2020
Annual Report
From Resilience Grows Optimism
February 25, 2021
Dear Shareholder:
2020 will be a pivotal year in peoples’ memory. Most certainly, people for generations to come will reflect upon the
global pandemic that consumed the attention of the planet. During the pandemic came historic tension because of
racial injustices, unprecedented climate-driven events, and a brutal national election process.
In mid-December, USA Today ran a survey that asked the question “In a single word, how would you describe the
year 2020?” Twenty-three percent of people responded “awful, terrible, or horrible.” Fifteen percent responded
with “[expletive].” (Frankly, that would have been my response.) Eleven percent responded with “challenging or
difficult.” Ten percent said “disaster, catastrophic, hell.” Eight percent responded with “crazy, wild, unpredictable.”
Six percent said “tumultuous, turbulent, whirlwind, or chaotic,” five percent said “anxious, stressful, or depressing,”
and five percent said “OK, wonderful, good.” Only five percent classified it as a good year.
It made me think about how I would categorize Nelnet’s year in one word. Pretty quickly, it came to me: resilient.
Our earnings came in at an all-time high of $9.02 per share, including resilient core earnings, but also large gains
from our ALLO and Hudl investments. Because of the pandemic, we also incurred large expenses for increases in
provision for loan losses and impairment charges on certain investments. Every one of our core businesses rose to
the year’s challenges and navigated uncharted waters that made all of us extremely proud of our fellow associates.
In 2019, we spent a lot of time rededicating our people to stay focused on our core values and our purpose to serve
our customers, our associates, our communities, and our shareholders. It could not have been better timing coming
into the insanity of the year 2020.
// Pandemic and Working From Home
When the pandemic came into full focus in early March, we moved approximately 6,000 associates from an office
environment to working from home in one week – and we did it with virtually zero disruption to our customers. We
stayed focused on the health and welfare of our customers, our associates and their families, and our communities. We
never lost sight of the financial health and bottom line of the corporation. As a senior management team, we remain
dedicated stewards of the capital we have been entrusted to manage.
2020 Letter to Shareholders | Page 1
// NextGen Federal Servicing Procurement
In addition to managing through the pandemic and the work from home environment, the largest uncertainty for
our company in the last year has been actions by the federal government surrounding the student loan servicing
procurement called the Next Generation Financial Servicing Environment (NextGen). NextGen is made up of
components including the core servicing system, or Enhanced Processing System (EPS), and the customer service and
processing work, or Business Process Operations (BPO), that is performed for borrowers using those systems. The
procurement process has been rife with challenges and changes over the last five years. At the start of the pandemic,
the Department of Education (Department) eliminated two of the three bidders in the EPS component, including
Nelnet, and subsequently cancelled that version of the system procurement. They later awarded BPO contracts to
other entities, but to our knowledge those contracts have not been implemented. The federal government has since
issued another procurement and has then put that version on hold during the transition to the new Administration. We
remain hopeful that the most recent procurement will move forward, and we are optimistic that, as we are continually
the top-rated servicer in the nation, we will play an important role in government-funded loan servicing in the future.
// Loan Forgiveness
In the lead-up to the presidential election and in the current budget cycle, there has been significant public discussion
and debate around the forgiveness of student loans. As the largest unsecured consumer lender in the world, the
federal government has taken on the huge burden of lending $1.7 trillion to students. There are many sides to the
discussion and the potential impact on the cost of higher education, on existing borrowers, and on future borrowers,
as the government lends $140 billion in new funding each year. We are hopeful and confident that thoughtful policies
will be implemented that are best for the people truly in need. We are ready to help implement those policies however
we can when the decisions are finalized.
// Diversity and Inclusion
Diversity and inclusion have become an extremely important topic of discussion in companies across the country. To
be crystal clear, Nelnet has always been committed to equality in all forms, including race, gender, ethnic background,
and sexual orientation. Nelnet leadership believes equality to be a key component in its corporate culture and crucial
to the health of any organization. We believe organizational culture is set by the tone at the top and by implementing
processes to ensure the intended culture is represented throughout an organization.
Following the murder of George Floyd last summer, Nelnet made an unwavering commitment to stand in support of
the Black community and be a part of the long-term solution to systemic racism and inequality in the world - because
Black lives matter. For the leadership at Nelnet, it is important not to just make a statement, but to put meaningful,
sustained, and multi-faceted action behind our words by working to ensure equitable opportunity and treatment for
all people of color.
2020 Letter to Shareholders | Page 2
Our leaders chose to focus on distinct initiatives where we believe we can use the company’s resources, influence, and
data to create real change.
As part of Nelnet’s commitment to deepen its support of organizations advancing racial and socioeconomic equality
and social justice, we created the Service, Not Silence fundraising and volunteer campaign. Through this fundraiser,
Nelnet associates could donate to local and national organizations advancing these issues. The money raised
was matched by the Nelnet Foundation 3:1. The company created an aggressive goal of $1 million to give to these
organizations and Nelnet hit that goal in a short period of time.
To further Nelnet’s objective of creating an awesome work environment and furthering associate development, Better
Together, Nelnet’s Diversity, Equity, and Inclusion Program, launched a robust mentoring program. The program is
available to all associates, prioritizing mentorships for associates from underrepresented racial and ethnic groups.
Having opportunities to build meaningful relationships with leadership is always a motivator to keep associates
engaged. Associates participating in this program are partnered with tenured Nelnet leaders for guidance, support,
and coaching. Better Together has also provided training sessions for all associates on cultural competence and
unconscious bias. We also revised our scholarship program for the children of Nelnet associates to better recognize
minority and low-income students.
We have changed new hire recruiting methods, tactics, and strategies in order to increase pools of minority, female,
veteran, and disabled candidates, in addition to creating specific programs to increase diversity throughout the
company focused on race and gender.
The company is making progress in the number of women working in leadership positions across the organization.
Nelnet’s Board of Directors has an equal number of women and men, excluding our Executive Chairman Mike Dunlap.
The company has acknowledged that people of color are underrepresented in leadership positions at Nelnet, and this
needs to change. We are committed to have our workforce reflect the diversity in our communities. We know that we
are not alone in corporate America in facing or tackling this challenge, and we are committed to the work.
Pay equity is equal pay for work and experience of equal value. By paying associates fairly and consistently based on
the role they perform, working conditions, and market data, companies can ensure that associates are not paid based
on factors like gender, race, or ethnicity. We know that subjective factors can play a role in compensation, to the
associate’s disadvantage or to their advantage.
Nelnet launched a supplier diversity program to help us develop relationships with minority and women-owned
companies to meet our business needs. In fact, we are committing to significantly increase our IT infrastructure
spending with minority-owned suppliers.
The Nelnet leadership team has committed to bringing analytical rigor to measuring and maintaining our progress in
order to hold ourselves accountable for creating real change on all these fronts.
2020 Letter to Shareholders | Page 3
// Nelnet Renewable Energy
I mentioned our funding of solar energy projects via tax equity financing in last year’s letter, and I’m proud to say that
Nelnet continues to make a positive, indirect impact on the environment. We have now funded or committed to fund
$149 million for the development and operations of over 214 megawatts of power at 86 community solar sites across
the country. We continue to be encouraged by the financial yields offered by these investments and believe the federal
tax incentives and operational cash flows are a great fit within our capital deployment strategy.
Though it is counterintuitive, the accounting for these investments requires a significant write-down of these
investments in the initial couple of years followed by a corresponding write-up in the latter years of investment.
Meanwhile, the cash flow of these investments is front-loaded such that the next capital outlay at any given time is not
significant. Though these investments may create unusual impacts to our earnings each year, we like the cash flows they
generate. By the end of the hold period, the economic gain realized will also be realized in our earnings.
As we’ve previously discussed, Nelnet continues to be innovative and provide value in current and new markets with
existing and new services. In this regard, during 2020 we have expanded our footprint within renewable energy to be
more than simply an investor but rather look to diversify and grow our service offering within the industry. Based on
customer feedback, we determined there was a need in the market that we were well positioned to solve. We leveraged
our loan servicing infrastructure and expertise to launch a solar subscription acquisition and management business for
solar projects that are selling power to commercial and residential off-takers. In addition, we are utilizing our tax equity
underwriting, market relationships, and asset management proficiency to bring other tax equity co-investors into the
financing of solar projects. The renewable energy team is focused on continued innovation to diversify the services
we offer and grow the margin earned within this space. We remain optimistic about the growth of this business and
our ability to provide value within it, especially with the direction of the new Administration, corporate America, the
momentum toward socially responsible management, and the need to combat climate change.
// Nelnet Diversified Services
It was anything but a dull year within our loan servicing operation. The division showed its resiliency amid a significant
amount of volatility which is demonstrated in its revenue for the year of over $497 million. The earnings for the year
were a bit choppy due to multiple events tied to the federal government and the pandemic. The Coronavirus Aid,
Relief, and Economic Security Act (CARES Act), which was passed by Congress and signed into law by President
Trump on March 27, 2020, effectively put all direct student loans into a zero-interest forbearance status. In response,
the Department of Education’s office of Federal Student Aid lowered the rates that it pays student loan servicers per
borrower due to the unique status of all loans going into forbearance.
As you can imagine, the COVID forbearance took away a significant portion of NDS’s workload. We knew we had an
opportunity to find new things for our associates in these roles to do so we could retain these hard-working associates.
This was especially important when keeping in mind that at some point all the loans will exit the forbearance status and
millions of borrowers will need trained and experienced people to help them navigate back into repayment. Further
complicating the process was the unknown date of when the CARES Act forbearance would end – as of the publication
of this letter, President Biden has extended it through September 30, 2021.
2020 Letter to Shareholders | Page 4
We were able to leverage hundreds of our associates for different opportunities that were presenting themselves as a
part of the pandemic, such as for the states of Nebraska and Wisconsin to help process record levels of unemployment
claims and to perform contact tracing. Although these activities did not fully offset the lost revenue due to the CARES
Act, they did help mitigate the severity and helped us retain people to be able to serve borrowers once it expires.
Another excellent opportunity presented itself toward the end of the year when Wells Fargo launched a process
to sell its $10 billion private student loan portfolio and the accompanying servicing business. We have always
prided ourselves on opportunistic acquisitions of loan portfolios. Taking on that level of servicing in one fell swoop
is definitely within the ordinary course of business given our level of expertise and experience. However, the
approximately $1 billion dollars of capital to fund the 10 times leverage one can put on a private loan portfolio was a
bit larger than our appetite for capital investment in a single transaction. We were fortunate enough to join with some
large entities who funded the vast majority of equity in the transaction and we will assume all of the servicing, growing
our number of private loan servicing borrowers by over 70%. We are looking forward to executing this transaction
during the first half of 2021 and putting up to $100 million of additional capital to work as a partial owner of the assets.
With these successes and the continued deployment of the Velocity loan servicing system we remain optimistic about
the future of our servicing business.
// Nelnet Financial Services
There are many products and services we offer within our Nelnet Financial Services division, but the primary revenue
and net income driver is our student loan asset management business, which is driven by loan volume and how we
finance those loans in the capital markets. As you are all acutely aware, 2020 saw many highs and lows in the capital
markets. We went into the pandemic-induced downturn well-positioned to take advantage of market turmoil – and
emerged stronger nine months later. This is another shining example of the resiliency of our business.
From a macro perspective, the sudden drop in interest rates was very beneficial to our fixed rate loan portfolio that
was only partially hedged. Moreover, during the depth of the crisis, we spent $33 million to acquire student loan
residuals with 15% to 20% expected returns. Those residuals effectively correlate to approximately $550 million in
loans and complement the $1.6 billion in whole loans we acquired during the year. Lastly, the disruption in fixed
income trading caused spreads to widen to levels not seen since the credit crisis. We were buyers throughout 2020
and capitalized on the lower prices to add over $400 million to our assets under management at Whitetail Rock, our
SEC-registered investment advisor.
2020 Letter to Shareholders | Page 5
// Nelnet Bank
More great news came in 2020 with the launch of Nelnet Bank. After years of hard work, we felt very fortunate to
be granted approval by the FDIC and Utah Department of Financial Institutions for federal deposit insurance and an
Industrial Bank Charter, respectively. After the charter was granted, our bank team worked tirelessly to stand up the
entity and we launched Nelnet Bank on November 2. It was the first new industrial bank launched since 2008.
A true virtual bank with one physical location in Salt Lake City, Nelnet Bank is now receiving institutional deposits and
making loans every day. We are elated at this accomplishment and confident we can add value to our customers, our
communities, and our shareholders with state-of-the-art systems and loan products. We believe the bank will be a
key part of our asset replacement strategy as our FFELP program continues to run off. We are originating refinance
loans and will be launching an in-school private student loan product in 2021. We could not be more excited about
innovation at Nelnet in the form of a new bank launch.
// Nelnet Business Services
Nelnet Business Services (NBS) is a diversified international business that specializes in facilitating education
commerce. Our diversified revenue streams are resilient in challenging times because most of our revenue streams are
recurring in nature. In fact, resilience is the perfect way to describe Nelnet Business Services’ performance in 2020.
Our ability to increase earnings 6% over 2019 was the financial measure of resilience. The year could have been much
different under COVID-19 than what we experienced. The effort to achieve consistent earnings was the direct result of
a solid business model, loyal customers, and the adaptability of the Nelnet Business Services team members.
We could not be prouder of the way our team members responded to pandemic impacts. Once at home, our team
members continued to perform at high levels, efficiency did not decline, calls were answered, chats were completed,
and emails sent – all because of a resilient team of people dedicated to the mission of our clients.
I also want to give a special thanks to our Australian team members. Australia, and our office in Melbourne, was
effectively shut down for the longest period of any of our locations. The team in Australia exhibited resolve and
resilience in dealing with the most significant restrictions anywhere in our company.
NBS produced more net income in 2020 than in 2019. We begin 2021 with anticipation that vaccine deployment will
return both K-12 education and higher education to normalcy in the fall of 2021. Our team members stand ready to
support our clients, our families, and our students no matter what the future brings.
2020 Letter to Shareholders | Page 6
// FACTS Management
We serve over 11,000 private faith-based K-12 schools in the United States and in over 50 countries worldwide. Our
revenue streams from these schools are derived from licensing fees for software used to manage schools, transaction-
based fees for creating and presenting bills, processing payments, and offering deferred payment plans to help
families afford tuition. Of particular importance this year was our capability to process financial aid applications.
Traditionally, we supported our school clients in processing applications from families and evaluating whether they
qualify for need-based aid, and then allocating limited funds in the form of need-based scholarships. Because of
the design of our flexible systems and service capability, we were able to help states allocate CARES Act funding to
families struggling with COVID-19 financial impacts to keep their children in a school of their choice.
Throughout the last half of the year, our Nelnet Business Services division was working on two strategic acquisitions
that eventually closed at year-end: Catholic Faith Technologies (CFT), based in Overland Park, Kan. and Higher School
Instructional Services (Higher School), based in New York City.
CFT was formed in 2010 and has a powerful and customizable learning and content management platform for
churches and non-education corporate customers – two markets where we are looking to expand our NBS products
and services. Their platform is branded as CFT in the faith-based market and as CD2 Learning (CD2) in the public and
private business sector.
The expansion into online learning management technologies for church and faith-based communities complements
our Aware3 church member engagement platform. Like our FACTS Management business, CFT has a relationship
with over 35 Archdioceses and ministries in the U.S., as well as internationally. This acquisition allows us to continue to
advance our mission to “Make Educational Dreams Possible with Service and Technology.” Additionally, CD2 will meet
one of our primary initiatives to diversify and grow in new vertical markets.
There are lots of students falling behind despite the efforts of our public and private school systems. We are
committed to helping students catch up through FACTS Education Solutions. FACTS Education Solutions helps
students catch up through focused tutoring services paid for by the Department’s Title I Program. We also help
teachers with professional development through the Title II program. Both programs were in great demand as
teachers needed to learn how to teach virtually and help kids that had a difficult time with the transition.
The acquisition of Higher School as of December 31, 2020 complements FACTS Education Solutions’ existing business.
Founded in 2004, Higher School has an outstanding reputation in the academic services market and is dedicated to
improving outcomes for their students and educators.
Over the past nine years, Higher School has developed a strong partnership with approximately 50 Yeshiva schools
in New York City, one of the fastest growing faith-based markets in the country. Higher School's experience and deep
knowledge of the largest K-12 system in the U.S. will support FACTS Education Solutions’ continued growth.
2020 Letter to Shareholders | Page 7
// Nelnet Campus Commerce
In the United States and Australia, Nelnet Campus Commerce serves over 1,200 higher education institutions. In 2020,
higher education saw a significant decrease in enrollment, with many students taking gap years when faced with the
prospect of losing an in-person higher education learning experience. Our business was resilient to lower enrollment,
because of the recurring nature of our revenue streams, and because of the high retention rate and loyalty we achieve
with our higher education clients. However, most of the services we offer remain enrollment dependent – for example,
the creation and presentation of a bill to a student, helping a student or family with a deferred payment plan, or a
payment or refund processed for a student.
The loyalty we have to our clients and they have to us has been built up over many years. This was reflected in the
high retention rates we maintained with our clients and, in almost every case, we were able to maintain or grow these
service relationships. We look forward to seeing expanded enrollment in higher education with vaccine deployment
and the return of more students to campus in the fall of 2021.
// Nelnet Communication Services
Another shining beacon in the Nelnet portfolio of companies in 2020 was the validation of the business model and
our investment in ALLO Communications. As the pandemic unfolded, it became absolutely clear to everyone that high
speed broadband is critical in a work from home, school from home, teach from home environment – not to mention
the impact of social distancing on gaming and remote social activities. In my household, everyone put massive
simultaneous stress on our ALLO internet. I am like tens of thousands of our customers; I can’t even imagine living
without it. As I have previously stated publicly, if my family had to choose between me and their ALLO service,
I don’t think it would be a very difficult decision. The demand from mid-sized cities and rural areas for ALLO’s
service is insatiable.
With the growing demand for fiber becoming greater and greater throughout the year, we decided to enter into
a transaction in the fourth quarter to restructure ALLO’s balance sheet and provide additional funding for ALLO’s
growth. SDC Capital Partners invested $197 million for an approximate 48% equity interest in ALLO. Nelnet retained
just over 45%. The investment, combined with ALLO’s $230 million debt facility structured in January of 2021, will
position ALLO for accelerated growth not solely reliant upon Nelnet. As a result of these transactions, ALLO paid
Nelnet $260 million to redeem preferred interests held by Nelnet. Currently, Nelnet holds approximately $130 million
of additional preferred ALLO interests earning 6.25%. Overall, Nelnet recognized a pretax gain of $259 million in
the fourth quarter, or more than $5.00 per share in 2020. As a result, ALLO is now treated as an equity-method
investment and no longer consolidated as part of Nelnet’s financial statements.
2020 Letter to Shareholders | Page 8
// Hudl
Resilience was also a key theme for Hudl in 2020. When sports paused globally in March, the company quickly worked
to strengthen its capital position and launch a number of new initiatives. This ensured the company could stay true to
its mission and serve coaches, athletes, and analysts in the best way possible.
Hudl launched its Return to Play initiative, allowing schools to sign a multi-year agreement to upgrade to a school-wide
package. These deals provided both short-term budget relief for the school and long-term account growth for the
company. Most importantly, these school-wide packages promote equity across sports and genders by providing the
same tools for all athletes and coaches. In total, around 4,000 schools participated in Hudl’s Return to Play program.
Last year, we discussed Hudl’s acquisition of the Italy-based company Wyscout. Wyscout boasts the largest soccer
video archive in the world, with more than 210,000 full matches analyzed across 90 countries, and more than 550,000
players profiled on the platform. Since the acquisition, Hudl has worked to integrate Wyscout into Hudl’s family of
products and expand distribution through the company’s global sales reach. That work couldn’t have proven more
timely as travel restrictions shut down global talent scouting and recruiting efforts, pushing everyone to video
scouting and leading to significant increases in platform utilization.
Two years ago, we talked about Hudl’s acquisition of the Netherlands-based company Incatec and the subsequent
launch of Hudl Focus, the company’s automatic capture, upload, and livestream solution. Hudl Focus played a huge
role this year to help teams make every moment count. With fan restrictions in most of the country, schools relied even
more on the company’s livestream offering to keep fans and athletes connected. In 2020, the company roughly tripled
the number of Hudl Focus cameras installed.
Not to be left behind, the company’s media division – focused on highlights, athletes, fans, and brands – saw
significant brand partnership growth in 2020. More brands turned to the platform for unique ways to connect with
both athletes and the company’s highly-coveted demographic of fans.
As we’ve shared before, Hudl completed a significant financing round in May 2020. In addition to Nelnet’s
approximately $26 million participation in the round and further funding from other current investors, Hudl also added
Bain Capital’s expertise to the mix. As part of the round, all investors have the opportunity to participate in a follow-on
investment in May 2021, and Nelnet expects to fully participate in the second tranche.
// Mike Dunlap's Thoughts on the Market
It is our goal for each Nelnet shareholder to record a gain or loss in market value proportional to the gain or loss
in per-share fundamental value recorded by the company. To achieve this goal, we strive to maintain a one-to-one
relationship between the company’s fundamental value and market price. As that implies, we would rather see Nelnet’s
stock price at a fair level than at an artificial level. Our fair value approach may not be preferred by all investors, but we
believe it aligns with Nelnet’s long-term approach to both our business model and market value. However, from time
to time Mrs./Mr. Market can be irrational and will materially overvalue or undervalue the investment style they
currently love.
2020 Letter to Shareholders | Page 9
Here’s an excerpt from an article I wrote in February 2000:
“’Internet/NASDAQ,’ ‘Biotech,’ ‘Nifty Fifty,’ ‘1929.’ What do all of these things have in common? They are all
speculative bubbles. Today, there are warning signs we may be in a speculative bubble. Many believe it is different this
time, that we are in a new paradigm. However, fear and greed still run the market. Currently we are in the greed phase.
People are buying stock, not based on the discounted cash flow the stock will pay out to shareholders, but with a hope
and prayer a greater fool will buy it from them in the near future for a far higher price.”
Today, we are once again living in wild and crazy times. How do you know you are in a bubble? My dad’s 84-year-old
close friend asked me to explain Bitcoin and whether or not he should buy some. Some other friends are asking me
about GameStop and AMC Theaters. What happens when the government increases liquidity exponentially, maybe
infinitely, and pours trillions of dollars of cash into the economy? When there is more money than investable assets?
The magic about the market is it will create new options. Many companies with negative earnings, suspect business
plans, and questionable long-term prospects are entering the public markets through IPOs, direct listings, and Special
Purpose Acquisition Companies (SPACs) for billions and billions of dollars.
In May 1999, I went to a Young Presidents’ Organization Technology University in San Francisco. I have many
interesting, funny, and informative memories from this meeting, but I am going to share the top three.
Number 3. In the 20 years from 1979 to 1999, there was more wealth created within a twenty-mile radius of
downtown San Francisco than in all of Europe since World War II. I would guess if you did the same analysis again
from 1999-2021 it may be true again.
Number 2. e.Schwab was set up as a distinct separate company with its own offices across town. In 18 months, the
new e.Schwab took over the original Charles Schwab.
Number 1. I was in a small breakout session with about 20 c-suite executives with several new dot.com companies
and the likes of Yahoo, Palm, Amazon, and CNET. The CEO of Williams-Sonoma was presenting. Howard Lester
was 67 years old and had worked decades of blood, sweat, and tears to build Williams-Sonoma into a household
brand. At the time, the company had roughly a $2 billion market value and around $100 million in earnings. One
interesting fact that he shared was that wherever they had a store location their mail order sales increased tenfold.
But the funniest and truest thing he said was, “Someday all of you dot.com companies are going to have to make
real money and you can take your Yahoo money and shove it up your a$#.”
What does any of this have to do with Nelnet? I am now the 57-year-old version of Howard. I am not sure how funny
I think it is when all of these companies that lose money, but are master marketers at selling hype, are going public
quickly while the market is hot through SPACs (giving up to 20% dilution in exchange for speed and ease) for multiples
of Nelnet’s market value. The magic question I ask myself is how many will be here 22 years from now? Our goal at
Nelnet is to be here decades into the future and for our stock to trade for a fair value. When we make investments and
buy businesses, we look at the discounted cash we will create over time and then look for ways to reinvest that cash
into the future. As you read in Jeff’s letter, we have a decent track record. We are owner shareholders and treat our
shareholders’ cash like it is our own – because it is.
2020 Letter to Shareholders | Page 10
Could Nelnet hype, spin out, and financially engineer a short-term higher market value? Maybe. Would that help our
customers? Our associates? Our communities? We would argue it would hurt all three. It may help our shareholders
in the short term, but long term we see no value and most likely it would create negative long-term value because of
the added costs, distractions, and lack of diversification. But, someone could use the new spun out stock as currency
to buy other overpriced, overhyped companies. So, are we going to merge our cash flowing great businesses with
another company’s hype, dreams, negative cash flow, and potential prospects that must perform perfectly to justify
the value? Where is the margin of error on the projections if everything doesn’t go perfectly? We would then have
50% of the cash flow supporting 100% of an inflated market value of the combined entity. If we were to do this ten
times and subsequently don’t find a greater fool to cash out to in time, we would all be left with pennies on the
dollar. What about the additional cost and impact to our customers caused by the distraction, or the impact to our
associates, and communities? We have always worked to balance all four of our constituencies (customers, associates,
communities, and shareholders).
I wish all of our shareholders had the exact same investment philosophy, objectives and time frame as I do but I realize
that we do have a diverse group of smart people in our shareholder group. That said, the bottom line is if you are
looking for the quick pop in value you may get from Bitcoin, or the newest hyped entrant to the market, then Nelnet is
the wrong investment. If you want us to invest your money for the long term, we will try and maximize the long term
cash flow and long term sustainable value to the best of our abilities.
One last thought: an example of the overexuberance of the internet bubble is the market value of SoftBank. Their
stock price has been increasing recently and is just now nearing its record price from February 2000. Excluding
dividends, which there have been a few under 1% in recent years, their return has been close to zero for the last 21
years. Another example of overexuberance is the Japanese stock market that just surpassed their price from 1990.
So, if you had bought an index fund on the Japanese stock market in 1990 your return excluding dividends would have
been zero for the last 31 years. From the time I went to the conference in May 1999 to today, Berkshire Hathaway has
gone up five times from $73,000 per share to $365,000 per share and Williams-Sonoma’s stock price has increased
from $8 to $126, or 15 times your money, excluding dividends. If you are a long-term investor, are you sure you want to
invest in the Yahoo money?
Capital Deployment By Year (in millions)
FFELP loan/residual acquisitions, net of financing
Private and consumer loan/residual acquisitions, net of financing
Business acquisitions
Nelnet Bank
ALLO acquisition and capital expenditures
Other capital expenditures (non-ALLO)
Hudl investment
Other investments (venture capital/real estate/solar)
Debt repurchases
Stock repurchases
Dividends
2013
2014
2015
2016
2017
2018
2019
2020
8-Year Total
$38
$68
-
-
-
$17
-
$20
$79
$13
$19
$127
$17
$47
-
-
$26
$1
$45
$47
$16
$19
$140
$173
-
-
$47
$17
$41
$53
$42
$96
$19
-
$61
-
-
$39
$29
-
$22
$77
$69
$21
-
$75
-
-
$115
$41
$10
$19
$181
$69
$24
$105
$188
$153
-
$87
$38
-
$67
$13
$45
$27
$71
$61
-
-
$45
$48
-
$141
$71
$30
$100
$48
$65
$26
$103
$396
-
$40
$29
$26
$73
$32
$622
$714
$230
$100
$381
$281
$78
$725
$465
$421
$190
$254
$345
$628
$318
$534
$723
$397
$1,008
$4,207
2020 Letter to Shareholders | Page 11
Nelnet’s Corporate Performance (Annual Percentage Change)
Nelnet Per Share Book Value
With Dividends Included
Nelnet Per Share Market Value
With Dividends Included
S&P 500
With Dividends Included
Net Income Reinvested1
(in millions)
2004
2005
2006
2007
2008
2009
2010
2011
2012
2013
2014
2015
2016
2017
2018
2019
2020
CAGR/Total
49.2%
41.5%
6.3%
(1.6%)
6.6%
21.0%
23.7%
22.6%
16.7%
26.1%
21.1%
16.0%
15.4%
8.8%
9.9%
6.2%
15.6%
17.3%
20.2%
51.1%
(32.7%)
(52.5%)
13.3%
20.7%
41.6%
4.9%
27.5%
42.8%
10.9%
(26.6%)
52.7%
9.1%
(3.2%)
12.7%
23.7%
8.4%
10.9%
4.9%
15.8%
5.5%
(37.0%)
26.5%
15.1%
2.1%
16.0%
32.4%
13.7%
1.4%
12.0%
21.8%
(4.4%)
31.5%
18.4%
9.6%
$149
$181
$6
($63)
$24
$135
$115
$160
$89
$271
$273
$153
$166
$80
$156
$72
$247
$2,214
1We believe well-managed companies do not distribute to the shareholders all their earnings. Instead, they retain a part of their earnings and reinvest the
capital to grow the business. Since going public in late 2003, the company has recognized $3.2 billion in cumulative net income and, of that amount, has
reinvested $2.2 billion – or 69% of our earnings over time – back into the business.
2020 Letter to Shareholders | Page 12
// Closing
Without a doubt we have some strong opinions about the debt and equity markets and our focus on running Nelnet
for the long term. When we look ahead, we often say it is hard to plan too many years out as the speed of change in
the world is inspiring. As we grow and navigate uncharted waters in the post-pandemic era, our goal is to be able to
adapt, innovate, and implement change quickly within our company.
If we were to summarize in one word what we believe will describe 2021, it would be optimism. We believe in the
resiliency of humankind and specifically in the resiliency of America and the American Dream. Although it may be
cautious optimism, we are still very excited about all of the businesses we are in as we have extreme faith in our people
and the culture we have built to empower them to provide our customers with exceptional service and ensure we are
good stewards of the capital you have entrusted us to invest.
Dream. Learn. Grow.
Jeff Noordhoek, Chief Executive Officer
Nelnet Board of Directors
Michael S.
Dunlap
James P.
Abel
David
Graff
Thomas E.
Henning
Preeta
Bansal
Joann
Martin
William R.
Cintani
Kathleen A.
Farrell Ph.D.
Kimberly
Rath
Nelnet Bank Board of Directors
Michael S.
Dunlap
Crawford
Cragun
Tim
Tewes
Jaime
Pack
Carine Strom
Clark
Connie
Edmond
Anthony
Goins
Andrea
Moss
2020 Letter to Shareholders | Page 13
Forward-Looking and Cautionary Statements
This letter to shareholders contains forward-looking statements within the meaning of federal securities laws. The words “anticipate,” “believe,”
“continue,” “could,” “estimate,” “expect,” “future,” “intend,” “may,” “plan,” “potential,” “predict,” “should,” “will,” “would,” and similar expressions, as well
as statements in future tense, are intended to identify forward-looking statements. These statements are based on management's current expectations
as of the date of this letter and are subject to known and unknown risks, uncertainties, assumptions, and other factors that may cause the actual results
and performance to be materially different from any future results or performance expressed or implied by such forward-looking statements. Such risks
and uncertainties include, but are not limited to: risks and uncertainties related to the severity, magnitude, and duration of the Coronavirus Disease 2019
("COVID-19") pandemic, including changes in the macroeconomic environment and consumer behavior, restrictions on business, educational, individual,
or travel activities intended to slow the spread of the pandemic, and volatility in market conditions resulting from the pandemic; risks related to the ability
to successfully maintain and increase allocated volumes of student loans serviced by the company under existing and any future servicing contracts with
the Department, which current contracts accounted for 27 percent of the company's revenue in 2020; risks to the company related to the Department's
initiatives to procure new contracts for federal student loan servicing and awards of contracts to other parties, including the pending and uncertain
nature of the Department's procurement process, the possibility that awards or other evaluations of proposals may be challenged by various interested
parties and may not be finalized or implemented for an extended period of time or at all, risks that the company may not be successful in obtaining any
of such potential new contracts, and risks related to the company's ability to comply with agreements with third-party customers for the servicing of
loans; risks related to the company's loan portfolio, such as interest rate basis and repricing risk and changes in levels of loan repayment or default rates;
the use of derivatives to manage exposure to interest rate fluctuations; the uncertain nature of expected benefits from FFEL Program, private education,
and consumer loan purchases and initiatives to purchase additional FFEL Program, private education, and consumer loans; financing and liquidity risks,
including risks of changes in the securitization and other financing markets for loans; risks and uncertainties from changes in terms of education loans
and in the educational credit and services marketplace resulting from changes in applicable laws, regulations, and government programs and budgets,
such as changes resulting from the Coronavirus Aid, Relief, and Economic Security Act and the expected decline over time in FFEL Program loan interest
income due to the discontinuation of new FFEL Program loan originations in 2010 and the resulting initiatives by the company to adjust to a post-FFEL
Program environment; risks and uncertainties of the expected benefits from the November 2020 launch of Nelnet Bank operations, including the ability
to successfully conduct banking operations and achieve expected market penetration; risks related to the expected benefits to the company and to ALLO
from the recapitalization and additional funding for ALLO and the company’s continuing investment in ALLO, and risks related to investments in solar
projects, including risks of not being able to realize tax credits which remain subject to recapture by taxing authorities; risks and uncertainties related to
other initiatives to pursue additional strategic investments, acquisitions, and other activities, such as the planned transactions associated with the sale by
Wells Fargo of its private education loan portfolio, including activities that are intended to diversify the company both within and outside of its historical
core education-related businesses; risks from changes in economic conditions and consumer behavior; cybersecurity risks, including potential disruptions
to systems, disclosure of confidential information, and/or damage to reputation resulting from cyber-breaches; and changes in the general interest rate
environment, including the availability of any relevant money-market index rate such as LIBOR or the relationship between the relevant money-market
index rate and the rate at which the company's assets and liabilities are priced.
For more information, see the "Risk Factors" sections and other cautionary discussions of risks and uncertainties included in documents filed or furnished
by the company with the Securities and Exchange Commission (SEC), including the most recent form 10-K filed by the company with the SEC. All forward-
looking statements in this letter are as of the date of this letter. Although the company may voluntarily update or revise its forward-looking statements from
time to time to reflect actual results or changes in the company's expectations, the company disclaims any commitment to do so except as required by law.
2020 Letter to Shareholders | Page 14
10-K
UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
FORM 10-K
(Mark One)
☒ ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
For the fiscal year ended December 31, 2020
☐ TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
For the transition period from to .
or
COMMISSION FILE NUMBER 001-31924
NELNET, INC.
(Exact name of registrant as specified in its charter)
Nebraska
(State or other jurisdiction of incorporation or organization)
121 South 13th Street, Suite 100
Lincoln, Nebraska
(Address of principal executive offices)
84-0748903
(I.R.S. Employer Identification No.)
68508
(Zip Code)
Registrant’s telephone number, including area code: (402) 458-2370
SECURITIES REGISTERED PURSUANT TO SECTION 12(b) OF THE ACT:
Title of each class
Class A Common Stock, Par Value $0.01 per Share
Trading Symbol
NNI
Name of each exchange on which registered
New York Stock Exchange
SECURITIES REGISTERED PURSUANT TO SECTION 12(g) OF THE ACT: None
Indicate by check mark if the registrant is a well-known seasoned issuer, as defined in Rule 405 of the Securities Act. Yes ☒ No ☐
Indicate by check mark if the registrant is not required to file reports pursuant to Section 13 or Section 15(d) of the Act. Yes ☐ No ☒
Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange
Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been
subject to such filing requirements for the past 90 days. Yes ☒ No ☐
Indicate by check mark whether the registrant has submitted electronically every Interactive Data File required to be submitted pursuant to
Rule 405 of Regulation S-T (§232.405 of this chapter) during the preceding 12 months (or for such shorter period that the registrant was
required to submit such files). Yes ☒ No ☐
Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, a smaller reporting
company, or an emerging growth company. See the definitions of “large accelerated filer,” “accelerated filer,” “smaller reporting company,”
and "emerging growth company" in Rule 12b-2 of the Exchange Act.
Large accelerated filer ☒
Non-accelerated filer ☐
Accelerated filer ☐
Smaller reporting company ☐
Emerging growth company ☐
If an emerging growth company, indicate by check mark if the registrant has elected not to use the extended transition period for complying
with any new or revised financial accounting standards provided pursuant to Section 13(a) of the Exchange Act. ☐
Indicate by check mark whether the registrant has filed a report on and attestation to its management’s assessment of the effectiveness of its
internal control over financial reporting under Section 404(b) of the Sarbanes-Oxley Act (15 U.S.C. 7262(b)) by the registered public
accounting firm that prepared or issued its audit report. ☒
Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Act). Yes ☐ No ☒
The aggregate market value of the registrant’s voting common stock held by non-affiliates of the registrant on June 30, 2020 (the last business
day of the registrant’s most recently completed second fiscal quarter), based upon the closing sale price of the registrant’s Class A Common
Stock on that date of $47.74 per share, was $918,743,888. The registrant’s Class B Common Stock is not listed for public trading on any
exchange or market system, but shares of Class B Common Stock are convertible into shares of Class A Common Stock at any time on a
share-for-share basis. For purposes of this calculation, shares of common stock beneficially owned by any director or executive officer of the
registrant or by any person who beneficially owns greater than 10 percent of the Class A Common Stock or who is otherwise believed by the
registrant to be in a control position have been excluded, since such persons may be deemed to be affiliates of the registrant. This
determination of affiliate status is not conclusive for other purposes.
As of January 31, 2021, there were 27,195,862 and 11,155,571 shares of Class A Common Stock and Class B Common Stock, par value
$0.01 per share, outstanding, respectively (excluding 11,305,731 shares of Class A Common Stock held by wholly owned subsidiaries).
DOCUMENTS INCORPORATED BY REFERENCE
Portions of the registrant’s definitive Proxy Statement to be filed for its 2021 Annual Meeting of Shareholders, scheduled to be held May 20,
2021, are incorporated by reference into Part III of this Form 10-K.
NELNET, INC.
FORM 10-K
TABLE OF CONTENTS
December 31, 2020
Forward-Looking and Cautionary Statements............................................................................................
2
PART I
Item 1.
Item 1A.
Item 1B.
Item 2.
Item 3.
Item 4.
Item 5.
Item 6.
Item 7.
Business..........................................................................................................................
Risk Factors.....................................................................................................................
Unresolved Staff Comments...........................................................................................
Properties........................................................................................................................
Legal Proceedings...........................................................................................................
Mine Safety Disclosures.................................................................................................
PART II
Market for Registrant's Common Equity, Related Stockholder Matters, and Issuer
Purchases of Equity Securities...............................................................................
Selected Financial Data...................................................................................................
Management's Discussion and Analysis of Financial Condition and Results of
Operations..............................................................................................................
Item 7A.
Quantitative and Qualitative Disclosures About Market Risk........................................
Item 8.
Item 9.
Item 9A.
Item 9B.
Item 10.
Item 11.
Item 12.
Item 13.
Item 14.
Item 15.
Item 16.
Financial Statements and Supplementary Data...............................................................
Changes in and Disagreements with Accountants on Accounting and Financial
Disclosure...............................................................................................................
Controls and Procedures.................................................................................................
Other Information...........................................................................................................
PART III
Directors, Executive Officers, and Corporate Governance.............................................
Executive Compensation.................................................................................................
Security Ownership of Certain Beneficial Owners and Management and Related
Stockholder Matters...............................................................................................
Certain Relationships and Related Transactions, and Director Independence...............
Principal Accountant Fees and Services.........................................................................
PART IV
Exhibits and Financial Statement Schedules..................................................................
Form 10-K Summary......................................................................................................
Signatures....................................................................................................................................................
3
19
33
33
33
33
34
35
35
68
72
72
72
74
75
75
75
75
75
76
82
83
Appendix A
Description of The Federal Family Education Loan Program........................................
A-1
FORWARD-LOOKING AND CAUTIONARY STATEMENTS
This report contains forward-looking statements and information that are based on management's current expectations as of the date of this
document. Statements that are not historical facts, including statements about the Company's plans and expectations for future financial condition,
results of operations or economic performance, or that address management's plans and objectives for future operations, and statements that assume or
are dependent upon future events, are forward-looking statements. The words “anticipate,” “assume,” “believe,” “continue,” “could,” “estimate,”
“expect,” “forecast,” “future,” “intend,” “may,” “plan,” “potential,” “predict,” “scheduled,” “should,” “will,” “would,” and similar expressions, as
well as statements in future tense, are intended to identify forward-looking statements.
The forward-looking statements are based on assumptions and analyses made by management in light of management's experience and its perception
of historical trends, current conditions, expected future developments, and other factors that management believes are appropriate under the
circumstances. These statements are subject to known and unknown risks, uncertainties, assumptions, and other factors that may cause the actual
results and performance to be materially different from any future results or performance expressed or implied by such forward-looking
statements. These factors include, among others, the risks and uncertainties set forth in “Risk Factors” and elsewhere in this report, and include such
risks and uncertainties as:
•
•
•
•
•
•
•
•
•
•
•
risks and uncertainties related to the severity, magnitude, and duration of the Coronavirus Disease 2019 (“COVID-19”) pandemic, including
changes in the macroeconomic environment and consumer behavior, restrictions on business, educational, individual, or travel activities
intended to slow the spread of the pandemic, and volatility in market conditions resulting from the pandemic, including interest rates, the
value of equities, and other financial assets;
risks related to the ability to successfully maintain and increase allocated volumes of student loans serviced by the Company under existing
and any future servicing contracts with the U.S. Department of Education (the "Department"), which current contracts accounted for 27
percent of the Company's revenue in 2020, risks to the Company related to the Department's initiatives to procure new contracts for federal
student loan servicing, including the pending and uncertain nature of the Department's NextGen and ISS procurement processes (under
which awards of new NextGen contracts have been made to other service providers), the possibility that awards or evaluations of proposals
may be challenged by various interested parties and may not be finalized or implemented for an extended period of time or at all, risks that
the Company may not be successful in obtaining any of such potential new contracts, and risks related to the Company's ability to comply
with agreements with third-party customers for the servicing of Federal Direct Loan Program, Federal Family Education Loan Program (the
"FFEL Program" or "FFELP"), and private education and consumer loans;
loan portfolio risks such as interest rate basis and repricing risk resulting from the fact that the interest rate characteristics of the student
loan assets do not match the interest rate characteristics of the funding for those assets, the risk of loss of floor income on certain student
loans originated under the FFEL Program, risks related to the use of derivatives to manage exposure to interest rate fluctuations,
uncertainties regarding the expected benefits from purchased securitized and unsecuritized FFELP, private education, and consumer loans
and initiatives to purchase additional FFELP, private education, and consumer loans, and risks from changes in levels of loan prepayment
or default rates;
financing and liquidity risks, including risks of changes in the general interest rate environment, including the availability of any relevant
money market index rate such as LIBOR or the relationship between the relevant money market index rate and the rate at which the
Company's assets and liabilities are priced, and changes in the securitization and other financing markets for loans, including adverse
changes resulting from unanticipated repayment trends on student loans in FFELP securitization trusts that could accelerate or delay
repayment of the associated bonds, which may increase the costs or limit the availability of financings necessary to purchase, refinance, or
continue to hold student loans;
risks from changes in the terms of education loans and in the educational credit and services markets resulting from changes in applicable
laws, regulations, and government programs and budgets, such as changes resulting from the Coronavirus Aid, Relief, and Economic
Security Act (the "CARES Act") and the expected decline over time in FFELP loan interest income due to the discontinuation of new
FFELP loan originations in 2010 and potential government initiatives or legislative proposals to consolidate existing FFELP loans to the
Federal Direct Loan Program or otherwise allow FFELP loans to be refinanced with Federal Direct Loan Program loans;
risks related to a breach of or failure in the Company's operational or information systems or infrastructure, or those of third-party vendors,
including cybersecurity risks related to the potential disclosure of confidential loan borrower and other customer information, the potential
disruption of the Company's systems or those of third-party vendors or customers, and/or the potential damage to the Company's reputation
resulting from cyber-breaches;
uncertainties inherent in forecasting future cash flows from student loan assets and related asset-backed securitizations;
risks and uncertainties of the expected benefits from the November 2020 launch of Nelnet Bank operations, including the ability to
successfully conduct banking operations and achieve expected market penetration;
risks related to the expected benefits to the Company and to ALLO Communications LLC (“ALLO”) from the recapitalization and
additional funding for ALLO and the Company’s continuing investment in ALLO, and risks related to investments in solar projects,
including risks of not being able to realize tax credits which remain subject to recapture by taxing authorities;
risks and uncertainties related to other initiatives to pursue additional strategic investments, acquisitions, and other activities, such as the
planned transactions associated with the sale by Wells Fargo of its private education loan portfolio, including activities that are intended to
diversify the Company both within and outside of its historical core education-related businesses; and
risks and uncertainties associated with litigation matters and with maintaining compliance with the extensive regulatory requirements
applicable to the Company's businesses, reputational and other risks, including the risk of increased regulatory costs resulting from the
politicization of student loan servicing, and uncertainties inherent in the estimates and assumptions about future events that management is
required to make in the preparation of the Company's consolidated financial statements.
All forward-looking statements contained in this report are qualified by these cautionary statements and are made only as of the date of this document.
Although the Company may from time to time voluntarily update or revise its prior forward-looking statements to reflect actual results or changes in
the Company's expectations, the Company disclaims any commitment to do so except as required by law. In this report, unless the context indicates
otherwise, references to "Nelnet," "the Company," "we," "our," and "us" refer to Nelnet, Inc. and its subsidiaries.
2
ITEM 1. BUSINESS
Overview
PART I.
Nelnet 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. Substantially all
revenue from external customers is earned, and all long-lived assets are located, in the United States.
The Company was formed as a Nebraska corporation in 1978 to service federal student loans for two local banks. The
Company built on this initial foundation as a servicer to become a leading originator, holder, and servicer of federal student
loans, principally consisting of loans originated under the Federal Family Education Loan Program. A detailed description of
the FFEL Program is included in Appendix A to this report.
The Health Care and Education Reconciliation Act of 2010 (the “Reconciliation Act of 2010”) discontinued new loan
originations under the FFEL Program, effective July 1, 2010, and requires that all new federal student loan originations be made
directly by the Department through the Federal Direct Loan Program. This law does not alter or affect the terms and conditions
of existing FFELP loans.
As a result of the Reconciliation Act of 2010, the Company no longer originates new FFELP loans. However, a significant
portion of the Company's income continues to be derived from its existing FFELP student loan portfolio. As of December 31,
2020, the Company had a $20.2 billion loan portfolio, consisting primarily of FFELP loans, that management anticipates will
amortize over the next approximately 20 years and has a weighted average remaining life of 9.8 years. Interest income on the
Company's existing FFELP loan portfolio will decline over time as the portfolio is paid down. However, since July 1, 2010,
which is the effective date on and after which no new loans can be originated under the FFEL Program, the Company has
purchased $27.9 billion of FFELP loans from other FFELP loan holders looking to exit or adjust their FFELP businesses. The
Company believes there may be additional opportunities to purchase FFELP portfolios to generate incremental earnings and
cash flow. However, since all FFELP loans will eventually run off, a key objective of the Company is to reposition itself for the
post-FFELP environment.
To reduce its reliance on interest income from FFELP loans, the Company has expanded its services and products. This
expansion has been accomplished through internal growth and innovation as well as business acquisitions. The Company is also
actively expanding its private education and consumer loan portfolios, and in November 2020 launched Nelnet Bank (as further
discussed below). In addition, the Company has been servicing federally owned student loans for the Department since 2009.
Recent Developments
ALLO’s Recapitalization and Additional Funding
On October 1, 2020, the Company entered into various agreements with SDC 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. On October 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 on December 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 of
$133.0 million, 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 of
$228.5 million, and accounts for such investment as a separate equity investment. As a result of the deconsolidation of ALLO
on December 21, 2020, the Company recognized a gain of $258.6 million in the fourth quarter of 2020.
On January 19, 2021, ALLO closed on certain private debt financing facilities from unrelated third-party lenders providing for
an aggregate financing of up to $230.0 million. With proceeds from this transaction, ALLO redeemed a portion of its non-
3
voting preferred membership units held by the Company in exchange for an aggregate redemption price payment to the
Company of $100.0 million.
See note 2 of the notes to consolidated financial statements included in this report for additional information related to the
ALLO recapitalization. ALLO’s results of operations, prior to deconsolidation, are presented by the Company as a reportable
operating segment.
Nelnet Bank
On November 2, 2020, the Company obtained final approval from the Federal Deposit Insurance Corporation (“FDIC”) for
federal deposit insurance and for a bank charter from the Utah Department of Financial Institutions (“UDFI”) in connection
with the establishment of Nelnet Bank, and Nelnet Bank launched operations. Nelnet Bank operates as an internet Utah-
chartered industrial bank franchise focused on the private education loan marketplace, with a home office in Salt Lake City,
Utah. Nelnet Bank operates as a subsidiary of the Company, and the industrial bank charter allows the Company to maintain its
other diversified business offerings.
Operating Segments
The Company’s reportable operating segments are summarized below. Business activities and operating segments that are not
reportable are combined and included in "Corporate and Other Activities."
Loan Servicing and Systems (“LSS”)
•
•
•
Referred to as Nelnet Diversified Services (“NDS”)
Focuses on student and consumer loan origination services and servicing, loan origination and servicing-related
technology solutions, and outsourcing business services
Includes the brands Nelnet Diversified Solutions, Nelnet Loan Servicing, Nelnet Servicing, Great Lakes
Educational Loan Services, Inc. (“Great Lakes”), Firstmark Services, GreatNet, and Nelnet Renewable Energy
Education Technology, Services, and Payment Processing (“ETS&PP”)
•
•
•
Referred to as Nelnet Business Services (“NBS”)
Includes the brands FACTS, Nelnet Campus Commerce, PaymentSpring, FACTS Education Solutions, Aware3,
HigherSchool Instructional Services, Catholic Faith Technologies, CD2 Learning, and Nelnet International
Services include tuition payment plans and billing, financial needs assessment services, online payment and
refund processing, school information system software, payment technologies, and professional development and
educational instruction services
Communications
•
•
Includes the operations of ALLO prior to the deconsolidation of ALLO on December 21, 2020
Focuses on providing fiber optic service directly to homes and businesses for internet, telephone, and television
services
Asset Generation and Management (“AGM”)
•
•
Also referred to as Nelnet Financial Services
Includes the acquisition and management of student and other loan assets
Nelnet Bank
•
Internet Utah-chartered industrial bank focused on the private education loan marketplace
A more detailed description of each of the Company's reportable operating segments and Corporate and Other Activities is
provided below.
Loan Servicing and Systems
The primary service offerings of this operating segment include:
•
•
•
•
•
Servicing federally-owned student loans for the Department
Servicing FFELP loans
Originating and servicing private education and consumer loans
Backup servicing for FFELP, private education, and consumer loans
Providing student loan servicing software and other information technology products and services
4
•
•
Customer acquisition, management services, and backup servicing for community solar developers
Providing outsourced services including call center, processing, technology, and marketing services
As of December 31, 2020, the Company serviced $490.2 billion of loans for 15.2 million borrowers. See Part II, Item 7 -
Management's Discussion and Analysis of Financial Condition and Results of Operations (the “MD&A”) - “Loan Servicing and
Systems Operating Segment - Results of Operations - Student Loan Servicing Volumes” for additional information related to
the Company's servicing volume.
Servicing federally-owned student loans for the Department
Nelnet Servicing, LLC (“Nelnet Servicing”), a subsidiary of the Company, and Great Lakes, acquired by the Company in
February 2018, are two of the four large private sector companies (referred to as Title IV Additional Servicers, or “TIVAS”)
that have student loan servicing contracts awarded by the Department in June 2009 to provide servicing for loans owned by the
Department. The Department has also awarded contracts to four not-for-profit entities (“NFP”) to service loans owned by the
Department. These loans include Federal Direct Loan Program loans originated directly by the Department and FFEL Program
loans purchased by the Department. Under the servicing contracts, Nelnet Servicing and Great Lakes earn a monthly fee from
the Department for each unique borrower who has loans owned by the Department and serviced by Nelnet Servicing or Great
Lakes, respectively. The amount paid per each unique borrower is dependent on the status of the borrower (e.g., in school or in
repayment). As of December 31, 2020, Nelnet Servicing was servicing $191.7 billion of student loans for 5.6 million borrowers
under its contract, and Great Lakes was servicing $251.6 billion of student loans for 7.6 million borrowers under its contract.
The Department is the Company's largest customer, representing 27 percent of the Company's revenue in 2020 and 66 percent
of the LSS operating segment’s revenue.
The current servicing contracts with the Department are currently scheduled to expire on June 14, 2021, but provide the
potential for an additional six-month extension at the Department’s discretion through December 14, 2021. The Consolidated
Appropriations Act, 2021, signed into law on December 27, 2020, provides that the Department may extend the period of
performance for the servicing contracts scheduled to expire on December 14, 2021 for up to two additional years to December
14, 2023.
The Department is conducting a contract procurement process entitled Next Generation Financial Services Environment
(“NextGen”) for a new framework for the servicing of all student loans owned by the Department. On January 15, 2019, the
Department issued solicitations for certain NextGen components, including the NextGen Enhanced Processing Solution
(“EPS”), which is for a technology servicing system and certain processing functions the Department planned to use under
NextGen to service the Department's student loan customers, and the NextGen Business Processing Operations (“BPO”), which
is for the back office and call center operational functions for servicing the Department's student loan customers.
On June 24, 2020, the Department awarded and signed contracts with five other companies in connection with the BPO
solicitation. On July 10, 2020, the Department cancelled the solicitation for the EPS component. In the Department's description
of its cancellation of the EPS solicitation component, the Department indicated that it continues to be committed to the goals
and vision of NextGen, and that it would be introducing a new solicitation to continue the NextGen strategy in the future. On
October 28, 2020, the Department issued a new federal loan servicing solicitation for an Interim Servicing Solution ("ISS"). ISS
was a follow-on to the existing contracts, which would award a full system and servicing solution to two providers. Under ISS,
the selected providers would have provided the technology platform to host the Department's student loan portfolio; customer
service (including contact centers) and back-office processing; digital engagement layer including borrower-facing website and
mobile-applications; intake, imaging, and fulfillment; and portfolio-level operations. As the companies awarded BPO contracts
are onboarded, contact center and back-office operations would have shifted from the ISS contract to the BPO providers. The
Consolidated Appropriations Act, 2021 contains provisions directing certain aspects of the NextGen process, including that any
new federal student loan servicing environment shall provide for the participation of multiple student loan servicers and the
allocation of borrower accounts to eligible student loan servicers based on performance, and directed the suspension of
awarding any ISS contract for at least 90 days. On January 9, 2021, the Department suspended the ISS solicitation. In the
Department’s description of the suspension, it indicated that in consideration of the Consolidated Appropriations Act, 2021, the
Government is reassessing its needs and will amend or cancel the subject solicitation in the future.
The Department currently allocates new loan volume among the TIVAS and NFP servicers based on the following performance
metrics:
•
Two metrics measure the satisfaction among separate customer groups, including borrowers (35 percent) and
Department personnel who work with the servicers (5 percent).
•
Three metrics measure the success of keeping borrowers in an on-time repayment status and helping borrowers avoid
5
default as reflected by the percentage of borrowers in current repayment status (30 percent), percentage of borrowers
more than 90 days but fewer than 271 days delinquent (15 percent), and percentage of borrowers over 270 days and
fewer than 361 days delinquent (15 percent). The loans are evaluated in 15 different loan portfolio stratifications to
account for differences in portfolios.
The allocation of ongoing volume is determined twice each year based on the performance of each servicer in relation to the
other servicers. Quarterly results are compiled for each servicer. The average of the September and December quarter-end
results are used to allocate volume for the period from March 1 to August 31, and the average of the March and June quarter-
end results are used to allocate volume for the period from September 1 to February month end, of each year.
Under the most recent publicly announced performance metrics measurements used by the Department for the quarterly periods
January 1, 2020 through June 30, 2020, Great Lakes' and Nelnet Servicing's overall rankings among the then-current nine
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 period September 1, 2020 through February 28,
2021 are 20 percent and 10 percent, respectively.
In October 2020, the Department communicated to its servicers that a not-for-profit servicer requested to end its contract with
the Department. Effective October 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 in Great Lakes' allocation to increase by two
percent and each remaining servicer to obtain an additional one percent allocation.
Incremental revenue components earned by Nelnet Servicing or Great Lakes from the Department (in addition to loan servicing
revenues) include:
•
•
Administration of the Total and Permanent Disability (TPD) Discharge program. Nelnet Servicing processes
applications for the TPD discharge program and is responsible for discharge, monitoring, and servicing TPD loans.
Individuals who are totally and permanently disabled may qualify for a discharge of their federal student loans, and the
Company processes applications under the program and receives a fee from the Department on a per application basis,
as well as a monthly servicing fee during the monitoring period. Nelnet Servicing is the exclusive provider of this
service to the Department.
Origination of consolidation loans. The Department outsources the origination of consolidation loans whereby each of
the servicers receive Federal Direct Loan consolidation origination volume based on borrower choice. The Department
pays the Company a fee for each completed consolidation loan application it processes. Nelnet Servicing and Great
Lakes each service the consolidation volume it originates.
Servicing FFELP loans
NDS services the Company's student loan portfolio and the portfolios of third parties. The loan servicing activities include loan
conversion activities, application processing, borrower updates, customer service, payment processing, due diligence
procedures, funds management reconciliations, and claim processing. These activities are performed internally for the
Company's portfolio, in addition to generating external fee revenue when performed for third-party clients.
The Company uses proprietary systems to manage the servicing process. These systems provide for automated compliance with
most of the federal student loan regulations adopted under Title IV of the Higher Education Act of 1965, as amended (the
“Higher Education Act”).
The Company serviced FFELP loans on behalf of 124 third-party servicing customers as of December 31, 2020. The
Company's FFELP servicing customers include national and regional banks, credit unions, and various state and nonprofit
secondary markets. The majority of the Company's external FFELP loan servicing activities are performed under “life of loan”
contracts, which essentially provide that as long as the applicable loan exists, the Company shall be the sole servicer of that
loan; however, the agreement may contain “deconversion” provisions where, for a fee, the lender may move the loan to another
servicer.
The discontinuation of new FFELP loan originations in July 2010 has caused and will continue to cause FFELP servicing
revenue to decline as these loan portfolios are paid down. However, the Company believes there may be opportunities to
service additional FFELP loan portfolios from current FFELP participants as the program winds down.
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Originating and servicing private education and consumer loans
NDS conducts origination and servicing activities for private education and consumer loans. Private education loans are non-
federal private credit loans made to students or their families; as such, the loans are not issued or guaranteed by the federal
government. These loans are used primarily to bridge the gap between the cost of higher education and the amount funded
through financial aid, federal loans, or the borrowers' personal resources. Although similar in terms of activities and functions
as FFELP loan servicing (e.g., application processing, disbursement processing, payment processing, customer service,
statement distribution, and reporting), private education loan servicing activities are not required to comply with provisions of
the Higher Education Act and may be more customized to individual client requirements.
The Company has invested and currently plans to continue to invest in modernizing key technologies and services to position
its consumer loan servicing business for the long-term, expanding services to include personal loan products and other
consumer installment assets. The Company is in the process of a complete modernization of its private education and consumer
loan origination and repayment servicing systems. Improvements in systems will allow for diversified products to be both
originated and serviced with state-of-the-art application and servicing platforms to drive growth for the Company's client
partners. Presenting a very wide market opportunity of new entrants and existing players, consumer lending is currently
expected to be a growth area. In both backup servicing and full servicing partnerships, the Company is a valuable resource for
consumer lenders and asset holders as it allows for leveraged economies of scale, high compliance, and secure service to client
partners.
NDS serviced private education and consumer loans on behalf of 39 third-party servicing customers as of December 31, 2020.
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 $10 billion portfolio of private education loans (representing
approximately 475,000 borrowers) that Wells Fargo announced in December 2020 it had agreed to sell to investors.
Backup servicing for FFELP, private education, and consumer loans
NDS offers protection against unexpected business failure or any event that stretches a third party service provider’s resources
beyond its capability to perform essential services through backup servicing. Backup servicing for loan asset owners, investors,
financiers, and other stakeholders is a way to safeguard assets and mitigate financial risk, generally in conjunction with a
structured long-term financing of the assets (like an asset-backed securitization).
NDS’s backup service provides a trigger response plan with pre-built system profiles that remain on standby, ready to be
utilized if a contracted asset manager or service provider cannot perform its duties. The Company performs testing and
maintenance against the loan transfer process each month with backup clients and certifies compliance. For a monthly fee, these
arrangements require a 30 to 90 day notice from a triggering event to transfer the customer's servicing volume to the Company's
platform and becoming a full servicing customer. NDS offers backup servicing for FFEL, private education, and consumer loan
programs that leverages existing servicing systems and full service experience. NDS provides backup servicing arrangements to
assist 17 entities for more than 5.6 million borrowers.
Providing student loan servicing software and other information technology products and services
NDS provides data center services, student loan servicing software for servicing private education and federal loans, guaranty
servicing software, and consulting and professional services to support the technology platforms. These proprietary software
systems are used internally by the Company and/or licensed to third-party student loan holders and servicers. These software
systems have been adapted so they can be offered as hosted servicing software solutions that can be used by third parties for
guaranty servicing and to service various types of student loans, including Federal Direct Loan Program and FFEL Program
loans. The Company earns a monthly fee from its remote hosting customers for each loan or unique borrower on the Company's
platform, with a minimum monthly charge for most contracts. As of December 31, 2020, 6.6 million borrowers were hosted on
the Company's hosted servicing software solution platforms, including 4.0 million borrowers that were serviced by three of the
four NFP servicers that have contracts to service loans for the Department and 2.3 million borrowers that were serviced by the
Great Lakes’ former parent company in accordance with a contract that expired in January 2021.
Customer acquisition, management services, and backup servicing for community solar developers
NDS, under the brand Nelnet Renewable Energy, works with solar developers and financiers to provide marketing, sales, and
customer engagement services to meet key milestones before solar projects are interconnected to the grid and provide the
subsequent operational support for the term of the subscriber agreement, including addressing incoming inquiries, verifying
eligibility, billing, payment processing, and reconciliation. The Company earns a one-time fee for subscriber acquisition and a
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recurring fee for subscriber management. Additionally, NDS provides backup servicing capabilities to solar developers and
financiers, which provides assurances that projects will still be serviced in the event the primary servicer’s situation changes.
Providing outsourced services including call center, processing, technology, and marketing services
NDS provides business process outsourcing primarily specializing in contact center management. The contact center solutions
and services include taking inbound calls, helping with outreach campaigns and sales, and interacting with customers through
multi-channels. Processing services include application processing and verification, payment processing, credit dispute, and
account management services. NDS also outsources technology expertise and capacity to supplement development needs in
organizations.
Competition
The Company's scalable servicing platform allows it to provide compliant, efficient, and reliable service at a low cost, giving
the Company a competitive advantage over others in the industry. The principal competitor for existing and prospective FFELP
and private education loan servicing business is Navient Corporation (“Navient”), which in 2018 entered into an agreement
with First Data, now part of Fiserv, to provide technology solutions for servicing Navient's federal education loans in addition
to the technology role they already played with respect to private education loans. Navient is the largest for-profit provider of
servicing functions. In contrast to its competitors, the Company has segmented its private education loan servicing on a distinct
platform, created specifically to meet the needs of private education student loan borrowers, their families, the schools they
attend, and the lenders who serve them. This ensures access to specialized teams with a dedicated focus on servicing these
borrowers.
With the elimination of new loan originations under the FFEL Program, four TIVAS servicers, including Nelnet Servicing and
Great Lakes, and four NFPs, are servicers of federally-owned loans. The two other TIVAS servicers are FedLoan Servicing
(Pennsylvania Higher Education Assistance Agency (“PHEAA”)) and Navient. NDS currently licenses its hosted servicing
software to three of the four NFP servicers.
NDS is one of the leaders in the development of servicing software for guaranty agencies, consumer and private education loan
programs, the Federal Direct Loan Program, and FFELP student loans. Many student loan lenders and servicers utilize the
Company's software either directly or indirectly. NDS believes the investments it has made to scale its systems and to create a
secure infrastructure to support the Department's servicing volume and requirements increase its competitive advantage as a
long-term partner in the loan servicing market.
Education Technology, Services, and Payment Processing
NBS provides services and technology to administrators, teachers, students, and families of K-12 schools and higher education
institutions. The Company’s payment processing services and technologies also serve customers outside of education.
The Company's solutions include:
•
•
•
•
Tuition payment plans
Payment processing
Advancement (giving management)
Professional development
•
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•
•
School administration
Financial management
Enrollment and communications
Instructional services
The majority of this segment's customers are located in the United States; however, the Company also provides services and
technology in Australia, New Zealand, and Southeast Asia, and currently believes there are opportunities to increase its
customer base and revenues internationally.
See the MD&A - “Education Technology, Services, and Payment Processing Operating Segment - Results of Operations” for a
discussion of the seasonality of the business in this operating segment.
K-12
In the K-12 market, FACTS comprehensive set of solutions includes (i) financial management, (ii) school administration
solutions, (iii) advancement, (iv) enrollment and communications; (v) professional development and educational instruction
services, and (vi) innovative technology products that aid in teacher and student evaluations. The Company provides services
for more than 11,000 K-12 schools and serves over 4 million students and families. The Company’s K-12 business generated
$153.4 million in revenue for the year ended December 31, 2020.
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The Company is the market leader in education financial management services, including actively managed tuition payment
plans, financial needs assessment (grant and aid), incidental billing, advanced accounting, and payment forms. K-12 educational
institutions contract with the Company to administer tuition payment plans that allow families to make recurring payments
generally over six to 12 months. The Company earns tuition payment plan services revenue by collecting a fee from either the
institution or the payer to administer the plan. Additionally, the Company may earn revenue for payment processing fees when
families make tuition payments. The Company's grant and aid assessment service helps K-12 schools evaluate and determine
the amount of financial aid to disburse to the families it serves. The Company earns service revenue by charging a fee for grant
and aid applications processed. Under the FACTS brand, the Company provides actively managed tuition payment plans in
Australia through Nelnet International.
The Company’s school administration solutions include FACTS Student Information System (“SIS”), Family App, and Parent
Alert. FACTS SIS automates the flow of information between school administrators, teachers, and parents and includes
administrative processes such as admissions, enrollment, scheduling, cafeteria management, attendance, and grade book
management. The Company’s information systems software is sold as a subscription service to schools. The Company also
offers a streamlined, social, and fully integrated learning management system to enhance classroom instruction for both
teachers and students. FACTS Family App provides families with mobile access to the information they need and Parent Alert
allows for instant communication with families when needed. The Company offers the school information system to more than
50 countries globally through Nelnet International.
The combination of the Company’s school administration software and tuition management and grant and aid assessment
services has significantly increased the value of the Company’s offerings in this area, allowing the Company to deliver a
comprehensive suite of solutions to schools.
The Company's advancement solution, FACTS Giving, is a comprehensive donation platform that streamlines donor
communications, organizes donor information, and provides access to data analysis and reporting. Enrollment and
communications solutions include School Site and Application and Enrollment. School Site offers website design and
Application and Enrollment is a simple, cost effective admissions software.
FACTS Education Solutions provides customized professional development services for teachers and school leaders as well as
instructional services for students experiencing academic challenges. These services provide continuous advanced learning and
professional development while helping private schools identify and attain equitable participation in federal education
programs. FACTS Education Solutions also offers an innovative technology product that aids in both teacher and student
evaluation. On December 31, 2020, the Company acquired HigherSchool Instructional Services, a services company that
provides supplemental instructional services and educational professional development for approximately 50 K-12 schools in
New York City. HigherSchool Instructional Services compliments and will integrate operationally with FACTS Education
Solutions.
Higher Education
In the higher education market, the Company (known as Nelnet Campus Commerce) offers solutions including (i) tuition
payment plans and (ii) payments technology and processing. The Company provides service for more than 1,200 colleges and
universities worldwide and serves over 7 million students and families. The Company’s higher education business generated
$126.0 million in revenue for the year ended December 31, 2020.
Higher education institutions contract with the Company to administer tuition payment plans that allow the student and family
to make recurring payments on either a semester or annual basis. The Company earns tuition payment plan services revenue by
collecting a fee from either the student or family to administer the plan. Additionally, the Company may earn revenue for
payment processing fees when families make tuition payments.
The Company's payment technology solutions allow for electronic billing and payment of campus charges. Payment
technologies includes cashiering for face-to-face transactions, campus-wide commerce management, and refunds management,
among other activities. The Company earns revenue for e-billing, hosting and maintenance, credit card processing fees, and e-
payment transaction fees, which are powered by the Company's secure payment processing systems. The Company also offers a
product, CampusKey, which provides students with a mobile app to replace their plastic student ID card.
The Company's payment technology and processing solutions are sold as a subscription service to colleges and universities. The
systems process payments through the appropriate channels in the banking or credit card networks to make deposits into the
client's bank account. The systems can be further deployed to other departments around campus as requested (e.g., application
fees, alumni giving, parking, events, etc.).
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Nelnet International also offers payments technology and processing solutions to higher education institutions in Australia, New
Zealand, and Southeast Asia.
Non-education services
Under the brands PaymentSpring and Aware3, the Company has expanded its customer base to include both education and non-
education customers. PaymentSpring offers technology and payment services including electronic transfer and credit card
processing, reporting, billing and invoicing, mobile and virtual terminal solutions, and specialized integrations to business
software. Aware3 is a mobile first technology focused on increasing engagement, online giving, and communication for church
and not-for-profit customers. On December 31, 2020, the Company acquired CD2 LLC (“CD2”). CD2 has been operating since
2010 and includes two divisions, CD2 Learning, which is the brand for corporate sales, and Catholic Faith Technologies, which
is the brand for churches, schools, and ministries. CD2 provides a platform technology solution that includes five features:
learning management, collaboration/workflow, gamification, customer management/document storage, and employee boarding.
The acquisition of CD2 further expands NBS’s non-education customer base. For the year ended December 31, 2020, the
Company earned $6.2 million in revenue from its non-education services.
Competition
The Company is the largest provider of tuition management and financial needs assessment services to the private and faith-
based K-12 market in the United States. Competitors include financial institutions, tuition management providers, financial
needs assessment providers, accounting firms, and a myriad of software companies.
In the higher education market, the Company targets business offices at colleges and universities. In this market, the primary
competition is from a relatively small number of campus commerce and tuition payment providers, as well as solutions
developed in-house by colleges and universities.
The Company's principal competitive advantages are (i) the customer service it provides to institutions and consumers, (ii) the
technology provided with the Company's service, and (iii) the Company's ability to integrate its technology with the institution
clients and their third party service providers. The Company believes its clients select products primarily based on technology
features, functionality, and the ability to integrate with other systems, but price and service also impact the selection process.
Communications
The Company provided communication services through ALLO, a former majority owned subsidiary, until a recapitalization
and additional funding for ALLO resulted in a deconsolidation of ALLO from the Company’s consolidated financial statements
on December 21, 2020. See “Recent Developments - ALLO Recapitalization and Additional Funding” above. The Company
continues to hold a significant investment in ALLO. ALLO derives its revenue primarily from the sale of telecommunication
services, including internet, telephone, and television services, to business, governmental, and residential customers in
Nebraska and Colorado, and specializes in high-speed internet and broadband services available through its all-fiber network.
ALLO currently serves or has announced plans to serve 13 communities in Nebraska and two in Colorado. ALLO plans to
continue to increase market share and revenue in its existing markets and is currently evaluating opportunities to expand to
additional communities.
Asset Generation and Management
AGM includes the acquisition, management, and ownership of the Company's loan assets (excluding loan assets held by Nelnet
Bank). Loans consist of federally insured student loans (originated under the FFEL Program), private education loans, and
consumer loans. Substantially all of AGM’s loan portfolio (97.8 percent as of December 31, 2020) is federally insured. As of
December 31, 2020, AGM's loan portfolio was $19.6 billion. The Company generates a substantial portion of its earnings from
the spread, referred to as the Company's loan spread, between the yield it receives on its loan portfolio and the associated costs
to finance such portfolio. See the MD&A - "Asset Generation and Management Operating Segment - Results of Operations -
Loan Spread Analysis,” for further details related to the loan spread. The loan assets are held in a series of lending subsidiaries
and associated securitization trusts designed specifically for this purpose. In addition to the loan spread earned on its portfolio,
all costs and activity associated with managing the portfolio, such as servicing of the assets and debt maintenance, are included
in this segment.
AGM's portfolio of federally insured student loans is subject to minimal credit risk, as these loans are guaranteed by the
Department at levels ranging from 97 percent to 100 percent. The Higher Education Act regulates every aspect of the federally
insured student loan program, including certain communications with borrowers, loan originations, and default aversion. Failure
to service a student loan properly could jeopardize the guarantee on federal student loans. In the case of death, disability, or
bankruptcy of the borrower, the guarantee covers 100 percent of the loan's principal and accrued interest. FFELP loans are
10
guaranteed by state agencies or nonprofit companies designated as guarantors, with the Department providing reinsurance to the
guarantor. Guarantors are responsible for performing certain functions necessary to ensure the program's soundness and
accountability. Generally, the guarantor is responsible for ensuring that loans are serviced in compliance with the requirements
of the Higher Education Act. When a borrower defaults on a FFELP loan, AGM submits a claim to the guarantor, who provides
reimbursements of principal and accrued interest, subject to the applicable risk share percentage.
AGM’s portfolios of private education and consumer loans are subject to credit risk and defaults may increase above current
levels based on numerous factors, including a decline in the economy or an increase in unemployment.
Origination and acquisition
The Reconciliation Act of 2010 discontinued originations of new FFELP loans, effective July 1, 2010. However, the Company
believes there may be ongoing opportunities to continue to purchase FFELP loan portfolios from current FFELP participants
looking to exit or adjust their FFELP businesses. For example, the Company purchased a total of $1.3 billion of FFELP student
loans from various third parties during 2020. However, since all FFELP loans will eventually pay off, a key objective of the
Company over the last several years is to reposition itself for the post-FFELP environment. As such, the Company is actively
expanding its private education and consumer loan portfolios.
During 2020, the Company purchased $152.0 million of private education loans and $137.0 million of 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.
AGM's competition for the purchase of FFELP, private education, and consumer loan portfolios includes banks, hedge funds,
and other finance companies.
Interest rate risk management
Since the Company generates a significant portion of its earnings from its loan spread, the interest rate sensitivity of the
Company's balance sheet is very important to its operations. The current and future interest rate environment can and will affect
the Company's interest income and net income. The effects on the Company's results of operations as a result of the changing
interest rate environments are further outlined in the MD&A - "Asset Generation and Management Operating Segment - Results
of Operations - Loan Spread Analysis" and in Part II, Item 7A, “Quantitative and Qualitative Disclosures About Market Risk -
Interest Rate Risk.”
Nelnet Bank
As discussed under “Recent Developments - Nelnet Bank” above, Nelnet Bank launched operations on November 2, 2020.
Nelnet Bank was funded by the Company with an initial capital contribution of $100 million, consisting of $55.9 million of
cash and $44.1 million of student loan asset-backed securities. In addition, the Company made a pledged deposit of $40.0
million with Nelnet Bank, as required under an agreement with the FDIC. Nelnet Bank operates as an internet Utah chartered
industrial bank franchise focused on the private education loan marketplace, with a home office in Salt Lake City, Utah.
Currently, Nelnet Bank originates school refinance or consolidation loans, which are funded by deposits from custodians and
commercial and institutional customers. Throughout Nelnet Bank’s three-year de novo period, Nelnet Bank plans to continue to
launch products focused on helping students achieve their dreams, with the origination of in-school student loans and expansion
of deposit products to consumers over the next year. As of December 31, 2020, Nelnet Bank had $17.5 million in private
education loans.
Corporate and Other Activities
Other business activities and operating segments that are not reportable are combined and included in Corporate and Other
Activities. Corporate and Other Activities include the following items:
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•
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The operating results of Whitetail Rock Capital Management, LLC (“WRCM”), the Company's SEC-registered
investment advisor subsidiary
Income earned on certain investment activities, including renewable energy (solar) and real estate
Interest expense incurred on unsecured and certain other corporate related debt transactions
Other product and service offerings that are not considered reportable operating segments
Corporate and Other Activities also include certain corporate activities and overhead functions related to executive
management, internal audit, human resources, accounting, legal, enterprise risk management, information technology,
occupancy, and marketing. These costs are allocated to each operating segment based on estimated use of such activities and
services.
Whitetail Rock Capital Management, LLC
As of December 31, 2020, WRCM, the Company's SEC-registered investment advisor subsidiary, had $1.87 billion in assets
under management for third-party customers, consisting of student loan asset-backed securities and Nelnet stock. WRCM earns
annual management fees of 25 basis points for asset-backed securities under management and up to 50 percent of the gains
from the sale of securities or securities being called prior to the full contractual maturity for which it provides advisory services.
WRCM earns annual management fees of five basis points for Nelnet stock under management. During 2020, WRCM earned
$3.6 million in management fees and generated $7.2 million in performance fees. 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.
Solar, real estate, and other investments
The Company makes investments to further diversify itself both within and outside of its historical core education-related
businesses, including investments in renewable energy resources (solar projects), real estate, and early-stage and emerging
growth companies. The Company’s investments in certain tax-advantaged projects promoting renewable energy resources
(solar projects) are designed to generate a return primarily through the realization of federal income tax credits, operating cash
flows, and other tax benefits, over specified time periods. The solar projects are currently forecasted to generate more than 214
megawatts of power each year. Recent real estate investments have been focused on the development of commercial properties
in the Midwest, and particularly in Lincoln, Nebraska, where the Company is headquartered. These investments include
projects for the development of properties in Lincoln’s east downtown Telegraph District, where a new facility for the
Company’s student loan servicing operations is located, and projects in Lincoln’s Haymarket District, including the new
headquarters of Hudl, an online video analysis and coaching tools software company for athletes of all levels. The Company is
also a tenant at Hudl's headquarters. David S. Graff, a member of the Company’s board of directors, is a co-founder, the chief
executive officer, and a director of Hudl. In addition, the Company has a total equity investment in Hudl of $128.6 million.
Regulation and Supervision
The Company's operating segments and industry partners are heavily regulated by federal and state government regulatory
agencies. The following provides a summary of the more significant existing and proposed legislation and regulations affecting
the Company. A failure to comply with these laws and regulations could subject the Company to substantial fines, penalties,
and remedial and other costs, restrictions on business, and the loss of business. Regulations and supervision can change rapidly,
and changes could alter the Company's business plan and increase the Company's operating expenses as new or additional
regulatory compliance requirements are addressed.
Loan Servicing and Systems
NDS, which services Federal Direct Loan Program, FFELP, and private education and consumer loans, is subject to federal and
state consumer protection, privacy, and related laws and regulations. Some of the more significant federal laws and regulations
include:
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The Higher Education Act, which establishes financial responsibility and administrative capability requirements that
govern all third-party servicers of federally insured student loans
The Telephone Consumer Protection Act (“TCPA”), which governs communication methods that may be used to contact
customers
The Truth-In-Lending Act (“TILA”) and Regulation Z, which govern disclosures of credit terms to consumer borrowers
The Fair Credit Reporting Act (“FCRA”) and Regulation V, which govern the use and provision of information to
consumer reporting agencies
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The Equal Credit Opportunity Act (“ECOA”) and Regulation B, which prohibit discrimination on the basis of race, creed,
or other prohibited factors in extending credit
The Servicemembers Civil Relief Act (“SCRA”), which applies to all debts incurred prior to commencement of active
military service and limits the amount of interest, including certain fees or charges that are related to the obligation or
liability
The Military Lending Act (“MLA”), which protects active duty members of the military, their spouses, and their
dependents from certain lending practices
The Electronic Funds Transfer Act (“EFTA”) and Regulation E, which protect individual consumers engaged in electronic
fund transfers (“EFTs”)
The Gramm-Leach-Bliley Act (“GLBA”) and Regulation P, which govern a financial institution’s treatment of nonpublic
personal information about consumers and require that an institution, under certain circumstances, notify consumers about
its privacy policies and practices
The General Data Protection Regulation (“GDPR”), a European Union (“EU”) regulation which places specific
requirements on businesses that collect and process personal data of individuals residing in the EU, and provides for
significant fines and other penalties for non-compliance
The California Consumer Privacy Act (“CCPA”), which enhances the privacy rights and consumer protection for residents
of California
The Coronavirus Aid, Relief, and Economic Security Act (“CARES Act”), which provides temporary relief measures
currently in place through September 30, 2021 for federal student loans held by the Department, during the COVID-19
pandemic
Laws prohibiting unfair, deceptive, or abusive acts or practices (“UDAAP”)
Various laws, regulations, and standards that govern government contractors
As a student loan servicer for the federal government and for financial institutions, including the Company’s FFELP student
loan portfolio, the Company is subject to the Higher Education Act (“HEA”) and related laws, rules, regulations, and policies.
The HEA regulates every aspect of the federally insured student loan program. Failure to comply with the HEA could result in
fines, the loss of the insurance and related federal guarantees on affected FFELP loans, expenses required to cure servicing
deficiencies, suspension or termination of the right to participate as a FFELP servicer, negative publicity, and potential legal
claims. The Company has designed its servicing operations to comply with the HEA, and it regularly monitors the Company's
operations to maintain compliance. While the HEA is required to be reviewed and reauthorized by Congress every five years,
Congress has not reauthorized the HEA since 2008, choosing to temporarily extend the HEA each year since 2013 while
Congress works on the next reauthorization. The Company continuously monitors for potential changes to HEA and evaluates
possible impacts to its business operations.
Under the TCPA, plaintiffs may seek actual monetary loss or damages of $500 per violation, and courts may treble the damage
award for willful or knowing violations. In addition, TCPA lawsuits have asserted putative class action claims.
The Dodd-Frank Wall Street Reform and Consumer Protection Act (the “Dodd-Frank Act”) established the Consumer Financial
Protection Bureau (“CFPB”), which has broad authority to regulate a wide range of consumer financial products and services.
The Company's student loan servicing business is subject to CFPB oversight authority.
In 2015, the CFPB conducted a public inquiry into student loan servicing practices throughout the industry and issued a report
discussing public comments submitted in response to the inquiry, and suggesting a framework to improve borrower outcomes
and reduce defaults, including the creation of consistent, industry-wide standards for the entire servicing market.
The CFPB has authority to draft new regulations implementing federal consumer financial protection laws, to enforce those
laws and regulations, and to conduct examinations of the Company's operations to determine compliance. The CFPB’s authority
includes the ability to assess financial penalties and fines and provide for restitution to consumers if it determines there have
been violations of consumer financial protection laws. The CFPB also provides consumer financial education, tracks consumer
complaints, requests data from industry participants, and promotes the availability of financial services to underserved
consumers and communities. The CFPB has authority to prevent unfair, deceptive, or abusive acts or practices and to ensure
that all consumers have access to fair, transparent, and competitive markets for consumer financial products and services. The
CFPB’s scrutiny of financial services has impacted industry participants’ approach to their services, including how the
Company interacts with consumers.
The Dodd-Frank Act empowers state attorneys general and state regulators to bring civil actions to remedy violations of state
law. Most states also have statutes that prohibit unfair and deceptive practices. To the extent states enact requirements that
13
differ from federal standards or state officials and courts adopt interpretations of federal consumer laws that differ from those
adopted by the CFPB under the Dodd-Frank Act, the Company's ability to offer the same products and services to consumers
nationwide may be limited.
As a third-party service provider to financial institutions, the Company is subject to periodic examination by the Federal
Financial Institutions Examination Council (“FFIEC”). FFIEC is a formal interagency body of the U.S. government empowered
to prescribe uniform principles, standards, and report forms for the federal examination of financial institutions by the Federal
Reserve Banks, the FDIC, and the CFPB, and to make recommendations to promote uniformity in the supervision of financial
institutions.
Several states have enacted laws regulating and monitoring the activity of student loan servicers. Some of these laws stipulate
additional licensing fees which increase the Company’s cost of doing business. Where the Company has obtained licenses, state
licensing statutes may impose a variety of requirements and restrictions on the Company. In addition, these statutes may also
subject the Company to the supervisory and examination authority of state regulators in certain cases, and the Company will be
subject to and experience exams by state regulators. If the Company is found to not have complied with applicable laws,
regulations, or requirements, it could: (i) lose one or more of its licenses or authorizations, (ii) become subject to a consent
order or administrative enforcement action, (iii) face lawsuits (including class action lawsuits), sanctions, or penalties, or (iv) be
in breach of certain contracts, which may void or cancel such contracts. The Company anticipates additional states adopting
similar laws.
Education Technology, Services, and Payment Processing
NBS provides tuition management services and school information software for K-12 schools and tuition management services
and payment processing solutions for higher education institutions. The Company also provides payment technologies and
payment services for software platforms, businesses, and nonprofits beyond the K-12 and higher education space. As a service
provider that takes payment instructions from institutions and their constituents and sends them to bank partners, the Company
is directly or indirectly subject to a variety of federal and state laws and regulations. The Company's contracts with clients and
bank partners require the Company to comply with these laws and regulations.
The Company's payment processing services are subject to the EFTA and Regulation E, which govern automatic deposits to
and withdrawals from deposit accounts and customers’ rights and liabilities arising from the use of debit cards and certain other
electronic banking services. The Company assists bank partners with fulfilling their compliance obligations pursuant to these
requirements.
The Company's payment processing services are also subject to the National Automated Clearing House Association
(“NACHA”) requirements, which include operating rules and sound risk management procedures to govern the use of the
Automated Clearing House (“ACH”) Network. These rules are used to ensure that the ACH Network is efficient, reliable, and
secure for its members. Because the ACH Network uses a batch process, the importance of proper submissions by NACHA
members is magnified. The Company is also impacted by laws and regulations that affect the bankcard industry. The Company
is registered with Visa, MasterCard, American Express, and the Discover Network as a service provider and is subject to their
respective rules.
The Company's higher education institution clients are subject to the Family Educational Rights and Privacy Act (“FERPA”),
which protects the privacy of student education records. These clients disclose certain non-directory information concerning
their students to the Company, including contact information, student identification numbers, and the amount of students’ credit
balances pursuant to one or more exceptions under FERPA. Additionally, as the Company is indirectly subject to FERPA, it
may not permit the transfer of any personally identifiable information to another party other than in a manner in which an
educational institution may properly disclose it. While the Company believes that it has adequate policies and procedures in
place to safeguard the privacy of such information, a breach of this prohibition could result in a five-year suspension of the
Company's access to the related client’s records. The Company may also be subject to similar state laws and regulations that
restrict higher education institutions from disclosing certain personally identifiable student information.
