NELNET INC, 10-K filed on 2/27/2020
Annual Report
v3.19.3.a.u2
Cover - USD ($)
12 Months Ended
Dec. 31, 2019
Jan. 31, 2020
Jun. 28, 2019
Document Information [Line Items]      
Document Type 10-K    
Amendment Flag false    
Document Annual Report true    
Document Period End Date Dec. 31, 2019    
Document Transition Report false    
Entity File Number 001-31924    
Entity Registrant Name NELNET, INC    
Entity Central Index Key 0001258602    
Current Fiscal Year End Date --12-31    
Document Fiscal Year Focus 2019    
Document Fiscal Period Focus FY    
Entity Incorporation, State or Country Code NE    
Entity Tax Identification Number 84-0748903    
Entity Address, Address Line One 121 South 13th Street, Suite 100    
Entity Address, City or Town Lincoln,    
Entity Address, State or Province NE    
Entity Address, Postal Zip Code 68508    
City Area Code 402    
Local Phone Number 458-2370    
Title of 12(b) Security Class A Common Stock, Par Value $0.01 per Share    
Trading Symbol NNI    
Security Exchange Name NYSE    
Entity Well-known Seasoned Issuer Yes    
Entity Voluntary Filers No    
Entity Current Reporting Status Yes    
Entity Interactive Data Current Yes    
Entity Filer Category Large Accelerated Filer    
Entity Small Business false    
Entity Emerging Growth Company false    
Entity Shell Company false    
Entity Public Float     $ 1,195,786,762
Documents Incorporated by Reference Portions of the registrant’s definitive Proxy Statement to be filed for its 2020 Annual Meeting of Shareholders, scheduled to be held May 21, 2020, are incorporated by reference into Part III of this Form 10-K.    
Class A      
Document Information [Line Items]      
Entity Common Stock, Shares Outstanding   28,462,915  
Class B      
Document Information [Line Items]      
Entity Common Stock, Shares Outstanding   11,271,609  
v3.19.3.a.u2
Consolidated Balance Sheets - USD ($)
$ in Thousands
Dec. 31, 2019
Dec. 31, 2018
Assets:    
Loans receivable (net of allowance for loan losses of $61,914 and $60,388 respectively) $ 20,669,371 $ 22,377,142
Cash and cash equivalents:    
Cash and cash equivalents - not held at a related party 13,922 9,472
Cash and cash equivalents - held at a related party 119,984 111,875
Total cash and cash equivalents 133,906 121,347
Investments and notes receivable 246,973 249,370
Restricted cash 650,939 701,366
Restricted cash - due to customers 437,756 369,678
Accrued interest receivable 733,623 679,197
Accounts receivable (net of allowance for doubtful accounts of $4,455 and $3,271, respectively) 115,391 59,531
Goodwill 156,912 156,912
Intangible assets, net 81,532 114,290
Property and equipment, net 348,259 344,784
Other assets 134,308 45,533
Fair value of derivative instruments 0 1,818
Total assets 23,708,970 25,220,968
Liabilities:    
Bonds and notes payable 20,529,054 22,218,740
Accrued interest payable 47,285 61,679
Other liabilities 303,781 256,092
Due to customers 437,756 369,678
Total liabilities 21,317,876 22,906,189
Commitments and contingencies
Nelnet, Inc. shareholders' equity:    
Preferred stock, $0.01 par value. Authorized 50,000,000 shares; no shares issued or outstanding 0 0
Common stock:    
Additional paid-in capital 5,715 622
Retained earnings 2,377,627 2,299,556
Accumulated other comprehensive earnings 2,972 3,883
Total Nelnet, Inc. shareholders' equity 2,386,712 2,304,464
Noncontrolling interests 4,382 10,315
Total equity 2,391,094 2,314,779
Total liabilities and equity 23,708,970 25,220,968
Class A    
Common stock:    
Common stock 285 288
Class B    
Common stock:    
Common stock 113 115
Variable Interest Entity, Primary Beneficiary    
Assets:    
Loans receivable (net of allowance for loan losses of $61,914 and $60,388 respectively) 20,664,126 22,359,655
Cash and cash equivalents:    
Restricted cash 639,816 677,611
Other assets 735,286 679,735
Liabilities:    
Bonds and notes payable 20,742,798 22,146,374
Other liabilities 158,067 163,327
Common stock:    
