview - Impacts of
COVID-19 Pandemic - Loan Servicing and Systems"
above for additional information. The Company
expects that private education loan servicing
revenue will increase beginning in the first half
of
2021 as a result of the Company being selected
to
service all of the approximately
portfolio of private education loans that Wells Private education and consumer Fargo announced in December 2020 it had agreed to loan servicing 32,492 36,788
sell to investors.
Decrease was due to a decrease in the number of
borrowers serviced and the impact of borrower
relief policies implemented by lenders in
response to the COVID-19 pandemic. See "Overview
-
Impacts of COVID-19 Pandemic - Loan Servicing
and Systems" above for additional information.
Over time, FFELP servicing revenue will continue
to decrease as third-party customers' FFELP FFELP servicing 20,183 25,043
portfolios pay off.
Increase in 2020 compared to 2019 was due to
increased contract programming revenue for
services provided related to hosted FFELP
guarantee activities and an increase in remote
hosted borrowers. These items were partially
offset due to the negative impact in 2020 of
COVID-19 forbearances on loans serviced by the
Company's Direct Servicing hosted clients. The
Company's remote hosted servicing and system
support contract with
representing 2.3 million borrowers, expired in
January 2021. Revenue recognized from providing Software services 41,999 41,077
these services during 2020 was
The majority of this revenue relates to providing
contact center and back office operational
outsourcing activities. Increase in 2020 compared
to
2019 was due to providing temporary
outsourcing services to state agencies to process
unemployment claims and conduct certain health
contact tracing support activities. Revenue from
providing these temporary services was
million in 2020. See "Overview - Impacts of
COVID-19 Pandemic - Loan Servicing and Systems" Outsourced services and other 30,217 8,700 above for additional information. Loan servicing and systems revenue$ 451,561 455,255 49
-------------------------------------------------------------------------------- EDUCATION TECHNOLOGY, SERVICES, AND PAYMENT PROCESSING OPERATING SEGMENT - RESULTS OF OPERATIONS This segment of the Company's business is subject to seasonal fluctuations which correspond, or are related to, the traditional school year. Tuition management revenue is recognized over the course of the academic term, but the peak operational activities take place in summer and early fall. Higher amounts of revenue are typically recognized during the first quarter due to fees related to grant and aid applications as well as online applications and enrollment services. The Company's operating expenses do not follow the seasonality of the revenues. This is primarily due to generally fixed year-round personnel costs and seasonal marketing costs. 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, a services company that provides supplemental instructional services and educational professional development for K-12 schools inNew York City , andCD2 LLC , a platform technology solution that includes learning management, collaboration/workflow, gamification, customer management/document storage, and employee boarding. The results ofHigherSchool Instructional Services and CD2 LLC will be reported in the Company's consolidated financial statements from the date of acquisition. Summary and Comparison of Operating Results Year ended December 31, 2020 2019 Additional information
Represents interest income on tuition funds held
in custody for schools. Decrease was due to a
decrease in interest rates in 2020 as compared
with 2019. If interest rates remain at current
levels, the Company anticipates this segment will Net interest income$ 2,982 9,198 earn minimal interest income in future periods. Education technology, services, and payment processing revenue 282,196 277,331 See table below for additional information. Intersegment revenue 20 - Other income 373 259 Total other income 282,589 277,590 Cost to provide education technology, services, and payment processing services 82,206 81,603
See table below for additional information.
Increase in 2020 compared to 2019 was due to an
increase in headcount to support the growth of
the customer base and investment in the Salaries and benefits 98,847 94,666
development of new technologies.
Represents primarily amortization of intangible
assets from prior business acquisitions.
Amortization of intangible assets related to
business acquisitions was$8.7 million and$12.1 Depreciation and amortization 9,459 12,820
million for 2020 and 2019, respectively.
Decrease in 2020 compared to 2019 was due to a
reduction of travel expenses and the cancellation
of on-site conferences as a result of the Other expenses 14,566 22,027
COVID-19 pandemic.
Intersegment expenses represent costs for certain
corporate activities and services that are
allocated to each operating segment based on Intersegment expenses, net 14,293 13,405 estimated use of such activities and services. Total operating expenses 137,165 142,918 Income before income taxes 66,200 62,267 Represents income tax expense at an effective tax Income tax expense (15,888) (14,944) rate of 24%. Net income$ 50,312 47,323 50
--------------------------------------------------------------------------------
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.
Year endedDecember 31, 2020 2019
Additional information
Decrease in 2020 compared to 2019 was due
to the COVID-19 pandemic. Revenue
recognized during the first six months of
2020 was primarily related to payment
plans for the 2019-2020 academic year for
K-12 schools and the spring and summer
2020 semester for institutions of higher
education. As a result, fees for the
majority of payment plans for these
periods were received and were based on
school enrollments prior to the
conditions arising from the COVID-19
pandemic. Revenue recognized during the
second six months of 2020 was related to
the 2020-2021 academic year and was Tuition payment plan negatively impacted due to the COVID-19 services$ 100,674 106,682
pandemic.
Increase in 2020 compared to 2019 was due
to an increase in payments volume from
new school customers, partially offset by
the decline in payment volume for certain
of the Company's existing customers as a Payment processing 114,304 110,848
result of the COVID-19 pandemic.
Increase in 2020 compared to 2019 was due
to an increase from FACTS Student
Information System ("SIS") software
subscriptions, online application and
enrollment services, and financial needs
assessment services as a result of an Education technology and increase in the number of students and services 65,885 58,578 customers using these products. Other 1,333 1,223 Education technology, services, and payment processing revenue 282,196 277,331 Costs primarily relate to payment Cost to provide education processing revenue and such costs technology, services, and decrease/increase in relationship to payment processing services 82,206 81,603 payment revenue. Net revenue$ 199,990 195,728
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 Before tax operating margin 33.1 % 31.8 %
results of operations between periods.