Some of the Company's K-12 and higher education institution clients choose to charge convenience fees to students, parents, or
other payers who make online payments using a credit or debit card. Laws and regulations related to such fees vary from state
to state and certain states have laws that to varying degrees prohibit the imposition of a surcharge on a cardholder who elects to
use a credit or debit card in lieu of cash, check, or other means.
The Company's contracts with higher education institution clients also require the Company to comply with regulations
promulgated by the Department regarding the handling of student financial aid funds received by institutions on behalf of their
students under Title IV of the Higher Education Act. These regulations are designed to ensure students have convenient access
14
to their Title IV funds, do not incur unreasonable fees, and are not led to believe they must open a financial account to receive
such funds.
Asset Generation and Management
The Dodd-Frank Act created a comprehensive regulatory framework for derivatives transactions, with regulatory authority
allocated among the Commodity Futures Trading Commission (“CFTC”), other prudential regulators, and the SEC. This
framework, among other things, subjects certain swap participants to capital and margin requirements, recordkeeping, and
business conduct standards and imposes registration and regulation of swap dealers and major swap participants. Even where a
securitization trust qualifies for an exemption, many of the Company's derivative counterparties are subject to capital, margin,
and business conduct requirements and therefore the Company may be impacted. Where securitization trusts do not qualify for
an exemption, the Company may be unable to enter into new swaps to hedge interest rate risk or the costs associated with such
swaps may increase. With respect to existing securitization trusts, an inability to amend, novate, or otherwise materially modify
existing swap contracts could result in a downgrade of outstanding asset-backed securities. As a result, the Company's business,
ability to access the capital markets for financing, and costs may be impacted by these regulations.
Nelnet Bank
Nelnet Bank, chartered in November 2020, is a Utah Industrial Bank that is regulated by the FDIC and the UDFI.
Nelnet Bank, which originates private education loans, is subject to federal and state consumer protection, privacy, and related
laws and regulations. In addition to having to comply with the majority of laws and regulations addressed in the Loan Servicing
and Systems section, there are additional laws and regulations that Nelnet Bank must comply with. Some of the more
significant laws and regulations applicable to Nelnet Bank include:
•
•
•
•
•
Regulation W and Federal Reserve Act Sections 23A and 23B - Designed to prevent losses to a bank resulting from
affiliate engagement and transfer of a bank’s federal deposit insurance safety net to an affiliate
Community Reinvestment Act - Encourages depository institutions to help meet the credit needs of the communities in
which they operate
Federal Trade Commission (“FTC”) Act - Prevents unfair or deceptive acts or practices (UDAP) and ensures consumer
privacy (including the Telephone Sales Rule, FTC Guides Concerning the Use of Endorsements and Testimonials in
Advertising, and FTC Policy Statement Regarding Advertising Substantiation)
Regulation O - Places limits and conditions on credit extensions that a bank can offer to its executive officers, principal
shareholders, directors, and related interests
Right to Financial Privacy Act - Establishes specific procedures that government authorities must follow when requesting a
customer’s financial records from a bank or other financial institution
Regulation D, the Truth in Savings Act (reserve requirements), and Regulation DD (disclosure of deposit terms to customers)
will be applicable to Nelnet Bank once consumer deposit products are launched, which is tentatively scheduled for the fourth
quarter of 2021.
Corporate
Governmental bodies in the United States and abroad have adopted, or are considering the adoption of, laws and regulations
restricting the transfer and requiring the safeguarding of nonpublic personal information. For example, in the United States, the
Company and its financial institution clients are, respectively, subject to the FTC’s and the federal banking regulators’ privacy
and information safeguarding requirements under the GLBA. The GLBA requires financial institutions to periodically disclose
their privacy policies and practices relating to sharing such information and enables customers to opt out of the Company’s
ability to share information with unaffiliated third parties under certain circumstances. Other federal and state laws and
regulations impact the Company’s ability to share certain information with affiliates and non-affiliates for marketing and/or
non-marketing purposes, or to contact customers with marketing offers. The GLBA also requires financial institutions to
implement a comprehensive information security program that includes administrative, technical, and physical safeguards to
ensure the security and confidentiality of customer records and information. These security and privacy policies and procedures
for the protection of personal and confidential information are in effect across all businesses and geographic locations. Federal
law also makes it a criminal offense, except in limited circumstances, to obtain or attempt to obtain customer information of a
financial nature by fraudulent or deceptive means. Data privacy and data protection are areas of increasing state legislative
focus. For example, the CCPA, which became effective on January 1, 2020, applies to for-profit businesses that conduct
business in California and meet certain revenue or data collection thresholds. The CCPA gives consumers the right to request
disclosure of information collected about them, and whether that information has been sold or shared with others, the right to
15
request deletion of personal information (subject to certain exceptions), the right to opt out of the sale of the consumer’s
personal information, and the right not to be discriminated against for exercising these rights. The CCPA contains several
exemptions, including an exemption applicable to information that is collected, processed, sold, or disclosed pursuant to the
GLBA. In addition, the California Privacy Rights and Enforcement Act of 2020, which amends and expands upon the CCPA,
will become effective on January 1, 2023. Further, similar laws may be adopted by other states where the Company does
business. The federal government may also pass data privacy or data protection legislation. In addition, in the EU, privacy law
is now governed by the GDPR, which is directly binding and applicable for each EU member state from May 25, 2018. The
GDPR contains enhanced compliance obligations and increased penalties for non-compliance compared to the prior law
governing data privacy in the EU.
Intellectual Property
The Company owns numerous trademarks and service marks (“Marks”) to identify its various products and services. As of
December 31, 2020, the Company had 64 registered Marks. The Company actively asserts its rights to these Marks when it
believes infringement may exist. The Company believes its Marks have developed and continue to develop strong brand-name
recognition in the industry and the consumer marketplace. Each of the Marks has, upon registration, an indefinite duration so
long as the Company continues to use the Mark on or in connection with such goods or services as the Mark identifies. In order
to protect the indefinite duration, the Company makes filings to continue registration of the Marks. The Company owns one
patent application that has been published, but has not yet been issued, and has also actively asserted its rights thereunder in
situations where the Company believes its claims may be infringed upon. The Company owns many copyright protected works,
including its various computer system codes and displays, websites, and marketing materials. The Company also has trade
secret rights to many of its processes and strategies and its software product designs. The Company's software products are
protected by both registered and common law copyrights, as well as strict confidentiality and ownership provisions placed in
license agreements, which restrict the ability to copy, distribute, or improperly disclose the software products. The Company
also has adopted internal procedures designed to protect the Company's intellectual property.
The Company seeks federal and/or state protection of intellectual property when deemed appropriate, including patent,
trademark/service mark, and copyright. The decision whether to seek such protection may depend on the perceived value of the
intellectual property, the likelihood of securing protection, the cost of securing and maintaining that protection, and the
potential for infringement. The Company's employees are trained in the fundamentals of intellectual property, intellectual
property protection, and infringement issues. The Company's employees are also required to sign agreements requiring, among
other things, confidentiality of trade secrets, assignment of inventions, and non-solicitation of other employees post-
termination. Consultants, suppliers, and other business partners are also required to sign nondisclosure agreements to protect the
Company's proprietary rights.
Human Capital Resources
The Company’s employees (referred to by the Company as associates) are critical to its success, and the executive team puts
significant focus on human capital resources. In addition, the executive team regularly updates the Company’s board of
directors and its committees on the operation and status of human capital trends and activities. Key areas of focus for the
Company include:
Headcount data
Total associate headcount by reportable segment as of December 31, 2020 follows:
NDS
NBS
Nelnet Bank
AGM
Corporate and
other
Number
4,314
1,195
16
11
663
6,199
Percent of
total
69.6 %
19.3
0.3
0.2
10.6
100.0 %
None of the Company’s associates are covered by collective bargaining agreements. The Company is not involved in any
material disputes with any of its associates, and the Company believes that relations with its associates are good.
16
Employee recruitment, engagement, and retention
The Company works diligently to attract the best talent from a diverse range of sources in order to meet the current and future
demands of its businesses, and has established relationships with trade schools, universities, professional associations, and
industry groups to proactively attract talent. In 2020, the Company hired approximately 1,900 new associates.
In 2020, the Company conducted an associate engagement survey using a leading outside firm that specializes in employee
engagement. Ninety-four percent of the Company’s associates participated in the survey, 14 points above the survey provider’s
industry benchmark. There were many questions, but the overarching goal of the survey was to determine overall associate
engagement through understanding how associates feel about working for the Company and if associates would recommend the
Company as a great place to work. The results of that survey were an overall engagement score of 79 out of 100, which was 5
points above the survey provider’s industry benchmark. The Company’s management team has collected all the feedback, and
is focusing on making associate-suggested changes to become an even better place to work.
The Company believes its positive associate engagement has resulted in higher levels of associate retention. For 2020, associate
voluntary turnover was approximately 20 percent, an 8 percentage point decrease from 2019. The average associate has over 6
years of service.
Diversity and inclusion
The Company embraces diversity among its associates, including their unique backgrounds, experiences, and talents, and the
Company strives to cultivate a culture and vision that supports and enhances its ability to recruit, develop, and retain diverse
talent at every level. The Company demonstrates its commitment to diversity, equity, and inclusion at the highest levels of the
Company. An equal number of the Company’s independent directors are women and men.
As of December 31, 2020, the Company’s workforce was approximately 57 percent women. People of color, as defined by the
U.S. Equal Employment Opportunity Commission's EEO-1 race and ethnicity categories for the U.S., represented
approximately 20 percent of the Company’s workforce (based on associate self-identification). The Company is making
progress in the number of women and people of color working in leadership positions (defined by the Company as an associate
with one or more direct report) across the organization. As of December 31, 2020, women and people of color held 50 percent
and 8 percent of leadership positions in the Company, respectively. The Company has acknowledged that people of color are
underrepresented in leadership positions at Nelnet, and is committed to have its workforce reflect the diversity in its
communities.
As part of its diversity and inclusion focus in 2020, the Company made an unwavering commitment to Black lives matter and to
stand in support of all people of color and be a part of the long-term solution to systemic racism and inequality in the world.
Accordingly, the Company deepened its support of organizations advancing racial and socioeconomic equality and social
justice, and in 2020 the Company created the Service, Not Silence fundraising and volunteer campaign. Through this
fundraiser, associates could donate to local and national organizations advancing these issues, with donations matched by the
Nelnet Foundation 3:1. The campaign raised over $1 million. The Company also revised its scholarship program for the
children of Nelnet associates to better recognize minority and low-income students.
To further Nelnet’s objective of creating an inspiring work environment and furthering associate development, the Company
developed and launched the Nelnet Diversity, Equity, and Inclusion Council (the “Council”), sponsored by the Chief Executive
Officer and the Executive Director of People Services. This Council of 25 members represents locations, functions, and
business segments across the entire Company. Its top priorities include:
•
•
•
Implementing a comprehensive diversity and inclusion learning and development plan to build awareness and drive
inclusive behaviors;
Developing the Company’s diversity pipeline through recruiting, hiring, developing, mentoring, and retaining diverse
top talent; and
Promoting a work environment that enables associates to feel safe to express their ideas and perspectives and feel they
belong.
During 2020, the Council partnered with Nelnet University to launch a robust mentoring program. The program is available to
all associates, prioritizing mentorships for associates from underrepresented racial and ethnic groups. Associates participating in
this program are partnered with tenured Nelnet leaders for guidance, support, and coaching. The Council has also provided
training sessions for all associates on cultural competence and unconscious bias. In addition, the Company has changed new
17
hire recruiting methods and strategies to increase pools of minority, women, veteran, and disabled candidates, and has created
other programs to increase diversity throughout the Company focused on race and gender.
Talent, development, and training
The Company’s talent strategy is focused on attracting the best talent from a diverse range of sources, recognizing and
rewarding their performance, and continually developing, engaging, and retaining them.
The Company is committed to the continued development of its people. Strategic talent reviews and succession planning occur
on a planned cadence annually across all business areas. The executive team convenes meetings with senior leadership and the
board of directors to review top enterprise talent. The Company continues to provide opportunities for associates to grow their
careers internally, with over half of open management positions filled internally during 2020.
The Company provides a variety of professional, technical, and leadership training courses to help its associates grow in their
current roles and build new skills. The Company emphasizes individual development planning as part of its annual goal setting
process, and offers mentoring programs, along with change management and project management upskilling opportunities. The
Company has leadership development resources for all leaders across the organization and continues to build tools for leaders to
develop their teams on the job and in roles to create new opportunities to learn and grow.
Training is provided in a number of formats to accommodate the learner’s style, location, and technological knowledge and
access, including instructor-led courses and hundreds of online courses in the Company’s learning management system. The
Company also offers tuition assistance to associates for degree programs, non-degree seeking individual classes, or certificate
programs that are related to areas of business at Nelnet. During 2020, the Company paid over $400,000 in tuition assistance for
its associates.
Competitive pay, benefits, wellness, and safety
The general compensation philosophy of the Company, as an organization that values the long-term success of its shareholders,
customers, and associates, is that the Company will pay fair, competitive, and equitable compensation that is designed to
encourage focus on the long-term performance objectives of the Company and is differentiated based on both the individual’s
performance and the performance of their respective business segment. In carrying out this philosophy, the Company structures
its overall compensation framework with the general objectives of encouraging ownership, savings, wellness, productivity, and
innovation. In addition, total compensation is intended to be market competitive compared to select industry surveys, internally
consistent, and aligned with the philosophy of a performance-based organization. The Company provides a comprehensive
benefits package, opportunities for retirement savings, and a robust wellness program. The holistic wellness program focuses on
four pillars: personal, professional, physical, and financial well-being.
In response to the COVID-19 pandemic, the Company has implemented and continues to implement safety measures in all its
facilities. The Company has implemented adjustments to its operations designed to keep associates safe and comply with
federal and local guidelines, including those regarding social distancing. As of March 2020, the majority of associates were
working and continue to work from home.
Culture, values, and ethics
The Company believes acting ethically and responsibly is the right thing to do, and embraces core values of open, honest
communication in work environments. The Company also believes that it must do its part to improve the world for current and
future generations, and as part of this philosophy the Company contributes time, talent, and resources to strengthen the
communities where the Company does business. The Company’s associates participate in many initiatives focused on
supporting their communities both financially and with their time.
Ethics are deeply embedded in the Company’s values and business processes. The Company has a Code of Ethics and Conduct
that all associates are required to read and acknowledge. The Company regularly re-enforces its commitment to ethics and
integrity in associate communications, in its everyday actions, and in processes and controls. As a part of the Company’s on-
going efforts to ensure its associates conduct business with the highest levels of ethics and integrity, the Company has
compliance training programs. The Company also maintains an Ask Ethics email through which associates can raise concerns
they may have about business behavior they do not feel comfortable discussing personally with managers or human resources
personnel. In addition, the Company maintains a separate anonymous portal for any associate concerns about the Company's
financial reporting, internal controls, and related matters.
18
Available Information
The Company's internet website address is www.nelnet.com, and the Company's investor relations website address is
www.nelnetinvestors.com. Copies of the Company's annual reports on Form 10-K, quarterly reports on Form 10-Q, current
reports on Form 8-K, and amendments to such reports are available on the Company's investor relations website free of charge
as soon as reasonably practicable after such reports are filed with or furnished to the SEC. The Company routinely posts
important information for investors on its investor relations website.
The Company has adopted a Code of Ethics and Conduct that applies to directors, officers, and employees, including the
Company's principal executive officer and its principal financial and accounting officer, and has posted such Code of Ethics and
Conduct on its investor relations website. Amendments to and waivers granted with respect to the Company's Code of Ethics
and Conduct relating to its executive officers and directors, which are required to be disclosed pursuant to applicable securities
laws and stock exchange rules and regulations, will also be posted on its investor relations website. The Company's Corporate
Governance Guidelines, Audit Committee Charter, People Development and Compensation Committee Charter, Nominating
and Corporate Governance Committee Charter, Risk and Finance Committee Charter, and Compliance Committee Charter are
also posted on its investor relations website.
Information on the Company's websites is not incorporated by reference into this report and should not be considered part of
this report.
ITEM 1A. RISK FACTORS
We operate our businesses in a highly competitive and regulated environment. We are subject to risks including, but not limited
to, strategic, market, liquidity, credit, regulatory, technology, operational, security, and other business risks such as reputation
damage related to negative publicity and dependencies on key personnel, customers, vendors, and systems. This section
discusses material risk factors that could adversely affect our financial results and condition and the value of, and return on, an
investment in us. Although this section attempts to highlight key risk factors, other risks may emerge at any time and we cannot
predict all risks or estimate the extent to which they may affect us. These risk factors should be read in conjunction with the
other information included in this report.
Loan Portfolio
Our loan portfolio is subject to certain risks related to interest rates, and the derivatives we use to manage interest rate risks,
prepayment risk, and credit risk, each of which could reduce the expected cash flows and earnings on our portfolio.
Interest rate risk - basis and repricing risk
We are exposed to interest rate risk in the form of basis risk and repricing risk because the interest rate characteristics of our
loan assets do not always match the interest rate characteristics of the funding for those assets.
We fund the majority of our FFELP student loan assets with one-month or three-month LIBOR indexed floating rate securities.
Meanwhile, the interest earned on our FFELP student loan assets is indexed to one-month LIBOR, three-month commercial
paper, and Treasury bill rates. The differing interest rate characteristics of our loan assets versus the liabilities funding these
assets result in basis risk, which impacts the excess spread earned on our loans. We also face repricing risk due to the timing of
the interest rate resets on our liabilities, which may occur as infrequently as once a quarter, in contrast to the timing of the
interest rate resets on our assets, which generally occur daily. In a declining interest rate environment, this may cause our
variable student loan spread to compress, while in a rising interest rate environment, it may cause the variable spread to
increase.
As of December 31, 2020, we had $17.8 billion, $0.7 billion, and $0.6 billion of FFELP loans indexed to the one-month
LIBOR, three-month commercial paper, and three-month Treasury bill rate, respectively, all of which reset daily, and $6.5
billion of debt indexed to three-month LIBOR, which resets quarterly, and $10.7 billion of debt indexed to one-month LIBOR,
which resets monthly. While these indices are all short term in nature with rate movements that are highly correlated over a
longer period of time, the indices' historically high level of correlation may be disrupted in the future due to capital market
dislocations or other factors not within our control. In such circumstances, our earnings could be adversely affected to a
material extent.
We have entered into basis swaps to hedge our basis and repricing risk, under which we receive three-month LIBOR set
discretely in advance and pay one-month LIBOR plus or minus a spread as defined in the agreements (the "1:3 Basis Swaps").
19
Interest rate risk - loss of floor income
FFELP loans originated prior to April 1, 2006 generally earn interest at the higher of the borrower rate, which is fixed over a
period of time, or a floating rate based on the Special Allowance Payments ("SAP") formula set by the Department. The SAP
rate is based on an applicable index plus a fixed spread that depends on loan type, origination date, and repayment status. We
generally finance our student loan portfolio with variable rate debt. In low and/or certain declining interest rate environments,
when the fixed borrower rate is higher than the SAP rate, these student loans earn at a fixed rate while the interest on the
variable rate debt typically continues to reflect the low and/or declining interest rates. In these interest rate environments, we
may earn additional spread income that we refer to as floor income.
Depending on the type of loan and when it was originated, the borrower rate is either fixed to term or is reset to an annual rate
each July 1. As a result, for loans where the borrower rate is fixed to term, we may earn floor income for an extended period of
time, which we refer to as fixed rate floor income, and for those loans where the borrower rate is reset annually on July 1, we
may earn floor income to the next reset date, which we refer to as variable rate floor income.
For the year ended December 31, 2020, we earned $116.8 million of fixed rate floor income, which reflects $6.7 million of net
settlements paid related to derivatives used to hedge loans earning fixed rate floor income. Absent the use of derivative
instruments, a rise in interest rates will reduce the amount of floor income received and this will have an impact on earnings due
to interest margin compression caused by increased financing costs, until such time as the federally insured loans earn interest
at a variable rate in accordance with their SAP formulas. In higher interest rate environments, where the interest rate rises above
the borrower rate and fixed rate loans effectively convert to variable rate loans, the impact of the rate fluctuations is reduced.
Interest rate risk - use of derivatives
We utilize derivative instruments to manage interest rate sensitivity. See note 6 of the notes to the consolidated financial
statements included in this report for additional information on derivatives used by us to manage interest rate risk. Our
derivative instruments are intended as economic hedges but do not qualify for hedge accounting; consequently, the change in
fair value, called the “mark-to-market,” of these derivative instruments is included in our operating results. Changes or shifts in
the forward yield curve can and have significantly impacted the valuation of our derivatives. Accordingly, changes or shifts in
the forward yield curve will impact our results of operations.
Developing an effective strategy for dealing with movements in interest rates is complex, and no strategy can completely
insulate us from risks associated with such fluctuations. Because many of our derivatives are not balance guaranteed to a
particular pool of student loans and we may not elect to fully hedge our risk on a notional and/or duration basis, we are subject
to the risk of being under or over hedged, which could result in material losses. In addition, our interest rate risk management
activities could expose us to substantial mark-to-market losses if interest rates move in a materially different way than was
expected based on the environment when the derivatives were entered into. As a result, our economic hedging activities may
not effectively manage our interest rate sensitivity or have the desired beneficial impact on our results of operations or financial
condition.
Since June 10, 2013, the CFTC has required over-the-counter derivative transactions to be executed through an exchange or
central clearinghouse. Clearing is a process by which a third-party, the clearinghouse, steps in between the original
counterparties and guarantees the performance of both, by requiring that each post substantial amounts of liquid collateral on an
initial (initial margin) and mark-to-market (variation margin) basis to cover the clearinghouse's potential future exposure in the
event of default. The clearing requirements require us to post substantial amounts of liquid collateral when executing new
derivative instruments, which could negatively impact our liquidity and capital resources and may prevent or limit us from
utilizing derivative instruments to manage interest rate sensitivity and risks.
Interest rate movements have an impact on the amount of payments we are required to settle with our clearinghouse on a daily
basis. We attempt to manage market risk associated with interest rates by establishing and monitoring limits as to the types and
degree of risk that may be undertaken. However, if interest rates move materially and negatively impact the fair value of our
derivative portfolio, the replacement of LIBOR as a benchmark rate as discussed below has significant adverse impacts on our
derivatives, or if we enter into additional derivatives in which the fair value of such derivatives becomes negative, we could be
required to pay a significant amount of variation margin to our clearinghouse. These payments, if significant, could negatively
impact our liquidity and capital resources.
Based on our interest rate swaps outstanding as of December 31, 2020, if the forward interest rate curve was 50 basis points
lower for the remaining duration of these derivatives, we would have been required to pay approximately $64.4 million in
additional variation margin. In addition, if the forward basis curve between one-month and three-month LIBOR experienced a
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ten basis point reduction in spread for the remaining duration of our 1:3 Basis Swaps (in which we pay one-month LIBOR and
receive three-month LIBOR), we would have been required to pay approximately $19.1 million in additional variation margin.
In addition, some of our variable rate debt is floored at zero percent, while the floating side of our fixed rate derivatives hedging
the debt are not floored. If one-month LIBOR were to fall below zero percent, we may experience losses. The scope of these
losses would depend on three factors - the notional amount of the fixed rate derivative portfolio, the extent to which one-month
LIBOR is below zero percent, and the amount of time it remained there.
Interest rate risk - replacement of LIBOR as a benchmark rate
The London Interbank Offered Rate (“LIBOR”) is a widely accepted interest rate benchmark referenced in financial contracts
globally and is used to determine interest rates on commercial and consumer loans, bonds, derivatives, and numerous other
financial instruments. As of December 31, 2020, the interest earned on a principal amount of $17.8 billion in our FFELP
student loan asset portfolio was indexed to one-month LIBOR, and the interest paid on a principal amount of $17.1 billion of
our FFELP student loan asset-backed debt securities was indexed to one-month or three-month LIBOR. In addition, the
majority of our derivative financial instrument transactions used to manage interest rate risks are indexed to LIBOR.
In July 2017, the United Kingdom’s Financial Conduct Authority, which regulates LIBOR, announced that it intends to stop
compelling banks to submit LIBOR rates after 2021. Accordingly, there is significant uncertainty regarding the availability of
LIBOR as a benchmark rate after 2021. In April 2018, the Federal Reserve Bank of New York commenced publication of three
reference rates based on overnight United States Treasury repurchase agreement transactions, including the Secured Overnight
Financing Rate (“SOFR”), which has been recommended as an alternative to United States dollar LIBOR by the Alternative
Reference Rates Committee. Uncertainty exists as to the transition process and broad acceptance of SOFR as the primary
alternative to LIBOR, including what effect it would have on the value of LIBOR-based securities, financial contracts, and
variable rate loans. Although the indentures for student loan asset-backed debt securities issued in our most recent LIBOR-
indexed securitization transactions include new interest rate determination fallback provisions emerging in the market for new
issuances of LIBOR-indexed debt securities, many of the contracts for our existing LIBOR-indexed assets, liabilities, and
derivative instruments from historical transactions do not include provisions that contemplated the possibility of a permanent
discontinuation of LIBOR and clearly specified a method for transitioning from LIBOR to an alternative benchmark rate, and it
is not yet known how the market in general, specific counterparties in particular, the courts, or regulators will address the
significant complexities and uncertainties involved in a transition away from LIBOR to an alternative benchmark rate.
Specifically, the Department has not yet indicated any market transition away from the current LIBOR framework for paying
special allowance payments to holders of FFELP assets. As a result, we cannot predict the impact that a transition from LIBOR
to an alternative benchmark rate would have on our existing LIBOR-indexed assets, liabilities, and derivative instruments, but
such impact could have material adverse effects on the value, performance, and related cash flows of such LIBOR-indexed
items, including our funding costs, net interest income, loan and other asset values, and asset-liability management strategies. In
particular, any such transition could:
•
•
adversely affect the interest rates paid or received on, the income and expenses associated with, and the pricing and
value of our LIBOR-based assets and liabilities, which include the majority of our FFELP student loan assets and
FFELP student loan asset-backed debt securities issued to fund those assets, as well as the majority of our derivative
financial instruments we use to manage LIBOR-based interest rate risks associated with such FFELP student loan-
related assets and liabilities;
result in uncertainty or differences in the calculation of the applicable interest rate or payment amounts on our LIBOR-
based assets and liabilities depending on the terms of the governing instruments, which in turn could result in disputes,
litigation, or other actions with counterparties regarding the interpretation and enforceability of certain fallback
language in LIBOR-based securities and contracts, and the potential renegotiation of previous contracts;
• make future asset-backed securitizations more difficult to complete or more expensive until LIBOR or alternative
benchmark rate uncertainties are resolved; and
•
result in basis risk if the alternative benchmark rate on our loan assets does not match the alternative benchmark rate
for the funding for those assets.
In addition, a transition away from LIBOR to an alternative benchmark rate or rates may impact our existing transaction data,
systems, operations, pricing, and risk management processes, and require significant efforts to transition to or develop
appropriate systems and analytics to reflect a new benchmark rate environment. There can be no assurance that such efforts will
successfully mitigate the financial and operational risks associated with a transition away from LIBOR.
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Prepayment risk
Higher rates of prepayments of student loans, including consolidations by the Department through the Federal Direct Loan
Program or private refinancing programs, would reduce our interest income.
Pursuant to the Higher Education Act, borrowers may prepay loans made under the FFEL Program at any time without penalty.
Prepayments may result from consolidations of student loans by the Department through the Federal Direct Loan Program or by
a lending institution through a private education or unsecured consumer loan, which historically tend to occur more frequently
in low interest rate environments; from borrower defaults, which will result in the receipt of a guaranty payment; and from
voluntary full or partial prepayments; among other things.
Legislative and executive action risk exists as Congress and the President evaluate economic stimulus packages and proposals
to reauthorize the Higher Education Act. If the federal government and the Department initiate additional loan forgiveness or
cancellation, other repayment options or plans, or consolidation loan programs, such initiatives could further increase
prepayments and reduce interest income, and could also reduce servicing fees. Future laws, executive actions, or other policy
statements may encourage or force consolidation, create additional income-based repayment or debt forgiveness programs,
create broad debt cancellation programs, or establish other policies and programs that impact prepayments on education loans.
Even if a broad debt cancellation program only applied to student loans held by the Department, such program could result in a
significant increase in consolidations of FFELP loans to Federal Direct Loan Program loans and a corresponding increase in
prepayments with respect to our FFELP loan portfolio. Some variability in prepayment levels is expected, although
extraordinary or extended increases in prepayment rates could have a materially adverse effect on our revenues, cash flows,
profitability, and business outlook, and, as a result, could materially, adversely affect our business, financial condition, and
results of operations.
We cannot predict how or what programs or policies will be impacted by any actions that the Administration, Congress, or the
federal government may take.
Credit risk
Future losses due to defaults on loans held by us present credit risk which could adversely affect our earnings. Our estimated
allowance for loan losses is based on periodic evaluations of the credit risk in our loan portfolios, including the consideration of
the following factors (as applicable), for each of our loan portfolios: loans in repayment versus those in nonpaying status;
delinquency status; type of private education or consumer loan program; trends in defaults in the portfolio based on internal and
industry data; past experience; trends in federally insured student loan claims rejected for payment by guarantors; changes to
federal student loan programs; current macroeconomic factors, including unemployment rates, gross domestic product, and
consumer price index; and other relevant qualitative factors.
The vast majority (97.8 percent) of our student loan portfolio is federally guaranteed. The federal government currently
guarantees 97 percent of the principal and interest on federally insured student loans disbursed on and after July 1, 2006 (and 98
percent for those loans disbursed on and after October 1, 1993 and prior to July 1, 2006), which limits our loss exposure on the
outstanding balance of our federally insured portfolio. Federally insured student loans disbursed prior to October 1, 1993 are
fully insured for both principal and interest. Our private education and consumer loans are unsecured, with neither a
government nor a private insurance guarantee. Accordingly, we bear the full risk of loss on these loans if the borrower and co-
borrower, if applicable, default. We are actively expanding our acquisition of private education and consumer loan portfolios,
which increases our exposure to credit risk.
On January 1, 2020, we adopted Accounting Standards Update (“ASU”) No. 2016-13, Financial Instruments — Credit Losses,
which utilizes an “expected loss” model for recognizing credit losses referred to as the Current Expected Credit Loss (“CECL”)
model. This differs significantly from the “incurred loss” model (the model used by us to recognize credit losses for all periods
prior to January 1, 2020), which delayed recognition until it was probable a loss had been incurred, and the adoption of the
CECL model on January 1, 2020 resulted in an increase to our allowance for loan losses of $91.0 million. See note 3 of the
notes to consolidated financial statements included in this report for further details on the impact on our consolidated financial
statements from the adoption of the CECL accounting standard.
If future defaults on loans held by us are higher than anticipated, which could result from a variety of factors such as downturns
in the economy, regulatory or operational changes, and other unforeseen future trends, or actual performance is significantly
worse than currently estimated, our estimate of the allowance for loan losses and the related provision for loan losses in our
statements of income would be materially affected.
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Our loan portfolio and other assets and operations could suffer adverse consequences to the extent that natural disasters,
widespread health crises similar to the COVID-19 pandemic discussed further below, terrorist activities, or international
hostilities affect the financial markets or the economy in general or in any particular region.
Natural disasters, widespread health crises similar to the COVID-19 pandemic discussed further below, terrorist activities, or
international hostilities affecting the financial markets or the economy in general or in any particular region could lead, for
example, to an increase in loan delinquencies, borrower bankruptcies, or defaults that could result in higher levels of
nonperforming assets, net charge-offs, and provisions for credit losses, as well as have adverse effects on our other assets and
business operations. Our ability to mitigate the adverse consequences of these occurrences is in part dependent on the quality of
our resiliency planning, and our ability, if any, to anticipate the nature of any such event that occurs. The adverse impact of
natural disasters, widespread health crises, terrorist activities, or international hostilities also could be increased to the extent
that there is a lack of preparedness on the part of national or regional emergency responders or on the part of other
organizations and businesses that we transact with, particularly those that we depend upon, but have no control over.
Additionally, the force and frequency of natural disasters are increasing as the climate changes.
Liquidity and Funding
The current maturities of our loan warehouse financing facilities do not match the maturities of the related funded loans,
and we may not be able to modify and/or find alternative funding related to the loan collateral in these facilities prior to
their expiration.
The majority of our portfolio of student loans is funded through asset-backed securitizations that are structured to substantially
match the maturities of the funded assets, and there are minimal liquidity issues related to these facilities. We also have loans
funded in shorter term warehouse facilities. The current maturities of the warehouse facilities do not match the maturity of the
related funded assets. Therefore, we will need to modify and/or find alternative funding related to the loan collateral in these
facilities prior to their expiration.
We have two FFELP warehouse facilities as described in note 5 of the notes to consolidated financial statements included in
this report. The FFELP warehouse facilities have revolving financing structures supported by liquidity provisions, which expire
on February 26, 2021 and in May 2021, respectively. In the event we are unable to renew the liquidity provisions for a facility,
the facility would become a term facility at a stepped-up cost, with no additional student loans being eligible for financing, and
we would be required to refinance the existing loans in the facility by the final maturity dates in February 2023 and May 2022,
respectively. The FFELP warehouse facilities also contain financial covenants relating to levels of our consolidated net worth,
ratio of recourse indebtedness to adjusted EBITDA, and unencumbered cash. Any noncompliance with these covenants could
result in a requirement for the immediate repayment of any outstanding borrowings under the facilities. As of December 31,
2020, $252.2 million was outstanding under the FFELP warehouse facilities and $21.2 million was advanced as equity support.
We also have a consumer loan warehouse facility that has an aggregate maximum financing amount available of $100.0
million, liquidity provisions to April 23, 2021, and a final maturity date of April 23, 2022. As of December 31, 2020, $25.8
million was outstanding and $11.5 million was advanced as equity support under this warehouse facility. In addition, we have a
private education loan warehouse facility that has an aggregate maximum financing amount available of $175.0 million,
liquidity provisions through February 13, 2022, and a final maturity date of February 13, 2023. As of December 31, 2020,
$150.4 million was outstanding and $16.4 million was advanced as equity support under this warehouse facility.
If we are unable to obtain cost-effective funding alternatives for the loans in the warehouse facilities prior to the facilities'
maturities, our cost of funds could increase, adversely affecting our results of operations. If we cannot find funding alternatives,
we would lose our collateral, including the loan assets and cash advances, related to these facilities.
Operations
Risks associated with our operations, as further discussed below, include those related to the importance of maintaining scale by
retaining existing customers and attracting new business opportunities, our information technology systems and potential
security and privacy breaches, and our ability to manage performance related to regulatory requirements.
Our largest fee-based customer, the Department of Education, represented 27 percent of our revenue in 2020. Failure to
extend the Department contracts or obtain new Department contracts in the Department's NextGen or ISS procurement
processes, our inability to consistently surpass competitor performance metrics, or unfavorable contract modifications or
interpretations, could significantly lower servicing revenue and hinder future service opportunities.
Our subsidiaries Nelnet Servicing, LLC (“Nelnet Servicing”) and Great Lakes Educational Loan Services, Inc. (“Great Lakes”)
are two of four large private sector companies that have student loan servicing contracts awarded by the Department in June
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2009 to provide additional servicing capacity for loans owned by the Department. The Department also contracts with four not-
for-profit entities to service student loans. As of December 31, 2020, Nelnet Servicing was servicing $191.7 billion of student
loans for 5.6 million borrowers under its contract, and Great Lakes was servicing $251.6 billion of student loans for 7.6 million
borrowers under its contract. For the year ended December 31, 2020, we recognized $326.7 million in revenue from the
Department under these contracts, which represented 27 percent of our revenue.
The current servicing contracts with the Department are currently scheduled to expire on June 14, 2021, but provide the
potential for an additional six-month extension at the Department’s discretion through December 14, 2021. The Consolidated
Appropriations Act, 2021, signed into law on December 27, 2020, provides that the Department may extend the period of
performance for the servicing contracts scheduled to expire on December 14, 2021 for up to two additional years to December
14, 2023.
The Department is conducting a contract procurement process entitled Next Generation Financial Services Environment
(“NextGen”) for a new framework for the servicing of all student loans owned by the Department. The Department has also
issued a new federal loan servicing solicitation for an Interim Servicing Solution ("ISS"), which solicitation is currently
suspended. For additional information on the NextGen and ISS procurement processes, see Part I, Item 1, “Loan Servicing and
Systems - Servicing federally-owned student loans for the Department.”
In the event that our servicing contracts are not extended beyond the current expiration date or we are not chosen as a
subsequent servicer, loan servicing revenue would decrease significantly. There are significant risks to us and uncertainties
regarding the current Department contracts and potential future Department contracts, including the uncertain nature of the
Department's awards of new NextGen contracts to other service providers and the pending and uncertain nature of other
components of the NextGen contract procurement process and the ISS contract procurement process, which could be subject to
potential delays, cancellations, or material changes to the structure of the contract procurement process; the possibility that new
contract awards and evaluations of proposals may be challenged by various interested parties and may not be finalized or
implemented for an extended period of time or at all; risks that we may not be successful in obtaining any new contracts with
the Department; and risks and uncertainties as to the terms and requirements under a potential new contract or contracts with
the Department. We cannot predict the timing, nature, or ultimate outcome of the Department's NextGen contract procurement
process or the ISS solicitation.
New loan volume is currently allocated among the eight servicers based on certain performance metrics established by the
Department and compared among all loan servicers in this group. The amount of future allocations of new loan volume could
be negatively impacted if we are unable to consistently surpass comparable competitor and/or other performance metrics.
In the event the current or any future Department servicing contracts become subject to unfavorable modifications or
interpretations by the Department, loan servicing revenue could decrease significantly, performance penalties could be assessed,
and/or operating costs to perform the contracts could increase significantly.
Additionally, we are partially dependent on the existing Department contracts to broaden servicing operations with the
Department, other federal and state agencies, and commercial clients. The size and importance of these contracts provide us the
scale and infrastructure needed to profitably expand into new business opportunities. Failure to extend the Department contracts
beyond the current expiration date, or obtain new Department contracts, could significantly hinder future opportunities, as well
as result in potential restructuring charges that may be necessary to re-align our cost structure with our servicing operations.
The COVID-19 pandemic has adversely impacted our results of operations, and is expected to continue to adversely impact
our results of operations, as well as adversely impact our businesses, financial condition, and/or cash flows.
The COVID-19 pandemic has caused significant disruption to the U.S. and world economies, including significantly higher
unemployment and underemployment, significantly lower interest rates, and extreme volatility in the U.S. and world markets.
These effects have adversely impacted our results of operations and, if these effects result in sustained economic stress or
recession, they could have a material adverse impact on us in a number of ways.
COVID-19 has materially disrupted business operations, resulting in significantly higher levels of unemployment or
underemployment. As a result, many individual student and consumer borrowers have experienced financial hardship, making it
difficult, if not impossible, to meet loan payment obligations without temporary assistance, and we expect that more borrowers
will be similarly affected the longer the COVID-19 pandemic continues. We are monitoring key metrics of financial hardship,
including changes in weekly unemployment claims, enrollment in auto-debit payments, requests for new forbearances,
enrollment in hardship payment plans, and early delinquency metrics.
We consider the characteristics of our loan portfolios and their expected behavior in forecasted economic scenarios. We update
our evaluation of current and forecasted economic conditions each reporting period and adjust our allowance for loan losses as
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appropriate. If future economic conditions as a result of COVID-19 are significantly worse than what was assumed as a part of
these assessments, specifically related to the severity and length of the downturn and the timing and extent of subsequent
recovery, it could result in additional allowance for loan losses and impairment charges being recorded in future periods.
Our net interest income and profitability have been and could further be negatively affected by volatility in interest rates caused
by uncertainties stemming from COVID-19. Higher income volatility from changes in interest rates and spreads to benchmark
indices has caused and could cause a loss of net interest income and adverse changes in current fair value measurements of our
assets and liabilities. Fluctuations in interest rates have impacted and will continue to impact both the level of income and
expense recorded on most of our assets and liabilities and the value of all interest-earning assets and interest-bearing liabilities,
which in turn could have a material adverse effect on our net income, operating results, or financial condition.
The majority of our employees continue to work from home. We have never had to run our operations to such extent remotely
for an extended period of time, and it is possible we will encounter challenges to running our businesses. For example,
COVID-19 has presented potential risks to staffing, such as stress on our workforce as a result of homeschooling, caring for
themselves and loved ones, and potential burnout, and it is possible that key employees or a significant number of employees
may be affected by the virus. In addition, our operations rely on the efficient and secure collection, processing, storage, and
transmission of personal, confidential, and other information in a significant number of customer transactions on a continuous
basis through our computer systems and networks and those of our third-party service providers. Unanticipated issues arising
from handling personal, confidential, and other information in a work-from-home environment could lead to greater risks for
us, including cybersecurity and privacy risks.
Beginning in March 2020, schools largely moved to on-line classes for their students. Although many schools moved to on-
campus learning beginning with the 2020/2021 academic year, it is uncertain if, and the extent to which, they will have to move
back to on-line classes during the academic term if the COVID-19 pandemic increases in severity. The COVID-19 pandemic
has and may continue to impact demand for our education technologies, services, and payment processing products and
services.
Under the Coronavirus Aid, Relief, and Economic Security Act (the “CARES Act”) signed into law on March 27, 2020, federal
student loan payments and interest accruals were suspended on all loans owned by the Department. The benefits of the law
were applied retroactively to March 13, 2020, when the President declared a state of emergency related to COVID-19, and these
federal student loan borrower relief provisions have been extended through September 30, 2021. Beginning March 13, 2020, we
received less servicing revenue per borrower from the Department based on the borrower forbearance status than what was
earned on such accounts prior to these provisions. As a result of the extension of these CARES Act provisions through
September 30, 2021, we currently anticipate Department servicing revenue will be lower in 2021 from recent historical periods
due to the lower rates. 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. We currently anticipate 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. We currently anticipate 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. For additional
information on the impacts of COVID-19 on our results of operations, see Part II, Item 7, “Management’s Discussion and
Analysis of Financial Condition and Results of Operations - Overview - Impacts of COVID-19 Pandemic.”
If 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.
Although the CARES Act does not apply to our FFELP, private education, or consumer loans, several states have announced
various initiatives to suspend payment obligations for private education loan borrowers in those states, and we continue to
support these initiatives and our FFELP, private education, and consumer loan borrowers. Due to uncertainties regarding,
among other things, the duration of the COVID-19 pandemic and any new legislation, regulations, guidance, or widely accepted
practices with respect to relief to loan borrowers, we are not able to estimate the ultimate impact that debt relief measures will
have on our results of operations.
The CARES Act and other COVID-19-related borrower relief measures have resulted in, and may continue to result in, certain
processing and other changes within our loan servicing operations, including the processing of automatic forbearances, special
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payment instructions, and special credit reporting. Such changes involve additional regulatory and other complexities,
uncertainties, and matters of interpretation, and have resulted in litigation. In addition, such COVID-19 regulatory measures and
associated operational changes increase the risk that noncompliance with applicable laws, regulations, and Consumer Financial
Protection Bureau guidance could result in penalties, litigation, reputation damage, and a loss of customers.
Legislative risk exists as Congress evaluates additional COVID-19 related economic stimulus packages. If the federal
government initiates additional loan forgiveness, other repayment options or plans, or consolidation loan programs, such
initiatives could increase prepayments and reduce interest income, and could also reduce servicing fees.
We currently believe our liquidity and capital resources position is strong, and we expect to be able to fund our business
operations for the foreseeable future. We also currently plan to continue making regular quarterly dividend payments on our
Class A and Class B common stock, subject to future earnings, capital requirements, financial condition, and other factors.
However, if circumstances surrounding COVID-19 continue to change in significantly adverse ways and/or if the pandemic
continues for an extended period of time, our liquidity and capital resources position could be materially and adversely affected,
which could adversely impact our businesses, cash flows (including forecasted cash flows from our asset-backed
securitizations), and overall financial condition, and could also result in a reduction, suspension, or discontinuation of quarterly
dividend payments on our Class A and Class B common stock.
The extent to which the COVID-19 pandemic impacts our businesses, results of operations, financial condition, and/or cash
flows will depend on future developments, which are highly uncertain and largely beyond our control, including, among others:
the scope, severity, and duration of the pandemic; the number of our employees, borrowers, customers, and vendors adversely
affected by the pandemic; the impact of the pandemic on schools, student enrollment, and the need for student and consumer
loans; the broader public health and economic dislocations resulting from the pandemic; the actions taken by governmental
authorities to limit the public health, financial, and economic impacts of the pandemic; any further legislative or regulatory
changes that suspend or reduce payments or cancel or discharge obligations for student or consumer loan borrowers; any
reputational damage related to the broader reception and perception of our response to the pandemic; and the impact of the
pandemic on local, U.S., and world economies. However, as with many other businesses, the impact of the COVID-19
pandemic, or any other pandemic, on our businesses could be material and adverse. To the extent that the COVID-19 pandemic
continues to adversely affect the U.S. and world economies and/or adversely affects our businesses, results of operations,
financial condition, and/or cash flows, it may also have the effect of increasing the likelihood and/or magnitude of other risks
described in this report.
A failure of our operating systems or infrastructure could disrupt our businesses, cause significant losses, result in
regulatory action, and damage our reputation.
We operate many different businesses in diverse markets and depend on the efficient and uninterrupted operation of our
computer network systems, software, datacenters, cloud services providers, telecommunications systems, and the rest of our
operating systems and infrastructure to process and monitor large numbers of daily transactions in compliance with contractual,
legal, regulatory, and our own standards. Such systems and infrastructure could be disrupted because of a cyberattack, spikes in
transaction volume, power outages, telecommunications failures, degradation or loss of internet or website availability, natural
disasters, political or social unrest, and terrorist acts. A significant adverse incident could damage our reputation and credibility,
lead to customer dissatisfaction and loss of customers or revenue, and result in regulatory action, in addition to increased costs
to service our customers and protect our network. Such event also could result in large expenditures to repair or replace the
damaged properties, networks, or information systems or to protect them from similar events in the future. System redundancy
may be ineffective or inadequate, and our business continuity plans may not be sufficient for all eventualities. Any significant
loss of customers or revenue, or significant increase in costs of serving those customers, could adversely affect our growth,
financial condition, and results of operations.
Operating system and infrastructure risks continue to increase in part because of the proliferation of new technologies, the use
of the internet and telecommunications technologies to support and process customer transactions, the increased number and
complexity of transactions being processed, and the increased sophistication and activities of organized crime, hackers,
terrorists, activists, nation state threat actors, and other external parties. In addition, to access our services and products, our
customers may use personal smartphones, tablet PCs, and other mobile devices that are beyond our control systems.
Malicious and abusive activities, such as the dissemination of computer viruses, worms, and other destructive or disruptive
software, internal and external threats, computer hackings, social engineering, process breakdowns, denial of service attacks,
ransomware or ransom demands to not expose vulnerabilities in systems, and other malicious activities have become more
common. These activities could have adverse consequences on our network and our customers, including degradation of
service, excessive call volume, and damage to our or our customers' equipment and data. Although to date we have not
experienced a material loss relating to cyberattacks or system outage, there can be no assurance that we will not suffer such
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losses in the future or that there is not a current threat that remains undetected at this time. Our risk and exposure to these
matters remains heightened because of, among other things, the evolving nature of these threats, and the size and scale of our
services.
We could also incur losses resulting from the risk of unauthorized access to our computer systems, the execution of
unauthorized transactions by employees, errors relating to transaction processing and technology, breaches of the internal
control system and compliance requirements, and failures to properly execute business continuation and disaster recovery plans.
In the event of a breakdown in the internal control system, improper operation of systems, or unauthorized employee actions,
we could suffer financial loss, potential legal actions, fines, or civil monetary penalties that could arise as a result of an
operational deficiency or as a result of noncompliance with applicable regulatory standards, adverse business decisions or their
implementation, and customer attrition due to potential negative publicity and damage to our reputation.
As a result of the above risks, we continue to develop and enhance our training, controls, processes, and practices designed to
protect, monitor, and restore our systems, computers, software, data, and networks from attack, damage, or unauthorized access,
and this remains a priority for us, each of our business segments, and our Board of Directors. Even though we maintain
technology and telecommunication, professional services, media, network security, privacy, injury, and liability insurance
coverage to offset costs that may be incurred as a result of a cyberattack, information security breach, or extended system
outage, this insurance coverage may not cover all costs of such incidents.
A security breach of our information technology systems could result in the disclosure of confidential customer and other
information, significant financial losses and legal exposure, and damage to our reputation.
Our operations rely on the secure processing, storage and transmission of personal, confidential and other sensitive information
in our information technology systems, including customer, personnel, and vendor data. Although we devote significant
resources to maintain and regularly upgrade our systems and processes that are designed to protect the security of our systems,
software and networks and to protect the confidentiality, integrity and availability of information belonging to us and our
customers, we experience increasingly numerous and more sophisticated attacks on our systems, and our cybersecurity
measures may not be entirely effective.
We may not be able to anticipate or to implement effective preventive measures against all types of potential security breaches,
because the techniques used change frequently, generally increase in sophistication, often are not recognized until launched,
sometimes go undetected even when successful, and result in cybersecurity attacks originating from a wide variety of sources,
including organized crime, hackers, terrorists, activists, hostile foreign governments, and other external parties. Those parties
may also attempt to fraudulently induce employees, customers, or other users of our systems to disclose sensitive information to
gain access to our data or that of our customers, such as through “phishing” schemes. These risks may increase in the future as
we continue to increase our mobile and internet-based product offerings and expand our internal usage of web-based products
and applications. In addition, our customers often use their own devices, such as computers, smart phones, and tablet
computers, to make payments and manage their accounts. We have limited ability to assure the safety and security of our
customers’ transactions to the extent they are using their own devices, which could be subject to similar threats. A penetration
or circumvention of our information security systems, or the intentional or unintentional disclosure, alteration or destruction by
an authorized user of confidential information necessary for our operations, could result in serious negative consequences for
us. These consequences may include violations of applicable privacy and other laws; financial loss to us or to our customers;
loss of confidence in our cybersecurity measures; customer dissatisfaction; significant litigation exposure; regulatory fines,
penalties or intervention; reimbursement or other compensatory costs; additional compliance costs; significant disruption of our
business operations; and harm to our reputation. Although to date we have not experienced a material loss relating to
information security breaches, there can be no assurance that we will not suffer such losses in the future or that there is not a
current threat that remains undetected at this time.
In addition, we routinely transmit, receive, and process large volumes of personal, confidential and proprietary information
through third parties. Although we work to ensure that third parties with which we do business maintain information security
systems and processes, those measures may not be entirely effective, and an information security breach of a third-party system
may not be revealed to us in a timely manner, which could compromise our ability to respond effectively. An interception,
misuse or mishandling of personal, confidential or proprietary information being processed, sent to or received from a third
party could result in material adverse legal liability, regulatory actions, disruptions, and reputational harm with respect to our
businesses.
27
We must adapt to rapid technological change. If we are unable to take advantage of technological developments or our
software products experience quality problems and development delays, we may experience a decline in the demand for our
products and services.
Our long-term operating results depend substantially upon our ability to continually enhance, develop, introduce, and market
new products and services. We must continually and cost-effectively maintain and improve our information technology systems
and infrastructure in order to successfully deliver competitive and cost effective products and services to our customers. The
widespread adoption of new technologies and market demands could require substantial expenditures to enhance system
infrastructure and existing products and services. If we fail to enhance and scale our systems and operational infrastructure or
products and services, our operating segments may lose their competitive advantage and this could adversely affect financial
and operating results.
Our products and services are based on sophisticated software and computing systems that often encounter development delays,
and the underlying software may contain undetected bugs or other defects that interfere with its intended operation. Quality
problems with our software products and errors or delays in our processing of electronic transactions could result in additional
development costs, diversion of technical and other resources from our other development efforts, loss of credibility with
current or potential clients, harm to our reputation, or exposure to liability claims.
We rely on third parties for a wide array of services for our customers, and to meet our contractual obligations. The failure
of a third party with which we work could adversely affect our business performance and reputation.
We rely on third parties for a wide array of critical operational services, technology, datacenter hosting facilities, cloud
computing platforms, and software. We also rely upon data from external sources to maintain our proprietary databases,
including data from customers, business partners, and various government sources.
Our third-party service providers may be vulnerable to damage or interruption from earthquakes, floods, fires, power loss,
cyberattacks, telecommunications failures, acts of terrorism, and similar events. They may also be subject to break-ins,
sabotage, intentional acts of vandalism, and similar misconduct, as well as local administrative actions, changes to legal or
permitting requirements, and litigation to stop, limit or delay operations. If a third-party service provider experiences an outage,
or our services are disrupted, we may temporarily lose the ability to conduct certain business activities, which could impact our
ability to serve our customers and meet our contractual, legal or regulatory compliance obligations. Our businesses would also
be harmed if our customers and potential customers believe our services are unreliable. Even though we have selected the third
parties with which we do business carefully and have disaster recovery and business continuity arrangements, our services
could be interrupted. Some of our third-party service providers may engage vendors of their own as they provide services or
technology solutions for our operations, which introduces the same risks that these “fourth parties” could be the source of
operational failures.
Third parties that facilitate our business activities, including exchanges, clearinghouses, payment networks, or financial
intermediaries, could also be sources of operational risks to our businesses, including with respect to breakdowns or failures of
their systems, misconduct by their employees, or cyberattacks that could affect their ability to deliver a product or service to us
or result in the loss or compromise of our information or the information of our customers. Our ability to implement backup
systems or other safeguards with respect to third-party systems is limited. Furthermore, an attack on, or failure of, a third-party
system may not be revealed to us in a timely manner, which could compromise our ability to respond effectively.
We must satisfy certain requirements necessary to maintain the federal guarantees of our federally insured loans and the
federally insured loans that we service for third parties, and we may incur penalties or lose our guarantees if we fail to meet
these requirements.
As of December 31, 2020, we serviced $30.8 billion of FFELP loans that maintained a federal guarantee, of which $16.3 billion
and $14.5 billion were owned by us and third-party entities, respectively. We must meet various requirements in order to
maintain the federal guarantee on federally insured loans, which is conditional based on compliance with origination, servicing,
and collection policies set by the Department and guaranty agencies. If we misinterpret Department guidance, or incorrectly
apply the Higher Education Act, the Department could determine that we are not in compliance. Federally insured loans that are
not originated, disbursed, or serviced in accordance with the Department's and guaranty agency regulations may risk partial or
complete loss of the guarantee. If we experience a high rate of servicing deficiencies (including any deficiencies resulting from
the conversion of loans from one servicing platform to another, errors in the loan origination process, establishment of the
borrower's repayment status, and due diligence or claim filing processes), it could result in the loan guarantee being revoked or
denied. In most cases we have the opportunity to cure these deficiencies by following a prescribed cure process which usually
involves obtaining the borrower's reaffirmation of the debt. However, not all deficiencies can be cured.
28
A guaranty agency may also assess an interest penalty upon claim payment if the deficiency does not result in a loan rejection.
These interest penalties are not subject to cure provisions and are typically related to isolated instances of due diligence
deficiencies. Additionally, we may become ineligible for special allowance payment benefits from the time of the first
deficiency leading to the loan rejection through the date that the loan is cured.
As FFELP loan holders, servicers, and guaranty agencies exit the loan program and consolidation within the industry takes
place, this increases the complexity of servicing and claim filing due to the amount of loan servicing and loan guaranty transfers
and the opportunity for errors at the time a claim is filed.
Failure to comply with federal and guarantor regulations may result in fines, penalties, the loss of the insurance and related
federal guarantees on affected FFELP loans, the loss of special allowance payment benefits, expenses required to cure servicing
deficiencies, suspension or termination of the right to participate as a FFELP servicer, negative publicity, and potential legal
claims, including potential claims by our servicing customers if they lose the federal guarantee on loans that we service for
them. If we are subjected to significant fines, or loss of insurance or guarantees on a material number of FFELP loans, or if we
lose our ability to service FFELP loans, it could have a material, negative impact on our business, financial condition, or results
of operations.
Our servicing contracts with the Department of Education expose us to additional risks inherent in government contracts
and our third-party FFELP loan servicing business is subject to additional risks inherent in government programs.
The Federal government could engage in a prolonged debate linking the federal deficit, debt ceiling, government shutdown, and
other budget issues. If U.S. lawmakers in the future fail to reach agreement on these issues, the federal government could stop
or delay payment on its obligations. Further, legislation to address the federal deficit and spending could impose proposals that
would adversely affect the FFEL and Federal Direct Loan Programs' servicing businesses.
We contract with the Department to administer loans held by the Department in both the FFEL and Federal Direct Loan
Programs, we own a portfolio of FFELP loans, and we service our FFELP loans and loans for third parties. These loan
programs are authorized by the Higher Education Act and are subject to periodic reauthorization and changes to the programs
by the Administration and U.S. Congress. Any changes, including the potential for borrowers to refinance loans via Direct
Consolidation Loans, or broad loan forgiveness, could have a material impact to our cash flows from servicing, interest income,
and operating margins. For example, a broad student loan debt cancellation program by the government could result in a
significant decrease in our Department servicing revenues and our revenues for servicing FFELP loans for third parties, and
even if a broad debt cancellation program only applied to student loans held by the Department, such program could result in a
significant increase in consolidations of FFELP loans held by third parties to Federal Direct Loan Program loans, and thus an
associated decrease in our third-party FFELP loan servicing revenues.
Government entities in the United States often reserve the right to audit contract costs and conduct inquiries and investigations
of business practices. These entities also conduct reviews and investigations and make inquiries regarding systems, including
systems of third parties, used in connection with the performance of the contracts. Negative findings from audits, investigations,
or inquiries could affect the contractor’s future revenues and profitability. If improper or illegal activities are found in the
course of government audits or investigations, we could become subject to various civil and criminal penalties, including those
under the civil U.S. False Claims Act. Additionally, we may be subject to administrative sanctions, which may include
termination or non-renewal of contracts, forfeiture of profits, suspension of payments, fines and suspensions, or debarment from
doing business with other agencies of that government. Due to the inherent limitations of internal controls, it may not be
possible to detect or prevent all improper or illegal activities.
The Government could change governmental policies, programs, regulatory environments, spending sentiment, and many other
factors and conditions, some of which could adversely impact our business, financial condition, and results of operations. We
cannot predict how or what programs or policies will be impacted by the federal government. The conditions described above
could impact not only our contracts with the Department, but also other existing or future contracts with government or
commercial entities.
Our ability to continue to grow and maintain our contracts with commercial businesses and government agencies is partly
dependent on our ability to maintain compliance with various laws, regulations, and industry standards applicable to those
contracts.
We are subject to various laws, regulations, and industry standards related to our commercial and government contracts. In
most cases, these contracts are subject to termination rights, audits, and investigations. The laws and regulations that impact our
operating segments are outlined in Part I, Item 1, “Regulation and Supervision.” Additionally, our contracts with the federal
government require that we maintain internal controls in accordance with the National Institute of Standards and Technologies
29
(“NIST”) and our operating segments that utilize payment cards are subject to the Payment Card Industry Data Security
Standards (“PCI DSS”). If we are found to be in noncompliance with the contract provisions or applicable laws, regulations, or
standards, or the contracted party exercises its termination or other rights for that or other reasons, our reputation could be
negatively affected, and our ability to compete for new contracts or maintain existing contracts could diminish. If this were to
occur, our results of operations from existing contracts and future opportunities for new contracts could be negatively affected.
We could face significant legal and reputational harm if we fail to safeguard the privacy of personal information.
We are subject to complex and evolving laws and regulations, both inside and outside of the United States, governing the
privacy and protection of personal information of individuals. The protected individuals can include our customers, employees,
and the customers and employees of our clients, vendors, counterparties, and other third parties. Ensuring the collection, use,
transfer, and storage of personal information complies with applicable laws and regulations in relevant jurisdictions can
increase operating costs, impact the development of new products or services, and reduce operational efficiency. Any
mishandling or misuse of the personal information of customers, employees, or others by us or a third party affiliate could
expose us to litigation or regulatory fines, penalties, or other sanctions. Additional risks could arise if we or an affiliated third
party do not provide adequate disclosure or transparency to our customers about the personal information collected from them
and its use; fail to receive, document, and honor the privacy preferences expressed by customers; fail to protect personal
information from unauthorized disclosure; or fail to maintain proper training on privacy practices for all employees or third
parties who have access to personal data. Concerns regarding the effectiveness of our measures to safeguard personal
information and abide by privacy preferences, or even the perception that those measures are inadequate, could cause the loss of
existing or potential customers and thereby reduce our revenue. In addition, any failure or perceived failure to comply with
applicable privacy or data protection laws and regulations could result in requirements to modify or cease certain operations or
practices, and/or significant liabilities, regulatory fines, penalties, and other sanctions. The regulatory framework for privacy
issues is evolving and is likely to continue doing so for the foreseeable future, which creates uncertainty. Because the
interpretation and application of privacy and data protection laws and privacy standards are still uncertain, it is possible that
these laws or privacy standards may be interpreted and applied in a manner that is inconsistent with our practices. Any inability
to adequately address privacy concerns, even if unfounded, or to comply with applicable privacy or data protection laws,
regulations, and privacy standards, could result in additional cost and liability for us, damage our reputation, and harm our
business.
Nelnet Bank’s operations may not achieve expected market penetration and business plan results.
On November 2, 2020, Nelnet Bank, our banking subsidiary, launched operations. Nelnet Bank operates as an internet Utah-
chartered industrial bank franchise focused on the private education loan marketplace, and its bank charter allows us to maintain
our other diversified business offerings. Nelnet Bank was funded by us 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, we made a pledged
deposit of $40.0 million with Nelnet Bank, as required under an agreement with the Federal Deposit Insurance Corporation
(“FDIC”).
The regulatory landscape surrounding industrial banks continues to be scrutinized. Nelnet Bank will monitor the regulatory
environment and any related changes that may impact the charter or its operations. Nelnet Bank has established a 3-year
business plan, which requires ongoing monitoring to ensure alignment to financial and asset targets as well as other
commitments. Failure to meet these targets and commitments could jeopardize the Nelnet Bank charter.
Our failure to successfully manage business and certain asset acquisitions and other investments could have a material
adverse effect on our business, financial condition, and/or results of operations.
We have expanded our services and products through business acquisitions and we may acquire other new businesses, products,
and services, or enhance existing businesses, products, and services, or make other investments to further diversify our
businesses both within and outside of our historical education-related businesses, through acquisitions of other companies,
product lines, technologies, and personnel, or through investments in new asset classes. Any acquisition or investment is subject
to a number of risks. Such risks may include diversion of management time and resources, disruption of our ongoing
businesses, difficulties in integrating acquisitions (including potential delays or errors in converting loan servicing portfolio
acquisitions to our servicing platform), loss of key employees, degradation of services, difficulty expanding information
technology systems and other business processes to incorporate the acquired businesses, extensive regulatory requirements,
dilution to existing shareholders if our common stock is issued in consideration for an acquisition or investment, incurring or
assuming indebtedness or other liabilities in connection with an acquisition, unexpected declines in real estate values or the
failure to realize expected benefits from real estate development projects, lack of familiarity with new markets, and difficulties
in supporting new product lines. Our failure to successfully manage acquisitions or investments, or successfully integrate
acquisitions, could have a material adverse effect on our business, financial condition, and/or results of operations.
30
Correspondingly, our expectations as to the accretive nature of the acquisitions or investments could be inaccurate.
Our significant investments in ALLO and Hudl are subject to a number of risks, including macroeconomic conditions,
competition, political and regulatory requirements, technology advancements, cybersecurity threats, retention of key personnel,
and other risks. ALLO derives its revenue primarily from the sale of telecommunication services, including internet, telephone,
and television services, to business, governmental, and residential customers in Nebraska and Colorado, and specializes in high-
speed internet and broadband services available through its all-fiber network. Telecommunications businesses are highly
competitive and subject to extensive federal, state, and local regulations. Additionally, our investment in ALLO is dependent on
ALLO maintaining and expanding its infrastructure and ability to continue to increase market share in existing and new
markets.
Hudl is a leading sports performance analysis company and their software provides more than 4.3 million coaches, athletes,
trainers and analysts across 30+ sports the insights to be more competitive. The Hudl business is subject to global market
conditions, new competition, advancements in technology, and continued demand for their products and services. The
COVID-19 pandemic was significantly disruptive to the Hudl business, and this impact could continue for the duration of the
pandemic.
The operating results of these companies could impact the valuation of these investments on our financial statements and we
may not be able to fully monetize these investments without a liquidation event.
Regulatory and Legal
Federal and state laws and regulations can restrict our businesses and result in increased compliance expenses, and
noncompliance with these laws and regulations could result in penalties, litigation, reputation damage, and a loss of
customers.
Our operating segments are heavily regulated by federal and state government regulatory agencies. See Part I, Item 1,
"Regulation and Supervision." The laws and regulations enforced by these agencies are proposed or enacted to protect
consumers and the financial industry as a whole, not necessarily us, our operating segments, or our shareholders. We have
procedures and controls in place to monitor compliance with numerous federal and state laws and regulations. However,
because these laws and regulations are complex, differ between jurisdictions, and are often subject to interpretation, or as a
result of unintended errors, we may, from time to time, inadvertently be in non-compliance with these laws and regulations.
Compliance with these laws and regulations is expensive and requires the time and attention of management. These costs divert
capital and focus away from efforts intended to grow our business. If we do not successfully comply with laws, regulations, or
policies, we could incur fines or penalties, lose existing or new customer contracts or other business, and suffer damage to our
reputation. Changes in these laws and regulations can significantly alter our business environment, limit business operations,
and increase costs of doing business, and we cannot predict the impact such changes would have on our profitability.
The Consumer Financial Protection Bureau (CFPB) has the authority to supervise and examine large nonbank student loan
servicers, including us. If in the course of such an examination the CFPB were to determine that we were not in compliance
with applicable laws, regulations, and CFPB guidance, it is possible that this could result in material adverse consequences,
including, without limitation, settlements, fines, penalties, public enforcement action, adverse regulatory actions, changes in our
business practices, or other actions. The CFPB has also issued student loan servicing rules since its inception, and continues to
review servicing areas where new guidance or rules may be issued in the future.
There continues to be uncertainty regarding how the CFPB's recommendations, strategies, and priorities will impact our
businesses and our results of operations going forward. Actions by the CFPB could result in requirements to alter our services,
causing them to be less attractive or effective and impair our ability to offer them profitably. In the event that the CFPB changes
regulations adopted in the past by other regulators, or modifies past regulatory guidance, our compliance costs and litigation
exposure could increase.
Several states have enacted laws regulating and monitoring the activity of student loan servicers. Some of these laws stipulate
additional licensing fees which increase our cost of doing business. Where we have obtained licenses, state licensing statutes
may impose a variety of requirements and restrictions on us. In addition, these statutes may also subject us to the supervisory
and examination authority of state regulators in certain cases, and we will be subject to and experience exams by state
regulators. If we are found to not have complied with applicable laws, regulations, or requirements, we could: (i) lose one or
more of our licenses or authorizations, (ii) become subject to a consent order or administrative enforcement action, (iii) face
lawsuits (including class action lawsuits), sanctions, or penalties, or (iv) be in breach of certain contracts, which may void or
cancel such contracts. We anticipate additional states adopting similar laws.
31
As a result of the Reconciliation Act of 2010, our existing FFELP loan portfolio will continue to decline over time.
The Reconciliation Act of 2010 discontinued new loan originations under the FFEL Program effective July 1, 2010, and
requires all new federal loan originations be made through the Federal Direct Loan Program. Although the new law did not alter
or affect the terms and conditions of existing FFELP loans, interest income related to existing FFELP loans will decline over
time as existing FFELP loans are paid down, refinanced, or repaid by guaranty agencies after default. We currently believe that
in the short-term we will 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. If we are unable to grow or develop new
revenue streams, our consolidated revenue and operating margin will decrease as a result of the decline in FFELP loan volume
outstanding.
Exposure related to certain tax issues could decrease our net income.
Federal and state income tax laws and regulations are often complex and require interpretation. From time to time, we engage in
transactions in which the tax consequences may be subject to uncertainty. Significant judgment is required in assessing and
estimating the tax consequences of these transactions. We prepare and file tax returns based on the interpretation of tax laws
and regulations. In the normal course of business, our tax returns are subject to examination by various taxing authorities. Such
examinations may result in future tax and interest assessments by these taxing authorities. In accordance with authoritative
accounting guidance, we establish reserves for tax contingencies related to deductions and credits that we may be unable to
sustain. Differences between the reserves for tax contingencies and the amounts ultimately owed are recorded in the period they
become known. Adjustments to our reserves could have a material effect on our financial statements.
We may also be impacted by changes in tax laws, including tax rate changes, new tax laws, and subsequent interpretations of
tax laws by federal and state tax authorities. For example, any future tax legislation increasing the corporate federal income tax
rate and/or limiting deductions could have a negative impact on the Company’s financial results. In addition, several states are
in a deficit position due to the pandemic. Accordingly, states may look to expand their taxable base, alter their tax calculation,
or increase tax rates, which could result in an additional cost to the Company.
In addition to corporate tax matters, as both a lender and servicer of student loans, we are required to report student loan interest
received and cancellation of indebtedness to individuals and the Internal Revenue Service on an annual basis. These
informational forms assist individuals in complying with their federal and state income tax obligations. The statutory and
regulatory guidance regarding the calculations, recipients, and timing are complex and we know that interpretations of these
rules vary across the industry. The complexity and volume associated with these informational forms creates a risk of error
which could result in penalties or damage to our reputation.
We invest in certain tax-advantaged projects promoting renewable energy resources (solar projects). Our investments in these
projects are designed to generate a return primarily through the realization of federal income tax credits, operating cash flows,
and other tax benefits, over specified time periods. Our investments in these projects may not generate returns as anticipated
and may have an adverse impact on our financial results. We are subject to the risk that tax credits recorded currently and
previously, which remain subject to recapture by taxing authorities based on compliance features required to be met at the
project level, will fail to meet certain government compliance requirements and will not be able to be realized. The possible
inability to realize these tax credits and other tax benefits can have a negative impact on our financial results. The risk of not
being able to realize the tax credits and other tax benefits depends on many factors outside of our control, including changes in
the applicable tax code and the ability of the projects to continue operation.
Principal Shareholder and Related Party Transactions
Our Executive Chairman beneficially owns 82.3 percent of the voting rights of our shareholders and effectively has control
over all of our matters.
Michael S. Dunlap, our Executive Chairman and a principal shareholder, beneficially owns 82.3 percent of the voting rights of
our shareholders. Accordingly, each member of the Board of Directors and each member of management has been elected or
effectively appointed by Mr. Dunlap and can be removed by Mr. Dunlap. As a result, Mr. Dunlap, as Executive Chairman and
controlling shareholder, has control over all of our matters and has the ability to take actions that benefit him, but may not
benefit other minority shareholders, and may otherwise exercise his control in a manner with which other minority shareholders
may not agree or which they may not consider to be in their best interests.
32
Our contractual arrangements and transactions with Union Bank and Trust Company ("Union Bank"), which is under
common control with us, present conflicts of interest and pose risks to our shareholders that the terms may not be as
favorable to us as we could receive from unrelated third parties.
Union Bank is controlled by Farmers & Merchants Investment Inc. ("F&M"), which owns 81.5 percent of Union Bank's
common stock and 15.5 percent of Union Bank's non-voting non-convertible preferred stock. Certain grantor retained annuity
trusts established by Mr. Dunlap, a significant shareholder, as well as Executive Chairman, and a member of our Board of
Directors, and his spouse own a total of 50.4 percent of F&M’s outstanding voting common stock, and a certain grantor
retained annuity trust established by Mr. Dunlap’s sister, Angela L. Muhleisen, owns 49.2 percent of F&M’s outstanding voting
common stock. In addition, Mr. Dunlap and his family and Ms. Muhleisen and her family own a total of 8.9 percent and 7.9
percent, respectively, of F&M’s outstanding non-voting preferred stock, which amounts are convertible into shares of F&M
common stock which would currently represent an additional 3.0 percent and 2.8 percent, respectively, of F&M’s outstanding
common stock on an as converted basis. Mr. Dunlap serves as a Director and Chairman of F&M, and as a Director of Union
Bank. Ms. Muhleisen serves as a Director and Chief Executive Officer of F&M and as a Director, Chairperson, President, and
Chief Executive Officer of Union Bank. Union Bank is deemed to have beneficial ownership of a significant number of shares
of Nelnet because it serves in a capacity of trustee or account manager for various trusts and accounts holding shares of Nelnet,
and may share voting and/or investment power with respect to such shares. As of December 31, 2020, Union Bank was deemed
to beneficially own 10.1 percent of the voting rights of our outstanding common stock, and Mr. Dunlap and Ms. Muhleisen
beneficially owned 82.3 percent and 12.1 percent, respectively, of the voting rights of our outstanding common stock (with
certain shares deemed under applicable SEC rules to be beneficially owned by both Mr. Dunlap and Ms. Muhleisen).
We have entered into certain contractual arrangements with Union Bank, including loan purchases, loan servicing, loan
participations, banking and lending services, 529 Plan administration services, lease arrangements, trustee services, and various
other investment and advisory services. The net aggregate impact on our consolidated statements of income for the years ended
December 31, 2020, 2019, and 2018 related to the transactions with Union Bank was income (before income taxes) of $15.4
million, $9.7 million, and $9.2 million, respectively. See note 21 of the notes to consolidated financial statements included in
this report for additional information related to the transactions between us and Union Bank.
We intend to maintain our relationship with Union Bank, which our management believes provides certain benefits to us. Those
benefits include Union Bank's knowledge of and experience in the FFELP industry, its willingness to provide services, and at
times liquidity and capital resources, on an expedient basis, and the proximity of Union Bank to our corporate headquarters
located in Lincoln, Nebraska.
The majority of the transactions and arrangements with Union Bank are not offered to unrelated third parties or subject to
competitive bids. Accordingly, these transactions and arrangements not only present conflicts of interest, but also pose the risk
to our shareholders that the terms of such transactions and arrangements may not be as favorable to us as we could receive from
unrelated third parties. Moreover, we may have and/or may enter into contracts and business transactions with related parties
that benefit Mr. Dunlap and his sister, as well as other related parties, that may not benefit us and/or our minority shareholders.
ITEM 1B. UNRESOLVED STAFF COMMENTS
The Company has no unresolved comments from the staff of the Securities and Exchange Commission regarding its periodic or
current reports under the Securities Exchange Act of 1934.
ITEM 2. PROPERTIES
The Company's headquarters are located in Lincoln, Nebraska. The Company owns or leases office space facilities primarily in
Nebraska, Wisconsin, and Colorado.
The Company believes its existing office space facilities and equipment, which are used by all reportable segments, are in good
operating condition and are suitable for the conduct of its business.
ITEM 3. LEGAL PROCEEDINGS
Note 23, “Legal Proceedings,” of the notes to consolidated financial statements included in this report is incorporated herein by
reference.
ITEM 4. MINE SAFETY DISCLOSURES
Not applicable.
33
PART II.
ITEM 5. MARKET FOR REGISTRANT'S COMMON EQUITY, RELATED STOCKHOLDER MATTERS, AND
ISSUER PURCHASES OF EQUITY SECURITIES
The Company's Class A common stock is listed and traded on the New York Stock Exchange under the symbol “NNI,” while
its Class B common stock is not publicly traded. The number of holders of record of the Company's Class A common stock and
Class B common stock as of January 31, 2021 was 1,400 and 76, respectively. The record holders of the Class B common stock
are Michael S. Dunlap, Shelby J. Butterfield, various members of the Dunlap and Butterfield families, and various other estate
planning trusts established by and/or entities controlled by them. Because many shares of the Company's Class A common
stock are held by brokers and other institutions on behalf of shareholders, the Company is unable to estimate the total number of
beneficial owners represented by these record holders.
The Company paid quarterly cash dividends on its Class A and Class B common stock during the years ended December 31,
2019 and 2020 in amounts totaling $0.74 per share and $0.82 per share, respectively. The Company currently plans to continue
making comparable regular quarterly dividend payments, subject to future earnings, capital requirements, financial condition,
and other factors.
Performance Graph
The following graph compares the change in the cumulative total shareholder return on the Company's Class A common stock
to that of the cumulative return of the S&P 500 Index and the S&P 500 Financials Index. The graph assumes that the value of
an investment in the Company's Class A common stock and each index was $100 on December 31, 2015 and that all dividends,
if applicable, were reinvested. The performance shown in the graph represents past performance and should not be considered
an indication of future performance.
Company/Index
12/31/2015
12/31/2016
12/31/2017
12/31/2018
12/31/2019
12/31/2020
Nelnet, Inc.
S&P 500
S&P 500 Financials
$
100.00 $
153.11 $
167.30 $
161.71 $
182.14 $
100.00
100.00
111.96
122.80
136.40
150.04
130.42
130.49
171.49
172.41
225.93
203.04
169.49
The preceding information under the caption “Performance Graph” shall be deemed to be “furnished” but not “filed” with the
Securities and Exchange Commission.
34
Period
October 1 - October 31, 2020
November 1 - November 30, 2020
December 1 - December 31, 2020
Total
(a)
(b)
Stock Repurchases
The following table summarizes the repurchases of Class A common stock during the fourth quarter of 2020 by the Company or
any “affiliated purchaser” of the Company, as defined in Rule 10b-18(a)(3) under the Securities Exchange Act of 1934.
Total number
of shares
purchased (a)
Average price
paid per share
Total number of shares
purchased as part of
publicly announced
plans or programs (b)
Maximum number of
shares that may yet be
purchased under the
plans or programs (b)
72 $
—
3,008
3,080 $
66.88
—
69.34
69.28
—
—
—
—
3,246,732
3,246,732
3,246,732
The total number of shares consist of shares owned and tendered by employees to satisfy tax withholding obligations
upon the vesting of restricted shares. Unless otherwise indicated, shares owned and tendered by employees to satisfy tax
withholding obligations were purchased at the closing price of the Company’s shares on the date of vesting.
On May 8, 2019, the Company announced that its Board of Directors authorized a new stock repurchase program to
repurchase up to a total of five million shares of the Company's Class A common stock during the three-year period
ending May 7, 2022.
Equity Compensation Plans
For information regarding the securities authorized for issuance under the Company's equity compensation plans, see Part III,
Item 12 of this report.
ITEM 6. SELECTED FINANCIAL DATA
The selected financial data previously required by Item 301 of Regulation S-K has been omitted pursuant to SEC Release No.
33-10890; 34-90459, and the resulting amendments to Item 301 of Regulation S-K effective February 10, 2021.
ITEM 7. MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF
OPERATIONS
(Management’s Discussion and Analysis of Financial Condition and Results of Operations is for the years ended
December 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 ended December 31, 2020
compared to the year ended December 31, 2019 is presented below. A discussion related to the results of operations and
changes in financial condition for the year ended December 31, 2019 compared to the year ended December 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 the United States Securities and Exchange Commission
on February 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 Adjustments
The 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.
GAAP net income attributable to Nelnet, Inc.
Realized and unrealized derivative market value adjustments
Tax effect (a)
Net income attributable to Nelnet, Inc., excluding derivative market
value adjustments (b)
Earnings per share:
Year ended December 31,
2020
2019
$
352,443
28,144
141,803
76,195
(6,755)
(18,287)
$
373,832
199,711
GAAP net income attributable to Nelnet, Inc.
$
Realized and unrealized derivative market value adjustments
Tax effect (a)
9.02
0.72
(0.17)
Net income attributable to Nelnet, Inc., excluding derivative market
value adjustments (b)
$
9.57
3.54
1.90
(0.45)
4.99
(a)
(b)
The tax effects are calculated by multiplying the realized and unrealized derivative market value adjustments by the applicable statutory
income tax rate.
"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 ended December 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 of ALLO
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's May 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 of December 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 as Nelnet 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 on
December 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.
On November 2, 2020, the Company obtained final approval from the Federal Deposit Insurance Corporation ("FDIC") for
federal deposit insurance and for a bank charter from the Utah Department of Financial Institutions ("UDFI") in connection
with the establishment of Nelnet Bank, and Nelnet Bank launched operations. Nelnet Bank operates as an internet Utah-
chartered industrial bank franchise focused on the private education loan marketplace, with a home office in Salt 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 with Nelnet 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 in Nelnet 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 Nelnet Bank) for the
years ended December 31, 2020 and 2019 (dollars in millions). See "Results of Operations" for each such reportable operating
segment under this Item 7 for additional detail.
LSS (a)
ETS&PP
ALLO (c)
AGM (b)
(a)
(b)
(c)
Revenue includes intersegment revenue.
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.
On December 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 period January 1, 2020 through December 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
On October 1, 2020, the Company entered into various agreements with SDC 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. On October 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 on December 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.
On January 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
Revenue$497.5$282.2$76.6$310.6$511.7$277.3$64.3$314.320202019Net Income (loss)$40.6$50.3$(25.2)$145.0$58.8$47.3$(23.5)$145.9
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
before April 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 of January 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 in March 2020, the coronavirus 2019 or COVID-19 (“COVID-19”) pandemic resulted in many businesses and
schools closing or reducing hours throughout the U.S. to combat the spread of COVID-19, and states and local jurisdictions
implementing various containment efforts, including lockdowns on non-essential business and other business restrictions, stay-
at-home orders, and shelter-in-place orders. The COVID-19 pandemic has caused significant disruption to the U.S. and world
economies, including significantly higher unemployment and underemployment, significantly lower interest rates, and extreme
volatility in the U.S. and world markets. 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 of March 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 on March 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 to March 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 through September 30, 2021. Beginning March 13, 2020, the Company received less servicing revenue per
borrower from the Department based on the borrower forbearance status through September 30, 2020 than what was earned on
such accounts prior to these provisions, and the Department further reduced the monthly rate paid to its servicers for those in a
forbearance status for the period from October 1, 2020 through September 30, 2021 from $2.19 per borrower to $2.05 per
borrower. As a result of the extension of these CARES Act provisions through September 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 past September 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 ended December 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, effective March 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, effective March 13, 2020 through June 30, 2020, the
Company proactively applied a 90 day natural disaster forbearance to any loan that was 31-269 days past due (for federally
insured loans) and 80 days past due (for private education loans), and to any current loan upon request. Beginning July 1, 2020,
the Company discontinued proactively applying 90 day natural disaster forbearances on past due loans. However, the Company
will continue to apply a natural disaster forbearance in 90 day increments to any federally insured and private education loan
upon request through September 30, 2021. As of December 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 in May 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, effective March 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, effective March 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 in the United States and other countries, business and/or school closures and
disruptions, and the effectiveness of actions taken in the 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 in Agile Sports Technologies, Inc. (doing business as "Hudl")
On May 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 the May 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 ended
December 31, 2020 and 2019, respectively. In addition, Great Lakes, which was acquired by the Company on February 7, 2018,
also earns loan servicing revenue from a similar servicing contract with the Department. Revenue earned by Great Lakes related
to this contract was $179.9 million and $185.7 million for the years ended December 31, 2020 and 2019, respectively.
Nelnet Servicing and Great Lakes' servicing contracts with the Department are currently scheduled to expire on June 14, 2021,
but provide the potential for an additional six-month extension at the Department’s discretion through December 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
On January 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 after January 1, 2020 are presented under
ASC 326 (recognizing estimated credit losses expected to occur over the asset's remaining life) while prior period amounts
continue to be reported in accordance with previously applicable GAAP (recognizing estimated credit losses using an incurred
loss model); therefore, the comparative information for 2019 is not comparable to the information presented for 2020.
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 the U.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 of December 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 of December 31, 2020. As of December 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 ended December 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 of December 16, 2024. As of
December 31, 2020, the unsecured line of credit had $120.0 million outstanding. Subsequent to December 31, 2020,
the Company paid down the full balance outstanding on the line of credit, and as of February 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.
On November 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 with Nelnet Bank, as required
under an agreement with the FDIC.
The majority of the Company’s portfolio of student loans is funded in asset-backed securitizations that will generate
significant earnings and cash flow over the life of these transactions. As of December 31, 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 ending May 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 of December 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 ended December 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 that Nelnet
Bank’s results of operations are not discussed since such operations were launched in November 2020 and were not material to
the Company’s 2020 consolidated results of operations).
Year ended December 31,
2020
2019
Loan interest
$ 595,113
914,256
24,543
34,421
619,656
948,677
Investment interest
Total interest income
Interest expense
Net interest income
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 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 interest rates.
330,071
289,585
699,327
Decrease was due primarily to a decrease in cost of funds and a decrease in the average
balance of debt outstanding.
249,350 See table below for additional analysis.
Less provision for loan losses
63,360
39,000
Net interest income after provision for
loan losses
226,225
210,350
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 operating segment - results of operations.
Other income/expense:
LSS revenue
ETS&PP revenue
Communications revenue
Other
Gain on sale of loans
451,561
282,196
76,643
57,561
33,023
455,255 See LSS operating segment - results of operations.
277,331 See ETS&PP operating segment - results of operations.
64,269 See Communications operating segment - results of operations.
47,918 See table below for components of “other income.”
17,261 Gain on sale of loans is from the sale of consumer loans.
Gain from deconsolidation of ALLO
258,588
—
Impairment expense and provision for
beneficial interests
(24,723)
—
Derivative settlements, net
3,679
45,406
Derivative market value adjustments, net
(28,144)
(76,195)
Total other income/expense
1,110,384
831,245
On December 21, 2020, the Company deconsolidated ALLO from the Company’s
consolidated financial statements as a result of ALLO’s recapitalization. See “Overview -
Recapitalization and Additional Funding for ALLO” above for additional information.
During the first quarter of 2020, the Company recognized a provision expense of $26.3
million and an impairment charge of $7.8 million related to 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 $9.7 million of the provision related to beneficial interest in
consumer loan securitization investments due to improved 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 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 value of the Company's floor
income interest rate swaps.
Cost of services:
Cost to provide education technology,
services, and payment processing
services
82,206
81,603
Represents primarily direct costs to provide payment processing services in the ETS&PP
operating segment.
Cost to provide communications services
22,812
20,423
Total cost of services
105,018
102,026
Operating expenses:
Salaries and benefits
501,832
463,503
Represents costs of services primarily associated with television programming costs in the
Communications operating segment.