Net assets of consolidated education and other lending variable interest entities $ 1,138,363 $ 1,407,300
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Consolidated Balance Sheets (Parentheticals) - USD ($)
$ in Thousands
Dec. 31, 2019
Dec. 31, 2018
Allowance for loan losses $ 61,914 $ 60,388
Allowance for doubtful accounts $ 4,455 $ 3,271
Preferred stock, par value (in dollars per share) $ 0.01 $ 0.01
Preferred stock, authorized shares (in shares) 50,000,000 50,000,000
Preferred stock, issued shares (in shares) 0 0
Preferred stock, outstanding shares (in shares) 0 0
Class A    
Par value (in dollars per share) $ 0.01 $ 0.01
Shares authorized (in shares) 600,000,000 600,000,000
Shares issued (in shares) 28,458,495 28,798,464
Shares outstanding (in shares) 28,458,495 28,798,464
Class B    
Par value (in dollars per share) $ 0.01 $ 0.01
Shares authorized (in shares) 60,000,000 60,000,000
Shares issued (in shares) 11,271,609 11,459,641
Shares outstanding (in shares) 11,271,609 11,459,641
v3.19.3.a.u2
Consolidated Statements of Income - USD ($)
$ in Thousands
12 Months Ended
Dec. 31, 2019
Dec. 31, 2018
Dec. 31, 2017
Interest income:      
Loan interest $ 914,256 $ 897,666 $ 757,731
Investment interest 34,421 26,600 12,695
Total interest income 948,677 924,266 770,426
Interest expense:      
Interest on bonds and notes payable 699,327 669,906 465,188
Net interest income 249,350 254,360 305,238
Less provision for loan losses 39,000 23,000 14,450
Net interest income after provision for loan losses 210,350 231,360 290,788
Other income:      
Other income 65,179 54,805 55,728
Derivative market value and foreign currency transaction adjustments and derivative settlements, net (30,789) 71,085 (18,554)
Total other income 831,245 832,532 479,062
Cost of services:      
Cost of services 102,026 76,492 58,628
Operating expenses:      
Salaries and benefits 463,503 436,179 301,885
Depreciation and amortization 105,049 86,896 39,541
Other expenses 194,272 178,031 143,112
Total operating expenses 762,824 701,106 484,538
Income before income taxes 176,745 286,294 226,684
Income tax expense 35,451 58,770 64,863
Net income 141,294 227,524 161,821
Net loss attributable to noncontrolling interests 509 389 11,345
Net income attributable to Nelnet, Inc. $ 141,803 $ 227,913 $ 173,166
Earnings per common share:      
Net income attributable to Nelnet, Inc. shareholders - basic and diluted (in dollars per share) $ 3.54 $ 5.57 $ 4.14
Weighted average common shares outstanding - basic and diluted (in shares) 40,047,402 40,909,022 41,791,941
Loan servicing and systems revenue      
Other income:      
Revenue $ 455,255 $ 440,027 $ 223,000
Education technology services and payment processing services      
Other income:      
Revenue 277,331 221,962 193,188
Cost of services:      
Cost of services 81,603 59,566 48,678
Communications revenue      
Other income:      
Revenue 64,269 44,653 25,700
Cost of services:      
Cost of services $ 20,423 $ 16,926 $ 9,950
v3.19.3.a.u2
Consolidated Statements of Comprehensive Income - USD ($)
$ in Thousands
3 Months Ended 12 Months Ended
Dec. 31, 2019
Sep. 30, 2019
Jun. 30, 2019
Mar. 31, 2019
Dec. 31, 2018
Sep. 30, 2018
Jun. 30, 2018
Mar. 31, 2018
Dec. 31, 2019
Dec. 31, 2018
Dec. 31, 2017
Statement of Comprehensive Income [Abstract]                      
Net income $ 41,834 $ 33,135 $ 24,678 $ 41,647 $ 21,674 $ 43,126 $ 49,539 $ 113,185 $ 141,294 $ 227,524 $ 161,821
Available-for-sale securities:                      
Unrealized holding (losses) gains arising during period, net                 (1,199) 1,056 2,349
Reclassification adjustment for gains recognized in net income, net of losses                 0 (978) (2,528)
Income tax effect                 288 (69) 66
Total other comprehensive (loss) income                 (911) 9 (113)
Comprehensive income                 140,383 227,533 161,708
Comprehensive loss attributable to noncontrolling interests                 509 389 11,345
Comprehensive income attributable to Nelnet, Inc.                 $ 140,892 $ 227,922 $ 173,053