51 -------------------------------------------------------------------------------- COMMUNICATIONS OPERATING SEGMENT - RESULTS OF OPERATIONS OnDecember 21, 2020 , the Company deconsolidated ALLO from the Company's consolidated financial statements. See note 2, "Recent Developments - ALLO Recapitalization," of the notes to consolidated financial statements included in this report for additional information. Accordingly, the operating results for the Communications operating segment for 2020 are fromJanuary 1, 2020 throughDecember 21, 2020 . Summary and Comparison of Operating Results Period from January 1 to December 21, Year ended December 31, 2020 2019 Additional information Net interest income $ 2 3 Communications revenue is derived primarily from the sale of pure fiber optic services to residential and business customers in Nebraska and Colorado, including internet, television, and telephone services. Increase was due to additional residential households and businesses served as a result of the completion of the Lincoln, Nebraska network build out in 2019 and continued maturity of ALLO's existing markets. See additional financial and operating data for ALLO in the Communications revenue 76,643 64,269 tables below. Other income 1,561 1,509 Total other income 78,204 65,778 Cost of services are primarily associated with television programming costs. Other costs include connectivity, franchise, and other regulatory Cost to provide communications costs directly related to providing internet and services 22,812 20,423 voice services. On October 1, 2020 (prior to the deconsolidation of ALLO), ALLO recognized compensation expense of$9.3 million related to the modification of certain ALLO equity awards previously granted to Salaries and benefits 30,935 21,004 members of ALLO's management. Depreciation reflects the allocation of the costs of ALLO's property and equipment over the period in which such assets are used. A significant amount of property and equipment purchases have been made to support ALLO's network expansion, which has increased depreciation expense in 2020 as compared to 2019. Amortization reflects the allocation of costs related to intangible assets recorded at fair value as of the date the Company acquired ALLO in 2015 over their estimated useful Depreciation and amortization 42,588 37,173 lives. Other expenses includes selling, general, and administrative expenses necessary for operations, such as advertising, occupancy, professional services, construction materials, and personal property taxes. Decrease in 2020 as compared to 2019 was due to a reduction in certain construction costs and travel expenses as a result Other expenses 13,327 15,165 of the COVID-19 pandemic. Intersegment expenses represent costs for certain corporate activities and services that are allocated to each operating segment based on Intersegment expenses 1,732 2,962 estimated use of such activities and services. Total operating expenses 88,582 76,304 Loss before income taxes (33,188) (30,946) Represents income tax benefit at an effective tax Income tax benefit 7,965 7,427 rate of 24%. As ALLO grows in current and new markets, it incurs large upfront capital expenditures and associated depreciation and upfront customer acquisition costs. Management uses EBITDA to compare ALLO's performance to that of its competitors and to eliminate certain non-cash and non-operating items in order to consistently measure performance from period to period. See Net loss$ (25,223) (23,519) additional information below.
Additional Information: Net loss$ (25,223) (23,519) Net interest income (2) (3) Income tax benefit (7,965) (7,427) Depreciation and amortization 42,588
37,173
Earnings before interest, income taxes, depreciation, and For additional information regarding this non-GAAP amortization (EBITDA)$ 9,398 6,224 measure, see the table below. 52
-------------------------------------------------------------------------------- Certain financial and operating data for ALLO is summarized in the tables below. Period fromJanuary 1 to December 21, 2020 Year endedDecember 31, 2019
Residential revenue$ 58,029 75.7 %$ 48,344 75.2 % Business revenue 18,038 23.5 15,689 24.4 Other revenue 576 0.8 236 0.4 Communications revenue$ 76,643 100.0 %$ 64,269 100.0 % Internet$ 48,362 63.1 %$ 38,239 59.5 % Television 17,091 22.3 16,196 25.2 Telephone 11,037 14.4 9,705 15.1 Other 153 0.2 129 0.2 Communications revenue$ 76,643 100.0 %$ 64,269 100.0 % Net loss$ (25,223) $ (23,519) EBITDA (a) 9,398 6,224 Capital expenditures 47,957 44,988 As of September 30, September 30,December 21, 2020 2020June 30, 2020 March 31, 2020 December 31, 2019 2019June 30, 2019 March 31, 2019 December 31, 2018 Residential customer information: Households served 59,274 56,787 53,067 49,684 47,744 45,228 42,760 40,338 37,351 Households passed (b) 149,622 147,087 144,869 143,505 140,986 137,269 132,984 127,253 122,396 Households served/passed 39.6 % 38.6 % 36.6 % 34.6 % 33.9 % 32.9 % 32.2 % 31.7 % 30.5 % Total households in current markets 171,121 171,121 171,121 171,121 160,884 159,974 159,974 152,840 152,840 (a) Earnings before interest, income taxes, depreciation, and amortization ("EBITDA") is a supplemental non-GAAP performance measure that is frequently used in capital-intensive industries such as telecommunications. ALLO's management uses EBITDA to compare ALLO's performance to that of its competitors and to eliminate certain non-cash and non-operating items in order to consistently measure performance from period to period. EBITDA excludes interest and income taxes because these items are associated with a company's particular capitalization and tax structures. EBITDA also excludes depreciation and amortization expense because these non-cash expenses primarily reflect the impact of historical capital investments, as opposed to the cash impacts of capital expenditures made in recent periods, which may be evaluated through cash flow measures. The Company reports EBITDA for ALLO because the Company believes that it provides useful additional information for investors regarding a key metric used by management to assess ALLO's performance. There are limitations to using EBITDA as a performance measure, including the difficulty associated with comparing companies that use similar performance measures whose calculations may differ from ALLO's calculations. In addition, EBITDA should not be considered a substitute for other measures of financial performance, such as net income or any other performance measures derived in accordance with GAAP. A reconciliation of EBITDA from net income (loss) under GAAP is presented under "Summary and Comparison of Operating Results" in the table above. (b) Represents the number of single residence homes, apartments, and condominiums that ALLO already serves and those in which ALLO has the capacity to connect to its network distribution system without further material extensions to the transmission lines, but have not been connected. 53 -------------------------------------------------------------------------------- ASSET GENERATION AND MANAGEMENT OPERATING SEGMENT - RESULTS OF OPERATIONS Loan Portfolio As ofDecember 31, 2020 , the AGM operating segment had a$19.6 billion loan portfolio, consisting primarily of federally insured loans, that management anticipates will amortize over the next approximately 20 years and has a weighted average remaining life of 9.8 years. For a summary of the Company's loan portfolio as ofDecember 31, 2020 and 2019, see note 4 of the notes to consolidated financial statements included in this report. Loan Activity The following table sets forth the activity of AGM's loan portfolio:
Year ended
2020 2019 Beginning balance$ 20,798,719 22,520,498 Loan acquisitions: Federally insured student loans 1,327,690 1,530,294 Private education loans 152,048 71,543 Consumer loans 136,985 405,726 Total loan acquisitions 1,616,723 2,007,563 Repayments, claims, capitalized interest, and other (1,999,095) (2,511,641) Consolidation loans lost to external parties (672,211) (990,720) Consumer loans sold (185,028) (226,981) Ending balance$ 19,559,108 20,798,719 The Company has also purchased partial ownership in certain federally insured and consumer loan securitizations. As of the latest remittance reports filed by the various trusts prior toDecember 31, 2020 , the Company's ownership correlates to approximately$500 million and$280 million of federally insured and consumer loans, respectively, included in these securitizations. Allowance for Loan Losses and Loan Delinquencies OnJanuary 1, 2020 , the Company adopted 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. 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. The expected credit losses are adjusted each period for changes in expected lifetime credit losses. 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 . Results for reporting periods beginning afterJanuary 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. Management has determined that each of AGM's federally insured, private education, and consumer loan portfolios 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 credit losses. AGM's total allowance for loan losses of$175.4 million atDecember 31, 2020 represents reserves equal to 0.7% of AGM's federally insured loans (or 26.3% of the risk sharing component of the loans that is not covered by the federal guaranty), 6.1% of AGM's private education loans, and 24.9% of AGM's consumer loans. For a summary of the Company's activity in the allowance for loan losses for 2020 and 2019, and a summary of the Company's loan status and delinquency amounts as ofDecember 31, 2020 and 2019, see note 4 of the notes to consolidated financial statements included in this report. 54 -------------------------------------------------------------------------------- Loan Spread Analysis The following table analyzes the loan spread on AGM's portfolio of loans, which represents the spread between the yield earned on loan assets and the costs of the liabilities and derivative instruments used to fund the assets. The spread amounts included in the following table are calculated by using the notional dollar values found in the table under the caption "Net interest income after provision for loan losses, net of settlements on derivatives" below, divided by the average balance of loans or debt outstanding.
Year ended
2020 2019 Variable loan yield, gross 3.17 % 4.80 % Consolidation rebate fees (0.84) (0.83)
Discount accretion, net of premium and deferred origination costs amortization
0.01 0.02 Variable loan yield, net 2.34 3.99 Loan cost of funds - interest expense (1.64) (3.25) Loan cost of funds - derivative settlements (a) (b) 0.05 0.03 Variable loan spread 0.75 0.77 Fixed rate floor income, gross 0.61 0.22 Fixed rate floor income - derivative settlements (a) (c) (0.03) 0.19 Fixed rate floor income, net of settlements on derivatives 0.58 0.41 Core loan spread 1.33 % 1.18 % Average balance of AGM's loans$ 20,163,876 21,698,094 Average balance of AGM's debt outstanding 19,964,813 21,259,309 (a) Derivative settlements represent the cash paid or received during the current period to settle with derivative instrument counterparties the economic effect of the Company's derivative instruments based on their contractual terms. Derivative accounting requires that net settlements with respect to derivatives that do not qualify for "hedge treatment" under GAAP be recorded in a separate income statement line item below net interest income. The Company maintains an overall risk management strategy that incorporates the use of derivative instruments to reduce the economic effect of interest rate volatility. As such, management believes derivative settlements for each applicable period should be evaluated with the Company's net interest income (loan spread) as presented in this table. The Company reports this non-GAAP information because it believes that it provides additional information regarding operational and performance indicators that are closely assessed by management. There is no comprehensive, authoritative guidance for the presentation of such non-GAAP information, which is only meant to supplement GAAP results by providing additional information that management utilizes to assess performance. See note 6 of the notes to consolidated financial statements included in 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 2020 and 2019 periods presented in the table under the caption "Consolidated Financial Statement Impact Related to Derivatives - Statements of Income" in note 6 and in this table. A reconciliation of core loan spread, which includes the impact of derivative settlements on loan spread, to loan spread without derivative settlements follows. Year ended December 31, 2020 2019 Core loan spread 1.33 % 1.18 % Derivative settlements (1:3 basis swaps) (0.05)
(0.03)
Derivative settlements (fixed rate floor income) 0.03 (0.19) Loan spread 1.31 % 0.96 % (b) Derivative settlements consist of net settlements received related to the Company's 1:3 basis swaps. (c) Derivative settlements consist of net settlements (paid) received related to the Company's floor income interest rate swaps. 55 -------------------------------------------------------------------------------- A trend analysis of AGM's core and variable loan spreads by calendar year quarter is summarized below. [[Image Removed: nni-20201231_g4.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 7A, "Quantitative and Qualitative Disclosures About Market Risk - Interest Rate Risk," which provides additional detail on AGM's FFELP student loan assets and related funding for those assets. Variable loan spread was compressed during the first and second quarters of 2020 due to a widening 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 the significant decrease in interest rates duringMarch 2020 and the first half of the second quarter of 2020. In a declining interest rate environment, variable 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 rate resets on the Company's debt that occurs either monthly or quarterly. During the third and fourth quarters of 2020, as the Company's debt reset at lower interest rates, the Company's variable loan spread increased. See Item 7A, "Quantitative and Qualitative Disclosures About Market Risk - Interest Rate Risk," which provides additional detail on AGM's FFELP student loan assets and related funding for those assets. 