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 October 1, 2020 (prior to the deconsolidation of ALLO), ALLO
recognized compensation expense of $9.3 million related to the modification of certain
equity awards previously 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 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 additional information.
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 between 21 and 24 percent.
Depreciation and amortization
118,699
105,049
Other expenses
Total operating expenses
Income before income taxes
160,574
781,105
450,486
194,272
762,824
176,745
Income tax expense
Net income
Net loss attributable to
noncontrolling interests
100,860
349,626
35,451
141,294
2,817
509
Net income attributable to Nelnet, Inc. $ 352,443
141,803
Additional information:
Net income attributable to Nelnet, Inc.
$ 352,443
Derivative market value adjustments, net
28,144
141,803 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.
76,195
Tax effect
(6,755)
(18,287)
Net income attributable to Nelnet, 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
Variable loan interest margin
$
144,871
174,954
Settlements on associated derivatives
10,378
5,214
Variable loan interest margin, net
of settlements on derivatives
155,249
180,168
Fixed rate floor income
123,460
49,677
Settlements on associated derivatives
(6,699)
40,192
Fixed rate floor income, net of
settlements on derivatives
Investment interest
116,761
24,543
89,869
34,421
Corporate debt interest expense
(3,289)
(9,702)
Net interest income (net of
settlements on derivatives)
$
293,264
294,756
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
operations.
Represents the net settlements received related to the Company’s 1:3 basis
swaps.
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 Risk" for additional information.
Represents the net settlements (paid) received related to the Company’s floor
income interest rate swaps.
Includes interest expense on the Junior Subordinated Hybrid Securities,
unsecured line of credit, and the 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 agreement
that was executed in May of 2020.
The following table summarizes the components of "other income."
Gain on remeasurement of HUDL investment (a)
Investment advisory services (b)
Management fee revenue (c)
Borrower late fee income (d)
Income/gains from investments, net
Loss from solar investments (e)
Other
Other income
Year ended December 31,
2020
2019
$
$
51,018
10,875
9,421
5,194
2,205
(37,423)
16,271
57,561
—
2,941
9,736
12,884
8,356
(2,220)
16,221
47,918
(a)
(b)
(c)
(d)
(e)
During the second quarter of 2020, the Company recognized a $51.0 million (pre-tax) gain to adjust the carrying value of its investment
in Hudl to reflect Hudl's May 2020 equity raise transaction value.
The Company provides investment advisory services through Whitetail Rock Capital Management, LLC ("WRCM"), the Company's
SEC-registered investment advisor subsidiary, under various arrangements. WRCM earns annual fees of 25 basis points on the majority
of the outstanding balance of asset-backed securities under management and up to 50 percent of the gains from the sale of asset-backed
securities or asset-backed securities being called prior to the full contractual maturity for which it provides advisory services. As of
December 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.
Represents revenue earned from providing administrative support and marketing services primarily to Great Lakes’ former parent
company in accordance with a contract that expired in January 2021.
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 effective March 13, 2020 to provide borrowers relief as a result of the
COVID-19 pandemic.
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
December 31,
2018
March 31,
2019
June 30,
2019
September 30,
2019
December 31,
2019
March 31,
2020
June 30,
2020
September 30,
2020
December 31,
2020
As of
Servicing volume
(dollars in millions):
Nelnet:
Government
FFELP
Private and consumer
Great Lakes:
Government
Total
Number of servicing
borrowers:
Nelnet:
Government
FFELP
$
179,507
183,093
181,682
184,399
183,790
185,477
185,315
189,932
191,678
36,748
15,666
35,917
16,065
35,003
16,025
232,694
$
464,615
237,050
472,125
236,500
469,210
33,981
16,286
240,268
474,934
33,185
16,033
32,326
16,364
31,392
16,223
239,980
472,988
243,205
477,372
243,609
476,539
31,122
16,267
249,723
487,044
30,763
16,226
251,570
490,237
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
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
636,136
Great 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 and Great Lakes' servicing contracts with the Department are currently scheduled to expire on June 14, 2021,
but provide the potential for an additional six-month extension at the Department's discretion through December 14, 2021. The
Consolidated Appropriations Act, 2021, signed into law on December 27, 2020, provides that the Department may extend the
period of performance for the servicing contracts scheduled to expire on December 14, 2021 for up to two additional years to
December 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 periods January
1, 2020 through June 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 period September 1, 2020 through February 28, 2021 are
20 percent and 10 percent, respectively.
In October 2020, the Department communicated to its servicers that a not-for-profit servicer requested to end its contract with
the Department. Effective October 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 in Great 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
Net interest income
$
315
1,916
Decrease was due to lower interest rates in 2020 as compared to 2019.
Loan servicing and systems revenue
451,561
455,255
See table below for additional analysis.
Intersegment servicing revenue
36,520
46,751
Other income
9,421
9,736
Total other income
497,502
511,742
Salaries and benefits
285,526
276,136
Depreciation and amortization
37,610
34,755
Other expenses
57,420
71,064
Intersegment expenses
63,886
54,325
Total operating expenses
444,442
436,280
Income before income taxes
53,375
77,378
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 decrease as AGM's FFELP portfolio pays
off.
Represents revenue earned from providing administrative support and
marketing services primarily to Great Lakes’ former parent company in
accordance with a contract that expired in January 2021.
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 servicing system.
Increase was due to capital expenditures to support the recent extension of the
government 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 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 Department servicing
contracts.
Income tax expense
Net income
(12,810)
(18,571) Reflects income tax expense at an effective tax rate of 24%.
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 compared to 2019.
Before tax operating margin
10.7 %
15.1 %
48
Loan servicing and systems revenue
Year ended December 31,
2020
2019
Government servicing - Nelnet
$ 146,798
157,991
Government servicing - Great Lakes
179,872
185,656
Private education and consumer loan
servicing
32,492
36,788
FFELP servicing
20,183
25,043
Software services
41,999
41,077
Outsourced services and other
30,217
8,700
Loan servicing and systems revenue
$ 451,561
455,255
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
information.
Represents revenue from the Great Lakes' 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 Servicing and
Systems" above for additional 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 $10
billion portfolio of private education loans that Wells Fargo announced in
December 2020 it had agreed to 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 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 Great Lakes’ former parent, representing 2.3 million borrowers, expired
in January 2021. Revenue recognized from providing these services during
2020 was $16.3 million.
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
$21.9 million in 2020. See "Overview - Impacts of COVID-19 Pandemic -
Loan Servicing and Systems" above for additional information.
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.
On December 31, 2020, the Company acquired HigherSchool Instructional Services, a services company that provides
supplemental instructional services and educational professional development for K-12 schools in New York City, and CD2
LLC, a platform technology solution that includes learning management, collaboration/workflow, gamification, customer
management/document storage, and employee boarding. The results of HigherSchool 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
Net interest income
$
2,982
9,198
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 earn minimal interest income in future periods.
Education technology, services, and
payment processing revenue
Intersegment revenue
Other income
282,196
277,331 See table below for additional information.
20
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.
Salaries and benefits
98,847
94,666
Depreciation and amortization
9,459
12,820
Other expenses
14,566
22,027
Intersegment expenses, net
14,293
13,405
Total operating expenses
137,165
142,918
Income before income taxes
66,200
62,267
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 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 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 COVID-19
pandemic.
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.
Income tax expense
Net income
(15,888)
(14,944) Represents income tax expense at an effective tax rate of 24%.
$
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 ended December 31,
2020
2019
Tuition payment plan services
$ 100,674
106,682
Payment processing
114,304
110,848
Education technology and services
Other
Education technology, services, and
payment processing revenue
Cost to provide education technology,
services, and payment processing
services
Net revenue
65,885
1,333
58,578
1,223
282,196
277,331
82,206
81,603
$ 199,990
195,728
Before tax operating margin
33.1 %
31.8 %
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 negatively
impacted due to the COVID-19 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 result of the
COVID-19 pandemic.
Information System
Increase in 2020 compared to 2019 was due to an increase from FACTS
Student
(“SIS”) software subscriptions, online
application and enrollment services, and financial needs assessment services
as a result of an increase in the number of students and customers using these
products.
Costs primarily relate to payment processing revenue and such costs
decrease/increase in relationship to payment revenue.
Before tax operating margin is a measure of before tax operating profitability
as a percentage of revenue, and for the ETS&PP segment is calculated as
income before income taxes divided by net revenue. The Company uses this
metric to monitor and assess the segment’s performance, manage operating
costs, identify and evaluate business trends affecting the segment, and make
strategic decisions, and believes that it facilitates an understanding of the
operating performance of the segment and provides a meaningful comparison
of the results of operations between periods.
51
COMMUNICATIONS OPERATING SEGMENT - RESULTS OF OPERATIONS
On December 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 from
January 1, 2020 through December 21, 2020.
Summary and Comparison of Operating Results
Net interest income
Period from
January 1 to
December 21,
2020
$
2
Year ended
December 31,
2019
3
Communications revenue
Other income
Total other income
76,643
1,561
78,204
64,269
1,509
65,778
Cost to provide communications
services
22,812
20,423
Salaries and benefits
30,935
21,004
Depreciation and amortization
42,588
37,173
Other expenses
13,327
15,165
Intersegment expenses
Total operating expenses
1,732
88,582
2,962
76,304
Loss before income taxes
(33,188)
(30,946)
Additional information
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 tables below.
Cost of services are primarily associated with television programming costs.
Other costs include connectivity, franchise, and other regulatory costs directly
related to providing internet and 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 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 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 of the COVID-19 pandemic.
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.
Income tax benefit
7,965
7,427 Represents income tax benefit at an effective tax rate of 24%.
Net loss
$
(25,223)
(23,519)
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 additional
information below.
Additional Information:
Net loss
Net interest income
Income tax benefit
Depreciation and amortization
Earnings before interest, income
taxes, depreciation, and
amortization (EBITDA)
$
(25,223)
(23,519)
(2)
(7,965)
42,588
(3)
(7,427)
37,173
$
9,398
6,224
For additional information regarding this non-GAAP measure, see the table
below.
52
Certain financial and operating data for ALLO is summarized in the tables below.
Residential revenue
Business revenue
Other revenue
Communications revenue
Internet
Television
Telephone
Other
Communications revenue
Net loss
EBITDA (a)
Capital expenditures
Period from January 1 to
December 21, 2020
Year ended December 31,
2019
$
$
$
$
$
58,029
18,038
576
76,643
48,362
17,091
11,037
153
76,643
(25,223)
9,398
47,957
75.7 % $
23.5
0.8
48,344
15,689
236
75.2 %
24.4
0.4
100.0 % $
64,269
100.0 %
63.1 % $
22.3
14.4
0.2
38,239
16,196
9,705
129
59.5 %
25.2
15.1
0.2
100.0 % $
64,269
100.0 %
$
(23,519)
6,224
44,988
December 21,
2020
September 30,
2020
June 30,
2020
March 31,
2020
December 31,
2019
September 30,
2019
June 30,
2019
March 31,
2019
December 31,
2018
As of
Residential
customer
information:
Households
served
Households
passed (b)
Households
served/passed
Total households
in current
markets
59,274
56,787
53,067
49,684
47,744
45,228
42,760
40,338
37,351
149,622
147,087
144,869
143,505
140,986
137,269
132,984
127,253
122,396
39.6 %
38.6 %
36.6 %
34.6 %
33.9 %
32.9 %
32.2 %
31.7 %
30.5 %
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 of December 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 of December 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:
Beginning balance
Loan acquisitions:
Federally insured student loans
Private education loans
Consumer loans
Total loan acquisitions
Repayments, claims, capitalized interest, and other
Consolidation loans lost to external parties
Consumer loans sold
Ending balance
Year ended December 31,
2020
2019
$
20,798,719
22,520,498
1,327,690
1,530,294
152,048
136,985
71,543
405,726
1,616,723
2,007,563
(1,999,095)
(2,511,641)
(672,211)
(185,028)
(990,720)
(226,981)
$
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 to December 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
On January 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 after
January 1, 2020 are presented under ASC 326 (recognizing estimated credit losses expected to occur over the asset's remaining
life) while prior period amounts continue to be reported in accordance with previously applicable GAAP (recognizing estimated
credit losses using an incurred loss model); therefore, the comparative information for 2019 is not comparable to the
information presented for 2020.
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 at December 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 of December 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.
Variable loan yield, gross
Consolidation rebate fees
Discount accretion, net of premium and deferred origination costs amortization
Variable loan yield, net
Loan cost of funds - interest expense
Loan cost of funds - derivative settlements (a) (b)
Variable loan spread
Fixed rate floor income, gross
Fixed rate floor income - derivative settlements (a) (c)
Fixed rate floor income, net of settlements on derivatives
Core loan spread
Year ended December 31,
2020
2019
3.17 %
(0.84)
0.01
2.34
(1.64)
0.05
0.75
0.61
(0.03)
0.58
1.33 %
4.80 %
(0.83)
0.02
3.99
(3.25)
0.03
0.77
0.22
0.19
0.41
1.18 %
Average balance of AGM’s loans
Average balance of AGM’s debt outstanding
$ 20,163,876
19,964,813
21,698,094
21,259,309
(a)
(b)
(c)
Derivative settlements represent the cash paid or received during the current period to settle with derivative instrument
counterparties the economic effect of the Company's derivative instruments based on their contractual terms. Derivative
accounting requires that net settlements with respect to derivatives that do not qualify for "hedge treatment" under GAAP be
recorded in a separate income statement line item below net interest income. The Company maintains an overall risk
management strategy that incorporates the use of derivative instruments to reduce the economic effect of interest rate
volatility. As such, management believes derivative settlements for each applicable period should be evaluated with the
Company’s net interest income (loan spread) as presented in this table. The Company reports this non-GAAP information
because it believes that it provides additional information regarding operational and performance indicators that are closely
assessed by management. There is no comprehensive, authoritative guidance for the presentation of such non-GAAP
information, which is only meant to supplement GAAP results by providing additional information that management utilizes to
assess performance. See note 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.
Core loan spread
Derivative settlements (1:3 basis swaps)
Derivative settlements (fixed rate floor income)
Loan spread
Year ended December 31,
2020
2019
1.33 %
(0.05)
0.03
1.31 %
1.18 %
(0.03)
(0.19)
0.96 %
Derivative settlements consist of net settlements received related to the Company’s 1:3 basis swaps.
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.
(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
during March 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:
Fixed rate floor income, gross
Derivative settlements (a)
Fixed rate floor income, net
Year ended December 31,
2020
123,460
(6,699)
116,761
$
$
2019
49,677
40,192
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 of December 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 of December 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.
Other income
7,189
13,088
Gain on sale of loans
33,023
17,261
Impairment expense and provision
for beneficial interests
(16,607)
—
Derivative settlements, net
3,679
45,406
Derivative market value
adjustments, net
Total other income/expense
Salaries and benefits
(28,144)
(76,195)
(860)
1,747
(440)
1,545
Other expenses
15,806
34,445
Intersegment expenses
39,172
47,362
Total operating expenses
56,725
83,352
Income before income taxes
162,703
115,796
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 March 13, 2020 to provide borrowers relief as a result of the COVID-19
pandemic. See "Overview - Impacts of COVID-19 Pandemic - Asset Generation
and Management" above for additional information.
The Company sold $185.0 million and $227.0 million of consumer loans in 2020
and 2019, respectively.
In March 2020, the Company recognized a provision expense of $26.3 million
related to its beneficial interest in consumer loan securitization investments as a
result of the expected impacts of the COVID-19 pandemic. During the fourth
quarter of 2020, the Company reversed $9.7 million of such provision due to
improved economic conditions. See note 7 of the notes to consolidated financial
statements included 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 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 value of the Company's floor income
interest rate swaps.
The Company recognized $16.7 million of expenses in 2019 to extinguish asset-
backed notes from certain securitizations prior to their contractual maturity.
Excluding these costs, other expenses were $17.7 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 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 services.
Total operating expenses, excluding the $16.7 million 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 2019, respectively.
Income tax expense
Net income
Additional information:
(39,049)
(27,792) Represents income tax expense at an effective tax rate of 24%.
$ 123,654
88,004
Net income
$ 123,654
88,004
Derivative market value
adjustments, net
28,144
76,195
Tax effect
(6,755)
(18,287)
Net income, excluding derivative
market value adjustments
$ 145,043
145,912
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 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 the average balance of loans in 2020 as
compared to 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 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.
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
Variable interest income, gross
$ 637,979
1,040,785
Decrease in 2020 compared to 2019 was due to a decrease in the gross yield
earned on loans and a decrease in the average balance of loans.
Consolidation rebate fees
(168,933)
(180,701) Decrease was due to a decrease in the average consolidation loan balance.
Discount accretion, net of premium
and deferred origination costs
amortization
2,578
4,495
Net discount accretion is due to the Company's purchases of loans at a net
discount over the last several years.
Variable interest income, net
471,624
864,579
Interest on bonds and notes payable
(326,753)
(689,625)
Derivative settlements, net (a)
10,378
5,214
Variable loan interest margin,
net of settlements on
derivatives (a)
155,249
180,168
Fixed rate floor income, gross
123,460
49,677
Derivative settlements, net (a)
(6,699)
40,192
Fixed rate floor income, net of
settlements on derivatives
Core loan interest income (a)
116,761
272,010
89,869
270,037
Decrease in 2020 compared to 2019 was due to a decrease in cost of funds and
a decrease in the average balance of debt outstanding.
Derivative settlements include the net settlements received related to the
Company’s 1:3 basis swaps.
Fixed rate floor income increased due to lower interest rates in 2020 as
compared to 2019.
Derivative settlements include the settlements (paid) received related to the
Company's floor income interest rate swaps.
Investment interest
16,390
17,707
Decrease was due to lower interest rates and lower weighted average cash and
restricted cash balances in 2020 as compared to 2019.
Intercompany interest
(1,404)
(3,750)
Decrease was due to lower interest rates and lower weighted average debt
outstanding in 2020 as compared to 2019.
Provision for loan losses - federally
insured loans
Provision for loan losses - private
education loans
Provision for loan losses - consumer
loans
(18,691)
(8,000)
(6,155)
—
(38,183)
(31,000)
See "Allowance for Loan Losses and Loan Delinquencies" included above
under "Asset Generation and Management Operating Segment - Results of
Operations.
Net interest income after provision
for loan losses (net of settlements
on derivatives) (a)
$ 223,967
244,994
Net interest income (net of settlements on derivatives - and excluding
provision for loan losses) for 2020 and 2019 was $287.0 million and $284.0
million, respectively. The increase in 2020 as compared to 2019 was due to an
increase in core loan spread, partially offset by a decrease in the 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,” on October 1, 2020, the Company
entered into various agreements with SDC, a third party global digital infrastructure investor, and ALLO, for various
transactions contemplated by the parties in connection with a recapitalization and additional funding for ALLO. As part of the
transactions, on October 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 on December 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.
On January 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
before April 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 of January 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 of December 31, 2020
to be $2.3 million, which is included in “other liabilities” on the consolidated balance sheet.
Nelnet Bank
On November 2, 2020, the Company obtained final approval from the FDIC for federal deposit insurance and for a bank charter
from the UDFI in connection with the establishment of Nelnet Bank, and Nelnet Bank launched operations. Nelnet Bank was
funded by the Company with an initial capital contribution of $100.0 million, consisting of $55.9 million of cash and $44.1
60
million of student loan asset-backed securities. In addition, the Company made a pledged deposit of $40.0 million with Nelnet
Bank, as required under an agreement with the FDIC discussed below.
Prior to FDIC approval, Nelnet Bank, Nelnet, Inc. (the parent), and Michael S. Dunlap (Nelnet, Inc.’s controlling shareholder)
entered into a Capital and Liquidity Maintenance Agreement and a Parent Company Agreement with the FDIC in connection
with Nelnet, Inc.’s role as a source of financial strength for Nelnet Bank. As part of the Capital and Liquidity Maintenance
Agreement, Nelnet, Inc. is obligated to (i) contribute capital to Nelnet Bank for it to maintain capital levels that meet FDIC
requirements for a “well capitalized” bank, including a leverage ratio of capital to total assets of at least 12 percent; (ii) provide
and maintain an irrevocable asset liquidity takeout commitment for the benefit of Nelnet Bank in an amount equal to the greater
of either 10 percent of Nelnet Bank’s total assets or such additional amount as agreed to by Nelnet Bank and Nelnet, Inc.; (iii)
provide additional liquidity to Nelnet Bank in such amount and duration as may be necessary for Nelnet Bank to meet its
ongoing liquidity obligations; and (iv) establish and maintain a pledged deposit of $40.0 million with Nelnet Bank.
Based on the current business plan for Nelnet 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 to Nelnet Bank for the next two to three years.
Sources of Liquidity
The Company has historically generated positive cash flow from operations. For the years ended December 31, 2020 and 2019,
the Company's net cash provided by operating activities was $212.8 million and $298.9 million, respectively.
As of December 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 of December 31, 2020. As of December 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 on December 16, 2024. As of December 31, 2020,
there was $120.0 million outstanding on the unsecured line of credit and $335.0 million was available for future use.
Subsequent to December 31, 2020, the Company paid down the full balance outstanding on the line of credit, and as of
February 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 on
May 30, 2022. As of December 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 of December 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 ended December 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 ended December 31, 2020
was $621.2 million and $1.10 billion, respectively. Cash provided by investing activities and used in financing activities for the
year ended December 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.
Bonds and notes issued in asset-backed securitizations
FFELP, private education, and consumer loan warehouse facilities
As of December 31, 2020
Carrying amount
Final maturity
$
$
18,886,920
5/27/25 - 10/25/68
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 of December 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 of December 31, 2020. As
of December 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 of December 31, 2020, private education and consumer loans funded with
operating cash, loans acquired subsequent to December 31, 2020, and loans owned by Nelnet Bank.
62
Asset-backed Securitization Cash Flow Forecast
$2.30 billion
(dollars in millions)
The forecasted future undiscounted cash flows of approximately $2.30 billion include approximately $1.19 billion (as of
December 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's December 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 of December 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 of December 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 at December 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 of December 31, 2020, had an aggregate maximum
financing amount available of $200.0 million, an advance rate of 80 to 90 percent, liquidity provisions through February 13,
2021, and a final maturity date of February 13, 2022. As of December 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. On
February 12, 2021, the liquidity provisions on this facility were extended to February 13, 2022, the final maturity was extended
to February 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 to April 23, 2021, and a final maturity date of April 23, 2022. As of December 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 of December 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 Activities
The Company utilizes derivative instruments to manage interest rate sensitivity. By using derivative instruments, the Company
is exposed to market risk which could impact its liquidity. Based on the derivative portfolio outstanding as of December 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 of December 16, 2024. As
of December 31, 2020, the unsecured line of credit had $120.0 million outstanding and $335.0 million was available for future
use. As of February 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 of May 30, 2022. As of
December 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 of December
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 ending May 7, 2022. As of December 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.
Year ended December 31, 2020
Year ended December 31, 2019
Total shares
repurchased
Purchase price (in
thousands)
Average price of
shares repurchased
(per share)
1,594,394 $
726,273
73,358 $
40,411
46.01
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 on June 17, 2019 from Shelby J. Butterfield, a significant shareholder of the Company, and from the
Butterfield Family Trust, an estate planning trust for the family of Stephen 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 on May 27, 2020 from Shelby 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 of June 17, 2019, and May 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 from Ms. Butterfield and the Butterfield Family Trust, the purchased shares were shares of the Company's Class B
common stock that Ms. Butterfield and the Butterfield 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 on March 13, 2020, June 15,
2020, and September 15, 2020, respectively, and a dividend of $0.22 per share was paid on December 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 on March 15, 2021, to shareholders of record at the close of business on
March 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:
Bonds and notes payable (a)
Operating lease liabilities
Total
As of December 31, 2020
Total
19,558,849
20,796
19,579,645
$
$
Less than 1
year
118,558
6,578
125,136
1 to 3 years
3 to 5 years
433,371
6,795
440,166
218,761
2,986
221,747
More than 5
years
18,788,159
4,437
18,792,596
(a)
Amounts exclude interest as substantially all bonds and notes payable carry variable rates of interest.
As of December 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 in the
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
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. In December 2019, the Financial 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 after December 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.
ITEM 7A. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
(All dollars are in thousands, except share amounts, unless otherwise noted)
Interest Rate Risk
The Company’s primary market risk exposure arises from fluctuations in its borrowing and lending rates, the spread between
which could impact the Company due to shifts in market interest rates.
The following table sets forth the Company’s loan assets and debt instruments by rate characteristics:
Fixed-rate loan assets
Variable-rate loan assets
Total
Fixed-rate debt instruments
Variable-rate debt instruments
Total
As of December 31, 2020
As of December 31, 2019
Dollars
Percent
Dollars
Percent
$
8,737,346
44.6 % $
3,647,365
10,839,305
55.4
17,151,354
$
19,576,651
100.0 % $
20,798,719
$
960,327
4.9 % $
562,203
18,598,522
95.1
20,240,977
$
19,558,849
100.0 % $
20,803,180
17.5 %
82.5
100.0 %
2.7 %
97.3
100.0 %
FFELP loans originated prior to April 1, 2006 generally earn interest at the higher of the borrower rate, which is fixed over a
period of time, or a floating rate based on the special allowance payment ("SAP") formula set by the Department. The SAP rate
is based on an applicable index plus a fixed spread that depends on loan type, origination date, and repayment status. The
Company generally finances its student loan portfolio with variable rate debt. In low and/or declining interest rate
environments, when the fixed borrower rate is higher than the SAP rate, the Company’s student loans earn at a fixed rate while
the interest on the variable rate debt typically continues to reflect the low and/or declining interest rates. In these interest rate
environments, the Company may earn additional spread income that it refers to as floor income.
Depending on the type of loan and when it was originated, the borrower rate is either fixed to term or is reset to an annual rate
each July 1. As a result, for loans where the borrower rate is fixed to term, the Company may earn floor income for an extended
period of time, which the Company refers to as fixed rate floor income, and for those loans where the borrower rate is reset
annually on July 1, the Company may earn floor income to the next reset date, which the Company refers to as variable rate
floor income. All FFELP loans first originated on or after April 1, 2006 effectively earn at the SAP rate, since lenders are
required to rebate fixed rate floor income and variable rate floor income for those loans to the Department.
68
As a result of the significant drop in interest rates during the first half of 2020, the Company earned $4.8 million of variable-
rate floor income on approximately $1.4 billion of FFELP loans during the six months ended June 30, 2020. Since the borrower
rate reset on July 1, 2020, the Company no longer earns such variable-rate floor income on these loans, reflecting the lower
interest rate environment. No variable-rate floor income was earned by the Company in 2019.
A summary of fixed rate floor income earned by the Company during these years follows.
Fixed rate floor income, gross
Derivative settlements (a)
Fixed rate floor income, net
Year ended December 31,
2020
2019
$
$
123,460
(6,699)
116,761
49,677
40,192
89,869
(a)
Derivative settlements consist of 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.
Absent the use of derivative instruments, a rise in interest rates will reduce the amount of floor income received and has an
impact on earnings due to interest margin compression caused by increasing financing costs, until such time as the federally
insured loans earn interest at a variable rate in accordance with their SAP formulas. In higher interest rate environments, where
the interest rate rises above the borrower rate and fixed rate loans effectively become variable rate loans, the impact of the rate
fluctuations is reduced.
The decrease in net derivative settlements (paid) 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 of December 31, 2020, to
hedge loans earning fixed rate floor income.
The following graph depicts fixed rate floor income for a borrower with a fixed rate of 6.75% and a SAP rate of 2.64%:
69
The following table shows the Company’s federally insured student loan assets that were earning fixed rate floor income as of
December 31, 2020:
Fixed interest rate
range
< 3.0%
3.0 - 3.49%
3.5 - 3.99%
4.0 - 4.49%
4.5 - 4.99%
5.0 - 5.49%
5.5 - 5.99%
6.0 - 6.49%
6.5 - 6.99%
7.0 - 7.49%
7.5 - 7.99%
8.0 - 8.99%
> 9.0%
Borrower/lender
weighted average
yield
2.88%
3.19%
3.65%
4.20%
4.71%
5.22%
5.67%
6.19%
6.70%
7.17%
7.71%
8.18%
9.05%
Estimated variable
conversion rate (a)
0.24%
0.55%
1.01%
1.56%
2.07%
2.58%
3.03%
3.55%
4.06%
4.53%
5.07%
5.54%
6.41%
$
$
Loan balance
1,186,168
1,503,152
1,444,215
1,081,191
674,391
447,689
300,574
346,665
339,577
125,250
227,133
537,150
200,936
8,414,091
(a) The estimated variable conversion rate is the estimated short-term interest rate at which loans would convert to a
variable rate. As of December 31, 2020, the weighted average estimated variable conversion rate was 1.94% and the
short-term interest rate was 15 basis points.
The following table summarizes the outstanding derivative instruments as of December 31, 2020 used by the Company to
economically hedge loans earning fixed rate floor income.
Maturity
Notional amount
Weighted average
fixed rate paid by the
Company (a)
2021
$
2022 (b)
2023
2024 (c)
2025
$
600,000
500,000
900,000
2,000,000
500,000
4,500,000
2.15 %
0.94
0.62
0.32
0.35
0.70 %
(a)
(b)
(c)
For all interest rate derivatives, the Company receives discrete three-month LIBOR.
$250.0 million of these derivatives have forward effective start dates in June 2021.
$750.0 million of these derivatives have forward effective start dates in June 2021.
70
The Company is also exposed to interest rate risk in the form of basis risk and repricing risk because the interest rate
characteristics of the Company’s assets do not match the interest rate characteristics of the funding for those assets. The
following table presents the Company’s FFELP student loan assets and related funding for those assets arranged by underlying
indices as of December 31, 2020:
Index
1 month LIBOR (a)
3 month H15 financial commercial paper
3 month Treasury bill
1 month LIBOR
3 month LIBOR (a)
Fixed rate
Auction-rate (b)
Asset-backed commercial paper (c)
Other (d)
Frequency of
variable resets
Assets
Funding of student
loan assets
Daily
Daily
Daily
Monthly
Quarterly
—
Varies
Varies
—
$
17,800,940
736,982
591,251
—
—
—
—
—
1,281,065
20,410,238
$
—
—
—
10,658,995
6,468,648
923,076
749,925
252,165
1,357,429
20,410,238
(a)
The Company has certain basis swaps outstanding in which the Company receives three-month LIBOR and pays one-month LIBOR plus or
minus a spread as defined in the agreements (the "1:3 Basis Swaps"). The Company entered into these derivative instruments to better match
the interest rate characteristics on its student loan assets and the debt funding such assets. The following table summarizes the 1:3 Basis Swaps
outstanding as of December 31, 2020.
Maturity
Notional amount (i)
2021
2022
2023
2024
2026
2027
$
$
250,000
2,000,000
750,000
1,750,000
1,150,000
250,000
6,150,000
(i)
The weighted average rate paid by the Company on the 1:3 Basis Swaps as of
December 31, 2020 was one-month LIBOR plus 9.1 basis points.
(b)
(c)
(d)
As of December 31, 2020, the Company was sponsor for $749.9 million of outstanding asset-backed securities that were set and provide for
interest rates to be periodically reset via a "dutch auction" (“Auction Rate Securities”). Since the auction feature has essentially been
inoperable for substantially all auction rate securities since 2008, the Auction Rate Securities generally pay interest to the holder at a maximum
rate as defined by the indenture. While these rates will vary, they will generally be based on a spread to LIBOR or Treasury Securities, or the
Net Loan Rate as defined in the financing documents.
The interest rates on the Company's warehouse facilities are indexed to asset-backed commercial paper rates.
Assets include accrued interest receivable and restricted cash. Funding represents overcollateralization (equity) and other liabilities included in
FFELP asset-backed securitizations and warehouse facilities.
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 interest rate characteristics of the Company's
LIBOR-indexed assets and funding for those assets. See Item 1A, "Risk Factors - Loan Portfolio - Interest rate risk -
replacement of LIBOR as a benchmark rate."
71
Sensitivity Analysis
The following tables summarize the effect on the Company’s earnings, based upon a sensitivity analysis performed by the
Company assuming hypothetical increases in interest rates of 100 basis points and 300 basis points while funding spreads
remain constant. In addition, a sensitivity analysis was performed assuming the funding index increases 10 basis points and 30
basis points while holding the asset index constant, if the funding index is different than the asset index. The sensitivity analysis
was performed on the Company’s variable rate assets (including loans earning fixed rate floor income) and liabilities. The
analysis includes the effects of the Company’s derivative instruments in existence during these periods.
Interest rates
Asset and funding index mismatches
Change from
increase of
100 basis points
Change from
increase of
300 basis points
Increase of
10 basis points
Increase of
30 basis points
Dollars
Percent
Dollars
Percent
Dollars
Percent
Dollars
Percent
Year ended December 31, 2020
Effect on earnings:
Decrease in pre-tax net income before
impact of derivative settlements
$ (57,447)
(12.8) % $ (108,018)
(24.0) % $
(7,157)
(1.6) % $ (21,477)
(4.8) %
Impact of derivative settlements
13,955
3.1
41,864
9.3
6,112
1.4
18,336
4.1
Increase (decrease) in net income
before taxes
Increase (decrease) in basic and
diluted earnings per share
Effect on earnings:
Decrease in pre-tax net income before
impact of derivative settlements
$ (43,492)
(9.7) % $ (66,154)
(14.7) % $
(1,045)
(0.2) % $
(3,141)
(0.7) %
$
(0.85)
$
(1.29)
$
(0.02)
$
(0.06)
Year ended December 31, 2019
$ (23,199)
(13.1) % $ (43,368)
(24.5) % $
(9,462)
(5.3) % $ (28,385)
(16.1) %
Impact of derivative settlements
28,793
16.3
86,380
48.8
6,780
3.8
20,340
11.5
Increase (decrease) in net income
before taxes
Increase (decrease) in basic and
diluted earnings per share
$
5,594
3.2 % $ 43,012
24.3 % $
(2,682)
(1.5) % $
(8,045)
(4.6) %
$
0.11
$
0.82
$
(0.05)
$
(0.15)
Financial Statement Impact – Derivatives
For a table summarizing the effect of derivative instruments in the consolidated statements of income, including the
components of "derivative market value adjustments and derivative settlements, net" included in the consolidated statements of
income, see note 6 of the notes to consolidated financial statements included in this report.
ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA
Reference is made to the consolidated financial statements listed under the heading “(a) 1. Consolidated Financial Statements”
of Item 15 of this report, which consolidated financial statements are incorporated into this report by reference in response to
this Item 8.
ITEM 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND FINANCIAL
DISCLOSURE
None.
72
ITEM 9A. CONTROLS AND PROCEDURES
Disclosure Controls and Procedures
The Company’s management, with the participation of the Company's principal executive and principal financial officers,
evaluated the effectiveness of the Company's disclosure controls and procedures (as defined in Rules 13a-15(e) and 15d-15(e)
under the Securities Exchange Act of 1934) as of December 31, 2020. Based on this evaluation, the Company’s principal
executive and principal financial officers concluded that the Company's disclosure controls and procedures were effective as of
December 31, 2020.
Changes in Internal Control over Financial Reporting
There were no changes in the Company's internal control over financial reporting during the fiscal quarter ended December 31,
2020 that have materially affected, or are reasonably likely to materially affect, the Company's internal control over financial
reporting. The Company has not experienced any material impact to its internal control over financial reporting despite the fact
that the majority of its employees are working remotely due to the COVID-19 pandemic. The Company is continually
monitoring and assessing the effect of the COVID-19 situation on its internal controls to minimize the impact on their design
and operating effectiveness.
Effective January 1, 2020, the Company implemented ASU No. 2016-13, Financial Instruments - Credit Losses. As a result,
management made the following significant modifications to the Company's internal control over financial reporting
environment, including changes to accounting policies and procedures, operational processes, and documentation practices:
(a)
(b)
(c)
Updated written policies and procedures addressing selected methods and policies for developing the allowance for
loan losses and determining significant judgments, including the data used; assessment of risk; and identification of
significant assumptions in the allowance estimation process.
Developed a process to evaluate whether adjustments to the selected methodology are necessary based on historical
information, current economic conditions, and reasonable and supportable forecasts.
Updated documentation for assumptions and data used to develop its loss rates, including evaluation of the relevance
and reliability of any external data; amount and timing of expected cash flows; and remaining life of loan
methodologies.
Management's Report on Internal Control over Financial Reporting
Management is responsible for establishing and maintaining adequate internal control over financial reporting (as defined in
Rule 13a-15(f) under the Securities Exchange Act of 1934) for the Company. The Company's internal control system is
designed to provide reasonable assurance to the Company's management and board of directors regarding the reliability of
financial reporting and the preparation and fair presentation of published financial statements in accordance with U.S. generally
accepted accounting principles.
Management assessed the effectiveness of the Company's internal control over financial reporting as of December 31, 2020
based on the criteria for effective internal control described in Internal Control - Integrated Framework (2013) issued by the
Committee of Sponsoring Organizations of the Treadway Commission. Based on this assessment, management believes that, as
of December 31, 2020, the Company's internal control over financial reporting is effective.
The effectiveness of the Company's internal control over financial reporting as of December 31, 2020 has been audited by
KPMG LLP, the Company's independent registered public accounting firm, as stated in their report included herein.
Inherent Limitations on Effectiveness of Internal Controls
The Company's management, including the chief executive and chief financial officers, understands that the disclosure controls
and procedures and internal control over financial reporting are subject to certain limitations, including the exercise of judgment
in designing, implementing, and evaluating the controls and procedures, the assumptions used in identifying the likelihood of
future events, and the inability to eliminate misconduct completely. Because of its inherent limitations, internal control over
financial reporting may not prevent or detect misstatements. Also, projections of any evaluation of effectiveness to future
periods are subject to the risk that controls may become inadequate because of changes in conditions, or that the degree of
compliance with the policies or procedures may deteriorate.
73
Report of Independent Registered Public Accounting Firm
To the Shareholders and Board of Directors
Nelnet, Inc.:
Opinion on Internal Control Over Financial Reporting
We have audited Nelnet, Inc. and subsidiaries’ (the Company) internal control over financial reporting as of December 31,
2020, based on criteria established in Internal Control – Integrated Framework (2013) issued by the Committee of Sponsoring
Organizations of the Treadway Commission. In our opinion, the Company maintained, in all material respects, effective internal
control over financial reporting as of December 31, 2020, based on criteria established in Internal Control – Integrated
Framework (2013) issued by the Committee of Sponsoring Organizations of the Treadway Commission.
We also have audited, in accordance with the standards of the Public Company Accounting Oversight Board (United States)
(PCAOB), the consolidated balance sheets of the Company as of December 31, 2020 and 2019, the related consolidated
statements of income, comprehensive income, shareholders’ equity, and cash flows for each of the years in the three-year period
ended December 31, 2020, and the related notes (collectively, the consolidated financial statements), and our report dated
February 25, 2021 expressed an unqualified opinion on those consolidated financial statements.
Basis for Opinion
The Company’s management is responsible for maintaining effective internal control over financial reporting and for its
assessment of the effectiveness of internal control over financial reporting, included in the accompanying Management’s Report
on Internal Control over Financial Reporting. Our responsibility is to express an opinion on the Company’s internal control
over financial reporting based on our audit. We are a public accounting firm registered with the PCAOB and are required to be
independent with respect to the Company in accordance with the U.S. federal securities laws and the applicable rules and
regulations of the Securities and Exchange Commission and the PCAOB.
We conducted our audit in accordance with the standards of the PCAOB. Those standards require that we plan and perform the
audit to obtain reasonable assurance about whether effective internal control over financial reporting was maintained in all
material respects. Our audit of internal control over financial reporting included obtaining an understanding of internal control
over financial reporting, assessing the risk that a material weakness exists, and testing and evaluating the design and operating
effectiveness of internal control based on the assessed risk. Our audit also included performing such other procedures as we
considered necessary in the circumstances. We believe that our audit provides a reasonable basis for our opinion.
Definition and Limitations of Internal Control Over Financial Reporting
A company’s internal control over financial reporting is a process designed to provide reasonable assurance regarding the
reliability of financial reporting and the preparation of financial statements for external purposes in accordance with generally
accepted accounting principles. A company’s internal control over financial reporting includes those policies and procedures
that (1) pertain to the maintenance of records that, in reasonable detail, accurately and fairly reflect the transactions and
dispositions of the assets of the company; (2) provide reasonable assurance that transactions are recorded as necessary to permit
preparation of financial statements in accordance with generally accepted accounting principles, and that receipts and
expenditures of the company are being made only in accordance with authorizations of management and directors of the
company; and (3) provide reasonable assurance regarding prevention or timely detection of unauthorized acquisition, use, or
disposition of the company’s assets that could have a material effect on the financial statements.
Because of its inherent limitations, internal control over financial reporting may not prevent or detect misstatements. Also,
projections of any evaluation of effectiveness to future periods are subject to the risk that controls may become inadequate
because of changes in conditions, or that the degree of compliance with the policies or procedures may deteriorate.
/s/ KPMG LLP
Lincoln, Nebraska
February 25, 2021
ITEM 9B. OTHER INFORMATION
During the fourth quarter of 2020, no information was required to be disclosed in a report on Form 8-K, but not reported.
74
PART III.
ITEM 10. DIRECTORS, EXECUTIVE OFFICERS, AND CORPORATE GOVERNANCE
The information as to the directors, executive officers, and corporate governance of the Company set forth under the captions
“PROPOSAL 1 - ELECTION OF DIRECTORS,” “EXECUTIVE OFFICERS,” and “CORPORATE GOVERNANCE,” and the
information as to any delinquent report under Section 16(a) of the Securities Exchange Act of 1934 set forth under the caption
“SECURITY OWNERSHIP OF DIRECTORS, EXECUTIVE OFFICERS, AND PRINCIPAL SHAREHOLDERS - Delinquent
Section 16(a) Reports," to the extent any such disclosure is required, in the definitive Proxy Statement to be filed on Schedule
14A with the SEC, no later than 120 days after the end of the Company's fiscal year, relating to the Company's 2021 Annual
Meeting of Shareholders scheduled to be held on May 20, 2021 (the “Proxy Statement”), is incorporated herein by reference.
ITEM 11. EXECUTIVE COMPENSATION
The information set forth under the captions “CORPORATE GOVERNANCE” and “EXECUTIVE COMPENSATION” in the
Proxy Statement is incorporated herein by reference.
ITEM 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT AND
RELATED STOCKHOLDER MATTERS
The information set forth under the caption “SECURITY OWNERSHIP OF DIRECTORS, EXECUTIVE OFFICERS, AND
PRINCIPAL SHAREHOLDERS - Stock Ownership” in the Proxy Statement is incorporated herein by reference. There are no
arrangements known to the Company, the operation of which may at a subsequent date result in a change in the control of the
Company.
The following table summarizes information about compensation plans under which equity securities are authorized for
issuance.
Equity Compensation Plan Information
As of December 31, 2020
Number of shares to be
issued upon exercise of
outstanding options,
warrants, and rights (a)
Weighted-average exercise
price of outstanding
options, warrants, and
rights (b)
Number of shares
remaining available for
future issuance under
equity compensation plans
(excluding securities
reflected in column (a)) (c)
—
—
—
—
—
—
1,770,260 (1)
—
1,770,260
Plan category
Equity compensation plans approved by
shareholders
Equity compensation plans not approved
by shareholders
Total
(1) Includes 1,308,874, 68,445, and 392,941 shares of Class A Common Stock remaining available for future issuance under the Nelnet,
Inc. Restricted Stock Plan, Nelnet, Inc. Directors Stock Compensation Plan, and Nelnet, Inc. Employee Share Purchase Plan,
respectively.
ITEM 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS, AND DIRECTOR INDEPENDENCE
The information set forth under the captions “CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS,”
“CORPORATE GOVERNANCE - Board Composition and Director Independence,” and “CORPORATE GOVERNANCE -
Board Committees” in the Proxy Statement is incorporated herein by reference.
ITEM 14. PRINCIPAL ACCOUNTANT FEES AND SERVICES
The information set forth under the caption “PROPOSAL 2 - RATIFICATION OF APPOINTMENT OF INDEPENDENT
REGISTERED PUBLIC ACCOUNTING FIRM - Independent Accountant Fees and Services” in the Proxy Statement is
incorporated herein by reference.
75
ITEM 15. EXHIBITS AND FINANCIAL STATEMENT SCHEDULES
(a) 1. Consolidated Financial Statements
PART IV.
The following consolidated financial statements of Nelnet, Inc. and its subsidiaries and the Report of Independent
Registered Public Accounting Firm thereon are included in Item 8 above:
Report of Independent Registered Public Accounting Firm
Consolidated Balance Sheets as of December 31, 2020 and 2019
Consolidated Statements of Income for the years ended December 31, 2020, 2019, and 2018
Consolidated Statements of Comprehensive Income for the years ended December 31, 2020, 2019, and 2018
Consolidated Statements of Shareholders' Equity for the years ended December 31, 2020, 2019, and 2018
Consolidated Statements of Cash Flows for the years ended December 31, 2020, 2019, and 2018
Notes to Consolidated Financial Statements
2. Financial Statement Schedules
Page
F-2
F-4
F-5
F-6
F-7
F-8
F-10
All schedules are omitted because they are not applicable or the required information is shown in the consolidated financial
statements or notes thereto.
3. Exhibits
The exhibits listed in the accompanying index to exhibits are filed, furnished, or incorporated by reference as part of this
report.
(b) Exhibits
Exhibit No. Description
Exhibit Index
2.1 ++
Stock Purchase Agreement dated as of October 18, 2017, among Nelnet Diversified Solutions, LLC, as
Purchaser, Nelnet, Inc., as Purchaser Parent, and Great Lakes Higher Education Corporation, as Seller, filed as
Exhibit 2.1 to the registrant's Annual Report on Form 10-K for the year ended December 31, 2017 and
incorporated herein by reference.
2.2
2.3
3.1
3.2
4.1
4.2
First Amendment to Stock Purchase Agreement dated as of February 1, 2018, among Nelnet Diversified
Solutions, LLC, as Purchaser, Nelnet, Inc., as Purchaser Parent, and Great Lakes Higher Education Corporation,
as Seller, filed as Exhibit 2.2 to the registrant's Annual Report on Form 10-K for the year ended December 31,
2017 and incorporated herein by reference.
Second Amendment to Stock Purchase Agreement dated as of February 1, 2018, among Nelnet Diversified
Solutions, LLC, as Purchaser, Nelnet, Inc., as Purchaser Parent, and Great Lakes Higher Education Corporation,
as Seller, filed as Exhibit 2.3 to the registrant's Annual Report on Form 10-K for the year ended December 31,
2017 and incorporated herein by reference.
Composite Third Amended and Restated Articles of Incorporation of Nelnet, Inc., as amended on May 23, 2019,
filed as Exhibit 3.2 to the registrant's Quarterly Report on Form 10-Q for the quarter ended June 30, 2019 and
incorporated herein by reference.
Ninth Amended and Restated Bylaws of Nelnet, Inc., as amended as of May 24, 2018, filed as Exhibit 3.2 to the
registrant's Current Report on Form 8-K filed on May 24, 2018 and incorporated herein by reference.
Description of Securities Registered Under Section 12 of the Securities Exchange Act of 1934, filed as Exhibit
4.1 to the registrant’s Annual Report on Form 10-K for the year ended December 31, 2019 and incorporated
herein by reference.
Form of Class A Common Stock Certificate of Nelnet, Inc., filed on November 24, 2003 as Exhibit 4.1 to the
registrant’s Registration Statement on Form S-1 (Registration No. 333-108070) and incorporated herein by
reference.
76
4.3
4.4
10.1
10.2
10.3
10.4
10.5
10.6
10.7
10.8
10.9
10.10+
10.11
10.12
10.13
Certain instruments, including indentures of trust, defining the rights of holders of long-term debt of the
registrant and its consolidated subsidiaries, none of which instruments authorizes a total amount of indebtedness
thereunder in excess of 10 percent of the total assets of the registrant and its subsidiaries on a consolidated basis,
are omitted from this Exhibit Index pursuant to Item 601(b)(4)(iii)(A) of Regulation S-K. Certain of such
instruments have been previously filed with the Securities and Exchange Commission, and the registrant hereby
agrees to furnish a copy of any such instrument to the Commission upon request.
Registration Rights Agreement, dated as of December 16, 2003, by and among Nelnet, Inc. and the shareholders
of Nelnet, Inc. signatory thereto, filed on November 24, 2003 as Exhibit 4.11 to the registrant’s Registration
Statement on Form S-1 (Registration No. 333-108070) and incorporated herein by reference.
Composite Form of Amended and Restated Participation Agreement, dated as of June 1, 2001, between NELnet,
Inc. (subsequently renamed National Education Loan Network, Inc.) and Union Bank and Trust Company, as
amended by the First Amendment thereto dated as of December 19, 2001 through the Cancellation of the
Fifteenth Amendment thereto dated as of March 16, 2011 (such Participation Agreement and each amendment
through the Cancellation of the Fifteenth Amendment thereto have been previously filed as set forth in the
Exhibit Index for the registrant’s Annual Report on Form 10-K for the year ended December 31, 2012, and are
incorporated herein by reference), filed as Exhibit 10.1 to the registrant's Annual Report on Form 10-K for the
year ended December 31, 2013 and incorporated herein by reference.
Sixteenth Amendment of Amended and Restated Participation Agreement, dated as of March 23, 2012, by and
between Union Bank and Trust Company and National Education Loan Network, Inc., filed as Exhibit 10.3 to
the registrant's Quarterly Report on Form 10-Q for the quarter ended March 31, 2012 and incorporated herein by
reference.
Seventeenth Amendment of Amended and Restated Participation Agreement, dated as of August 1, 2019, by and
between Union Bank and Trust Company and National Education Loan Network, Inc., filed as Exhibit 10.2 to
the registrant's Quarterly Report on Form 10-Q for the quarter ended September 30, 2019 and incorporated
herein by reference.
Guaranteed Purchase Agreement, dated as of March 19, 2001, by and between NELnet, Inc. (subsequently
renamed National Education Loan Network, Inc.) and Union Bank and Trust Company, filed on September 25,
2003 as Exhibit 10.36 to the registrant’s Registration Statement on Form S-1 (Registration No. 333-108070) and
incorporated herein by reference.
First Amendment of Guaranteed Purchase Agreement, dated as of February 1, 2002, by and between NELnet,
Inc. (subsequently renamed National Education Loan Network, Inc.) and Union Bank and Trust Company, filed
on September 25, 2003 as Exhibit 10.37 to the registrant’s Registration Statement on Form S-1 (Registration No.
333-108070) and incorporated herein by reference.
Second Amendment of Guaranteed Purchase Agreement, dated as of December 1, 2002, by and between Nelnet,
Inc. (f/k/a/ NELnet, Inc.) (subsequently renamed National Education Loan Network, Inc.) and Union Bank and
Trust Company, filed on September 25, 2003 as Exhibit 10.38 to the registrant’s Registration Statement on Form
S-1 (Registration No. 333-108070) and incorporated herein by reference.
Guaranteed Purchase Agreement, dated as of September 1, 2010, by and between Nelnet, Inc. and Union Bank
and Trust Company, filed as Exhibit 10.3 to the registrant's Quarterly Report on Form 10-Q for the quarter ended
September 30, 2010 and incorporated herein by reference.
First Amendment of Guaranteed Purchase Agreement, dated as of March 22, 2011, by and between Nelnet, Inc.
and Union Bank and Trust Company, filed as Exhibit 10.2 to the registrant's Quarterly Report on Form 10-Q for
the quarter ended March 31, 2011 and incorporated herein by reference.
Amendment of Agreements dated as of February 4, 2005, by and between National Education Loan Network,
Inc. and Union Bank and Trust Company, filed as Exhibit 10.1 to the registrant’s Current Report on Form 8-K
filed on February 10, 2005 and incorporated herein by reference.
Nelnet, Inc. Employee Share Purchase Plan, as amended through March 17, 2011, filed as Exhibit 10.4 to the
registrant's Quarterly Report on Form 10-Q for the quarter ended March 31, 2011 and incorporated herein by
reference.
Office Building Lease dated June 21, 1996 between Miller & Paine and Union Bank and Trust Company, filed
as Exhibit 10.3 to the registrant's Current Report on Form 8-K filed on October 16, 2006 and incorporated herein
by reference.
Amendment to Office Building Lease dated June 11, 1997 between Miller & Paine and Union Bank and Trust
Company, filed as Exhibit 10.4 to the registrant's Current Report on Form 8-K filed on October 16, 2006 and
incorporated herein by reference.
Lease Amendment Number Two dated February 8, 2001 between Miller & Paine and Union Bank and Trust
Company, filed as Exhibit 10.5 to the registrant's Current Report on Form 8-K filed on October 16, 2006 and
incorporated herein by reference.
77
10.14
10.15
10.16
10.17
10.18
10.19
10.20+
10.21+
10.22+
10.23+
10.24
10.25
10.26
10.27
10.28
10.29
10.30
10.31
Lease Amendment Number Three dated May 23, 2005 between Miller & Paine, LLC and Union Bank and Trust
Company, filed as Exhibit 10.6 to the registrant's Current Report on Form 8-K filed on October 16, 2006 and
incorporated herein by reference.
Lease Amendment Number Four dated November 13, 2007 between M & P Building, LLC and Union Bank and
Trust Company, filed as Exhibit 10.14 to the registrant's Annual Report on Form 10-K for the year ended
December 31, 2017 and incorporated herein by reference.
Lease Amendment Number Five entered into in September 2008 between M & P Building, LLC and Union
Bank and Trust Company, filed as Exhibit 10.15 to the registrant's Annual Report on Form 10-K for the year
ended December 31, 2017 and incorporated herein by reference.
Lease Amendment Number Six dated December 15, 2017 between Nelnet Real Estate Ventures, Inc. and Union
Bank and Trust Company, filed as Exhibit 10.16 to the registrant's Annual Report on Form 10-K for the year
ended December 31, 2017 and incorporated herein by reference.
Lease Agreement dated May 20, 2005 between Miller & Paine, LLC and Union Bank and Trust Company, filed
as Exhibit 10.7 to the registrant's Current Report on Form 8-K filed on October 16, 2006 and incorporated herein
by reference.
Office Sublease dated April 30, 2001 between Union Bank and Trust Company and Nelnet, Inc., filed as Exhibit
10.8 to the registrant's Current Report on Form 8-K filed on October 16, 2006 and incorporated herein by
reference.
Nelnet, Inc. Restricted Stock Plan, as amended through May 22, 2014, filed as Exhibit 10.1 to the registrant's
Current Report on Form 8-K filed on May 28, 2014 and incorporated herein by reference.
Amendment to Nelnet, Inc. Restricted Stock Plan, effective as of February 11, 2020, filed as Exhibit 10.21 to the
registrant’s Annual Report on Form 10-K for the year ended December 31, 2019 and incorporated herein by
reference.
Nelnet, Inc. Directors Stock Compensation Plan, as amended through March 21, 2018, filed as Exhibit 10.1 to
the registrant's Current Report on Form 8-K filed on May 24, 2018 and incorporated herein by reference.
Nelnet, Inc. Executive Officers Incentive Compensation Plan, effective as of January 1, 2019, filed as Exhibit
10.1 to the registrant's Current Report on Form 8-K filed on May 23, 2019 and incorporated herein by reference.
Loan Purchase Agreement, dated as of November 25, 2008, by and between Nelnet Education Loan Funding,
Inc., f/k/a NEBHELP, INC., acting, where applicable, by and through Wells Fargo Bank, National Association,
not individually but as Eligible Lender Trustee for the Seller under the Warehouse Agreement or Eligible Lender
Trust Agreement, and Union Bank and Trust Company, acting in its individual capacity and as trustee, filed as
Exhibit 10.71 to the registrant's Annual Report on Form 10-K for the year ended December 31, 2008 and
incorporated herein by reference.
Student Loan Servicing Contract between the United States Department of Education and Nelnet Servicing,
LLC, filed as Exhibit 10.1 to the registrant's Quarterly Report on Form 10-Q for the quarter ended June 30, 2010
and incorporated herein by reference.
Modification of Contract dated effective as of June 17, 2014 for Student Loan Servicing Contract between the
United States Department of Education and Nelnet Servicing, LLC, filed as Exhibit 10.1 to the registrant's
Current Report on Form 8-K filed on June 18, 2014 and incorporated herein by reference.
Modification of Contract dated effective as of September 1, 2014 for Student Loan Servicing Contract between
the United States Department of Education and Nelnet Servicing, LLC, filed as Exhibit 10.1 to the registrant's
Current Report on Form 8-K filed on September 2, 2014 and incorporated herein by reference.
Modification of Contract dated effective as of June 16, 2019 for Student Loan Servicing Contract between the
United States Department of Education and Nelnet Servicing, LLC, filed as Exhibit 10.1 to the registrant's
Current Report on Form 8-K filed on May 17, 2019 and incorporated herein by reference.
Modification of Contract dated effective as of November 25, 2019 for Student Loan Servicing Contract between
the United States Department of Education and Nelnet Servicing, LLC, filed as Exhibit 10.1 to the registrant's
Current Report on Form 8-K filed on November 27, 2019 and incorporated herein by reference.
Modification of Contract dated effective as of December 15, 2020 for Student Loan Servicing Contract between
the United States Department of Education and Nelnet Servicing, LLC, filed as Exhibit 10.1 to the registrant’s
Current Report on Form 8-K filed on December 15, 2020 and incorporated herein by reference.
Student Loan Servicing Contract between the United States Department of Education and Great Lakes
Educational Loan Services, Inc., filed as Exhibit 10.6 to the registrant's Current Report on Form 8-K filed on
May 17, 2019 and incorporated herein by reference.
78
10.32
10.33
10.34
10.35
10.36
10.37
10.38
10.39
10.40#
10.41
10.42
10.43
10.44#
10.45#
10.46
10.47
Modification of Contract dated effective as of May 21, 2014 for Student Loan Servicing Contract between the
United States Department of Education and Great Lakes Educational Loan Services, Inc., filed as Exhibit 10.7 to
the registrant's Current Report on Form 8-K filed on May 17, 2019 and incorporated herein by reference.
Modification of Contract dated effective as of September 1, 2014 for Student Loan Servicing Contract between
the United States Department of Education and Great Lakes Educational Loan Services, Inc., filed as Exhibit
10.8 to the registrant's Current Report on Form 8-K filed on May 17, 2019 and incorporated herein by reference.
Modification of Contract dated effective as of June 16, 2019 for Student Loan Servicing Contract between the
United States Department of Education and Great Lakes Educational Loan Services, Inc., filed as Exhibit 10.2 to
the registrant's Current Report on Form 8-K filed on May 17, 2019 and incorporated herein by reference.
Modification of Contract dated effective as of November 25, 2019 for Student Loan Servicing Contract between
the United States Department of Education and Great Lakes Educational Loan Services, Inc., filed as Exhibit
10.2 to the registrant's Current Report on Form 8-K filed on November 27, 2019 and incorporated herein by
reference.
Modification of Contract dated effective as of December 15, 2020 for Student Loan Servicing Contract between
the United States Department of Education and Great Lakes Educational Loan Services, Inc., filed as Exhibit
10.2 to the registrant’s Current Report on Form 8-K filed on December 15, 2020 and incorporated herein by
reference.
Management Agreement, dated effective as of May 1, 2011, by Whitetail Rock Capital Management, LLC and
Union Bank and Trust Company, filed as Exhibit 10.3 to the registrant's Quarterly Report on Form 10-Q for the
quarter ended March 31, 2011 and incorporated herein by reference.
Management Agreement, dated effective as of January 20, 2012, by and between Union Bank and Trust
Company and Whitetail Rock Capital Management, LLC, filed as Exhibit 10.58 to the registrant's Annual Report
on Form 10-K for the year ended December 31, 2011 and incorporated herein by reference.
Management Agreement, dated effective as of October 27, 2015, by and between Union Bank and Trust
Company and Whitetail Rock Capital Management, LLC, filed as Exhibit 10.25 to the registrant's Annual Report
on Form 10-K for the year ended December 31, 2015 and incorporated herein by reference.
Appendix A, dated July 29, 2020, to Management Agreement dated effective as of October 27, 2015, by and
between Union Bank and Trust Company and Whitetail Rock Capital Management, LLC, filed as Exhibit 10.4 to
the registrant's Quarterly Report on Form 10-Q for the quarter ended June 30, 2020 and incorporated herein by
reference.
Management Agreement, dated effective as of January 4, 2016, by and between Union Bank and Trust Company
and Whitetail Rock Capital Management, LLC, filed as Exhibit 10.1 to the registrant's Quarterly Report on Form
10-Q for the quarter ended March 31, 2016 and incorporated herein by reference.
Management Agreement, dated effective as of March 23, 2017, by and between Union Bank and Trust Company
and Whitetail Rock Capital Management, LLC, filed as Exhibit 10.1 to the registrant's Quarterly Report on Form
10-Q for the quarter ended March 31, 2017 and incorporated herein by reference.
Amended Appendix A, dated May 8, 2019, to Management Agreement, dated effective as of March 23, 2017, by
and between Union Bank and Trust Company and Whitetail Rock Capital Management, LLC, filed as Exhibit
10.3 to the registrant's Quarterly Report on Form 10-Q for the quarter ended March 31, 2019 and incorporated
herein by reference.
Amended Appendix A, dated July 29, 2020, to Management Agreement dated effective as of March 23, 2017, by
and between Union Bank and Trust Company and Whitetail Rock Capital Management, LLC, filed as Exhibit
10.5 to the registrant's Quarterly Report on Form 10-Q for the quarter ended June 30, 2020 and incorporated
herein by reference.
Management Agreement dated effective as of July 29, 2020, by and between Union Bank and Trust Company
and Whitetail Rock Capital Management, LLC, filed as Exhibit 10.6 to the registrant's Quarterly Report on Form
10-Q for the quarter ended June 30, 2020 and incorporated herein by reference.
Investment Management Agreement, dated effective as of February 10, 2012, by and among Whitetail Rock
SLAB Fund I, LLC, Whitetail Rock Fund Management, LLC, and Whitetail Rock Capital Management, LLC,
filed as Exhibit 10.4 to the registrant's Quarterly Report on Form 10-Q for the quarter ended March 31, 2012 and
incorporated herein by reference.
Investment Management Agreement, dated effective as of February 14, 2013, by and among Whitetail Rock
SLAB Fund III, LLC, Whitetail Rock Fund Management, LLC, and Whitetail Rock Capital Management, LLC,
filed as Exhibit 10.31 to the registrant's Annual Report on Form 10-K for the year ended December 31, 2013 and
incorporated herein by reference.
79
10.48
10.49
10.50
10.51
10.52
10.53
10.54
10.55
10.56
10.57
10.58
10.59
10.60±
10.61±
10.62±±
Form of Custodian Agreement for Whitetail Rock SLAB Funds by and among the Fund, Whitetail Rock Fund
Management, LLC, and Union Bank and Trust Company, filed as Exhibit 10.27 to the registrant's Annual Report
on Form 10-K for the year ended December 31, 2014 and incorporated herein by reference.
Form of Administrative Services Agreement for Whitetail Rock SLAB Funds by and among the Fund, Whitetail
Rock Fund Management, LLC, Adminisystems, Inc., and Union Bank and Trust Company, filed as Exhibit
10.28 to the registrant's Annual Report on Form 10-K for the year ended December 31, 2014 and incorporated
herein by reference.
Management Agreement dated as of August 8, 2019 between 1867 – Riley Road, LLC (of which Farmers &
Merchants Investment Inc., North Central Bancorp, Inc., and Nelnet Solar, LLC are members) and 1867
Capital-1, LLC (a wholly owned subsidiary of Nelnet, Inc.), filed as Exhibit 10.3 to the registrant's Quarterly
Report on Form 10-Q for the quarter ended September 30, 2019 and incorporated herein by reference.
Subordination Agreement effective as of July 26, 2019, by and between Union Bank and Trust Company,
Nelnet, Inc., and Agile Sports Technologies, Inc., filed as Exhibit 10.7 to the registrant's Quarterly Report on
Form 10-Q for the quarter ended June 30, 2019 and incorporated herein by reference.
Second Amended and Restated Credit Agreement dated as of December 16, 2019, among Nelnet, Inc., U.S.
Bank National Association, as Administrative Agent; Wells Fargo Bank, National Association, as Syndication
Agent; Citibank, N.A. and Royal Bank of Canada, as Co-Documentation Agents; U.S. Bank National
Association and Wells Fargo Securities, LLC, as Joint Lead Arrangers and Joint Book Runners; and various
lender parties thereto, filed as Exhibit 10.1 to the registrant's Current Report on Form 8-K filed on December 16,
2019 and incorporated herein by reference.
Amendment No. 1 to Second Amended and Restated Credit Agreement dated as of October 1, 2020, among
Nelnet, Inc., the various Lenders signatory thereto, and U.S. Bank National Association, as Administrative
Agent for the Lenders, filed as Exhibit 10.1 to the registrant’s Current Report on Form 8-K filed on October 2,
2020 and incorporated herein by reference.
Second Amended and Restated Guaranty dated as of December 16, 2019, by each of the subsidiaries of Nelnet,
Inc. signatories thereto, in favor of U.S. Bank National Association, as Administrative Agent, filed as Exhibit
10.2 to the registrant's Current Report on Form 8-K filed on December 16, 2019 and incorporated herein by
reference.
Agreement for Purchase and Sale of Interest in Aircraft dated as of December 31, 2018, by and between National
Education Loan Network, Inc. and Union Financial Services, Inc., filed as Exhibit 10.42 to the registrant's
Annual Report on Form 10-K for the year ended December 31, 2018 and incorporated herein by reference.
Aircraft Joint Ownership Agreement dated as of January 1, 2019, by and between National Education Loan
Network, Inc. and MSD711, LLC, filed as Exhibit 10.43 to the registrant's Annual Report on Form 10-K for the
year ended December 31, 2018 and incorporated herein by reference.
Aircraft Management Agreement, dated as of January 1, 2019, by and between Duncan Aviation, Inc. and
National Education Loan Network, Inc. and MSD711, LLC, filed as Exhibit 10.44 to the registrant's Annual
Report on Form 10-K for the year ended December 31, 2018 and incorporated herein by reference.
Amended and Restated Consulting and Services Agreement made and entered into as of October 1, 2013, by and
between Nelnet, Inc. and Union Bank and Trust Company, filed as Exhibit 10.2 to the registrant's Quarterly
Report on Form 10-Q for the quarter ended September 30, 2013 and incorporated herein by reference.
Master Private Loan Program Agreement dated as of August 22, 2018, by and between Union Bank and Trust
Company and Nelnet, Inc., filed as Exhibit 10.1 to the registrant's Quarterly Report on Form 10-Q for the quarter
ended September 30, 2018 and incorporated herein by reference.
Education Loan Marketing Agreement dated as of August 22, 2018, by and between Nelnet Consumer Finance,
Inc. and Union Bank and Trust Company, filed as Exhibit 10.2 to the registrant's Quarterly Report on Form 10-Q
for the quarter ended September 30, 2018 and incorporated herein by reference.
Private Student Loan Origination and Servicing Agreement dated as of August 22, 2018, by and between Nelnet
Servicing, LLC, d/b/a Firstmark Services, and Union Bank and Trust Company, filed as Exhibit 10.3 to the
registrant's Quarterly Report on Form 10-Q for the quarter ended September 30, 2018 and incorporated herein by
reference.
Private Student Loan Purchase Agreement dated as of November 19, 2019, by and among National Education
Loan Network, Inc., as Purchaser, Union Bank and Trust Company, as Purchaser Lender Trustee, and Union
Bank and Trust Company, as Seller, filed as Exhibit 10.56 to the registrant’s Annual Report on Form 10-K for
the year ended December 31, 2019 and incorporated herein by reference.
80
10.63
10.64
10.65
10.66
10.67
10.68
10.69
10.70
10.71±±
10.72±±
10.73
10.74
10.75
10.76++
10.77++
10.78
Private Loan Sale Agreement dated as of October 9, 2014, by and between Nelnet, Inc. and Union Bank and
Trust Company, filed as Exhibit 10.47 to the registrant's Annual Report on Form 10-K for the year ended
December 31, 2014 and incorporated herein by reference.
Private Student Loan Servicing Agreement dated as of October 9, 2014, by and between Nelnet Servicing, LLC
and Union Bank and Trust Company, filed as Exhibit 10.48 to the registrant's Annual Report on Form 10-K for
the year ended December 31, 2014 and incorporated herein by reference.
First Amendment of Loan Servicing Agreement dated as of September 27, 2013, by and between Nelnet, Inc.
and Union Bank and Trust Company, filed as Exhibit 10.49 to the registrant's Annual Report on Form 10-K for
the year ended December 31, 2014 and incorporated herein by reference.
Private Loan Servicing Letter Agreement dated as of February 27, 2017, by and between Nelnet Servicing, LLC
and Union Bank and Trust Company, filed as Exhibit 10.54 to the registrant's Annual Report on Form 10-K for
the year ended December 31, 2017 and incorporated herein by reference.
Form of Trust/Custodial/Safekeeping Agreement by and between National Education Loan Network, Inc., as
Principal, and Union Bank and Trust Company, as Trustee, filed as Exhibit 10.55 to the registrant's Annual
Report on Form 10-K for the year ended December 31, 2017 and incorporated herein by reference.
Form of Special Investment Directions by National Education Loan Network, Inc. and its affiliates, as Principal
under the Form of Trust/Custodial/Safekeeping Agreement between Principal and Union Bank and Trust
Company, as Trustee, filed as Exhibit 10.56 to the registrant's Annual Report on Form 10-K for the year ended
December 31, 2017 and incorporated herein by reference.
Loan Participation Agreement dated as of January 1, 2018 between Union Bank and Trust Company and Union
Bank and Trust Company as trustee for National Education Loan Network, Inc., filed as Exhibit 10.1 to the
registrant's Quarterly Report on Form 10-Q for the quarter ended March 31, 2018 and incorporated herein by
reference.
Amended and Restated Trust Agreement dated as of December 21, 2018 among Nelnet Private Student Loan
Financing Corporation, as Depositor, Union Bank and Trust Company, as Trustee, and U.S. Bank Trust National
Association, as Delaware Trustee, filed as Exhibit 10.57 to the registrant's Annual Report on Form 10-K for the
year ended December 31, 2018 and incorporated herein by reference.
Amended and Restated Trust Agreement, dated effective as of January 11, 2019, by and among Nelnet Private
Student Loan Financing Corporation, as Depositor, Union Bank and Trust Company, as Trustee, National
Education Loan Network, Inc., as Administrator, and U.S. Bank Trust National Association, as Delaware
Trustee, filed as Exhibit 10.1 to the registrant's Quarterly Report on Form 10-Q for the quarter ended June 30,
2019 and incorporated herein by reference.
Interim Trust Agreement, dated effective as of January 11, 2019, by and among ACM F Acquisition, LLC, as
ACM Seller, National Education Loan Network, Inc., as NELN Seller, and Union Bank and Trust Company, as
Interim Trustee, filed as Exhibit 10.2 to the registrant's Quarterly Report on Form 10-Q for the quarter ended
June 30, 2019 and incorporated herein by reference.
SLABS Participation Agreement, dated effective as of May 5, 2020, by and between National Education Loan
Network, Inc., and Union Bank and Trust Company, as Trustee, filed as Exhibit 10.1 to the registrant’s Quarterly
Report on Form 10-Q for the quarter ended June 30, 2020 and incorporated herein by reference.
Parent Company Agreement, dated as of June 26, 2020, by and among the Federal Deposit Insurance
Corporation, Nelnet, Inc., Michael Dunlap, and Nelnet Bank, filed as Exhibit 10.2 to the registrant’s Quarterly
Report on Form 10-Q for the quarter ended June 30, 2020 and incorporated herein by reference.
Capital and Liquidity Maintenance Agreement, dated as of June 26, 2020, by and among the Federal Deposit
Insurance Corporation, Nelnet, Inc., Michael Dunlap, and Nelnet Bank, filed as Exhibit 10.3 to the registrant’s
Quarterly Report on Form 10-Q for the quarter ended June 30, 2020 and incorporated herein by reference.
Master Agreement entered into as of October 1, 2020, by and among SDC Allo Holdings, LLC, Nelnet, Inc., and
ALLO Communications LLC, filed as Exhibit 10.1 to the registrant’s Quarterly Report on Form 10-Q for the
quarter ended September 30, 2020 and incorporated herein by reference.
Membership Unit Purchase Agreement, dated as of October 1, 2020, by and among SDC Allo Holdings, LLC,
Nelnet, Inc., and ALLO Communications LLC, filed as Exhibit 10.2 to the registrant’s Quarterly Report on
Form 10-Q for the quarter ended September 30, 2020 and incorporated herein by reference.
Omnibus Amendment dated as of October 15, 2020 to the Master Agreement and the Membership Unit Purchase
Agreement, by and among SDC Allo Holdings, LLC, Nelnet, Inc., and ALLO Communications LLC, filed as
Exhibit 10.3 to the registrant’s Quarterly Report on Form 10-Q for the quarter ended September 30, 2020 and
incorporated herein by reference.
81
21.1*
23.1*
31.1*
31.2*
32**
Subsidiaries of Nelnet, Inc.
Consent of KPMG LLP, Independent Registered Public Accounting Firm.
Certification Pursuant to Section 302 of the Sarbanes-Oxley Act of 2002 of Chief Executive Officer Jeffrey R.
Noordhoek.
Certification Pursuant to Section 302 of the Sarbanes-Oxley Act of 2002 of Chief Financial Officer James D.
Kruger.
Certification Pursuant to 18 U.S.C. Section 1350, as Adopted Pursuant to Section 906 of the Sarbanes-Oxley Act
of 2002.
101.INS*
Inline XBRL Instance Document - the instance document does not appear in the Interactive Data File because its
XBRL tags are embedded within the Inline XBRL document.
101.SCH*
Inline XBRL Taxonomy Extension Schema Document
101.CAL*
Inline XBRL Taxonomy Extension Calculation Linkbase Document
101.DEF*
Inline XBRL Taxonomy Extension Definition Linkbase Document
101.LAB*
Inline XBRL Taxonomy Extension Label Linkbase Document
101.PRE*
Inline XBRL Taxonomy Extension Presentation Linkbase Document
104*
Cover Page Interactive Data File (formatted as Inline XBRL and contained in Exhibit 101).
* Filed herewith
** Furnished herewith
+ Indicates a management contract or compensatory plan or arrangement contemplated by Item 15(a)(3) of Form 10-K.
++ Pursuant to Item 601(a)(5) of Regulation S-K, certain schedules and similar attachments to the exhibit have been omitted.
The exhibit is not intended to be, and should not be relied upon as, including disclosures regarding any facts and
circumstances relating to the registrant or any of its subsidiaries or affiliates. The exhibit contains representations and
warranties by the registrant and the other parties that were made only for purposes of the agreement set forth in the exhibit
and as of specified dates. The representations, warranties, and covenants in the agreement were made solely for the benefit
of the parties to the agreement, may be subject to limitations agreed upon by the contracting parties (including being
qualified by confidential disclosures made for the purposes of allocating contractual risk between the parties to the
agreement instead of establishing these matters as facts), and may apply contractual standards of materiality or material
adverse effect that generally differ from those applicable to investors. In addition, information concerning the subject matter
of the representations, warranties, and covenants may change after the date of the agreement, which subsequent information
may or may not be fully reflected in the registrant's public disclosures.
± Certain portions of this exhibit have been redacted and are subject to a confidential treatment order granted by the U.S.
Securities and Exchange Commission pursuant to Rule 24b-2 under the Securities Exchange Act of 1934.
±± Certain portions of this exhibit have been omitted pursuant to Item 601(b)(10)(iv) of Regulation S-K because the
information in such portions is both not material and would likely cause competitive harm to the registrant if publicly
disclosed.
# Schedules, exhibits, and similar attachments to this exhibit have been omitted pursuant to Item 601(a)(5) of Regulation S-K.
ITEM 16. FORM 10-K SUMMARY
The Company has elected not to include an optional summary of information required by Form 10-K.
82
Pursuant to the requirements of Section 13 or 15(d) of the Securities Exchange Act of 1934, the registrant has duly caused this
report to be signed on its behalf by the undersigned, thereunto duly authorized.
SIGNATURES
Dated: February 25, 2021
NELNET, INC.
By:
/s/ JEFFREY R. NOORDHOEK
Name:
Jeffrey R. Noordhoek
Title: Chief Executive Officer
(Principal Executive Officer)
Pursuant to the requirements of the Securities Exchange Act of 1934, this report has been signed below by the following
persons on behalf of the registrant and in the capacities and on the dates indicated.
Signature
Title
Date
/s/ JEFFREY R. NOORDHOEK
Jeffrey R. Noordhoek
Chief Executive Officer
(Principal Executive Officer)
February 25, 2021
/s/ JAMES D. KRUGER
James D. Kruger
Chief Financial Officer
(Principal Financial Officer and
Principal Accounting Officer)
February 25, 2021
/s/ MICHAEL S. DUNLAP
Executive Chairman
February 25, 2021
Michael S. Dunlap
/s/ JAMES P. ABEL
James P. Abel
/s/ PREETA D. BANSAL
Preeta D. Bansal
/s/ WILLIAM R. CINTANI
William R. Cintani
/s/ KATHLEEN A. FARRELL
Kathleen A. Farrell
/s/ DAVID S. GRAFF
David S. Graff
/s/ THOMAS E. HENNING
Thomas E. Henning
/s/ JOANN M. MARTIN
JoAnn M. Martin
/s/ KIMBERLY K. RATH
Kimberly K. Rath
February 25, 2021
February 25, 2021
February 25, 2021
February 25, 2021
February 25, 2021
February 25, 2021
February 25, 2021
February 25, 2021
Director
Director
Director
Director
Director
Director
Director
Director
83
NELNET, INC. AND SUBSIDIARIES
Index to Consolidated Financial Statements
Report of Independent Registered Public Accounting Firm
Consolidated Balance Sheets as of December 31, 2020 and 2019
Consolidated Statements of Income for the years ended December 31, 2020, 2019, and 2018
Consolidated Statements of Comprehensive Income for the years ended December 31, 2020, 2019, and 2018
Consolidated Statements of Shareholders' Equity for the years ended December 31, 2020, 2019, and 2018
Consolidated Statements of Cash Flows for the years ended December 31, 2020, 2019, and 2018
Notes to Consolidated Financial Statements
Page
F-1
F-4
F-5
F-6
F-7
F-8
F-10
F - 1
Report of Independent Registered Public Accounting Firm
To the Shareholders and Board of Directors
Nelnet, Inc.:
Opinion on the Consolidated Financial Statements
We have audited the accompanying consolidated balance sheets of Nelnet, Inc. and subsidiaries (the Company) as of December
31, 2020 and 2019, the related consolidated statements of income, comprehensive income, shareholders’ equity, and cash flows
for each of the years in the three‑year period ended December 31, 2020, and the related notes collectively, the consolidated
financial statements. In our opinion, the consolidated financial statements present fairly, in all material respects, the financial
position of the Company as of December 31, 2020 and 2019, and the results of its operations and its cash flows for each of the
years in the three‑year period ended December 31, 2020, in conformity with U.S. generally accepted accounting principles.
We also have audited, in accordance with the standards of the Public Company Accounting Oversight Board (United States)
(PCAOB), the Company’s internal control over financial reporting as of December 31, 2020, based on criteria established in
Internal Control – Integrated Framework (2013) issued by the Committee of Sponsoring Organizations of the Treadway
Commission, and our report dated February 25, 2021 expressed an unqualified opinion on the effectiveness of the Company’s
internal control over financial reporting.
Change in Accounting Principle
As discussed in Note 3 to the consolidated financial statements, the Company has changed its method of accounting for the
recognition and measurement of credit losses as of January 1, 2020 due to the adoption of ASU 2016-13 “Financial
Instruments - Credit Losses (Topic 326): Measurement of Credit Losses on Financial Instruments, and its related
amendments.”
Basis for Opinion
These consolidated financial statements are the responsibility of the Company’s management. Our responsibility is to express
an opinion on these consolidated financial statements based on our audits. We are a public accounting firm registered with the
PCAOB and are required to be independent with respect to the Company in accordance with the U.S. federal securities laws and
the applicable rules and regulations of the Securities and Exchange Commission and the PCAOB.
We conducted our audits in accordance with the standards of the PCAOB. Those standards require that we plan and perform the
audit to obtain reasonable assurance about whether the consolidated financial statements are free of material misstatement,
whether due to error or fraud. Our audits included performing procedures to assess the risks of material misstatement of the
consolidated financial statements, whether due to error or fraud, and performing procedures that respond to those risks. Such
procedures included examining, on a test basis, evidence regarding the amounts and disclosures in the consolidated financial
statements. Our audits also included evaluating the accounting principles used and significant estimates made by management,
as well as evaluating the overall presentation of the consolidated financial statements. We believe that our audits provide a
reasonable basis for our opinion.
Critical Audit Matter
The critical audit matter communicated below is a matter arising from the current period audit of the consolidated financial
statements that was communicated or required to be communicated to the audit committee and that: (1) relates to accounts or
disclosures that are material to the consolidated financial statements and (2) involved our especially challenging, subjective, or
complex judgments. The communication of a critical audit matter does not alter in any way our opinion on the consolidated
financial statements, taken as a whole, and we are not, by communicating the critical audit matter below, providing a separate
opinion on the critical audit matter or on the accounts or disclosures to which it relates.
Assessment of the allowance for loan losses
As discussed in Note 3 to the consolidated financial statements, the Company adopted ASU No. 2016-13, Financial
Instruments — Credit Losses (ASC Topic 326), as of January 1, 2020. The allowance for loan losses as of January 1,
2020 was $152.9 million (the January 1, 2020 ALL). As discussed in Note 4 to the consolidated financial statements,
the Company’s allowance for loan losses as of December 31, 2020 was $175.7 million (the December 31, 2020 ALL).
The January 1, 2020 ALL and December 31, 2020 ALL, collectively the ALL, is the measure of expected credit losses
on a pooled basis for those loans that share similar risk characteristics. The Company estimated the ALL using an
undiscounted cash flow model on its federally insured and private education loan portfolios and a remaining life
method for its consumer loan portfolio. The Company’s methodologies are based on relevant available information,
F - 2
from internal and external sources, relating to past events, current conditions, and reasonable and supportable
forecasts. For the undiscounted cash flow models, the expected credit losses are the product of multiplying the
Company’s estimates of probability of default (PD), loss given default (LGD), and the exposure at default (EAD) over
the expected life of the loans. For the remaining life method, the expected credit losses are the product of multiplying
the Company’s estimated net loss rate by the EAD over the expected life of the loans. Both the undiscounted model
and remaining life method incorporate current and forecasted economic scenarios over the reasonable and supportable
forecast periods. After the reasonable and supportable forecast periods, the Company reverts to their actual long-term
historical loss experience in the historical observation period. A portion of the ALL is comprised of qualitative
adjustments to historical loss experience.
We identified the assessment of the January 1, 2020 ALL and the December 31, 2020 ALL as a critical audit matter. A
high degree of audit effort, including specialized skills and knowledge, and subjective and complex auditor judgment
was involved in the assessment due to significant measurement uncertainty. Specifically, the assessment encompassed
the evaluation of the ALL methodology, including the methods and models used to estimate the PD, LGD, and net loss
rates used in the remaining life method, and their significant assumptions. Such assumptions included segmentation of
loans with similar risk characteristics, the current and forecasted economic scenarios, the reasonable and supportable
forecast period, and the historical observation period. In addition, auditor judgment was required to evaluate the
sufficiency of audit evidence obtained.
The following are the primary procedures we performed to address this critical audit matter. We evaluated the design
and tested the operating effectiveness of certain internal controls related to the Company’s measurement of the ALL
estimates, including controls over the:
•
•
•
•
•
development of the ALL methodology
development of the PD and LGD models
identification and determination of the significant assumptions used in the PD and LGD models, and the net loss
rates used in the remaining life method
performance monitoring of the PD and LGD models, and net loss rates used in the remaining life method for the
December 31, 2020 ALL
analysis of the ALL results, trends, and ratios.
We evaluated the Company’s process to develop the ALL estimates by testing certain sources of data, factors, and
assumptions that the Company used, and considered the relevance and reliability of such data, factors, and
assumptions. In addition, we involved credit risk professionals with specialized skills and knowledge, who assisted in:
•
•
•
•
•
•
•
evaluating the Company’s ALL methodology for compliance with U.S. generally accepted accounting principles
evaluating judgments made by the Company relative to the development and performance testing of the PD and
LGD models, and net loss rates used in the remaining life method
assessing the conceptual soundness and performance testing of the PD and LGD models by inspecting the model
documentation to determine whether the models are suitable for their intended use
evaluating the methodology used to develop the economic forecast scenarios and underlying assumptions by
comparing it to the Company’s business environment and relevant industry practices
assessing the economic forecast scenarios through comparison to publicly available forecasts
evaluating the length of the historical observation period and reasonable and supportable forecast period by
comparing to specific portfolio risk characteristics and trends
determining whether the loan portfolio is segmented by similar risk characteristics by comparing to the
Company’s business environment and relevant industry practices.
We also assessed the cumulative results of the procedures performed to assess the sufficiency of the audit evidence
obtained related to the ALL by evaluating the:
•
•
•
cumulative results of the audit procedures
qualitative aspects of the Company’s accounting practices
potential bias in the accounting estimate.
/s/ KPMG LLP
We have served as the Company’s auditor since 1998.
Lincoln, Nebraska
February 25, 2021
F - 3
NELNET, INC. AND SUBSIDIARIES
Consolidated Balance Sheets
As of December 31, 2020 and 2019
Assets:
Loans and accrued interest receivable (net of allowance for loan losses of $175,698 and
$61,914, respectively)
Cash and cash equivalents:
Cash and cash equivalents - not held at a related party
Cash and cash equivalents - held at a related party
Total cash and cash equivalents
Investments
Restricted cash
Restricted cash - due to customers
Accounts receivable (net of allowance for doubtful accounts of $1,824 and $4,455, respectively)
Goodwill
Intangible assets, net
Property and equipment, net
Other assets
Total assets
Liabilities:
Bonds and notes payable
Accrued interest payable
Bank deposits
Other liabilities
Due to customers
Total liabilities
Commitments and contingencies
Equity:
Nelnet, Inc. shareholders' equity:
$
$
Preferred stock, $0.01 par value. Authorized 50,000,000 shares; no shares issued or outstanding
Common stock:
Class A, $0.01 par value. Authorized 600,000,000 shares; issued and outstanding 27,193,154
shares and 28,458,495 shares, respectively
Class B, convertible, $0.01 par value. Authorized 60,000,000 shares; issued and outstanding
11,155,571 shares and 11,271,609 shares, respectively
Additional paid-in capital
Retained earnings
Accumulated other comprehensive earnings
Total Nelnet, Inc. shareholders' equity
Noncontrolling interests
Total equity
Total liabilities and equity
Supplemental information - assets and liabilities of consolidated education and other
lending variable interest entities:
Loans and accrued interest receivable
Restricted cash
Bonds and notes payable
Accrued interest payable and other liabilities
Net assets of consolidated education and other lending variable interest entities
See accompanying notes to consolidated financial statements.