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Consolidated Statements of Shareholders' Equity - USD ($)
$ in Thousands
Total
Preferred stock shares
Common stock shares
Class A
Common stock shares
Class B
Additional paid-in capital
Retained earnings
Accumulated other comprehensive earnings
Noncontrolling interests
Beginning balance (in shares) at Dec. 31, 2016   0 30,628,112 11,476,932        
Beginning balance at Dec. 31, 2016 $ 2,070,925 $ 0 $ 306 $ 115 $ 420 $ 2,056,084 $ 4,730 $ 9,270
Increase (Decrease) in Stockholders' Equity [Roll Forward]                
Issuance of noncontrolling interests 19,578             19,578
Net income (loss) 161,821         173,166   (11,345)
Other comprehensive income (loss) (113)           (113)  
Distribution to noncontrolling interests (1,645)             (1,645)
Cash dividends on Class A and Class B common stock (24,097)         (24,097)    
Issuance of common stock, net of forfeitures (in shares)     178,114          
Issuance of common stock, net of forfeitures 3,621   $ 2   3,619      
Compensation expense for stock based awards 4,193       4,193      
Repurchase of common stock (in shares)     (1,473,054)          
Repurchase of common stock (68,896)   $ (15)   (7,711) (61,170)    
Conversion of common stock (in shares)     8,345 (8,345)        
Ending balance at Dec. 31, 2017 2,165,387 $ 0 $ 293 $ 115 521 2,143,983 4,617 15,858
Ending balance (in shares) at Dec. 31, 2017   0 29,341,517 11,468,587        
Increase (Decrease) in Stockholders' Equity [Roll Forward]                
Issuance of noncontrolling interests 1,023             1,023
Net income (loss) 227,524         227,913   (389)
Other comprehensive income (loss) 9           9  
Distribution to noncontrolling interests (525)             (525)
Cash dividends on Class A and Class B common stock (26,839)         (26,839)    
Issuance of common stock, net of forfeitures (in shares)     316,148          
Issuance of common stock, net of forfeitures 5,174   $ 3   5,171      
Compensation expense for stock based awards 6,194       6,194      
Repurchase of common stock (in shares)     (868,147)          
Repurchase of common stock (45,331)   $ (8)   (11,264) (34,059)    
Acquisition of noncontrolling interest (19,101)         (13,449)   (5,652)
Conversion of common stock (in shares)     8,946 (8,946)        
Ending balance at Dec. 31, 2018 2,314,779 $ 0 $ 288 $ 115 622 2,299,556 3,883 10,315
Ending balance (in shares) at Dec. 31, 2018   0 28,798,464 11,459,641        
Increase (Decrease) in Stockholders' Equity [Roll Forward]                
Issuance of noncontrolling interests 4,756             4,756
Net income (loss) 141,294         141,803   (509)
Other comprehensive income (loss) (911)           (911)  
Distribution to noncontrolling interests (4,103)             (4,103)
Cash dividends on Class A and Class B common stock (29,485)         (29,485)    
Issuance of common stock, net of forfeitures (in shares)     198,272          
Issuance of common stock, net of forfeitures 4,851   $ 2   4,849      
Compensation expense for stock based awards 6,401       6,401      
Repurchase of common stock (in shares)     (726,273)          
Repurchase of common stock (40,411)   $ (7)   (6,157) (34,247)    
Conversion of common stock (in shares)     188,032 (188,032)        
Conversion of common stock     $ 2 $ (2)        
Ending balance at Dec. 31, 2019 $ 2,391,094 $ 0 $ 285 $ 113 $ 5,715 $ 2,377,627 $ 2,972 $ 4,382
Ending balance (in shares) at Dec. 31, 2019   0 28,458,495 11,271,609        
v3.19.3.a.u2
Consolidated Statements of Shareholders' Equity (Parentheticals) - $ / shares
12 Months Ended
Dec. 31, 2019
Dec. 31, 2018
Dec. 31, 2017
Class A      
Cash dividend on Class A and Class B common stock (in dollars per share) $ 0.74 $ 0.66 $ 0.58
Class B      
Cash dividend on Class A and Class B common stock (in dollars per share) $ 0.74 $ 0.66 $ 0.58
v3.19.3.a.u2
Consolidated Statements of Cash Flows - USD ($)
$ in Thousands
12 Months Ended
Dec. 31, 2019
Dec. 31, 2018
Dec. 31, 2017