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: Year ended December 31, 2020 2019 Fixed rate floor income, gross $ 123,460 49,677 Derivative settlements (a) (6,699) 40,192 Fixed rate floor income, net $ 116,761 89,869 Fixed rate floor income contribution to spread, net 0.58 % 0.41 % (a) Derivative settlements consist of net settlements (paid) received related to the Company's derivatives used to hedge student loans earning fixed rate floor income. Gross fixed rate floor income increased in 2020 as compared to 2019 due to lower interest rates in 2020 as compared to 2019. 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. The decrease in net derivative settlements (paid) 56 -------------------------------------------------------------------------------- received from the floor income interest rate swaps in 2020 as compared to 2019 was due to a decrease in the weighted average of notional amount of derivatives outstanding in 2020 as compared to 2019 and a decrease in interest rates. The Company added$2.75 billion (notional amount) of additional derivatives during the fourth quarter of 2020, resulting in a total of$4.5 billion (notional amount) of derivatives outstanding as ofDecember 31, 2020 , to hedge loans earning fixed rate floor income. See Item 7A, "Quantitative and Qualitative Disclosures About Market Risk - Interest Rate Risk," which provides additional detail on AGM'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 As ofDecember 31, 2020 , the interest earned on a principal amount of$17.8 billion in the Company's FFELP student loan asset portfolio was indexed to one-month LIBOR, and the interest paid on a principal amount of$17.1 billion of the Company's FFELP student loan asset-backed debt securities was indexed to one-month or three-month LIBOR. In addition, the majority of the Company's derivative financial instrument transactions used to manage LIBOR interest rate risks are indexed to LIBOR. A market transition away from the current LIBOR framework could result in significant changes to the interest rate characteristics of the Company's LIBOR-indexed assets and funding for those assets, as well as the Company's LIBOR-indexed derivative instruments. See Item 1A, "Risk Factors - Loan Portfolio - Interest rate risk - replacement of LIBOR as a benchmark rate." 57
--------------------------------------------------------------------------------
Summary and Comparison of Operating Results
Year ended December 31, 2020 2019 Additional information Net interest income after provision for loan losses$ 220,288 199,588
See table below for additional analysis.
Represents primarily borrower late fees. The decrease
in borrower late fees in 2020 compared to 2019 was
due to the Company suspending borrower late fees
effective
as a result of the COVID-19 pandemic. See "Overview -
Impacts of COVID-19 Pandemic - Asset Generation and Other income
7,189 13,088
Management" above for additional information.
The Company sold
33,023 17,261
consumer loans in 2020 and 2019, respectively.
In
expense of
interest in consumer loan securitization investments
as a result of the expected impacts of the COVID-19
pandemic. During the fourth quarter of 2020, the
Company reversed
to improved economic conditions. See note 7 of the Impairment expense and provision
notes to consolidated financial statements included for beneficial interests
(16,607) -
in this report.
The Company maintains an overall risk management
strategy that incorporates the use of derivative
instruments to reduce the economic effect of interest
rate volatility. Derivative settlements for each
applicable period should be evaluated with the
Company's net interest income as reflected in the Derivative settlements, net 3,679 45,406
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 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 results in an increase in the fair Derivative market value
value of the Company's floor income interest rate adjustments, net (28,144) (76,195) swaps. Total other income/expense (860) (440) Salaries and benefits 1,747 1,545
The Company recognized
2019 to extinguish asset-backed notes from certain
securitizations prior to their contractual maturity.
Excluding these costs, other expenses were
million in 2019. Other than the debt extinguishment
costs, the primary component of other expenses is
servicing fees paid to third parties. The decrease in
servicing fees in 2020 as compared to 2019 was due to Other expenses
15,806 34,445
a decrease in the Company's loan portfolio.
Amounts include fees paid to the LSS operating
segment for the servicing of the Company's loan
portfolio. These amounts exceed the actual cost of
servicing the loans. The decrease in servicing fees
in 2020 compared to 2019 was due to the expected
amortization of the Company'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. 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 39,172 47,362
services.
Total operating expenses, excluding the
of expenses in 2019 related to the extinguishment of
debt prior to their contractual maturity (as
described above), were 28 basis points and 31 basis
points of the average balance of loans in 2020 and Total operating expenses
56,725 83,352 2019, respectively. Income before income taxes 162,703 115,796 Represents income tax expense at an effective tax Income tax expense (39,049) (27,792) rate of 24%. Net income$ 123,654 88,004 Additional information:
See "Overview - GAAP Net Income and Non-GAAP Net
Income, Excluding Adjustments" above for additional
information about non-GAAP net income, excluding
derivative market value adjustments. The decrease in Net income
$ 123,654 88,004
non-GAAP net income in 2020 compared to 2019 was due
to (i) the provision expense recognized by the
Company in 2020 related to beneficial interest in
consumer loan securitizations; (ii) the decrease in Derivative market value
the average balance of loans in 2020 as compared to adjustments, net
28,144 76,195
2019; (iii) an incremental provision for loan losses
in 2020 related to the increase in expected defaults
as a result of the COVID-19 pandemic; and (iv) a
decrease in borrower late fees. These items were
partially offset by (i) an increase in core loan Tax effect (6,755) (18,287)
spread; (ii) an increase in gains from the sale of
consumer loan portfolios in 2020 as compared to 2019;
and (iii) recognizing expenses for the early
extinguishment of debt in 2019. Net income, excluding derivative market value adjustments$ 145,043 145,912 58
--------------------------------------------------------------------------------
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."