F - 4
$
$
$
2020
2019
(Dollars in thousands, except share data)
$
20,185,656
21,402,868
33,292
87,957
121,249
992,940
553,175
283,971
76,460
142,092
75,070
123,527
92,020
22,646,160
19,320,726
28,701
54,633
312,280
301,471
20,017,811
—
272
112
3,794
2,621,762
6,102
2,632,042
(3,693)
2,628,349
22,646,160
13,922
119,984
133,906
247,099
650,939
437,756
115,391
156,912
81,532
348,259
134,308
23,708,970
20,529,054
47,285
—
303,781
437,756
21,317,876
—
285
113
5,715
2,377,627
2,972
2,386,712
4,382
2,391,094
23,708,970
20,132,996
499,223
(19,355,375)
(83,127)
1,193,717
21,399,382
639,847
(20,742,798)
(162,494)
1,133,937
NELNET, INC. AND SUBSIDIARIES
Consolidated Statements of Income
Years ended December 31, 2020, 2019, and 2018
2020
2019
2018
(Dollars in thousands, except share data)
$
595,113
Interest income:
Loan interest
Investment interest
Total interest income
Interest expense:
Interest on bonds and notes payable and bank deposits
Net interest income
Less provision for loan losses
Net interest income after provision for loan losses
Other income/expense:
Loan servicing and systems revenue
Education technology, services, and payment processing revenue
Communications revenue
Other
Gain on sale of loans
Gain from deconsolidation of ALLO
Impairment expense and provision for beneficial interests
Derivative market value adjustments and derivative settlements, net
Total other income/expense
Cost of services:
Cost to provide education technology, services, and payment processing services
Cost to provide communications services
Total cost of services
Operating expenses:
Salaries and benefits
Depreciation and amortization
Other expenses
Total operating expenses
Income before income taxes
Income tax expense
Net income
24,543
619,656
330,071
289,585
63,360
226,225
451,561
282,196
76,643
57,561
33,023
258,588
(24,723)
(24,465)
1,110,384
82,206
22,812
105,018
501,832
118,699
160,574
781,105
450,486
100,860
349,626
2,817
352,443
914,256
34,421
948,677
699,327
249,350
39,000
210,350
455,255
277,331
64,269
47,918
17,261
—
—
(30,789)
831,245
81,603
20,423
102,026
463,503
105,049
194,272
762,824
176,745
35,451
141,294
509
141,803
897,666
26,600
924,266
669,906
254,360
23,000
231,360
440,027
221,962
44,653
54,805
—
—
(11,721)
71,085
820,811
59,566
16,926
76,492
436,179
86,896
166,310
689,385
286,294
58,770
227,524
389
227,913
Net loss attributable to noncontrolling interests
Net income attributable to Nelnet, Inc.
Earnings per common share:
Net income attributable to Nelnet, Inc. shareholders - basic and diluted
$
$
9.02
3.54
5.57
Weighted average common shares outstanding - basic and diluted
39,059,588
40,047,402
40,909,022
See accompanying notes to consolidated financial statements.
F - 5
NELNET, INC. AND SUBSIDIARIES
Consolidated Statements of Comprehensive Income
Years ended December 31, 2020, 2019, and 2018
2020
2019
2018
(Dollars in thousands)
$
349,626
141,294
227,524
Net income
Other comprehensive income (loss):
Available-for-sale securities:
Unrealized holding gains (losses) arising during period, net
Reclassification adjustment for gains recognized in net income, net of losses
Income tax effect
Total other comprehensive income (loss)
Comprehensive income
Comprehensive loss attributable to noncontrolling interests
6,637
(2,521)
(986)
3,130
352,756
2,817
(1,199)
—
288
(911)
1,056
(978)
(69)
9
140,383
227,533
509
389
Comprehensive income attributable to Nelnet, Inc.
$
355,573
140,892
227,922
See accompanying notes to consolidated financial statements.
F - 6
NELNET, INC. AND SUBSIDIARIES
Consolidated Statements of Shareholders' Equity
Years ended December 31, 2020, 2019, and 2018
Nelnet, Inc. Shareholders
Preferred
stock
shares
Common stock shares
Class A
Class B
Preferred
stock
Class A
common
stock
Class B
common
stock
Additional
paid-in
capital
Retained
earnings
Accumulated
other
comprehensive
earnings
Noncontrolling
interests
Total equity
(Dollars in thousands, except share data)
—
29,341,517
11,468,587 $ —
293
115
521
2,143,983
4,617
15,858
2,165,387
—
—
28,798,464
11,459,641
288
115
622
2,299,556
3,883
10,315
2,314,779
—
—
9
—
—
—
—
—
(743)
—
—
1,023
1,023
(389)
227,524
—
9
(525)
(525)
—
—
—
—
—
—
(26,839)
5,174
6,194
(45,331)
1,264
—
(5,652)
(19,101)
—
—
(911)
—
—
—
—
—
—
—
4,756
4,756
(509)
141,294
—
(911)
(4,103)
(4,103)
—
—
—
—
(29,485)
4,851
6,401
(40,411)
(6,077)
(6,077)
—
—
Repurchase of common stock
—
(868,147)
Balance as of December 31, 2017
Issuance of noncontrolling
interests
Net income (loss)
Other comprehensive income
Distribution to noncontrolling
interests
Cash dividends on Class A and
Class B common stock - $0.66
per share
Issuance of common stock, net of
forfeitures
Compensation expense for stock
based awards
Impact of adoption of new
accounting standards
Conversion of common stock
Acquisition of noncontrolling
interest
Balance as of December 31, 2018
Issuance of noncontrolling
interests
Net income (loss)
Other comprehensive loss
Distribution to noncontrolling
interests
Cash dividends on Class A and
Class B common stock - $0.74
per share
Issuance of common stock, net of
forfeitures
Compensation expense for stock
based awards
Repurchase of common stock
Impact of adoption of new
accounting standard
Conversion of common stock
Balance as of December 31, 2019
Issuance of noncontrolling
interests
Net income (loss)
Other comprehensive income
Distribution to noncontrolling
interests
Cash dividends on Class A and
Class B common stock - $0.82
per share
Issuance of common stock, net of
forfeitures
Compensation expense for stock
based awards
Repurchase of common stock
Impact of adoption of new
accounting standard
Conversion of common stock
Acquisition of noncontrolling
interest
Deconsolidation of
noncontrolling interest - ALLO
Other equity transactions, net of
costs incurred to sell shares of
subsidiary
—
—
—
—
—
—
—
—
—
—
—
316,148
—
—
—
8,946
—
—
—
—
—
—
198,272
—
(726,273)
—
—
—
—
—
—
—
—
—
—
—
—
213,015
—
(1,594,394)
—
—
—
—
—
—
—
—
—
—
—
—
—
—
—
—
—
—
—
—
—
—
—
—
—
—
—
—
—
—
(8,946)
—
—
—
—
—
—
—
—
—
—
—
—
—
—
—
—
—
—
—
—
—
—
—
—
—
—
—
—
—
—
—
—
—
—
—
227,913
—
—
—
—
—
—
(26,839)
—
3
—
5,171
—
—
—
6,194
—
—
(8)
—
(11,264)
(34,059)
—
—
—
—
—
—
2,007
—
—
—
—
(13,449)
—
—
—
—
—
—
—
—
—
—
—
—
—
—
141,803
—
—
—
—
—
—
(29,485)
2
—
4,849
—
—
6,401
—
—
(7)
—
(6,157)
(34,247)
—
—
(2)
2
285
—
—
—
—
—
—
—
—
—
—
—
—
—
—
—
—
—
—
—
—
—
—
—
—
—
—
—
—
—
—
—
188,032
(188,032)
—
—
—
—
—
28,458,495
11,271,609
113
5,715
2,377,627
2,972
4,382
2,391,094
—
—
—
—
—
352,443
—
—
—
—
3,130
219,265
219,265
(2,817)
349,626
—
3,130
—
(16,123)
(16,123)
—
—
—
—
(31,778)
2
—
5,626
—
—
7,290
—
—
(16)
—
(14,837)
(58,505)
—
—
1
(1)
—
—
—
—
—
—
—
—
—
—
(18,868)
—
(375)
—
—
—
—
—
1,218
—
—
—
—
—
—
—
—
—
—
—
—
—
—
—
(31,778)
5,628
7,290
(73,358)
(18,868)
—
(225)
(600)
(208,175)
(208,175)
—
1,218
116,038
(116,038)
—
—
—
—
—
—
Balance as of December 31, 2020
—
27,193,154
11,155,571 $ —
272
112
3,794
2,621,762
6,102
(3,693)
2,628,349
See accompanying notes to consolidated financial statements.
F - 7
NELNET, INC. AND SUBSIDIARIES
Consolidated Statements of Cash Flows
Years ended December 31, 2020, 2019, and 2018
Net income attributable to Nelnet, Inc.
Net loss attributable to noncontrolling interests
Net income
Adjustments to reconcile net income to net cash provided by operating activities:
Depreciation and amortization, including debt discounts and loan premiums and deferred
origination costs
Loan discount accretion
Provision for loan losses
Derivative market value adjustments
(Payments to) proceeds from termination of derivative instruments, net
(Payments to) proceeds from clearinghouse - initial and variation margin, net
Gain from deconsolidation of ALLO, including cash impact
Gain from sale of loans
Gain from investments, net
(Gain from) loss on repurchases and extinguishment of debt, net
Deferred income tax expense (benefit)
Non-cash compensation expense
Impairment expense and provision for beneficial interests
Other
Increase in loan and investment accrued interest receivable
Decrease (increase) in accounts receivable
Decrease (increase) in other assets, net
Decrease in the carrying amount of ROU asset
(Decrease) increase in accrued interest payable
Increase (decrease) in other liabilities
Decrease in the carrying amount of lease liability
(Decrease) increase in due to customers
Net cash provided by operating activities
Cash flows from investing activities, net of acquisitions:
Purchases of loans
Purchases of loans from a related party
Net proceeds from loan repayments, claims, and capitalized interest
Proceeds from sale of loans
Purchases of available-for-sale securities
Proceeds from sales of available-for-sale securities
Proceeds from beneficial interest in loan securitizations
Purchases of other investments
Proceeds from other investments
Purchases of property and equipment
Business acquisitions, net of cash and restricted cash acquired
2020
2019
2018
(Dollars in thousands)
$
352,443
141,803
227,913
(2,817)
(509)
(389)
349,626
141,294
227,524
198,473
192,662
(35,285)
(35,824)
63,360
28,144
—
(26,747)
(287,579)
(33,023)
(14,055)
(1,924)
7,974
16,739
24,723
186
(61,090)
40,880
59,182
11,594
39,000
76,195
(12,530)
(70,685)
—
(17,261)
(3,095)
16,553
(7,265)
6,781
—
584
(54,586)
(55,949)
(19,858)
8,793
(18,584)
(14,394)
35,907
(9,401)
(136,285)
49,100
(8,678)
68,078
212,815
298,915
184,682
(40,800)
23,000
(1,014)
10,283
40,382
—
—
(8,139)
(359)
10,981
6,539
11,721
(2,551)
(248,869)
3,059
(4,069)
—
11,640
(12,506)
—
59,388
270,892
(1,459,696)
(1,906,669)
(3,847,553)
(147,539)
(101,538)
(74,698)
2,644,347
3,462,391
3,322,783
136,126
196,564
23,712
(471,510)
(1,010)
(46,424)
173,784
44,213
105
6,593
71,415
—
(168,216)
(103,250)
(67,040)
13,011
63,879
23,039
(113,312)
(92,499)
(125,023)
(29,989)
—
(12,562)
Net cash provided by (used in) investing activities
$
621,219
1,524,566
(732,351)
F - 8
NELNET, INC. AND SUBSIDIARIES
Consolidated Statements of Cash Flows (Continued)
Cash flows from financing activities:
Payments on bonds and notes payable
Proceeds from issuance of bonds and notes payable
Payments of debt issuance costs
Payments to extinguish debt
Increase in bank deposits, net
Dividends paid
Repurchases of common stock
Proceeds from issuance of common stock
Acquisition of noncontrolling interest
Issuance of noncontrolling interests
Distribution to noncontrolling interests
Net cash (used in) provided by financing activities
Net (decrease) increase in cash, cash equivalents and restricted cash
Cash, cash equivalents, and restricted cash, beginning of year
2020
2019
2018
(Dollars in thousands)
$ (3,129,485)
(4,698,878)
(3,113,503)
1,884,689
2,997,972
3,922,962
(8,674)
—
54,633
(31,778)
(73,358)
1,653
(600)
205,768
(1,088)
(14,406)
(14,030)
—
(29,485)
(40,411)
1,552
—
4,650
(235)
(1,098,240)
(1,793,271)
(264,206)
30,210
1,222,601
1,192,391
(13,808)
—
—
(26,839)
(45,331)
1,359
(13,449)
918
(525)
711,784
250,325
942,066
Cash, cash equivalents, and restricted cash, end of year
$
958,395
1,222,601
1,192,391
Supplemental disclosures of cash flow information:
Cash disbursements made for interest
Cash disbursements made for income taxes, net of refunds and credits received (a)
Cash disbursements made for operating leases
Noncash operating, investing, and financing activity:
ROU assets obtained in exchange for lease obligations
Receipt of beneficial interest in consumer loan securitizations
Distribution to noncontrolling interest
$
$
$
$
$
$
301,570
29,685
11,488
4,282
52,501
15,035
657,436
17,672
9,966
8,731
39,780
3,868
591,394
473
—
—
—
—
(a) For 2020, 2019, and 2018 the Company utilized $53.9 million, $31.8 million, and $14.7 million of federal and state tax credits,
respectively, related primarily to renewable energy.
Supplemental disclosures of noncash activities regarding the adoption of the new accounting standard for measurement of credit
losses on January 1, 2020 are contained in note 3.
Supplemental disclosures of noncash activities regarding the Company's recapitalization of ALLO in 2020 and business
acquisitions during 2020 and 2018 are contained in note 2 and note 8, respectively.
The following table provides a reconciliation of cash, cash equivalents, and restricted cash reported in the consolidated balance
sheets to the total of the amounts reported in the consolidated statements of cash flows.
As of
December 31, 2020
As of
December 31, 2019
As of
December 31, 2018
As of
December 31, 2017
Total cash and cash equivalents
$
Restricted cash
Restricted cash - due to customers
Cash, cash equivalents, and restricted cash
$
121,249
553,175
283,971
958,395
133,906
650,939
437,756
121,347
701,366
369,678
1,222,601
1,192,391
66,752
688,193
187,121
942,066
See accompanying notes to consolidated financial statements.
F - 9
NELNET, INC. AND SUBSIDIARIES
Notes to Consolidated Financial Statements
(Dollars in thousands, except share amounts, unless otherwise noted)
1. Description of Business
Nelnet, Inc. and its subsidiaries (“Nelnet” or 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 the Company 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. Substantially all revenue from external customers is earned, and all long-
lived assets are located, in the United States.
The Company was formed as a Nebraska corporation in 1978 to service federal student loans for two local banks. The
Company built on this initial foundation as a servicer to become a leading originator, holder, and servicer of federal student
loans, principally consisting of loans originated under the Federal Family Education Loan Program (“FFELP” or “FFEL
Program”) of the U.S. Department of Education (the “Department”).
The Health Care and Education Reconciliation Act of 2010 (the “Reconciliation Act of 2010”) discontinued new loan
originations under the FFEL Program, effective July 1, 2010, and requires that all new federal student loan originations be made
directly by the Department through the Federal Direct Loan Program. This law does not alter or affect the terms and conditions
of existing FFELP loans. As a result of this law, the Company no longer originates new FFELP loans. To reduce its reliance on
interest income on student loans, the Company has expanded its services and products. This expansion has been accomplished
through internal growth and innovation as well as business acquisitions.
The Company's reportable operating segments include:
• Loan Servicing and Systems (“LSS”)
• Education Technology, Services, and Payment Processing (“ETS&PP”)
• Communications
• Asset Generation and Management (“AGM”)
• Nelnet Bank
A description of each reportable operating segment is included below. See note 15 for additional information on the Company's
segment reporting.
Loan Servicing and Systems
The primary service offerings of the Loan Servicing and Systems operating segment include:
•
•
•
•
•
•
•
Servicing federally-owned student loans for the Department of Education
Servicing FFELP loans
Originating and servicing private education and consumer loans
Backup servicing for FFELP, private education and consumer loans
Providing student loan servicing software and other information technology products and services
Customer acquisition, management services, and backup servicing for community solar developers
Providing outsourced services including call center, processing, and marketing services
LSS provides for the servicing of the Company's student loan portfolio and the portfolios of third parties. The loan servicing
activities include loan conversion activities, application processing, borrower updates, customer service, payment processing,
due diligence procedures, funds management reconciliations, and claim processing. These activities are performed internally for
the Company's portfolio in addition to generating external fee revenue when performed for third-party clients. In addition, LSS
provides backup servicing to third-parties, which allows a transfer of the customer’s servicing volume to the Company’s
platform and becoming a full servicing customer if their existing servicer cannot perform their duties.
On February 7, 2018, NDS acquired Great Lakes Educational Loan Services, Inc. (“Great Lakes”). See note 8 for additional
information related to this acquisition. Nelnet Servicing, LLC, (“Nelnet Servicing”), a subsidiary of the Company, and Great
Lakes are two of four large private sector companies (referred to as Title IV Additional Servicers, or “TIVAS”) awarded a
student loan servicing contract by the Department to provide additional servicing capacity for loans owned by the Department.
F - 10
NELNET, INC. AND SUBSIDIARIES
Notes to Consolidated Financial Statements
(Dollars in thousands, except share amounts, unless otherwise noted)
This segment also provides student loan servicing software, which is used internally and licensed to third-party student loan
holders and servicers. These software systems have been adapted so that they can be offered as hosted servicing software
solutions usable by third parties to service various types of student loans, including Federal Direct Loan Program and FFEL
Program loans.
This segment also provides business process outsourcing primarily specializing in contact center management. The contact
center solutions and services include taking inbound calls, helping with outreach campaigns and sales, interacting with
customers through multi-channels, and processing and technology services.
Education Technology, Services, and Payment Processing
The Education Technology, Services, and Payment Processing segment (known as Nelnet Business Solutions (“NBS”))
provides service and technology to administrators, teachers, students, and families of K-12 schools and higher education
institutions. The Company's payment processing services and technologies also serve customers outside of education.
In the K-12 market, the Company (known as FACTS) offers (i) financial management, including tuition payment plans,
financial needs assessment (grant and aid), incidental billing, advanced accounting, and payment forms; (ii) school
administration solutions, including school information system software that automates the flow of information between school
administrators, teachers, and parents and includes administrative processes such as admissions, enrollment, scheduling,
cafeteria management, attendance, and grade book management; (iii) advancement (giving management), including a
comprehensive donation platform that streamlines donor communications, organizes donor information, and provides access to
data analysis and reporting; (iv) enrollment and communications, including website design and cost effective admissions
software; (v) professional development and educational instruction services; and (vi) innovative technology products that aid in
teacher and student evaluations. In the higher education market, the Company (known as Nelnet Campus Commerce) offers
solutions including (i) tuition payment plans and (ii) payment technology and processing.
Outside of the education market, the Company also offers technology and payment services including electronic transfer and
credit card processing, reporting, billing and invoicing, mobile and virtual terminal solutions, and specialized integrations to
business software. In addition, this operating segment offers mobile first technology focused on increasing engagement, online
giving, and communication for church and not-for-profit customers. Additionally, the Company may earn revenue for payment
processing fees when families make tuition payments.
Communications
ALLO Communications LLC (“ALLO”) provides pure fiber optic service to homes and businesses for internet, television, and
telephone services. ALLO derives its revenue primarily from the sale of communication services to residential, governmental,
and business customers in Nebraska and Colorado. Internet and television services include revenue from residential and
business customers for subscriptions to ALLO's data and video products. ALLO data services provide high-speed internet
access over ALLO's all-fiber network at various symmetrical speeds of up to 1 gigabit per second for residential customers and
is capable of providing symmetrical speeds of over 1 gigabit per second for business customers. Telephone services include
local and long distance telephone service, hosted PBX services, and other services.
On December 21, 2020 the Company deconsolidated ALLO from the Company’s consolidated financial statements due to
ALLO’s recapitalization. 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 deconsolidation, are presented by the Company as a reportable operating
segment. See note 2, “Recent Developments - ALLO Recapitalization,” for a description of this transaction and the Company’s
continued involvement.
Asset Generation and Management
The Company's Asset Generation and Management operating segment includes the acquisition, management, and ownership of
the Company's loan assets (excluding loan assets held by Nelnet Bank). Substantially all loan assets included in this segment
are student loans originated under the FFEL Program, including the Stafford Loan Program, the PLUS Loan program, and loans
that reflect the consolidation into a single loan of certain previously separate borrower obligations (“Consolidation” loans).
AGM also acquires private education and consumer loans. AGM generates a substantial portion of its earnings from the spread,
referred to as the Company's loan spread, between the yield it receives on its loan portfolio and the associated costs to finance
such portfolio. The loan assets are held in a series of lending subsidiaries and associated securitization trusts designed
specifically for this purpose. In addition to the loan spread earned on its portfolio, all costs and activity associated with
managing the portfolio, such as servicing of the assets and debt maintenance, are included in this segment.
F - 11
NELNET, INC. AND SUBSIDIARIES
Notes to Consolidated Financial Statements
(Dollars in thousands, except share amounts, unless otherwise noted)
Nelnet Bank
On November 2, 2020, the Company obtained final approval from the Federal Deposit Insurance Corporation ("FDIC") for
federal deposit insurance and for a bank charter from the Utah Department of Financial Institutions ("UDFI") in connection
with the establishment of Nelnet Bank, and Nelnet Bank launched operations. Nelnet Bank operates as an internet Utah-
chartered industrial bank franchise focused on the private education loan marketplace, with a home office in Salt Lake City,
Utah.
Corporate and Other Activities
Other business activities and operating segments that are not reportable are combined and included in Corporate and Other
Activities. Corporate and Other Activities include the following items:
•
•
•
•
The operating results of Whitetail Rock Capital Management, LLC (“WRCM”), the Company's SEC-registered
investment advisor subsidiary
Income earned on certain investment activities, including renewable energy (solar) and real estate
Interest expense incurred on unsecured and certain other corporate related debt transactions
Other product and service offerings that are not considered reportable operating segments
Corporate and Other Activities also include certain corporate activities and overhead functions related to executive
management, internal audit, human resources, accounting, legal, enterprise risk management, information technology,
occupancy, and marketing. These costs are allocated to each operating segment based on estimated use of such activities and
services.
2. Recent Developments - ALLO Recapitalization
On October 1, 2020, the Company entered into various agreements with SDC Allo Holdings, LLC (“SDC”), a third party global
digital infrastructure investor, and ALLO, then a majority owned communications subsidiary of the Company, for various
transactions contemplated by the parties in connection with a recapitalization and additional funding for ALLO.
The agreements provided for a series of interrelated transactions, whereby on October 15, 2020, ALLO received proceeds of
$197.0 million from SDC as the purchase price for the issuance of non-voting preferred membership units of ALLO, and
redeemed $160.0 million of non-voting preferred membership units of ALLO held by the Company. On December 21, 2020,
the non-voting preferred membership units of ALLO held by SDC automatically converted into voting membership units of
ALLO pursuant to the terms of the agreements upon the receipt on December 21, 2020 of the required approvals from
applicable regulatory authorities. As a result of such conversion, 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 as summarized below.
F - 12
NELNET, INC. AND SUBSIDIARIES
Notes to Consolidated Financial Statements
(Dollars in thousands, except share amounts, unless otherwise noted)
As of
December 21, 2020
Voting interest/equity method investment - recorded at fair value
$
Preferred membership interest investment - recorded at fair value
Less: ALLO assets deconsolidated:
Cash and cash equivalents – not held at a related party
Cash and cash equivalents – held at a related party
Accounts receivable
Goodwill
Intangible assets
Property and equipment, net
Other assets
Other liabilities
Noncontrolling interests
Gain recognized upon deconsolidation of ALLO
$
132,960
228,530
(299)
(28,692)
(4,138)
(21,112)
(6,083)
(245,295)
(29,643)
24,185
208,175
258,588
The agreements between 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
before April 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 of December 31, 2020, the outstanding preferred membership units of ALLO held by
the Company was $228.9 million. The preferred membership units earn a preferred annual return of 6.25 percent.
The impact to the Company’s 2020 operating results as a result of the ALLO recapitalization is summarized below:
Gain from deconsolidation
Compensation expense (note 1)
Obligation to SDC (note 2)
$
$
258,588
(9,298)
(2,339)
246,951
Note 1: On October 1, 2020 (prior to the deconsolidation of ALLO), ALLO recognized compensation expense related to the
modification of certain equity awards previously granted to members of ALLO’s management.
Note 2: 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 as of December
31, 2020 to be $2.3 million, which is included in “other liabilities” on the consolidated balance sheet.
3. Summary of Significant Accounting Policies and Practices
Consolidation
The consolidated financial statements include the accounts of Nelnet, Inc. and its consolidated subsidiaries. In addition, the
accounts of all variable interest entities (“VIEs”) of which the Company has determined that it is the primary beneficiary are
included in the consolidated financial statements. All significant intercompany balances and transactions have been eliminated
in consolidation.
Variable Interest Entities
The Company assesses its partnerships and joint ventures to determine if the entity meets the qualifications of a VIE. The
Company performs a qualitative assessment of each VIE to determine if it is the primary beneficiary. The primary beneficiary is
the entity which has both: (1) the power to direct the activities of the VIE that most significantly impact the VIE’s economic
performance, and (2) the obligation to absorb losses or receive benefits of the entity that could potentially be significant to the
F - 13
NELNET, INC. AND SUBSIDIARIES
Notes to Consolidated Financial Statements
(Dollars in thousands, except share amounts, unless otherwise noted)
VIE. The Company examines specific criteria and uses judgment when determining whether an entity is a VIE and whether it is
the primary beneficiary. The Company performs this review initially at the time it enters into a partnership or joint venture
agreement and reassess upon reconsideration events.
VIEs - Consolidated
The Company is required to consolidate VIEs in which it has determined it is the primary beneficiary.
The Company's education and other lending subsidiaries are engaged in the securitization of finance assets. These lending
subsidiaries hold beneficial interests in eligible loans, subject to creditors with specific interests. The liabilities of the
Company's lending subsidiaries are not the direct obligations of Nelnet, Inc. or any of its other subsidiaries. Each lending
subsidiary is structured to be bankruptcy remote, meaning that it should not be consolidated in the event of bankruptcy of the
parent company or any other subsidiary. The Company is generally the administrator and master servicer of the securitized
assets held in its lending subsidiaries and owns the residual interest of the securitization trusts. For accounting purposes, the
transfers of loans to the securitization trusts do not qualify as sales. Accordingly, all the financial activities and related assets
and liabilities, including debt, of the securitizations are reflected in the Company's consolidated financial statements and are
summarized as supplemental information on the balance sheet.
VIEs - Not consolidated
The Company is not required to consolidate VIEs in which it has determined it is not the primary beneficiary.
The Company makes investments in entities that promote renewable energy sources (solar). The Company’s investments in
these entities generate a return primarily through the realization of federal income tax credits, operating cash flows, and other
tax benefits, such as tax deductions from operating losses of the investments, over specified time periods. These investments are
included in "investments" on the consolidated balance sheets and accounted for under the HLBV method of accounting. The
carrying value of these investments are reduced by tax credits earned when the solar project is placed in service. The
Company’s unfunded capital and other commitments related to these unconsolidated VIEs are included in “other liabilities” on
the consolidated balance sheet. The Company’s maximum exposure to loss from these unconsolidated VIEs include the
investment, unfunded capital commitments, and previously recorded tax credits which remain subject to recapture by taxing
authorities based on compliance features required to be met at the project level. The tax credit recapture period ratably
decreases over five years from when the project is placed in service. While the Company believes potential losses from these
investments are remote, the maximum exposure was determined by assuming a scenario where the energy-producing projects
completely fail and do not meet certain government compliance requirements resulting in recapture of the related tax credits.
The following table provides a summary of solar investment VIEs that the Company has not consolidated:
As of December 31,
2020
2019
Investment carrying amount
Tax credits subject to recapture
Unfunded capital and other commitments
Maximum exposure to loss (a)
$
$
(30,373)
117,740
17,462
104,829
7,562
67,069
14,006
88,637
(a)
Amounts include $15.6 million and $3.0 million as of December 31, 2020 and 2019, respectively, syndicated to
other investors in certain solar projects.
As of December 31, 2020, the Company owned 45 percent of the economic rights of ALLO Communications LLC and has a
disproportional 43 percent of the voting rights related to all operating decisions for ALLO's business. See note 1, “Description
of Business,” for a description of ALLO, including the primary services offered. See note 2, “Recent Developments - ALLO
Recapitalization,” for disclosure of ALLO’s recapitalization and the Company’s recognition of its voting interest/equity method
and non-voting preferred membership investments, which is the Company’s maximum exposure to loss.
Accounting Standard Adopted in 2020
In June 2016, the Financial Accounting Standards Board (“FASB”) issued ASU No. 2016-13, Financial Instruments – Credit
Losses (“ASC 326”), which replaces the incurred loss methodology with an expected loss methodology that is referred to as the
F - 14
NELNET, INC. AND SUBSIDIARIES
Notes to Consolidated Financial Statements
(Dollars in thousands, except share amounts, unless otherwise noted)
current expected credit loss ("CECL") methodology. Since its original issuance in 2016, the FASB has issued several updates to
the original ASU.
The CECL methodology utilizes a lifetime “expected credit loss” measurement objective for the recognition of credit losses for
financial assets measured at amortized cost at the time the financial asset is originated or acquired, including, for the Company,
loans receivable, accounts receivable, and held-to-maturity beneficial interests in loan securitizations. The expected credit
losses are adjusted each period for changes in expected lifetime credit losses. In addition, ASC 326 made changes to the
accounting for available-for-sale debt securities. For available-for-sale debt securities where fair value is less than amortized
cost, credit-related impairment, if any, is recognized through an allowance for credit losses and adjusted each period for
changes in credit risk.
On January 1, 2020, the Company adopted ASC 326 using the modified retrospective method for all financial assets measured
at amortized cost. Results for reporting periods beginning after January 1, 2020 are presented under ASC 326 (recognizing
estimated credit losses expected to occur over the asset's remaining life) while prior period amounts continue to be reported in
accordance with previously applicable GAAP (recognizing estimated credit losses using an incurred loss model); therefore, the
comparative information for 2019 is not comparable to the information presented for 2020. Adoption of the new guidance
primarily impacted the allowance for loan losses related to the Company's loan portfolio. Upon adoption, the Company
recorded an increase to the allowance for loan losses of $91.0 million, which included a reclassification of the non-accretable
discount balance and premiums related to loans purchased with evidence of credit deterioration, and decreased retained
earnings, net of tax, by $18.9 million. The following table illustrates the impact of the adoption of ASC 326.
Balances at
December 31, 2019
Impact of ASC 326
adoption
Balances at
January 1, 2020
Assets
Loans and accrued interest receivable, net of allowance
Loans receivable
Accrued interest receivable
Loan discount, net
Non-accretable discount
Allowance for loan losses
$
20,798,719
733,497
(35,036)
(32,398)
(61,914)
Loans and accrued interest receivable, net of allowance
21,402,868
—
—
33,790
32,398
(91,014)
(24,826)
20,798,719
733,497
(1,246)
—
(152,928)
21,378,042
Liabilities
Other liabilities (deferred taxes)
Equity
Retained earnings
303,781
(5,958)
297,823
2,377,627
(18,868)
2,358,759
The Company adopted ASC 326 using the prospective transition approach for loans receivable purchased with credit
deterioration ("PCD") that were previously classified as purchased credit impaired ("PCI"). In accordance with the standard, the
Company did not reassess whether PCI assets met the criteria of PCD assets as of the date of adoption. On January 1, 2020, the
unamortized cost basis of the PCD assets were adjusted to reflect the addition of $32.4 million in the allowance for loan losses
(as reflected in the table above). The remaining noncredit premium on these loans as of January 1, 2020 (based on the adjusted
amortized cost basis) will be amortized into interest income over the life of the loans. Changes to the allowance for loan losses
on these loans after adoption are recorded through provision expense.
Summary of Significant Accounting Policies Affected by Implementation of ASC 326
Allowance for Loan Losses
The allowance for loan losses is a valuation account that is deducted from the loans’ amortized cost basis to present the net
amount expected to be collected on the loans as of the balance sheet date. Such allowance is based on the credit losses expected
to arise over the life of the asset which includes consideration of prepayments. Loans are charged off when management
determines the loan is uncollectible. Charge-offs are recognized as a reduction to the allowance for loan losses. Expected
F - 15
NELNET, INC. AND SUBSIDIARIES
Notes to Consolidated Financial Statements
(Dollars in thousands, except share amounts, unless otherwise noted)
recoveries of amounts previously charged off, not to exceed the aggregate of the amount previously charged off, are included in
the estimate of the allowance for loan losses at the balance sheet date.
The Company aggregates loans with similar risk characteristics into pools to estimate its expected credit losses. The Company
evaluates such pooling decisions each quarter and makes adjustments as risk characteristics change.
The Company determines its estimated credit losses for the following financial assets as follows:
Loans receivable
Management has determined that the federally insured, private education, and consumer loan portfolios each meet the definition
of a portfolio segment, which is defined as the level at which an entity develops and documents a systematic method for
determining its allowance for loan losses. Accordingly, the portfolio segment disclosures are presented on this basis in note 4
for each of these portfolios. The Company does not disaggregate its portfolio segment loan portfolios into classes of financing
receivables.
The Company utilizes an undiscounted cash flow methodology in determining its lifetime expected credit losses on its federally
insured and private education loan portfolios and a remaining life methodology for its consumer loan portfolio. For the
undiscounted cash flow models, the expected credit losses are the product of multiplying the Company’s estimates of
probability of default and loss given default and the exposure of default over the expected life of the loans. For the remaining
life method, the expected credit losses are the product of multiplying the Company’s estimated net loss rate by the exposure at
default over the expected life of the loans. Management estimates the allowance balance using relevant available information,
from internal and external sources, relating to past events, current economic conditions, and reasonable and supportable
forecasts. The Company has determined that, for modeling current expected credit losses, the Company can reasonably estimate
expected losses that incorporate current economic conditions and forecasted probability weighted economic scenarios up to a
one-year period. Macroeconomic factors used in the models include such variables as unemployment rates, gross domestic
product, and consumer price index. After the "reasonable and supportable" period, the Company reverts to its actual long-term
historical loss experience in the historical observation period. The Company uses a straight line reversion method over two
years. Historical credit loss experience provides the basis for the estimation of expected credit losses. A portion of the
allowance is comprised of qualitative adjustments to historical loss experience.
Qualitative adjustments consider the following factors, as applicable, for each of the Company’s loan portfolios: student loans
in repayment versus those in nonpaying status; delinquency status; type of private education or consumer loan program; trends
in defaults in the portfolio based on Company and industry data; past experience; trends in federally insured student loan claims
rejected for payment by guarantors; changes in federal student loan programs; and other relevant qualitative factors.
Changes in the allowance for the year ended December 31, 2020 were primarily a result of the adoption of ASC 326 and
changes in macroeconomic factors that were impacted by COVID-19.
The federal government guarantees 97 percent of the principal of and the interest on federally insured student loans disbursed
on and after July 1, 2006 (and 98 percent for those loans disbursed on and after October 1, 1993 and prior to July 1, 2006),
which limits the Company’s loss exposure on the outstanding balance of the Company’s federally insured portfolio. Federally
insured student loans disbursed prior to October 1, 1993 are fully insured. Private education and consumer loans are unsecured,
with neither a government nor a private insurance guarantee. Accordingly, the Company bears the full risk of loss on these
loans if the borrower and co-borrower, if applicable, default. The Company places private education loans on nonaccrual status
when the collection of principal and interest is 90 days past due and charges off the loan when the collection of principal and
interest is 120 days past due. The Company places consumer loans on nonaccrual status when the collection of principal and
interest is 90 days past due and charges off the loan when the collection of principal and interest is 120 days or 180 days past
due, depending on type of loan program. Collections, if any, are reflected as a recovery through the allowance for loan losses.
Purchased Loans Receivable with Credit Deterioration (“PCD”)
The Company has purchased federally insured rehabilitation loans that have experienced more than insignificant credit
deterioration since origination. Rehabilitation loans are loans that have previously defaulted, but for which the borrower has
made a specified number of on-time payments. Although rehabilitation loans benefit from the same guarantees as other
federally insured loans, rehabilitation loans have generally experienced redefault rates that are higher than default rates for
federally insured loans that have not previously defaulted. These PCD loans are recorded at the amount paid. An allowance for
loan losses is determined using the same methodology as for other loans held for investment. The sum of the loans’ purchase
F - 16
NELNET, INC. AND SUBSIDIARIES
Notes to Consolidated Financial Statements
(Dollars in thousands, except share amounts, unless otherwise noted)
price and allowance for loan losses becomes its initial amortized cost basis. The difference between the initial amortized cost
basis and the par value of the loan is a noncredit discount or premium, which is amortized or accreted into interest income over
the life of the loan. Subsequent changes to the allowance for credit losses are recorded through provision expense.
Loan Accrued Interest Receivable
The Company has elected to present its loan accrued interest receivable balance combined in its consolidated balance sheets
with the loans receivable amortized cost balance.
For the Company’s federally insured loan portfolio, the Company has elected to measure an allowance for credit losses for
accrued interest receivables. For federally insured loans, accrued interest receivable is typically charged-off when the
contractual payment of principal or interest has become greater than 270 days past due. Charge-offs of accrued interest
receivable are recognized as a reduction to the allowance for loan losses.
For the Company’s private education and consumer loan portfolios, the Company has elected not to measure an allowance for
credit losses for accrued interest receivables. For private education and consumer loans, the accrual of interest is discontinued
when the contractual payment of principal or interest has become 90 days past due. Charge-offs of accrued interest receivable
are recognized by reversing interest income.
Reclassifications
Certain amounts previously reported have been reclassified to conform to the current period presentation. These
reclassifications include:
•
•
•
Reclassifying the line item "accrued interest receivable" on the Company's consolidated balance sheet to "loans and
accrued interest receivable" and "investments";
Reclassifying "gain on sale of loans" that was previously included in "other income" to a new line item on the
Company's consolidated statements of income; and
Reclassifying “impairment expense” that was previously included in “other expenses” to a new line on the Company’s
consolidated statements of income.
Noncontrolling Interests
Amounts for noncontrolling interests reflect the proportionate share of membership interest (equity) and net income attributable
to the holders of minority membership interests in the following entities:
• Whitetail Rock Capital Management, LLC - WRCM is the Company’s SEC-registered investment advisor
subsidiary. WRCM issued 10 percent minority membership interests on January 1, 2012.
In addition, the Company has established multiple entities for the purpose of investing in renewable energy (solar) and federal
opportunity zone programs in which it has noncontrolling members.
Use of Estimates
The preparation of the consolidated financial statements in conformity with U.S. generally accepted accounting principles
(“GAAP”) requires management to make a number of estimates and assumptions that affect the reported amounts of assets and
liabilities, reported amounts of revenues and expenses, and other disclosures. Actual results may differ from those estimates.
Loans Receivable
Loans consist of federally insured student loans, private education loans, and consumer loans. If the Company has the ability
and intent to hold loans for the foreseeable future, such loans are held for investment and carried at amortized cost. Amortized
cost includes the unamortized premium or discount and capitalized origination costs and fees, all of which are amortized to
interest income. Loans which are held-for-investment also have an allowance for loan loss as needed. Any loans the Company
has the ability and intent to sell are classified as held for sale and are carried at the lower of cost or fair value. Loans which are
held for sale do not have the associated premium or discount and origination costs and fees amortized into interest income and
there is also no related allowance for loan losses. There were no loans classified as held for sale as of December 31, 2020 and
2019.
F - 17
NELNET, INC. AND SUBSIDIARIES
Notes to Consolidated Financial Statements
(Dollars in thousands, except share amounts, unless otherwise noted)
Federally insured loans were originated under the FFEL Program by certain eligible lenders as defined by the Higher Education
Act of 1965, as amended (the “Higher Education Act”). These loans, including related accrued interest, are guaranteed at their
maximum level permitted under the Higher Education Act by an authorized guaranty agency, which has a contract of
reinsurance with the Department. The terms of the loans, which vary on an individual basis, generally provide for repayment in
monthly installments of principal and interest. Generally, Stafford and PLUS loans have repayment periods between five and
ten years. Consolidation loans have repayment periods of twelve to thirty years. FFELP loans do not require repayment while
the borrower is in-school, and during the grace period immediately upon leaving school. Under the Higher Education Act a
borrower may also be granted a deferment or forbearance for a period of time based on need, during which time the borrower is
not considered to be in repayment. Interest continues to accrue on loans in the in-school, deferment, and forbearance program
periods. In addition, eligible borrowers may qualify for income-driven repayment plans offered by the Department. These plans
determine the borrower's payment amount based on their discretionary income and may extend their repayment period. Interest
rates on federally insured student loans may be fixed or variable, dependent upon the type of loan, terms of the loan agreements,
and date of origination.
Substantially all FFELP loan principal and related accrued interest is guaranteed as provided by the Higher Education Act.
These guarantees are subject to the performance of certain loan servicing due diligence procedures stipulated by applicable
Department regulations. If these due diligence requirements are not met, affected student loans may not be covered by the
guarantees in the event of borrower default. Such student loans are subject to “cure” procedures and reinstatement of the
guarantee under certain circumstances.
Loans also include private education and consumer loans. Private education loans are loans to students or their families that are
non-federal loans and loans not insured or guaranteed under the FFEL Program. These loans are used primarily to bridge the
gap between the cost of higher education and the amount funded through financial aid, federal loans, or borrowers' personal
resources. The terms of the private education loans, which vary on an individual basis, generally provide for repayment in
monthly installments of principal and interest over a period of up to thirty years. The private education loans are not covered by
a guarantee or collateral in the event of borrower default. Consumer loans are unsecured loans to an individual for personal,
family, or household purposes. The terms of the consumer loans, which vary on an individual basis, generally provide for
repayment in weekly or monthly installments of principal and interest over a period of up to six years.
Allowance for Loan Losses – Prior to Adoption of ASC 326
Prior to the adoption of ASC 326 effective January 1, 2020, the allowance for loan losses represented management's estimate of
probable losses on loans. The provision for loan losses for periods ended prior to January 1, 2020 reflected the activity for the
applicable period and provided an allowance at a level that the Company's management believed was appropriate to cover
probable losses inherent in the loan portfolio. The Company evaluated the adequacy of the allowance for loan losses using a
historical loss rate methodology adjusted for qualitative factors separately on each of its federally insured, private education,
and consumer loan portfolios. These evaluation processes were subject to numerous judgments and uncertainties including the
selection of loss rates over time and determination of the loss emergence period.
In determining the appropriate allowance for loan losses, the Company considered several factors, as applicable, for each of the
Company’s loan portfolios, including: loans in repayment versus those in a nonpaying status, delinquency status, trends in
defaults in the portfolio based on Company and industry data, past experience, trends in student loan claims rejected for
payment by guarantors, changes to federal student loan programs, type of program, current economic conditions, and other
relevant qualitative factors.
For loans purchased where there was evidence of credit deterioration since the origination of the loan, the Company recorded a
credit discount, separate from the allowance for loan losses, which was non-accretable to interest income. Remaining discounts
and premiums for purchased loans were recognized in interest income over the remaining estimated lives of the loans. The
Company continued to evaluate credit losses associated with purchased loans based on current information and changes in
expectations to determine if additional allowance for loan losses on such portfolios were needed.
Cash and Cash Equivalents and Statements of Cash Flows
For purposes of the consolidated statements of cash flows, the Company considers all investments with original maturities of
three months or less to be cash equivalents.
Accrued interest on loans purchased and sold is included in cash flows from operating activities in the respective period. Net
purchased loan accrued interest was $92.3 million, $112.9 million, and $181.0 million in 2020, 2019, and 2018, respectively.
F - 18
NELNET, INC. AND SUBSIDIARIES
Notes to Consolidated Financial Statements
(Dollars in thousands, except share amounts, unless otherwise noted)
Investments
The Company classifies its debt securities, primarily student loan and other asset-backed securities, as available-for-sale. These
securities are carried at fair value, with the changes in fair value, net of taxes, carried as a separate component of shareholders’
equity. The amortized cost of debt securities in this category is adjusted for amortization of premiums and accretion of
discounts, which are amortized using the effective interest rate method. When an investment is sold, the cost basis is determined
through specific identification of the security sold.
The Company classifies its residual interest in federally insured and consumer loan securitizations as held-to-maturity beneficial
interest investments. The Company measures accretable yield initially as the excess of all cash flows expected to be collected
attributable to the beneficial interest estimated at the acquisition/transaction date over the initial investment and recognizes
interest income over the life of the beneficial interest using the effective interest method. The Company continues to update,
over the life of the beneficial interest, the expectation of cash flows to be collected. Beneficial interest investments are
evaluated for impairment by comparing the present value of the remaining cash flows as estimated at the initial transaction date
(or the last date previously revised) to the present value of the cash flows expected to be collected at the current financial
reporting date, both discounted using the same effective rate equal to the current yield used to accrete the beneficial interest. If
the present value of remaining cash flows is less than the present value of cash flows expected to be collected, the Company
records an allowance for credit losses for the difference. Subsequent favorable changes, if any, decreases the allowance for
credit losses. The Company reflects the changes in the allowance for credit losses in provision for beneficial interests on the
consolidated statements of income.
Equity investments with readily determinable fair values are measured at fair value, with changes in the fair value recognized
through net income (other than those equity investments accounted for under the equity method of accounting or those that
result in consolidation of the investee).
For equity investments without readily determinable fair value, the Company uses the measurement alternative of cost minus
impairment, if any, plus or minus changes resulting from observable price changes in orderly transactions for the identical or a
similar investment of the same issuer. The Company uses qualitative factors to identify impairment on these investments.
The Company accounts for equity investments over which it has significant influence but not a controlling financial interest
using the equity method of accounting. Equity method investments are recorded at cost and subsequently increased or decreased
by the amount of the Company’s proportionate share of the net earnings or losses and other comprehensive income of the
investee. Equity method investments are evaluated for other-than-temporary impairment using certain impairment indicators
such as a series of operating losses of an investee or other factors. These factors may indicate that a decrease in value of the
investment has occurred that is other-than-temporary and shall be recognized.
The Company accounts for its solar investments and equity investments 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 amount the Company recognizes for its share of the earnings or losses from the equity
investment for the period.
Restricted Cash
Restricted cash primarily includes amounts for student loan securitizations and other secured borrowings. This cash must be
used to make payments related to trust obligations. Amounts on deposit in these accounts are primarily the result of timing
differences between when principal and interest is collected on the student loans held as trust assets and when principal and
interest is paid on the trust's asset-backed debt securities. Restricted cash also includes collateral deposits with derivative third-
party clearinghouses.
Restricted Cash - Due to Customers
As a servicer of student loans, the Company collects student loan remittances and subsequently disburses these remittances to
the appropriate lending entities. In addition, as part of the Company's Education Technology, Services, and Payment Processing
F - 19
NELNET, INC. AND SUBSIDIARIES
Notes to Consolidated Financial Statements
(Dollars in thousands, except share amounts, unless otherwise noted)
operating segment, the Company collects tuition payments and subsequently remits these payments to the appropriate schools.
Cash collected for customers and the related liability are included in the accompanying consolidated balance sheets.
Accounts Receivable
Accounts receivable are presented at their net realizable values, which include allowances for doubtful accounts. Allowance
estimates are based upon individual customer experience, as well as the age of receivables and likelihood of collection.
Business Combinations
The Company uses the acquisition method in accounting for acquired businesses. Under the acquisition method, the financial
statements reflect the operations of an acquired business starting from the completion of the acquisition. The assets acquired
and liabilities assumed are recorded at their respective estimated fair values at the date of acquisition. Any excess of the
purchase price over the estimated fair values of the identifiable net assets acquired is recorded as goodwill. All contingent
consideration is measured at fair value on the acquisition date and included in the consideration transferred in the acquisition.
Contingent consideration classified as a liability is remeasured to fair value at each reporting date until the contingency is
resolved, and changes in fair value are recognized in earnings.
Goodwill
The Company reviews goodwill for impairment annually (as of November 30) and whenever triggering events or changes in
circumstances indicate its carrying value may not be recoverable. Goodwill is tested for impairment using a fair value approach
at the reporting unit level. A reporting unit is the operating segment, or a business one level below that operating segment if
discrete financial information is prepared and regularly reviewed by segment management. However, components are
aggregated as a single reporting unit if they have similar economic characteristics.
The Company tests goodwill for impairment in accordance with applicable accounting guidance. The guidance provides an
entity the option to first assess qualitative factors to determine whether the existence of events or circumstances leads to a
determination that it is more likely than not (more than 50%) that the estimated fair value of a reporting unit is less than its
carrying amount. If an entity elects to perform a qualitative assessment and determines that an impairment is more likely than
not, the entity is then required to perform a quantitative impairment test, otherwise no further analysis is required. An entity
also may elect not to perform the qualitative assessment and, instead, proceed directly to the quantitative impairment test.
For the 2020, 2019, and 2018 annual reviews of goodwill, the Company assessed qualitative factors and concluded it was not
more likely than not that the fair value of its reporting units were less than their carrying amount. As such, the Company was
not required to perform further impairment testing and concluded there was no impairment of goodwill.
Intangible Assets
The Company uses estimates to determine the fair value of acquired assets to allocate the purchase price to acquired intangible
assets. Such estimates are generally based on estimated future cash flows or cost savings associated with particular assets and
are discounted to present value using an appropriate discount rate. The estimates of future cash flows associated with intangible
assets are generally prepared using a cost savings method, a lost income method, or an excess return method, as appropriate. In
utilizing such methods, management must make certain assumptions about the amount and timing of estimated future cash
flows and other economic benefits from the assets, the remaining economic useful life of the assets, and general economic
factors concerning the selection of an appropriate discount rate. The Company may also use replacement cost or market
comparison approaches to estimate fair value if such methods are determined to be more appropriate.
Intangible assets with finite lives are amortized over their estimated lives. Such assets are amortized using a method of
amortization that reflects the pattern in which the economic benefits of the intangible asset are consumed or otherwise used up.
If that pattern cannot be reliably determined, the Company uses a straight-line amortization method.
The Company evaluates the estimated remaining useful lives of purchased intangible assets and whether events or changes in
circumstances warrant a revision to the remaining periods of amortization.
Property and Equipment
Property and equipment are carried at cost, net of accumulated depreciation. Maintenance and repairs are charged to expense as
incurred, and major improvements, including leasehold improvements, are capitalized. Gains and losses from the sale of
F - 20
NELNET, INC. AND SUBSIDIARIES
Notes to Consolidated Financial Statements
(Dollars in thousands, except share amounts, unless otherwise noted)
property and equipment are included in determining net income. The Company uses the straight-line method for recording
depreciation and amortization. Leasehold improvements are amortized straight-line over the shorter of the lease term or
estimated useful life of the asset.
Leases
At the inception of an arrangement, the Company determines if the arrangement is, or contains, a lease and records the lease in
the consolidated financial statements upon lease commencement, which is the date when the underlying asset is made available
by the lessor. The Company primarily leases office and data center space. Leases with an initial term of 12 months or less are
not recorded on the balance sheet. The lease expense for these leases is recognized on a straight-line basis over the lease term.
All other lease assets (ROU assets) and lease liabilities are recognized based on the present value of lease payments over the
lease term at the commencement date. The Company classifies each lease as operating or financing, with the income statement
reflecting lease expense for operating leases and amortization/interest expense for financing leases. When the discount rate
implicit in the lease cannot be readily determined, the Company uses its incremental borrowing rate.
The Company accounts for lease and non-lease components together as a single, combined lease component for its office and
data center space. In addition, the Company identified itself as the lessor in its Communications operating segment for services
provided to customers that include customer-premise equipment. The Company accounts for those services and associated
leases as a single, combined component. The non-lease services are 'predominant' in those contracts. Therefore, the combined
component is considered a single performance obligation under ASC Topic 606, Revenue from Contracts with Customers.
Most leases include one or more options to renew, with renewal terms that can be extended. The exercise of lease renewal
options for the majority of leases is at the Company's discretion. Renewal options that the Company is reasonably certain to
exercise are included in the lease term.
Certain leases include escalating rental payments or rental payments adjusted periodically for inflation. None of the lease
agreements include any residual value guarantees, a transfer of title, or a purchase option that is reasonably certain to be
exercised.
Impairment of Long-Lived Assets
The Company reviews its long-lived assets, such as ROU assets, property and equipment, and purchased intangibles subject to
amortization, for impairment whenever events or changes in circumstances indicate that the carrying amount of an asset may
not be recoverable. Recoverability of assets to be held and used is measured by a comparison of the carrying amount of an asset
to estimated undiscounted future cash flows expected to be generated by the asset. If the carrying amount of an asset exceeds its
estimated future cash flows, an impairment charge is recognized by the amount by which the carrying amount of the asset
exceeds the fair value of the asset.
Assumptions and estimates about future cash flows generated by, remaining useful lives of, and fair values of the Company's
intangible and other long-lived assets are complex and subjective. They can be affected by a variety of factors, including
external factors such as industry and economic trends, and internal factors such as changes in the Company's business strategy
and internal forecasts. Although the Company believes the historical assumptions and estimates used are reasonable and
appropriate, different assumptions and estimates could materially impact the reported financial results.
Fair Value Measurements
The Company uses estimates of fair value in applying various accounting standards for its financial statements.
Fair value is defined as the price to sell an asset or transfer a liability in an orderly transaction between willing and able market
participants. In general, the Company's policy in estimating fair values is to first look at observable market prices for identical
assets and liabilities in active markets, where available. When these are not available, other inputs are used to model fair value,
such as prices of similar instruments, yield curves, volatilities, prepayment speeds, default rates, and credit spreads, relying first
on observable data from active markets. Depending on current market conditions, additional adjustments to fair value may be
based on factors such as liquidity, credit, and bid/offer spreads. In some cases fair values are based on estimates using present
value or other valuation techniques. Those techniques are significantly affected by the assumptions used, including the discount
rate and estimates of future cash flows. Transaction costs are not included in the determination of fair value. When possible, the
Company seeks to validate the model's output to market transactions. Depending on the availability of observable inputs and
prices, different valuation models could produce materially different fair value estimates. The values presented may not
represent future fair values and may not be realizable. Additionally, there may be inherent weaknesses in any calculation
F - 21
NELNET, INC. AND SUBSIDIARIES
Notes to Consolidated Financial Statements
(Dollars in thousands, except share amounts, unless otherwise noted)
technique, and changes in the underlying assumptions used, including discount rates and estimates of future cash flows, could
significantly affect the estimates of current or future values.
The Company categorizes its fair value estimates based on a hierarchical framework associated with three levels of price
transparency utilized in measuring assets and liabilities at fair value. Classification is based on the lowest level of input that is
significant to the fair value of the instrument. The three levels include:
•
•
•
Level 1: Quoted prices for identical instruments in active markets. The types of financial instruments included in Level 1
are highly liquid instruments with quoted prices.
Level 2: Quoted prices for similar instruments in active markets; quoted prices for identical or similar instruments in
markets that are not active; and model-derived valuations whose inputs are observable or whose primary value drivers are
observable.
Level 3: Instruments whose primary value drivers are unobservable. Inputs are developed based on the best information
available; however, significant judgment is required by management in developing the inputs.
Revenue Recognition
The Company applies the provisions of ASC Topic 606, Revenue from Contracts with Customers ("ASC Topic 606"), to its fee-
based operating segments. The majority of the Company’s revenue earned in its Asset Generation and Management operating
segment, including loan interest and derivative activity, is explicitly excluded from the scope of ASC Topic 606. The Company
recognizes revenue under the core principle of ASC Topic 606 to depict the transfer of control of products and services to the
Company’s customers in an amount reflecting the consideration to which the Company expects to be entitled. In order to
achieve that core principle, the Company applies the following five-step approach: (1) identify the contract with a customer, (2)
identify the performance obligations in the contract, (3) determine the transaction price, (4) allocate the transaction price to the
performance obligations in the contract, and (5) recognize revenue when a performance obligation is satisfied. The Company’s
contracts with customers often include promises to transfer multiple products and services to a customer. Determining whether
products and services are considered distinct performance obligations that should be accounted for separately versus together
may require significant judgment.
Timing of revenue recognition may differ from the timing of invoicing to customers. The Company records deferred revenue
when revenue is received or receivable in advance of the delivery of service. For multi-year contracts, the Company generally
invoices customers annually at the beginning of each annual coverage period. Payment terms and conditions vary by contract
type, although terms generally include a requirement of payment within 30 to 60 days. In instances where the timing of revenue
recognition differs from the timing of invoicing, the Company has determined its contracts do not include a significant
financing component.
The Company recognizes an asset for the incremental costs of obtaining a contract with a customer if it expects the benefit of
those costs to be longer than one year. The Company has determined that certain sales incentive programs and pre-production
contract fulfillment costs meet the requirements to be capitalized. Total capitalized costs to obtain a contract were immaterial
during the periods presented and are included in “other assets” on the consolidated balance sheets.
Additional information related to revenue earned in its Asset Generation and Management operating segment is provided
below. See note 16, "Disaggregated Revenue and Deferred Revenue" for additional information related to the Company's fee-
based operating segments.
Loan interest income - Loan interest on federally insured student loans is paid by the Department or the borrower, depending on
the status of the loan at the time of the accrual. The Department makes quarterly interest subsidy payments on certain qualified
FFELP loans until the student is required under the provisions of the Higher Education Act to begin repayment. Borrower
repayment of FFELP loans normally begins within six months after completion of the borrower's course of study, leaving
school, or ceasing to carry at least one-half the normal full-time academic load, as determined by the educational institution.
Borrower repayment of PLUS and Consolidation loans normally begins within 60 days from the date of loan disbursement.
Borrower repayment of private education loans typically begins six months following the borrower's graduation from a
qualified institution, and the interest is either paid by the borrower or capitalized annually or at repayment. Repayment of
consumer loans typically starts upon origination of the loan.
The Department provides a special allowance to lenders participating in the FFEL Program. The special allowance is accrued
based upon the fiscal quarter average rate of 13-week Treasury Bill auctions (for loans originated prior to January 1, 2000), the
F - 22
NELNET, INC. AND SUBSIDIARIES
Notes to Consolidated Financial Statements
(Dollars in thousands, except share amounts, unless otherwise noted)
fiscal quarter average rate of the daily three-month financial commercial paper rates (for loans originated on and after January
1, 2000), or the fiscal quarter average rate of daily one-month LIBOR rates (for loans originated on and after January 1, 2000,
and for lenders which elected to change the special allowance index to one-month LIBOR effective April 1, 2012) relative to
the yield of the student loan.
The Company recognizes loan interest income as earned, net of amortization of loan premiums and deferred origination costs
and the accretion of loan discounts. Loan interest income is recognized based upon the expected yield of the loan after giving
effect to interest rate reductions resulting from borrower utilization of incentives such as timely payments ("borrower benefits")
and other yield adjustments. Loan premiums or discounts, deferred origination costs, and borrower benefits are amortized/
accreted over the estimated life of the loans, which includes an estimate of forecasted payments in excess of contractually
required payments (the constant prepayment rate). The constant prepayment rate used by the Company to amortize/accrete
federally insured loan premiums/discounts is 5 percent for Stafford loans and 3 percent for Consolidation loans. The Company
periodically evaluates the assumptions used to estimate the life of the loans and prepayment rates. In instances where there are
changes to the assumptions, amortization/accretion is adjusted on a cumulative basis to reflect the change since the acquisition
of the loan.
The Company also pays the Department an annual 105 basis point rebate fee on Consolidation loans. These rebate fees are
netted against loan interest income.
Interest Expense
Interest expense is based upon contractual interest rates, adjusted for the amortization of debt issuance costs and the accretion of
discounts. The amortization of debt issuance costs and accretion of discounts are recognized using the effective interest method.
Transfer of Financial Assets and Extinguishments of Liabilities
The Company accounts for loan sales and debt repurchases in accordance with applicable accounting guidance. If a transfer of
loans qualifies as a sale, the Company derecognizes the loan and recognizes a gain or loss as the difference between the
carrying basis of the loan sold and the consideration received. The Company from time to time repurchases its outstanding debt
and records a gain or loss on the early extinguishment of debt based upon the difference between the carrying amount of the
debt and the amount paid to the third party. The Company recognizes the results of a transfer of loans and the extinguishment of
debt based upon the settlement date of the transaction.
Derivative Accounting
All over-the-counter derivative contracts executed by the Company are cleared post-execution at the Chicago Mercantile
Exchange (“CME”), a regulated clearinghouse. Substantially all of the Company’s outstanding derivatives are over-the-counter
contracts. Clearing is a process by which a third-party, the clearinghouse, steps in between the original counterparties and
guarantees the performance of both, by requiring that each post liquid collateral on an initial (initial margin) and mark-to-
market (variation margin) basis to cover the clearinghouse’s potential future exposure in the event of default.
The CME legally characterizes variation margin payments for over-the-counter derivatives they clear as settlements of the
derivatives’ exposure rather than collateral against the exposure. For accounting and presentation purposes, the Company
considers variation margin and the corresponding derivative instrument as a single unit of account. As such, variation margin
payments are considered in determining the fair value of the centrally cleared derivative portfolio. The Company records
derivative contracts on its balance sheet with a fair value of zero due to the payment or receipt of variation margin between the
Company and the CME settling the outstanding mark-to-market exposure on such derivatives to a balance of zero on a daily
basis. 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 market
value of derivative instruments is reported in current period earnings. Changes or shifts in the forward yield curve can
significantly impact the valuation of the Company’s derivatives, and therefore impact the results of operations of the Company.
The changes in fair value of derivative instruments, as well as the settlement payments made on such derivatives, are included
in “derivative market value adjustments and derivative settlements, net” on the consolidated statements of income.
Income Taxes
Income taxes are accounted for under the asset and liability method. Deferred tax assets and liabilities are recognized for the
future tax consequences attributable to differences between the financial statement carrying amounts of existing assets and
liabilities and their respective tax bases and operating loss and tax credit carry forwards. Deferred tax assets and liabilities are
F - 23
NELNET, INC. AND SUBSIDIARIES
Notes to Consolidated Financial Statements
(Dollars in thousands, except share amounts, unless otherwise noted)
measured using enacted tax rates expected to apply to taxable income in the years in which those temporary differences are
expected to be recovered or settled. The effect on deferred tax assets and liabilities of a change in tax rates is recognized in
income in the period that includes the enactment date. The Company uses the deferred method of accounting for its credits
related to state tax incentives and investments that generate investment tax credits. The investment tax credits are recognized as
a reduction to the related asset.
Income tax expense includes deferred tax expense, which represents a portion of the net change in the deferred tax asset or
liability balance during the year, plus any change made in the valuation allowance, and current tax expense, which represents
the amount of tax currently payable to or receivable from a tax authority plus amounts for expected tax deficiencies.
Compensation Expense for Stock Based Awards
The Company has a restricted stock plan that is intended to provide incentives to attract, retain, and motivate employees in
order to achieve long term growth and profitability objectives. The restricted stock plan provides for the grant to eligible
employees of awards of restricted shares of Class A common stock. The fair value of restricted stock awards is determined on
the grant date based on the Company's stock price and is amortized to compensation cost over the related vesting periods, which
range up to ten years. For those awards with only service conditions that have graded vesting schedules, the Company
recognizes compensation expense on a straight-line basis over the requisite service period for each separately vesting portion of
the award, as if the award was, in substance, multiple awards. Holders of restricted stock are entitled to receive dividends from
the date of grant whether or not vested. The Company accounts for forfeitures as they occur.
The Company also has a directors stock compensation plan pursuant to which non-employee directors can elect to receive their
annual retainer fees in the form of fully vested shares of Class A common stock, and also elect to defer receipt of such shares
until the termination of their service on the board of directors. The fair value of grants under this plan is determined on the grant
date based on the Company's stock price, and is expensed over the board member's annual service period.
4. Loans and Accrued Interest Receivable and Allowance for Loan Losses
Loans and accrued interest receivable consisted of the following:
Federally insured student loans:
Stafford and other
Consolidation
Total
Private education loans
Consumer loans
Accrued interest receivable
Loan discount, net of unamortized loan premiums and deferred origination costs
Non-accretable discount
Allowance for loan losses:
Federally insured loans
Private education loans
Consumer loans
As of December 31,
2020
2019
$
4,383,000
14,746,173
19,129,173
338,132
109,346
4,684,314
15,644,229
20,328,543
244,258
225,918
19,576,651
20,798,719
794,611
(9,908)
—
(128,590)
(19,852)
(27,256)
733,497
(35,036)
(32,398)
(36,763)
(9,597)
(15,554)
$
20,185,656
21,402,868
On January 30, 2020 and July 29, 2020, the Company sold $124.2 million (par value) and $60.8 million (par value),
respectively, of consumer loans to an unrelated third party who securitized such loans. The Company recognized a gain of
$18.2 million (pre-tax) and $14.8 million (pre-tax), respectively, as part of these transactions. As partial considerations received
for the consumer loans sold, the Company received a 31.4 percent and 25.4 percent residual interest, respectively, in the
consumer loan securitizations that are included in "investments" on the Company's consolidated balance sheet.
F - 24
NELNET, INC. AND SUBSIDIARIES
Notes to Consolidated Financial Statements
(Dollars in thousands, except share amounts, unless otherwise noted)
Activity in the Allowance for Loan Losses
The following table presents the activity in the allowance for loan losses by portfolio segment.
Balance at
beginning
of period
Impact of
ASC 326
adoption
Provision
for loan
losses
Charge-offs
Recoveries
Initial allowance
on loans
purchased with
credit
deterioration (a)
Loan sale
and other
Balance at
end of
period
Year ended December 31, 2020
Federally insured loans
$
36,763
72,291
18,691
(14,955)
Private education loans
Consumer loans
9,597
15,554
$
61,914
4,797
13,926
91,014
6,486
38,183
63,360
(1,659)
(12,115)
(28,729)
—
631
1,132
1,763
15,800
—
—
—
—
(29,424)
128,590
19,852
27,256
15,800
(29,424)
175,698
Federally insured loans
$
42,310
Private education loans
Consumer loans
10,838
7,240
$
60,388
Federally insured loans
$
38,706
Private education loans
Consumer loans
12,629
3,255
$
54,590
Year ended December 31, 2019
8,000
(13,547)
—
31,000
39,000
(1,965)
(12,498)
(28,010)
—
724
812
1,536
Year ended December 31, 2018
14,000
(11,396)
—
9,000
23,000
(2,415)
(5,056)
(18,867)
—
624
41
665
—
—
—
—
—
—
—
—
—
—
—
—
—
—
—
—
—
—
(11,000)
(11,000)
1,000
—
—
1,000
36,763
9,597
15,554
61,914
42,310
10,838
7,240
60,388
(a)
During the year ended December 31, 2020, the Company acquired $835.0 million (par value) of federally insured rehabilitation
loans that met the definition of PCD loans when they were purchased by the Company.
Loan Status and Delinquencies
The key credit quality indicators for the Company’s federally insured, private education, and consumer loan portfolios are loan
status, including delinquencies. The impact of changes in loan status is incorporated into the allowance for loan losses
calculation. Delinquencies have the potential to adversely impact the Company’s earnings through increased servicing and
collection costs and account charge-offs. The table below shows the Company’s loan status and delinquency amounts.
F - 25
NELNET, INC. AND SUBSIDIARIES
Notes to Consolidated Financial Statements
(Dollars in thousands, except share amounts, unless otherwise noted)
Federally insured loans:
Loans in-school/grace/deferment (a)
$
1,036,028
5.4 %
$
1,074,678
5.3 %
$
1,298,493
2020
As of December 31,
2019
1,973,175
10.3
1,339,821
6.6
1,430,291
2018
5.9 %
6.4
Loans in forbearance (b)
Loans in repayment status:
Loans current
13,683,054
84.9 %
15,410,993
86.0 %
16,882,252
86.9 %
Loans delinquent 31-60 days (c)
Loans delinquent 61-90 days (c)
Loans delinquent 91-120 days (c)
Loans delinquent 121-270 days (c)
Loans delinquent 271 days or greater (c)(d)
633,411
307,936
800,257
674,975
20,337
3.9
1.9
5.0
4.2
0.1
650,796
428,879
310,851
812,107
300,418
3.6
2.4
1.7
4.5
1.8
683,084
427,764
283,831
806,692
343,489
3.5
2.2
1.5
4.2
1.7
Total loans in repayment
16,119,970
84.3
100.0 %
17,914,044
88.1
100.0 %
19,427,112
87.7
100.0 %
Total federally insured loans
19,129,173
100.0 %
20,328,543
100.0 %
22,155,896
100.0 %
Accrued interest receivable
Loan discount, net of unamortized premiums
and deferred origination costs
Non-accretable discount (e)
Allowance for loan losses
Total federally insured loans and accrued
interest receivable, net of allowance for
loan losses
791,453
(14,505)
—
(128,590)
730,059
(35,822)
(28,036)
(36,763)
675,898
(54,546)
(23,833)
(42,310)
$ 19,777,531
$ 20,957,981
$ 22,711,105
Private education loans:
Loans in-school/grace/deferment (a)
$
Loans in forbearance (b)
Loans in repayment status:
Loans current
Loans delinquent 31-60 days (c)
Loans delinquent 61-90 days (c)
Loans delinquent 91 days or greater (c)
5,049
2,388
1.5 %
0.7
$
4,493
3,108
1.8 %
1.3
$
4,320
1,494
1.9 %
0.7
327,550
1,099
675
1,371
99.1 %
227,013
95.9 %
208,977
95.0 %
0.3
0.2
0.4
2,814
1,694
5,136
1.2
0.7
2.2
3,626
1,560
5,998
1.6
0.7
2.7
Total loans in repayment
330,695
97.8
100.0 %
236,657
96.9
100.0 %
220,161
97.4
100.0 %
Total private education loans
338,132
100.0 %
244,258
100.0 %
225,975
100.0 %
Accrued interest receivable
Loan premium, net of unaccreted discount
Non-accretable discount (e)
Allowance for loan losses
Total private education loans and accrued
interest receivable, net of allowance for
loan losses
Consumer loans:
Loans in deferment
Loans in repayment status:
Loans current
Loans delinquent 31-60 days (c)
Loans delinquent 61-90 days (c)
Loans delinquent 91 days or greater (c)
Total loans in repayment
Total consumer loans
Accrued interest receivable
Loan premium
Allowance for loan losses
2,157
2,957
—
(19,852)
1,558
46
(4,362)
(9,597)
1,126
(1,245)
(5,563)
(10,838)
$
323,394
$
231,903
$
209,455
$
829
0.8 %
$
—
$
—
105,650
954
804
1,109
97.4 %
220,404
97.5 %
136,130
98.2 %
0.9
0.7
1.0
2,046
1,545
1,923
0.9
0.7
0.9
1,012
832
653
0.7
0.6
0.5
108,517
99.2
100.0 %
225,918
100.0 %
138,627
100.0 %
109,346
100.0 %
1,001
1,640
(27,256)
225,918
1,880
740
(15,554)
138,627
665
2,219
(7,240)
Total consumer loans and accrued interest
receivable, net of allowance for loan losses
$
84,731
$
212,984
$
134,271
F - 26
NELNET, INC. AND SUBSIDIARIES
Notes to Consolidated Financial Statements
(Dollars in thousands, except share amounts, unless otherwise noted)
(a)
(b)
(c)
(d)
(e)
Loans for borrowers who still may be attending school or engaging in other permitted educational activities and are not yet required to make
payments on the loans, e.g., residency periods for medical students or a grace period for bar exam preparation for law students.
Loans for borrowers who have temporarily ceased making full payments due to hardship or other factors, according to a schedule approved by
the servicer consistent with the established loan program servicing procedures and policies.
The period of delinquency is based on the number of days scheduled payments are contractually past due and relate to repayment loans, that is,
receivables not charged off, and not in school, grace, deferment, or forbearance.
A portion of loans included in loans delinquent 271 days or greater includes loans in claim status, which are loans that have gone into default
and have been submitted to the guaranty agency.
Upon adoption of ASC 326 on January 1, 2020, the Company reclassified the non-accretable discount balance related to loans purchased with
evidence of credit deterioration to allowance for loan losses.
In March 2020, the rapid outbreak of the respiratory disease caused by a novel strain of coronavirus, coronavirus 2019 or
COVID-19 (“COVID-19”), was declared a global pandemic by the World Health Organization and a national emergency by the
President, and caused significant disruptions in the U.S. and world economies. As a result of COVID-19, effective March 13,
2020 through June 30, 2020, the Company proactively applied a 90 day natural disaster forbearance to any loan that was 31-269
days past due (for federally insured loans) and 80 days past due (for private education loans), and to any current loan upon
request. Beginning July 1, 2020, the Company discontinued proactively applying 90 day natural disaster forbearances on past
due loans. However, the Company will continue to apply a natural disaster forbearance in 90 day increments to any federally
insured and private education loan upon request through September 30, 2021.
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.
The Company will continue to review whether additional and/or extended borrower relief policies and activities are needed. All
relief provided to borrowers by the Company through December 31, 2020 have been delays in payment that the Company
considers to be insignificant and the modifications have not been accounted for as troubled debt restructuring.
Nonaccrual Status
The Company does not place federally insured loans on nonaccrual status due to the government guaranty. The amortized cost
of private and consumer loans on nonaccrual status, as well as the allowance for loan losses related to such loans, as of
December 31, 2020, 2019, and 2018 was not material.
F - 27
NELNET, INC. AND SUBSIDIARIES
Notes to Consolidated Financial Statements
(Dollars in thousands, except share amounts, unless otherwise noted)
Amortized Cost Basis by Origination Year
The following table presents the amortized cost of the Company's private education and consumer loans by loan status and
delinquency amount as of December 31, 2020 based on year of origination. Effective July 1, 2010, no new loan originations can
be made under the FFEL Program and all new federal loan originations must be made under the Federal Direct Loan Program.
As such, all the Company’s federally insured loans were originated prior to July 1, 2010.
2020
2019
2018
2017
2016
Prior
years
Total
Private education loans:
Loans in school/grace/deferment
$
Loans in forbearance
Loans in repayment status:
638
392
1,518
313
Loans current
112,783
79,161
Loans delinquent 31-60 days
Loans delinquent 61-90 days
Loans delinquent 91 days or greater
—
94
—
24
—
—
Total loans in repayment
Total private education loans
112,877
$ 113,907
79,185
81,016
—
—
958
—
—
—
958
958
—
—
—
—
—
—
—
—
206
305
2,687
1,378
5,049
2,388
5,444
129,204
327,550
28
—
—
1,047
581
1,371
1,099
675
1,371
5,472
132,203
330,695
5,983
136,268
338,132
Accrued interest receivable
Loan premium, net of unaccreted discount
Allowance for loan losses
Total private education loans and
accrued interest receivable, net of
allowance for loan losses
Consumer loans:
Loans in deferment
Loans in repayment status:
$
62
447
317
3
Loans current
58,738
22,213
22,098
2,601
Loans delinquent 31-60 days
Loans delinquent 61-90 days
Loans delinquent 91 days or greater
405
264
93
371
390
452
159
130
550
Total loans in repayment
Total consumer loans
59,500
$ 59,562
23,426
23,873
22,937
23,254
19
20
14
2,654
2,657
Accrued interest receivable
Loan premium
Allowance for loan losses
Total consumer loans and accrued
interest receivable, net of allowance
for loan losses
2,157
2,957
(19,852)
$ 323,394
—
829
—
105,650
—
—
—
954
804
1,109
—
108,517
—
109,346
1,001
1,640
(27,256)
$ 84,731
—
—
—
—
—
—
—
F - 28
NELNET, INC. AND SUBSIDIARIES
Notes to Consolidated Financial Statements
(Dollars in thousands, except share amounts, unless otherwise noted)
5. Bonds and Notes Payable
The following tables summarize the Company’s outstanding debt obligations by type of instrument:
Variable-rate bonds and notes issued in FFELP loan asset-backed
securitizations:
Bonds and notes based on indices
Bonds and notes based on auction
As of December 31, 2020
Carrying
amount
Interest rate
range
Final maturity
$ 17,127,643
0.28% - 2.05%
5/27/25 - 10/25/68
749,925
1.12% - 2.14%
3/22/32 - 11/26/46
Total FFELP variable-rate bonds and notes
17,877,568
Fixed-rate bonds and notes issued in FFELP loan asset-backed
securitizations
FFELP warehouse facilities
Private education loan warehouse facility
Consumer loan warehouse facility
Variable-rate bonds and notes issued in private education loan asset-backed
securitizations
Fixed-rate bonds and notes issued in private education loan asset-backed
securitization
Unsecured line of credit
Other borrowings
923,076
1.42% - 3.45%
10/25/67 - 8/27/68
252,165
0.27% / 0.31%
5/20/22 / 2/26/23
150,397
25,809
0.28%
0.28%
2/13/22
4/23/22
49,025
1.65% / 1.90%
12/26/40 / 6/25/49
37,251
3.60% / 5.35%
12/26/40 / 12/28/43
120,000
1.65%
12/16/24
123,558
0.84% / 1.90%
5/4/21 / 5/30/22
Discount on bonds and notes payable and debt issuance costs
Total
19,558,849
(238,123)
$ 19,320,726
Variable-rate bonds and notes issued in FFELP loan asset-backed
securitizations:
Bonds and notes based on indices
Bonds and notes based on auction
As of December 31, 2019
Carrying
amount
Interest rate
range
Final maturity
$ 18,428,998
1.98% - 3.61%
5/27/25 - 1/25/68
768,626
2.75% - 3.60%
3/22/32 - 11/26/46
Total FFELP variable-rate bonds and notes
19,197,624
Fixed-rate bonds and notes issued in FFELP loan asset-backed
securitizations
FFELP warehouse facilities
Consumer loan warehouse facility
Variable-rate bonds and notes issued in private education loan asset-backed
securitizations
Fixed-rate bonds and notes issued in private education loan asset-backed
securitization
Unsecured line of credit
Unsecured debt - Junior Subordinated Hybrid Securities
Other borrowings
Discount on bonds and notes payable and debt issuance costs
Total
512,836
778,094
116,570
2.00% - 3.45%
10/25/67 / 11/25/67
1.98% / 2.07%
5/20/21 / 5/31/22
1.99%
4/23/22
73,308
3.15% / 3.54%
12/26/40 / 6/25/49
3.60% / 5.35%
12/26/40 / 12/28/43
3.29%
5.28%
3.44%
12/16/24
9/15/61
5/30/22
49,367
50,000
20,381
5,000
20,803,180
(274,126)
$ 20,529,054
F - 29
NELNET, INC. AND SUBSIDIARIES
Notes to Consolidated Financial Statements
(Dollars in thousands, except share amounts, unless otherwise noted)
Secured Financing Transactions
The Company has historically relied upon secured financing vehicles as its most significant source of funding for loans. The net
cash flow the Company receives from the securitized loans generally represents the excess amounts, if any, generated by the
underlying loans over the amounts required to be paid to the bondholders, after deducting servicing fees and any other expenses
relating to the securitizations. The Company’s rights to cash flow from securitized loans are subordinate to bondholder
interests, and the securitized loans may fail to generate any cash flow beyond what is due to bondholders. The Company’s
secured financing vehicles during the periods presented include loan warehouse facilities and asset-backed securitizations.
The majority of the bonds and notes payable are primarily secured by the loans receivable, related accrued interest, and by the
amounts on deposit in the accounts established under the respective bond resolutions or financing agreements.
FFELP warehouse facilities
The Company funds the majority of its FFELP loan acquisitions using its FFELP warehouse facilities. Student loan
warehousing allows the Company to buy and manage student loans prior to transferring them into more permanent financing
arrangements.
As of December 31, 2020, the Company had two FFELP warehouse facilities as summarized below.
Maximum financing amount
Amount outstanding
Amount available
Expiration of liquidity provisions
Final maturity date
Advanced as equity support
$
$
$
NFSLW-I
NHELP-II
Total
260,000
252,165
7,835
50,000
—
50,000
310,000
252,165
57,835
May 20, 2021
February 26, 2021
May 20, 2022
February 26, 2023
21,209
—
21,209
The FFELP warehouse facilities are supported by liquidity provisions, which are subject to the respective expiration date shown
in the above table. In the event the Company is unable to renew the liquidity provisions by such date, the facility would become
a term facility at a stepped-up cost, with no additional student loans being eligible for financing, and the Company would be
required to refinance the existing loans in the facility by the facility's final maturity date. The NFSLW-I warehouse facility has
a static advance rate until the expiration date of the liquidity provisions. 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. The NHELP-II
warehouse facility has a static advance rate that requires initial equity for loan funding and does not require increased equity
based on market movements.
The FFELP warehouse facilities contain financial covenants relating to levels of the Company’s consolidated net worth, ratio of
recourse indebtedness to adjusted EBITDA, and unencumbered cash. Any noncompliance with these covenants could result in a
requirement for the immediate repayment of any outstanding borrowings under the facilities.
F - 30
NELNET, INC. AND SUBSIDIARIES
Notes to Consolidated Financial Statements
(Dollars in thousands, except share amounts, unless otherwise noted)
Asset-backed securitizations
The following tables summarize the asset-backed securitization transactions completed in 2020 and 2019.
Date securities issued
2020-1
2/20/20
2020-2
3/11/20
2020-3
3/19/20
2020-4 (a)
8/27/20
2020-5 (a)
10/1/20
Total
Total original principal amount $
435,600
272,100
352,600
191,300
295,000
1,546,600
Securitizations completed during the year ended December 31, 2020
Class A senior notes:
Total principal amount
Bond discount
Issue price
Cost of funds
$
$
424,600
—
424,600
1-month LIBOR
plus 0.74%
Final maturity date
3/26/68
Class B subordinated notes:
Total principal amount
Bond discount
Issue price
Cost of funds
$
$
11,000
—
11,000
1-month LIBOR
plus 1.75%
Final maturity date
3/26/68
264,300
(44)
264,256
343,600
(1,503)
342,097
191,300
(19)
191,281
295,000
1,518,800
—
(1,566)
295,000
1,517,234
1.83%
4/25/68
1-month LIBOR
plus 0.92%
3/26/68
1.42%
8/27/68
1-month LIBOR
plus 0.88%
10/25/68
7,800
(574)
7,226
9,000
(284)
8,716
2.50%
4/25/68
1-month LIBOR
plus 1.90%
3/26/68
27,800
(858)
26,942
(a)
Total original principal amount excludes the Class B subordinated tranche for the 2020-4 and 2020-5 transactions, totaling $5.0 million and
$7.5 million, respectively, that was retained by the Company at issuance. As of December 31, 2020, the Company had a total of $40.1 million
(par value) of its own asset-backed securities that were retained upon initial issuance or repurchased 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 in 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. Upon sale, these notes would be shown as "bonds and notes payable" in the Company's consolidated
balance sheet. The Company believes the market value of such notes is currently less than par value. Any excess of the par value over the
market value on the date of sale would be recognized by the Company as interest expense over the life of the bonds.
F - 31
NELNET, INC. AND SUBSIDIARIES
Notes to Consolidated Financial Statements
(Dollars in thousands, except share amounts, unless otherwise noted)
Securitizations completed during the year ended December 31, 2019
Private
education
loan
2019-A
2019-2
2019-3
2019-4
2019-5
2019-6
2019-1
Class
A-2
Notes
Class
A-1
Notes
2019-1
total
2019-7
Class
A-2
Notes
Class
A-1
Notes
2019-7
total
Total
2/27/19
2/27/19
2/27/19
4/30/19
6/25/19
7/24/19
8/22/19
9/25/19
10/30/19
12/19/19
12/19/19
12/19/19
$ 35,700
448,000
496,800
416,100
47,159
498,300
418,600
374,500
145,200
210,300
200,000
420,800
2,817,459
$ 35,700
448,000
483,700
405,000
47,159
485,800
408,000
364,500
140,200
210,300
200,000
410,300
2,744,659
Date securities
issued
Total original
principal amount
Class A senior
notes:
Total principal
amount
Bond discount
—
—
—
—
—
—
—
(114)
(26)
—
—
—
(140)
Issue price
$ 35,700
448,000
483,700
405,000
47,159
485,800
408,000
364,386
140,174
210,300
200,000
410,300
2,744,519
1-month
LIBOR
plus
0.30%
1-month
LIBOR
plus
0.75%
1-month
LIBOR
plus
0.90%
1-month
LIBOR
plus
0.80%
1-month
LIBOR
plus
0.87%
Prime rate
less 1.60%
Cost of funds
2.53%
2.46%
1-month
LIBOR
plus
0.50%
1-month
LIBOR
plus
1.00%
Final maturity date
4/25/67
4/25/67
6/27/67
6/25/49
8/25/67
9/26/67
10/25/67
11/25/67
1/25/68
1/25/68
Class B
subordinated
notes:
Total principal
amount
Bond discount
Issue price
Cost of funds
Final maturity date
$ 13,100
11,100
12,500
10,600
10,000
5,000
—
—
—
—
(4)
(913)
$ 13,100
11,100
12,500
10,600
9,996
4,087
1-month
LIBOR
plus
1.40%
1-month
LIBOR
plus
1.50%
4/25/67
6/27/67
1-month
LIBOR
plus
1.55%
1-month
LIBOR
plus
1.65%
3.45%
2.00%
8/25/67
9/26/67
10/25/67
11/25/67
10,500
72,800
—
(917)
10,500
71,883
1-month
LIBOR
plus
1.75%
1/25/68
During 2019, the Company extinguished $1.05 billion of notes payable included in certain FFELP asset-backed securitizations
prior to the notes’ contractual maturities. To extinguish the notes, the Company paid premiums of $14.0 million and wrote off
$2.7 million of debt issuance costs. In total, the Company recognized $16.7 million (pre-tax) in expenses to extinguish these
notes, which is included in “other expenses” on the consolidated statements of income.