Statement of Cash Flows [Abstract]      
Net income attributable to Nelnet, Inc. $ 141,803 $ 227,913 $ 173,166
Net loss attributable to noncontrolling interests (509) (389) (11,345)
Net income 141,294 227,524 161,821
Adjustments to reconcile net income to net cash provided by operating activities, net of acquisitions:      
Depreciation and amortization, including debt discounts and loan premiums and deferred origination costs 192,662 184,682 137,823
Loan discount accretion (35,824) (40,800) (44,812)
Provision for loan losses 39,000 23,000 14,450
Derivative market value adjustments 76,195 (1,014) (26,379)
Unrealized foreign currency transaction adjustment 0 0 45,600
(Payments to) proceeds from termination of derivative instruments, net (12,530) 10,283 (30,382)
Loss on extinguishment of debt 16,689 0 0
(Payments to) proceeds from clearinghouse - initial and variation margin, net (70,685) 40,382 76,325
Gain from sale of loans (17,261) 0 0
Deferred income tax (benefit) expense (7,265) 10,981 (1,544)
Non-cash compensation expense 6,781 6,539 4,416
Impairment expense 0 11,721 3,626
Other (2,647) (11,049) (2,410)
Increase in accrued interest receivable (54,586) (248,869) (39,203)
(Increase) decrease in accounts receivable (55,949) 3,059 (4,234)
Increase in other assets (11,065) (4,069) (42,270)
(Decrease) increase in accrued interest payable (14,394) 11,640 4,362
Increase (decrease) in other liabilities 40,422 (12,506) (2,341)
Increase in due to customers 68,078 59,388 67,419
Net cash provided by operating activities 298,915 270,892 322,267
Cash flows from investing activities, net of acquisitions:      
Purchases of loans (2,008,207) (3,922,251) (325,476)
Net proceeds from loan repayments, claims, and capitalized interest 3,462,391 3,322,783 3,363,526
Proceeds from sale of loans 196,564 23,712 53,203
Purchases of available-for-sale securities (1,010) (46,424) (128,523)
Proceeds from sales of available-for-sale securities 105 71,415 156,540
Purchases of investments and issuance of notes receivable (103,250) (67,040) (29,339)
Proceeds from investments and notes receivable 70,472 23,039 11,545
Purchases of property and equipment (92,499) (125,023) (156,005)
Business (acquisitions) sale, net of cash and restricted cash acquired 0 (12,562) 4,511
Net cash provided by (used in) investing activities 1,524,566 (732,351) 2,949,982
Cash flows from financing activities:      
Payments on bonds and notes payable (4,698,878) (3,113,503) (5,403,224)
Proceeds from issuance of bonds and notes payable 2,997,972 3,922,962 1,984,558
Payments of debt issuance costs (14,406) (13,808) (6,497)
Payments to extinguish debt (14,030) 0 0
Payment of contingent consideration 0 0 (850)
Dividends paid (29,485) (26,839) (24,097)
Repurchases of common stock (40,411) (45,331) (68,896)
Proceeds from issuance of common stock 1,552 1,359 678
Acquisition of noncontrolling interest 0 (13,449) 0
Issuance of noncontrolling interests 4,650 918 19,473
Distribution to noncontrolling interests (235) (525) (1,645)
Net cash (used in) provided by financing activities (1,793,271) 711,784 (3,500,500)
Net increase (decrease) in cash, cash equivalents and restricted cash 30,210 250,325 (228,251)
Cash, cash equivalents, and restricted cash, beginning of year 1,192,391 942,066 1,170,317
Cash, cash equivalents, and restricted cash, end of year 1,222,601 1,192,391 942,066
Supplemental disclosures of cash flow information:      
Cash disbursements made for interest 657,436 591,394 390,278
Cash disbursements made for income taxes, net of refunds and credits [1] 17,672 473 96,271
Noncash investing and financing activity:      
Receipt of beneficial interest in consumer loan securitizations 39,780 0 0
Distribution to noncontrolling interests 3,868 0 0
Cash and cash equivalents:      
Cash, cash equivalents, and restricted cash $ 1,192,391 $ 942,066 $ 942,066
[1] For 2019 and 2018, the Company utilized $31.8 million and $14.7 million of federal and state tax credits, respectively, related primarily to renewable energy.