Year ended December 31, 2020 2019 Additional information
Decrease in 2020 compared to 2019 was due to a
decrease in the gross yield earned on loans and a
Variable interest income, gross
1,040,785
decrease in the average balance of loans.
Decrease was due to a decrease in the average Consolidation rebate fees (168,933) (180,701) consolidation loan balance. Discount accretion, net of premium Net discount accretion is due to the Company's and deferred origination costs
purchases of loans at a net discount over the last amortization
2,578 4,495 several years. Variable interest income, net 471,624 864,579 Decrease in 2020 compared to 2019 was due to a Interest on bonds and notes decrease in cost of funds and a decrease in the payable (326,753) (689,625)
average balance of debt outstanding.
Derivative settlements include the net settlements Derivative settlements, net (a) 10,378
5,214 received related to the Company's 1:3 basis swaps. Variable loan interest margin, net of settlements on derivatives (a) 155,249 180,168 Fixed rate floor income increased due to lower Fixed rate floor income, gross 123,460 49,677
interest rates in 2020 as compared to 2019.
Derivative settlements include the settlements
(paid) received related to the Company's floor Derivative settlements, net (a) (6,699) 40,192 income interest rate swaps. Fixed rate floor income, net of settlements on derivatives 116,761 89,869 Core loan interest income (a) 272,010 270,037
Decrease was due to lower interest rates and lower
weighted average cash and restricted cash balances Investment interest
16,390 17,707
in 2020 as compared to 2019.
Decrease was due to lower interest rates and lower
weighted average debt outstanding in 2020 as Intercompany interest (1,404) (3,750)
compared to 2019.
Provision for loan losses - See "Allowance for Loan Losses and Loan federally insured loans (18,691) (8,000) Delinquencies" included above under "Asset Provision for loan losses - Generation and Management Operating Segment - private education loans (6,155) - Results of Operations. Provision for loan losses - consumer loans (38,183) (31,000)
Net interest income (net of settlements on
derivatives - and excluding provision for loan
losses) for 2020 and 2019 was
as compared to 2019 was due to an increase in core provision for loan losses (net of
loan spread, partially offset by a decrease in the
settlements on derivatives) (a)
244,994
average 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 6 of the notes to consolidated financial statements included in 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 2020 and 2019 periods presented in the table under the caption "Consolidated Financial Statement Impact Related to Derivatives - Statements of Income" in note 6 and in this table. 59 -------------------------------------------------------------------------------- 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. The Company may issue equity and debt securities in the future in order to improve capital, increase liquidity, refinance upcoming maturities, or provide for general corporate purposes. Moreover, the Company may from time-to-time repurchase certain amounts of its outstanding secured debt securities, including debt securities which the Company may issue in the future, for cash and/or through exchanges for other securities. Such repurchases or exchanges may be made in open market transactions, privately negotiated transactions, or otherwise. Any such repurchases or exchanges will depend on prevailing market conditions, the Company's liquidity requirements, contractual restrictions, compliance with securities laws, and other factors. The amounts involved in any such transactions may be material. The Company has historically utilized operating cash flow, secured financing transactions (which include warehouse facilities and asset-backed securitizations), operating lines of credit, and other borrowing arrangements to fund its Asset Generation and Management operations and loan acquisitions. In addition, the Company has used operating cash flow, borrowings on its unsecured line of credit, repurchase agreements, and unsecured debt offerings to fund corporate activities; business acquisitions; solar, real estate, and other investments; repurchases of common stock; and repurchases of its own debt. Recent Developments As discussed above under "Overview - Recapitalization and Additional Funding for ALLO," onOctober 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. As part of the transactions, onOctober 15, 2020 , ALLO received proceeds of$197.0 million from SDC as the purchase price payment by SDC for the issuance of membership units of ALLO, and redeemed$160.0 million of non-voting preferred membership units of ALLO held by the Company. Upon the receipt of regulatory approvals onDecember 21, 2020 , 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 of ALLO, and the Company deconsolidated ALLO from the Company's consolidated financial statements. OnJanuary 19, 2021 , ALLO closed on 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, ALLO redeemed a portion of its non-voting preferred membership units held by the Company 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 ALLO to redeem, on or beforeApril 2024 , the remaining preferred membership units of ALLO held by the Company, plus the amount of accrued and unpaid preferred return on such units. As ofJanuary 19, 2021 , the outstanding preferred membership units of ALLO held by the Company was$129.7 million . The preferred membership units 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. As part of the ALLO recapitalization transaction, the Company and SDC entered into an agreement, in which the Company has a contingent payment obligation to pay SDC a contingent payment amount of$25.0 million to$35.0 million in the event the Company disposes of its voting membership units of ALLO that it holds and realizes from such disposition certain targeted return levels. The Company recognized the estimated fair value of the contingent payment obligation as ofDecember 31, 2020 to be$2.3 million , which is included in "other liabilities" on the consolidated balance sheet.Nelnet Bank OnNovember 2, 2020 , the Company obtained final approval from theFDIC for federal deposit insurance and for a bank charter from the UDFI in connection with the establishment ofNelnet Bank , andNelnet 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 60 -------------------------------------------------------------------------------- million of student loan asset-backed securities. In addition, the Company made a pledged deposit of$40.0 million withNelnet Bank , as required under an agreement with theFDIC discussed below. Prior toFDIC approval,Nelnet Bank ,Nelnet, Inc. (the parent), andMichael S. Dunlap (Nelnet, Inc.'s controlling shareholder) entered into a Capital and Liquidity Maintenance Agreement and a Parent Company