Auction Rate Securities
The interest rates on certain of the Company's FFELP asset-backed securities were set and provide for interest rates to be
periodically reset via a "dutch auction" ("Auction Rate Securities"). As of December 31, 2020, the Company is currently the
sponsor on $749.9 million of Auction Rate Securities. Since the auction feature has essentially been inoperable for substantially
all auction rate securities since 2008, the Auction Rate Securities generally pay interest to the holder at a maximum rate as
defined by the indenture. While these rates will vary, they will generally be based on a spread to LIBOR or Treasury Securities,
or the Net Loan Rate as defined in the financing documents.
Private Education Loan Warehouse Facility
During 2020, the Company obtained a private education loan warehouse facility. As of December 31, 2020, the facility has an
aggregate maximum financing amount available of $200.0 million, an advance rate of 80 to 90 percent, liquidity provisions
through February 13, 2021, and a final maturity date of February 13, 2022. As of December 31, 2020, $150.4 million was
outstanding under this warehouse facility, $49.6 million was available for future funding, and the Company had $16.4 million
advanced as equity support.
Consumer Loan Warehouse Facility
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 to April 23, 2021, and a final maturity date of April 23, 2022. As of December 31, 2020, $25.8 million was
F - 32
NELNET, INC. AND SUBSIDIARIES
Notes to Consolidated Financial Statements
(Dollars in thousands, except share amounts, unless otherwise noted)
outstanding under this warehouse facility, $74.2 million was available for future funding, and the Company had $11.5 million
advanced as equity support.
Unsecured Line of Credit
The Company has a $455.0 million unsecured line of credit that has a maturity date of December 16, 2024. 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. As of December 31, 2020, $120.0 million was
outstanding on the line of credit and $335.0 million was available for future use. Interest on amounts borrowed under the line of
credit is payable, at the Company's election, at an alternate base rate or a Eurodollar rate, plus a variable rate (LIBOR), in each
case as defined in the credit agreement. As of December 31, 2020, the Company has selected the Eurodollar rate. The initial
margin applicable to Eurodollar borrowings is 150 basis points and may vary from 100 to 200 basis points depending on the
Company's credit rating.
The line of credit agreement contains certain financial covenants that, if not met, lead to an event of default under the
agreement. The covenants include, among others, maintaining:
• A minimum consolidated net worth
• A minimum recourse indebtedness to adjusted EBITDA (over the last four rolling quarters)
• A limitation on recourse indebtedness
• A limitation on the amount of unsecuritized private education and consumer loans in the Company’s portfolio
• A limitation on permitted investments, including business acquisitions that are not in one of the Company's existing
lines of business
As of December 31, 2020, the Company was in compliance with all of these requirements. Many of these covenants are
duplicated in the Company's other lending facilities, including its warehouse facilities.
The Company's operating line of credit does not have any covenants related to unsecured debt ratings. However, changes in the
Company's ratings have modest implications on the pricing level at which the Company obtains funds.
A default on the Company's other debt facilities would result in an event of default on the Company's unsecured line of credit
that would result in the outstanding balance on the line of credit becoming immediately due and payable.
Junior Subordinated Hybrid Securities
During 2020, the Company redeemed all the outstanding $20.4 million of Hybrid Securities at par.
Other Borrowings
During 2020, the Company entered into an agreement with Union Bank and Trust Company ("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 loan asset-backed securities. As of December 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. The agreement automatically
renews annually and is terminable by either party upon five business days' notice. The Company can participate student loan
asset-backed securities to Union Bank to the extent of availability under the grantor trusts, up to $100.0 million or an amount in
excess of $100.0 million if mutually agreed to by both parties. Student loan asset-backed securities under this agreement have
been accounted for by the Company as a secured borrowing.
During 2019, the Company entered into a $22.0 million secured line of credit agreement with a maturity date of May 30, 2022
and an interest rate of one-month LIBOR plus 1.75%. As of December 31, 2020, $5.0 million was outstanding under this line of
credit and $17.0 million was available for future use. The line of credit is secured by several Company-owned properties.
Debt Covenants
Certain bond resolutions and related credit agreements contain, among other requirements, covenants relating to restrictions on
additional indebtedness, limits as to direct and indirect administrative expenses, and maintaining certain financial ratios.
Management believes the Company is in compliance with all covenants of the bond indentures and related credit agreements as
of December 31, 2020.
F - 33
NELNET, INC. AND SUBSIDIARIES
Notes to Consolidated Financial Statements
(Dollars in thousands, except share amounts, unless otherwise noted)
Maturity Schedule
Bonds and notes outstanding as of December 31, 2020 are due in varying amounts as shown below.
2021
2022
2023
2024
2025
2026 and thereafter
$
$
118,558
433,371
—
120,000
98,761
18,788,159
19,558,849
Generally, the Company's secured financing instruments can be redeemed on any interest payment date at par plus accrued
interest. Subject to certain provisions, all bonds and notes are subject to redemption prior to maturity at the option of certain
lending subsidiaries.
Debt Repurchases
The following table summarizes the Company's repurchases of its own debt. Gains recorded by the Company from the
repurchase of debt are included in "other income" on the Company’s consolidated statements of income.
Year ended December 31,
2020
2019
2018
Par value
Purchase price
Gain
$
$
27,445
(25,521)
1,924
—
—
—
12,905
(12,546)
359
6. Derivative Financial Instruments
The Company uses derivative financial instruments primarily to manage interest rate risk. The Company is exposed to interest
rate risk in the form of basis risk and repricing risk because the interest rate characteristics of the Company's assets do not
match the interest rate characteristics of the funding for those assets. The Company periodically reviews the mismatch related to
the interest rate characteristics of its assets and liabilities together with the Company's outlook as to current and future market
conditions. Based on those factors, the Company uses derivative instruments as part of its overall risk management strategy.
Derivative instruments used as part of the Company's interest rate risk management strategy are discussed below.
Basis Swaps
Interest earned on the majority of the Company's FFELP student loan assets is indexed to the one-month LIBOR rate.
Meanwhile, the Company funds a portion of its FFELP loan assets with three-month LIBOR indexed floating rate
securities. The differing interest rate characteristics of the Company's loan assets versus the liabilities funding these assets
results in basis risk, which impacts the Company's excess spread earned on its loans.
The Company also faces repricing risk due to the timing of the interest rate resets on its liabilities, which may occur as
infrequently as once a quarter, in contrast to the timing of the interest rate resets on its assets, which generally occur daily.
As of December 31, 2020, the Company had $17.8 billion, $0.7 billion, and $0.6 billion of FFELP loans indexed to the one-
month LIBOR rate, three-month commercial paper rate, and the three-month treasury bill rate, respectively, the indices for
which reset daily, and $6.5 billion of debt indexed to three-month LIBOR, the indices for which reset quarterly, and $10.7
billion of debt indexed to one-month LIBOR, the indices for which reset monthly.
The Company has used derivative instruments to hedge its basis risk and repricing risk. The Company has entered into basis
swaps in which the Company receives three-month LIBOR set discretely in advance and pays one-month LIBOR plus or minus
a spread as defined in the agreements (the 1:3 Basis Swaps).
F - 34
NELNET, INC. AND SUBSIDIARIES
Notes to Consolidated Financial Statements
(Dollars in thousands, except share amounts, unless otherwise noted)
The following table summarizes the Company’s 1:3 Basis Swaps outstanding:
As of December 31,
2020
2019
Maturity
Notional amount
Notional amount
$
2020
2021
2022
2023
2024
2026
2027
—
250,000
2,000,000
750,000
1,750,000
1,150,000
250,000
$
6,150,000
1,000,000
250,000
2,000,000
750,000
1,750,000
1,150,000
250,000
7,150,000
The weighted average rate paid by the Company on the 1:3 Basis Swaps as of December 31, 2020 and 2019, was one-month
LIBOR plus 9.1 basis points and 9.7 basis points, respectively.
Interest rate swaps – floor income hedges
FFELP loans originated prior to April 1, 2006 generally earn interest at the higher of the borrower rate, which is fixed over a
period of time, or a floating rate based on the Special Allowance Payments ("SAP") formula set by the Department. The SAP
rate is based on an applicable index plus a fixed spread that depends on loan type, origination date, and repayment status. The
Company generally finances its student loan portfolio with variable rate debt. In low and/or certain declining interest rate
environments, when the fixed borrower rate is higher than the SAP rate, these student loans earn at a fixed rate while the
interest on the variable rate debt typically continues to reflect the low and/or declining interest rates. In these interest rate
environments, the Company may earn additional spread income that it refers to as floor income.
Depending on the type of loan and when it was originated, the borrower rate is either fixed to term or is reset to an annual rate
each July 1. As a result, for loans where the borrower rate is fixed to term, the Company may earn floor income for an extended
period of time, which the Company refers to as fixed rate floor income, and for those loans where the borrower rate is reset
annually on July 1, the Company may earn floor income to the next reset date, which the Company refers to as variable rate
floor income. All FFELP loans first originated on or after April 1, 2006 effectively earn at the SAP rate, since lenders are
required to rebate fixed rate floor income and variable rate floor income for these loans to the Department.
Absent the use of derivative instruments, a rise in interest rates may reduce the amount of floor income received and this may
have an impact on earnings due to interest margin compression caused by increasing financing costs, until such time as the
federally insured loans earn interest at a variable rate in accordance with their SAP formulas. In higher interest rate
environments, where the interest rate rises above the borrower rate and fixed rate loans effectively become variable rate loans,
the impact of the rate fluctuations is reduced.
As of December 31, 2020 and 2019, the Company had $8.4 billion and $3.3 billion, respectively, of FFELP student loan assets
that were earning fixed rate floor income, of which the weighted average estimated variable conversion rate for these loans,
which is the estimated short-term interest rate at which loans would convert to a variable rate, was 1.94% and 3.72%,
respectively.
F - 35
NELNET, INC. AND SUBSIDIARIES
Notes to Consolidated Financial Statements
(Dollars in thousands, except share amounts, unless otherwise noted)
The following table summarizes the outstanding derivative instruments used by the Company to economically hedge loans
earning fixed rate floor income.
As of December 31, 2020
As of December 31, 2019
Maturity
Notional amount
$
2020
2021
2022 (b)
2023
2024 (c)
2025
—
600,000
500,000
900,000
2,000,000
500,000
Weighted average
fixed rate paid by the
Company (a)
Notional amount
Weighted average
fixed rate paid by the
Company (a)
— % $
1,500,000
1.01 %
2.15
0.94
0.62
0.32
0.35
600,000
250,000
150,000
—
—
2.15
1.65
2.25
—
—
$
4,500,000
0.70 % $
2,500,000
1.42 %
(a)
(b)
(c)
For all interest rate derivatives, the Company receives discrete three-month LIBOR.
$250.0 million of the derivatives outstanding at December 31, 2020 and 2019 have forward effective start dates in June
2021.
$750.0 million of the derivatives outstanding have formal effective start dates in June 2021.
Consolidated Financial Statement Impact Related to Derivatives - Statements of Income
The following table summarizes the components of "derivative market value adjustments and derivative settlements, net"
included in the consolidated statements of income.
Settlements:
1:3 basis swaps
Interest rate swaps - floor income hedges
Other
Total settlements - income
Change in fair value:
1:3 basis swaps
Interest rate swaps - floor income hedges
Other
Total change in fair value - (expense) income
Derivative market value adjustments and derivative
settlements, net - (expense) income
Derivative Instruments - Credit and Market Risk
Year ended December 31,
2020
2019
2018
$
10,378
(6,699)
—
3,679
(7,462)
(20,682)
—
(28,144)
5,214
40,192
—
45,406
1,515
(77,027)
(683)
(76,195)
5,577
64,901
(407)
70,071
12,573
(10,962)
(597)
1,014
$
(24,465)
(30,789)
71,085
Interest rate movements have an impact on the amount of variation margin the Company may be required to pay to its third-
party clearinghouse. The Company attempts to manage market risk associated with interest rates by establishing and monitoring
limits as to the types and degree of risk that may be undertaken. The Company's derivative portfolio and hedging strategy is
reviewed periodically by its internal risk committee and board of directors' Risk and Finance Committee. With the Company's
current derivative portfolio, the Company does not currently anticipate any movement in interest rates having a material impact
on its liquidity or capital resources, nor expects future movements in interest rates to have a material impact on its ability to
meet variation margin payments to its third-party clearinghouse. Due to the existing low interest rate environment, the
Company's exposure to downward movements in interest rates on its interest rate swaps is limited. In addition, the historical
high correlation between one-month and three-month LIBOR limits the Company's exposure to interest rate movements on the
1:3 Basis Swaps.
F - 36
NELNET, INC. AND SUBSIDIARIES
Notes to Consolidated Financial Statements
(Dollars in thousands, except share amounts, unless otherwise noted)
7. Investments
A summary of the Company's investments follows:
As of December 31, 2020
As of December 31, 2019
Amortized
cost
Gross
unrealized
gains
Gross
unrealized
losses
Fair
value
Amortized
cost
Gross
unrealized
gains
Gross
unrealized
losses
Fair
value
Investments (at fair value):
Student loan asset-backed and
other debt securities -
available-for-sale (a)
Equity securities
$ 340,578
36,227
8,042
8,768
(13) 348,607
(2,954) 42,041
Total investments (at fair value) $ 376,805
16,810
(2,967) 390,648
48,790
9,622
58,412
3,911
4,561
8,472
—
52,701
(1,283) 12,900
(1,283) 65,601
Other Investments (not measured
at fair value):
Venture capital and funds:
Measurement alternative (b)
Equity method
Other
Total venture capital and funds
Real estate:
Equity method
Other
Total real estate
Investment in ALLO:
Voting interest/equity method
Preferred membership interest
Total investment in ALLO
Solar (c)
Beneficial interest in federally
insured loan securitizations (d)
Beneficial interest in consumer loan
securitizations, net of allowance for
credit losses of $4,449 as of
December 31, 2020 (d)
Tax liens and affordable housing
Total investments (not measured
at fair value)
Total investments
144,795
14,018
894
159,707
50,291
847
51,138
129,396
228,916
358,312
(30,373)
30,377
27,954
5,177
602,292
$ 992,940
72,760
15,379
1,301
89,440
44,159
867
45,026
—
—
—
7,562
—
33,187
6,283
181,498
247,099
(a)
As of December 31, 2020, $118.6 million (par value) of student loan asset-backed securities were subject to participation
interests held by Union Bank, as discussed in note 5 under "Other Borrowings."
As of December 31, 2020, the stated maturities of a majority of the Company's student loan asset-backed and other debt
securities classified as available-for-sale were greater than 10 years; however, such securities with a fair value of $58.6
million as of December 31, 2020 are scheduled to mature within the next 10 years, including $2.6 million, $31.2 million,
and $24.8 million scheduled to mature within the next one year, 1-5 years, and 6-10 years, respectively.
F - 37
NELNET, INC. AND SUBSIDIARIES
Notes to Consolidated Financial Statements
(Dollars in thousands, except share amounts, unless otherwise noted)
(b)
(c)
The Company has an investment in Agile Sports Technologies, Inc. (doing business as “Hudl”) that is included in
“venture capital and funds” in the above table. On May 20, 2020, the Company made an additional equity investment of
approximately $26 million in Hudl, as one of the participants in an equity raise completed by Hudl. Prior to the additional
2020 investment, the Company had direct and indirect equity ownership interests in Hudl of less than 20%, which did not
materially change as a result of this transaction. The Company accounts for its investment in Hudl using the measurement
alternative method, which requires it to adjust its carrying value of the investment for changes resulting from observable
market transactions. 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 the May 20, 2020 transaction value. This gain is included in
"other income" on the consolidated statements of income. As of December 31, 2020, the carrying amount of the
Company’s investment in Hudl is $128.6 million.
David S. Graff, who has served on the Company’s Board of Directors since May 2014, is CEO, co-founder, and a director
of Hudl.
The Company makes investments in entities that promote renewable energy sources (solar). The Company’s investments
in these entities generate a return primarily through the realization of federal income tax credits, operating cash flows, and
other tax benefits, such as tax deductions from operating losses of the investments, over specified time periods which
range from 5 to 6 years. As of December 31, 2020, the Company has funded $148.6 million in solar investments. The
carrying value of the Company’s solar investments are reduced by tax credits earned when the solar project is placed in
service. The solar investment balance at December 31, 2020 represents total tax credits earned on solar projects placed in
service through December 31, 2020 being larger than total payments made by the Company on such projects. The
Company is committed to fund an additional $17.5 million on these projects.
The Company accounts for its solar investments 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. During the years ended December 31, 2020 and 2019, the Company recognized
pre-tax losses of $37.4 million and $2.2 million, respectively, on its solar investments. These losses are included in "other
income" in the consolidated statements of income.
(d)
The Company has purchased partial ownership in certain federally insured and consumer loan securitizations. As of the
latest remittance reports filed by the various trusts prior to December 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.
Impairment Expense and Provision for Beneficial Interests
During the first quarter of 2020, the Company recorded a $26.3 million provision charge related to the Company's beneficial
interest in consumer loan securitizations. As of March 31, 2020, the Company's estimate of future cash flows from the
beneficial interest in consumer loan securitizations was lower than previously 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 and recorded an allowance for credit losses of $26.3 million. Additionally, during the first quarter of 2020, the
Company recorded a $7.8 million impairment charge related to several of its venture capital investments. The Company
identified several venture capital investments, a majority of which were accounted for under the measurement alternative, that
were also negatively impacted by the distressed economic conditions resulting from the COVID-19 pandemic, and estimated
that the fair value of such investments was significantly reduced from their previous carrying value. During the fourth quarter of
2020, due to improved economic conditions, the Company reduced the allowance for credit losses related to the consumer loan
beneficial interests by $9.7 million. The activity described above is included in “impairment expense and provision for
beneficial interests” on the consolidated statements of income.
8. Business Combinations
Great Lakes Educational Loan Services, Inc. ("Great Lakes")
On February 7, 2018, the Company acquired 100 percent of the outstanding stock of Great Lakes for total cash consideration of
$150.0 million. Great Lakes provides servicing for federally-owned student loans for the Department of Education, FFELP
loans, and private education loans. The acquisition of Great Lakes has expanded the Company's portfolio of loans it services.
The operating results of Great Lakes are included in the Loan Servicing and Systems operating segment.
As part of the acquisition, the Company acquired the remaining 50 percent ownership in GreatNet Solutions, LLC ("GreatNet"),
a joint venture formed prior to the acquisition between Nelnet Servicing, a subsidiary of the Company, and Great Lakes. Prior
to the acquisition of the remaining 50 percent of GreatNet, the Company consolidated the operating results of GreatNet, as the
Company was deemed to have control over the joint venture. The proportionate share of membership interest (equity) and net
F - 38
NELNET, INC. AND SUBSIDIARIES
Notes to Consolidated Financial Statements
(Dollars in thousands, except share amounts, unless otherwise noted)
loss of GreatNet that was attributable to Great Lakes was reflected as a noncontrolling interest in the Company's consolidated
financial statements. The Company recognized a $19.1 million reduction to consolidated shareholders' equity as a result of
acquiring Great Lakes' 50 percent ownership in GreatNet. This transaction resulted in a $5.7 million decrease in noncontrolling
interests and a $13.4 million decrease in retained earnings.
The following table summarizes the estimated fair values of the assets acquired and liabilities assumed at the acquisition date.
The fair value assigned to the acquisition of the noncontrolling interest in GreatNet reduced the total consideration allocated to
the assets acquired and liabilities assumed of Great Lakes from $150.0 million to $136.6 million.
Cash and cash equivalents
Accounts receivable
Property and equipment
Other assets
Intangible assets
Excess cost over fair value of net assets acquired (goodwill)
Other liabilities
Net assets acquired
$
$
27,399
23,708
35,919
14,018
75,329
15,043
(54,865)
136,551
The $75.3 million of acquired intangible assets on the date of acquisition had a weighted-average useful life of approximately 4
years. The intangible assets that made up this amount include customer relationships of $70.2 million (4-year average useful
life) and a trade name of $5.1 million (7-year useful life).
The $15.0 million of goodwill was assigned to the Loan Servicing and Systems operating segment and is not expected to be
deductible for tax purposes. The amount allocated to goodwill was primarily attributed to the deferred tax liability related to the
difference between the carrying amount and tax bases of acquired identifiable intangible assets and the synergies and economies
of scale expected from combining the operations of the Company and Great Lakes.
The pro forma impacts of the Great Lakes acquisition on the Company’s 2018 historical results prior to the acquisition were not
material.
Tuition Management Systems, LLC ("TMS")
On November 20, 2018, the Company acquired 100 percent of the membership interests of TMS for total cash consideration of
$27.0 million. TMS provides tuition payment plans, billing services, payment technology solutions, and refund management to
educational institutions. The TMS acquisition added both K-12 and higher education schools to the Company's existing
customer base, further enhancing the Company's market share leading position with private faith based K-12 schools and
advancing to a market leading position in higher education. The operating results of TMS are included in the Education
Technology, Services, and Payment Processing operating segment from the date of acquisition.
The following table summarizes the estimated fair values of the assets acquired and liabilities assumed at the acquisition date.
Cash and cash equivalents
Restricted cash - due to customers
Accounts receivable
Other assets
Intangible assets
Excess cost over fair value of net assets acquired (goodwill)
Other liabilities
Due to customers
Net assets acquired
$
$
438
123,169
1,019
381
26,390
3,110
(4,321)
(123,169)
27,017
F - 39
NELNET, INC. AND SUBSIDIARIES
Notes to Consolidated Financial Statements
(Dollars in thousands, except share amounts, unless otherwise noted)
The $26.4 million of acquired intangible assets on the date of acquisition had a weighted-average useful life of approximately
10 years. The intangible assets that made up this amount include customer relationships of $25.4 million (10-year useful life)
and computer software of $1.0 million (2-year useful life).
The $3.1 million of goodwill was assigned to the Education Technology, Services, and Payment Processing operating segment
and is expected to be deductible for tax purposes. The amount allocated to goodwill was primarily attributed to the synergies
and economies of scale expected from combining the operations of the Company and TMS.
The pro forma impacts of the TMS acquisition on the Company's historical results prior to the acquisition were not material.
HigherSchool Publishing Company ("HigherSchool")
On December 31, 2020, the Company acquired 100 percent of the outstanding stock of HigherSchool for total cash
consideration of $24.7 million. HigherSchool provides supplemental instructional services and educational professional
development for K-12 schools. The acquisition of HigherSchool has expanded the Company's professional development and
educational instruction services. The operating results of HigherSchool are included in the Education Technology, Services, and
Payment Processing operating segment from the date of acquisition.
The following table summarizes the estimated fair values of the assets acquired and liabilities assumed at the acquisition date.
Cash and cash equivalents
Accounts receivable
Intangible assets
Excess cost over fair value of net assets acquired (goodwill)
Other liabilities
Net assets acquired
$
$
7
5,711
24,200
6,292
(11,510)
24,700
The acquired intangible assets were customer relationships of $24.2 million (10-year useful life).
The $6.3 million of goodwill was assigned to the Education Technology, Services, and Payment Processing operating segment
and is not expected to be deductible for tax purposes. The amount allocated to goodwill was primarily attributed to the deferred
tax liability related to the difference between the carrying amount and tax basis of acquired identifiable intangible assets.
The pro forma impacts of the HigherSchool acquisition on the Company's historical results prior to the acquisition were not
material.
9. Intangible Assets
Intangible assets consist of the following:
Weighted average
remaining useful
life as of
December 31, 2020
(months)
As of December 31,
2020
2019
Amortizable intangible assets, net:
Customer relationships (net of accumulated amortization of $83,419 and
$60,553, respectively)
Computer software (net of accumulated amortization of $4,127 and $3,233,
respectively)
Trade names (net of accumulated amortization of $3,455 and $2,792,
respectively)
Total - amortizable intangible assets, net
99
35
6
91
$
66,974
71,900
6,430
2,154
1,666
$
75,070
7,478
81,532
F - 40
NELNET, INC. AND SUBSIDIARIES
Notes to Consolidated Financial Statements
(Dollars in thousands, except share amounts, unless otherwise noted)
The Company recorded amortization expense on its intangible assets of $30.8 million, $32.8 million, and $30.2 million during
the years ended December 31, 2020, 2019, and 2018, respectively. The Company will continue to amortize intangible assets
over their remaining useful lives. As of December 31, 2020, the Company estimates it will record amortization expense as
follows:
2021
2022
2023
2024
2025
2026 and thereafter
$
$
23,042
9,939
9,830
7,457
4,644
20,158
75,070
10. Goodwill
The change in the carrying amount of goodwill by reportable operating segment was as follows:
Loan
Servicing
and Systems
Education
Technology,
Services, and
Payment
Processing
Communications
Asset
Generation and
Management (a)
Corporate
and Other
Activities
Balance as of December 31, 2018 and 2019 $
23,639
Goodwill acquired
Deconsolidation of ALLO
—
—
Balance as of December 31, 2020
$
23,639
70,278
6,292
—
76,570
21,112
—
(21,112)
41,883
—
—
—
41,883
—
—
—
—
Total
156,912
6,292
(21,112)
142,092
(a) As a result of the Reconciliation Act of 2010, the Company no longer originates new FFELP loans, and net interest income from
the Company's existing FFELP loan portfolio will decline over time as the Company's portfolio pays down. As a result, as this
revenue stream winds down, goodwill impairment will be triggered for the Asset Generation and Management reporting unit
due to the passage of time and depletion of projected cash flows stemming from its FFELP student loan portfolio. Management
believes the elimination of new FFELP loan originations will not have an adverse impact on the fair value of the Company's
other reporting units.
F - 41
NELNET, INC. AND SUBSIDIARIES
Notes to Consolidated Financial Statements
(Dollars in thousands, except share amounts, unless otherwise noted)
11. Property and Equipment
Property and equipment consisted of the following:
Non-communications:
Computer equipment and software
Building and building improvements
Office furniture and equipment
Leasehold improvements
Transportation equipment
Land
Construction in progress
Accumulated depreciation - non-communications
Non-communications, net property and equipment
Communications:
Network plant and fiber
Customer located property
Central office
Transportation equipment
Computer equipment and software
Other
Land
Construction in progress
Accumulated depreciation - communications
Communications, net property and equipment
Total property and equipment, net
Useful life
2020
2019
As of December 31,
1-5 years
5-48 years
1-10 years
1-15 years
5-10 years
—
—
4-15 years
2-4 years
5-15 years
4-10 years
1-5 years
1-39 years
—
—
$
172,664
52,444
21,899
9,168
4,857
3,642
18,478
283,152
(159,625)
123,527
—
—
—
—
—
—
—
—
—
—
—
$
123,527
160,319
37,904
21,245
9,517
5,049
1,400
13,738
249,172
(142,270)
106,902
254,560
27,011
17,672
6,611
5,574
3,702
70
54
315,254
(73,897)
241,357
348,259
The Company recorded depreciation expense on its property and equipment of $87.9 million, $72.3 million, and $56.7 million
during the years ended December 31, 2020, 2019, and 2018, respectively.
On December 21, 2020, the Company deconsolidated ALLO from the Company’s consolidated financial statements. See note 2,
“Recent Developments - ALLO Recapitalization,” for a description of the transaction and a summary of the deconsolidation
impact.
Impairment charges
As part of integrating technology and becoming more efficient and effective in meeting borrower needs, the Company
continues to evaluate the best use of its servicing systems on a post-Great Lakes acquisition basis. As a result of this evaluation,
in 2018, the Company recorded an impairment charge of $3.9 million (pre-tax) within its Loan Servicing and Systems operating
segment related to certain external software development costs that were previously capitalized.
On October 16, 2018, the Company terminated its investment in a proprietary payment processing platform. This decision was
made as a result of decreases in price and advancements of technology by established processors in the industry. As a result of
this decision, in 2018, the Company recorded an impairment charge of $7.8 million (pre-tax) within its Education Technology,
Services, and Payment Processing operating segment. The charge primarily represents computer equipment and external
software development costs related to the payment processing platform.
The above impairment charges are included in "impairment expense, net of recoveries" in the consolidated statements of
income.
F - 42
NELNET, INC. AND SUBSIDIARIES
Notes to Consolidated Financial Statements
(Dollars in thousands, except share amounts, unless otherwise noted)
12. Shareholders’ Equity
Classes of Common Stock
The Company's common stock is divided into two classes. The Class B common stock has ten votes per share and the Class A
common stock has one vote per share on all matters to be voted on by the Company's shareholders. Each Class B share is
convertible at any time at the holder's option into one Class A share. With the exception of the voting rights and the conversion
feature, the Class A and Class B shares are identical in terms of other rights, including dividend and liquidation rights.
Stock Repurchases
The Company has a stock repurchase program that expires on May 7, 2022 in which it can repurchase up to five million shares
of its Class A common stock on the open market, through private transactions, or otherwise. As of December 31, 2020, 3.2
million shares may still be purchased under the Company's stock repurchase program. Shares repurchased by the Company
during 2020, 2019, and 2018 are shown in the table below. In accordance with the corporate laws of the state in which the
Company is incorporated, all shares repurchased by the Company are legally retired upon acquisition by the Company.
Year ended December 31, 2020
Year ended December 31, 2019
Year ended December 31, 2018
13. Earnings per Common Share
Total shares
repurchased
Purchase price
(in thousands)
Average price of
shares repurchased
(per share)
1,594,394 $
73,358 $
726,273
868,147
40,411
45,331
46.01
55.64
52.22
Presented below is a summary of the components used to calculate basic and diluted earnings per share. The Company applies
the two-class method in computing both basic and diluted earnings per share, which requires the calculation of separate
earnings per share amounts for common stock and unvested share-based awards. Unvested share-based awards that contain
nonforfeitable rights to dividends are considered securities which participate in undistributed earnings with common stock.
Year ended December 31,
2020
Unvested
restricted
stock
shareholders
Common
shareholders
Total
Common
shareholders
2019
Unvested
restricted
stock
shareholders
Total
Common
shareholders
2018
Unvested
restricted
stock
shareholders
Total
Numerator:
Net income
attributable to
Nelnet, Inc.
Denominator:
Weighted-average
common shares
outstanding - basic
and diluted
Earnings per share -
basic and diluted
$
347,451
4,992
352,443
139,946
1,857
141,803
225,170
2,743
227,913
38,506,351
553,237
39,059,588
39,523,082
524,320
40,047,402
40,416,719
492,303
40,909,022
$
9.02
9.02
9.02
3.54
3.54
3.54
5.57
5.57
5.57
Unvested restricted stock awards are the Company's only potential common shares and, accordingly, there were no awards that
were antidilutive and not included in average shares outstanding for the diluted earnings per share calculation.
As of December 31, 2020, a cumulative amount of 209,924 shares have been deferred by non-employee directors under the
Directors Stock Compensation Plan and will become issuable upon the termination of service by the respective non-employee
director on the board of directors. These shares are included in the Company's weighted average shares outstanding calculation.
F - 43
NELNET, INC. AND SUBSIDIARIES
Notes to Consolidated Financial Statements
(Dollars in thousands, except share amounts, unless otherwise noted)
14. Income Taxes
The Company is subject to income taxes in the United States, Canada, and Australia. Significant judgment is required in
evaluating the Company's tax positions and determining the provision for income taxes. During the ordinary course of business,
there are many transactions and calculations for which the ultimate tax determination is uncertain.
As required by the Income Taxes Topic of the FASB Accounting Standards Codification ("ASC Topic 740"), the Company
recognizes in the consolidated financial statements only those tax positions determined to be more likely than not of being
sustained upon examination, based on the technical merits of the positions. It further requires that a change in judgment related
to the expected ultimate resolution of uncertain tax positions be recognized in earnings in the period of such change.
As of December 31, 2020, the total amount of gross unrecognized tax benefits (excluding the federal benefit received from state
positions) was $20.3 million, which is included in “other liabilities” on the consolidated balance sheet. Of this total, $16.0
million (net of the federal benefit on state issues) represents the amount of unrecognized tax benefits that, if recognized, would
favorably affect the effective tax rate in future periods. The Company currently anticipates uncertain tax positions will decrease
by $6.7 million prior to December 31, 2021 as a result of a lapse of applicable statutes of limitations, settlements,
correspondence with examining authorities, and recognition or measurement considerations with federal and state jurisdictions;
however, actual developments in this area could differ from those currently expected. Of the anticipated $6.7 million decrease,
$5.3 million, if recognized, would favorably affect the Company's effective tax rate. A reconciliation of the beginning and
ending amount of gross unrecognized tax benefits follows:
Gross balance - beginning of year
Additions based on tax positions of prior years
Additions based on tax positions related to the current year
Settlements with taxing authorities
Reductions for tax positions of prior years
Reductions due to lapse of applicable statutes of limitations
Gross balance - end of year
Year ended December 31,
2020
2019
$
$
20,148
634
2,523
—
(69)
(2,918)
20,318
23,445
651
1,339
(1,810)
(380)
(3,097)
20,148
All the reductions shown in the table above that are due to prior year tax positions, settlements, and the lapse of statutes of
limitations impacted the effective tax rate.
The Company's policy is to recognize interest and penalties accrued on uncertain tax positions as part of interest expense and
other expense, respectively. As of December 31, 2020 and 2019, $5.4 million and $5.0 million in accrued interest and penalties,
respectively, were included in “other liabilities” on the consolidated balance sheets. The Company recognized interest expense
of $0.4 million, $0.1 million, and $0.4 million related to uncertain tax positions for the years ended December 31, 2020, 2019,
and 2018, respectively. The impact to the consolidated statements of income related to penalties for uncertain tax positions was
not significant for the years 2020, 2019, and 2018. The impact of timing differences and tax attributes are considered when
calculating interest and penalty accruals associated with the unrecognized tax benefits.
The Company and its subsidiaries file a consolidated federal income tax return in the U.S. and the Company or one of its
subsidiaries files income tax returns in various state, local, and foreign jurisdictions. The Company is no longer subject to U.S.
federal income tax examinations for years prior to 2017. The Company is no longer subject to U.S. state and local income tax
examinations by tax authorities prior to 2010. As of December 31, 2020, the Company has tax uncertainties that remain
unsettled in the jurisdiction of California (2010 through 2017).
F - 44
NELNET, INC. AND SUBSIDIARIES
Notes to Consolidated Financial Statements
(Dollars in thousands, except share amounts, unless otherwise noted)
The provision for income taxes consists of the following components:
Year ended December 31,
2020
2019
2018
Current:
Federal
State
Foreign
Total current provision
Deferred:
Federal
State
Foreign
Total deferred provision
$
82,832
9,815
239
92,886
7,269
718
(13)
7,974
Provision for income tax expense
$
100,860
38,931
3,546
239
42,716
(4,280)
(2,922)
(63)
(7,265)
35,451
45,822
1,969
(2)
47,789
11,783
(883)
81
10,981
58,770
The differences between the income tax provision computed at the statutory federal corporate tax rate and the financial
statement provision for income taxes are shown below:
Tax expense at federal rate
Increase (decrease) resulting from:
State tax, net of federal income tax benefit
Tax credits
Provision for uncertain federal and state tax matters
Other
Effective tax rate
Year ended December 31,
2020
2019
2018
21.0 %
21.0 %
21.0 %
2.8
(1.1)
(0.2)
(0.2)
22.3 %
2.5
(3.0)
(0.7)
0.2
20.0 %
2.4
(1.9)
(1.0)
—
20.5 %
F - 45
NELNET, INC. AND SUBSIDIARIES
Notes to Consolidated Financial Statements
(Dollars in thousands, except share amounts, unless otherwise noted)
The tax effect of temporary differences that give rise to deferred tax assets and liabilities include the following:
As of December 31,
2020
2019
Deferred tax assets:
Student loans
Deferred revenue
Accrued expenses
Tax credit carryforwards
Basis in certain derivative contracts
Lease liability
Stock compensation
Securitizations
Net operating losses
Total gross deferred tax assets
Less valuation allowance
Net deferred tax assets
Deferred tax liabilities:
Partnership basis
Debt and equity investments
Depreciation
Intangible assets
Loan origination services
Lease right of use asset
Basis in certain derivative contracts
Other
Total gross deferred tax liabilities
Net deferred tax asset (liability)
$
26,894
18,081
10,661
5,987
5,061
4,123
2,546
694
647
74,694
(569)
74,125
64,023
20,538
14,092
7,703
5,040
4,037
—
661
$
116,094
(41,969)
15,479
18,037
4,112
9,394
—
5,891
2,167
1,261
551
56,892
(548)
56,344
56,741
3,775
11,489
5,399
4,647
5,684
2,730
1,003
91,468
(35,124)
The Company has performed an evaluation of the recoverability of deferred tax assets. In assessing the realizability of the
Company's deferred tax assets, management considers whether it is more likely than not that some portion or all of the deferred
tax assets will be realized. The ultimate realization of deferred tax assets is dependent upon the generation of future taxable
income during the period in which those temporary differences become deductible or eligible for utilization of a tax credit
carryforward. Management considers the scheduled reversals of deferred tax liabilities, projected taxable income, carry back
opportunities, and tax planning strategies in making the assessment of the amount of the valuation allowance. With the
exception of a portion of the Company's state net operating losses, it is management's opinion that it is more likely than not that
the deferred tax assets will be realized and should not be reduced by a valuation allowance. The amount of deferred tax assets
considered realizable could be reduced in the near term if estimates of future taxable income during the carry forward period are
reduced.
As of December 31, 2020 and 2019, the Company had a current income tax receivable of $21.5 million and $27.3 million,
respectively, that is included in "other assets" on the consolidated balance sheets.
F - 46
NELNET, INC. AND SUBSIDIARIES
Notes to Consolidated Financial Statements
(Dollars in thousands, except share amounts, unless otherwise noted)
15. Segment Reporting
The Company's reportable operating segments include:
• Loan Servicing and Systems
• Education Technology, Services, and Payment Processing
• Communications
• Asset Generation and Management
• Nelnet Bank
The Company earns fee-based revenue through its Loan Servicing and Systems and Education Technology, Services, and
Payment Processing operating segments and earned revenue from its Communications operating segment prior to its
deconsolidation on December 21, 2020. In addition, the Company earns interest income on its loan portfolio in its Asset
Generation and Management operating segment. On November 2, 2020, the Company launched operations of Nelnet Bank.
Nelnet bank operates as an internet bank franchise focused primarily on the private education loan marketplace.
The Company’s operating segments are defined by the products and services they offer and the types of customers they serve,
and they reflect the manner in which financial information is currently evaluated by management. See note 1, "Description of
Business," for a description of each operating segment, including the primary products and services offered.
The management reporting process measures the performance of the Company’s operating segments based on the management
structure of the Company, as well as the methodology used by management to evaluate performance and allocate resources.
Executive management (the "chief operating decision maker") evaluates the performance of the Company’s operating segments
based on their financial results prepared in conformity with U.S. GAAP.
The accounting policies of the Company’s operating segments are the same as those described in the summary of significant
accounting policies. Intersegment revenues are charged by a segment that provides a product or service to another
segment. Intersegment revenues and expenses are included within each segment consistent with the income statement
presentation provided to management. Income taxes are allocated based on 24% of income before taxes for each individual
operating segment. The difference between the consolidated income tax expense and the sum of taxes calculated for each
operating segment is included in income taxes in Corporate and Other Activities.
Corporate and Other Activities
Other business activities and operating segments that are not reportable are combined and included in Corporate and Other
Activities. Corporate and Other Activities includes the following items:
•
•
•
Income earned on certain investment activities, including renewable energy (solar) and real estate
Interest expense incurred on unsecured and certain other corporate related debt transactions
Other product and service offerings that are not considered reportable operating segments including, but not limited to,
WRCM, the SEC-registered investment advisor subsidiary
Corporate and Other Activities also includes certain corporate activities and overhead functions related to executive
management, internal audit, human resources, accounting, legal, enterprise risk management, information technology,
occupancy, and marketing. These costs are allocated to each operating segment based on estimated use of such activities and
services.
Segment Results
The following tables include the results of each of the Company's reportable operating segments reconciled to the consolidated
financial statements.
F - 47
NELNET, INC. AND SUBSIDIARIES
Notes to Consolidated Financial Statements
(Dollars in thousands, except share amounts, unless otherwise noted)
Year ended December 31, 2020
Loan
Servicing
and Systems
Education
Technology,
Services, and
Payment
Processing
Communications
(a)
Asset
Generation
and
Management
Nelnet
Bank
Corporate
and Other
Activities
Eliminations
Total
Total interest income
Interest expense
Net interest income (expense)
Less provision for loan losses
$
Net interest income after provision for loan
losses
Other income/expense:
Loan servicing and systems revenue
Intersegment revenue
Education technology, services, and
payment processing revenue
Communications revenue
Other
Gain on sale of loans
Gain from deconsolidation of ALLO
Impairment expense and provision for
beneficial interests
Derivative settlements, net
Derivative market value adjustments, net
436
121
315
—
315
451,561
36,520
—
—
9,421
—
—
—
—
—
3,036
54
2,982
—
2,982
—
20
282,196
—
373
—
—
—
—
—
2
—
2
—
2
—
—
—
76,643
1,561
—
—
—
—
—
Total other income/expense
497,502
282,589
78,204
611,474
328,157
283,317
63,029
220,288
—
—
—
—
7,189
33,023
—
(16,607)
3,679
(28,144)
(860)
—
—
—
1,747
—
15,806
39,172
56,725
414
41
373
330
43
—
—
—
—
48
—
—
—
—
—
48
—
—
—
36
—
135
—
171
(80)
20
(60)
—
5,775
3,178
2,597
—
2,597
—
—
—
—
38,969
—
258,588
(8,116)
—
—
(1,480)
(1,480)
—
—
—
619,656
330,071
289,585
63,360
226,225
—
451,561
(36,540)
—
—
—
—
—
—
—
—
—
282,196
76,643
57,561
33,023
258,588
(24,723)
3,679
(28,144)
289,441
(36,540)
1,110,384
—
—
—
84,741
29,043
59,320
(82,543)
90,561
201,477
(41,098)
160,379
2,817
—
—
—
—
—
—
(36,540)
(36,540)
—
—
—
—
—
82,206
22,812
105,018
501,832
118,699
160,574
—
781,105
450,486
(100,860)
349,626
2,817
352,443
Cost of services:
Cost to provide education technology,
services, and payment processing services
Cost to provide communications services
Total cost of services
Operating expenses:
Salaries and benefits
Depreciation and amortization
Other expenses
Intersegment expenses, net
Total operating expenses
Income (loss) before income taxes
Income tax (expense) benefit
Net income (loss)
Net loss (income) attributable to
noncontrolling interests
Net income (loss) attributable to Nelnet,
Inc.
—
—
—
285,526
37,610
57,420
63,886
444,442
53,375
(12,810)
40,565
82,206
—
82,206
98,847
9,459
14,566
14,293
137,165
66,200
(15,888)
50,312
—
22,812
22,812
30,935
42,588
13,327
1,732
88,582
(33,188)
162,703
7,965
(39,049)
(25,223)
123,654
—
—
—
—
$
40,565
50,312
(25,223)
123,654
(60)
163,196
Total assets as of December 31, 2020
$
190,297
436,702
—
20,773,968
216,937
1,225,790
(197,534)
22,646,160
(a) On December 21, 2020, the Company deconsolidated ALLO from the Company’s consolidated financial statements. See note 2, “Recent Developments -
ALLO Recapitalization,” for a description of the transaction and a summary of the deconsolidation impact. Accordingly, the operating results for the
Communications operating segment in the table above are for the period from January 1 2020 through December 21, 2020.
F - 48
NELNET, INC. AND SUBSIDIARIES
Notes to Consolidated Financial Statements
(Dollars in thousands, except share amounts, unless otherwise noted)
Year ended December 31, 2019
Education
Technology,
Services, and
Payment
Processing
Asset
Generation
and
Management
Nelnet
Bank
Corporate
and Other
Activities
Communications
Total interest income
Interest expense
Net interest income (expense)
Less provision for loan losses
Net interest income after provision for loan
losses
Other income/expense:
Loan servicing and systems revenue
Intersegment revenue
Education technology, services, and
payment processing revenue
Communications revenue
Other
Gain on sale of loans
Gain from deconsolidation of ALLO
Impairment expense and provision for
beneficial interests
Derivative settlements, net
Derivative market value adjustments, net
Loan
Servicing
and Systems
$
2,031
115
1,916
—
1,916
455,255
46,751
—
—
9,736
—
—
—
—
—
9,244
46
9,198
—
9,198
—
—
277,331
—
259
—
—
—
—
—
3
—
3
—
3
—
—
—
64,269
1,509
—
—
—
—
—
Total other income/expense
511,742
277,590
65,778
Cost of services:
Cost to provide education technology,
services, and payment processing services
Cost to provide communications services
Total cost of services
Operating expenses:
Salaries and benefits
Depreciation and amortization
Other expenses
Intersegment expenses, net
Total operating expenses
Income (loss) before income taxes
Income tax (expense) benefit
Net income (loss)
Net loss (income) attributable to
noncontrolling interests
Net income (loss) attributable to Nelnet,
Inc.
—
—
—
276,136
34,755
71,064
54,325
436,280
77,378
(18,571)
58,807
81,603
—
81,603
94,666
12,820
22,027
13,405
142,918
62,267
(14,944)
47,323
—
20,423
20,423
21,004
37,173
15,165
2,962
76,304
(30,946)
115,796
7,427
(23,519)
(27,792)
88,004
—
—
—
—
$
58,807
47,323
(23,519)
88,004
931,963
693,375
238,588
39,000
199,588
—
—
—
—
13,088
17,261
—
—
45,406
(76,195)
(440)
—
—
—
1,545
—
34,445
47,362
83,352
Eliminations
Total
(3,796)
(3,796)
—
—
—
948,677
699,327
249,350
39,000
210,350
—
455,255
(46,751)
—
—
—
—
—
—
—
—
—
277,331
64,269
47,918
17,261
—
—
45,406
(76,195)
9,232
9,587
(355)
—
(355)
—
—
—
—
23,327
—
—
—
—
—
23,327
(46,751)
831,245
—
—
—
70,152
20,300
51,571
(71,303)
70,720
(47,748)
18,428
(29,320)
509
(28,811)
—
—
—
—
—
—
(46,751)
(46,751)
—
—
—
—
—
81,603
20,423
102,026
463,503
105,049
194,272
—
762,824
176,745
(35,451)
141,294
509
141,803
—
—
—
—
—
—
—
—
—
—
—
—
—
—
—
—
—
—
—
—
—
—
—
—
—
—
—
—
—
Total assets as of December 31, 2019
$
290,311
506,382
303,347
22,128,917
—
627,897
(147,884)
23,708,970
F - 49
NELNET, INC. AND SUBSIDIARIES
Notes to Consolidated Financial Statements
(Dollars in thousands, except share amounts, unless otherwise noted)
Year ended December 31, 2018
Total interest income
Interest expense
Net interest income (expense)
Less provision for loan losses
Net interest income after provision for loan
losses
Other income/expense:
Loan servicing and systems revenue
Intersegment revenue
Education technology, services, and
payment processing revenue
Communications revenue
Other
Gain on sale of loans
Gain from deconsolidation of ALLO
Impairment expense and provision for
beneficial interests
Derivative settlements, net
Derivative market value adjustments, net
Loan
Servicing
and Systems
$
1,351
—
1,351
—
1,351
440,027
47,082
—
—
7,284
—
—
Education
Technology,
Services, and
Payment
Processing
4,453
9
4,444
—
4,444
—
—
221,962
—
—
—
—
(3,906)
(7,815)
—
—
—
—
Cost of services:
Cost to provide education technology,
services, and payment processing services
Cost to provide communications services
Total cost of services
Operating expenses:
Salaries and benefits
Depreciation and amortization
Other expenses
Intersegment expenses, net
Total operating expenses
Income (loss) before income taxes
Income tax (expense) benefit
Net income (loss)
Net loss (income) attributable to
noncontrolling interests
Net income (loss) attributable to Nelnet,
Inc.
—
—
—
267,458
32,074
63,430
59,042
422,004
69,834
(16,954)
52,880
59,566
—
59,566
81,080
13,484
20,322
10,681
125,567
33,458
(8,030)
25,428
Asset
Generation
and
Management
911,502
662,360
249,142
23,000
Communications
4
9,987
(9,983)
—
(9,983)
226,142
—
—
—
44,653
1,075
—
—
—
—
—
—
16,926
16,926
18,779
23,377
11,900
2,578
56,634
—
—
—
—
12,723
—
—
—
70,478
(2,159)
81,042
—
—
—
1,526
—
15,961
47,870
65,357
(37,815)
241,827
9,075
(58,038)
(28,740)
183,789
808
—
—
—
$
53,688
25,428
(28,740)
183,789
Total other income/expense
490,487
214,147
45,728
Nelnet
Bank
Corporate
and Other
Activities
Eliminations
Total
—
—
—
—
—
—
—
—
—
—
—
—
—
—
—
—
—
—
—
—
—
—
—
—
—
—
—
—
—
19,944
10,540
9,404
—
9,404
—
—
—
—
33,724
—
—
—
(407)
3,173
36,490
—
—
—
67,336
17,960
54,697
(73,088)
66,905
(21,011)
15,177
(5,834)
(419)
(6,253)
(12,989)
(12,989)
—
—
—
924,266
669,906
254,360
23,000
231,360
—
440,027
(47,082)
—
—
—
—
—
—
—
—
—
221,962
44,653
54,805
—
—
(11,721)
70,071
1,014
(47,082)
820,811
—
—
—
—
—
—
(47,082)
(47,082)
—
—
—
—
—
59,566
16,926
76,492
436,179
86,896
166,310
—
689,385
286,294
(58,770)
227,524
389
227,913
Total assets as of December 31, 2018
$
226,445
471,719
286,816
23,806,321
—
563,841
(134,174)
25,220,968
F - 50
NELNET, INC. AND SUBSIDIARIES
Notes to Consolidated Financial Statements
(Dollars in thousands, except share amounts, unless otherwise noted)
16. Disaggregated Revenue and Deferred Revenue
The following provides additional revenue recognition information for the Company’s fee-based reportable operating segments.
Loan Servicing and Systems Revenue
Loan servicing and systems revenue consists of the following items:
•
•
•
Loan servicing revenue - Loan servicing revenue consideration is determined from individual contracts with customers
and is calculated monthly based on the dollar value of loans, number of loans, number of borrowers serviced for each
customer, or number of transactions. Loan servicing requires a significant level of integration and the individual
components are not considered distinct. The Company performs various services, including, but not limited to, (i)
application processing, (ii) monthly servicing, (iii) conversion processing, and (iv) fulfillment services, during each
distinct service period. Even though the mix and quantity of activities that the Company performs each period may
differ, the nature of the activities are substantially the same. Revenue is allocated to the distinct service period,
typically a month, and recognized as control transfers as customers simultaneously receive and consume benefits.
Software services revenue - Software services revenue consideration is determined from individual contracts with
customers and includes license and maintenance fees associated with loan software products, generally in a remote
hosted environment, and computer and software consulting. Usage-based revenue from remote hosted licenses is
allocated to the distinct service period, typically a month, and recognized as control transfers as customers
simultaneously receive and consume benefits. Revenue from any non-refundable up-front fee is recognized ratably
over the contract period, as the fee relates to set-up activities that provide no incremental benefit to the customers.
Computer and software consulting is also capable of being distinct and accounted for as a separate performance
obligation. Revenue allocated to computer and software consulting is recognized as services are provided.
Outsourced services revenue - Outsourced services revenue consideration is determined from individual contracts with
customers and is calculated monthly based on the volume of services. Revenue is allocated to the distinct service
period, typically a month, and recognized as control transfers as customers simultaneously receive and consume
benefits.
The following table provides disaggregated revenue by service offering:
Year ended December 31,
2020
2019
2018
Government servicing - Nelnet
Government servicing - Great Lakes
Private education and consumer loan servicing
$
FFELP servicing
Software services
Outsourced services and other
146,798
179,872
32,492
20,183
41,999
30,217
Loan servicing and systems revenue
$
451,561
157,991
185,656
36,788
25,043
41,077
8,700
455,255
157,091
168,298
41,474
31,542
32,929
8,693
440,027
Education Technology, Services, and Payment Processing Revenue
Education technology, services, and payment processing revenue consists of the following items:
•
•
Tuition payment plan services - Tuition payment plan services consideration is determined from individual plan
agreements, which are governed by plan service agreements, and includes access to a remote hosted environment and
management of payment processing. The management of payment processing is considered a distinct performance
obligation when sold with the remote hosted environment. Revenue for each performance obligation is allocated to the
distinct service period, the academic school term, and recognized ratably over the service period as customers
simultaneously receive and consume benefits.
Payment processing - Payment processing consideration is determined from individual contracts with customers and
includes electronic transfer and credit card processing, reporting, virtual terminal solutions, and specialized
F - 51
NELNET, INC. AND SUBSIDIARIES
Notes to Consolidated Financial Statements
(Dollars in thousands, except share amounts, unless otherwise noted)
integrations to business software for education and non-education markets. Volume-based revenue from payment
processing is allocated and recognized to the distinct service period, based on when each transaction is completed, and
recognized as control transfers as customers simultaneously receive and consume benefits. The electronic transfer and
credit card processing consideration is recognized as revenue on a gross basis as the Company is the principal in the
delivery of the payment processing. The Company has concluded it is the principal as it controls the services before
delivery to the educational institution or business, it is primarily responsible for the delivery of the services, and it has
discretion in setting prices charged to its customers. In addition, the Company has the unilateral ability to accept or
reject a transaction based on criteria established by the Company. The Company is liable for the costs of processing
the transactions and records such costs within "cost to provide education technology, services, and payment processing
services."
•
Education technology and services - Education technology and services consideration is determined from individual
contracts with customers and is based on the services selected by the customer. Services in K-12 private and faith
based schools primarily includes (i) assistance with financial needs assessment, (ii) school information system
software that automates administrative processes such as admissions, enrollment, scheduling, cafeteria management,
attendance, and grade book management, and (iii) professional development and educational instruction services.
Revenue for these services is recognized for the consideration the Company has a right to invoice, the amount of
which corresponds directly with the value provided to the customer based on the performance completed. Services
provided to the higher education market include payment technology and processing that allow for electronic billing
and payment of campus charges. These services are considered distinct performance obligations. Revenue for each
performance obligation is allocated to the distinct service period, typically a month or based on when each transaction
is completed, and recognized as control transfers as customers simultaneously receive and consume benefits.
The following table provides disaggregated revenue by service offering:
Year ended December 31,
2020
2019
2018
Tuition payment plan services
Payment processing
Education technology and services
Other
$
100,674
114,304
65,885
1,333
Education technology, services, and payment processing revenue
$
282,196
106,682
110,848
58,578
1,223
277,331
85,381
84,289
51,155
1,137
221,962
Cost to provide education technology, services, and payment processing services is primarily associated with providing
payment processing services. Interchange and payment network fees are charged by the card associations or payment networks.
Depending upon the transaction type, the fees are a percentage of the transaction’s dollar value, a fixed amount, or a
combination of the two methods. Other items included in cost to provide education technology, services, and payment
processing services include salaries and benefits and third-party professional service costs directly related to providing
professional development and educational instruction services to teachers, school leaders, and students.
Communications Revenue
Communications revenue is derived principally from internet, television, and telephone services and is billed as a flat fee in
advance of providing the service. Revenues for usage-based services, such as access charges billed to other telephone carriers
for originating and terminating long-distance calls on the Company's network, are billed in arrears. These are each considered
distinct performance obligations. Revenue is recognized monthly for the consideration the Company has a right to invoice, the
amount of which corresponds directly with the value provided to the customer based on the performance completed. The
Company recognizes revenue from these services in the period the services are rendered rather than billed. Revenue received or
receivable in advance of the delivery of services is included in deferred revenue. Earned but unbilled usage-based services are
recorded in accounts receivable.
F - 52
NELNET, INC. AND SUBSIDIARIES
Notes to Consolidated Financial Statements
(Dollars in thousands, except share amounts, unless otherwise noted)
The following table provides disaggregated revenue by service offering and customer type. The amounts listed for 2020 reflect
activity prior to ALLO’s deconsolidation on December 21, 2020:
Internet
Television
Telephone
Other
Communications revenue
Residential revenue
Business revenue
Other
Communications revenue
Period from
January 1 2020 -
December 21, 2020
Year ended December 31,
2018
2019
$
$
$
$
48,362
17,091
11,037
153
76,643
58,029
18,038
576
76,643
38,239
16,196
9,705
129
64,269
48,344
15,689
236
64,269
24,069
12,949
7,546
89
44,653
33,434
10,976
243
44,653
Cost to provide communications services is primarily associated with television programming costs. The Company has various
contracts to obtain television programming from programming vendors whose compensation is typically based on a flat fee per
customer. The cost of the right to exhibit network programming under such arrangements is recorded in the month the
programming is available for exhibition. Programming costs are paid each month based on calculations performed by the
Company and are subject to periodic audits performed by the programmers. Other items in cost to provide communications
services include connectivity, franchise, and other regulatory costs directly related to providing internet and telephone services.
Other Income
The following table provides the components of "other income" on the consolidated statements of income:
Year ended December 31,
2020
2019
2018
Gain on remeasurement of HUDL investment
$
Investment advisory services
Management fee revenue
Borrower late fee income
Income/gains from investments, net
Loss from solar investments
Other
Other income
51,018
10,875
9,421
5,194
2,205
—
2,941
9,736
12,884
8,356
(37,423)
(2,220)
16,271
57,561
$
16,221
47,918
—
6,009
7,284
12,302
9,579
—
19,631
54,805
•
Investment advisory fees - Investment advisory services are provided by WRCM, the Company's SEC-registered
investment advisor subsidiary, under various arrangements. The Company earns monthly fees based on the monthly
outstanding balance of investments and certain performance measures, which are recognized monthly as the
uncertainty of the transaction price is resolved.
• Management fee revenue - Management fee revenue is earned for providing administrative support and marketing
services provided primarily to Great Lakes' former parent company. Revenue is allocated to the distinct service period,
based on when each transaction is completed.
•
Borrower late fee income - Late fee income is earned by the education lending subsidiaries. Revenue is allocated to the
distinct service period, based on when each transaction is completed.
F - 53
NELNET, INC. AND SUBSIDIARIES
Notes to Consolidated Financial Statements
(Dollars in thousands, except share amounts, unless otherwise noted)
Deferred Revenue
Activity in the deferred revenue balance, which is included in "other liabilities" on the consolidated balance sheets, is shown
below:
Balance as of December 31, 2017
$
Deferral of revenue
Recognition of revenue
Balance as of December 31, 2018
Deferral of revenue
Recognition of revenue
Balance as of December 31, 2019
Deferral of revenue
Recognition of revenue
Deconsolidation of ALLO
Business acquisition
Loan
Servicing
and Systems
Education,
Technology,
Services, and
Payment
Processing
Communications
Corporate
and Other
Activities
4,968
5,117
24,164
77,297
1,665
25,325
1,479
5,553
Total
32,276
113,292
(5,672)
(70,905)
(24,439)
(5,430)
(106,446)
4,413
3,585
30,556
93,373
2,551
36,024
1,602
3,505
39,122
136,487
(5,286)
(91,855)
(35,343)
(3,479)
(135,963)
2,712
2,490
32,074
90,183
3,232
43,596
1,628
3,209
39,646
139,478
(3,824)
(90,409)
(42,903)
(3,286)
(140,422)
—
—
—
1,419
33,267
(3,925)
—
—
—
—
1,551
(3,925)
1,419
36,196
Balance as of December 31, 2020
$
1,378
17. Major Customer
Nelnet Servicing earns loan servicing revenue from a servicing contract with the Department. Revenue earned by Nelnet
Servicing related to this contract was $146.8 million, $158.0 million, and $157.1 million for the years ended December 31,
2020, 2019, and 2018, respectively.
In addition, Great Lakes, which was acquired by the Company on February 7, 2018, also earns loan servicing revenue from a
similar servicing contract with the Department. Revenue earned by Great Lakes related to this contract was $179.9 million and
$185.7 million for the years ended December 31, 2020 and 2019, respectively. Revenue of $168.3 million was earned for the
period from February 7, 2018 to December 31, 2018.
The current servicing contracts with the Department are currently scheduled to expire on June 14, 2021, but provide the
potential for an additional six-month extension at the Department’s discretion through December 14, 2021. The Consolidated
Appropriations Act, 2021, signed into law on December 27, 2020, provides that the Department may extend the period of
performance for the servicing contracts scheduled to expire on December 14, 2021 for up to two additional years to December
14, 2023.
The Department is conducting a contract procurement process entitled Next Generation Financial Services Environment
(“NextGen”) for a new framework for the servicing of all student loans owned by the Department. On January 15, 2019, the
Department issued solicitations for certain NextGen components, including the NextGen Enhanced Processing Solution
(“EPS”), which is for a technology servicing system and certain processing functions the Department planned to use under
NextGen to service the Department's student loan customers, and the NextGen Business Processing Operations (“BPO”), which
is for the back office and call center operational functions for servicing the Department's student loan customers.
On June 24, 2020, the Department awarded and signed contracts with five other companies in connection with the BPO
solicitation. On July 10, 2020, the Department cancelled the solicitation for the EPS component. In the Department's description
of its cancellation of the EPS solicitation component, the Department indicated that it continues to be committed to the goals
and vision of NextGen, and that it would be introducing a new solicitation to continue the NextGen strategy in the future. On
October 28, 2020, the Department issued a new federal loan servicing solicitation for an Interim Servicing Solution ("ISS"). ISS
was a follow-on to the existing contracts, which would award a full system and servicing solution to two providers. Under ISS,
the selected providers would have provided the technology platform to host the Department's student loan portfolio; customer
service (including contact centers) and back-office processing; digital engagement layer including borrower-facing website and
mobile-applications; intake, imaging, and fulfillment; and portfolio-level operations. As the companies awarded BPO contracts
are onboarded, contact center and back-office operations would have shifted from the ISS contract to the BPO providers. The
F - 54
NELNET, INC. AND SUBSIDIARIES
Notes to Consolidated Financial Statements
(Dollars in thousands, except share amounts, unless otherwise noted)
Consolidated Appropriations Act, 2021 contains provisions directing certain aspects of the NextGen process, including that any
new federal student loan servicing environment shall provide for the participation of multiple student loan servicers and the
allocation of borrower accounts to eligible student loan servicers based on performance, and directed the suspension of
awarding any ISS contract for at least 90 days. On January 9, 2021, the Department suspended the ISS solicitation. In the
Department’s description of the suspension, it indicated that in consideration of the Consolidated Appropriations Act, 2021, the
Government is reassessing its needs and will amend or cancel the subject solicitation in the future.
18. Leases
The following table provides supplemental balance sheet information related to leases:
Operating lease ROU assets, which is included in "other assets" on the
consolidated balance sheet
Operating lease liabilities, which is included in "other liabilities" on the
consolidated balance sheet
The following table provides components of lease expense:
Rental expense, which is included in "other expenses" on the
consolidated statements of income (a)
Rental expense, which is included in "cost to provide communications
services" on the consolidated statements of income (a)
Total operating rental expense
As of December 31,
2020
2019
18,301
18,733
Year ended December 31,
2020
2019
11,885
1,997
13,882
32,770
33,689
11,171
1,609
12,780
$
$
$
$
(a)
Includes short-term and variable lease costs, which are immaterial.
Weighted average remaining lease term and discount rate are shown below:
Weighted average remaining lease term (years)
Weighted average discount rate
Maturity of lease liabilities are shown below:
2021
2022
2023
2024
2025
2026 and thereafter
Total lease payments
Imputed interest
Total
As of December 31,
2020
2019
5.65
2.43 %
7.29
3.93 %
$
$
6,578
3,857
2,938
1,562
1,424
4,437
20,796
(2,063)
18,733
F - 55
NELNET, INC. AND SUBSIDIARIES
Notes to Consolidated Financial Statements
(Dollars in thousands, except share amounts, unless otherwise noted)
The Company adopted the new lease standard using the effective date as its date of initial application (January 1, 2019) as noted
above, and as required, the following disclosure is provided for periods prior to adoption. Future minimum lease payments as of
December 31, 2018 are shown below:
2019
2020
2021
2022
2023
2024 and thereafter
$
9,181
8,261
5,776
3,745
2,904
5,479
Total minimum lease payments
$
35,346
Total rental expense incurred by the Company prior to the adoption of the new lease standard was $8.4 million during 2018.
19. Defined Contribution Benefit Plan
The Company has a 401(k) savings plan that covers substantially all of its employees. Employees may contribute up to 100
percent of their pre-tax salary, subject to IRS limitations. The Company matches up to 100 percent on the first 3 percent of
contributions and 50 percent on the next 2 percent. The Company made contributions to the plan of $11.6 million, $10.8
million, and $9.8 million during the years ended December 31, 2020, 2019, and 2018, respectively.
20. Stock Based Compensation Plans
Restricted Stock Plan
The following table summarizes restricted stock activity:
Non-vested shares at beginning of year
Granted
Vested
Canceled
Non-vested shares at end of year
Year ended December 31,
2020
2019
2018
549,845
151,639
(114,282)
(34,746)
552,456
532,336
186,281
(109,651)
(59,121)
549,845
398,210
279,441
(100,035)
(45,280)
532,336
As of December 31, 2020, there was $16.2 million of unrecognized compensation cost included in equity on the consolidated
balance sheet related to restricted stock, which is expected to be recognized as compensation expense in future periods as
shown in the table below.
2021
2022
2023
2024
2025
2026 and thereafter
$
5,912
3,787
2,488
1,604
1,009
1,374
$
16,174
For the years ended December 31, 2020, 2019, and 2018, the Company recognized compensation expense of $7.3 million, $6.4
million, and $6.2 million, respectively, related to shares issued under the restricted stock plan, which is included in "salaries and
benefits" on the consolidated statements of income.
F - 56
NELNET, INC. AND SUBSIDIARIES
Notes to Consolidated Financial Statements
(Dollars in thousands, except share amounts, unless otherwise noted)
Employee Share Purchase Plan
The Company has an employee share purchase plan pursuant to which employees are entitled to purchase Class A common
stock from payroll deductions at a 15 percent discount from market value. During the years ended December 31, 2020, 2019,
and 2018, the Company recognized compensation expense of $0.4 million, $0.3 million, and $0.3 million, respectively, in
connection with issuing 36,687 shares, 33,250 shares, and 28,744 shares, respectively, under this plan, which is included in
"salaries and benefits" on the consolidated statements of income.
Non-employee Directors Compensation Plan
The Company has a compensation plan for non-employee directors pursuant to which non-employee directors can elect to
receive their annual retainer fees in the form of cash or Class A common stock. If a non-employee director elects to receive
Class A common stock, the number of shares of Class A common stock that are awarded is equal to the amount of the annual
retainer fee otherwise payable in cash divided by 85 percent of the fair market value of a share of Class A common stock on the
date the fee is payable. Non-employee directors who choose to receive Class A common stock may also elect to defer receipt of
the Class A common stock until termination of their service on the board of directors.
For the years ended December 31, 2020, 2019, and 2018, the Company recognized $1.2 million, $1.2 million, and $1.0 million,
respectively, of expense related to this plan, which is included in "other expenses" on the consolidated statements of income.
The following table provides the number of shares awarded under this plan for the years ended December 31, 2020, 2019, and
2018.
Year ended December 31, 2020
Year ended December 31, 2019
Year ended December 31, 2018
Shares issued -
not deferred
Shares issued-
deferred
Total
12,740
9,588
8,029
16,513
11,212
10,680
29,253
20,800
18,709
As of December 31, 2020, a cumulative amount of 209,924 shares have been deferred by directors and will be issued upon the
termination of their service on the board of directors. These shares are included in the Company's weighted average shares
outstanding calculation.
21. Related Parties (dollar amounts in this note are not in thousands)
Transactions with Union Bank and Trust Company
Union Bank and Trust Company ("Union Bank") is controlled by Farmers & Merchants Investment Inc. (“F&M”), which owns
a majority of Union Bank's common stock and a minority share of Union Bank's non-voting non-convertible preferred stock.
Michael S. Dunlap, Executive Chairman and a member of the board of directors and a significant shareholder of the Company,
along with his spouse and children, owns or controls a significant portion of the stock of F&M, and Mr. Dunlap's sister, Angela
L. Muhleisen, along with her spouse and children, also owns or controls a significant portion of F&M stock. Mr. Dunlap serves
as a Director and Chairman of F&M, and as a Director of Union Bank. Ms. Muhleisen serves as a Director and Chief Executive
Officer of F&M and as a Director, Chairperson, President, and Chief Executive Officer of Union Bank. Union Bank is deemed
to have beneficial ownership of a significant number of shares of the Company because it serves in a capacity of trustee or
account manager for various trusts and accounts holding shares of the Company, and may share voting and/or investment power
with respect to such shares. Mr. Dunlap and Ms. Muhleisen beneficially own a significant percent of the voting rights of the
Company's outstanding common stock.
The Company has entered into certain contractual arrangements with Union Bank. These transactions are summarized below.
Loan Purchases
The Company purchased $144.9 million (par value) and $67.7 million (par value) of private education loans from Union Bank
in 2020 and 2019, respectively. There were no private education loan purchases in 2018. In addition, the Company purchased
$32.6 million (par value) and $74.7 million (par value) of consumer loans from Union Bank in 2019 and 2018, respectively.
There were no consumer loan purchases in 2020. The net premiums paid by the Company on the loan acquisitions was $2.6
million and $1.2 million in 2020 and 2019, respectively. The premiums paid by the Company in 2018 were not significant.
F - 57
NELNET, INC. AND SUBSIDIARIES
Notes to Consolidated Financial Statements
(Dollars in thousands, except share amounts, unless otherwise noted)
The Company has an agreement with Union Bank in which the Company provides marketing, origination, and loan servicing
services to Union Bank related to private education loans. Union Bank paid $2.0 million and $1.8 million in marketing fees to
the Company in 2020 and 2019, respectively, under this agreement. Marketing fees paid in 2018 were not significant.
Loan Servicing
The Company serviced $331.3 million, $395.5 million, and $405.5 million of FFELP and private education loans for Union
Bank as of December 31, 2020, 2019, and 2018, respectively. Servicing and origination fee revenue earned by the Company
from servicing loans for Union Bank was $0.7 million, $0.6 million, and $0.5 million for the years ended December 31, 2020,
2019, and 2018, respectively.
Funding - Participation Agreements
The Company maintains 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 loans (the “FFELP Participation Agreement”). The
Company uses this facility as a source to fund FFELP student loans. As of December 31, 2020 and 2019, $874.2 million and
$749.6 million, respectively, 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 on a short-term basis. The Company can participate loans to Union Bank to the extent
of availability under the grantor trusts, up to $900 million or an amount in excess of $900 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.
The Company maintains 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 of December 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. The agreement automatically renews annually and is terminable by either party upon five
business days' notice. The Company can participate student loan asset-backed securities to Union Bank to the extent of
availability under the grantor trusts, up to $100.0 million or an amount in excess of $100.0 million if mutually agreed to by both
parties. Student loan asset-backed securities under this agreement have been accounted for by the Company as a secured
borrowing.
Funding - Real Estate
401 Building, LLC (“401 Building”) is an entity that was established in 2015 for the sole purpose of acquiring, developing, and
owning a commercial real estate property in Lincoln, Nebraska. The Company owns 50% of 401 Building. On May 1, 2018,
Union Bank, as lender, received a $1.5 million promissory note from 401 Building. The promissory note carries an interest rate
of 6.00% and has a maturity date of December 1, 2032.
330-333, LLC (“330-333”) is an entity that was established in 2016 for the sole purpose of acquiring, developing, and owning a
commercial real estate property in Lincoln, Nebraska. The Company owns 50% of 330-333. On October 22, 2019, Union
Bank, as lender, received a $162,000 promissory note from 330-333. The promissory note carries an interest rate of 6.00% and
has a maturity date of December 1, 2032.
12100.5 West Center, LLC ("West Center") is an entity that was established in 2016 for the sole purpose of acquiring,
developing, and owning a commercial real estate property in Omaha, Nebraska. The Company owns 33.33% of West Center.
On October 29, 2019, Union Bank, as lender, received a $2.9 million promissory note from West Center. The promissory note
carries an interest rate of 3.85% and has a maturity date of October 30, 2024.
Operating Cash Accounts
The majority of the Company's cash operating accounts are maintained at Union Bank. The Company also invests amounts in
the Short term Federal Investment Trust (“STFIT”) of the Student Loan Trust Division of Union Bank, which are included in
“cash and cash equivalents - held at a related party” and “restricted cash - due to customers” on the accompanying consolidated
balance sheets. As of December 31, 2020 and 2019, the Company had $285.6 million and $390.5 million, respectively, invested
in the STFIT or deposited at Union Bank in operating accounts, of which $197.6 million and $270.5 million as of December 31,
2020 and 2019, respectively, represented cash collected for customers. Interest income earned by the Company on the amounts
F - 58
NELNET, INC. AND SUBSIDIARIES
Notes to Consolidated Financial Statements
(Dollars in thousands, except share amounts, unless otherwise noted)
invested in the STFIT and in cash operating accounts for the years ended December 31, 2020, 2019, and 2018, was $0.5
million, $1.6 million, and $1.0 million, respectively.
529 Plan
The Company provides certain 529 Plan administration services to certain college savings plans (the “College Savings Plans”)
through a contract with Union Bank, as the program manager. Union Bank is entitled to a fee as program manager pursuant to
its program management agreement with the College Savings Plans. For the years ended December 31, 2020, 2019, and 2018,
the Company has received fees of $1.3 million, $3.7 million, and $3.2 million, respectively, from Union Bank related to the
administration services provided to the College Savings Plans.
During 2020, certain call center services were provided by the Company to Union Bank for College Savings Plan clients. Fees
received from Union Bank for such services were not significant.
Additionally, Union Bank, as the program manager for the College Savings Plans, has agreed to allocate plan bank deposits to
Nelnet Bank. As of December 31, 2020, Nelnet Bank had received $48.4 million in deposits from the funds offered under the
College Savings Plans.
Lease Arrangements
Union Bank leases approximately 4,000 square feet in the Company's corporate headquarters building. Union Bank paid the
Company approximately $80,000, $79,000, and $76,000 for commercial rent and storage income during 2020, 2019, and 2018,
respectively. The lease agreement expires on June 30, 2023.
Other Fees Paid to Union Bank
During the years ended December 31, 2020, 2019, and 2018, the Company paid Union Bank approximately $279,000,
$213,000, and $128,000, respectively, in cash management, trustee, and health savings account maintenance fees.
Other Fees Received from Union Bank
During the years ended December 31, 2020, 2019, and 2018, Union Bank paid the Company approximately $317,000,
$317,000, and $231,000, respectively, under certain employee sharing arrangements. During the years ended December 31,
2020, 2019, and 2018, Union Bank paid the Company approximately $273,000, $92,000, and $34,000, respectively, for
communications services. In addition, during the years ended December 31, 2019 and 2018, Union Bank paid the Company
approximately $1,000 and $4,000 in payment processing fees (net of merchant fees of approximately $4,000 and $13,000),
respectively. No such fees were received from Union Bank during 2020.
401(k) Plan Administration
Union Bank administers the Company's 401(k) defined contribution plan. Fees paid to Union Bank to administer the plan are
paid by the plan participants and were approximately $447,000, $366,000, and $313,000 during the years ended December 31,
2020, 2019, and 2018, respectively.
Investment Services
Union Bank has established various trusts whereby Union Bank serves as trustee for the purpose of purchasing, holding,
managing, and selling investments in student loan asset-backed securities. WRCM, an SEC-registered investment advisor and a
subsidiary of the Company, has a management agreement with Union Bank under which WRCM performs various advisory and
management services on behalf of Union Bank with respect to investments in securities by the trusts, including identifying
securities for purchase or sale by the trusts. The agreement provides that Union Bank will pay to WRCM annual fees of 25
basis points on the outstanding balance of the investments in the trusts. As of December 31, 2020, the outstanding balance of
investments in the trusts was $1.2 billion. In addition, Union Bank will pay additional fees to WRCM of up to 50 percent of the
gains from the sale of securities from the trusts or securities being called prior to the full contractual maturity. For the years
ended December 31, 2020, 2019, and 2018, the Company earned $9.8 million, $1.8 million, and $4.5 million, respectively, of
fees under this agreement.
WRCM also has management agreements with Union Bank under which it is designated to serve as investment advisor with
respect to the assets (principally Nelnet stock) within several trusts established by Mr. Dunlap and his spouse, and Ms.
Muhleisen and her spouse. Union Bank serves as trustee for the trusts. Per the terms of the agreements, Union Bank pays
F - 59
NELNET, INC. AND SUBSIDIARIES
Notes to Consolidated Financial Statements
(Dollars in thousands, except share amounts, unless otherwise noted)
WRCM five basis points of the aggregate value of the assets of the trusts as of the last day of each calendar quarter. As of
December 31, 2020, WRCM was the investment advisor with respect to a total 480,000 shares and 4.8 million shares of the
Company's Class A and Class B common stock, respectively, held directly by these trusts. For the years ended December 31,
2020, 2019, and 2018, the Company earned approximately $141,000, $144,000, and $141,000, respectively, of fees under these
agreements.
WRCM has established private investment funds for the primary purpose of purchasing, selling, investing, and trading, directly
or indirectly, in student loan asset-backed securities, and to engage in financial transactions related thereto. Mr. Dunlap, Jeffrey
R. Noordhoek (an executive officer of the Company), Ms. Muhleisen and her spouse, and WRCM have invested in certain of
these funds. Based upon the current level of holdings by non-affiliated limited partners, the management agreements provide
non-affiliated limited partners the ability to remove WRCM as manager without cause. WRCM earns 50 basis points (annually)
on the outstanding balance of the investments in these funds, of which WRCM pays approximately 50 percent of such amount
to Union Bank as custodian. As of December 31, 2020, the outstanding balance of investments in these funds was $134.3
million. The Company paid Union Bank $0.3 million in each of 2020, 2019, and 2018, as custodian of the funds.
Nelnet Bank
Upon its establishment on November 2, 2020, Nelnet Bank entered into agreements with Union Bank in which Union Bank
provides investment custodial services and correspondent bank services. Fees paid during 2020 by Nelnet Bank to Union Bank
under these agreements were not significant.
Transactions with F&M
The Company, F&M, and the holding company of BankFirst of Norfolk, Nebraska ("BankFirst"), of which Mr. Dunlap is a
member of the Board of Directors, have co-invested a total of $10.3 million, $4.6 million, and $1.7 million, respectively, in a
Company-managed limited liability company that invests in renewable energy (solar). As part of these transactions, the
Company receives management and performance fees under a management agreement. For the years ended December 31, 2020
and 2019, the Company earned approximately $46,000 and $69,000 and approximately $15,000 and $69,000 of management
fees from F&M and BankFirst, respectively, under this agreement.
Transactions with Union Financial Services (“UFS”)
UFS is owned 50 percent by Mr. Dunlap. Historically, the Company owned a 65 percent interest in an aircraft due to the
frequent business travel needs of the Company's executives and the limited availability of commercial flights in Lincoln,
Nebraska, where the Company's headquarters are located. UFS owned the remaining interest in the same aircraft. On December
31, 2018, the Company purchased an additional 17.5 percent interest in the aircraft from UFS for $717,500, which reflected
what available information indicated was the aircraft's fair market value at the time of sale. As a result of this transaction, the
Company's ownership in the aircraft increased to 82.5 percent. On December 31, 2018, UFS also contributed a 17.5 percent
interest in the aircraft to an entity owned by Mr. Dunlap.
Transactions with Agile Sports Technologies, Inc. (doing business as "Hudl")
David Graff, who has served on the Company's Board of Directors since 2014, is CEO, co-founder, and a director of Hudl. On
May 20, 2020, the Company made an additional equity investment in Hudl, as one of the participants in an equity raise
completed by Hudl. See Note 7, “Investments” for additional information on this equity raise. The Company and Mr. Dunlap,
along with his children, currently hold combined direct and indirect equity ownership interests in Hudl of 19.6% and 3.7%,
respectively, which did not materially change as a result of the May 2020 transaction. The Company's and Mr. Dunlap's direct
and indirect equity ownership interests in Hudl consist of preferred stock with certain liquidation preferences that are
considered substantive. Accordingly, for accounting purposes, the Company's and Mr. Dunlap's equity ownership interests are
not considered in-substance common stock and the Company is accounting for its equity investment in Hudl using the
measurement alternative method.
On July 26, 2019, the Company, as lender, received a $16.0 million promissory note from Hudl. The promissory note carried a
14 percent interest rate and was due 180 days from the date of issuance. In connection with this promissory note, the Company
entered into a Subordination Agreement with Union Bank, effective as of July 26, 2019, which required the Company to
subordinate its promissory note from Hudl to existing notes Union Bank holds from Hudl. The $16.0 million promissory note
from Hudl was paid in full to the Company in August 2019.
F - 60
NELNET, INC. AND SUBSIDIARIES
Notes to Consolidated Financial Statements
(Dollars in thousands, except share amounts, unless otherwise noted)
The Company makes investments to further diversify the Company both within and outside of its historical core education-
related businesses, including investments in real estate. Recent real estate investments have been focused on the development of
commercial properties in the Midwest, and particularly in Lincoln, Nebraska, where the Company's headquarters are located.
One investment includes the development of a building in Lincoln's Haymarket District that is the headquarters of Hudl, in
which Hudl is the primary tenant in this building.
Transaction with Assurity Life Insurance Company ("Assurity")
Thomas Henning, who has served on the Company's Board of Directors since 2003, is the President and Chief Executive
Officer of Assurity. During the years ended December 31, 2020, 2019, and 2018, Nelnet Business Services, a subsidiary of the
Company, paid $1.8 million, $1.7 million, and $1.7 million, respectively, to Assurity for insurance premiums for insurance on
certain tuition payment plans. As part of providing the tuition payment plan insurance to Nelnet Business Services, Assurity
entered into a reinsurance agreement with the Company's insurance subsidiary, under which Assurity paid the Company's
insurance subsidiary reinsurance premiums of $1.4 million, $1.3 million, and $1.3 million in 2020, 2019, and 2018,
respectively, and the Company's insurance subsidiary paid claims on such reinsurance to Assurity of $1.0 million, $0.9 million,
and $0.9 million in 2020, 2019, and 2018, respectively. In addition, Assurity pays Nelnet Business Services a partial refund
annually based on claim experience, which was approximately $64,000, $56,000, and $84,000 for the years ended December
31, 2020, 2019, and 2018, respectively.
During 2020, Assurity invested approximately $1.2 million in a Company-managed limited liability company that invests in
renewable energy (solar). As part of this transaction, the Company receives management and performance fees under a
management agreement. During the year ended December 31, 2020, the Company earned approximately $12,000 in
management fees from Assurity under this agreement.
22. Fair Value
The following tables present the Company’s financial assets and liabilities that are measured at fair value on a recurring basis.
There were no transfers into or out of level 1, level 2, or level 3 for the year ended December 31, 2020.
Assets:
Investments (a):
Student loan asset-backed and other
debt securities - available-for-sale
Equity securities
Equity securities measured at net asset
value (b)
As of December 31, 2020
As of December 31, 2019
Level 1
Level 2
Total
Level 1
Level 2
Total
$
—
348,504
348,504
10,114
—
10,114
—
6
52,597
52,597
—
6
Debt securities - available-for-sale
103
—
Total investments
Total assets
10,217
348,504
390,648
$ 10,217
348,504
390,648
31,927
103
104
110
110
—
52,597
52,597
12,894
104
65,601
65,601
(a)
Investments represent investments recorded at fair value on a recurring basis. Level 1 investments are measured based
upon quoted prices and include investments traded on an active exchange, such as the New York Stock Exchange, and
corporate bonds, mortgage-backed securities, U.S. government bonds, and U.S. Treasury securities that trade in active
markets. Level 2 investments include student loan asset-backed securities and municipal bonds. The fair value for the
student loan asset-backed securities is determined using indicative quotes from broker-dealers or an income approach
valuation technique (present value using the discount rate adjustment technique) that considers, among other things, rates
currently observed in publicly traded debt markets for debt of similar terms issued by companies with comparable credit
risk.
(b)
In accordance with the Fair Value Measurements Topic of the FASB Accounting Standards Codification, certain
investments that are measured at fair value using the net asset value per share (or its equivalent) practical expedient have
not been classified in the fair value hierarchy.
F - 61
NELNET, INC. AND SUBSIDIARIES
Notes to Consolidated Financial Statements
(Dollars in thousands, except share amounts, unless otherwise noted)
The following table summarizes the fair values of all of the Company’s financial instruments on the consolidated balance
sheets:
Financial assets:
Loans receivable
Accrued loan interest receivable
Cash and cash equivalents
Investments (at fair value)
Beneficial interest in loan securitizations
Restricted cash
Restricted cash – due to customers
Financial liabilities:
Bonds and notes payable
Accrued interest payable
Bank deposits
Due to customers
Financial assets:
Loans receivable
Accrued loan interest receivable
Cash and cash equivalents
Investments (at fair value)
Beneficial interest in loan securitizations
Restricted cash
Restricted cash – due to customers
Financial liabilities:
Bonds and notes payable
Accrued interest payable
Due to customers
Fair value
Carrying value
Level 1
Level 2
Level 3
As of December 31, 2020
$
20,454,132
19,391,045
794,611
121,249
390,648
58,709
553,175
283,971
794,611
121,249
390,648
58,331
553,175
283,971
19,270,810
19,320,726
28,701
54,599
301,471
28,701
54,633
301,471
—
—
121,249
10,217
—
553,175
283,971
—
—
48,422
301,471
—
20,454,132
794,611
—
348,504
—
—
—
19,270,810
28,701
6,177
—
—
—
—
58,709
—
—
—
—
—
—
Fair value
Carrying value
Level 1
Level 2
Level 3
As of December 31, 2019
$
21,477,630
20,669,371
733,497
133,906
65,601
33,258
650,939
437,756
733,497
133,906
65,601
33,187
650,939
437,756
20,479,095
20,529,054
47,285
437,756
47,285
437,756
—
—
133,906
110
—
650,939
437,756
—
—
437,756
—
21,477,630
733,497
—
52,597
—
—
—
20,479,095
47,285
—
—
—
—
33,258
—
—
—
—
—
The methodologies for estimating the fair value of financial assets and liabilities that are measured at fair value on a recurring
basis are previously discussed. The remaining financial assets and liabilities were estimated using the following methods and
assumptions:
Loans Receivable
Fair values for loans receivable were determined by modeling loan cash flows using stated terms of the assets and internally-
developed assumptions. The significant assumptions used to project cash flows are prepayment speeds, default rates, cost of
funds, required return on equity, and future interest rate and index relationships. A number of significant inputs into the models
are internally derived and not observable to market participants.