Agreement with theFDIC in connection withNelnet, Inc.'s role as a source of financial strength forNelnet Bank . As part of the Capital and Liquidity Maintenance Agreement,Nelnet, Inc. is obligated to (i) contribute capital toNelnet Bank for it to maintain capital levels that meetFDIC 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 ofNelnet Bank in an amount equal to the greater of either 10 percent ofNelnet Bank's total assets or such additional amount as agreed to byNelnet Bank andNelnet, Inc. ; (iii) provide additional liquidity toNelnet Bank in such amount and duration as may be necessary forNelnet Bank to meet its ongoing liquidity obligations; and (iv) establish and maintain a pledged deposit of$40.0 million withNelnet Bank . Based on the current business plan forNelnet Bank and its strong financial condition after the first few months of operations, 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 toNelnet Bank for the next two to three years. Sources of Liquidity The Company has historically generated positive cash flow from operations. For the years endedDecember 31, 2020 and 2019, the Company's net cash provided by operating activities was$212.8 million and$298.9 million , respectively. As ofDecember 31, 2020 , the Company had cash and cash equivalents of$121.2 million . The Company also had a portfolio of available-for-sale investments, consisting primarily of student loan asset-backed securities, with a fair value of$348.6 million as ofDecember 31, 2020 . As ofDecember 31, 2020 , the Company had participated$118.6 million of these securities, and such participation is reflected as debt on the Company's consolidated balance sheet. The Company also has a$455.0 million unsecured line of credit that matures onDecember 16, 2024 . As ofDecember 31, 2020 , there was$120.0 million outstanding on the unsecured line of credit and$335.0 million was available for future use. Subsequent toDecember 31, 2020 , the Company paid down the full balance outstanding on the line of credit, and as ofFebruary 25, 2021 ,$455.0 million was available for future use. The line of credit provides that the Company may increase the aggregate financing commitments, through the existing lenders and/or through new lenders, up to a total of$550.0 million , subject to certain conditions. In addition, the Company has a$22.0 million secured line of credit agreement that matures onMay 30, 2022 . As ofDecember 31, 2020 , the secured line of credit had$5.0 million outstanding with$17.0 million 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 ofDecember 31, 2020 , the Company holds$40.1 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; 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 year endedDecember 31, 2020 , the Company generated$212.8 million from operating activities, compared to$298.9 million for the same period in 2019. The decrease in cash flows from operating activities was due to: •The adjustments to net income for derivative market value adjustments; •Adjustments to net income for the impact of the gains from the deconsolidation of ALLO and sale of loans and investments; and •The impact of changes to other liabilities and the due to customers liability account in 2020 as compared to 2019. 61 -------------------------------------------------------------------------------- These factors were partially offset by: •The increase in net income; •Adjustments to net income for the impact of the non-cash provision for loan losses and impairment charges; •A decrease in net payments to the Company's clearinghouse for margin payments on derivatives; and •The impact of changes to accounts receivable and other assets in 2020 as compared to 2019. 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 year endedDecember 31, 2020 was$621.2 million and$1.10 billion , respectively. Cash provided by investing activities and used in financing activities for the year endedDecember 31, 2019 was$1.52 billion and$1.79 billion , respectively. Investing and financing activities are further addressed in the discussion that follows. Liquidity Needs and Sources of Liquidity Available to Satisfy Debt Obligations Secured by Loan Assets and Related Collateral The following table shows the Company's debt obligations outstanding that are secured by loan assets and related collateral.
As of
Carrying amount Final maturity
Bonds and notes issued in asset-backed securitizations
5/27/25 - 10/25/68 FFELP, private education, and consumer loan warehouse facilities 428,371 2/13/22 - 2/26/23$ 19,315,291 Bonds and Notes Issued in Asset-backed Securitizations The majority of the Company'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 the Company receives on the loans and cost of financing within these transactions, and (ii) the servicing and administration fees the Company earns from these transactions, the Company has created a portfolio that will generate earnings and significant cash flow over the life of these transactions. As ofDecember 31, 2020 , based on cash flow models developed to reflect management's current estimate of, among other factors, prepayments, defaults, deferment, forbearance, and interest rates, the Company currently expects future undiscounted cash flows from its portfolio to be approximately$2.30 billion as detailed below. The forecasted cash flow presented below includes all loans funded in asset-backed securitizations as ofDecember 31, 2020 . As ofDecember 31, 2020 , the Company had$19.0 billion of loans included in asset-backed securitizations, which represented 96.8 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 ofDecember 31, 2020 , private education and consumer loans funded with operating cash, loans acquired subsequent toDecember 31, 2020 , and loans owned byNelnet Bank . 62 -------------------------------------------------------------------------------- Asset-backed Securitization Cash Flow Forecast$2.30 billion (dollars in millions) [[Image Removed: nni-20201231_g5.jpg]] The forecasted future undiscounted cash flows of approximately$2.30 billion include approximately$1.19 billion (as ofDecember 31, 2020 ) 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$1.11 billion , or approximately$0.84 billion after income taxes based on the estimated effective tax rate, is expected to be accretive to the Company'sDecember 31, 2020 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$185 million to$215 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$55 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. There is significant uncertainty regarding the availability of LIBOR as a benchmark rate after 2021, and any 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. In addition, the COVID-19 pandemic may impact forecasted cash flows from the Company's asset- 63 -------------------------------------------------------------------------------- backed securitizations. See Item 1A, "Risk Factors - Loan Portfolio - Interest rate risk - replacement of LIBOR as a benchmark rate," and "Risk Factors - 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." 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 7A, "Quantitative and Qualitative Disclosures About Market Risk - Interest Rate Risk." 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 ofDecember 31, 2020 , the Company had two FFELP warehouse facilities with an aggregate maximum financing amount available of$310.0 million , of which$252.2 million was outstanding and$57.8 million was available for additional funding. One warehouse facility has a static advance rate until the expiration date of the liquidity provisions (May 20, 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 (May 20, 2022 ). The other warehouse facility has a static advance rate that requires initial equity for loan funding and does not require increased equity based on market movements. As ofDecember 31, 2020 , the Company had$21.2 million advanced as equity support on these facilities. For further discussion of the Company's FFELP warehouse facilities outstanding atDecember 31, 2020 , see note 5 of the notes to consolidated financial statements included in this report. The Company has a private education loan warehouse facility that, as ofDecember 31, 2020 , had an aggregate maximum financing amount available of$200.0 million , an advance rate of 80 to 90 percent, liquidity provisions throughFebruary 13, 2021 , and a final maturity date ofFebruary 13, 2022 . As ofDecember 31, 2020 ,$150.4 million was outstanding under this warehouse facility,$49.6 million was available for future funding, and$16.4 million was advanced as equity support. OnFebruary 12, 2021 , the liquidity provisions on this facility were extended toFebruary 13, 2022 , the final maturity was extended toFebruary 13, 2023 , and the maximum facility amount was decreased to$175.0 million . The Company has a consumer loan warehouse facility that has an aggregate maximum financing amount available of$100.0 million , an advance rate of 70 or 75 percent depending on the type of collateral and subject to certain concentration limits, liquidity provisions toApril 23, 2021 , and a final maturity date ofApril 23, 2022 . As ofDecember 31, 2020 ,$25.8 million was outstanding under this facility,$74.2 million was available for future funding, and$11.5 million 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. 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. In December of 2020, Wells Fargo announced the sale of its approximately$10 billion portfolio of private education student loans representing approximately 475,000 borrowers. In conjunction with the sale, the Company was selected as servicer of the portfolio and will begin servicing the portfolio following a series of loan transfers during the first half of 2021. In addition, the Company has entered into agreements to participate in a joint venture to acquire the portfolio. The Company expects to own approximately 8 percent of the interest in the loans and, dependent upon financing, currently expects to invest approximately$100 million as part of the acquisition. In addition, the Company will serve as the sponsor and administrator for loan securitizations on behalf of the purchaser group as the loans are securitized, and provide the required level of risk retention as the loans are permanently financed. This transaction is expected to close during the first half of 2021, with the securitizations occurring subsequent to closing. The Company plans to fund additional loan acquisitions and related investments using current cash and investments; using its unsecured line of credit, using its Union Bank participation agreement (as described below); using its existing warehouse 64 -------------------------------------------------------------------------------- facilities (as described above); increasing the capacity under existing and/or establishing new warehouse facilities; and continuing to access the asset-backed securities market. 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 ofDecember 31, 2020 ,$874.2 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 2020, the Company completed five FFELP asset-backed securitizations totaling$1.6 billion (par value). The proceeds from these transactions were used primarily to refinance student loans included in the Company's FFELP warehouse facilities. See note 5 of the notes to consolidated financial statements included in 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 Hedging ActivitiesThe 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 ofDecember 31, 2020 , 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 6 of the notes to consolidated financial statements included in this report for additional information on the Company's derivative portfolio. Other Debt Facilities As discussed above, the Company has a$455.0 million unsecured line of credit with a maturity date ofDecember 16, 2024 . As ofDecember 31, 2020 , the unsecured line of credit had$120.0 million outstanding and$335.0 million was available for future use. As ofFebruary 25, 2021 , no amounts were outstanding on the line of credit and$455.0 million was available for future use. The Company also has a$22.0 million secured line of credit agreement with a maturity date ofMay 30, 2022 . As ofDecember 31, 2020 , the secured line of credit had$5.0 million outstanding with$17.0 million available for future use. The line of credit is secured by several Company-owned properties. Upon the maturity date of these 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 student loan asset-backed securities. As ofDecember 31, 2020 ,$118.6 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. 65 -------------------------------------------------------------------------------- For further discussion of these debt facilities described above, see note 5 of the notes to consolidated financial statements included in this report. Debt Repurchases Due to the Company's positive liquidity position and opportunities in the capital markets, the Company has repurchased its own debt over the last several years, and may continue to do so in the future. See note 5 of the notes to consolidated financial statements included in this report for information on debt repurchased by the Company during the last three years. 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 endingMay 7, 2022 . As ofDecember 31, 2020 , 3,246,732 shares remain authorized for repurchase under the Company's stock repurchase program. Shares may be repurchased from time to time depending on various factors, including share prices and other potential uses of liquidity. Shares repurchased by the Company during 2020 and 2019 are shown below. Certain of these repurchases were made pursuant to a trading plan adopted by the Company in accordance with Rule 10b5-1 under the Securities Exchange Act of 1934.