Beneficial Interest in Loan Securitizations
Fair values for beneficial interest in loan securitizations were determined by modeling securitization cash flows and internally-
developed assumptions. The significant assumptions used to project cash flows are prepayment speeds, default rates, cost of
funds, required return on equity, and future interest rate and index relationships. A number of significant inputs into the models
are internally derived and not observable to market participants.
F - 62
NELNET, INC. AND SUBSIDIARIES
Notes to Consolidated Financial Statements
(Dollars in thousands, except share amounts, unless otherwise noted)
Cash and Cash Equivalents, Restricted Cash, Restricted Cash – Due to Customers, Accrued Loan Interest Receivable,
Accrued Interest Payable, and Due to Customers
The carrying amount approximates fair value due to the variable rate of interest and/or the short maturities of these instruments.
Bonds and Notes Payable
The fair value of bonds and notes payable was determined from quotes from broker-dealers or through standard bond pricing
models using the stated terms of the borrowings, observable yield curves, market credit spreads, and weighted average life of
underlying collateral. Fair value adjustments for unsecured corporate debt are made based on indicative quotes from observable
trades.
Bank Deposits
Some of the Company’s deposits are fixed-rate and the fair value for these deposits are estimated using discounted cash flows
based on rates currently offered for deposits of similar maturities. These are level 2 valuations. The fair value of the remaining
deposits equal the amounts payable on demand at the balance sheet date and are reported at their carrying value. These are level
1 valuations.
Limitations
The fair value estimates are made at a specific point in time based on relevant market information and information about the
financial instruments. Because no market exists for a significant portion of the Company's financial instruments, fair value
estimates are based on judgments regarding future expected loss experience, current economic conditions, risk characteristics of
various financial instruments, and other factors. These estimates are subjective in nature and involve uncertainties and matters
of significant judgment and therefore cannot be determined with precision. Therefore, the calculated fair value estimates in
many instances cannot be substantiated by comparison to independent markets and, in many cases, may not be realizable in a
current sale of the instrument. Changes in assumptions could significantly affect the estimates.
23. Legal Proceedings
The Company is subject to various claims, lawsuits, and proceedings that arise in the normal course of business. These matters
frequently involve claims by student loan borrowers disputing the manner in which their student loans have been serviced or the
accuracy of reports to credit bureaus, claims by student loan borrowers or other consumers alleging that state or Federal
consumer protection laws have been violated in the process of collecting loans or conducting other business activities, and
disputes with other business entities. In addition, from time to time, the Company receives information and document requests
from state or federal regulators concerning its business practices. The Company cooperates with these inquiries and responds to
the requests. While the Company cannot predict the ultimate outcome of any regulatory examination, inquiry, or investigation,
the Company believes its activities have materially complied with applicable law, including the Higher Education Act, the rules
and regulations adopted by the Department thereunder, and the Department's guidance regarding those rules and regulations.
On the basis of present information, anticipated insurance coverage, and advice received from counsel, it is the opinion of the
Company's management that the disposition or ultimate determination of these claims, lawsuits, and proceedings will not have a
material adverse effect on the Company's business, financial position, or results of operations.
F - 63
NELNET, INC. AND SUBSIDIARIES
Notes to Consolidated Financial Statements
(Dollars in thousands, except share amounts, unless otherwise noted)
24. Quarterly Financial Information (Unaudited)
2020
First
quarter
Second
quarter
Third
quarter
Fourth
quarter
Net interest income
(Provision) negative provision for loan losses
$
55,073
(76,299)
66,635
(2,999)
Net interest income (loss) after provision (negative provision) for loan
losses
Loan servicing and systems revenue
Education technology, services, and payment processing revenue
Communications revenue
Other
Gain on sale of loans
Gain from deconsolidation of ALLO
Impairment expense and provision for beneficial interests
Derivative market value adjustments and derivative settlements, net
Cost to provide education technology, services, and payment processing
services
Cost to provide communications services
(21,226)
112,735
83,675
18,181
8,281
18,206
—
(34,087)
(16,365)
(22,806)
(5,582)
Salaries and benefits
Depreciation and amortization
Other expenses
Income tax benefit (expense)
Net (loss) income
Net (income) loss attributable to noncontrolling interests
81,322
5,821
87,143
113,794
74,121
20,211
1,502
14,817
—
—
86,556
10,116
96,672
113,990
65,097
19,253
(12,350)
—
258,588
9,696
1,049
(11,059)
63,636
111,042
59,304
18,998
60,127
—
—
(332)
1,910
(15,376)
(5,743)
(25,243)
(5,914)
(18,782)
(5,573)
(119,878)
(119,247)
(126,096)
(136,612)
(27,648)
(43,384)
10,133
(39,765)
(767)
(29,393)
(37,052)
(21,264)
86,610
(128)
86,482
(30,308)
(34,744)
(19,156)
71,176
327
71,503
(31,350)
(45,391)
(70,573)
231,606
3,385
234,991
Net (loss) income attributable to Nelnet, Inc.
$
(40,532)
Earnings per common share:
Net (loss) income attributable to Nelnet, Inc. shareholders - basic and
diluted
$
(1.01)
2.21
1.86
6.10
F - 64
NELNET, INC. AND SUBSIDIARIES
Notes to Consolidated Financial Statements
(Dollars in thousands, except share amounts, unless otherwise noted)
2019
First
quarter
Second
quarter
Third
quarter
Fourth
quarter
Net interest income
Provision for loan losses
Net interest income after provision for loan losses
Loan servicing and systems revenue
Education technology, services, and payment processing revenue
Communications revenue
Other
Gain on sale of loans
$
58,816
(7,000)
51,816
59,825
(9,000)
50,825
114,898
113,985
79,159
14,543
9,067
—
60,342
15,758
14,440
1,712
Derivative market value adjustments and derivative settlements, net
(11,539)
(24,088)
66,457
(10,000)
56,457
113,286
74,251
16,470
13,439
—
1,668
64,252
(13,000)
51,252
113,086
63,578
17,499
10,973
15,549
3,170
Cost to provide education technology, services, and payment processing
services
Cost to provide communications services
Salaries and benefits
Depreciation and amortization
Other expenses
Income tax expense
Net income
Net loss (income) attributable to noncontrolling interests
(21,059)
(4,759)
(15,871)
(5,101)
(25,671)
(5,236)
(19,002)
(5,327)
(111,059)
(111,214)
(116,670)
(124,561)
(24,213)
(43,816)
(11,391)
41,647
(56)
(24,484)
(45,417)
(6,209)
24,678
(59)
(27,701)
(58,329)
(8,829)
33,135
77
(28,651)
(46,710)
(9,022)
41,834
546
42,380
Net income attributable to Nelnet, Inc.
$
41,591
24,619
33,212
Earnings per common share:
Net income attributable to Nelnet, Inc. shareholders - basic and diluted
$
1.03
0.61
0.83
1.06
F - 65
NELNET, INC. AND SUBSIDIARIES
Notes to Consolidated Financial Statements
(Dollars in thousands, except share amounts, unless otherwise noted)
25. Condensed Parent Company Financial Statements
The following represents the condensed balance sheets as of December 31, 2020 and 2019 and condensed statements of income,
comprehensive income, and cash flows for each of the years in the three-year period ended December 31, 2020 for Nelnet, Inc.
The Company is limited in the amount of funds that can be transferred to it by its subsidiaries through intercompany loans,
advances, or cash dividends. These limitations relate to the restrictions by trust indentures under the lending subsidiaries debt
financing arrangements.
Balance Sheets
(Parent Company Only)
As of December 31, 2020 and 2019
2020
2019
Assets:
Cash and cash equivalents
Investments and notes receivable
Investment in subsidiary debt
Restricted cash
Investment in subsidiaries
Notes receivable from subsidiaries
Other assets
Total assets
Liabilities:
Notes payable
Other liabilities
Total liabilities
Equity:
Nelnet, Inc. shareholders' equity:
Common stock
Additional paid-in capital
Retained earnings
Accumulated other comprehensive earnings
Total Nelnet, Inc. shareholders' equity
Noncontrolling interest
Total equity
Total liabilities and shareholders' equity
$
$
$
$
69,687
707,332
38,903
93,271
1,963,413
21,209
115,631
3,009,446
236,317
140,710
377,027
384
3,794
2,621,762
6,102
2,632,042
377
2,632,419
3,009,446
73,144
137,229
13,818
9,567
2,181,122
42,552
100,059
2,557,491
67,655
97,952
165,607
398
5,715
2,377,627
2,972
2,386,712
5,172
2,391,884
2,557,491
F - 66
NELNET, INC. AND SUBSIDIARIES
Notes to Consolidated Financial Statements
(Dollars in thousands, except share amounts, unless otherwise noted)
Statements of Income
(Parent Company Only)
Years ended December 31, 2020, 2019, and 2018
2020
2019
2018
Investment interest income
Interest expense on bonds and notes payable
Net interest income (expense)
Other income/expense:
Other income
Gain from debt repurchases
Equity in subsidiaries income
Gain from deconsolidation of ALLO
Derivative market value adjustments and derivative settlements, net
Total other income/expense
Operating expenses
Income before income taxes
Income tax (expense) benefit
Net income
Net loss attributable to noncontrolling interest
$
4,110
3,179
931
40,904
1,962
132,101
258,588
(24,465)
409,090
14,006
396,015
(43,577)
352,438
5
Net income attributable to Nelnet, Inc.
$
352,443
4,925
9,588
(4,663)
8,384
136
182,346
—
(30,789)
160,077
19,561
135,853
5,950
141,803
—
141,803
17,707
9,270
8,437
13,944
359
158,364
—
71,085
243,752
4,795
247,394
(19,481)
227,913
—
227,913
Statements of Comprehensive Income
(Parent Company Only)
Years ended December 31, 2020, 2019, and 2018
2020
2019
2018
$
352,438
141,803
227,913
6,637
(2,521)
(986)
3,130
355,568
5
(1,199)
1,056
—
288
(911)
140,892
—
140,892
(978)
(69)
9
227,922
—
227,922
Net income
Other comprehensive income (loss):
Available-for-sale securities:
Unrealized holding gains (losses) arising during period, net
Reclassification adjustment for gains recognized in net
income, net of losses
Income tax effect
Total other comprehensive income (loss)
Comprehensive income
Comprehensive loss attributable to noncontrolling interest
Comprehensive income attributable to Nelnet, Inc.
$
355,573
F - 67
NELNET, INC. AND SUBSIDIARIES
Notes to Consolidated Financial Statements
(Dollars in thousands, except share amounts, unless otherwise noted)
Statements of Cash Flows
(Parent Company Only)
Years ended December 31, 2020, 2019, and 2018
Net income attributable to Nelnet, Inc.
Net loss attributable to noncontrolling interest
Net income
Adjustments to reconcile net income to net cash (used in) provided by operating activities:
Depreciation and amortization
Derivative market value adjustments
(Payments to) proceeds from termination of derivative instruments, net
(Payments to) proceeds from clearinghouse - initial and variation margin, net
Equity in earnings of subsidiaries
Gain from deconsolidation of ALLO, including cash impact
Gain from debt repurchases
Gain from investments, net
Deferred income tax expense (benefit)
Non-cash compensation expense
Impairment expense
Other
(Increase) decrease in other assets
Increase (decrease) in other liabilities
Net cash (used in) provided by operating activities
Cash flows from investing activities:
Purchases of available-for-sale securities
Proceeds from sales of available-for-sale securities
Capital distributions/contributions from/to subsidiaries, net
Decrease (increase) in notes receivable from subsidiaries
(Purchases of) proceeds from subsidiary debt, net
Increase in guaranteed payment from subsidiary
Purchases of other investments
Proceeds from other investments
Net cash (used in) provided by investing activities
Cash flows from financing activities:
Payments on notes payable
Proceeds from issuance of notes payable
Payments of debt issuance costs
Dividends paid
Repurchases of common stock
Proceeds from issuance of common stock
Acquisition of noncontrolling interest
Issuance of noncontrolling interest
Net cash provided by (used in) financing activities
Net increase (decrease) in cash, cash equivalents, and restricted cash
Cash, cash equivalents, and restricted cash, beginning of period
Cash, cash equivalents, and restricted cash, end of period
Cash disbursements made for:
Interest
Income taxes, net of refunds and credits
Noncash investing and financing activities:
Recapitalization of accrued interest payable to accrued guaranteed payment
Recapitalization of note payable to guaranteed payment
Recapitalization of guaranteed payment to investment in subsidiary
Contribution to subsidiary, net
F - 68
2020
352,443
$
(5)
2019
141,803
—
2018
227,913
—
352,438
141,803
227,913
534
28,144
—
(26,747)
(132,101)
(287,579)
(1,962)
(46,019)
23,747
16,739
7,784
(329)
(17,410)
26,009
(56,752)
(342,563)
168,555
99,830
21,343
(25,085)
—
(54,637)
8,564
(123,993)
(20,381)
190,520
(49)
(31,778)
(73,358)
1,653
(600)
194,985
260,992
80,247
82,711
162,958
2,577
29,685
—
—
—
49,066
$
$
$
$
$
$
$
467
76,195
(12,530)
(70,685)
442
(1,014)
10,283
40,382
(182,346)
(158,364)
—
(136)
(3,969)
(19,183)
6,781
—
(481)
(10,672)
29,384
(45,372)
—
—
449,602
14,421
—
—
(47,106)
27,926
444,843
(361,272)
60,000
(1,129)
(29,485)
(40,411)
1,552
—
878
—
(359)
(11,177)
21,814
6,539
—
(4,770)
25,252
(9,621)
147,320
(46,382)
75,605
(334,280)
(31,325)
61,841
(70,270)
(28,610)
7,783
(365,638)
(8,651)
300,000
(827)
(26,839)
(45,331)
1,359
(13,449)
13
(369,867)
206,275
29,604
53,107
82,711
9,501
17,672
—
—
—
—
(12,043)
65,150
53,107
8,628
473
6,674
186,429
273,360
—
APPENDIX A
Description of
The Federal Family Education Loan Program
The Federal Family Education Loan Program
The Higher Education Act provided for a program of federal insurance for student loans as well as reinsurance of student loans
guaranteed or insured by state agencies or private non-profit corporations.
The Higher Education Act authorized certain student loans to be insured and reinsured under the Federal Family Education
Loan Program (“FFELP”). The Student Aid and Fiscal Responsibility Act, enacted into law on March 30, 2010, as part of the
Health Care and Education Reconciliation Act of 2010, terminated the authority to make FFELP loans. As of July 1, 2010, no
new FFELP loans have been made.
Generally, a student was eligible for loans made under the Federal Family Education Loan Program only if he or she:
•
Had been accepted for enrollment or was enrolled in good standing at an eligible institution of higher education;
• Was carrying or planning to carry at least one-half the normal full-time workload, as determined by the institution,
for the course of study the student was pursuing;
• Was not in default on any federal education loans;
•
Had not committed a crime involving fraud in obtaining funds under the Higher Education Act which funds had
not been fully repaid; and
• Met other applicable eligibility requirements.
Eligible institutions included higher educational institutions and vocational schools that complied with specific federal
regulations. Each loan is evidenced by an unsecured note.
The Higher Education Act also establishes maximum interest rates for each of the various types of loans. These rates vary not
only among loan types, but also within loan types depending upon when the loan was made or when the borrower first obtained
a loan under the Federal Family Education Loan Program. The Higher Education Act allows lesser rates of interest to be
charged.
Types of loans
Four types of loans were available under the Federal Family Education Loan Program:
•
•
•
•
Subsidized Stafford Loans
Unsubsidized Stafford Loans
PLUS Loans
Consolidation Loans
These loan types vary as to eligibility requirements, interest rates, repayment periods, loan limits, eligibility for interest
subsidies, and special allowance payments. Some of these loan types have had other names in the past. References to these
various loan types include, where appropriate, their predecessors.
The primary loan under the Federal Family Education Loan Program is the Subsidized Stafford Loan. Students who were not
eligible for Subsidized Stafford Loans based on their economic circumstances might have obtained Unsubsidized Stafford
Loans. Graduate or professional students and parents of dependent undergraduate students might have obtained PLUS Loans.
Consolidation Loans were available to borrowers with existing loans made under the Federal Family Education Loan Program
and other federal programs to consolidate repayment of the borrower's existing loans. Prior to July 1, 1994, the Federal Family
Education Loan Program also offered Supplemental Loans for Students (“SLS Loans”) to graduate and professional students
and independent undergraduate students and, under certain circumstances, dependent undergraduate students, to supplement
their Stafford Loans.
A - 1
Subsidized Stafford Loans
General. Subsidized Stafford Loans were eligible for insurance and reinsurance under the Higher Education Act if the eligible
student to whom the loan was made was accepted or was enrolled in good standing at an eligible institution of higher education
or vocational school and carried at least one-half the normal full-time workload at that institution. Subsidized Stafford Loans
had limits as to the maximum amount which could be borrowed for an academic year and in the aggregate for both
undergraduate and graduate or professional study. Both annual and aggregate limitations excluded loans made under the PLUS
Loan Program. The Secretary of Education had discretion to raise these limits to accommodate students undertaking
specialized training requiring exceptionally high costs of education.
Subsidized Stafford Loans were made only to student borrowers who met the needs tests provided in the Higher Education Act.
Provisions addressing the implementation of needs analysis and the relationship between unmet need for financing and the
availability of Subsidized Stafford Loan Program funding have been the subject of frequent and extensive amendments.
Interest rates for Subsidized Stafford Loans. For Stafford Loans first disbursed to a “new” borrower (a “new” borrower is
defined for purposes of this section as one who had no outstanding balance on a FFELP loan on the date the new promissory
note was signed) for a period of enrollment beginning before January 1, 1981, the applicable interest rate is fixed at 7%.
For Stafford Loans first disbursed to a “new” borrower, for a period of enrollment beginning on or after January 1, 1981, but
before September 13, 1983, the applicable interest rate is fixed at 9%.
For Stafford Loans first disbursed to a “new” borrower, for a period of enrollment beginning on or after September 13, 1983,
but before July 1, 1988, the applicable interest rate is fixed at 8%.
For Stafford Loans first disbursed to a borrower with an outstanding balance on a PLUS, SLS, or Consolidation Loan, but not
on a Stafford Loan, where the new loan is intended for a period of enrollment beginning before July 1, 1988, the applicable
interest rate is fixed at 8%.
For Stafford Loans first disbursed before October 1, 1992, to a “new” borrower or to a borrower with an outstanding balance on
a PLUS, SLS, or Consolidation Loan, but not a Stafford Loan, where the new loan is intended for a period of enrollment
beginning on or after July 1, 1988, the applicable interest rate is as follows:
•
Original fixed interest rate of 8% for the first 48 months of repayment. Beginning on the first day of the 49th
month of repayment, the interest rate increased to a fixed rate of 10% thereafter. Loans in this category were
subject to excess interest rebates and have been converted to a variable interest rate based on the bond equivalent
rate of the 91-day Treasury bill auctioned at the final auction before the preceding June 1, plus 3.25%. The
variable interest rate is adjusted annually on July 1. The maximum interest rate for loans in this category is 10%.
For Stafford Loans first disbursed on or after July 23, 1992, but before July 1, 1994, to a borrower with an outstanding Stafford
Loan made with a 7%, 8%, 9%, or 8%/10% fixed interest rate, the original, applicable interest rate is the same as the rate
provided on the borrower's previous Stafford Loan (i.e., a fixed rate of 7%, 8%, 9%, or 8%/10%). Loans in this category were
subject to excess interest rebates and have been converted to a variable interest rate based on the bond equivalent rate of the 91-
day Treasury bill auctioned at the final auction before the preceding June 1, plus 3.1%. The variable interest rate is adjusted
annually on July 1. The maximum interest rate for a loan in this category is equal to the loan's previous fixed rate (i.e., 7%, 8%,
9%, or 10%).
For Stafford Loans first disbursed on or after October 1, 1992, but before December 20, 1993, to a borrower with an
outstanding balance on a PLUS, SLS, or Consolidation Loan, but not on a Stafford Loan, the original, applicable interest rate is
fixed at 8%. Loans in this category were subject to excess interest rebates and have been converted to a variable interest rate
based on the bond equivalent rate of the 91-day Treasury bill auctioned at the final auction before the preceding June 1, plus
3.1%. The variable interest rate is adjusted annually on July 1. The maximum interest rate for a loan in this category is 8%.
For Stafford Loans first disbursed on or after October 1, 1992, but before July 1, 1994, to a “new” borrower, the applicable
interest rate is variable and is based on the bond equivalent rate of the 91-day Treasury bill auctioned at the final auction before
the preceding June 1, plus 3.1%. The variable interest rate is adjusted annually on July 1. The maximum interest rate for a loan
in this category is 9%.
For Stafford Loans first disbursed on or after December 20, 1993, but before July 1, 1994, to a borrower with an outstanding
balance on a PLUS, SLS, or Consolidation Loan, but not on a Stafford Loan, the applicable interest rate is variable and is based
on the bond equivalent rate of the 91-day Treasury bill auctioned at the final auction before the preceding June 1, plus 3.1%.
The variable interest rate is adjusted annually on July 1. The maximum interest rate for a loan in this category is 9%.
A - 2
For Stafford Loans first disbursed on or after July 1, 1994, but before July 1, 1995, where the loan is intended for a period of
enrollment that includes or begins on or after July 1, 1994, the applicable interest rate is variable and is based on the bond
equivalent rate of the 91-day Treasury bill auctioned at the final auction before the preceding June 1, plus 3.1%. The variable
interest rate is adjusted annually on July 1. The maximum interest rate for a loan in this category is 8.25%.
For Stafford Loans first disbursed on or after July 1, 1995, but before July 1, 1998, the applicable interest rate is as follows:
• When the borrower is in school, in grace, or in an authorized period of deferment, the applicable interest rate is
variable and is based on the bond equivalent rate of the 91-day Treasury bill auctioned at the final auction before
the preceding June 1, plus 2.5%. The variable interest rate is adjusted annually on July 1. The maximum interest
rate is 8.25%.
• When the borrower is in repayment or in a period of forbearance, the applicable interest rate is variable and is
based on the bond equivalent rate of the 91-day Treasury bill auctioned at the final auction before the preceding
June 1, plus 3.1%. The variable interest rate is adjusted annually on July 1. The maximum interest rate is 8.25%.
For Stafford Loans first disbursed on or after July 1, 1998, but before July 1, 2006, the applicable interest rate is as follows:
• When the borrower is in school, in grace, or in an authorized period of deferment, the applicable interest rate is
variable and is based on the bond equivalent rate of the 91-day Treasury bill auctioned at the final auction before
the preceding June 1, plus 1.7%. The variable interest rate is adjusted annually on July 1. The maximum interest
rate is 8.25%.
• When the borrower is in repayment or in a period of forbearance, the applicable interest rate is variable and is
based on the bond equivalent rate of the 91-day Treasury bill auctioned at the final auction before the preceding
June 1, plus 2.3%. The variable interest rate is adjusted annually on July 1. The maximum interest rate is 8.25%.
For Stafford Loans first disbursed on or after July 1, 2006, the applicable interest rate is fixed at 6.80%. However, for Stafford
Loans for undergraduates, the applicable interest rate was reduced in phases for which the first disbursement was made on or
after:
•
•
July 1, 2008 and before July 1, 2009, the applicable interest rate is fixed at 6.00%,
July 1, 2009 and before July 1, 2010, the applicable interest rate is fixed at 5.60%.
Unsubsidized Stafford Loans
General. The Unsubsidized Stafford Loan program was created by Congress in 1992 for students who did not qualify for
Subsidized Stafford Loans due to parental and/or student income and assets in excess of permitted amounts. These students
were entitled to borrow the difference between the Stafford Loan maximum for their status (dependent or independent) and
their Subsidized Stafford Loan eligibility through the Unsubsidized Stafford Loan Program. The general requirements for
Unsubsidized Stafford Loans, including special allowance payments, are essentially the same as those for Subsidized Stafford
Loans. However, the terms of the Unsubsidized Stafford Loans differ materially from Subsidized Stafford Loans in that the
federal government will not make interest subsidy payments and the loan limitations were determined without respect to the
expected family contribution. The borrower is required to either pay interest from the time the loan is disbursed or the accruing
interest is capitalized when repayment begins at the end of a deferment or forbearance, when the borrower is determined to no
longer have a partial financial hardship under the Income-Based Repayment plan or when the borrower leaves the plan.
Unsubsidized Stafford Loans were not available before October 1, 1992. A student meeting the general eligibility requirements
for a loan under the Federal Family Education Loan Program was eligible for an Unsubsidized Stafford Loan without regard to
need.
Interest rates for Unsubsidized Stafford Loans. Unsubsidized Stafford Loans are subject to the same interest rate provisions as
Subsidized Stafford Loans, with the exception of Unsubsidized Stafford Loans first disbursed on or after July 1, 2008, which
retain a fixed interest rate of 6.80%.
A - 3
PLUS Loans
General. PLUS Loans were made to parents, and under certain circumstances spouses of remarried parents, of dependent
undergraduate students. Effective July 1, 2006, graduate and professional students were eligible borrowers under the PLUS
Loan program. For PLUS Loans made on or after July 1, 1993, the borrower could not have an adverse credit history as
determined by criteria established by the Secretary of Education. The basic provisions applicable to PLUS Loans are similar to
those of Stafford Loans with respect to the involvement of guarantee agencies and the Secretary of Education in providing
federal insurance and reinsurance on the loans. However, PLUS Loans differ significantly, particularly from the Subsidized
Stafford Loans, in that federal interest subsidy payments are not available under the PLUS Loan Program and special allowance
payments are more restricted.
Interest rates for PLUS Loans. For PLUS Loans first disbursed on or after January 1, 1981, but before October 1, 1981, the
applicable interest rate is fixed at 9%.
For PLUS Loans first disbursed on or after October 1, 1981, but before November 1, 1982, the applicable interest rate is fixed
at 14%.
For PLUS Loans first disbursed on or after November 1, 1982, but before July 1, 1987, the applicable interest rate is fixed at
12%.
Beginning July 1, 2001, for PLUS Loans first disbursed on or after July 1, 1987, but before October 1, 1992, the applicable
interest rate is variable and is based on the weekly average one-year constant maturity Treasury bill yield for the last calendar
week ending on or before June 26 preceding July 1 of each year, plus 3.25%. The variable interest rate is adjusted annually on
July 1. The maximum interest rate is 12%. Prior to July 1, 2001, PLUS Loans in this category had interest rates which were
based on the 52-week Treasury bill auctioned at the final auction held prior to the preceding June 1, plus 3.25%. The annual
(July 1) variable interest rate adjustment was applicable prior to July 1, 2001, as was the maximum interest rate of 12%. PLUS
Loans originally made at a fixed interest rate, which have been refinanced for purposes of securing a variable interest rate, are
subject to the variable interest rate calculation described in this paragraph.
Beginning July 1, 2001, for PLUS Loans first disbursed on or after October 1, 1992, but before July 1, 1994, the applicable
interest rate is variable and is based on the weekly average one-year constant maturity Treasury yield for the last calendar week
ending on or before June 26 preceding July 1 of each year, plus 3.1%. The variable interest rate is adjusted annually on July 1.
The maximum interest rate is 10%. Prior to July 1, 2001, PLUS Loans in this category had interest rates which were based on
the 52-week Treasury bill auctioned at the final auction held prior to the preceding June 1, plus 3.1%. The annual (July 1)
variable interest rate adjustment was applicable prior to July 1, 2001, as was the maximum interest rate of 10%.
Beginning July 1, 2001, for PLUS Loans first disbursed on or after July 1, 1994, but before July 1, 1998, the applicable interest
rate is variable and is based on the weekly average one-year constant maturity Treasury yield for the last calendar week ending
on or before June 26 preceding July 1 of each year, plus 3.1%. The variable interest rate is adjusted annually on July 1. The
maximum interest rate is 9%. Prior to July 1, 2001, PLUS Loans in this category had interest rates which were based on the 52-
week Treasury bill auctioned at the final auction held prior to the preceding June 1, plus 3.1%. The annual (July 1) variable
interest rate adjustment was applicable prior to July 1, 2001, as was the maximum interest rate of 9%.
For PLUS Loans first disbursed on or after July 1, 1998, but before July 1, 2006, the applicable interest rate is variable and is
based on the bond equivalent rate of the 91-day Treasury bill auctioned at the final auction before the preceding June 1 of each
year, plus 3.1%. The variable interest rate is adjusted annually on July 1. The maximum interest rate is 9%.
For PLUS Loans first disbursed on or after July 1, 2006, the applicable interest rate is fixed at 8.5%.
SLS Loans
General. SLS Loans were limited to graduate or professional students, independent undergraduate students, and dependent
undergraduate students, if the students' parents were unable to obtain a PLUS Loan. Except for dependent undergraduate
students, eligibility for SLS Loans was determined without regard to need. SLS Loans were similar to Stafford Loans with
respect to the involvement of guarantee agencies and the Secretary of Education in providing federal insurance and reinsurance
on the loans. However, SLS Loans differed significantly, particularly from Subsidized Stafford Loans, because federal interest
subsidy payments were not available under the SLS Loan Program and special allowance payments were more restricted. The
SLS Loan Program was discontinued on July 1, 1994.
A - 4
Interest rates for SLS Loans. The applicable interest rates on SLS Loans made before October 1, 1992, and on SLS Loans
originally made at a fixed interest rate, which have been refinanced for purposes of securing a variable interest rate, are
identical to the applicable interest rates described for PLUS Loans made before October 1, 1992.
For SLS Loans first disbursed on or after October 1, 1992, but before July 1, 1994, the applicable interest rate is as follows:
•
Beginning July 1, 2001, the applicable interest rate is variable and is based on the weekly average one-year
constant maturity Treasury yield for the last calendar week ending on or before June 26 preceding July 1 of each
year, plus 3.1%. The variable interest rate is adjusted annually on July 1. The maximum interest rate is 11%.
Prior to July 1, 2001, SLS Loans in this category had interest rates which were based on the 52-week Treasury bill
auctioned at the final auction held prior to the preceding June 1, plus 3.1%. The annual (July 1) variable interest
rate adjustment was applicable prior to July 1, 2001, as was the maximum interest rate of 11%.
Consolidation Loans
General. The Higher Education Act authorized a program under which certain borrowers could consolidate their various
federally insured education loans into a single loan insured and reinsured on a basis similar to Stafford Loans. Consolidation
Loans could be obtained in an amount sufficient to pay outstanding principal, unpaid interest, late charges, and collection costs
on federally insured or reinsured student loans incurred under the Federal Family Education Loan and Direct Loan Programs,
including PLUS Loans made to the consolidating borrower, as well as loans made under the Perkins Loan (formally National
Direct Student Loan Program), Federally Insured Student Loan (FISL), Nursing Student Loan (NSL), Health Education
Assistance Loan (HEAL), and Health Professions Student Loan (HPSL) Programs. To be eligible for a FFELP Consolidation
Loan, a borrower had to:
•
•
Have outstanding indebtedness on student loans made under the Federal Family Education Loan Program and/or
certain other federal student loan programs; and
Be in repayment status or in a grace period on loans to be consolidated.
Borrowers who were in default on loans to be consolidated had to first make satisfactory arrangements to repay the loans to the
respective holder(s) or had to agree to repay the consolidating lender under an income-based repayment arrangement in order to
include the defaulted loans in the Consolidation Loan. For applications received on or after January 1, 1993, borrowers could
add additional loans to a Consolidation Loan during the 180-day period following the origination of the Consolidation Loan.
A married couple who agreed to be jointly liable on a Consolidation Loan for which the application was received on or after
January 1, 1993, but before July 1, 2006, was treated as an individual for purposes of obtaining a Consolidation Loan.
Interest rates for Consolidation Loans. For Consolidation Loans disbursed before July 1, 1994, the applicable interest rate is
fixed at the greater of:
•
•
9%, or
The weighted average of the interest rates on the loans consolidated, rounded to the nearest whole percent.
For Consolidation Loans disbursed on or after July 1, 1994, based on applications received by the lender before November 13,
1997, the applicable interest rate is fixed and is based on the weighted average of the interest rates on the loans consolidated,
rounded up to the nearest whole percent.
For Consolidation Loans on which the application was received by the lender between November 13, 1997, and September 30,
1998, inclusive, the applicable interest rate is variable according to the following:
•
•
For the portion of the Consolidation Loan which is comprised of FFELP, Direct, FISL, Perkins, HPSL, or NSL
loans, the variable interest rate is based on the bond equivalent rate of the 91-day Treasury bills auctioned at the
final auction before the preceding June 1, plus 3.1%. The variable interest rate for this portion of the
Consolidation Loan is adjusted annually on July 1. The maximum interest rate for this portion of the
Consolidation Loan is 8.25%.
For the portion of the Consolidation Loan which is attributable to HEAL Loans (if applicable), the variable
interest rate is based on the average of the bond equivalent rates of the 91-day Treasury bills auctioned for the
quarter ending June 30, plus 3.0%. The variable interest rate for this portion of the Consolidation Loan is adjusted
annually on July 1. There is no maximum interest rate for the portion of a Consolidation Loan that is represented
by HEAL Loans.
A - 5
For Consolidation Loans on which the application was received by the lender on or after October 1, 1998, the applicable
interest rate is determined according to the following:
•
•
For the portion of the Consolidation Loan which is comprised of FFELP, Direct, FISL, Perkins, HPSL, or NSL
loans, the applicable interest rate is fixed and is based on the weighted average of the interest rates on the non-
HEAL loans being consolidated, rounded up to the nearest one-eighth of one percent. The maximum interest rate
for this portion of the Consolidation Loan is 8.25%.
For the portion of the Consolidation Loan which is attributable to HEAL Loans (if applicable), the applicable
interest rate is variable and is based on the average of the bond equivalent rates of the 91-day Treasury bills
auctioned for the quarter ending June 30, plus 3.0%. The variable interest rate for this portion of the Consolidation
Loan is adjusted annually on July 1. There is no maximum interest rate for the portion of the Consolidation Loan
that is represented by HEAL Loans.
For a discussion of required payments that reduce the return on Consolidation Loans, see “Fees - Rebate fee on Consolidation
Loans” in this Appendix.
Interest rate during active duty
The Higher Education Opportunity Act of 2008 revised the Servicemembers Civil Relief Act to include FFEL Program loans.
Interest charges on FFEL Program loans are capped at 6% during a period of time on or after August 14, 2008, in which a
borrower has served or is serving on active duty in the Armed Forces, National Oceanic and Atmospheric Administration,
Public Health Services, or National Guard. The interest charge cap includes the interest rate in addition to any fees, service
charges, and other charges related to the loan. The cap is applicable to loans made prior to the date the borrower was called to
active duty.
Maximum loan amounts
Each type of loan was subject to certain limits on the maximum principal amount, with respect to a given academic year and in
the aggregate. Consolidation Loans were limited only by the amount of eligible loans to be consolidated. PLUS Loans were
limited to the difference between the cost of attendance and the other aid available to the student. Stafford Loans, subsidized
and unsubsidized, were subject to both annual and aggregate limits according to the provisions of the Higher Education Act.
Loan limits for Subsidized Stafford and Unsubsidized Stafford Loans. Dependent and independent undergraduate students
were subject to the same annual loan limits on Subsidized Stafford Loans; independent students were allowed greater annual
loan limits on Unsubsidized Stafford Loans. A student who had not successfully completed the first year of a program of
undergraduate education could borrow up to $3,500 in Subsidized Stafford Loans in an academic year. A student who had
successfully completed the first year, but who had not successfully completed the second year, could borrow up to $4,500 in
Subsidized Stafford Loans per academic year. An undergraduate student who had successfully completed the first and second
years, but who had not successfully completed the remainder of a program of undergraduate education, could borrow up to
$5,500 in Subsidized Stafford Loans per academic year.
Dependent students could borrow an additional $2,000 in Unsubsidized Stafford Loans for each year of undergraduate study.
Independent students could borrow an additional $6,000 of Unsubsidized Stafford Loans for each of the first two years and an
additional $7,000 for the third, fourth, and fifth years of undergraduate study. For students enrolled in programs of less than an
academic year in length, the limits were generally reduced in proportion to the amount by which the programs were less than
one year in length. A graduate or professional student could borrow up to $20,500 in an academic year where no more than
$8,500 was representative of Subsidized Stafford Loan amounts.
The maximum aggregate amount of Subsidized Stafford and Unsubsidized Stafford Loans, including that portion of a
Consolidation Loan used to repay such loans, which a dependent undergraduate student may have outstanding is $31,000 (of
which only $23,000 may be Subsidized Stafford Loans). An independent undergraduate student may have an aggregate
maximum of $57,500 (of which only $23,000 may be Subsidized Stafford Loans). The maximum aggregate amount of
Subsidized Stafford and Unsubsidized Stafford Loans, including the portion of a Consolidation Loan used to repay such loans,
for a graduate or professional student, including loans for undergraduate education, is $138,500, of which only $65,500 may be
Subsidized Stafford Loans. In some instances, schools could certify loan amounts in excess of the limits, such as for certain
health profession students.
Loan limits for PLUS Loans. For PLUS Loans made on or after July 1, 1993, the annual amounts of PLUS Loans were limited
only by the student's unmet need. There was no aggregate limit for PLUS Loans.
A - 6
Repayment
Repayment periods. Loans made under the Federal Family Education Loan Program, other than Consolidation Loans and loans
being repaid under an income-based or extended repayment schedule, must provide for repayment of principal in periodic
installments over a period of not less than five, nor more than ten years. A borrower may request, with concurrence of the
lender, to repay the loan in less than five years with the right to subsequently extend the minimum repayment period to five
years. Since the 1998 Amendments, lenders have been required to offer extended repayment schedules to new borrowers
disbursed on or after October 7, 1998 who accumulate outstanding FFELP Loans of more than $30,000, in which case the
repayment period may extend up to 25 years, subject to certain minimum repayment amounts. Consolidation Loans must be
repaid within maximum repayment periods which vary depending upon the principal amount of the borrower's outstanding
student loans, but may not exceed 30 years. For Consolidation Loans for which the application was received prior to January 1,
1993, the repayment period cannot exceed 25 years. Periods of authorized deferment and forbearance are excluded from the
maximum repayment period. In addition, if the repayment schedule on a loan with a variable interest rate does not provide for
adjustments to the amount of the monthly installment payment, the maximum repayment period may be extended for up to three
years.
Repayment of principal on a Stafford Loan does not begin until a student drops below at least a half-time course of study. For
Stafford Loans for which the applicable rate of interest is fixed at 7%, the repayment period begins between nine and twelve
months after the borrower ceases to pursue at least a half-time course of study, as indicated in the promissory note. For other
Stafford Loans, the repayment period begins six months after the borrower ceases to pursue at least a half-time course of study.
These periods during which payments of principal are not due are the “grace periods.”
In the case of SLS, PLUS, and Consolidation Loans, the repayment period begins on the date of final disbursement of the loan,
except that the borrower of a SLS Loan who also has a Stafford Loan may postpone repayment of the SLS Loan to coincide
with the commencement of repayment of the Stafford Loan.
During periods in which repayment of principal is required, unless the borrower is repaying under an income-based repayment
schedule, payments of principal and interest must in general be made at a rate of at least $600 per year, except that a borrower
and lender may agree to a lesser rate at any time before or during the repayment period. However, at a minimum, the payments
must satisfy the interest that accrues during the year. Borrowers may make accelerated payments at any time without penalty.
Income-sensitive repayment schedule. Since 1993, lenders have been required to offer income-sensitive repayment schedules,
in addition to standard and graduated repayment schedules, for Stafford, SLS, and Consolidation Loans. Beginning in 2000,
lenders have been required to offer income-sensitive repayment schedules to PLUS borrowers as well. Use of income-sensitive
repayment schedules may extend the maximum repayment period for up to five years if the payment amount established from
the borrower's income will not repay the loan within the maximum applicable repayment period.
Income-based repayment schedule. Effective July 1, 2009, a borrower in the Federal Family Education Loan Program or
Federal Direct Loan Program, other than a PLUS Loan made to a parent borrower or any Consolidation Loan that repaid one or
more parent PLUS loans, may qualify for an income-based repayment schedule regardless of the disbursement dates of the
loans if he or she has a partial financial hardship. A borrower has a financial hardship if the annual loan payment amount based
on a 10-year repayment schedule exceeds 15% of the borrower's adjusted gross income, minus 150% of the poverty line for the
borrower's actual family size. Interest will be paid by the Secretary of Education for subsidized loans for the first three years for
any borrower whose scheduled monthly payment is not sufficient to cover the accrued interest. Interest will capitalize at the end
of the partial financial hardship period, or when the borrower begins making payments under a standard repayment schedule.
The Secretary of Education will cancel any outstanding balance after 25 years if a borrower who has made payments under this
schedule meets certain criteria.
Deferment periods. No principal payments need be made during certain periods of deferment prescribed by the Higher
Education Act. For a borrower who first obtained a Stafford or SLS loan which was disbursed before July 1, 1993, deferments
are available:
•
•
•
During a period not exceeding three years while the borrower is a member of the Armed Forces, an officer in the
Commissioned Corps of the Public Health Service or, with respect to a borrower who first obtained a student loan
disbursed on or after July 1, 1987, or a student loan for a period of enrollment beginning on or after July 1, 1987,
an active duty member of the National Oceanic and Atmospheric Administration Corps;
During a period not exceeding three years while the borrower is a volunteer under the Peace Corps Act;
During a period not exceeding three years while the borrower is a full-time paid volunteer under the Domestic
Volunteer Act of 1973;
A - 7
•
•
•
•
•
•
•
•
•
•
During a period not exceeding three years while the borrower is a full-time volunteer in service which the
Secretary of Education has determined is comparable to service in the Peace Corp or under the Domestic
Volunteer Act of 1970 with an organization which is exempt from taxation under Section 501(c)(3) of the Internal
Revenue Code;
During a period not exceeding two years while the borrower is serving an internship necessary to receive
professional recognition required to begin professional practice or service, or a qualified internship or residency
program;
During a period not exceeding three years while the borrower is temporarily totally disabled, as established by
sworn affidavit of a qualified physician, or while the borrower is unable to secure employment because of caring
for a dependent who is so disabled;
During a period not exceeding two years while the borrower is seeking and unable to find full-time employment;
During any period that the borrower is pursuing a full-time course of study at an eligible institution (or, with
respect to a borrower who first obtained a student loan disbursed on or after July 1, 1987, or a student loan for a
period of enrollment beginning on or after July 1, 1987, is pursuing at least a half-time course of study);
During any period that the borrower is pursuing a course of study in a graduate fellowship program;
During any period the borrower is receiving rehabilitation training services for qualified individuals, as defined by
the Secretary of Education;
During a period not exceeding six months per request while the borrower is on parental leave;
Only with respect to a borrower who first obtained a student loan disbursed on or after July 1, 1987, or a student
loan for a period of enrollment beginning on or after July 1, 1987, during a period not exceeding three years while
the borrower is a full-time teacher in a public or nonprofit private elementary or secondary school in a “teacher
shortage area” (as prescribed by the Secretary of Education), and during a period not exceeding one year for
mothers, with preschool age children, who are entering or re-entering the work force and who are paid at a rate of
no more than $1 per hour more than the federal minimum wage; and
For loans that are in repayment status on or before September 28, 2018, the borrower is eligible for deferment
during periods the borrower is undergoing treatment for cancer and the 6 months following treatment.
For a borrower who first obtained a loan on or after July 1, 1993, deferments are available:
•
•
•
•
•
•
During any period that the borrower is pursuing at least a half-time course of study at an eligible institution;
During any period that the borrower is pursuing a course of study in a graduate fellowship program;
During any period the borrower is receiving rehabilitation training services for qualified individuals, as defined by
the Secretary of Education;
During a period not exceeding three years while the borrower is seeking and unable to find full-time employment;
During a period not exceeding three years for any reason which has caused or will cause the borrower economic
hardship. Economic hardship includes working full-time and earning an amount that does not exceed the greater
of the federal minimum wage or 150% of the poverty line applicable to a borrower's family size and state of
residence. Additional categories of economic hardship are based on the receipt of payments from a state or
federal public assistance program, service in the Peace Corps, or until July 1, 2009, the relationship between a
borrower's educational debt burden and his or her income; and
For loans that are in repayment status on or before September 28, 2018, the borrower is eligible for deferment
during periods the borrower is undergoing treatment for cancer and the 6 months following treatment.
Effective October 1, 2007, a borrower serving on active duty during a war or other military operation or national emergency, or
performing qualifying National Guard duty during a war or other military operation or national emergency may obtain a
military deferment for all outstanding Title IV loans in repayment. For all periods of active duty service that include October 1,
2007 or begin on or after that date, the deferment period includes the borrower's service period and 180 days following the
demobilization date.
A - 8
A borrower serving on or after October 1, 2007, may receive up to 13 months of active duty student deferment after the
completion of military service if he or she meets the following conditions:
•
•
•
Is a National Guard member, Armed Forces reserves member, or retired member of the Armed Forces;
Is called or ordered to active duty; and
Is enrolled at the time of, or was enrolled within six months prior to, the activation in a program at an eligible
institution.
The active duty student deferment ends the earlier of when the borrower returns to an enrolled status, or at the end of 13
months.
PLUS Loans first disbursed on or after July 1, 2008, are eligible for the following deferment options:
•
•
A parent PLUS borrower, upon request, may defer the repayment of the loan during any period during which the
student for whom the loan was borrowed is enrolled at least half time. Also upon request, the borrower can defer
the loan for the six-month period immediately following the date on which the student for whom the loan was
borrowed ceases to be enrolled at least half time, or if the parent borrower is also a student, the date after he or she
ceases to be enrolled at least half time.
A graduate or professional student PLUS borrower may defer the loan for the six-month period immediately
following the date on which he or she ceases to be enrolled at least half time. This option does not require a
request and may be granted each time the borrower ceases to be enrolled at least half time.
Prior to the 1992 Amendments, only some of the deferments described above were available to PLUS and Consolidation Loan
borrowers. Prior to the 1986 Amendments, PLUS Loan borrowers were not entitled to certain deferments.
Forbearance periods. The Higher Education Act also provides for periods of forbearance during which the lender, in case of a
borrower's temporary financial hardship, may postpone any payments. A borrower is entitled to forbearance for a period not
exceeding three years while the borrower's debt burden under Title IV of the Higher Education Act (which includes the Federal
Family Education Loan Program) equals or exceeds 20% of the borrower's gross income. A borrower is also entitled to
forbearance while he or she is serving in a qualifying internship or residency program, a “national service position” under the
National and Community Service Trust Act of 1993, a qualifying position for loan forgiveness under the Teacher Loan
Forgiveness Program, or a position that qualifies him or her for loan repayment under the Student Loan Repayment Program
administered by the Department of Defense. In addition, administrative forbearances are provided in circumstances such as, but
not limited to, a local or national emergency, a military mobilization, or when the geographical area in which the borrower or
endorser resides has been designated a disaster area by the President of the United States or Mexico, the Prime Minister of
Canada, or by the governor of a state.
Interest payments during grace, deferment, forbearance, and applicable income-based repayment ("IBR") periods. The
Secretary of Education makes interest payments on behalf of the borrower for Subsidized loans while the borrower is in school,
grace, deferment, and during the first 3 years of the IBR plan for any remaining interest that is not satisfied by the IBR payment
amount. Interest that accrues during forbearance periods, and, if the loan is not eligible for interest subsidy payments during
school, grace, deferment, and IBR periods, may be paid monthly or quarterly by the borrower. At the appropriate time, any
unpaid accrued interest may be capitalized by the lender.
For a borrower who is eligible for the Cancer Treatment Deferment, interest that accrues during the period of deferment on any
subsidized loan is subsidized. For cancer treatment deferment periods on any Unsubsidized Stafford Loan, the interest during
such periods is not charged to the borrower.
Fees
Guarantee fee and Federal default fee. For loans for which the date of guarantee of principal was on or after July 1, 2006, a
guarantee agency was required to collect and deposit into the Federal Student Loan Reserve Fund a Federal default fee in an
amount equal to 1% of the principal amount of the loan. The fee was collected either by deduction from the proceeds of the
loan or by payment from other non-Federal sources. Federal default fees could not be charged to borrowers of Consolidation
Loans.
A - 9
Origination fee. Beginning with loans first disbursed on or after July 1, 2006, the maximum origination fee which could be
charged to a Stafford Loan borrower decreased according to the following schedule:
•
•
•
1.5% with respect to loans for which the first disbursement was made on or after July 1, 2007, and before July 1,
2008;
1.0% with respect to loans for which the first disbursement was made on or after July 1, 2008, and before July 1,
2009; and
0.5% with respect to loans for which the first disbursement was made on or after July 1, 2009, and before July 1,
2010.
A lender could charge a lesser origination fee to Stafford Loan borrowers as long as the lender did so consistently with respect
to all borrowers who resided in or attended school in a particular state. Regardless of whether the lender passed all or a portion
of the origination fee on to the borrower, the lender had to pay the origination fee owed on each loan it made to the Secretary of
Education.
An eligible lender was required to charge the borrower of a PLUS Loan an origination fee equal to 3% of the principal amount
of the loan. This fee had to be deducted proportionately from each disbursement of the PLUS Loan and had to be remitted to
the Secretary of Education.
Lender fee. The lender of any loan made under the Federal Family Education Loan Program was required to pay a fee to the
Secretary of Education. For loans made on or after October 1, 2007, the fee was equal to 1.0% of the principal amount of such
loan. This fee could not be charged to the borrower.
Rebate fee on Consolidation Loans. The holder of any Consolidation Loan made on or after October 1, 1993, was required to
pay to the Secretary of Education a monthly rebate fee. For loans made on or after October 1, 1993, from applications received
prior to October 1, 1998, and after January 31, 1999, the fee is equal to 0.0875% (1.05% per annum) of the principal and
accrued interest on the Consolidation Loan. For loans made from applications received during the period beginning on or after
October 1, 1998, through January 31, 1999, the fee is 0.0517% (0.62% per annum).
Interest subsidy payments
Interest subsidy payments are interest payments paid on the outstanding principal balance of an eligible loan before the time the
loan enters repayment and during deferment periods. The Secretary of Education and the guarantee agencies enter into interest
subsidy agreements whereby the Secretary of Education agrees to pay interest subsidy payments on a quarterly basis to the
holders of eligible guaranteed loans for the benefit of students meeting certain requirements, subject to the holders' compliance
with all requirements of the Higher Education Act. Subsidized Stafford Loans are eligible for interest payments. Consolidation
Loans for which the application was received on or after January 1, 1993, are eligible for interest subsidy payments.
Consolidation Loans made from applications received on or after August 10, 1993, are eligible for interest subsidy payments
only if all underlying loans consolidated were Subsidized Stafford Loans. Consolidation Loans for which the application is
received by an eligible lender on or after November 13, 1997, are eligible for interest subsidy payments on that portion of the
Consolidation Loan that repaid subsidized FFELP Loans or similar subsidized loans made under the Direct Loan Program. The
portion of the Consolidation Loan that repaid HEAL Loans is not eligible for interest subsidy, regardless of the date the
Consolidation Loan was made.
Special allowance payments
The Higher Education Act provides for special allowance payments (SAP) to be made by the Secretary of Education to eligible
lenders. The rates for special allowance payments are based on formulas that differ according to the type of loan, the date the
loan was originally made or insured, and the type of funds used to finance the loan (taxable or tax-exempt).
Stafford Loans. The effective formulas for special allowance payment rates for Subsidized Stafford and Unsubsidized Stafford
Loans are summarized in the following chart. The T-Bill Rate mentioned in the chart refers to the average of the bond
equivalent yield of the 91-day Treasury bills auctioned during the preceding quarter.
A - 10
Date of Loans
On or after October 1, 1981
On or after November 16, 1986
On or after October 1, 1992
On or after July 1, 1995
On or after July 1, 1998
On or after January 1, 2000
On or after October 1, 2007 and held by a Department of
Education certified not-for-profit holder or Eligible
Lender Trustee holding on behalf of a Department of
Education certified not-for-profit entity
All other loans on or after October 1, 2007
Annualized SAP Rate
T-Bill Rate less Applicable Interest Rate + 3.5%
T-Bill Rate less Applicable Interest Rate + 3.25%
T-Bill Rate less Applicable Interest Rate + 3.1%
T-Bill Rate less Applicable Interest Rate + 3.1%(1)
T-Bill Rate less Applicable Interest Rate + 2.8%(2)
3 Month Commercial Paper Rate less Applicable Interest
Rate + 2.34%(3)(6)
3 Month Commercial Paper Rate less Applicable Interest
Rate + 1.94%(4)(6)
3 Month Commercial Paper Rate less Applicable Interest
Rate + 1.79%(5)(6)
(1) Substitute 2.5% in this formula while such loans are in-school, grace, or deferment status
(2) Substitute 2.2% in this formula while such loans are in-school, grace, or deferment status.
(3) Substitute 1.74% in this formula while such loans are in-school, grace, or deferment status.
(4) Substitute 1.34% in this formula while such loans are in-school, grace, or deferment status.
(5) Substitute 1.19% in this formula while such loans are in-school, grace, or deferment status.
(6) The Military Construction and Veterans Affairs and Related Agencies Appropriations Act of 2012 provides an
alternate calculation method that substitutes for 3 Month Commercial Paper Rate “1 Month London Inter Bank
Offered Rate (LIBOR) for United States dollars in effect for each of the days in such quarter as compiled and released
by the British Banker's Association." This method has to be selected by each lender or beneficial holder before April 1,
2012 and applies to all loans held under the same lender identification number for the quarter beginning April 1, 2012
and all succeeding 3-month periods.
PLUS, SLS, and Consolidation Loans. The formula for special allowance payments on PLUS, SLS, and Consolidation Loans
are as follows:
Date of Loans
On or after October 1, 1992
On or after January 1, 2000
PLUS loans on or after October 1, 2007 and held by a
Department of Education certified not-for-profit holder or
Eligible Lender Trustee holding on behalf of a
Department of Education certified not-for-profit entity
All other PLUS loans on or after October 1, 2007
Consolidation loans on or after October 1, 2007 and held
by a Department of Education certified not-for-profit
holder or Eligible Lender Trustee holding on behalf of a
Department of Education certified not-for-profit entity
All other Consolidation loans on or after October 1, 2007
Annualized SAP Rate
T-Bill Rate less Applicable Interest Rate + 3.1%
3 Month Commercial Paper Rate less Applicable Interest
Rate + 2.64%(1)
3 Month Commercial Paper Rate less Applicable Interest
Rate + 1.94%(1)
3 Month Commercial Paper Rate less Applicable Interest
Rate + 1.79%(1)
3 Month Commercial Paper Rate less Applicable Interest
Rate + 2.24%(1)
3 Month Commercial Paper Rate less Applicable Interest
Rate + 2.09%(1)
(1) The Military Construction and Veterans Affairs and Related Agencies Appropriations Act of 2012 provides an
alternate calculation method that substitutes for 3 Month Commercial Paper Rate “1 Month London Inter Bank
Offered Rate (LIBOR) for United States dollars in effect for each of the days in such quarter as compiled and released
by the British Banker's Association." This method has to be selected by each lender or beneficial holder before April 1,
2012 and applies to all loans held under the same lender identification number for the quarter beginning April 1, 2012
and all succeeding 3-month periods.
For PLUS and SLS Loans made prior to July 1, 1994, and PLUS loans made on or after July 1, 1998, which bear interest at
rates adjusted annually, special allowance payments are made only in quarters during which the interest rate ceiling on such
loans operates to reduce the rate that would otherwise apply based upon the applicable formula. See “Interest Rates for PLUS
Loans” and “Interest Rates for SLS Loans.” Special allowance payments are available on variable rate PLUS Loans and SLS
A - 11
Loans made on or after July 1, 1987, and before July 1, 1994, and on any PLUS Loans made on or after July 1, 1998, and
before January 1, 2000, only if the variable rate, which is reset annually, based on the weekly average one-year constant
maturity Treasury yield for loans made before July 1, 1998, and based on the 91-day or 52-week Treasury bill, as applicable for
loans made on or after July 1, 1998, exceeds the applicable maximum borrower rate. The maximum borrower rate is between
9% and 12% per annum. The portion, if any, of a Consolidation Loan that repaid a HEAL Loan is ineligible for special
allowance payments.
Recapture of excess interest. The Higher Education Reconciliation Act of 2005 provides that, with respect to a loan for which
the first disbursement of principal was made on or after April 1, 2006, if the applicable interest rate for any three-month period
exceeds the special allowance support level applicable to the loan for that period, an adjustment must be made by calculating
the excess interest and crediting such amounts to the Secretary of Education not less often than annually. The amount of any
adjustment of interest for any quarter will be equal to:
•
•
•
The applicable interest rate minus the special allowance support level for the loan, multiplied by
The average daily principal balance of the loan during the quarter, divided by
Four.
Special allowance payments for loans financed by tax-exempt bonds. The effective formulas for special allowance payment
rates for Stafford Loans and Unsubsidized Stafford Loans differ depending on whether loans to borrowers were acquired or
originated with the proceeds of tax-exempt obligations. The formula for special allowance payments for loans financed with
the proceeds of tax-exempt obligations originally issued prior to October 1, 1993 is:
T-Bill Rate less Applicable Interest Rate + 3.5%
2
provided that the special allowance applicable to the loans may not be less than 9.5% less the Applicable Interest Rate. Special
rules apply with respect to special allowance payments made on loans
•
•
Originated or acquired with funds obtained from the refunding of tax-exempt obligations issued prior to October
1, 1993, or
Originated or acquired with funds obtained from collections on other loans made or purchased with funds obtained
from tax-exempt obligations initially issued prior to October 1, 1993.
Amounts derived from recoveries of principal on loans eligible to receive a minimum 9.5% special allowance payment may
only be used to originate or acquire additional loans by a unit of a state or local government, or non-profit entity not owned or
controlled by or under common ownership of a for-profit entity and held directly or through any subsidiary, affiliate or trustee,
which entity has a total unpaid balance of principal equal to or less than $100,000,000 on loans for which special allowances
were paid in the most recent quarterly payment prior to September 30, 2005. Such entities may originate or acquire additional
loans with amounts derived from recoveries of principal until December 31, 2010. Loans acquired with the proceeds of tax-
exempt obligations originally issued after October 1, 1993, receive special allowance payments made on other loans.
Beginning October 1, 2006, in order to receive 9.5% special allowance payments, a lender must undergo an audit arranged by
the Secretary of Education attesting to proper billing for 9.5% payments on only eligible “first generation” and “second
generation” loans. First generation loans include those loans acquired using funds directly from the issuance of the tax-exempt
obligation. Second-generation loans include only those loans acquired using funds obtained directly from first-generation
loans. Furthermore, the lender must certify compliance of its 9.5% billing on such loans with each request for payment.
Adjustments to special allowance payments. Special allowance payments and interest subsidy payments are reduced by the
amount which the lender is authorized or required to charge as an origination fee. In addition, the amount of the lender
origination fee is collected by offset to special allowance payments and interest subsidy payments. The Higher Education Act
provides that if special allowance payments or interest subsidy payments have not been made within 30 days after the Secretary
of Education receives an accurate, timely, and complete request, the special allowance payable to the lender must be increased
by an amount equal to the daily interest accruing on the special allowance and interest subsidy payments due the lender.
A - 12
PROXY
121 SOUTH 13TH STREET, SUITE 100
LINCOLN, NE 68508
p 402.458.2370
www.nelnet.com
April 8, 2021
Dear Shareholder:
On behalf of the Board of Directors, we are pleased to invite you to Nelnet, Inc.'s Annual Shareholders' Meeting to be
held on Thursday, May 20, 2021 at 8:30 a.m. Central Time at the Hudl Building, 600 P Street, Suite 100, Lincoln,
Nebraska. Due to ongoing public health concerns regarding the COVID-19 pandemic and to support the health and
well-being of our shareholders, we are again offering a hybrid virtual meeting format whereby shareholders may
attend, participate in, and vote at the Annual Meeting online at http://www.virtualshareholdermeeting.com/NNI2021,
and we encourage shareholders to attend and participate in the Annual Meeting virtually, rather than in person. The
notice of the meeting and proxy statement on the following pages contain information about the meeting.
Your participation in the Annual Meeting is important. We hope that you will be able to attend the meeting virtually
and encourage you to read our annual report and proxy statement. At the meeting, members of the Company's
management team will discuss the Company's results of operations and business plans and will be available to answer
your questions. Regardless of whether you plan to attend, we urge you to vote your proxy at your earliest
convenience.
Thank you for your support of Nelnet, Inc.
Sincerely,
Michael S. Dunlap
Executive Chairman of the Board of Directors
Nelnet, Inc.
121 South 13th Street, Suite 100, Lincoln, Nebraska 68508
NOTICE OF ANNUAL MEETING OF SHAREHOLDERS
April 8, 2021
TIME AND DATE
8:30 a.m., Central Time, on Thursday, May 20, 2021
PLACE
Hudl Building
600 P Street, Suite 100
Lincoln, Nebraska 68508
Due to ongoing public health concerns regarding the COVID-19 pandemic and to support the
health and well-being of our shareholders, we are again offering a hybrid virtual meeting format
whereby shareholders may attend, participate in, and vote at the meeting online at http://
www.virtualshareholdermeeting.com/NNI2021, and we encourage shareholders to attend and
participate in the meeting virtually, rather than in person.
ITEMS OF BUSINESS
(1) To elect three Class I directors nominated by the Board of Directors to serve for three-year
terms until the 2024 Annual Meeting of Shareholders
(2) To ratify the appointment of KPMG LLP as the Company's independent registered public
accounting firm for 2021
(3) To conduct an advisory vote to approve the Company's executive compensation
(4) To transact such other business as may be properly introduced
RECORD DATE
You can vote if you were a shareholder as of the close of business on March 29, 2021
OTHER INFORMATION The Letter to Shareholders from the Chief Executive Officer and our 2020 Annual Report on
Form 10-K, which are not part of the proxy soliciting materials, are enclosed.
PROXY VOTING
The Board of Directors solicits your proxy and asks you to vote your proxy at your earliest
convenience to be sure your vote is received and counted. Instructions on how to vote are
contained in our proxy statement and in the Notice of Internet Availability of Proxy Materials.
Whether or not you plan to attend the meeting, we ask you to vote over the Internet as
described in those materials as promptly as possible in order to make sure that your shares
will be voted in accordance with your wishes at the meeting. Alternatively, if you requested
a copy of the proxy/voting instruction card by mail, you may mark, sign, date, and return
the proxy/voting instruction card in the envelope provided. The Board of Directors
encourages you to attend the meeting virtually due to the ongoing public health impact of the
COVID-19 pandemic and to support the health and well-being of the Company's shareholders.
If you attend the meeting virtually or in person, you may vote by proxy or you may revoke your
proxy and cast your vote virtually or in person, respectively. We recommend you vote by proxy
even if you plan to attend the meeting.
By Order of the Board of Directors,
William J. Munn
Corporate Secretary
Nelnet, Inc.
NELNET, INC.
2021 PROXY STATEMENT
TABLE OF CONTENTS
PROXY STATEMENT
General Information............................................................................................................................................................ 1
VOTING.................................................................................................................................................................................. 2
PROPOSAL 1 - ELECTION OF DIRECTORS...................................................................................................................... 6
Class I Director Nominees to Hold Office for a Term Expiring at the 2024 Annual Meeting of Shareholders................. 7
Class II Directors Continuing in Office for a Term Expiring at the 2022 Annual Meeting of Shareholders..................... 8
Class III Directors Continuing in Office for a Term Expiring at the 2023 Annual Meeting of Shareholders.................... 9
CORPORATE GOVERNANCE
Code of Business Conduct and Ethics for Directors, Officers, and Employees................................................................. 10
Board Composition and Director Independence................................................................................................................. 10
Governance Guidelines of the Board.................................................................................................................................. 10
Shareholder Communications with the Board.................................................................................................................... 10
Board Diversity................................................................................................................................................................... 11
The Board's Role in Risk Oversight.................................................................................................................................... 11
Board Leadership Structure................................................................................................................................................. 12
Board Committees............................................................................................................................................................... 12
Meetings of the Board......................................................................................................................................................... 14
Attendance at Annual Meetings of Shareholders................................................................................................................ 14
Director Compensation Overview....................................................................................................................................... 14
Director Compensation Elements........................................................................................................................................ 15
Other Compensation............................................................................................................................................................ 15
Director Compensation Table for Fiscal Year 2020........................................................................................................... 16
Share Ownership Guidelines for Board Members.............................................................................................................. 17
EXECUTIVE OFFICERS....................................................................................................................................................... 17
EXECUTIVE COMPENSATION
Compensation Discussion and Analysis............................................................................................................................. 18
People Development and Compensation Committee Report.............................................................................................. 26
Summary Compensation Table for Fiscal Years 2020, 2019, and 2018............................................................................. 26
Grants of Plan-Based Awards Table for Fiscal Year 2020................................................................................................. 28
Outstanding Equity Awards at Fiscal Year-End................................................................................................................. 28
Stock Vested Table for Fiscal Year 2020............................................................................................................................ 28
Stock Option, Stock Appreciation Right, Long-Term Incentive, and Defined Benefit Plans............................................ 28
Potential Payments Upon Termination or Change-in-Control............................................................................................ 29
Pay Ratio Disclosure........................................................................................................................................................... 29
SECURITY OWNERSHIP OF DIRECTORS, EXECUTIVE OFFICERS, AND PRINCIPAL SHAREHOLDERS
Stock Ownership................................................................................................................................................................. 30
Delinquent Section 16(a) Reports....................................................................................................................................... 40
CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS .................................................................................. 40
AUDIT COMMITTEE REPORT............................................................................................................................................ 47
PROPOSAL 2 - RATIFICATION OF APPOINTMENT OF INDEPENDENT REGISTERED PUBLIC
ACCOUNTING FIRM..................................................................................................................................................... 49
Independent Accountant Fees and Services........................................................................................................................ 49
PROPOSAL 3 - ADVISORY VOTE TO APPROVE EXECUTIVE COMPENSATION..................................................... 50
OTHER SHAREHOLDER MATTERS
Householding...................................................................................................................................................................... 51
Other Business.................................................................................................................................................................... 52
Shareholder Proposals for 2022 Annual Meeting............................................................................................................... 52
MISCELLANEOUS................................................................................................................................................................ 52
Nelnet, Inc.
121 South 13th Street
Suite 100
Lincoln, Nebraska 68508
PROXY STATEMENT
General Information
This proxy statement is furnished in connection with the solicitation of proxies by the Board of Directors of Nelnet, Inc. (the
“Company”) for the 2021 Annual Meeting of Shareholders (the “Annual Meeting”) to be held on Thursday, May 20, 2021, at
8:30 a.m., Central Time, at the Hudl Building, 600 P Street, Suite 100, Lincoln, Nebraska 68508. The Annual Meeting will be
held for the purposes set forth in the notice of such Annual Meeting on the cover page hereof.
Due to ongoing public health concerns regarding the COVID-19 pandemic and to support the health and well-being of our
shareholders, we are again offering a hybrid virtual meeting format whereby shareholders may attend, participate in, and vote at
the Annual Meeting online at http://www.virtualshareholdermeeting.com/NNI2021, and we encourage shareholders to attend
and participate in the Annual Meeting virtually, rather than in person.
Important Notice Regarding the Availability of Proxy Materials for the
2021 Annual Meeting of Shareholders to be held on May 20, 2021
Our notice of annual meeting and proxy statement, 2020 annual report on Form 10-K, letter to shareholders, electronic
proxy card, and other annual meeting materials are available on the Internet at www.proxyvote.com. We intend to begin
mailing our Notice of Internet Availability of Proxy Materials to shareholders on or about April 8, 2021. At that time, we also
will begin mailing paper copies of our proxy materials to shareholders who requested them. Additional information on how
these materials will be distributed is provided below.
Under U.S. Securities and Exchange Commission (the “SEC”) rules, we are allowed to mail a notice to our shareholders
informing them that our proxy statement, annual report on Form 10-K, electronic proxy card, and related materials are available
for viewing, free of charge, on the Internet. Shareholders may then access these materials and vote their shares over the Internet,
or request delivery of a full set of proxy materials by mail or email. These rules give us the opportunity to serve shareholders
more efficiently by making the proxy materials available online and reducing the environmental impact and costs associated
with printing and physical delivery. We are utilizing this process for the 2021 Annual Meeting. We intend to begin mailing the
required notice, called the Notice of Internet Availability of Proxy Materials (the "Notice"), to shareholders on or about April 8,
2021. The proxy materials will be posted on the Internet, at www.proxyvote.com, no later than the day we begin mailing the
Notice. If you receive a Notice, you will not receive a paper or email copy of the proxy materials unless you request one in the
manner set forth in the Notice.
The Notice contains important information, including:
•
•
•
•
The date, time, and location of the Annual Meeting, and information regarding virtual participation in the Annual
Meeting online
A brief description of the matters to be voted on at the meeting
A list of the proxy materials available for viewing at www.proxyvote.com and the control number you will need to
use to access the site
Instructions on how to access and review the proxy materials online, how to vote your shares over the Internet,
and how to get a paper or email copy of the proxy materials if that is your preference
You may vote online at the Annual Meeting through the virtual meeting process, in person at the Annual Meeting, or you may
vote by proxy. To obtain directions to attend the Annual Meeting and vote in person, please call 402-458-3038. To support the
health and well-being of our shareholders in view of the COVID-19 pandemic, we may take precautionary measures with
respect to attendance in person at the Annual Meeting, including measures under public heath protocols. Giving the Board of
Directors your proxy means that you authorize representatives of the Board to vote your shares at the Annual Meeting in the
manner you specify. We recommend that you vote by proxy even if you plan to attend the Annual Meeting. If your share
ownership is registered directly, you may refer to voting instructions contained in this proxy statement and in the Notice. If your
share ownership is beneficial (that is, your shares are held in the name of a bank, broker, or other nominee, referred to as being
held in “street name”), your broker will issue you a voting instruction form that you use to instruct them how to vote your
1
shares. Your broker must follow your voting instructions. Although most brokers and nominees offer mail, telephone, and
Internet voting, availability and specific procedures will depend on their voting arrangements.
Your vote is important. For this reason, the Board of Directors is requesting that you permit your common stock to be voted by
proxy at the Annual Meeting. This proxy statement contains important information for you to consider when deciding how to
vote on the matters brought before the Annual Meeting. Please read it carefully.
VOTING
Who Can Vote
You may vote if you owned Nelnet, Inc. Class A common stock, par value $0.01 per share, or Class B common stock, par value
$0.01 per share, as of the close of business on March 29, 2021 (the “record date”). At the close of business on March 29, 2021,
27,368,703 and 11,154,171 shares of the Company's Class A and Class B common stock, respectively, were outstanding and
eligible to vote. The Class A common stock is listed on the New York Stock Exchange under the symbol “NNI.” The Class B
common stock is not listed on any exchange or market. At the Annual Meeting, each Class A and Class B shareholder will be
entitled to one vote and 10 votes, respectively, in person or by proxy, for each share of Class A and Class B common stock,
respectively, owned of record as of the record date. The stock transfer books of the Company will not be closed. The Secretary
of the Company will make a complete record of the shareholders entitled to vote at the Annual Meeting available for inspection
by any shareholder beginning two business days after the Notice of the Annual Meeting is given and continuing through the
Annual Meeting, at the Company's headquarters in Lincoln, Nebraska at any time during regular business hours. Any
shareholder who would like to inspect such records should call Investor Relations at 402-458-3038 to request access and
schedule an appointment. Such records will also be available for inspection at the Annual Meeting, and will also be available
for review by shareholders during the Annual Meeting through the virtual meeting website.
As a matter of policy, the Company keeps private all proxies, ballots, and voting tabulations that identify individual
shareholders. Such documents are available for examination only by certain representatives associated with processing proxy
voting instructions and tabulating the vote. No vote of any shareholder is disclosed, except as may be necessary to meet legal
requirements.
How You Vote
You may vote your shares prior to the Annual Meeting by following the instructions provided in the Notice, this proxy
statement, and the voter website, www.proxyvote.com. If you requested a paper copy of the proxy materials, voting instructions
are also contained on the proxy card enclosed with those materials.
•
If you are a registered shareholder, there are three ways to vote your shares before the meeting:
By Internet (www.proxyvote.com): Use the Internet to transmit your voting instructions until 11:59 p.m.
EDT on May 19, 2021 for shares held directly, and by 11:59 p.m. EDT on May 17, 2021 for shares held
in the Nelnet Inc. Employee Share Purchase Plan. Have your Notice of Internet Availability of Proxy
Materials with you when you access the website and follow the instructions to obtain your records and to
create an electronic voting instruction form.
By mail: You can vote by mail by requesting a paper copy of the materials, which will include a proxy
card. There is no charge for requesting a paper copy of the materials. To be valid, proxy cards must be
received before the start of the Annual Meeting. If you want to receive a paper or e-mail copy of the
proxy materials, please choose one of the following methods to make your request:
•
•
•
By internet:
By telephone:
By e-mail*:
www.proxyvote.com
1-800-579-1639
sendmaterial@proxyvote.com
*
If requesting materials by e-mail, please send a blank e-mail with your 16-Digit Control Number in
the subject line.
By telephone (1-800-690-6903): Use any touch-tone phone to transmit your voting instructions until
11:59 p.m. EDT on May 19, 2021 for shares held directly, and by 11:59 p.m. EDT on May 17, 2021 for
shares held in the Nelnet Inc. Employee Share Purchase Plan. Have your proxy card with you when you
call and follow the instructions.
2
•
If your shares are held in street name, your broker, bank, or other holder of record may provide you with a
Notice of Internet Availability of Proxy Materials. Follow the instructions on the Notice to access our proxy
materials and vote online or to request a paper or e-mail copy of our proxy materials. If you receive these
materials in paper form, the materials will include a voting instruction card so you can instruct your broker,
bank, or other holder of record how to vote your shares.
You may vote your shares by attending the Annual Meeting through the virtual meeting process or in person. If you are a
registered shareholder, you can vote at the meeting any shares that were registered in your name as the shareholder of record as
of the record date. If your shares are held in street name, you are not a holder of record of those shares and cannot vote them at
the Annual Meeting unless you have a legal proxy from the holder of record. If you plan to attend in person and vote your street
name shares at the Annual Meeting, you should request a legal proxy from your broker, bank, or other holder of record and
bring it with you to the meeting along with proof of identification.
If you plan to vote your shares in person at the Annual Meeting, please pick up a ballot at the registration table upon your
arrival. You may then submit your ballot to a meeting usher at the time designated during the meeting. Ballots will not be
distributed during the meeting. Shares may not be voted after the final vote at the meeting.
Even if you plan to attend the Annual Meeting through the virtual meeting process or in person, we encourage you to vote your
shares by proxy.
Description of Virtual Meeting Process
Shareholders are encouraged to attend and participate in the Annual Meeting via the Internet through the virtual meeting
process, and may do so by visiting http://www.virtualshareholdermeeting.com/NNI2021. The Annual Meeting will begin
promptly at 8:30 a.m. Central Time on May 20, 2021 and online check-in will begin at 8:15 a.m. Central Time. Please allow
ample time for the online check-in procedures. Interested persons who were not shareholders as of the close of business on the
record date may listen, but not participate, in the Annual Meeting via http://www.virtualshareholdermeeting.com/NNI2021. In
order to attend, participate in, and vote at the Annual Meeting through the virtual meeting process, registered shareholders will
need
into http://
www.virtualshareholdermeeting.com/NNI2021 and follow the provided instructions. Holders of shares in street name who do
not have a control number may gain access to the Annual Meeting by logging into their brokerage firm’s web site and selecting
the shareholder communications mailbox to link through to the Annual Meeting. Instructions should also be provided on the
voting instruction card provided by their broker, bank, or other nominee. Shareholders who wish to submit a question may do
so during the Annual Meeting through http://www.virtualshareholdermeeting.com/NNI2021.
their 16-digit control number
their proxy card or Notice
received with
to use
log
to
We have structured our hybrid virtual annual meeting to provide shareholders who attend virtually with the same rights as those
shareholders who attend the meeting in person, including the ability to vote shares electronically during the meeting and ask
questions in accordance with the rules of conduct for the meeting. The hybrid virtual meeting platform is supported across
browsers and devices running the most updated version of applicable software and plug-ins. Participants should ensure they can
hear streaming audio prior to the start of the meeting. If you encounter technical difficulties with the virtual meeting platform
on the meeting day, please call the technical support number that will be posted on the meeting website. Technical support will
be available starting at 8:00 a.m. Central Time and until the end of the meeting.
If you wish to virtually submit a question during the meeting, type your question into the "Submit a question" field, and click
"Submit." Questions may be submitted beginning at 8:30 a.m. Central Time. Questions relevant to meeting matters will be
answered during the meeting. Questions regarding personal matters or matters not relevant to meeting matters will not be
answered.
3
What Items Require Your Vote
There are three proposals that will be presented for your consideration at the meeting:
•
•
•
Electing the three Class I director nominees named in this proxy statement to the Board of Directors for three-year
terms
Ratifying the appointment of KPMG LLP as the Company's independent registered public accounting firm
(“independent auditor”) for 2021
Approving on an advisory basis the Company's executive compensation
Each of the proposals have been submitted on behalf of the Company's Board of Directors.
How You Can Change Your Vote
If you are a registered shareholder, you can revoke your proxy and change your vote prior to the Annual Meeting by:
•
•
•
Sending a written notice of revocation to our Corporate Secretary at 121 South 13th Street, Suite 100, Lincoln,
Nebraska 68508 (the notification must be received by the close of business on May 19, 2021)
Voting again by Internet prior to 11:59 p.m. EDT on May 19, 2021 for shares held directly, and by 11:59 p.m.
EDT on May 17, 2021 for shares held in the Nelnet Inc. Employee Share Purchase Plan (only the latest vote you
submit will be counted)
Submitting a new properly signed and dated paper proxy card with a later date (your proxy card must be received
before the start of the Annual Meeting)
If your shares are held in street name, you should contact your broker, bank, or other holder of record about revoking your
voting instructions and changing your vote prior to the meeting.
If you are eligible to vote at the Annual Meeting, you also can revoke your proxy or voting instructions and change your vote at
the Annual Meeting by submitting a written or virtual ballot before the final vote at the meeting. Your attendance at the Annual
Meeting will not automatically revoke your proxy; you must specifically revoke your proxy.
Quorum Needed To Hold the Meeting
In order to conduct the Annual Meeting, the Company's Articles of Incorporation and Bylaws provide that shares constituting a
majority of the voting power of all the shares of the Company's stock entitled to vote must be present in person or by proxy.
This is called a quorum. If you return valid proxy instructions or vote in person at the Annual Meeting, your shares will be
considered part of the quorum. Abstentions and broker “non-votes” will be counted as present and entitled to vote for purposes
of determining a quorum. New York Stock Exchange ("NYSE") rules allow banks, brokers, and other nominees to vote in
their discretion the shares held by them for a customer on matters that the NYSE considers to be routine, even though
the bank, broker, or nominee has not received voting instructions from the customer. A broker “non-vote” occurs when
a bank, broker, or other nominee has not received voting instructions from the customer and the bank, broker, or other
nominee cannot vote the shares because the matter is not considered to be routine under NYSE rules.
Under NYSE rules, the election of directors and the advisory vote to approve executive compensation will not be
considered to be “routine” matters, and banks, brokers, and other nominees who are members of the NYSE will not be
permitted to vote shares held by them for a customer on these matters without instructions from the beneficial owner of
the shares.
4
Counting Your Vote
If you provide specific voting instructions, your shares will be voted as instructed. If you hold shares in your name and submit a
valid proxy without giving specific voting instructions, your shares will be voted as recommended by our Board of Directors. If
you hold your shares in your name and do not return a valid proxy and do not vote through the virtual meeting process for the
Annual Meeting or in person at the Annual Meeting, your shares will not be voted. If you hold your shares in the name of a
bank, broker, or other nominee, and you do not give that nominee instructions on how you want your shares to be voted, the
nominee has the authority to vote your shares in the nominee’s discretion on the ratification of the appointment of KPMG LLP
as independent auditor. However, as discussed above, the nominee will not be permitted to vote your shares without your
instructions on the election of directors or on the advisory vote to approve executive compensation.
Giving the Board your proxy also means that you authorize their representatives to vote in their discretion on any other matter
that may be properly presented at the Annual Meeting. As of the date of this proxy statement, the Company does not know of
any other matters to be presented at the Annual Meeting.
What Vote is Needed
Our Articles of Incorporation provide that directors are elected by a majority of the votes cast by the shares entitled to vote at
the Annual Meeting. Although abstentions and broker “non-votes” will be counted for purposes of determining whether there is
a quorum (as discussed above), they will not be counted as votes cast in the election of directors and thus will not have the
effect of votes for or against any director.
With respect to Proposal 1 (the election of the Class I directors), shareholders of the Company, or their proxy if one is
appointed, have cumulative voting rights under the Nebraska Model Business Corporation Act. That is, shareholders, or their
proxy, may vote their shares for as many directors as are to be elected, or may cumulate such shares and give one nominee as
many votes as the number of directors to be elected multiplied by the number of their shares, or may distribute votes on the
same principle among as many or as few nominees as they may desire. If a shareholder desires to vote cumulatively, he or she
must vote in person or give his or her specific cumulative voting instructions to the designated proxy that the number of votes
represented by his or her shares are to be cast for one or more designated nominees. Cumulative voting is not available for
internet voting, including online voting through the virtual meeting process.
The Nebraska Model Business Corporation Act and our Bylaws provide that a majority of votes cast at the meeting is required
to approve Proposals 2 and 3 (ratifying the appointment of KPMG LLP and approving on an advisory basis the Company's
executive compensation, respectively). Although abstentions and broker “non-votes” will be counted for purposes of
determining whether there is a quorum (as discussed above), they will not be counted as votes cast with respect to Proposals 2
and 3 and thus will not have the effect of votes for or against Proposals 2 and 3.
In accordance with the provisions of our Articles of Incorporation, the Class A common stock and Class B common stock will
vote as a single class on each of Proposals 1, 2 and 3.
Voting Recommendations
The Company's Board of Directors recommends that you vote:
•
•
•
“FOR” the election of each of the Class I director nominees to the Board of Directors for a three-year term
“FOR” the ratification of the appointment of KPMG LLP as the Company's independent registered public
accounting firm for 2021
“FOR” the approval of the compensation of the Company's named executive officers, as disclosed in this proxy
statement
A proxy, when properly executed and not revoked, will be voted in accordance with the authorization and instructions
contained therein. Unless a shareholder specifies otherwise, all shares represented will be voted in accordance with the
recommendations of the Company's Board of Directors.
Voting Results
The preliminary voting results will be announced at the Annual Meeting. The final voting results will be reported in a current
report on Form 8-K to be filed within four business days after the Annual Meeting date.
5
Cost of This Proxy Solicitation
The Company will pay the cost of soliciting proxies, including the preparation, assembly, and furnishing of proxy solicitation
and other required annual meeting materials. Directors, officers, and regular employees of the Company may solicit proxies by
telephone, electronic communications, or personal contact, for which they will not receive any additional compensation in
respect of such solicitations. The Company will also reimburse brokerage firms and others for all reasonable expenses for
furnishing proxy solicitation and other required annual meeting materials to beneficial owners of the Company's stock.
PROPOSAL 1 - ELECTION OF DIRECTORS
The Company’s Board of Directors consists of nine directors who are divided into three classes, designated as Class I, Class II,
and Class III. In accordance with the Company’s Articles of Incorporation, the number of directors constituting the entire Board
is fixed exclusively by the Board from time to time. The classes of directors serve for staggered three-year terms, with their
current terms ending at the annual meeting of shareholders in the following years: Class I directors - 2021; Class II directors -
2022; and Class III directors - 2023.
Shareholders are asked to elect three Class I directors to serve on the Board of Directors for a three-year term ending at the
2024 annual meeting of shareholders. The nominees for these Class I directorships are Michael S. Dunlap, Preeta D. Bansal,
and JoAnn M. Martin. Each nominee is currently serving on the Board as a Class I director. Mr. Dunlap was most recently
elected to the Board by the shareholders at the 2018 annual meeting of shareholders. Mses. Bansal and Martin were appointed
by the Board as Class I members on November 8, 2018, and March 23, 2020, respectively, upon the recommendation of the
Board's Nominating and Corporate Governance Committee, for a term expiring at the Company's 2021 annual meeting of
shareholders. Ms. Martin was initially appointed to the Board as a Class III member on March 19, 2020, prior to a rebalancing
of the distribution of the directors among the classes on March 23, 2020. In making these nominations, the Board and the
Nominating and Corporate Governance Committee considered each nominee’s specific experience, qualifications, and skills as
described below.
Upon the recommendation of the Board's Nominating and Corporate Governance Committee, the Board has nominated each of
the Class I director nominees named below to serve on the Board of Directors as Class I directors.
The Board of Directors recommends that shareholders vote FOR the election of each Class I director nominee (named
below) to the Board of Directors.
In the event that before the election any Class I director nominee becomes unable to serve or for good cause unwilling to serve,
if elected, the shares represented by proxy will be voted for any substitute nominees designated by the Board, unless the proxy
does not indicate that the shares are to be voted for all Class I director nominees, or, if the Board does not designate any
substitute nominees, the shares represented by proxy may be voted for a reduced number of nominees. The Board of Directors
knows of no reason why any of the persons nominated for election as Class I directors might be unable or unwilling to serve if
elected, and each nominee has consented to and expressed an intention to serve if elected. There are no arrangements or
understandings between any of the nominees and any other person pursuant to which any of the nominees was selected as a
nominee.