Purchase price (in Average price of shares
Total shares repurchased thousands) repurchased (per share) Year ended December 31, 2020 1,594,394 $ 73,358 $ 46.01 Year ended December 31, 2019 726,273 40,411 55.64 Included in the shares repurchased during 2019 in the table above are a total of 180,000 shares of Class A common stock the Company purchased onJune 17, 2019 fromShelby J. Butterfield , a significant shareholder of the Company, and from theButterfield Family Trust , an estate planning trust for the family ofStephen F. Butterfield , the Company's former Vice-Chairman. Included in the shares repurchased during 2020 are a total of 100,000 shares of Class A common stock the Company purchased onMay 27, 2020 fromShelby J. Butterfield . The shares purchased in 2019 and 2020 were purchased at a discount to the closing market price of the Company's Class A common stock as ofJune 17, 2019 , andMay 27, 2020 , respectively, and the transactions were separately approved by the Company's Board of Directors. Immediately prior to the Company's purchase of such shares fromMs. Butterfield and theButterfield Family Trust , the purchased shares were shares of the Company's Class B common stock thatMs. Butterfield and theButterfield Family Trust converted to shares of Class A common stock. Dividends Dividends of$0.20 per share on the Company's Class A and Class B common stock were paid onMarch 13, 2020 ,June 15, 2020 , andSeptember 15, 2020 , respectively, and a dividend of$0.22 per share was paid onDecember 15, 2020 . The Company's Board of Directors declared a first quarter 2021 cash dividend on the Company's Class A and Class B common stock of$0.22 per share. The dividend will be paid onMarch 15, 2021 , to shareholders of record at the close of business onMarch 1, 2021 . The Company currently plans to continue making regular quarterly dividend payments, subject to future earnings, capital requirements, financial condition, and other factors. Off-Balance Sheet Arrangements The Company does not have any off-balance sheet arrangements that have or are reasonably likely to have a current or future effect on its financial condition, revenues or expenses, results of operations, liquidity, capital expenditures, or capital resources that are material to investors. 66 -------------------------------------------------------------------------------- Contractual Obligations The Company's contractual obligations were as follows:
As of
Total Less than 1 year 1 to 3 years 3 to 5 years More than 5 years Bonds and notes payable (a)$ 19,558,849 118,558 433,371 218,761 18,788,159 Operating lease liabilities 20,796 6,578 6,795 2,986 4,437 Total$ 19,579,645 125,136 440,166 221,747 18,792,596 (a) Amounts exclude interest as substantially all bonds and notes payable carry variable rates of interest. As ofDecember 31, 2020 , the Company had a reserve of$16.0 million for uncertain income tax positions (including the federal benefit received from state positions). This obligation is not included in the above table as the timing and resolution of the income tax positions cannot be reasonably estimated at this time. CRITICAL ACCOUNTING POLICIES AND ESTIMATES This Management's Discussion and Analysis of Financial Condition and Results of Operations discusses the Company's consolidated financial statements, which have been prepared in accordance with accounting principles generally accepted inthe United States . The preparation of these financial statements requires management to make estimates and assumptions that affect the reported amounts of assets and liabilities and the reported amounts of income and expenses during the reporting periods. The Company bases its estimates and judgments on historical experience and on various other factors that the Company believes are reasonable under the circumstances. Actual results may differ from these estimates under varying assumptions or conditions. Note 3 of the notes to consolidated financial statements included in this report includes a summary of the significant accounting policies and methods used in the preparation of the consolidated financial statements. On an on-going basis, management evaluates its estimates and judgments, particularly as they relate to accounting policies that management believes are most "critical" - that is, they are most important to the portrayal of the Company's financial condition and results of operations and they require management's most difficult, subjective, or complex judgments, often as a result of the need to make estimates about the effect of matters that are inherently uncertain. Management has identified the allowance for loan losses as a critical accounting policy. Allowance for Loan Losses The allowance for loan losses represents the Company's estimate of the expected lifetime credit losses inherent in loan receivables as of the balance sheet date. The adequacy of the allowance for loan losses is assessed quarterly and the assumptions and models used in establishing the allowance are evaluated regularly. Because credit losses can vary substantially over time, estimating credit losses requires a number of assumptions about matters that are uncertain. Such assumptions are discussed below, and such uncertainty is due in part to the fact that loans in the Company's portfolio mature over the next 20 years (with a weighted average remaining life of 9.8 years), and actual credit losses will be affected by, among other things, future economic conditions and future personal financial situations for borrowers, over that extended time frame. Changes in the Company's assumptions affect "provision for loan losses" on the Company's consolidated income statements and the "allowance for loan losses" contained within "loans and accrued interest receivable, net of allowance for loan losses" on the Company's consolidated balance sheets. For additional information regarding our allowance for loan losses, see note 3 of the notes to consolidated financial statements included in this report. The Company estimates the allowance for loan losses for receivables that share similar risk characteristics based on a collective assessment using a combination of measurement models and management judgment. The models consider factors such as historical trends in credit losses, recent portfolio performance, and forward-looking macroeconomic conditions. The models vary by portfolio type including FFELP, private education, and consumer loans. If management does not believe the models reflect lifetime expected credit losses for the portfolio, an adjustment is made to reflect management judgment regarding qualitative factors including economic uncertainty, observable changes in portfolio performance, and other relevant factors. The Company's allowance for credit losses is based on various assumptions including: probability of default; loss given default; exposure at default; net loss rates for its consumer portfolio; contractual terms, including prepayments; forecast period; reversion method; reversion period; and macroeconomic factors, including unemployment rates, gross domestic product, and the consumer price index. 67
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The allowance for loan losses is made at a specific point in time and based on relevant information as discussed above. The allowance for loan losses is maintained at a level management believes is appropriate to provide for expected lifetime credit losses inherent in loan receivables as of the balance sheet date. This evaluation is inherently subjective because it requires numerous estimates made by management. These estimates are subjective in nature and involve uncertainties and matters of significant judgement. Changes in estimates could significantly affect the Company's recorded balance for the allowance for loan losses. ACCOUNTING STANDARDS ISSUED BUT NOT YET ADOPTED The following standard may have an impact on the Company's consolidated financial statements and disclosures. ASU 2019-12, Simplifying the Accounting for Income Taxes. InDecember 2019 , theFinancial Accounting Standards Board issued a new accounting standard that simplifies the accounting for income taxes by removing several exceptions in the current standard and adding guidance to reduce complexity in certain areas. The new standard clarifies that an entity may elect to, but is not required to, reflect an allocation of consolidated current and deferred tax expense for non-taxable legal entities that are treated as disregarded by taxing authorities in their separately issued financial statements. The new standard is effective for fiscal years, and interim periods within those fiscal years, beginning afterDecember 15, 2020 . The Company has determined to not reflect the allocation of income taxes in the financial statements of its disregarded entities, and thus the Company currently believes this standard will not have a significant impact on the Company's consolidated financial statements.
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