The following sets forth certain information about (i) each of the three nominees for election as Class I directors to serve for a
three-year term expiring at the 2024 annual meeting of shareholders, and (ii) each of the current Class II and Class III directors
whose term of office continues beyond the 2021 Annual Meeting. The information includes, with respect to each such person:
(a) their age, (b) the year during which they were first elected a director of the Company, (c) their principal occupation(s) and
any other directorships with publicly-held companies (if applicable) during the past five years, and (d) the qualifications of such
person that led to the conclusion that such person should serve as a director of the Company.
6
Class I Director Nominees to Hold Office for a Term Expiring at the 2024 Annual Meeting of Shareholders
Michael S. Dunlap, 57
Director since
January 1996
Preeta D. Bansal, 55
Director since
November 2018
JoAnn M. Martin, 66
Director since
March 2020
Executive Chairman, Nelnet, Inc.
Nelnet, Inc.
Executive Chairman, January 2014 - present
Chairman, January 1996 - December 2013
Chief Executive Officer, May 2007 - December 2013 and December 2001 - August 2003
Co-Chief Executive Officer, August 2003 - May 2007
Farmers & Merchants Investment Inc. (“F&M”), the parent of Union Bank and Trust
Company (“Union Bank”) (F&M and Union Bank are affiliates of the Company)
Chairman, January 2013 - present
Co-President and Director, January 2007 - January 2013
Mr. Dunlap's qualifications include more than 30 years of experience in the areas of banking and
financial services, leadership, strategic operations, and management, including as one of our co-
founders and our Chairman since the Company's inception, as well as his experience as a member
of the boards of directors of numerous other organizations. Mr. Dunlap's knowledge of every part
of our business and his intense focus on innovation and excellence are keys to our Board's success.
Massachusetts Institute of Technology, Lecturer, Senior Advisor, and Visiting Scholar - 2014
- 2019
HSBC Holdings plc, a multinational investment bank and financial services company, Global
General Counsel for Litigation and Regulatory Affairs, 2012 - 2013
Office of Management and Budget, Executive Office of the President of the United States,
General Counsel and Senior Policy Advisor, 2009 - 2011
Skadden, Arps, Slate, Meagher & Flom LLC, an international law firm, Partner, 2003 - 2009
United States Commission on International Religious Freedom, Commissioner, 2003 - 2009
(Chair, 2004 - 2005)
University of Nebraska College of Law, Visiting Professor, 2001 - 2003
State of New York, Solicitor General, 1999 - 2001
Ms. Bansal's qualifications include over 30 years of experience in corporate and public law,
banking, financial services, government, regulation, public policy, and academia as a distinguished
lawyer and global business leader. Ms. Bansal provides to the Board of Directors and the Company
valuable insight and leadership on various business, compliance, regulatory, and policy issues. Ms.
Bansal is a Henry Crown Fellow at the Aspen Institute, a life member of the Council on Foreign
Relations, and active with numerous local, national and global organizations. She received the
National Organization of Women’s “Woman of Power and Influence Award” in 2006 and was
named one of the “50 Most Influential Minority Lawyers in America” by the National Law
Journal in 2008.
Vice Chair, Ameritas Mutual Holding Company and Ameritas Life Insurance Corp.
Ameritas Mutual Holding Company is the parent company and owns Ameritas Holding
Company, which owns 100 percent of the stock of Ameritas Life Insurance Corp. These
entities offer a wide range of insurance and financial products and services to individuals,
families, and businesses.
Vice Chair, Ameritas Mutual Holding Company and Ameritas Life Insurance Corp.,
January 2020 - present
Chair, Ameritas Life Insurance Corp., August 2008 - January 2020
Chief Executive Officer, Ameritas Mutual Holding Company, 2009 - January 2020
President, Ameritas Mutual Holding Company, January 2009 - April 2017
National Research Corporation ("NRC"), a Lincoln, Nebraska-based publicly traded health
care consumer data analytics company.
Director, June 2001 - present
Ms. Martin's qualifications include a financial background as a certified public accountant and as
the former Chief Executive Officer of a mutual insurance holding company. She also has past
leadership experiences as a director of the Omaha branch of the Federal Reserve Bank of Kansas
City and other organizations, including past Chair of the American Council of Life Insurers.
7
Class II Directors Continuing in Office for a Term Expiring at the 2022 Annual Meeting of Shareholders
James P. Abel, 70
Director since
August 2003
William R. Cintani, 68
Director since
May 2012
Chief Executive Officer, NEBCO, Inc.
NEBCO, Inc., a company with interests in the manufacture of concrete building materials,
road construction, insurance, mining, railroading, farming, and real estate.
Chief Executive Officer, 2004 - present
President and Chief Executive Officer, 1983 - 2004
Ameritas Mutual Holding Company is the parent company and owns Ameritas Holding
Company, which owns 100 percent of the stock of Ameritas Life Insurance Corp. These
entities offer a wide range of insurance and financial products and services to individuals,
families, and businesses.
Chairman of the Board of Directors, Ameritas Mutual Holding Company and Ameritas
Holding Company, January 2006 - present
Director, Ameritas Life Insurance Corp., July 1993 - present
Mr. Abel's qualifications include his experience on boards of directors of other private
companies and his demonstrated executive leadership abilities and management experience as
Chief Executive Officer of a complex diversified organization, as well as his knowledge of
operations and experience with mergers and acquisitions, all of which give him critical insights
into the operational requirements of the Company.
Chairman and Chief Executive Officer, Mapes Industries
Mapes Industries, a diversified manufacturer of specialty architectural products with
distribution across the United States and Canada.
Chairman and Chief Executive Officer, 1993 - present
Mr. Cintani's qualifications include more than 40 years of managing a diverse, nationwide
manufacturing business with distribution in all 50 states and Canada. Mr. Cintani's service on
numerous civic, philanthropic, and service boards has provided him with a wide array of
experience in both corporate governance and operations. His practical knowledge and board
experience provide the Company with a resource for all aspects of finance, operations, IT, and
strategic planning. In addition, Mr. Cintani served 10 years as a member of the board of
directors for certain of the Company's asset-backed securities special purpose corporations.
Kimberly K. Rath, 60
Director since
October 2007
Co-Chair, Talent Plus, Inc.
Talent Plus, Inc., a global human resources consulting firm.
Co-Chair, August 2013 - present
President, Talent Plus, Inc., 2016 - 2019
Co-Founder, Talent Plus, Inc., 1989 - present
Ms. Rath's qualifications include over 30 years of experience in the field of human resources,
with expertise in executive development, employee engagement, and human capital
management. Ms. Rath has over 30 years of experience leading an international executive
management consulting and training organization, working with major global companies. Ms.
Rath serves as an executive strategic advisor to many leaders across the globe in both private
and public sectors.
8
Class III Directors Continuing in Office for a Term Expiring at the 2023 Annual Meeting of Shareholders
Kathleen A. Farrell, 57
Director since
October 2007
David S. Graff, 38
Director since
May 2014
Dean and Professor of Finance, College of Business, University of Nebraska-Lincoln
College of Business, University of Nebraska - Lincoln
Dean, December 2017 - present
Professor of Finance, August 2009 - present
Interim Dean, January 2017 - December 2017
Chair, Finance Department, August 2014 - December 2016
Senior Associate Dean of Academic Programs, August 2011 - July 2014
Associate Dean of Academic Programs, August 2010 - August 2011
Associate Professor of Finance, 2001 - July 2009
Assistant Professor of Finance, August 1993 - 2001
Dr. Farrell's qualifications include her expertise in corporate finance, executive turnover, and
executive compensation, and her prior experience as an auditor at a national public accounting
firm. Dr. Farrell has achieved designation as a Certified Public Accountant (inactive), has almost
30 years of experience teaching university courses in the areas of banking and finance, and has
conducted extensive research on these topics. Dr. Farrell has also published articles on these topics
in numerous scholarly journals.
Chief Executive Officer, Agile Sports Technologies, Inc. (doing business as Hudl)
Hudl provides online video analysis and coaching tools software for professional, college,
high school, club, and youth teams and athletes, and Hudl software is used by more than
180,000 teams and 6 million users around the world, serving more than 40 different sports,
including the National Hockey League, National Football League, National Basketball
Association, and English Premier League. Hudl has approximately 2,300 employees in 20
countries.
Chief Executive Officer, May 2006 - present
Mr. Graff's qualifications include his experience and expertise in computer science, marketing, and
sales. In addition, as co-founder of Hudl, Mr. Graff provides the Board of Directors and the
Company significant expertise in business development and innovation. Mr. Graff serves on the
Advisory Board for the Jeffrey S. Raikes School of Computer Science and Management at the
University of Nebraska. In 2010, Mr. Graff was featured on Inc. Magazine's 30 Under 30 list along
with the other Hudl co-founders, and in 2016 was named one of Fast Company's Most Creative
People. In addition, Mr. Graff served as a member of the board of directors for certain of the
Company's asset-backed securities special purpose corporations.
Thomas E. Henning, 68
Director since
August 2003
President and Chief Executive Officer, Assurity Group, Inc. and its subsidiary, Assurity Life
Insurance Company
Assurity Group, Inc. and its subsidiary, Assurity Life Insurance Company, which offers a
variety of disability income and critical illness protection, life insurance, and annuity
products.
President and Chief Executive Officer, 1990 - present
Great Western Bancorp, Inc. ("GWB") and Great Western Bank; GWB is a publicly traded
full service regional bank holding company.
Director, August 2015 - present
Federal Home Loan Bank Topeka, a part of the 12-member Federal Home Loan Bank
system. The bank serves the states of Oklahoma, Kansas, Nebraska, and Colorado and
provides liquidity to member institutions to assist in financing real estate.
Director, March 2007 - October 2015
Mr. Henning's qualifications include over 30 years of experience as President and Chief Executive
Officer of a large insurance company, his prior experience as President of a regional bank, his
financial expertise, including being a Chartered Financial Analyst, his experience in risk
assessment and management, and his vast knowledge and experience in leadership and
management. Mr. Henning also completed a comprehensive program of study by the National
Association of Corporate Directors ("NACD") and has been named a NACD Fellow.
9
CORPORATE GOVERNANCE
Code of Business Conduct and Ethics for Directors, Officers, and Employees
The Company has a written code of business conduct and ethics that applies to all of the Company's directors, officers, and
employees, including the Company's Executive Chairman, Chief Executive Officer, President, Chief Operating Officer, and
Chief Financial Officer (who is also the Company's principal accounting officer), and is designed to promote ethical and legal
conduct. Among other items, the code addresses the ethical handling of actual or potential conflicts of interest, compliance with
laws, accurate financial reporting, and procedures for promoting compliance with, and reporting violations of, the code. This
code is available on the Company's investor relations website at www.nelnetinvestors.com under “Corporate Governance” and
is available in print to any shareholder who requests it. Any future amendments to or waivers of the code, to the extent
applicable to any executive officer or director, will be posted at this location on the Company's website.
Board Composition and Director Independence
The Board of Directors is composed of a majority of independent directors as defined by the rules of the NYSE. A director does
not qualify as an independent director unless the Board has determined, pursuant to applicable legal and regulatory
requirements, that such director has no material relationship with the Company (either directly or as a partner, shareholder, or
officer of an organization that has a relationship with the Company). The Nominating and Corporate Governance Committee
reviews compliance with the definition of “independent” director annually. Mr. Dunlap beneficially owns 82.3% of the
combined voting power of the Company's shareholders. Because of his beneficial ownership, Mr. Dunlap can effectively elect
each member of the Board of Directors and has the power to defeat or remove each member of the Board of Directors.
The Board has evaluated commercial, consulting, charitable, familial, and other relationships with each of its directors, director
nominees, and entities with respect to which they are an executive officer, partner, member, and/or significant shareholder. As
part of this evaluation, the Board noted that none of the current directors received any consulting, advisory, or other
compensatory fees from the Company, other than those described under "Certain Relationships and Related Transactions" and
"Director Compensation Table for Fiscal Year 2020." Based on this independence review and evaluation, and on other facts and
circumstances the Board deemed relevant, the Board, in its business judgment, has determined that all of the Company's current
directors are independent, with the exception of Mr. Dunlap, who is currently an employee of the Company.
The Company's Nominating and Corporate Governance Committee is responsible for reviewing and approving all new
transactions, and any material amendments or modifications to existing transactions, between the Company and related parties,
and taking such actions as the Committee deems necessary and appropriate in relation to such transactions, including reporting
to the Board of Directors with respect to such transactions as the Committee deems necessary and appropriate. See “Certain
Relationships and Related Transactions.”
Governance Guidelines of the Board
The Board's governance is guided by the Company's Corporate Governance Guidelines. The Board's current guidelines are
available on the Company's investor relations website at www.nelnetinvestors.com under “Corporate Governance” and are
available in print to any shareholder who requests them. Among other matters, the guidelines provide for the following:
•
•
•
•
A majority of the members of the Board must be independent directors.
The Board undertakes an annual self-review.
The Board and each Board Committee has the authority to engage independent or outside counsel, accountants, or
other advisors, as it determines to be necessary or appropriate. All related fees and costs of such advisors are paid
by the Company.
Board members have open communication access to all members of management and counsel.
Shareholder Communications with the Board
Directors who are not employees or officers of the Company or any of its subsidiaries ("Non-Employee Directors") meet in
executive session, without the presence of management. Mr. Henning currently presides at these executive sessions. Anyone
who has a concern about the Company may communicate that concern directly to these Non-Employee Directors. Such
communication may be mailed to the Corporate Secretary at Nelnet, Inc., 121 South 13th Street, Suite 100, Lincoln, Nebraska
68508 or anonymously submitted via the Company's investor relations website at www.nelnetinvestors.com under "Corporate
Governance" - “Anonymous Reporting.” All such communications will be forwarded to the appropriate Non-Employee
10
Directors for their review. The Non-Employee Directors may take any action deemed appropriate or necessary, including the
retention of independent or outside counsel, accountants, or other advisors, with respect to any such communication addressed
to them. No adverse action will be taken against any individual making any such communication in good faith to the Non-
Employee Directors.
Board Diversity
In considering whether to recommend any candidate for election to the Board, including candidates recommended by
shareholders, the Nominating and Corporate Governance Committee will apply the criteria set forth in Nelnet's Corporate
Governance Guidelines. These criteria include the candidate's independence, wisdom, integrity, understanding and acceptance
of the Company's corporate philosophy, business or professional knowledge and experience, record of accomplishment, and
willingness to commit time and energy to the Company. Our Corporate Governance Guidelines also specify that the value of
diversity on the Board should be considered by the Nominating and Corporate Governance Committee in the director
identification and nomination process. The Board is committed to a strong and diverse membership and a thorough process to
identify those individuals who can best contribute to the Company's continued success. As part of this process, the Nominating
and Corporate Governance Committee will continue to take all reasonable steps to identify and consider for Board membership
all candidates who satisfy the business needs of the Company at the time of appointment.
The Committee seeks nominees with a broad diversity of experience, professional skills, and backgrounds. The Committee does
not assign specific weights to particular criteria and no particular criterion is necessarily applicable to all prospective nominees.
The Company believes that the backgrounds and qualifications of the directors, considered as a group, should provide a
significant composite mix of experience, knowledge, and abilities that will allow the Board to fulfill its responsibilities.
Nominees are not discriminated against on the basis of race, gender, religion, national origin, sexual orientation, disability, or
any other basis proscribed by law.
The Board's Role in Risk Oversight
Our Board of Directors oversees an enterprise-wide approach to risk management, designed to support the achievement of
organizational objectives, including strategic objectives, to improve long-term organizational performance and enhance
shareholder value. A fundamental part of risk management is not only understanding the risks a company faces and what steps
management is taking to manage those risks, but also understanding what level of risk is appropriate for the company in
fostering a culture of risk-aware and risk-adjusted decision-making that allows the Company to avoid adverse financial and
operational impacts. The involvement of the full Board of Directors in setting the Company's business strategy is a key part of
its assessment of management's appetite for risk and also a determination of what constitutes an appropriate level of risk for the
Company.
While the Board of Directors has the ultimate oversight responsibility for the risk management process, various committees of
the Board also have responsibility for risk management oversight. In particular, the Risk and Finance Committee assists the
Board of Directors in fulfilling its responsibilities with respect to oversight of the Company's enterprise-wide risk management
framework and oversight of the Company's strategies relating to capital management, including risks related to the availability/
transition of LIBOR as a benchmark rate applicable to significant amounts of the Company's assets and liabilities. The Audit
Committee focuses on the integrity of the Company's financial statements, system of internal controls, and policies for risk
assessment and risk management. The Nominating and Corporate Governance Committee assists the Board of Directors in
fulfilling its oversight responsibility with respect to regulatory, compliance, related-party transactions, and public policy issues
that affect the Company, and works closely with the Company's legal and policy services groups. The Compliance Committee
assists the Board of Directors in fulfilling its responsibility to oversee the Company's Compliance Management Program, which
is designed to ensure compliance with consumer protection laws, regulations, and corporate policies. In addition, the Audit
Committee and the Risk and Finance Committee oversee various aspects of the Company’s initiatives, procedures, controls,
plans, and other measures related to cybersecurity risks, including measures designed to prevent, detect, and respond to
cybersecurity threats, with the Board of Directors receiving frequent updates with respect to such measures and related
cybersecurity risk management activities. Finally, in setting compensation philosophy and strategy, the People Development
and Compensation Committee strives to create incentives that encourage an appropriate level of risk-taking behavior consistent
with the Company's business strategy.
11
Board Leadership Structure
Mr. Dunlap serves as Executive Chairman of the Board and Jeffrey R. Noordhoek serves as Chief Executive Officer. While the
Board of Directors and management do not believe either a combined Chairman and CEO or separate roles necessarily
guarantee better governance or the absence of risk, they believe the Company's current leadership structure is appropriate for
our business at this time. The Board believes that its current leadership structure best serves the objectives of the Board's
oversight of management, the ability of the Board to carry out its roles and responsibilities on behalf of the shareholders, and
the Company's overall corporate governance. The Board also believes that the current separation of the Chairman and CEO
roles allows the CEO to focus his time and energy on operating and managing the Company, while leveraging the experience
and perspectives of the Executive Chairman. It also allows the Executive Chairman to focus on leadership of the Board in
addition to providing management direction on company-wide issues. The Board periodically reviews the leadership structure
and may make changes in the future.
In addition, Mr. Henning is currently serving as the independent Lead Director of the Board. The Board believes having a lead
independent director is an important governance practice, given that the Executive Chairman is not an independent director
under our Corporate Governance Guidelines and applicable rules. Mr. Dunlap, as Executive Chairman, provides leadership to
the Board and works with the Board to define its structure and activities in the fulfillment of its responsibilities. In conjunction
with Mr. Henning as the independent Lead Director, Mr. Dunlap sets the Board agendas with Board and management input,
facilitates communication among directors, works with Mr. Henning to provide appropriate information flow to the Board, and
presides at meetings of the Board of Directors and shareholders. Mr. Henning works with Mr. Dunlap and other Board members
to provide strong, independent oversight of the Company's management and affairs. Among other things, Mr. Henning is
involved in the development of Board meeting agendas as well as the quality, quantity, and timeliness of information sent to the
Board, serves as the principal liaison between Mr. Dunlap and the independent directors, and chairs an executive session of the
Non-Employee Directors at most regularly scheduled Board meetings. This structure allows the Company to optimize the roles
of Chairman, CEO, and independent Lead Director and follow sound governance practices.
Board Committees
The Board uses committees to assist it in the performance of its duties. During 2020, the standing committees of the Board were
the Audit Committee, People Development and Compensation Committee, Compliance Committee, Nominating and Corporate
Governance Committee, Risk and Finance Committee, and Executive Committee. During 2020, all Board committees, with the
exception of the Executive Committee, were composed entirely of independent directors, and each committee other than the
Executive Committee operates pursuant to a formal written charter, approved by the Board, which sets forth the committees'
functions and responsibilities. Each committee charter is posted on the Company's investor relations website at
www.nelnetinvestors.com under “Corporate Governance” - “Governance Documents” and is available in print to any
shareholder who requests it. The purposes of each committee and their current members are set forth below.
Audit Committee
The Audit Committee is composed of Ms. Martin, and Messrs. Cintani, Graff, and Henning. The Committee held six meetings
in 2020. Each member of the Audit Committee is (1) “independent” in accordance with NYSE and SEC rules and regulations
and (2) sufficiently financially literate to enable them to discharge the responsibilities of an Audit Committee member. The
Board has determined that all of the members of the Audit Committee have accounting and related financial management
expertise which qualifies each of them as an “audit committee financial expert,” as defined in the applicable SEC rules and
regulations.
The Audit Committee provides assistance to the Board of Directors in its oversight of the integrity of the Company's financial
statements, the Company's system of internal controls, the Company's policy standards and guidelines for risk assessment and
risk management, the qualifications and independence of the Company's independent auditor, the performance of the
Company's internal and independent auditors, and the Company's compliance with other regulatory and legal requirements. The
Audit Committee discusses with management and the independent auditor the Company's annual audited financial statements,
including the Company's disclosures made under “Management's Discussion and Analysis of Financial Condition and Results
of Operations” in its filings with the SEC, and recommends to the Board of Directors whether such audited financial statements
should be included in the Company's annual report on Form 10-K. The Audit Committee also selects the independent auditors
for the next year and presents such selection to the shareholders for ratification.
12
People Development and Compensation Committee
The People Development and Compensation Committee is composed of Mses. Bansal, Farrell, and Rath, and Mr. Abel. The
Committee held four meetings in 2020. The members of the People Development and Compensation Committee are
“independent” in accordance with NYSE and SEC rules and regulations. The People Development and Compensation
Committee oversees the Company's compensation and benefit policies, succession planning, and leadership and people
development. The Company's compensation policies are designed with the goal of maximizing the success of our customers,
associates, and shareholder value over the long term. The People Development and Compensation Committee believes this goal
is best realized by utilizing a compensation program which serves to attract and retain superior executive talent by providing
management with performance-based incentives and closely aligning the financial interests of management with those of the
Company's shareholders. The level of compensation is based on numerous factors, including achievement of results and
financial objectives established by this Committee and the Board of Directors. See “Executive Compensation.”
Compliance Committee
The Compliance Committee is composed of Mses. Bansal, Farrell, and Martin, and Mr. Cintani. The Committee held four
meetings in 2020. The Compliance Committee has principal oversight responsibility with respect to the Company's Compliance
Management Program, including approval of applicable corporate policies, ensuring adequate resources are available for
training and communications, ensuring the Program is designed to adequately address consumer complaints and other
compliance issues, and receiving periodic reporting from management regarding compliance activities.
Nominating and Corporate Governance Committee
The Nominating and Corporate Governance Committee is composed of Mses. Bansal, Farrell, and Rath, and Messrs. Abel and
Graff. The Committee held four meetings in 2020. The members of the Nominating and Corporate Governance Committee are
“independent” as determined in accordance with NYSE and SEC rules and regulations. The Nominating and Corporate
Governance Committee is responsible for identifying and recommending qualified nominees to serve on the Company's Board
of Directors, identifying members of the Board to serve on each Board committee, overseeing the evaluation by the Board of
itself and its committees, identifying individuals to serve as officers of the Company and recommending such individuals to the
Board, as well as developing and overseeing the Company's internal corporate governance processes. The Nominating and
Corporate Governance Committee reviews related party transactions in accordance with the written policies and procedures
adopted by the Board of Directors for the Committee's review of related party transactions, and takes such actions as the
Committee deems necessary and appropriate in relation to such transactions, including reporting to the Board of Directors with
respect to such transactions as the Committee deems necessary and appropriate.
The Company's Corporate Governance Guidelines establish criteria for specific qualities and skills to be considered by the
Nominating and Corporate Governance Committee as necessary for the Company's directors to possess. These criteria include,
among other items, independence, diversity, integrity, understanding the Company's corporate philosophy, valid business or
professional knowledge, proven record of accomplishment with excellent organizations, ability to challenge and stimulate
management, and willingness to commit time and energy. The Nominating and Corporate Governance Committee has been
given the responsibility to take all reasonable steps to identify and evaluate nominees for director and has adopted a policy
requiring it to consider written proposals for director nominees received from shareholders of the Company. No such proposals
were received during 2020 from a beneficial owner of more than 5% of Nelnet's stock (other than current management). There
is no difference in the manner in which the Committee evaluates director nominees based on whether the nominee is
recommended by a shareholder. All of the nominees identified in this proxy statement have been recommended by the
Committee.
Ms. Bansal and Ms. Martin are current members of the Board standing for election to the Board by the Company’s shareholders
for the first time at the 2021 Annual Meeting. Ms. Bansal’s nomination for appointment to the Board in November 2018 was
originally recommended by Mr. Dunlap based on Ms. Bansal’s many distinguished accomplishments in business, law, and
policy. Ms. Martin’s nomination for appointment to the Board in March 2020 (shortly after her retirement as CEO and Chair of
Ameritas) was originally recommended by Mr. Dunlap based on Ms. Martin’s many years of distinguished executive leadership
for Ameritas.
When seeking candidates for director, the Nominating and Corporate Governance Committee solicits suggestions from
incumbent directors, management, shareholders, and others. The Committee has authority under its charter to retain a search
firm for this purpose. If the Committee believes a candidate would be a valuable addition to the Board of Directors, it
recommends his or her candidacy to the full Board of Directors.
13
The Company's Bylaws include provisions setting forth the specific conditions under which persons may be nominated by
shareholders for election as directors at an annual meeting of shareholders. The provisions include the condition that nominee
proposals from shareholders must be in writing and that shareholders comply with the time-frame requirements described under
“Other Shareholder Matters - Shareholder Proposals for 2022 Annual Meeting” for shareholder proposals not included in the
Company's Proxy Statement. A copy of such provisions is available upon written request to: Nelnet, Inc., 121 South 13th Street,
Suite 100, Lincoln, Nebraska 68508, Attention: Corporate Secretary. The Company's Bylaws are also posted on the Company's
investor relations website at www.nelnetinvestors.com under “Corporate Governance” - “Governance Documents.”
Risk and Finance Committee
The Risk and Finance Committee is composed of Ms. Martin, and Messrs. Cintani, Graff, and Henning. The Committee held
four meetings in 2020. The Risk and Finance Committee has principal oversight responsibility with respect to the Company's
enterprise-wide risk management framework, including the significant strategies, policies, procedures, and systems used to
identify, assess, measure, and manage the major risks facing the Company and oversight of the Company's material financial
matters, including capital management, funding strategy, investments, and acquisitions that are material to the Company's
business.
Executive Committee
The Executive Committee is composed of Ms. Farrell and Messrs. Dunlap and Henning. The Executive Committee held no
formal meetings in 2020. The Executive Committee exercises all of the powers of the full Board in the management of the
business and affairs of the Company during the intervals between meetings of the full Board, subject only to limitations as the
Board may impose from time to time, or as limited by applicable law.
Meetings of the Board
The Board of Directors held seven meetings in 2020. All directors attended at least 75% of the meetings of the Board and
committees on which they serve.
Attendance at Annual Meetings of Shareholders
The Company does not have a policy regarding director attendance at the annual meetings of shareholders. All directors
virtually attended the prior year's annual meeting of shareholders.
Director Compensation Overview
The Company’s compensation program for Non-Employee Directors is designed to reasonably compensate Non-Employee
Directors for their service on the Board of Directors and its committees, in amounts commensurate with their roles and
involvement, and taking into consideration the significant amount of time they devote in fulfilling their duties in view of the
Company’s size, complexity, and risks, as well as the experience and skill levels required of members of the Board. The
Company intends to compensate its Non-Employee Directors in a manner that attracts and retains high quality Board members,
and ensures that their interests are aligned with the shareholders. The People Development and Compensation Committee
reviews the compensation program for Non-Employee Directors on an annual basis and makes recommendations regarding the
program to the Board.
In addition to the various components of the Company’s compensation program for Non-Employee Directors discussed under
the "Director Compensation Elements," “Director Compensation Table for Fiscal Year 2020,” and “Share Ownership
Guidelines for Board Members” captions below, the Company has a policy prohibiting members of the Board of Directors from
short sales of the Company’s stock, buying or selling call or put options or other derivatives related to the Company’s stock, or
engaging in hedging or monetization transactions with respect to any of their direct or indirect interest in the Company’s stock,
including through the use of financial instruments such as prepaid variable forwards, equity swaps, collars, and exchange funds.
The Company's policy also requires members of the Board who wish to buy or sell the Company’s stock to do so only through
Rule 10b5-1 stock trading plans, and limits the use of margin accounts or other pledge arrangements by Board members with
respect to the Company's stock. See "Compensation Discussion and Analysis" - "Prohibition on Hedging and Short Sales, and
Limits on Share Pledging."
14
Director Compensation Elements
Non-Employee Directors are primarily compensated through an annual retainer in the base amount of $100,000 for each Non-
Employee Director. An additional annual retainer of $10,000 is paid to Non-Employee Directors who serve as members on each
of the Audit Committee, People Development and Compensation Committee, Compliance Committee, Nominating and
Corporate Governance Committee, Risk and Finance Committee, or Executive Committee, as applicable. The Chair of the
Audit Committee is also paid an additional $12,500 annual retainer fee. Non-Employee Directors are also compensated for
Board meeting and committee meeting attendance, earning $1,000 for each Board and committee meeting attended, and an
additional amount for the multi-day strategic planning retreat discussed in footnote (a) to the Director Compensation Table
below. Mr. Dunlap, who is an employee of the Company, does not receive any consideration for participation in Board or
committee meetings.
The Company's Board of Directors has approved an increase in the base annual retainer for Non-Employee Directors from
$100,000 to $125,000, beginning in June 2021. The annual retainer for serving on a committee did not change and will remain
at $10,000 for each committee on which a Non-Employee Director is a member.
The Company has a Directors Stock Compensation Plan for Non-Employee Directors that was approved by the Board of
Directors and shareholders, pursuant to which Non-Employee Directors can elect to receive their annual retainer fees in the
form of cash or in shares of the Company's Class A common stock. If a Non-Employee Director elects to receive Class A
common stock, the number of shares that will be granted will be equal to the amount of the annual retainer fee otherwise
payable in cash divided by 85 percent of the fair market value of a share of Class A common stock on the date the fee is
payable. Non-Employee Directors who choose to receive Class A common stock may also elect to defer receipt of the Class A
common stock until termination of their service on the Board of Directors. Any dividends paid in respect of deferred shares
during the deferral period will also be deferred in the form of additional shares and paid out at termination of service on the
Board of Directors. This plan may be amended or terminated by the Board of Directors at any time, but no amendment or
termination will adversely affect a Non-Employee Director's rights with respect to previously deferred shares without the
consent of the Non-Employee Director.
Other Compensation
The Company offers health, dental, and vision insurance coverage benefits under the Company’s insurance plans to Non-
Employee Directors who do not currently participate in another similar group insurance plan. Such insurance coverage is
provided on generally the same terms and conditions that apply to employees of the Company.
The Company offers a matching gift program in which all employees with at least six months of service and all members of the
Board of Directors are eligible to participate. Under this program, for every dollar ($100 minimum) that an employee or Board
member contributes in cash and securities to an eligible charitable organization or educational institution, the Company will
make matching donations of additional funds, subject to terms and conditions applicable in an equal manner to all employees
and Board members. The total maximum dollar amount payable under the program is $25,000 per director or employee per
calendar year. In addition, in 2020 the Company created the Service, Not Silence fundraising campaign, through which
employees and members of the Board of Directors could donate to local and national organizations advancing racial and
socioeconomic equality and social justice, with donations matched by the Nelnet Foundation 3:1.
15
Director Compensation Table for Fiscal Year 2020
The following table sets forth summary information regarding compensation of Non-Employee Directors for the fiscal year
ended December 31, 2020.
2020 Compensation
All other compensation ($)
Director name
James P. Abel
Preeta D. Bansal
William R. Cintani
Kathleen A. Farrell
David S. Graff
Thomas E. Henning
JoAnn M. Martin
Kimberly K. Rath
Fees paid in
cash ($) (a)
Stock
awards ($) (b)
Matching gift
programs (c)
Insurance
premiums
Total ($)
20,000
22,000
22,000
23,000
23,000
20,000
19,000
18,000
141,187
152,945
152,945
164,702
152,945
167,642
172,566 (e)
141,187
—
78,250
25,000
3,000
—
15,000
28,000
9,000
—
8,895 (d)
—
—
—
—
—
—
161,187
262,090
199,945
190,702
175,945
202,642
219,566
168,187
(a)
(b)
(c)
(d)
(e)
Amounts represent cash paid to Non-Employee Directors for attendance at Board and committee meetings,
including $4,000 paid to each Non-Employee Director for participation at a multi-day Company strategic planning
retreat at which senior leadership of the Company engaged and sought input from the Board in detailed
discussions of growth and investment strategies, target opportunities, and risks and challenges.
Each of the Non-Employee Directors elected to receive their annual retainer fees for 2020 in the form of awards of
the Company's Class A common stock or deferred shares under the Directors Stock Compensation Plan, which
awards are within the scope of Financial Accounting Standards Board Accounting Standards Codification Topic
718 ("FASB ASC Topic 718"). As such, the amounts under “stock awards” in the table above represent the grant
date fair value of the stock or deferred shares computed in accordance with FASB ASC Topic 718 based on the
closing market price of the Class A common stock on the date of issuance, June 19, 2020, of $47.41 per share.
Under this plan, the Company uses 85 percent of the closing market price of the Class A common stock on the
date the annual retainer fees are payable to calculate the number of shares to be issued under this plan. Additional
information about the Company’s accounting for stock-based compensation under FASB ASC Topic 718 can be
found in Note 3 - “Summary of Significant Accounting Policies and Practices - Compensation Expense for Stock
Based Awards” and Note 20 - “Stock Based Compensation Plans - Non-employee Directors Compensation Plan”
of the Notes to Consolidated Financial Statements included in the Company’s Annual Report on Form 10-K for
the fiscal year ended December 31, 2020.
Amounts represent matching contributions by the Company to charitable organizations during 2020 under the
Company's matching gift programs, including the Service, Not Silence campaign.
Ms. Bansal received health, dental, and vision insurance coverage benefits from the Company during 2020, since
Ms. Bansal does not currently participate in another similar group insurance plan. This amount represents the
dollar value of insurance premiums paid by the Company in 2020 related to these benefits.
The Company's Board of Directors appointed Ms. Martin as a member of the Board effective March 19, 2020. At
that time, Ms. Martin elected to receive her pro rata annual retainer fees (for the period March 19, 2020 through
May 22, 2020) in the form of Class A common stock. As such, a portion of the amount under "Stock awards"
represents the grant date fair value of the pro rata stock award based on the closing market price of the Company's
Class A common stock on the date of issuance, March 19, 2020, of $43.03 per share. The fair value of the pro rata
annual retainer fee was $19,622.
16
Share Ownership Guidelines for Board Members
The People Development and Compensation Committee of the Board of Directors believes that Board members should have a
significant equity interest in the Company. In order to promote equity ownership and further align the interests of Board
members with the Company's shareholders, the Committee has recommended and the Board has adopted Share Ownership
Guidelines for Board members. Under these guidelines, each Non-Employee Director is encouraged to own shares of the
Company's Class A common stock with a value of 50% of the amount obtained by multiplying the base annual retainer fee
($100,000) by the number of years the Director has served on the Board. As of February 26, 2021, all Non-Employee Directors
owned an amount of shares in excess of that suggested by the guidelines.
EXECUTIVE OFFICERS
Under the Company's Bylaws, each executive officer holds office for a term of one year or until his or her successor is elected
and qualified. The executive officers of the Company are elected by the Board of Directors at its annual meeting immediately
following the annual meeting of shareholders.
The following sets forth the executive officers of the Company, including their names, their ages, their positions with the
Company, and if different, their business experience during the last five years.
See "Proposal 1 - Election of Directors" for biographical information regarding Mr. Dunlap.
Name and Age Position and Business Experience
Terry J. Heimes, 56
James D. Kruger, 58
William J. Munn, 53
Chief Operating Officer, Nelnet, Inc., January 2014 - present
Chief Financial Officer, Nelnet, Inc., October 1998 - December 2013
Chief Financial Officer, Nelnet, Inc., January 2014 - present
Controller, Nelnet, Inc., October 1998 - December 2013
Corporate Secretary, Chief Governance Officer, and General Counsel, Nelnet, Inc.,
September 2006 - present
Jeffrey R. Noordhoek, 55
Chief Executive Officer, Nelnet, Inc., January 2014 - present
President, Nelnet, Inc., January 2006 - December 2013
Timothy A. Tewes, 62
President, Nelnet, Inc., January 2014 - present
President and Chief Executive Officer, Nelnet Business Solutions, Inc., a subsidiary of
Nelnet, Inc., May 2007 - December 2013
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EXECUTIVE COMPENSATION
Compensation Discussion and Analysis
In this Compensation Discussion and Analysis ("CD&A"), we provide a detailed description of our executive compensation
philosophy and program for our named executive officers (the “Named Executive Officers”) for fiscal 2020:
Name
Michael S. Dunlap
Title
Executive Chairman
Jeffrey R. Noordhoek
Chief Executive Officer
Terry J. Heimes
James D. Kruger
Chief Operating Officer
Chief Financial Officer
Timothy A. Tewes
President
Executive Summary
This CD&A describes the key principles and measures that underlie the Company's executive compensation policies for the
Named Executive Officers. The Company's stated compensation philosophy is clear and consistent, that it pays for
performance. Its Named Executive Officers are accountable for the performance of the Company and the business segment or
segments they manage, and are compensated based on that performance.
For 2020, the Company had net income, excluding derivative market value adjustments, of $373.8 million, or $9.57 per share.
Net income, excluding derivative market value adjustments, and the corresponding per share measure are non-GAAP financial
measures, and there is no comprehensive, authoritative guidance for the presentation of these measures. For information on how
these measures are calculated from the Company’s financial statements, reconciliations to the most directly comparable
financial measures for 2020 under GAAP, and other information about these measures, please refer to Item 7. Management’s
Discussion and Analysis of Financial Condition and Results of Operations - Overview - GAAP Net Income and Non-GAAP
Net Income, Excluding Adjustments on page 36 of the Company’s 2020 Annual Report on Form 10-K filed with the SEC on
February 25, 2021. The Company has delivered strong financial results supported by achievement of its key objectives of
growing its core businesses, driving diversification around its core, and improving customer experiences. The Company
believes that its executive compensation program contributes to a high-performance culture where executives deliver results
that drive sustained growth.
The following discussion summarizes the Company's executive compensation program, compensation philosophy, objectives,
and process considered in determining compensation for its Named Executive Officers.
People Development and Compensation Committee Governance and Processes
The Company's Board of Directors has designated the People Development and Compensation Committee (referred to in this
CD&A as the "Committee") to assist the Board in discharging its responsibilities relating to:
•
•
•
•
determining and administering the compensation of the Named Executive Officers and other executive officers of
the Company
administering certain compensation plans, including stock, incentive, and commission compensation plans
assessing the effectiveness of succession planning relative to key executive officers of the Company
reviewing, approving, and overseeing certain other benefit plans
The Committee consists solely of independent members (as defined by NYSE rules) of the Board of Directors, and operates
under a written charter adopted by the Board. It is the Committee's policy that all of the Company's compensation plans and
practices shall comply with applicable laws, rules, and regulations.
As discussed below, the Committee works with members of management to ensure a strong company culture and robust
practices for people development and executive compensation exist, in order to deliver quality products and services and serve
the Company's multiple stakeholders - customers, employees, shareholders, and the communities in which it operates. The
Committee or a subcommittee reviews and approves the Company's compensation framework and specific executive
18
compensation determinations. The Committee also coordinates with the Board of Directors to monitor the performance of the
Named Executive Officers throughout the year to ensure that the compensation being provided meets the performance incentive
objectives of the Company's compensation framework.
Role of Management in Recommending Executive Compensation
The Executive Director of People Services, the Chief Executive Officer, and the Chief Operating Officer, referred to herein as
the internal committee, are directed by the Committee to develop, recommend, and administer in a consistent manner,
compensation objectives and programs for the Committee and the Board of Directors to consider and approve. As part of this
process, each year the internal committee, with the assistance of other members of management, reviews and updates as
necessary the Company's compensation philosophy and strategy statement, and develops a proposed executive compensation
framework. The internal committee is also tasked with ensuring that the objectives of the programs are aligned with the
Company's long-term strategy. The Executive Chairman makes compensation recommendations for himself and the other
Named Executive Officers for the Committee's review and approval.
Objectives of Executive Compensation
The general compensation philosophy of the Company, as an organization that values the long-term success of its shareholders,
customers, and employees (referred to by the Company as associates), is that the Company will pay fair, competitive, and
equitable compensation that is designed to encourage focus on the long-term performance objectives of the Company and is
differentiated based on both the individual’s performance and the performance of their respective business segment. In carrying
out this philosophy, the Company structures its overall compensation framework with the general objectives of encouraging
ownership, savings, wellness, productivity, and innovation. In addition, total compensation is intended to be market competitive
compared to select industry surveys, internally consistent, and aligned with the philosophy of a performance-based
organization. The Company believes this approach will enable it to attract, retain, develop, and motivate the talent required for
the Company's long-term success, encourage the creation of shareholder value, and recognize high levels of associate
performance.
To build a strong work environment and culture that encourages innovation, development, and high performance, the Company
structures its total compensation to be comprised of:
Element
Base salary
Purpose
Competitive cash compensation to retain and
attract executive talent.
Annual performance-based
incentive bonuses
Drive the achievement of key short-term
business results and recognize individual
contributions to these results.
Characteristics
Fixed cash compensation based upon the scope and
complexity of the role, individual experience, performance,
and market competitiveness. Reviewed annually and
adjusted as warranted.
Primary mode to differentiate compensation based on
performance. Annual incentives based on a combination of
financial metrics and individual goals. Potential cash-equity
mix through performance-based incentive program stock
election framework.
Restricted stock awards
Promote long-term focus on shareholder
value, serve as an important retention tool,
and encourage equity stake in the Company.
Equity-based compensation subject to vesting periods, or
other restrictions on sale, generally for three to ten years.
Health, retirement, and
other benefits
Intrinsic rewards
Designed
to provide competitive health
insurance options and income replacement
upon retirement, death, or disability.
Non-cash rewards to increase engagement,
provide opportunities for individual growth,
and subsidize learning initiatives.
Benefits for Named Executive Officers are the same as
those available to all associates.
Professional
coaching,
mentoring, tuition reimbursement, and community activity
support.
development,
training
and
The annual and long-term performance measures used by the Compensation Committee in reviewing and determining executive
compensation are reflected in the Executive Officers Incentive Compensation Plan described below.
19
Summary of Executive Compensation Policies and Practices
What we do
What we don't do
No employment contracts
No significant additional perks to executive officers
No individual change in control/severance compensation
arrangements
No stock options
Pay for performance
Periodically utilize external, independent compensation
consulting firm(s)
Mitigate undue risk in compensation programs
Provide guidelines for stock ownership
Maintain minimum vesting periods for stock awards
Consider market data across industries to obtain a general
sense of current compensation practices and decisions
Prohibit hedging and short sales of stock
Provide for clawback of incentive-based compensation
Compensation Policies and Practices - Risk Management
The Committee and the internal committee review incentive compensation arrangements to ensure that the arrangements do not
encourage associates to take unnecessary and excessive risks. This risk assessment process includes a review of program
policies and practices; program analysis to identify risk and risk control related to the programs; and determinations as to the
sufficiency of risk identification, the balance of potential risk to potential reward, risk control, and the support of the programs
and their risks to the Company's strategy. A balance between Company and business segment performance is required to protect
against unnecessary risks being taken. Based on their review and evaluation of the Company's compensation policies and
practices for its associates, the Committee, the internal committee, and the Company’s Enterprise Risk Management team
believe that the Company’s policies and practices do not create inappropriate or unintended significant risks that are reasonably
likely to have a material adverse effect on the Company.
Prohibition on Hedging and Short Sales, and Limits on Share Pledging
The Company has a policy prohibiting members of the Board of Directors and all associates and officers, including senior
management, from engaging in short sales of the Company’s stock or buying or selling call or put options or other derivatives
related to the Company’s stock. The policy also prohibits these persons from engaging in hedging or monetization transactions
with respect to any of their direct or indirect interest in the Company’s stock, including through the use of financial instruments
such as prepaid variable forwards, equity swaps, collars, and exchange funds. The policy discourages Board members, officers
and associates from holding the Company’s stock in a margin account or otherwise pledging the Company’s stock as collateral
for a loan, unless such activity receives the prior approval of the Company, which may be granted in the Company’s discretion
if the individual can clearly demonstrate the financial capacity and the ability to promptly meet a margin call or repay the loan
without resorting to the pledged stock. In addition, such margin account or other pledge arrangements by a Board member or an
officer are limited by the policy to no more than 25 percent of such individual’s total shares of the Company’s stock held.
Clawback Policy
The Company has a Clawback Policy, which gives the Board of Directors or any appropriate committee of the Board (such as
the Committee) the discretion to recover incentive awards paid to any current or former executive officers of the Company if
the financial results used to determine the amount of the incentive awards are materially restated and/or such person engaged in
fraud or intentional misconduct. The Board may revise the policy to the extent it becomes necessary to conform with any
applicable NYSE or SEC rules that may be adopted in the future.
Say on Pay
The Company has determined, consistent with the preference expressed by the Company’s shareholders at the 2017 annual
meeting of shareholders and the related prior recommendation by the Board of Directors, that it is important for the
shareholders to have an opportunity to cast an advisory vote on executive compensation on an annual basis as a means to
express their views regarding the Company's executive compensation philosophy, plans, programs, policies, and decisions, all
as disclosed in the Company's proxy statement. Accordingly, shareholders will have the opportunity to cast an advisory vote on
executive compensation at this year's annual meeting. See Proposal 3 in this proxy statement with respect to a shareholder
advisory vote on the compensation of the Company's Named Executive Officers as disclosed in this proxy statement. Although
20
the shareholder vote on this proposal is non-binding, the Committee will consider the outcome of the vote when making future
compensation decisions for Named Executive Officers.
Consideration of Prior Say on Pay Votes
In making executive compensation determinations, the Committee has also considered the results of last year's advisory
shareholder vote approving the compensation of the Company's Named Executive Officers as disclosed in the proxy statement
for the 2020 annual meeting of shareholders. At the 2020 annual meeting, the Company's shareholders overwhelmingly
approved such executive compensation by 99.8 percent of the votes cast. These voting results, and similar previous say on pay
voting results, have strongly communicated the shareholders' endorsement of the Committee's decisions and policies to date.
The Board of Directors and the Committee reviewed these final vote results and determined that, given the significant level of
support from the shareholders, no significant changes to the Company's executive compensation plans, practices, and policies
were necessary at this time based on the say on pay vote results. The Committee will continue to consider the results from this
year's and future advisory shareholder votes regarding the Company's executive compensation programs.
Use of Compensation Consultant
To assist in establishing and maintaining a competitive overall compensation program, the Committee periodically engages a
nationally recognized compensation consulting firm to review the compensation levels and practices for the most highly
compensated executive officers of the Company, and compare those to the compensation levels and practices for executives
holding comparable positions within select industries and companies. Through comparisons of the base salaries, the annual
performance-based incentives, other benefit programs, and total compensation for the Company's Executive Chairman, Chief
Executive Officer, Chief Operating Officer, Chief Financial Officer, President, and other executives, the consultant's analysis is
used to develop a complete executive compensation package that is designed to be competitive in the marketplace. The study is
also used by the Committee to identify potential gaps or inconsistencies in total compensation and to identify appropriate
compensation levels and compensation design features and trends. The study is conducted as part of the Committee's oversight
of the Company's continuing efforts to attract, retain, and motivate top executive talent that will drive the Company's
performance results.
In 2019, the Committee engaged Towers Watson as its independent compensation consultant to review executive compensation
at the Company. The result of this review showed that executive compensation at the Company is generally comparable to that
of similar companies in terms of revenue and size. In connection with the 2019 engagement of Towers Watson, the Committee
determined that Towers Watson does not perform any other services for the Company or have any relationship that would raise
a conflict of interest or impair the independence of Towers Watson with respect to its 2019 services or its expected future
services for the Committee. In making this determination, the Committee discussed and considered the following factors: (i) the
fact that Towers Watson does not perform any other services for the Company; (ii) the amount of fees received by Towers
Watson from the Company as a percentage of the total revenue of Towers Watson; (iii) the policies and procedures of Towers
Watson that are designed to prevent conflicts of interest; (iv) any business or personal relationship between any individual
Towers Watson consultant involved in the engagement by the Committee and a member of the Committee; (v) any stock of the
Company owned by an individual Towers Watson consultant involved in the engagement; and (vi) any business or personal
relationship between Towers Watson or any individual Towers Watson consultant involved in the engagement and any
executive officer of the Company.
When developing the proposed compensation framework for the Committee to consider each year, the internal committee also
reviews broad-based third party surveys of executive compensation to obtain a general sense of current compensation levels and
practices in the marketplace. These reviews are based on information from various publicly available databases and
publications. The purpose of these reviews is to ensure compensation is aligned with the market for comparable jobs so the
Company can continue to attract, retain, motivate, and reward qualified executives. In addition, the internal committee
considers the average salary adjustments anticipated in the marketplace each year, and develops proposed target increases for
the Company's Named Executive Officers accordingly. In this way, the Company seeks to ensure that any changes to
compensation are appropriate and reflect material changes in the market.
Elements of Executive Compensation
The Company's Named Executive Officers are compensated with a combination of annual base salary, annual performance-
based incentive bonus payments, and, with respect to the Named Executive Officers other than Mr. Dunlap, the issuance of
shares of the Company's Class A common stock, which are typically restricted from sale for some period of time. Mr. Dunlap
has historically not received equity compensation because he already owns a significant amount of the Company's common
stock and controls the majority of voting rights of the Company, and thus already has significant interests aligned with the other
21
shareholders of the Company. In determining levels of compensation, the Committee and the internal committee work together
to establish targeted total compensation for each executive and then allocate that compensation among base salary and
performance-based incentive compensation.
Each element of compensation is designed to be competitive with comparable companies and to align management's incentives
with the long-term interests of the Company's shareholders. The Committee considers the Executive Chairman's
recommendations and determines the amount of each element of compensation by reviewing the current compensation mix for
each of the Named Executive Officers in view of the Company's performance, the Company's long-term objectives, and the
scope of that executive's responsibilities. The Committee seeks to achieve an appropriate balance between base salaries, annual
performance-based bonus incentives, and longer-term equity incentives for all of the Company's Named Executive Officers.
See "Objectives of Executive Compensation" above for a summary of the various elements of executive compensation. Further
details are provided below.
Base Salaries
Base salaries for the Company's Named Executive Officers are based on an evaluation of individual responsibilities of each
person, market comparisons from publicly available compensation surveys to obtain a general sense of current compensation
levels and practices in the marketplace, and an assessment of each individual's performance. Changes in base salaries of Named
Executive Officers depend on projected changes in the external market as well as individual contributions to the Company's
performance.
Base salaries for Messrs. Dunlap, Noordhoek, and Heimes were increased by 3.0% for 2020, and base salaries for Messrs.
Tewes and Kruger were increased by 7.7% for 2020, primarily as a result of strong individual performances and Company
results in the prior year, increased responsibilities for these officers resulting from the Company’s continued focus on growing
our core, diversifying with focus, and developing and implementing asset replacement strategies to mitigate the eventual runoff
of all Federal Family Education Loan Program (“FFELP”) student loans. The executives’ salary adjustments also reflected the
Committee’s determination of amounts appropriate to maintain the competitiveness of the base salary levels for the
corresponding officer positions. Specific increased responsibilities included those related to initiatives for the establishment of
Nelnet Bank, which resulted in Federal Deposit Insurance Corporation approval for federal deposit insurance, Utah Department
of Financial Institutions approval for a bank charter, and the successful launch of Nelnet Bank in November 2020; initiatives for
the support of continued growth of ALLO Communications LLC ("ALLO"), which resulted in a recapitalization and additional
funding for ALLO in the fourth quarter of 2020; initiatives to pursue business acquisitions in the Company’s Education
Technology, Services, and Payment Processing operating segment to expand the customer base, products, and services in this
operating segment; the continued work on the Company's analyses of and responses to the Department of Education's (the
"Department") contract procurement proposals for servicing all loans owned by the Department, including ongoing servicing
system and security enhancements; the continued development and implementation of a new state of the art platform for private
education and consumer loan originations and servicing; continued real estate investments focused on the development of
commercial properties in the Midwest, and particularly in Lincoln, Nebraska, where the Company's headquarters are located;
expansion of the Company’s investments in tax-advantaged projects promoting renewable energy resources (solar projects)
nationally, including the development and growth of Nelnet Renewable Energy, which was launched in June 2020, to provide
ancillary services in the solar marketplace; continued support for the Company’s investment in Hudl; and continued focus on
attracting, retaining and developing top notch talent for the Company.
Executive Officers Incentive Compensation Plan
In 2019, the Board of Directors established an Executive Officers Incentive Compensation Plan (the "Plan"), which provides the
Company's executive officers with an opportunity to earn performance-based incentive compensation that aligns their interests
with the interests of shareholders, including the achievement of long-term strategic business objectives.
The Plan, which is administered by the Committee or a subcommittee of the Committee, was approved by the Company's
shareholders at the 2019 annual meeting of shareholders. The performance measures upon which incentive compensation under
the Plan is based are generally described as follows:
•
Levels of earnings per share; net income; income before income taxes; net interest income; earnings per share or
net income excluding derivative market value and other adjustments as the Committee deems appropriate in the
Committee’s sole discretion; revenues from fee-based businesses (including measures related to the diversification
of revenues from fee-based businesses and increases in revenues through both organic growth and acquisitions);
federally insured student loan assets; private education loan assets; consumer loan assets; and total assets;
22
•
•
•
•
Return on equity (including return on tangible equity), return on assets or net assets, return on capital (including
return on total capital or return on invested capital), return on investments, and ratio of equity to total assets;
Student loan servicing and other education finance or service customer measures (including loan servicing volume
and service rating levels under contracts with the Department);
Success or progress made in efforts to obtain new contracts with the Department, as well as other loan servicing
business;
Cash flow measures (including cash flows from operating activities, cash flow return on investment, assets,
equity, or capital, and generation of long-term cash flows (including net cash flows from the Company’s
securitized loan portfolios));
• Market share;
•
•
•
•
•
•
•
•
Customer satisfaction levels, and employee engagement, productivity, retention, and satisfaction measures;
Operating performance and efficiency targets and ratios, as well as productivity targets and ratios;
Levels of, or increases or decreases in, operating margins, operating expenses, and/or nonoperating expenses;
Business segment, division or unit profitability and other performance measures (including growth in customer
base, revenues, earnings before interest, taxes, depreciation and amortization, and segment profitability, as well as
management of operating expense levels);
Acquisitions, dispositions, projects, or other specific events or transactions (including specific events or
transactions intended to enhance the long-term strategic positioning of the Company);
Performance of investments;
Regulatory compliance measures; or
Any other criteria as determined by the Committee in its sole discretion.
The Plan provides that in no event shall the amount paid under the Plan to a participant with respect to any calendar year exceed
150% of that participant’s base salary for that year.
While the Company strives for overall consistency in executive compensation, the Named Executive Officers' potential
incentive bonus amounts can vary by business segment due to differences in roles, business models, and business performance.
Incentives are generally positioned to be within a median range of the marketplace based on available broad based data.
The Company's 2020 annual performance-based incentive bonuses were paid, at the Named Executive Officers' option (other
than Mr. Dunlap, who received his incentive in cash), as either 100 percent cash, 100 percent stock, or 50 percent cash/50
percent stock. Those electing stock also received an additional number of shares representing 15 percent of the amount of their
bonus they elected to receive in stock, in order to promote increased and continued share ownership. All shares issued as part
of the incentive bonus awards were issued pursuant to the Company's Restricted Stock Plan discussed below, and were fully
vested but may not be transferred for three years from the date of issuance.
Performance of Named Executive Officers for 2020
In 2020, the Executive Chairman (Mr. Dunlap), Chief Executive Officer (Mr. Noordhoek), Chief Operating Officer (Mr.
Heimes), Chief Financial Officer (Mr. Kruger), and President (Mr. Tewes) were selected by the Committee to participate in and
be eligible for incentive compensation awards under the Plan for the year ended December 31, 2020. The Committee
established performance goals for these individuals in early 2020 utilizing certain of the performance measures under the Plan
referred to above and described in more detail below, and in early 2021 the Committee reviewed the level of attainment of the
performance goals for these individuals for 2020 under the terms of the Plan in establishing incentive awards for each. For
2020, the Committee considered the Named Executive Officers’ performance in respect of the Plan measures described above,
including rapidly implementing COVID-19-related adjustments to operations in order to keep associates and customers safe,
which adjustments are believed to have contributed to an increased associate retention level in 2020; the execution of certain
23
business acquisitions and other achievements in strategic positioning and the Company's core segments' operating results,
including diversification; the completion of a recapitalization and additional funding for ALLO, resulting in the recognition of a
gain of $258.6 million in the fourth quarter of 2020; execution of an additional equity investment in Hudl, resulting in the
recognition of a gain of $51.0 million in the second quarter of 2020; the completion of the extensive regulatory process to
establish Nelnet Bank in Utah, and the successful launch of Nelnet Bank in November 2020; the development and
implementation of certain technology projects, including a multi-asset class origination and servicing system, various cloud
strategies, and ongoing servicing system and security enhancements; loan and loan residual acquisitions and future cash flow
from the Company's loan portfolio; cash position and liquidity; improved stabilization and enhancements to operating systems
and infrastructure; real estate and solar project investments; and individual achievement.
Based on the Named Executive Officers’ performance in 2020 and the level of attainment of the 2020 performance goals for the
Named Executive Officers, the Committee awarded the Named Executive Officers an incentive equal to 100% of their
respective base salaries plus a restricted stock award as discussed below. The incentive is included in the Summary
Compensation Table below while the restricted stock award is not included in the Summary Compensation Table since the
stock awards were granted in 2021.
Restricted Stock Plan
The Company maintains a Restricted Stock Plan to reward performance by associates, including the Named Executive Officers
other than Mr. Dunlap. This plan permits the Committee to reward a recipient with an award of shares of the Company's Class
A common stock, which, in the Committee's sole discretion, may have vesting requirements or other restrictions. These awards
are designed to recognize and reward associates, and to connect the associates' financial interests directly to the Company's
performance, thereby encouraging associates to focus their efforts as owners of the Company. As discussed above, shares
issued in payment of annual performance-based incentive bonuses and other equity compensation awards are issued under the
Restricted Stock Plan. The Company does not grant stock options, since management and the Committee believe that awards of
shares of restricted stock are a better method of encouraging associates, including the Named Executive Officers, to focus on
the long-term value of the Company.
March 2021 Restricted Stock Awards
On March 10, 2021, the Committee awarded five-year restricted stock grants of 13,467 shares of Class A common stock under
the Restricted Stock Plan to each of Messrs. Noordhoek, Heimes, Tewes, and Kruger, with the number of restricted shares
granted to each of these Named Executive Officers computed as $1 million divided by the average market closing price for
Class A common stock over the five-trading day period ended March 4, 2021. These awards are scheduled to vest 20 percent
annually over the following five-year service period. Since these awards were issued in 2021, they are not included in the
Summary Compensation Table below.
Employee Share Purchase Plan
The Company also has an Employee Share Purchase Plan (“ESPP”) that assists all associates, including the Named Executive
Officers, in becoming owners and increasing their ownership of the Company. Under the ESPP, associates may purchase
shares of the Company's Class A common stock through payroll deductions, at a discount of 15% to the lower of the average
market price of the Company's stock on the first and last trading days of each calendar quarter.
Termination or Change-in-Control Compensation
Other than with respect to provisions in restricted stock award agreements for grants of restricted stock whereby any unvested
shares of restricted stock will become fully vested upon a termination of employment as a result of death, disability, or
retirement after reaching the age of 65 (and being employed by Nelnet for a minimum of 5 years), which provisions are
generally included in all agreements for restricted stock awards granted to associates, the Company does not have any contracts,
agreements, plans, or arrangements with the Named Executive Officers that provide for payment in connection with any
termination of employment or change-in-control of the Company.
Share Ownership Guidelines and Trading Requirements
The Committee believes that the Named Executive Officers should have a significant equity interest in the Company. In order
to promote equity ownership and further align the interests of management with the Company's shareholders, the Board of
Directors has adopted Share Ownership Guidelines for management associates at certain levels. Under these guidelines, each
24
Named Executive Officer is encouraged to own at least 15,000 shares of Company stock. As of February 26, 2021, all of the
Named Executive Officers met these guidelines, and are thereby subject to downside risk in the Company's equity performance.
The Company has adopted a policy requiring officers who wish to buy or sell the Company's stock to do so only through Rule
10b5-1 stock trading plans. This requirement is designed to enable officers to diversify a portion of their holdings in an orderly
manner as part of their retirement and tax planning or other financial planning activities. The use of Rule 10b5-1 stock trading
plans serves to reduce the risk that investors will view routine portfolio diversification stock sales by executive officers as a
signal of negative expectations with respect to the future value of the Company's stock. In addition, the use of Rule 10b5-1
stock trading plans reduces the potential for concerns about trading on the basis of material non-public information that could
damage the reputation of the Company.
Other Compensation
In addition to base salaries and annual performance-based incentive compensation, the Company provides the Named Executive
Officers with certain other customary benefits, including health, dental, and vision coverage to assist the Company in remaining
competitive for superior talent and to encourage executive retention. A critical aspect of the Company's health benefits program
is its focus on associate health and wellness. The Company encourages all associates, including the Named Executive Officers,
to take a proactive approach to their personal health and well-being. The Company has implemented wellness programs which
encourage and reward associates for healthy habits by offering the opportunity to lower their insurance premiums.
The Company owns a controlling interest in an aircraft due to the frequent business travel needs of the Named Executive
Officers and the limited availability of commercial flights in Lincoln, Nebraska, where the Company's headquarters are located.
An entity owned by Mr. Dunlap owns the remaining interest in the aircraft. Consistent with guidance issued in 2010 from the
Federal Aviation Administration, the Company can be reimbursed for the pro rata cost of owning, operating, and maintaining
the aircraft when used for routine personal travel by certain individuals whose positions with the Company require them to
routinely change travel plans within a short time period. Accordingly, the Company allows certain members of executive
management to utilize its interest in the aircraft for personal travel when it is not required for business travel. The value of the
personal use of the aircraft is computed based on the Company's aggregate incremental costs, which include variable operating
costs such as fuel costs, mileage costs, trip-related maintenance and hangar costs, on-board catering, landing/ramp fees, and
other miscellaneous variable costs. Any amounts regarding the value of any personal use of the aircraft by a Named Executive
Officer are included in the separate table for all other compensation under the Summary Compensation Table below.
The Company also offers the Named Executive Officers other perquisites, including indoor parking and use of Company-
sponsored suites at local venues for personal use when not occupied for business purposes.
Tax Treatment of Compensation
The Committee considers and evaluates the impact of applicable tax laws with respect to the Company’s executive
compensation policies, plans, and arrangements. For example, Section 162(m) of the Internal Revenue Code generally imposes
a $1,000,000 limitation on a public company's income tax deductibility in any tax year with respect to compensation paid to any
individual who served as the chief executive officer or the chief financial officer at any time during the taxable year and the
three other most highly compensated executive officers of the company (other than the chief executive officer or the chief
financial officer) for the taxable year, and once an executive becomes covered by Section 162(m), any compensation paid to
him or her in future years (including post-employment) becomes subject to the Section 162(m) limitation on tax deductibility.
While the Committee considers tax consequences to the Company as a factor when it makes compensation determinations, the
Committee reserves discretion to award compensation to the Named Executive Officers that is not deductible under Section
162(m) as the Committee deems appropriate.
Matching Gift Programs
The Company offers a matching gift program in which all associates with at least six months of service and all members of the
Board of Directors are eligible to participate. Under this program, for every dollar ($100 minimum) that an associate or Board
member contributes in cash or securities to an eligible charitable organization or educational institution, the Company will
make matching donations of additional funds, subject to terms and conditions applicable in an equal manner to all associates
and Board members. The total maximum dollar amount payable under the program is $25,000 per associate or Board member
per calendar year. In addition, the Company makes matching donations for contributions by associates to a centralized
charitable giving and financial resources program for the Lincoln, Nebraska community. Further, in 2020 the Company created
the Service, Not Silence fundraising campaign, through which employees and members of the Board of Directors could donate
to local and national organizations advancing racial and socioeconomic equality and social justice, with donations matched by
25
the Nelnet Foundation 3:1. The Service, Not Silence campaign resulted in significant donations from certain board members
and Named Executive Officers and Company matching gifts during 2020. Amounts matched by the Company for the Named
Executive Officers and Board members per the provisions of these programs are reflected and discussed in the Named
Executive Officer summary compensation table below and the director compensation table under "Director Compensation
Table for Fiscal Year 2020" above, respectively.
Conclusion
By ensuring market competitive compensation that is aligned with a performance-based organization philosophy, the Company
expects to attract, motivate, and retain the executive talent required to achieve the Company's long-term goals. This is critical,
as management and the Committee know that the Company's success hinges on having engaged executives who are committed
to the Company.
People Development and Compensation Committee Report
The People Development and Compensation Committee has reviewed and discussed the above Compensation Discussion and
Analysis with management. Based on this review and discussion, and such other matters deemed relevant and appropriate by
the People Development and Compensation Committee, the People Development and Compensation Committee recommended
to the Board of Directors that the Compensation Discussion and Analysis be included in this proxy statement and incorporated
by reference in the Company's Annual Report on Form 10-K for the year ended December 31, 2020.
Respectfully submitted,
Kimberly K. Rath, Chair
James P. Abel
Preeta D. Bansal
Kathleen A. Farrell
Summary Compensation Table for Fiscal Years 2020, 2019, and 2018
The following table sets forth summary information with respect to the compensation paid and bonuses granted for services
rendered by the Company's Chief Executive Officer and Chief Financial Officer, as well as each of the Company's other three
most highly compensated executive officers during the year ended December 31, 2020 (collectively, the “Named Executive
Officers”). The information presented in the table relates to the fiscal years ended December 31, 2020, 2019, and 2018.
Salaries and bonuses are paid at the discretion of the Board of Directors.
Annual compensation
Name and principal position
Michael S. Dunlap
Executive Chairman
Jeffrey R. Noordhoek
Chief Executive Officer
Terry J. Heimes
Chief Operating Officer
James D. Kruger
Chief Financial Officer
Timothy A. Tewes
President
All other
compensation
($) (b)
Total ($)
383,140
1,508,648
33,666
1,195,009
21,522
1,215,035
48,875
1,568,311
42,722
1,672,578
44,203
1,789,757
65,222
1,641,671
45,573
1,675,429
48,078
1,726,475
32,936
22,003
38,860
1,485,499
1,458,944
1,276,360
60,502
1,460,502
54,525
54,878
1,491,466
1,292,378
Year
2020
2019
2018
2020
2019
2018
2020
2019
2018
2020
2019
2018
2020
2019
2018
Salary ($)
Bonus ($) (a)
562,754
615,000
663,063
759,718
892,265
1,029,447
816,731
892,265
962,290
752,563
786,941
687,500
700,000
786,941
687,500
562,754
546,343
530,450
759,718
737,591
716,107
759,718
737,591
716,107
700,000
650,000
550,000
700,000
650,000
550,000
26
(a)
Amounts represent bonuses paid in 2021, 2020, and 2019 for services rendered during the 2020, 2019, and 2018 calendar
years, respectively. The Company's annual performance-based incentive bonuses were paid, at the executives' option
(other than to the Executive Chairman, who received his incentive in cash), as either 100 percent cash, 100 percent stock,
or 50 percent cash/50 percent stock. Those electing stock also received an additional number of shares representing 15
percent of the amount of their bonus they elected to receive in stock, to promote increased and continued share
ownership. All shares issued as part of the incentive bonus award were issued pursuant to the Company's Restricted
Stock Plan and were fully vested, but may not be transferred for three years from the date of issuance. The stock
issuances for annual performance bonuses were not made as equity incentive plan awards contemplating future service or
performance. See "Grants of Plan-Based Awards Table for Fiscal Year 2020" below for information relating to the shares
issued in 2020 with respect to 2019 annual incentive bonus payments.
(b)
“All other compensation” includes the following:
All other compensation
Employer
matching
contributions
under 401(k)
Plan ($)
Premiums
on life
insurance ($)
Matching
gift
programs
($) (1)
Dividends
on
restricted
stock ($) (2)
Personal use
of company
aircraft
($) (3)
Other
($) (4)
11,400
11,200
11,000
11,400
11,200
11,000
11,400
11,200
11,000
11,400
11,200
11,000
11,400
11,200
11,000
235
423
390
235
423
390
235
423
390
235
423
390
235
423
390
349,100
—
—
37,240
31,099
31,000
48,550
33,150
34,375
20,250
7,500
23,780
47,747
41,150
40,998
—
—
—
—
—
—
—
—
—
170
911
1,990
170
911
1,990
22,205
22,043
10,132
—
—
1,813
5,037
—
1,813
200
—
—
—
—
—
—
800
500
—
—
—
—
—
—
881
1,969
1,700
950
841
500
Total ($)
383,140
33,666
21,522
48,875
42,722
44,203
65,222
45,573
48,078
32,936
22,003
38,860
60,502
54,525
54,878
Michael S. Dunlap
Jeffrey R. Noordhoek
Terry J. Heimes
James D. Kruger
Timothy A. Tewes
Year
2020
2019
2018
2020
2019
2018
2020
2019
2018
2020
2019
2018
2020
2019
2018
(1) See “Compensation Discussion and Analysis - Matching Gift Programs” above for a description of these programs. The
amounts for each individual in 2019 and 2018 have been revised from prior years to include matching donations to a
centralized charitable giving and financial resources program for the Lincoln, Nebraska community. In 2020, Mr. Dunlap
made a special gift in support of the Company's Service, Not Silence fundraising campaign created in 2020 for advancing
racial and socioeconomic equality and social justice, with donations matched by the Nelnet Foundation 3:1. Due in part to
the inspiring level of participation throughout the Company, Mr. Dunlap made a special gift of $113,000 in support of the
campaign.
(2) The Company's cash dividend payments on its Class A and Class B common stock include dividend payments on unvested
shares of Class A common stock issued pursuant to the Company's Restricted Stock Plan. Dividends paid to the Named
Executive Officers on unvested restricted stock are included in the table above.
(3) See "Compensation Discussion and Analysis - Other Compensation" above for a description of this arrangement.
(4) Executive officers may receive other perquisites and other personal benefits, the aggregate annual dollar amounts of which
are below the current SEC threshold of $10,000 for reporting.
There were no stock awards (other than for bonuses), option awards, non-equity incentive plan compensation, or pension
or nonqualified deferred compensation earnings for any of the Company's Named Executive Officers during 2020, 2019
or 2018.
27
Grants of Plan-Based Awards Table for Fiscal Year 2020
The following table sets forth summary information relating to each grant of an award made to the Company's Named
Executive Officers in the fiscal year ended December 31, 2020 under the Company's Restricted Stock Plan.
Name
Grant date (a)
Approval of
grant by
Compensation
Committee
Number of
shares of stock
Grant date fair
value of stock
awards ($) (b)
Michael S. Dunlap
—
—
Jeffrey R. Noordhoek March 10, 2020
January 28, 2020
Terry J. Heimes
March 10, 2020
January 28, 2020
James D. Kruger
March 10, 2020
January 28, 2020
Timothy A. Tewes
March 10, 2020
January 28, 2020
—
9,143
9,143
8,064
8,064
—
477,265
477,265
420,941
420,941
(a)
(b)
On March 10, 2020, the Company issued stock to pay fiscal year 2019 bonuses for those employees who elected to receive stock instead of cash for
such bonuses. The stock issuances were not made as equity incentive plan awards. All 2019 bonuses paid in 2020 to employees who elected to receive
stock were paid in fully vested shares of Class A common stock issued pursuant to the Company's Restricted Stock Plan.
The Company determined the value of these awards based on the average of the closing market prices for the Company's Class A common stock on
February 28, 2020 through March 5, 2020, which was $52.20.
Outstanding Equity Awards at Fiscal Year-End
There were no unexercised, unearned, or unvested equity awards for the Company's Named Executive Officers outstanding as
of December 31, 2020.
Stock Vested Table for Fiscal Year 2020
The following table sets forth summary information relating to the stock vested for the Company's Named Executive Officers
during the fiscal year ended December 31, 2020.
Name
Number of shares
acquired on vesting
Value realized on
vesting ($)
Stock awards
Michael S. Dunlap
Jeffrey R. Noordhoek
Terry J. Heimes
James D. Kruger
Timothy A. Tewes
—
—
—
849 (a)
849 (a)
—
—
—
42,730 (b)
42,730 (b)
(a)
(b)
Amounts represent shares of restricted Class A common stock issued on March 13, 2015 pursuant to the Company's
Restricted Stock Plan.
The closing market price of the Company's Class A common stock as of March 10, 2020 (the vesting date for the shares)
was $50.33 per share.
Stock Option, Stock Appreciation Right, Long-Term Incentive, and Defined Benefit Plans
The Company does not have any stock option, stock appreciation right, long-term incentive, or defined benefit plans covering
its Named Executive Officers.
28
Potential Payments Upon Termination or Change-in-Control
Other than with respect to provisions in restricted stock award agreements for certain grants of restricted stock to the Named
Executive officers on March 10, 2021, as described under "Compensation Discussion and Analysis - March 2021 Restricted
Stock Awards", whereby any unvested shares of restricted stock will become fully vested upon a termination of employment as
a result of death, disability, or retirement after reaching the age of 65 (and being employed by Nelnet for a minimum of 5
years), which provisions are generally included in all agreements for restricted stock awards granted to employees, the
Company does not have any contracts, agreements, plans, or arrangements with the Named Executive Officers that provide for
payment in connection with any termination of employment or change-in-control of the Company. The assumed market value
(as of December 31, 2020) of the shares of unvested restricted stock awarded to each of Messrs. Heimes, Kruger, Noordhoek,
and Tewes in March 2021, which shares are scheduled to vest 20 percent annually over a five year period, was $959,389 each,
based on the closing market price of Class A common stock on December 31, 2020.
Pay Ratio Disclosure
As required by Section 953(b) of the Dodd-Frank Wall Street Reform and Consumer Protection Act, and Item 402(u) of the
SEC’s Regulation S-K, the Company is providing the following information about the relationship of the annual total
compensation of the employees of the Company and its consolidated subsidiaries and the annual total compensation of Jeffrey
R. Noordhoek, the Company’s Chief Executive Officer (the “CEO”).
For 2020, the Company’s last completed fiscal year:
•
•
the median of the annual total compensation of all employees of the Company and its consolidated subsidiaries
(other than the CEO) was $41,459; and
the annual total compensation of the CEO, as disclosed above in the "Summary Compensation Table for Fiscal
Years 2020, 2019, and 2018", was $1,568,311.
Based on this information, for 2020 the ratio of the annual total compensation of the CEO to the median of the annual total
compensation of all employees was 38 to 1. This ratio is a reasonable estimate calculated in a manner consistent with Item
402(u) of the SEC’s Regulation S-K. Given the different methodologies that various public companies may use to compute
estimates of their pay ratios, the Company’s estimated pay ratio may not be comparable with the estimated pay ratios of other
public companies.
For purposes of the pay ratio disclosure, SEC rules permit registrants to identify the median employee once every three years,
so long as there have not been significant changes in the registrant's employee population or employee compensation
arrangements that the registrant reasonably believes would result in a significant change in the pay ratio disclosure. The
Company most recently identified its median employee in 2018. On December 21, 2020, the Company's previously majority
owned communications subsidiary was deconsolidated from the Company's consolidated financial statements, which resulted in
a reduction of approximately 500 employees, and as such, the Company determined it would identify a new median employee
for 2020. To identify the median of the annual total compensation of all employees of the Company and its consolidated
subsidiaries in 2020, as well as to determine the annual total compensation of the median employee and the CEO in 2020, the
methodology and the material assumptions, adjustments, and estimates that the Company used were as follows:
1. The Company determined that, as of December 28, 2020, the last Monday of 2020 that was a business day, the total
number of employees of the Company and its consolidated subsidiaries (excluding the CEO) was 6,198, with 6,153
(99.3%) of these employees located in the United States, and 45 (less than 1%) of these employees located in
Australia. Accordingly, the total numbers of U.S. employees and non-U.S. employees, before taking into consideration
the adjustments permitted by SEC rules (as described below), were 6,153 and 45, respectively. These employees
included all full-time, part-time, seasonal, and temporary employees of the Company and its consolidated subsidiaries.
The Company selected the last Monday of 2020 that was a business day as the date within the last three months of the
Company’s last completed fiscal year that the Company would use to identify the median employee because it enabled
the Company to make such identification for 2020 in a reasonably efficient and economical manner from its existing
internal payroll reporting system.
2. The employee population used to identify the median employee, after taking into consideration the adjustments
permitted by SEC rules, consisted of all of the 6,153 employees (excluding the CEO) located in the U.S as of
December 28, 2020. As permitted by SEC rules, the Company chose to exclude all non-U.S. employees, consisting of
all of the 45 employees who are employed in Australia, from the employee population used to identify the median
29
employee, given the small number of employees in that jurisdiction and the estimated additional costs of obtaining,
analyzing, and including their compensation information for purposes of identifying the median employee and
determining the annual total compensation of the median employee. Based on the total numbers of U.S. employees
and non-U.S. employees (before taking into consideration the adjustments permitted by SEC rules) as set forth above,
the Company excluded a total of less than 5% of the total workforce of the Company and its consolidated subsidiaries
(45 employees) from the employee population used to identify the median employee, as permitted by SEC rules.
3. To identify the median employee from the employee population, the Company compared the amounts of salary and
wages of the employees for 2020 that are taxable for U.S. federal income tax purposes and reportable to the U.S.
Internal Revenue Service on Form W-2, as reflected in the Company’s existing internal payroll system reports as of
December 28, 2020, and this compensation measure was consistently applied to all employees included in the
calculation. In making this determination, the Company annualized the compensation of all permanent employees
(full-time or part-time) included in the employee population who were hired during 2020 but did not work for the
Company or a consolidated subsidiary for the entire fiscal year.
4. Using the median employee identified as described above, the Company combined all of the elements of such
employee’s compensation for 2020 in accordance with the requirements of Item 402(c)(x) of the SEC’s Regulation S-
K, resulting in annual total compensation of $41,459.
5. With respect to the annual total compensation of the CEO, the Company used the amount disclosed in the “Total”
column of the 2020 row for Mr. Noordhoek in the "Summary Compensation Table for Fiscal Years 2020, 2019, and
2018" included in this Proxy Statement and incorporated by reference under Item 11 of Part III of the Company’s 2020
Annual Report on Form 10-K.
SECURITY OWNERSHIP OF DIRECTORS, EXECUTIVE OFFICERS, AND PRINCIPAL SHAREHOLDERS
Stock Ownership
The authorized common stock of the Company consists of 660,000,000 shares, $0.01 par value per share. The authorized
common stock is divided into two classes, consisting of 600,000,000 shares of Class A common stock and 60,000,000 shares of
Class B common stock. The Company also has authorized 50,000,000 shares of preferred stock, $0.01 par value per share.
The following table sets forth information as of February 26, 2021, regarding the beneficial ownership of each class of the
Company's common stock by:
•
•
•
•
each person, entity, or group known by the Company to beneficially own more than five percent of the
outstanding shares of any class of common stock
each of the Named Executive Officers
each incumbent director and each nominee for director
all executive officers and directors as a group
Beneficial ownership is determined in accordance with the rules and regulations of the SEC. Under these rules, a person is
deemed to beneficially own a share of the Company's common stock if that person has or shares voting power or investment
power with respect to that share, or has the right to acquire beneficial ownership of that share within 60 days, including through
the exercise of any option, warrant, or other right or the conversion of any other security. The application of these rules results
in numerous situations with respect to the Company’s shares where more than one beneficial owner is listed for the same
shares, as discussed in the footnotes to the following table. For additional information regarding the significant amounts of
shares deemed to be beneficially owned by Michael S. Dunlap, Shelby J. Butterfield, and Angela L. Muhleisen, principal
shareholders of the Company, including the significant amounts of shares for which there are more than one beneficial owner
listed, see the “Additional Beneficial Ownership Information for Michael S. Dunlap, Shelby J. Butterfield, and Angela L.
Muhleisen” table after the following table.
30
With respect to the shares for which certain non-employee directors have elected to defer delivery of pursuant to the deferral
election provisions of the Company’s Directors Stock Compensation Plan as indicated in certain footnotes to the following
table, such shares are reported as beneficially owned by the respective director since, pursuant to such deferral election
provisions, such shares shall be distributed to such director as the lump sum payment of deferred shares at the time of the
termination of the director’s service on the Board (which the director has the unilateral right to cause within 60 days if the
director were to resign from the Board within such time period), or as the initial installment of up to five annual installments
commencing at the time of termination of the director’s service on the Board, as elected by the director.
Each share of Class B common stock is convertible at any time at the holder's option into one share of Class A common stock.
The number of shares of Class B common stock for each person in the table below assumes such person does not convert any
Class B common stock into Class A common stock. Unless otherwise indicated in a footnote, the address of each more than five
percent beneficial owner is c/o Nelnet, Inc., 121 South 13th Street, Suite 100, Lincoln, Nebraska 68508. Unless otherwise
indicated in a footnote, the persons named in the table below have sole voting and investment power with respect to all shares
of common stock shown as being beneficially owned by them.
Beneficial Ownership - As of February 26, 2021
Number of shares beneficially owned
Percentage of shares
beneficially owned (1)
Name
Class A
Class B
Total
Class A Class B
Total
Percentage
of combined
voting power
of all classes
of stock (2)
Michael S. Dunlap
Shelby J. Butterfield
Stephen F. Butterfield GST
Non-Exempt Marital Trust
Angela L. Muhleisen
Dunlap Holdings, LLC
Union Bank and Trust Company
Dan D. Muhleisen
Dimensional Fund Advisors LP
Deborah Bartels
The Vanguard Group
Whitetail Rock Capital
Management, LLC
Union Financial Services, Inc.
Terry J. Heimes
James D. Kruger
Jeffrey R. Noordhoek
Timothy A. Tewes
James P. Abel
Preeta D. Bansal
William R. Cintani
Kathleen A. Farrell
David S. Graff
Thomas E. Henning
JoAnn M. Martin
Kimberly K. Rath
Executive officers and directors
as a group (14 persons)
* Less than 1%.
5,674,721 (3)
510 (5)
10,852,785 (4)
3,364,100 (6)
16,527,506
3,364,610
20.9 % 97.3 % 43.1 %
8.8 %
30.2 %
*
510 (7)
5,994,750 (9)
—
3,217,279 (12)
4,688,299 (14)
2,224,342 (15)
1,864,177 (16)
1,571,511 (17)
2,094,061 (8)
1,085,658 (10)
1,600,000 (11)
1,085,658 (13)
—
—
—
—
480,510 (18)
—
213,546 (21)
160,027 (22)
519,726 (23)
59,116
71,366 (24)
7,233
27,878 (25)
41,716 (26)
19,439
61,525 (27)
3,682
49,515 (28)
7,899,588 (19)
1,586,691 (20)
—
—
—
—
—
—
—
—
—
—
—
—
2,094,571
7,080,408
1,600,000
4,302,937
4,688,299
2,224,342
1,864,177
1,571,511
8,380,098
1,586,691
213,546
160,027
519,726
59,116
71,366
7,233
27,878
41,716
19,439
61,525
3,682
49,515
*
22.0 %
—
11.8 %
17.2 %
8.2 %
6.9 %
5.8 %
18.8 %
5.5 %
9.7 % 18.5 %
14.3 %
4.2 %
9.7 % 11.2 %
12.2 %
—
5.8 %
—
4.9 %
—
4.1 %
—
1.8 % 70.8 % 21.9 %
4.1 %
14.2 %
—
*
—
*
*
—
*
1.4 %
—
1.9 %
*
—
*
*
—
*
*
—
*
*
—
*
*
—
*
*
—
*
*
—
*
*
—
*
*
—
*
82.3 %
24.2 %
15.1 %
12.1 %
11.5 %
10.1 %
3.4 %
1.6 %
1.3 %
1.1 %
57.3 %
11.4 %
*
*
*
*
*
*
*
*
*
*
*
*
6,754,653
10,852,785
17,607,438
24.8 % 97.3 % 45.9 %
83.1 %
(1)
(2)
(3)
Based on 27,196,862 shares of Class A common stock and 11,154,171 shares of Class B common stock
outstanding as of February 26, 2021.
These percentages reflect the different voting rights of the Company's Class A common stock and Class B
common stock under the Company's Articles of Incorporation. Each share of Class A common stock has one vote
and each share of Class B common stock has ten votes on all matters to be voted upon by the Company's
shareholders.
As reported in a Schedule 13D/A filed by Mr. Dunlap (on a joint basis with Dunlap Holdings, LLC and Union
Financial Services, Inc. (“UFS”)) on February 11, 2021, Mr. Dunlap is deemed to have sole voting and investment
power over 1,969,574 shares of Class A common stock. Mr. Dunlap may be deemed to have shared voting and
31
investment power over a total of 3,705,147 shares of Class A common stock, which includes (i) a total of 7,358
shares held in various increments by each of Mr. Dunlap's three adult sons, (ii) a total of 3,217,279 shares held for
the accounts of miscellaneous trusts, IRAs, and investment accounts at Union Bank and Trust Company (“Union
Bank”) (some of which shares may under certain circumstances be pledged as security by Union Bank's customers
under the terms of the accounts) with respect to which Union Bank may be deemed to have or share voting or
investment power, (iii) a total of 240,000 shares held by six separate grantor retained annuity trusts (“GRATs”)
established by Angela L. Muhleisen (a sister of Mr. Dunlap) in 2020, for which GRATs Whitetail Rock Capital
Management, LLC ("WRCM"), a majority owned subsidiary of the Company, serves as investment adviser, as
discussed in footnote 18 below, (iv) a total of 240,000 shares held by four separate GRATs established by Dan D.
Muhleisen (Ms. Muhleisen’s spouse) in 2020, for which GRATs WRCM serves as investment adviser, and (v)
510 shares held by the Stephen F. Butterfield GST Non-Exempt Marital Trust (the “Butterfield GST Non-Exempt
Marital Trust”), an estate planning trust for the family of Mr. Butterfield (the former Vice Chairman of the Board
of Directors and significant shareholder of the Company who passed away in 2018), for which trust Shelby J.
Butterfield serves as a co-trustee and WRCM serves as investment adviser with respect to shares of the
Company’s stock held therein. Mr. Dunlap is a control person of Union Bank through Farmers & Merchants
Investment Inc. (“F&M”). Mr. Dunlap disclaims beneficial ownership of the shares held for the accounts of
miscellaneous trusts, IRAs, and investment accounts at Union Bank, except to the extent that he actually has or
shares voting power or investment power with respect to such shares. With respect to the number of shares of
Class A common stock reported as beneficially owned by Mr. Dunlap that are held by Union Bank, the number of
shares set forth in the table reflects the number of shares held by Union Bank as of December 31, 2020, as
reported in a Schedule 13G/A filed by Union Bank on February 11, 2021. The total of 3,217,279 shares held for
the accounts of miscellaneous trusts, IRAs, and investment accounts at Union Bank may also be deemed to be
beneficially owned by Union Bank and Ms. Muhleisen (also a control person of Union Bank through F&M) and
are also included in the total number of shares beneficially owned by each of them as set forth in this table. Such
number of shares held by Union Bank includes (a) a total of 140,625 shares held by Union Bank as trustee under a
post-annuity trust and a charitable remainder unitrust ("CRUT") established by Jeffrey R. Noordhoek, which
shares may also be deemed to be beneficially owned by Mr. Noordhoek and are also included in the total number
of shares beneficially owned by Mr. Noordhoek as set forth in this table, (b) a total of 349,987 shares held by
Union Bank in various managed agency accounts and trusts for Deborah Bartels (a sister of Mr. Dunlap and Ms.
Muhleisen), her spouse, and the adult sons of Ms. Bartels and her spouse, which shares may also be deemed to be
beneficially owned by Ms. Bartels and are also included in the total number of shares beneficially owned by Ms.
Bartels as set forth in this table, and (c) a total of 40,000 shares held by Union Bank as trustee under certain
GRATs and other irrevocable trusts established in 2020 by Terry J. Heimes and his spouse, which shares may also
be deemed to be beneficially owned by Mr. Heimes and are also included in the total number of shares
beneficially owned by Mr. Heimes as set forth in this table. The total of 480,000 shares held by the total of ten
separate GRATs established by Ms. Muhleisen and Mr. Muheisen are also reported as beneficially owned by Ms.
Muhleisen and are also included in the total number of shares beneficially owned by Ms. Muhleisen as set forth in
this table, and the total of 240,000 shares held by the four separate GRATs established by Mr. Muhleisen are also
reported as beneficially owned by Mr. Muhleisen and are also included in the total number of shares beneficially
owned by Mr. Muhleisen as set forth in this table. The 510 shares held by the Butterfield GST Non-Exempt
Marital Trust are also reported as beneficially owned by the Butterfield GST Non-Exempt Marital Trust and Ms.
Butterfield and are also included in the total number of shares beneficially owned by each of them as set forth in
this table. The total of 480,510 shares beneficially owned by trusts for which WRCM serves as investment adviser
are also deemed to be beneficially owned by WRCM, and are also included in the total number of shares
beneficially owned by WRCM as set forth in this table.
Mr. Dunlap is deemed to have sole voting and investment power over a total of 267,039 shares of Class B
common stock, which includes 194,344 shares held by Mr. Dunlap's spouse and 72,695 shares held by Mr.
Dunlap. Mr. Dunlap is deemed to have shared voting and investment power over a total of 10,585,746 shares of
Class B common stock, which includes (i) a total of 1,600,000 shares held by Dunlap Holdings, LLC, a family
limited liability company which is controlled by Mr. Dunlap and his family, (ii) 1,586,691 shares owned by UFS,
of which Mr. Dunlap is chairman, president, and treasurer and owns 50.0% of the outstanding capital stock, of
which Ms. Butterfield is the other director, and of which the Butterfield GST Non-Exempt Marital Trust, for
which WRCM serves as investment adviser with respect to shares of the Company’s stock held therein, including
shares of the Company’s stock held by such trust indirectly through UFS, owns the remaining 50.0% of the
outstanding capital stock, (iii) 881,550 shares held by Union Bank as trustee for a GRAT established by Mr.
Dunlap in 2003, (iv) a total of 2,323,368 shares held in four separate GRATs established by Mr. Dunlap in 2011,
three separate dynasty trusts established by Mr. Dunlap in 2011, and three separate post-annuity irrevocable trusts
established under two separate other GRATs in connection with the expiration of the annuity terms of such other
32
(4)
GRATs that were established by Mr. Dunlap in 2011, for which trusts WRCM serves as investment adviser, (v) a
total of 2,065,556 shares held in four separate GRATs established by Mr. Dunlap's spouse in 2015 and six
separate post-annuity irrevocable trusts established under two separate other GRATs in connection with the 2020
expiration of the annuity terms of such other GRATs that were established by Mr. Dunlap’s spouse in 2015, for
which trusts WRCM serves as investment adviser, (vi) a total of 165,000 shares held in six separate GRATs
established by Mr. Dunlap in 2020, for which GRATs WRCM serves as investment adviser; (vii) a total of
240,000 shares held in six separate GRATs established by Mr. Dunlap’s spouse in 2020, for which GRATs
WRCM serves as investment adviser; (viii) a total of 727,176 shares held in eight separate GRATs established in
2015 by Ms. Butterfield and Mr. Butterfield and two separate other trusts established by Mr. Butterfield in 2015,
for which trusts WRCM serves as investment adviser, (ix) 210,047 shares held by the Stephen F. Butterfield GST
Exempt Marital Trust (the “Butterfield GST Exempt Marital Trust”), an estate planning trust for the family of Mr.
Butterfield, for which trust WRCM serves as investment adviser with respect to shares of the Company’s stock
held therein, (x) 507,370 shares held by the Butterfield GST Non-Exempt Marital Trust, for which WRCM serves
as investment adviser with respect to shares of the Company’s stock held therein; (xi) a total of 36,089 shares held
by four separate trusts for the benefit of children of Mr. Butterfield established under the restated agreement for
the Stephen F. Butterfield Revocable Living Trust, for which trusts WRCM serves as investment adviser with
respect to shares of the Company’s stock held therein, (xii) 38,291 shares held by a charitable lead annuity trust
("CLAT") established by Mr. Butterfield in 2016, for which CLAT WRCM serves as investment adviser, (xiii) a
total of 204,108 shares held by Union Bank as trustee under five separate irrevocable trusts for the benefit of Mr.
Butterfield's children established upon the expiration in 2013 of the annuity term of a GRAT previously
established by Mr. Butterfield, (xiv) a total of 300 shares held in increments of 100 shares by each of Mr. Dunlap's
three adult sons, and (xv) a total of 200 shares held in increments of 100 shares by each of two separate dynasty
trusts established by each of Mr. Dunlap and his spouse in 2019. Other than the shares discussed above for which
it is noted that Mr. Dunlap is deemed to have sole voting and investment power, Mr. Dunlap disclaims beneficial
ownership of the shares discussed above, except to the extent that Mr. Dunlap actually has or shares voting power
or investment power with respect to such shares. The 1,586,691 shares owned by UFS are also reported as
beneficially owned by UFS and by Ms. Butterfield and the Butterfield GST Non-Exempt Marital Trust, and are
included in the total number of shares beneficially owned by each of them as set forth in this table. The 881,550
shares held by Union Bank as trustee for a GRAT established by Mr. Dunlap in 2003 and the total of 204,108
shares held by Union Bank as trustee for five separate irrevocable trusts for the benefit of Mr. Butterfield's
children may also be deemed to be beneficially owned by Union Bank and Ms. Muhleisen, and are also included
in the total number of shares beneficially owned by each of them as set forth in this table. The total of 727,176
shares held in eight separate GRATs established in 2015 by Ms. Butterfield and Mr. Butterfield and two separate
other trusts established by Mr. Butterfield in 2015, the 210,047 shares held by the Butterfield GST Exempt Marital
Trust, the 507,370 shares held by the Butterfield GST Non-Exempt Marital Trust, a total of 27,067 shares held in
two of the four separate trusts for the benefit of children of Mr. Butterfield established under the restated
agreement for the Stephen F. Butterfield Revocable Living Trust, the 38,291 shares held by a CLAT established
by Mr. Butterfield in 2016, and a total of 100,650 shares held by Union Bank as trustee under two of the five
separate irrevocable trusts for the benefit of Mr. Butterfield's children established upon the expiration in 2013 of
the annuity term of a GRAT previously established by Mr. Butterfield may also be deemed to be beneficially
owned by Ms. Butterfield, and are also included in the total number of shares beneficially owned by Ms.
Butterfield as set forth in this table. The total of 7,899,588 shares beneficially owned by trusts for which WRCM
serves as investment adviser, including, with respect to the Butterfield GST Non-Exempt Marital Trust, shares
beneficially owned indirectly through the holding of 50.0% of the outstanding capital stock of UFS, which holds a
total of 1,586,691 shares, are also deemed to be beneficially owned by WRCM, and are also included in the total
number of shares beneficially owned by WRCM as set forth in this table.
(5)
As reported in a Schedule 13G/A filed by Ms. Butterfield (on a joint basis with the Butterfield GST Non-Exempt
Marital Trust) on February 11, 2021 and in a Form 4 filed for Ms. Butterfield on March 12, 2021, Ms. Butterfield
is deemed to have shared voting and investment power with respect to 510 shares of Class A common stock held
by the Butterfield GST Non-Exempt Marital Trust, for which Ms. Butterfield serves as a co-trustee and WRCM
serves as investment adviser with respect to shares of the Company’s stock held therein. Such shares are also
reported as beneficially owned by Mr. Dunlap, the Butterfield GST Non-Exempt Marital Trust, and WRCM, and
are included in the total number of shares reported as beneficially owned by each of them in this table. The
business address for Ms. Butterfield is c/o Gallagher & Kennedy, 2575 East Camelback Road, Phoenix, Arizona
85016.
(6)
Ms. Butterfield has sole voting and investment power with respect to a total of 136,641 shares of Class B common
stock held by Ms. Butterfield. Ms. Butterfield is deemed to have shared voting and investment power with respect
33
to a total of 3,227,459 shares of Class B common stock, which include (i) 1,586,691 shares owned by UFS, of
which the Butterfield GST Non-Exempt Marital Trust owns 50.0% of the outstanding capital stock, (ii) 507,370
shares held directly by the Butterfield GST Non-Exempt Marital Trust, for which trust Ms. Butterfield serves as a
co-trustee and WRCM serves as investment adviser with investment power with respect to shares of the
Company’s stock held by the trust and voting power with respect to shares of the Company’s stock held by the
trust, including shares of the Company’s stock held indirectly through the holding of 50.0% of the outstanding
capital stock of UFS, (iii) 210,047 shares held by the Butterfield GST Exempt Marital Trust, for which Ms.
Butterfield serves as a co-trustee and WRCM serves as investment adviser with investment power with respect to
shares of the Company’s stock held by the trust and voting power with respect to shares of the Company’s stock
held by the trust, (iv) a total of 530,041 shares held in six separate GRATs established by Ms. Butterfield in 2015,
for which GRATs WRCM serves as investment adviser, (v) a total of 160,347 shares held in two separate GRATs
established by Mr. Butterfield in 2015, for which GRATs WRCM serves as investment adviser, (vi) a total of
100,650 shares held by Union Bank as trustee for two separate irrevocable trusts for the benefit of Mr. and Ms.
Butterfield's minor children established upon the 2013 expiration of an annuity term of a GRAT previously
established by Mr. Butterfield, (vii) 38,291 shares held by a CLAT established by Mr. Butterfield in 2016, for
which CLAT WRCM serves as investment adviser, (viii) a total of 36,788 shares held in two separate trusts
established by Mr. Butterfield in 2015 for the benefit of Ms. Butterfield’s two minor children, for which trusts
WRCM serves as investment adviser, (ix) 29,967 shares held by the Estate of Stephen F. Butterfield, for which
Ms. Butterfield serves as the Personal Representative, (x) a total of 27,067 shares held in two of the four separate
trusts for the benefit of children of Mr. Butterfield established under the restated agreement for the Stephen F.
Butterfield Revocable Living Trust, for which trusts WRCM serves as investment adviser with investment power
with respect to shares of the Company’s stock held by the trusts and voting power with respect to shares of the
Company’s stock held by the trusts, and (xi) a total of 200 shares held by Ms. Butterfield as UTMA custodian for
Mr. and Ms. Butterfield’s minor children. Ms. Butterfield disclaims beneficial ownership of the shares held by
UFS and the trusts discussed in this footnote, except to the extent that she actually has or shares voting power or
investment power with respect to such shares. The 1,586,691 shares owned by UFS are also deemed to be
beneficially owned by UFS and Mr. Dunlap, and are also included in the total number of shares beneficially
owned by each of them as set forth in this table. The total of 100,650 shares held by Union Bank as trustee for two
separate irrevocable trusts established upon the 2013 expiration of an annuity term of a GRAT previously
established by Mr. Butterfield may also be deemed to be beneficially owned by Union Bank, Mr. Dunlap, and Ms.
Muhleisen, and are also included in the total number of shares beneficially owned by each of them as set forth in
this table. The total of 3,096,642 shares held in trusts for which WRCM serves as investment adviser, including,
with respect to the Butterfield GST Non-Exempt Marital Trust, shares held indirectly through the holding of 50%
of the outstanding capital stock of UFS, which holds a total of 1,586,691 shares, are also deemed to be
beneficially owned by WRCM and may also be deemed to be beneficially owned by Mr. Dunlap, and are also
included in the total number of shares beneficially owned by each of them as set forth in this table.
As reported in a Schedule 13G/A filed by the Butterfield GST Non-Exempt Marital Trust (on a joint basis with
Ms. Butterfield) on February 11, 2021, the Butterfield GST Non-Exempt Marital Trust is deemed to have shared
voting and investment power with respect to 510 shares of Class A common stock held by the Butterfield GST
Non-Exempt Marital Trust, for which Ms. Butterfield serves as a co-trustee and WRCM serves as investment
adviser with respect to shares of the Company’s stock held therein. Such shares are also reported as beneficially
owned by Ms. Butterfield, WRCM, and Mr. Dunlap, and are also included in the total number of shares
beneficially owned by each of them as set forth in this table.
The Butterfield GST Non-Exempt Marital Trust is deemed to have shared voting and investment power with
respect to (i) 1,586,691 shares owned by UFS, of which the Butterfield GST Non-Exempt Marital Trust owns
50% of the outstanding capital stock, and (ii) 507,370 shares held directly by the Butterfield GST Non-Exempt
Marital Trust, for which WRCM serves as investment adviser with respect to shares of the Company’s stock held
therein, including shares of the Company’s stock held indirectly through the holding of 50% of the outstanding
capital stock of UFS. Such shares are also reported as beneficially owned by Ms. Butterfield, WRCM, and Mr.
Dunlap, and are also included in the total number of shares beneficially owned by each of them as set forth in this
table.
As reported in a Schedule 13G/A filed by Ms. Muhleisen on February 11, 2021, Ms. Muhleisen is deemed to have
sole voting and investment power over 180,109 shares of Class A common stock held by Ms. Muhleisen. Ms.
Muhleisen is deemed to have shared voting and investment power over a total of 5,814,641 shares of Class A
common stock, which includes (i) 52,344 shares jointly owned by Ms. Muhleisen and her spouse, Dan D.
Muhleisen, (ii) 2,097,362 shares owned by Mr. Muhleisen, (iii) 692,885 shares owned by Ms. Muhleisen's adult
34
(7)
(8)
(9)
daughter, (iv) 681,538 shares owned by Ms. Muhleisen's adult son, (v) a total of 552,000 shares held in two
separate irrevocable trusts established by Ms. Muhleisen and her spouse, of which the adult daughter and the adult
son of Ms. Muhleisen and her spouse are the initial beneficiaries and for which Union Bank serves as trustee, (vi)
a total of 352,170 shares held in four separate irrevocable trusts established upon the expiration of the annuity
term of GRATs established by Ms. Muhleisen and her spouse, of which the adult daughter and the adult son of
Ms. Muhleisen and her spouse are the beneficiaries and for which Union Bank serves as trustee, (vii) a total of
240,000 shares held by six separate GRATs established by Ms. Muhleisen in 2020, for which WRCM serves as
investment adviser, (viii) a total of 240,000 shares held by four separate GRATs established by Mr. Muhleisen in
2020, for which WRCM serves as investment adviser, (ix) a total of 20,000 shares held in two separate dynasty
trusts established by Ms. Muhleisen and her spouse in 2020, of which the adult daughter and the adult son of Ms.
Muhleisen and her spouse are the initial beneficiaries, and (x) shares that are owned by entities that Ms. Muhleisen
may be deemed to control, consisting of a total of 886,342 shares held by Union Bank for the accounts of
miscellaneous other trusts, IRAs, and investment accounts at Union Bank (some of which shares may under
certain circumstances be pledged as security by Union Bank's customers under the terms of the accounts) with
respect to which Union Bank may be deemed to have or share voting or investment power. Ms. Muhleisen, a
sister of Mr. Dunlap, is a director, chairperson, president, and chief executive officer of Union Bank and is a
control person of Union Bank through F&M. Ms. Muhleisen disclaims beneficial ownership of the shares held for
the accounts of miscellaneous trusts, IRAs, and investment accounts at Union Bank, except to the extent that she
actually has or shares voting power or investment power with respect to such shares. The address for Ms.
Muhleisen is c/o Union Bank and Trust Company, P.O. Box 82529, Lincoln, Nebraska 68501. With respect to the
number of shares beneficially owned by Ms. Muhleisen that are held by Union Bank, the number of shares set
forth in the table reflects the number of shares held by Union Bank as of December 31, 2020, as reported in a
Schedule 13G/A filed by Union Bank on February 11, 2021.
Ms. Muhleisen is deemed to have shared voting and investment power over a total of 1,085,658 shares of Class B
common stock that are held by Union Bank as trustee, which includes 881,550 shares held by Union Bank as
trustee for a GRAT established by Mr. Dunlap in 2003, and a total of 204,108 shares held by Union Bank as
trustee for five separate irrevocable trusts for the benefit of Mr. Butterfield's children established upon the 2013
expiration of an annuity term of a GRAT previously established by Mr. Butterfield. Ms. Muhleisen disclaims
beneficial ownership of the shares held by Union Bank as trustee for such GRAT and such five separate other
trusts, except to the extent that Ms. Muhleisen actually has or shares voting power or investment power with
respect to such shares. The total of 1,085,658 shares held by Union Bank as trustee for such GRAT and such five
separate other trusts are also deemed to be beneficially owned by Union Bank and Mr. Dunlap, and are also
included in the total number of shares beneficially owned by each of them as set forth in this table. A total of
100,650 shares held by Union Bank as trustee for two of the five separate trusts for the benefit of Mr. Butterfield's
children may also be deemed to be beneficially owned by Ms. Butterfield, and are also included in the total
number of shares beneficially owned by Ms. Butterfield as set forth in this table.
As reported in a Schedule 13G/A filed by Dunlap Holdings, LLC (on a joint basis with Mr. Dunlap and UFS) on
February 11, 2021, Dunlap Holdings, LLC, a family limited liability company which is controlled by Mr. Dunlap
and his family, is deemed to have shared voting and investment power with respect to 1,600,000 shares of Class B
common stock that it owns. The 1,600,000 shares owned by Dunlap Holdings, LLC are also included in the total
number of shares beneficially owned by Mr. Dunlap as set forth in this table.
As reported in a Schedule 13G/A filed by Union Bank on February 11, 2021, Union Bank is deemed to have sole
voting and investment power over 30,000 shares of Class A common stock held by the Union Bank profit sharing
plan. Union Bank is deemed to have shared voting and investment power over 3,187,279 shares of Class A
common stock, which includes (i) 18,000 shares held as trustee for a charitable foundation, (ii) a total of 140,625
shares held by Union Bank as trustee under a post-annuity trust and a CRUT established by Mr. Noordhoek, (iii) a
total of 40,000 shares held by Union Bank as trustee under certain GRATs and other irrevocable trusts established
in 2020 by Mr. Heimes and his spouse, (iv) a total of 2,330,937 shares held by Union Bank in individual accounts
for Ms. Muhleisen, Mr. Muhleisen, their adult daughter, and their adult son; and (v) a total of 657,717 shares held
for the accounts of miscellaneous trusts, IRAs, and investment accounts at Union Bank (some of which shares
may under certain circumstances be pledged as security by Union Bank's customers under the terms of the
accounts) with respect to which Union Bank may be deemed to have or share voting or investment power. Union
Bank disclaims beneficial ownership of such shares except to the extent that Union Bank actually has or shares
voting power or investment power with respect to such shares. The address for Union Bank is P.O. Box 82529,
Lincoln, Nebraska 68501; Attention: Angela L. Muhleisen, President. The number of shares of Class A common
(10)
(11)
(12)
35
(13)
(14)
(15)
(16)
stock set forth in the table for Union Bank reflects the number of shares held by Union Bank as of December 31,
2020.
Union Bank is deemed to have shared voting and investment power over a total of 1,085,658 shares of Class B
common stock that are held by Union Bank as trustee for a GRAT established by Mr. Dunlap in 2003 and as
trustee for five separate irrevocable trusts for the benefit of Mr. Butterfield's children, as discussed in footnote 10
above. Union Bank disclaims beneficial ownership of such shares except to the extent that Union Bank actually
has or shares voting power or investment power with respect to such shares.
As reported in a Schedule 13G/A filed by Mr. Muhleisen on February 11, 2021, Mr. Muhleisen is deemed to have
shared voting and investment power over a total of 4,688,299 shares of Class A common stock, which includes (i)
2,097,362 shares owned by Mr. Muhleisen; (ii) 52,344 shares owned jointly by Mr. Muhleisen and his spouse,
Angela L. Muhleisen, (iii) 692,885 shares owned by Mr. Muhleisen's adult daughter, (iv) 681,538 shares owned
by Mr. Muhleisen's adult son, (v) a total of 552,000 shares held in two separate irrevocable trusts established by
Mr. Muhleisen and his spouse, of which the adult daughter and the adult son of Mr. Muhleisen and his spouse are
the initial beneficiaries and for which Union Bank serves as trustee, (vi) a total of 352,170 shares held in four
separate irrevocable trusts established upon the expiration of the annuity term of GRATs established by Mr.
Muhleisen and his spouse, of which the adult daughter and the adult son of Mr. Muhleisen and his spouse are the
beneficiaries and for which Union Bank serves as trustee, (vii) a total of 240,000 shares held by four separate
GRATs established by Mr. Muhleisen in 2020, for which WRCM serves as investment adviser, and (viii) a total of
20,000 shares held in dynasty trusts established by Mr. Muhleisen and his spouse in 2020, of which the adult
daughter and the adult son of Mr. Muhleisen and his spouse are the initial beneficiaries. All of the shares included
as beneficially owned by Mr. Muhleisen are also included in the total number of shares beneficially owned by Ms.
Muhleisen as set forth in this table, and the total of 240,000 shares held by four separate GRATs established by
Mr. Muhleisen for which WRCM serves as investment adviser are also included in the total number of shares
beneficially owned by WRCM as set forth in this table. Mr. Muhleisen disclaims beneficial ownership of the
shares held in the trusts discussed above, except to the extent that he actually has or shares voting power or
investment power with respect to such shares. The address for Mr. Muhleisen is 6321 Doecreek Circle, Lincoln,
Nebraska 68516.
On February 12, 2021, Dimensional Fund Advisors LP ("Dimensional") filed a Schedule 13G/A indicating that
they beneficially owned 8.20% of the Company's Class A common stock as of December 31, 2020, with sole
voting power over a total of 2,185,556 shares and sole dispositive power over a total of 2,224,342 shares. The
amount set forth in the table reflects the number of shares reported in the Schedule 13G/A. Dimensional acts as
investment advisor and manager to certain funds, and indicated that all shares reported in their 13G/A were owned
by such funds. The address of Dimensional is Building One, 6300 Bee Cave Road, Austin, Texas 78746.
As reported in a Schedule 13G/A filed by Deborah Bartels on February 11, 2021, Ms. Bartels (a sister of Mr.
Dunlap and Ms. Muhleisen) has sole voting and dispositive power over 1,195,855 shares of Class A common
stock held by Ms. Bartels. Ms. Bartels is deemed to have shared voting and dispositive power over a total of
668,322 shares of Class A common stock, which includes (i) a total of 118,807 shares held in managed agency
accounts for Ms. Bartels and her spouse by Union Bank; (ii) 115,965 shares held by Ms. Bartels' spouse; (iii) a
total of 71,180 shares held by Union Bank as trustee for certain irrevocable trusts for the benefit of the adult sons
of Ms. Bartels and her spouse ("Post-GRAT Trusts") established in connection with the expiration of the annuity
term of GRATs established by Ms. Bartels and her spouse; (iv) a total of 160,000 shares held by Union Bank as
trustee for certain irrevocable trusts established by Ms. Bartels and her spouse, of which the adult sons of Ms.
Bartels and her spouse are the initial beneficiaries (the "2012 Dynasty Trusts"); and (v) a total of 202,370 shares
held in certain tax and estate planning trusts established by Ms. Bartels and her spouse in 2020, of which the adult
sons of Ms. Bartels and her spouse and another family member are the initial beneficiaries (the "2020 Dynasty
Trusts"). Ms. Bartels disclaims beneficial ownership of the shares held in the Post-GRAT Trusts, the 2012
Dynasty Trusts, and the 2020 Dynasty Trusts, except to the extent that she actually has or shares voting power or
dispositive power with respect to such shares. The total of 349,987 shares held in the managed agency accounts,
the Post-GRAT Trusts, and the 2012 Dynasty Trusts may also be deemed to be beneficially owned by Union
Bank, Mr. Dunlap, and Ms. Muhleisen, and are included in the total number of shares beneficially owned by each
of them as set forth in this table.
(17)
On February 10, 2021, The Vanguard Group ("Vanguard") filed a Schedule 13G/A indicating that they
beneficially owned 5.78% of the Company's Class A common stock as of December 31, 2020, with shared voting
power over 19,881 shares, sole dispositive power over 1,534,446 shares, and shared dispositive power over 37,065
36
(18)
(19)
(20)
(21)
shares. The amount set forth in the table reflects the number of shares reported in the Schedule 13G/A. The
address of Vanguard is 100 Vanguard Blvd., Malvern, Pennsylvania 19355.
As reported in a Schedule 13G/A filed by WRCM on February 11, 2021, WRCM is deemed to have shared voting
and investment power with respect to a total of 480,510 shares of Class A common stock, which includes (i) a
total of 480,000 shares held by the total of ten separate GRATs established in 2020 by Ms. Muhleisen and Mr.
Muheisen as discussed above in footnotes 9 and 14, respectively; and (ii) 510 shares held by the Butterfield GST
Non-Exempt Marital Trust as discussed above in footnote 7. Under the trusts, WRCM, an SEC-registered
investment adviser, serves as investment adviser with investment and voting power with respect to shares of the
Company’s stock held by the trusts. WRCM is not a beneficiary of any of the trusts. WRCM is a majority owned
subsidiary of the Company, and the total of 480,510 shares of Class A common stock may also be deemed to be
beneficially owned by Mr. Dunlap, and are included in the total number of shares beneficially owned by Mr.
Dunlap as set forth in this table. The 510 shares of Class A common held by the Butterfield GST Non-Exempt
Marital Trust may also be deemed to be beneficially owned by Ms. Butterfield, and are included in the total
number of shares beneficially owned by Ms. Butterfield as set forth in this table.
WRCM is deemed to have shared voting and investment power with respect to 7,899,588 shares of Class B
common stock, including shares held in four separate GRATs and three separate other irrevocable trusts
established by Mr. Dunlap in 2011, three separate post-annuity trusts established upon the expiration of the
annuity term of two other separate GRATs established by Mr. Dunlap in 2011, four separate GRATs established
by Mr. Dunlap's spouse in 2015, six separate post-annuity irrevocable trusts established under two separate other
GRATs in connection with the 2020 expiration of the annuity terms of such other GRATs that were established by
Mr. Dunlap’s spouse in 2015, six separate GRATs established by Mr. Dunlap in 2020, six separate GRATs
established by Mr. Dunlap’s spouse in 2020, six separate GRATs established by Ms. Butterfield in 2015, two
separate GRATs established by Mr. Butterfield in 2015, two separate trusts established by Mr. Butterfield in 2015
for the benefit of Ms. Butterfield’s two minor children, a CLAT established by Mr. Butterfield in 2016, the
Butterfield GST Non-Exempt Marital Trust, the Butterfield GST Exempt Marital Trust, and four separate trusts
for the benefit of children of Mr. Butterfield established under the restated agreement for the Stephen F.
Butterfield Revocable Living Trust. Under the trusts, WRCM serves as investment adviser with voting and
investment power with respect to shares of the Company’s stock held by the trusts, including, with respect to the
Butterfield GST Non-Exempt Marital Trust, shares of the Company’s stock held indirectly through the holding of
50% of the outstanding capital stock of UFS, which holds a total of 1,586,691 shares of Class B common stock.
WRCM is not a beneficiary of any of the trusts. The shares deemed to be beneficially owned by WRCM may also
be deemed to be beneficially owned by Mr. Dunlap, and the shares held in the eight separate GRATs established
by Ms. Butterfield and Mr. Butterfield in 2015, the two separate GRATs established by Mr. Butterfield in 2015
for the benefit of Ms. Butterfield’s two minor children, the CLAT established by Mr. Butterfield in 2016, the
Butterfield GST Non-Exempt Marital Trust, the Butterfield GST Exempt Marital Trust, and two of the four
separate trusts for the benefit of children of Mr. Butterfield established under the restated agreement for the
Stephen F. Butterfield Revocable Living Trust are also reported as beneficially owned by Ms. Butterfield. For
additional information regarding the shares held in trusts established by Mr. Dunlap and his spouse, and the shares
held in trusts established by or with respect to Ms. Butterfield and Mr. Butterfield, see footnotes 4 and 6,
respectively, above.
As reported in a Schedule 13G/A filed by UFS (on a joint basis with Mr. Dunlap and Dunlap Holdings, LLC) on
February 11, 2021, UFS is deemed to have shared voting and investment power with respect to 1,586,691 shares
of Class B common stock that it owns. The address for UFS is 502 East John Street, Carson City, Nevada 89706.
Mr. Dunlap and the Butterfield GST Non-Exempt Marital Trust each own 50.0% of the outstanding capital stock
of UFS, and the 1,586,691 shares of Class B common stock owned by UFS are also reported as beneficially
owned by each of Mr. Dunlap, Ms. Butterfield, the Butterfield GST Non-Exempt Marital Trust, and WRCM, and
are included in the total number of shares beneficially owned by each of them as set forth in this table.
Includes (i) a total of 40,000 shares held by Union Bank as trustee under certain GRATs and other irrevocable
trusts established in 2020 by Mr. Heimes and his spouse, (ii) 94,921 shares held by a revocable trust established in
2020 by Mr. Heimes, (iii) 50,000 shares held by a revocable trust established in 2020 by Mr. Heimes’ spouse, and
(iv) 87 shares owned by Mr. Heimes' spouse. A total of 50,000 shares are pledged as collateral for a line of credit
agreement, under which approximately $225,000 was drawn as of February 26, 2021. Mr. Heimes is deemed to
have shared voting and investment power with respect to the total of 40,000 shares held by Union Bank as trustee,
and such shares may also be deemed to be beneficially owned by Union Bank, Mr. Dunlap, and Ms. Muhleisen
and are included in the total number of shares beneficially owned by each of them as set forth in this table.
37
(22)
(23)
(24)
(25)
(26)
(27)
(28)
Includes 156,889 shares jointly owned by Mr. Kruger and his spouse.
Includes 311,008 shares held by Mr. Noordhoek’s restated revocable trust dated August 9, 2016, 126,462 shares
held by Union Bank as trustee under an irrevocable trust established upon the expiration of the annuity term of a
GRAT established by Mr. Noordhoek in 2003, and 14,163 shares held by Union Bank as trustee under a CRUT
established by Mr. Noordhoek. Mr. Noordhoek is deemed to have shared voting and investment power with
respect to the total of 140,625 shares held by Union Bank as trustee under the post-annuity trust and the CRUT,
and such shares may also be deemed to be beneficially owned by Union Bank, Mr. Dunlap, and Ms. Muhleisen
and are included in the total number of shares beneficially owned by each of them as set forth in this table.
Includes 60,641 shares that Mr. Abel has elected to defer delivery of pursuant to the deferral election provisions of
the Company's Directors Stock Compensation Plan. Also includes 500 shares owned by Mr. Abel's spouse.
Includes 23,930 shares that Mr. Cintani has elected to defer delivery of pursuant to the deferral election provisions
of the Company's Directors Stock Compensation Plan.
Includes 30,614 shares that Ms. Farrell has elected to defer delivery of pursuant to the deferral election provisions
of the Company's Directors Stock Compensation Plan.
Includes 45,224 shares that Mr. Henning has elected to defer delivery of pursuant to the deferral election
provisions of the Company's Directors Stock Compensation Plan and 3,102 shares owned by Mr. Henning's
spouse.
Includes 49,515 shares that Ms. Rath has elected to defer delivery of pursuant to the deferral election provisions of
the Company's Directors Stock Compensation Plan.
Additional Beneficial Ownership Information for Michael S. Dunlap, Shelby J. Butterfield, and Angela L. Muhleisen
As of February 26, 2021
Name
Michael S. Dunlap:
Shares held directly by Mr.
Dunlap and his spouse
Shares held by Dunlap Holdings,
LLC
Shares held by Union Bank for
2003 Dunlap GRAT
Shares held by WRCM-managed
2011 Dunlap GRATs and other
trusts
Shares held by WRCM-managed
2015 Dunlap GRATs and post-
annuity trusts
Shares held by WRCM-managed
2020 Dunlap GRATs
All of the shares held by 50%-
owned UFS
Shares held by WRCM-managed
Butterfield trusts
Shares held by WRCM-managed
Muhleisen GRATs
Shares held by Union Bank for
other persons:
For Muhleisen accounts
For Bartels accounts
For Butterfield trusts
For Noordhoek trusts
For Heimes trusts
For other accounts
Other shares
Totals for Michael S. Dunlap
(3)
(4)
(5)
(6)
(6)
(6)
(7)
(6)
(6)
(5)
(8)
(9)
(10)
Number of shares beneficially owned
Total
Class B
Class A
Percentage of shares
beneficially owned (1)
Class A Class B
Total
Percentage
of combined
voting power
of all classes
of stock (2)
1,969,574
267,039
2,236,613
7.2%
2.4 %
5.8 %
3.3 %
—
1,600,000
1,600,000
—
881,550
881,550
—
—
14.3 %
4.2 %
11.5 %
7.9 %
2.3 %
6.4 %
—
2,323,368
2,323,368
—
20.8 %
6.1 %
16.7 %
—
2,065,556
2,065,556
—
405,000
405,000
—
1,586,691
1,586,691
510
1,518,973
1,519,483
—
—
—
*
3.6%
1.1 %
14.2%
4.1 %
13.6%
4.0 %
18.5 %
5.4 %
14.9 %
480,000
—
480,000
1.8 % —
1.3 %
2,330,937
349,987
—
140,625
40,000
355,730
7,358
5,674,721
—
—
204,108
—
—
—
500
10,852,785
2,330,937
349,987
204,108
140,625
40,000
355,730
7,858
16,527,506
38
8.6%
1.3%
—
*
*
1.3%
*
—
—
1.8 %
—
—
—
*
20.9 % 97.3 % 43.1 %
6.1 %
*
*
*
*
*
*
2.9 %
11.4 %
10.9 %
*
*
1.7 %
1.5 %
*
*
*
*
82.3 %
Shelby J. Butterfield:
Shares held directly by Ms.
Butterfield
All of the shares held by 50%-
owned UFS
Shares directly held by WRCM-
managed Butterfield trusts
Shares held by Union Bank for
Butterfield trusts
Shares held by Stephen F.
Butterfield Estate
Other shares
Totals for Shelby J. Butterfield
Angela L. Muhleisen:
Shares held directly by Ms.
Muhleisen and her spouse
Shares held by WRCM-managed
Muhleisen GRATs
Shares held by Union Bank for
other Muhleisen accounts
Shares held by Muhleisen dynasty
trusts
Shares held by Union Bank for
other persons:
For 2003 Dunlap GRAT
For Bartels accounts
For Butterfield trusts
For Noordhoek trusts
For Heimes trusts
For other accounts
Totals for Angela L. Muhleisen
* Less than 1%.
(11)
(7)
(6)
(5)
(13)
—
136,641
136,641
—
1,586,691
1,586,691
510
1,509,951 (12)
1,510,461
—
100,650
100,650
—
—
510
29,967
200
3,364,100
29,967
200
3,364,610
—
—
*
—
—
—
*
1.2 %
*
1.0 %
14.2 %
4.1 %
11.4 %
13.5 %
3.9 %
10.9 %
*
*
*
*
*
30.2 %
*
*
8.8 %
*
*
24.2 %
2,329,815
(6)
480,000
2,278,593
20,000
—
—
—
—
2,329,815
8.6%
480,000
1.8%
2,278,593
8.4%
20,000
*
—
—
—
—
6.1 %
1.3 %
5.9 %
*
(5)
(8)
(9)
(10)
—
349,987
—
140,625
40,000
355,730
5,994,750
881,550
—
204,108
—
—
—
1,085,658
881,550
349,987
204,108
140,625
40,000
355,730
7,080,408
—
1.3%
—
*
*
1.3%
22.0%
7.9 %
—
1.8 %
—
—
—
9.7 % 18.5 %
2.3 %
*
*
*
*
*
1.7 %
1.6 %
6.4 %
*
*
*
1.5 %
*
*
*
12.1 %
(1) Based on 27,196,862 shares of Class A common stock and 11,154,171 shares of Class B common stock outstanding
as of February 26, 2021.
(2) These percentages reflect the different voting rights of the Company's Class A common stock and Class B common
stock under the Company's Articles of Incorporation. Each share of Class A common stock has one vote and each
share of Class B common stock has ten votes on all matters to be voted upon by the Company's shareholders.
(3) See footnotes (3) and (4) with respect to the line item for Mr. Dunlap in the Beneficial Ownership table above.
(4) See footnote (11) with respect to the line item for Dunlap Holdings, LLC in the Beneficial Ownership table above.
(5) Union Bank and Trust Company (“Union Bank”) is indirectly controlled by Mr. Dunlap and his sister Angela L.
Muhleisen through Farmers & Merchants Investment Inc. (“F&M”). See footnotes (12) and (13) with respect to the
line item for Union Bank in the Beneficial Ownership table above.
(6) Whitetail Rock Capital Management, LLC (“WRCM”) is a majority-owned subsidiary of the Company. See footnotes
(18) and (19) with respect to the line item for WRCM in the Beneficial Ownership table above.
(7) Union Financial Services, Inc. (“UFS”) is 50.0% owned by Mr. Dunlap and 50.0% owned by the Stephen F.
Butterfield GST Non-Exempt Marital Trust (the “Butterfield GST Non-Exempt Marital Trust”). See footnote (20)
with respect to the line item for UFS in the Beneficial Ownership table above. See also footnotes (7) and (8) with
respect to the line item for the Butterfield GST Non-Exempt Marital Trust in the Beneficial Ownership table above.
(8) Deborah Bartels is a sister of Mr. Dunlap and Ms. Muhleisen. See footnote (16) with respect to the line item for Ms.
Bartels in the Beneficial Ownership table above.
(9) See footnote (23) with respect to the line item for Jeffrey R. Noordhoek in the Beneficial Ownership table above.
39
(10) See footnote (21) with respect to the line item for Terry J. Heimes in the Beneficial Ownership table above.
(11) See footnotes (5) and (6) with respect to the line item for Ms. Butterfield in the Beneficial Ownership table above.
(12) Excludes shares held in WRCM-managed trusts for the benefit of Stephen F. Butterfield’s adult children from his first
marriage.
(13) See footnotes (9) and (10) with respect to the line item for Ms. Muhleisen in the Beneficial Ownership table above.
Delinquent Section 16(a) Reports
Section 16(a) of the Securities Exchange Act of 1934 (the "Exchange Act") requires the Company’s executive officers and
directors, and persons who beneficially own more than ten percent of a registered class of the Company’s equity securities, to
file with the SEC reports of ownership of Company securities and changes in reported ownership. Based solely on a review of
information furnished to the Company and contained in reports filed with the SEC, as well as written representations from
reporting persons that all reportable transactions were reported, the Company believes that during the year ended December 31,
2020, the Company’s executive officers, directors, and greater than ten percent beneficial owners timely filed all reports they
were required to file under Section 16(a) of the Exchange Act, except as noted below.
A Form 4 report for Jeffrey R. Noordhoek filed on March 12, 2021 included the late reporting of one transaction relating to a
gift transfer of 16,426 shares of Class A common stock by Mr. Noordhoek to his revocable trust in 2007, which transaction did
not change the total number of shares beneficially owned by Mr. Noordhoek, for which a Form 5 was not timely filed due to an
inadvertent administrative oversight. Subsequent to December 31, 2020, a Form 4 report for William J. Munn reporting one
transaction relating to a Rule 10b5-1 plan sale of 2,000 shares of Class A common stock on February 9, 2021 was inadvertently
filed late on February 23, 2021 due to an administrative oversight.
CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS
Policies and Procedures on Transactions with Related Persons
The Company has adopted written policies and procedures for the Nominating and Corporate Governance Committee's review
of any transaction, arrangement, or relationship (including any indebtedness or guarantee of indebtedness) or series of similar
transactions, arrangements, or relationships in which (i) the Company is a participant, (ii) the aggregate amount involved will or
may be expected to exceed $120,000, and (iii) a related person has or will have a direct or indirect material interest. For
purposes of this policy, a “related person” means (i) any of our directors, executive officers, or nominees for director, (ii) any
shareholder that beneficially owns more than five percent of the Company's outstanding shares of common stock, and (iii) any
immediate family member of the foregoing. The Nominating and Corporate Governance Committee approves or ratifies only
those transactions that it determines in good faith are in, or are not inconsistent with, the best interests of the Company and its
shareholders. The Nominating and Corporate Governance Committee may, in its discretion, submit certain transactions to the
full Board of Directors for approval where it deems appropriate.
In determining whether to approve or ratify a transaction, the Nominating and Corporate Governance Committee takes into
account the factors it deems appropriate, which may include, among others, the benefits to the Company, the availability of
other sources for comparable products or services, the impact on a director's independence in the event the related person is a
director, and the extent of the related person's interest in the transaction. The policy also provides for the delegation of its
authority to the Chairman of the Nominating and Corporate Governance Committee for any related person transaction requiring
pre-approval or ratification between meetings of the Nominating and Corporate Governance Committee. The Nominating and
Corporate Governance Committee reviews and assesses ongoing relationships with a related person on at least an annual basis
to see that they are in compliance with the policy and remain appropriate.
All approved related party transactions are communicated to the full Board of Directors by the Chairman of the Nominating and
Corporate Governance Committee, or his designee. Mr. Dunlap beneficially owns shares representing 82.3% of the combined
voting power of the Company's shareholders as of February 26, 2021. Because of his beneficial ownership, Mr. Dunlap can
effectively elect each member of the Board of Directors, including all members of the Nominating and Corporate Governance
Committee, and has the power to defeat or remove each member.
Although there is no formal requirement for executive management of the Company to approve related party transactions,
executive management reviews all related party transactions. Upon reviewing related party transactions, executive management
takes into account the factors it deems appropriate, which may include, among others, the benefits to the Company, the
availability of other sources for comparable products or services, the impact on a director's independence in the event the
related person is a director, and the extent of the related person's interest in the transaction. As Executive Chairman and
40
controlling shareholder of the Company, Mr. Dunlap effectively has control over each member of the Company's executive
management, who were initially hired by Mr. Dunlap and can be fired or otherwise penalized at his direction.
During 2020, the Company entered into certain transactions and had business arrangements with Union Bank and Trust
Company, Farmers & Merchants Investment Inc. ("F&M"), Mr. Dunlap, Hudl, Assurity Life Insurance Company ("Assurity"),
Shelby J. Butterfield, and various Ameritas entities. These transactions were reviewed and approved or ratified by the
Nominating and Corporate Governance Committee and reviewed by executive management. Union Bank and Trust Company,
F&M, Hudl, Assurity, Ms. Butterfield, and the Ameritas entities are related persons as discussed below. We cannot affirm
whether or not the fees and terms of each transaction are substantially the same terms as those prevailing at the time for
transactions with persons that do not have a relationship with the Company (either directly or as a partner, shareholder, or
officer of an organization that has a relationship with the Company). However, all related party transactions are based on
available market information for comparable assets, products, and services and are extensively negotiated.
•
•
•
Union Bank and Trust Company and Farmers & Merchants Investment Inc. - Union Bank is controlled by F&M,
which owns 81.5% of Union Bank's common stock and 15.5% of Union Bank's non-voting non-convertible preferred
stock. Certain grantor retained annuity trusts established by Michael S. Dunlap, a significant shareholder, Executive
Chairman, and a member of the Board of Directors of the Company, and his spouse, own a total of 50.4% of the
outstanding voting common stock of F&M, and a certain grantor retained annuity trust established by Mr. Dunlap’s
sister, Angela L. Muhleisen, owns 49.2% of the outstanding voting common stock of F&M. In addition, Mr. Dunlap
and his family and Ms. Muhleisen and her family own a total of 8.9 percent and 7.9 percent, respectively, of F&M's
outstanding non-voting preferred stock, which amounts are convertible into shares of F&M common stock which
would currently represent an additional 3.0 percent and 2.8 percent, respectively, of F&M's outstanding common stock
on an as converted basis. Mr. Dunlap serves as a Director and Chairman of F&M, and as a Director of Union Bank.
Ms. Muhleisen serves as a Director and Chief Executive Officer of F&M and as a Director, Chairperson, President,
and Chief Executive Officer of Union Bank. Union Bank is deemed to have beneficial ownership of a significant
number of shares of Nelnet because it serves in a capacity of trustee or account manager for various trusts and
accounts holding shares of the Company, and may share voting and/or investment power with respect to such shares.
At February 26, 2021, Union Bank was deemed to beneficially own 11.2% of the Company's common stock. The
stock holdings of Union Bank are deemed to be beneficially owned by both Mr. Dunlap and Ms. Muhleisen. At
February 26, 2021, Mr. Dunlap beneficially owned 43.1% of the Company's outstanding common stock and Ms.
Muhleisen beneficially owned 18.5% of the Company's outstanding common stock.
Hudl - Hudl is an online video and coaching tools software company for athletes of all levels, of which Mr. Graff, who
has served on the Company's Board of Directors since 2014, is CEO, co-founder, and a director.
Assurity - Assurity is a company which offers a variety of disability income and critical illness protection, life
insurance, and annuity products, of which Mr. Henning, who has served on the Company's Board of Directors since
2003, is President and CEO.
• Ms. Butterfield - Ms. Butterfield is a significant shareholder of the Company, and is also a co-trustee of the Stephen F.
Butterfield GST Non-Exempt Marital Trust (the "Butterfield GST Non-Exempt Marital Trust"), which is also a
significant shareholder of the Company. As of February 26, 2021, Ms. Butterfield and the Butterfield GST Non-
Exempt Marital Trust beneficially owned 8.8% and 5.5%, respectively, of the Company's outstanding common stock.
•
Ameritas - Ameritas Mutual Holding Company, Ameritas Holding Company, and Ameritas Life Insurance Corp.
(collectively referred to herein as “Ameritas”) are entities based in Lincoln, Nebraska that offer a wide range of
insurance and financial products and services to individuals, families, and businesses. Ms. Martin, who became a
member of the Company’s Board of Directors on March 19, 2020, serves as a director and vice chair for the Ameritas
entities. Ms. Martin served for many years as chief executive officer of Ameritas Mutual Holding Company and as
chair of Ameritas Life Insurance Corp., which is owned by Ameritas Holding Company, until her retirement from
those positions effective January 10, 2020. In addition, Mr. Abel is chair of Ameritas Mutual Holding Company and
Ameritas Holding Company, and a director of Ameritas Life Insurance Corp.
41
Transactions with Union Bank
The Company has entered into certain contractual arrangements with Union Bank. These transactions include:
•
•
•
Loan purchases - During 2020, the Company purchased $144.9 million (par value) of private education loans from
Union Bank. The net premium paid by the Company on these loan acquisitions was $2.6 million.
In addition, the Company has an agreement with Union Bank in which the Company provides marketing, origination,
and loan servicing services to Union Bank related to private education loans. Union Bank paid $2.0 million in
marketing fees to the Company in 2020 under this agreement.
Loan servicing - As of December 31, 2020, the Company serviced $331.3 million of loans for Union Bank. Servicing
and origination fee revenue earned by the Company from servicing loans for Union Bank was $0.7 million for the year
ended December 31, 2020.
Funding - Participation Agreements
◦
◦
The Company maintains 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 loans. The Company
uses this facility as a source to fund FFELP student loans. As of December 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 on a short term basis. The Company can participate
loans to Union Bank to the extent of availability under the grantor trusts, up to $900 million or an amount in
excess of $900 million if mutually agreed to by both parties.
In addition, the Company maintains 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 of December 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. The
agreement automatically renews annually and is terminable by either party upon five business days' notice.
The Company can participate student loan asset-backed securities to Union Bank to the extent of availability
under the grantor trusts, up to $100.0 million or an amount in excess of $100.0 million if mutually agreed to
by both parties. Student loan asset-backed securities under this agreement have been accounted for by the
Company as a secured borrowing.
•
Funding - Real Estate
◦
◦
◦
401 Building, LLC (“401 Building”) is an entity that was established in 2015 for the sole purpose of
acquiring, developing, and owning a commercial real estate property in Lincoln, Nebraska. The Company
owns 50% of 401 Building. On May 1, 2018, Union Bank, as lender, received a $1.5 million promissory note
from 401 Building. The promissory note carries an interest rate of 6.00% and has a maturity date of
December 1, 2032.
330-333, LLC (“330-333”) is an entity that was established in 2016 for the sole purpose of acquiring,
developing, and owning a commercial real estate property in Lincoln, Nebraska. The Company owns 50% of
330-333. On October 22, 2019, Union Bank, as lender, received a $162,000 promissory note from 330-333.
The promissory note carries an interest rate of 6.00% and has a maturity date of December 1, 2032.
12100.5 West Center, LLC ("West Center") is an entity that was established in 2016 for the sole purpose of
acquiring, developing, and owning a commercial real estate property in Omaha, Nebraska. The Company
owns 33.33% of West Center. On October 29, 2019, Union Bank, as lender, received a $2.9 million
promissory note from West Center. The promissory note carries an interest rate of 3.85% and has a maturity
date of October 30, 2024.
•
Operating cash - The majority of the Company's cash operating bank accounts are maintained at Union Bank. The
Company also invests cash in the Short term Federal Investment Trust (“STFIT”) of the Student Loan Trust Division
of Union Bank, which the Company uses as operating cash accounts and accounts to hold customer funds as a loan
42
•
•
•
•
•
servicer and payments provider before remitting such funds to lending entities and schools, respectively. As of
December 31, 2020, the Company had $285.6 million deposited at Union Bank in operating accounts or invested in
the STFIT. Interest income earned from cash deposited in these accounts for the year ended December 31, 2020 was
$0.5 million.
529 Plan administration - The Company provides certain 529 Plan administration services to certain college savings
plans (the “College Savings Plans”) through a contract with Union Bank, as the program manager. Union Bank is
entitled to a fee as program manager pursuant to its program management agreement with the College Savings Plans.
In 2020, the Company received fees of $1.3 million from Union Bank related to the Company's administration services
provided to the College Savings Plans.
During 2020, certain call center services were provided by the Company to Union Bank for College Savings Plan
clients. Fees received from Union Bank for such services in 2020 was approximately $62,000.
Additionally, Union Bank, as the program manager for the College Savings Plans, has agreed to allocate plan bank
deposits to Nelnet Bank. As of December 31, 2020, Nelnet Bank had received $48.4 million in deposits from the funds
offered under the College Savings Plans.
Lease arrangements - Union Bank leases approximately 4,000 square feet of office space in the Company's corporate
headquarters building. During 2020, Union Bank paid the Company approximately $80,000 for rent. The lease
agreement expires on June 30, 2023.
Other fees paid to Union Bank - During 2020, the Company paid Union Bank approximately $279,000 for cash
management, trustee, and health savings account maintenance fees.
Other fees received from Union Bank - During 2020, the Company received approximately $590,000 from Union
Bank related to employee sharing arrangements and for providing communications services.
Investment services - Union Bank has established various trusts whereby Union Bank serves as trustee for the purpose
of purchasing, holding, managing, and selling investments in student loan asset-backed securities. WRCM, an SEC-
registered investment advisor and a majority owned subsidiary of the Company, has a management agreement with
Union Bank, under which WRCM performs various advisory and management services on behalf of Union Bank with
respect to investments in securities by the trusts, including identifying securities for purchase or sale by the trusts. The
agreement provides that Union Bank will pay to WRCM annual fees of 25 basis points on the outstanding balance of
the investments in the trusts. As of December 31, 2020, the outstanding balance of investments in the trusts was $1.2
billion. In addition, Union Bank will pay additional fees to WRCM of up to 50 percent of the gains from the sale of
securities from the trusts or securities being called prior to the full contractual maturity. During 2020, the Company
earned $9.8 million of fees under this agreement.
WRCM also has management agreements with Union Bank under which it is designated to serve as investment advisor
with respect to the assets (principally Nelnet stock) within several trusts established by Mr. Dunlap and his spouse, and
Ms. Muhleisen and her spouse. Union Bank serves as trustee for the trusts. Per the terms of the agreements, Union
Bank pays WRCM five basis points (annually) of the aggregate value of the assets of the trusts as of the last day of
each calendar quarter. As of December 31, 2020, WRCM was the investment advisor with respect to a total of 480,000
shares and 4.8 million shares of the Company's Class A and Class B common stock, respectively, held directly by
these trusts. During 2020, the Company earned approximately $141,000 of fees under these agreements.
WRCM has established private investment funds for the primary purpose of purchasing, selling, investing, and trading,
directly or indirectly, in student loan asset-backed securities, and to engage in financial transactions related thereto.
Mr. Dunlap, Jeffrey R. Noordhoek (Chief Executive Officer of the Company), Ms. Muhleisen and her spouse, and
WRCM have invested $1.2 million, $1.1 million, $5.3 million, and $0.3 million, respectively, in certain of these funds.
Based upon the current level of holdings by non-affiliated limited partners, the management agreements provide non-
affiliated limited partners the ability to remove WRCM as manager without cause. WRCM earns 50 basis points
(annually) on the outstanding balance of the investments in these funds, of which WRCM pays approximately 50
percent of such amount to Union Bank as custodian. As of December 31, 2020, the total outstanding balance of
investments in these funds was $134.3 million. During 2020, the Company paid Union Bank $0.3 million as custodian
of the funds.
43
•
•
Defined contribution plan - Union Bank administers the Company's 401(k) defined contribution plan. Fees paid to
Union Bank to administer the plan, approximately $447,000 in 2020, are paid by the plan's participants.
Nelnet Bank - Upon the launch of its operations on November 2, 2020, Nelnet Bank entered into agreements with
Union Bank in which Union Bank provides investment custodial services and correspondent bank services. Fees paid
during 2020 by Nelnet Bank to Union Bank under these agreements were not significant.
The net aggregate impact on the Company's consolidated statements of income for the year ended December 31, 2020 related to
the transactions with Union Bank as described above was income (before income taxes) of approximately $15 million.
The Company intends to maintain its relationship with Union Bank, which the Company's management believes provides
certain benefits to the Company. Those benefits include Union Bank's knowledge of and experience in the FFELP industry, its
willingness to provide services, and at times liquidity and capital resources, on an expedient basis, and the proximity of Union
Bank to the Company's corporate headquarters located in Lincoln, Nebraska.
The majority of transactions and arrangements with Union Bank are not offered to unrelated third parties or subject to
competitive bids. Accordingly, these transactions and arrangements not only present conflicts of interest, but also pose the risk
to the Company's shareholders that the terms of such transactions and arrangements may not be as favorable to the Company as
it could receive from unrelated third parties. Moreover, the Company may have and/or may enter into contracts and business
transactions with related parties that benefit Mr. Dunlap and his sister, as well as other related parties, that may not benefit the
Company and/or its minority shareholders.
Transactions with F&M
The Company, F&M, and the holding company of BankFirst of Norfolk, Nebraska ("BankFirst"), of which Mr. Dunlap is a
member of the Board of Directors, have co-invested a total of $10.3 million, $4.6 million, and $1.7 million, respectively, in a
Company-managed limited liability company that invests in renewable energy (solar). As part of these transactions, the
Company receives management and performance fees under a management agreement. During 2020, the Company earned
approximately $46,000 and $15,000 of management fees under this agreement, from F&M and BankFirst, respectively.
Transactions with Mr. Dunlap
The Company owns an 82.5% interest in an aircraft due to the frequent business travel needs of the Company's executives and
the limited availability of commercial flights in Lincoln, Nebraska, where the Company's headquarters are located. An entity
owned by Mr. Dunlap (which entity is referred to herein as “MSD”) owns the remaining 17.5% interest in the same aircraft.
The aircraft joint ownership agreement between the Company and MSD for this aircraft provides that it will continue in effect
on a month to month basis until terminated by mutual agreement, and that MSD has the right to require the Company to
purchase MSD’s interest in the aircraft for an amount based on the aircraft's fair market value at that time. If the term of the
joint ownership agreement is not extended by agreement of the Company and MSD, the aircraft must be sold and the net
proceeds from the sale distributed to the Company and MSD in proportion to their ownership percentages. Under an aircraft
maintenance agreement among the Company, MSD, and an unrelated aviation service company, the Company and MSD paid a
total of $0.8 million in management fees to the service company in 2020 based on the Company's and MSD's respective
ownership percentages. The maintenance agreement also provides that the Company must pay for all flight operating expenses
for each flight conducted on its behalf, with a corresponding obligation by MSD, and that both the Company and MSD must
pay their pro-rata portion, based on actual use percentages, of the cost of maintaining the aircraft.
On June 26, 2020, Nelnet Bank, Nelnet, Inc., and Mr. Dunlap (as Nelnet, Inc.’s controlling shareholder) entered into a Capital
and Liquidity Maintenance Agreement and a Parent Company Agreement with the FDIC in connection with Nelnet, Inc.’s role
as a source of financial strength for Nelnet Bank. As part of the Capital and Liquidity Maintenance Agreement, Nelnet, Inc. is
obligated to (i) contribute capital to Nelnet Bank for it to maintain capital levels that meet FDIC requirements for a “well
capitalized” bank, including a leverage ratio of capital to total assets of at least 12 percent; (ii) provide and maintain an
irrevocable asset liquidity takeout commitment for the benefit of Nelnet Bank in an amount equal to the greater of either 10
percent of Nelnet Bank’s total assets or such additional amount as agreed to by Nelnet Bank and Nelnet, Inc.; (iii) provide
additional liquidity to Nelnet Bank in such amount and duration as may be necessary for Nelnet Bank to meet its ongoing
liquidity obligations; and (iv) establish and maintain a pledged deposit of $40.0 million with Nelnet Bank.
44
Transactions with Hudl
Prior to 2020, the Company and Mr. Dunlap, along with his children, held combined direct and indirect equity ownership
interests in Hudl. On May 20, 2020, the Company made an additional equity investment in Hudl of approximately $26 million,
as one of the participants in an equity raise completed by Hudl. The Company's and Mr. Dunlap's direct and indirect equity
ownership interests in Hudl, which consist of preferred stock with certain liquidation preferences that are considered
substantive, did not materially change as a result of Hudl's equity raise, and are currently 19.6% and 3.7%, respectively.
The Company holds a promissory note issued by Hudl for approximately $120,000 in certain fees paid by the Company on
behalf of Hudl in December 2015 related to the construction of a building for Hudl's corporate headquarters in Lincoln,
Nebraska. The promissory note is interest-free and repayment by Hudl is contingent upon its receipt of certain future refunds
from the City of Lincoln based on future job creation.
The Company owns 25 percent of TDP Phase Three, LLC ("TDP"), an entity established during 2015 for the sole purpose of
developing and operating a commercial building in Lincoln, Nebraska that is the corporate headquarters for Hudl and in which
Hudl is the primary tenant. As of December 31, 2020, TDP had four notes payable outstanding totaling $23.6 million, of which
recourse to the Company on these notes is equal to its ownership percentage of TDP.
Hudl has a $30.0 million unsecured line of credit with Union Bank, which expires on December 31, 2021.
Transactions with Assurity Life Insurance Company
During the year ended December 31, 2020, Nelnet Business Solutions, a subsidiary of the Company, paid $1.8 million to
Assurity for insurance premiums for insurance on certain tuition payment plans. As part of providing the tuition payment plan
insurance to Nelnet Business Solutions, Assurity entered into a reinsurance agreement with the Company's insurance
subsidiary, under which Assurity paid the Company's insurance subsidiary reinsurance premiums of $1.4 million in 2020, and
the Company's insurance subsidiary paid claims on such reinsurance to Assurity of $1.0 million in 2020. In addition, Assurity
pays Nelnet Business Solutions a partial refund annually based on claim experience, which was approximately $64,000 in 2020.
During the year ended December 31, 2020, the Company made available to its employees certain voluntary insurance products
through Assurity. Premiums are paid by participants and are remitted to Assurity by the Company on behalf of the participants.
The Company remitted to Assurity approximately $538,000 in premiums related to these products during 2020.
During 2020, Assurity invested approximately $1.2 million in a Company-managed limited liability company that invests in
renewable energy (solar). As part of this transaction, the Company receives management and performance fees under a
management agreement. During the year ended December 31, 2020, the Company earned approximately $12,000 in
management fees from Assurity under this agreement.
Both the aggregate of the payments made by the Company to Assurity during 2020, and the aggregate of the payments received
by the Company from Assurity during 2020, were less than 2% of Assurity's gross revenues for 2020.
Transactions with Ms. Butterfield
On May 27, 2020, the Company repurchased, in a privately negotiated transaction under the Company’s existing stock
repurchase program, a total of 100,000 shares of the Company’s Class A common stock (the “Repurchased Shares”) from Ms.
Butterfield. The shares were repurchased at a discount to the closing market price of the Company's Class A common stock as
of May 27, 2020, which closing market price was $51.15 per share, and the transaction was separately approved by the
Company’s Board of Directors. Immediately prior to the Company’s repurchase of the Repurchased Shares, the Repurchased
Shares were shares of the Company’s Class B common stock that Ms. Butterfield converted to shares of Class A common
stock.
WRCM has management agreements with Union Bank under which it is designated to serve as investment advisor with respect
to the Nelnet stock within several trusts established by Ms. Butterfield and Stephen F. Butterfield (who passed away in 2018).
Union Bank serves as trustee for the trusts. Per the terms of the agreements, Union Bank pays WRCM five basis points
(annually) of the aggregate value of the Nelnet stock in the trusts as of the last day of each calendar quarter. As of December
31, 2020, WRCM was the investment advisor with respect to a total of 510 shares and 2.3 million shares of the Company's
Class A and Class B common stock, respectively, held directly and indirectly by these trusts. During 2020, the Company earned
approximately $63,000 of fees under these agreements.
45
Transactions with Ameritas
The Company and Ameritas have each invested approximately $800,000 for a 50 percent ownership interest in BenefitEd, a
joint venture started in 2017 to help employers offer student loan repayment as an employee benefit by directly contributing
toward an employee’s student loan balance. The Company does not consolidate or control BenefitEd. The Company provides
accounting and payment processing services to BenefitEd, and Ameritas provides marketing services. The total value of these
services in 2020 was approximately $430,000 and $185,000, respectively.
During the year ended December 31, 2020, the Company used Ameritas Life Insurance Corp. to process claims related to the
dental insurance plan the Company makes available to its employees and of which the Company self-insures. The total fee paid
to Ameritas Life Insurance Corp. in 2020 was approximately $169,000.
The Company and Ameritas have co-investments in certain real estate projects focused on the development of commercial and
multi-family properties throughout the United States. As of December 31, 2020, the book value of the Company’s co-
investments in these projects was $1.9 million. Additionally, as part of the co-investment transactions with Ameritas, the
Company and Ameritas entered into an agreement under which the Company pays Ameritas a management fee related to each
real estate project. The total fee paid in 2020 to Ameritas under this agreement was approximately $120,000.
Ameritas owns a building in Lincoln, Nebraska where the Company leases approximately 40,000 square feet of office space.
During 2020, the Company paid Ameritas approximately $590,000 in rent for this space.
Other Employment Relationships
Mr. Cintani, who serves on the Company's Board of Directors, has a son, Brian Cintani, 44, who is employed by the Company
as an experienced financial analyst in the Company's capital markets group. During the year ended December 31, 2020, Brian
Cintani's total compensation was less than $200,000. Brian Cintani has been employed by the Company since 2002 and his
employment preceded Mr. Cintani's service as a director which began in May 2012.
Mr. Dunlap has a son, Matthew Dunlap, 32, who is employed by the Company as a Managing Director in the Nelnet Business
Solutions operating segment. During the year ended December 31, 2020, Matthew Dunlap's total compensation was less than
$300,000. Matthew Dunlap has been employed by the Company since 2017.
Other Transactions
Though not required to be disclosed under Item 404(a) of Regulation S-K, below are transactions and relationships the
Company had with other related parties during 2020.
NEBCO, Inc. is a family-owned company based in Lincoln, Nebraska with interests in the manufacture of concrete building
materials, road construction, insurance, mining, railroading, farming, and real estate, of which Mr. Abel, who has served on the
Company's Board of Directors since 2003, is CEO. During 2020, ALLO, a majority owned communications subsidiary of the
Company until December 21, 2020, paid a subsidiary of NEBCO $11,000 for construction rock products related to the
construction and expansion of ALLO's fiber optic network in Lincoln, Nebraska. In addition, the Company has 50 percent
ownership interests in several real estate joint venture entities that were established for the purpose of developing and operating
various properties in Lincoln, Nebraska. The Company does not consolidate or control these entities, and the other 50 percent
owner is an unrelated third party and the developer that makes the day-to-day operating and development decisions for the
various real estate development projects. During the development phase of certain projects, the developer, general contractor, or
a subcontractor may select NEBCO to be a supplier of materials, and these entities may pay NEBCO directly or indirectly for
such materials. The Company has no participation or input with respect to any involvement of NEBCO with such projects.
Unico Group, Inc. ("Unico"), an insurance agency of which Mr. Dunlap and Ms. Muhleisen's children own approximately
4.0%, provided real estate related insurance services to TDP during 2020. TDP paid Unico approximately $18,000 for these
services during 2020.
During 2020, the Company paid approximately $4,000 to Union Title Company, LLC, a 74.0% owned subsidiary of F&M, for
fees related to the Company's real estate development activity.
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The Company owns Canopy Park, LLC ("Canopy Park"), an entity that was established in 2019 for the sole purpose of
acquiring, developing, and owning a commercial real estate property in Lincoln, Nebraska. The Company owns 50% of Canopy
Park. On October 29, 2020, Great Western Bank, as lender, received a $32.5 million promissory note from Canopy Park. The
promissory note carries an interest rate of 2.1% plus one-month LIBOR and has a maturity date of November 10, 2035. Mr.
Henning has served on the board of directors of Great Western Bank since August 2015.
In addition to the foregoing, from time to time, the Company, some of the Company's executive officers, and some of the
members of the Company's Board of Directors invest in small or startup companies, often in the Company's local
community. In some cases, executive officers of the Company may also serve as members of the Board of Directors of such
companies in connection with the investment.
The Company and certain executive officers have invested a total of $2.0 million in Capricorn Healthcare and Special
Opportunities, LP ("Capricorn"). Capricorn is located in Palo Alto, California and is a limited partnership that primarily invests
in healthcare-related companies. As of December 31, 2020, the investors and amount invested include the Company $973,000,
Mr. Dunlap $973,000, and Mr. Noordhoek $97,000.
Neither the Company, the Company's executive officers, nor members of the Company's Board of Directors, individually or in
the aggregate, owns a majority interest in any of these companies. While the Company does not deem these investments to be
related party transactions, the Company reports investment activity of this type to the Board of Directors.
AUDIT COMMITTEE REPORT
Report of the Board Audit Committee
The Audit Committee of the Board of Directors (the “Committee”) is responsible for the oversight of the integrity of the
Company's consolidated financial statements, the Company's system of internal control over financial reporting, the Company's
policy standards and guidelines for risk assessment and risk management and compliance with legal and regulatory
requirements, the qualifications and independence of the Company's independent auditor, and the performance of the
Company's internal and independent auditors. The Committee has the sole authority and responsibility to select, determine the
compensation of, evaluate, and, when appropriate, replace the Company's independent auditor. The Committee, with input from
management, regularly monitors the performance of the key members of the independent auditors’ team, including the lead
partner. In the case of rotation of the lead partner, the Committee is involved in the selection of the new lead audit partner, and
considers such factors as the individual’s professional and relevant industry experience, other current assignments, and the
proximity of their office location to the Company’s headquarters. The Committee is also responsible under the Sarbanes-Oxley
Act of 2002 for establishing procedures for the receipt, retention, and treatment of complaints received by the Company
regarding accounting, internal accounting controls, or auditing matters, and the confidential, anonymous submission by
employees of concerns regarding questionable accounting or auditing matters. The Committee is currently comprised of four
independent directors and operates under a written charter adopted by the Board, a copy of which is available at
www.nelnetinvestors.com. The Board has determined that each Committee member is independent under the standards of
director independence established under the Company's Corporate Governance Guidelines and the NYSE listing requirements
and is also independent under applicable independence standards of the Exchange Act and the SEC rules thereunder.
The Committee serves in an oversight capacity and is not part of the Company's managerial or operational decision-making
process. Management is responsible for the financial reporting process, including the system of internal controls, for the
preparation of consolidated financial statements in accordance with generally accepted accounting principles, and for the report
on the Company's internal control over financial reporting. The Company's independent auditor, KPMG LLP, is responsible for
auditing the Company's financial statements and expressing an opinion as to their conformity with generally accepted
accounting principles and for expressing an opinion on the effectiveness of the Company's internal control over financial
reporting. The Committee's responsibility is to oversee the financial reporting process and to review and discuss management's
report on the Company's internal control over financial reporting. The Committee relies, without independent verification, on
the information provided to it and on the representations made by management, the internal auditor, and the independent
auditor.
The Committee held six meetings during 2020. The Committee, among other things:
•
Reviewed and discussed the Company's earnings releases, Quarterly Reports on Form 10-Q, and Annual Report
on Form 10-K, including the consolidated financial statements and compliance with legal and regulatory
requirements
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•
•
•
•
•
Reviewed and discussed, in conjunction with the Risk and Finance Committee, the Company's policies and
procedures for risk assessment and risk management and the major risk exposures of the Company and its
business units, as appropriate
Reviewed and discussed the annual plan and the scope of the work of the internal auditor for fiscal 2020 and
reviewed all completed reports of the internal auditor
Reviewed management's progress on addressing internal and certain external audit findings
Reviewed and discussed the annual plan and scope of the work of the independent auditor
Reviewed and discussed, in conjunction with the Compliance Committee, reports from management on the
Company's policies regarding applicable consumer-oriented legal and regulatory requirements
• Met with KPMG LLP, the internal auditor, and Company management in separate executive sessions
The Committee reviewed and discussed the audited consolidated financial statements for the year ended December 31, 2020
with management, the internal auditor, and KPMG LLP. The Committee reviewed and discussed the critical accounting policies
and estimates as set forth in the Company's Annual Report on Form 10-K, management's annual report on the Company's
internal control over financial reporting, and KPMG LLP's opinion on the effectiveness of internal control over financial
reporting. The Committee also discussed with management and the internal auditor the process used to support certifications by
the Company's Chief Executive Officer and Chief Financial Officer that are required by the SEC and the Sarbanes-Oxley Act of
2002 to accompany the Company's periodic filings with the SEC and the processes used to support management's annual report
on the Company's internal control over financial reporting.
The Committee discussed with KPMG LLP matters related to the audit of the Company's consolidated financial statements and
the matters required to be discussed by Auditing Standard No. 1301, Communications with Audit Committees, issued by the
Public Company Accounting Oversight Board (“PCAOB”), and in connection therewith discussed with KPMG LLP the matters
required to be discussed by the applicable requirements of the PCAOB and the SEC. This review included a discussion with
management and KPMG LLP as to the quality (not merely the acceptability) of the Company's accounting principles, the
reasonableness of significant estimates and judgments, and the disclosures within the Company's consolidated financial
statements, including the disclosures relating to critical accounting policies.
KPMG LLP also provided to the Committee the written disclosures and the letter required by applicable requirements of the
PCAOB regarding KPMG LLP's communications with the Committee concerning independence. The Committee discussed
with KPMG LLP their independence from the Company. When considering KPMG LLP's independence, the Committee
considered if services they provided to the Company beyond those rendered in connection with their audit of the Company's
consolidated financial statements, reviews of the Company's interim condensed consolidated financial statements included in its
Quarterly Reports on Form 10-Q, and their opinion on the effectiveness of the Company's internal control over financial
reporting were compatible with maintaining their independence. The Committee also reviewed and pre-approved, among other
things, the audit, audit-related, and tax services performed by KPMG LLP. For tax services, the pre-approval included
discussion with KPMG concerning their independence as required by PCAOB Rule 3524 (Audit Committee Pre-approval of
Certain Tax Services). The Committee received regular updates on the amount of fees and scope of audit, audit-related, and tax
services provided.
Based on the Committee's review and these meetings, discussions, and reports, and subject to the limitations on the Committee's
role and responsibilities referred to above and in the Audit Committee Charter, the Committee recommended to the Board that
the Company's audited consolidated financial statements for the year ended December 31, 2020 be included in the Company's
2020 Annual Report on Form 10-K for filing with the SEC.
The Committee has also selected KPMG LLP as the Company's independent auditor for the year ending December 31, 2021
and is presenting the selection to the shareholders for ratification.
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KPMG has been the Company’s independent auditor since 1998. The Committee last went through a Request for Proposal for
independent audit and non-audit services effective for the year ended December 31, 2012.
Respectfully submitted,
Thomas E. Henning, Chairman
William R. Cintani
David S. Graff
JoAnn M. Martin
PROPOSAL 2 - RATIFICATION OF APPOINTMENT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING
FIRM
The Audit Committee selects the Company's independent registered public accounting firm. This proposal is put before the
shareholders because the Board believes that it is good corporate governance practice to seek shareholder ratification of the
selection of the independent registered public accounting firm. If the appointment of KPMG LLP is not ratified, the Audit
Committee will evaluate the basis for the shareholders' vote when determining whether to continue the firm's engagement.
The Board of Directors of the Company recommends a vote FOR the ratification of the appointment of KPMG LLP as
the independent registered public accounting firm for 2021.
The affirmative vote of the majority of votes cast at the Annual Meeting is required to ratify the appointment of KPMG LLP.
Unless marked to the contrary, proxies will be voted FOR the ratification of the appointment of KPMG LLP as the independent
registered public accounting firm for 2021.
Representatives of KPMG LLP are expected to attend the Annual Meeting and to respond to appropriate questions from
shareholders present at the meeting and will have an opportunity to make a statement if they desire to do so.
Independent Accountant Fees and Services
Aggregate fees for professional services rendered by KPMG LLP for the years ended December 31, 2020 and 2019 are set forth
below.
2020
2019
Audit fees
Audit-related fees
Tax fees
All other fees
Total
$
$
1,157,853
1,467,500
109,000
1,780
2,736,133
827,910
1,476,500
30,898
1,780
2,337,088
Audit-related fees were for assurance and other services related to service provider compliance reports, including Service
Organization Controls (SOC1) reports on the effectiveness of the Company's controls for student loan servicing and other
services provided for its customers, employee benefit plan audits, agreed-upon procedures for Company-sponsored student loan
securitization financings and other matters, and consultations concerning financial accounting and reporting standards.
Tax fees were for services related to tax compliance and planning.
All other fees represent the amount paid by the Company for access to an online accounting and tax reference tool.
In addition to the services and fees described above, KPMG was engaged to perform audits of and provide tax services for
certain private investment funds which are managed by WRCM, for which KPMG received total fees of $85,500 and $82,500
in 2020 and 2019, respectively. Additionally, TDP Phase Three, LLC, an entity of which the Company owns 25 percent and
was established for the sole purpose of developing and operating a building, engaged KPMG to perform audits in 2020 and
2019, for which KPMG received total fees of $25,000 in each respective year.
The Audit Committee's pre-approval policy with respect to audit and permitted non-audit services by the independent auditor is
set forth in its charter. The Audit Committee has the sole authority to appoint, retain, and terminate the Company's independent
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auditor, which reports directly to the Audit Committee. The Audit Committee is directly responsible for the evaluation,
compensation (including as to fees and terms), and oversight of the work of the Company's independent auditor (including
resolution of disagreements between management and the independent auditor regarding financial reporting) for the purpose of
preparing or issuing an audit report or performing other audit, review, or attestation services for the Company. All related fees
and costs of the independent auditor, as determined by the Audit Committee, are paid promptly by the Company in accordance
with its normal business practices. All auditing services and permitted non-audit services performed for the Company by the
independent auditor, including the services for 2020 and 2019 described above, are pre-approved by the Audit Committee,
subject to applicable laws, rules, and regulations. The Audit Committee may form and delegate to a subcommittee the authority
to grant pre-approvals with respect to auditing services and permitted non-auditing services, provided that any such grant of
pre-approval shall be reported to the full Audit Committee at its next meeting.
PROPOSAL 3 - ADVISORY VOTE TO APPROVE EXECUTIVE COMPENSATION
Section 14A of the Exchange Act requires that the Company provide its shareholders with the opportunity to vote to approve,
on a nonbinding, advisory basis, the compensation of the Company's Named Executive Officers as disclosed pursuant to the
compensation disclosure rules of the SEC, and the Company is therefore providing its shareholders with the opportunity to cast
such an advisory vote on executive compensation at this year’s Annual Meeting as described below. The Company believes
that it is appropriate to seek the views of shareholders on the design and effectiveness of the Company's executive
compensation program.
Based on the results of an advisory vote on the frequency of advisory votes on executive compensation at the Company's 2017
annual meeting of shareholders, where the Board of Directors recommended and the shareholders voted in favor of holding an
advisory vote on executive compensation every year, the Board of Directors determined that, until the next vote on the
frequency of holding advisory votes on executive compensation, the Company will hold a shareholder advisory vote on
executive compensation every year. Therefore, the next advisory vote on executive compensation will occur at the Company’s
2022 annual meeting of shareholders. Section 14A of the Exchange Act requires that at least once every six years the Company
provide its shareholders with the opportunity to vote, on a nonbinding, advisory basis, on whether the frequency of future
advisory votes on executive compensation will be every one, two, or three years.
As described in the Compensation Discussion and Analysis section of this Proxy Statement, the Company's objective for its
executive compensation program is to attract, motivate, develop, and retain executives who will contribute to the Company's
long-term success and the creation of shareholder value. The Company seeks to accomplish this objective in a way that rewards
performance and is aligned with its shareholders' long-term interests, and the Company's compensation programs are designed
to reward the Named Executive Officers for the achievement of short-term and long-term strategic and operational goals and
the achievement of increased shareholder return, while at the same time avoiding the encouragement of unnecessary or
excessive risk-taking.
The framework and executive compensation philosophy are established by an independent People Development and
Compensation Committee of the Board of Directors. The following items reflect our commitment to pay for performance and to
maintain a strong executive compensation governance framework:
•
•
•
Incentive plans that are based upon financial and operational goals that are reviewed annually by the People
Development and Compensation Committee.
An annual risk assessment conducted by the People Development and Compensation Committee to evaluate
whether incentive programs drive behaviors that are demonstrably within the risk management parameters it
deems prudent.
A robust share ownership and retention policy.
The Compensation Discussion and Analysis and the compensation tables and disclosures provided in this Proxy Statement
describe the Company's executive compensation program in more detail, and discuss the following key elements of the
program:
• We pay for performance, both in setting base salaries and awarding incentives via an Executive Officers Incentive
Compensation Plan. This plan is used to assess the participating Named Executive Officers’ performance based
on numerous criteria, including certain financial measures such as levels of earnings, growth of assets, return on
equity and assets, cash flow, market share, operating margins and operating expenses; certain service measures
including performance of the Company's operating segments; employee engagement; and strategic positioning.
50
•
•
•
Periodically, we retain external, independent compensation consultants to review the compensation levels and
practices for the Named Executive Officers, compare those levels to executives in comparable positions in select
industries and companies, and identify potential gaps or inconsistencies in our compensation practices.
None of the Named Executive Officers has an employment agreement or severance arrangement. In addition, the
Company generally does not provide significant perquisites, tax reimbursements, or change in control benefits to
the Named Executive Officers that are not available to other employees, and we do not issue stock options.
Each of the Named Executive Officers is employed at-will and is expected to demonstrate exceptional personal
performance in order to continue serving as a member of the executive team.
The Company believes the compensation program for the Named Executive Officers is instrumental in helping the Company
achieve its strong financial performance, and is asking shareholders to approve the compensation of the Company's Named
Executive Officers as disclosed in this Proxy Statement, including in the Compensation Discussion and Analysis, the
compensation tables, and the narrative disclosures that accompany the compensation tables.
The vote on this proposal is not intended to address any specific element of compensation; rather, the vote relates to the
compensation of our Named Executive Officers, as described in this Proxy Statement in accordance with the compensation
disclosure rules of the SEC. As an advisory vote, the vote on this proposal is not binding upon the Company, the Board of
Directors, or the People Development and Compensation Committee. However, the People Development and Compensation
Committee, which is responsible for designing and administering the Company's executive compensation program, values the
opinions expressed by shareholders in their vote on this proposal and will consider the outcome of the vote when making future
compensation decisions for Named Executive Officers.
Accordingly, the Company's shareholders are asked to vote on the following resolution at the Annual Meeting:
“RESOLVED, that the Company's shareholders approve, on an advisory basis, the compensation of the Named
Executive Officers, as disclosed in the Company's Proxy Statement for the 2021 Annual Meeting of Shareholders
pursuant to the compensation disclosure rules of the Securities and Exchange Commission, including the
Compensation Discussion and Analysis, the Summary Compensation Table, and the other related tables and
disclosure.”
The Board of Directors recommends a vote FOR the approval of the compensation of the Company's Named Executive
Officers, as disclosed in this Proxy Statement.
OTHER SHAREHOLDER MATTERS
Householding
Under SEC rules, we are allowed to send in a single envelope our Notice of Internet Availability of Proxy Materials or a single
copy of our proxy solicitation and other required annual meeting materials to two or more shareholders sharing the same
address. We may do this only if the shareholders at that address share the same last name or if we reasonably believe that the
shareholders are members of the same family or group. If we are sending a Notice, the envelope must contain a separate Notice
for each shareholder at the shared address. Each Notice must also contain a unique control number that each shareholder will
use to gain access to our proxy materials and vote online. If we are mailing a paper copy of our proxy materials, the rules
require us to send each shareholder at the shared address a separate proxy card.
We believe these rules are beneficial to both our shareholders and to us. Our printing and postage costs are lowered anytime we
eliminate duplicate mailings to the same household. However, shareholders at a shared address may revoke their consent to the
householding program and receive their Notice in a separate envelope, or, if they have elected to receive a full copy of our
proxy materials in the mail, receive a separate copy of these materials. If you receive a single set of proxy materials but prefer
to receive separate copies for each registered account in your household, please contact our agent, Broadridge, at:
1-866-540-7095, or in writing at: Broadridge Householding Department, 51 Mercedes Way, Edgewood, New York 11717.
Broadridge will remove you from the householding program within 30 days of receipt of your request, following which you
will begin receiving an individual copy of the material.
You can also contact Broadridge at the phone number above if you received multiple copies of the proxy materials and would
prefer to receive a single copy in the future.
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Other Business
On the date that this Proxy Statement was first made available to shareholders, the Board of Directors had no knowledge of any
other matter which will come before the Annual Meeting other than the matters described herein. However, if any such matter
is properly presented at the Annual Meeting, the proxy solicited hereby confers discretionary authority to the proxies to vote in
their sole discretion with respect to such matters, as well as other matters incident to the conduct of the Annual Meeting.
Shareholder Proposals for 2022 Annual Meeting
Shareholder proposals intended to be presented at the 2022 Annual Meeting of Shareholders, currently scheduled for May 19,
2022, must be received at the Company's offices at 121 South 13th Street, Suite 100, Lincoln, Nebraska 68508, Attention:
Corporate Secretary, on or before December 9, 2021, to be eligible for inclusion in the Company's 2022 proxy materials. The
inclusion of any such proposal in such proxy materials shall be subject to the requirements of the proxy rules adopted under the
Exchange Act (the “Proxy Rules”). The submission of a shareholder proposal does not guarantee that it will be included in the
Company's Proxy Statement.
A shareholder may otherwise propose business for consideration or nominate persons for election to the Board of Directors, in
compliance with federal proxy rules, applicable state law, and other legal requirements and without seeking to have the
proposal included in the Company's Proxy Statement pursuant to the Proxy Rules. Under the Company's Bylaws, the Secretary
of the Company must receive notice of any such proposal or nominations for the Company's 2022 Annual Meeting between
January 20 and February 19, 2022 (90 to 120 days before the first anniversary of this year's Annual Meeting date). The notice
must contain the information required by the Company's Bylaws. A proxy may confer discretionary authority to vote on any
matter at a meeting if the Company does not receive notice of the matter within the time frame described above. A copy of the
Company's Bylaws is available at the Company's investor relations website at www.nelnetinvestors.com under “Corporate
Governance” - “Governance Documents” or is available upon request to: Nelnet, Inc., 121 South 13th Street, Suite 100,
Lincoln, Nebraska 68508, Attention: Corporate Secretary. The Chairman of the meeting may exclude matters that are not
properly presented in accordance with these requirements.
MISCELLANEOUS
The information under the captions “People Development and Compensation Committee Report” and “Audit Committee
Report” (i) shall not be deemed to be “soliciting material” or to be “filed” with the SEC or subject to Regulation 14A or the
liabilities of Section 18 of the Exchange Act, and (ii) shall not be deemed to be incorporated by reference in any filing under the
Securities Act of 1933 or the Exchange Act, except to the extent that the Company specifically incorporates such information
by reference in such filing.
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