v3.19.3.a.u2
Consolidated Statements of Cash Flows (Parenthetical) - USD ($)
$ in Millions
Dec. 31, 2019
Dec. 31, 2018
Statement of Cash Flows [Abstract]    
Tax credit utilized in period $ 31.8 $ 14.7
v3.19.3.a.u2
Description of Business
12 Months Ended
Dec. 31, 2019
Organization, Consolidation and Presentation of Financial Statements [Abstract]  
Description of Business 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; education technology, services, and payment processing; and 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 has four reportable operating segments. 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”)
A description of each reportable operating segment is included below. See note 14 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
Providing student loan servicing software and other information technology products and services
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.
On February 7, 2018, the Company acquired Great Lakes Educational Loan Services, Inc. (“Great Lakes”). See note 7 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.
This segment also provides student loan servicing software, which is used internally by the Company 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, and interacting with customers through multi-channels.
Education Technology, Services, and Payment Processing
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 actively managed 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) actively managed 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. The acquisition of ALLO in 2015 provides additional diversification of the Company's revenues and cash flows outside of education. In addition, the acquisition leverages the Company's existing infrastructure, customer service capabilities and call centers, and financial strength and liquidity for continued growth.
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, hostedPBX services, and other services.
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. 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). The Company also acquires private education and consumer loans. 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. 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.
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 real estate and renewable energy (solar)
Interest expense incurred on unsecured 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.
v3.19.3.a.u2
Summary of Significant Accounting Policies and Practices
12 Months Ended
Dec. 31, 2019
Accounting Policies [Abstract]  
Summary of Significant Accounting Policies and Practices 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 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.
As of December 31, 2019, the Company owned 98.9 percent of the economic rights of ALLO Communications LLC and has a disproportional 80 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. In addition to the Company’s original equity investment, Nelnet, Inc. (the parent) contributed additional equity with a yield-based preferred return of future earnings due on the newly contributed equity. The Company will continue to increase its ownership interests as it makes cash contributions to fund ALLO's operating losses and capital expenditures. In addition, ALLO's management, as current minority members, has the opportunity to earn ownership interests based on the financial performance of ALLO. Nelnet, Inc.’s maximum exposure to loss as a result of its involvement with ALLO is equal to its ownership interests investment. All of ALLO’s financial activities and related assets and liabilities are reflected in the Company’s consolidated financial statements. See note 14, “Segment Reporting,” for disclosure of ALLO’s total assets and results of operations (included in the "Communications" operating segment), note 15, "Disaggregated Revenue and Deferred Revenue," for disclosure of ALLO's disaggregated revenue and deferred revenue, note 9, "Goodwill," for disclosure of ALLO's goodwill, and note 10, “Property and Equipment,” for disclosure of ALLO’s fixed assets. ALLO's goodwill and property and equipment comprise the majority of its assets. The assets recognized as a result of consolidating ALLO are the property of ALLO and are not available for any other purpose.
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 and notes receivable" on the consolidated balance sheets. 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,
20192018
Investment carrying amount$7,562  2,724  
Tax credits subject to recapture67,069  11,345  
Unfunded capital and other commitments14,006  —  
Maximum exposure to loss (a)$88,637  14,069  
(a) Amount includes $3.0 million as of December 31, 2019 syndicated to other investors in certain solar projects.
Accounting Standard Adopted in 2019
In February 2016, the Financial Accounting Standards Board ("FASB") issued Accounting Standards Codification Topic 842, Leases ("ASC Topic 842"). The standard requires the identification of arrangements that should be accounted for as leases by lessees and the disclosure of key information about leasing arrangements. The standard establishes a right-of-use ("ROU") model that requires a lessee to recognize a ROU asset and lease liability for all leases with a term longer than twelve months and classify the lease as either operating or financing, with the income statement reflecting lease expense for operating leases and amortization/interest expense for financing leases.
The Company adopted the standard effective January 1, 2019, using the effective date as its date of initial application. Consequently, financial information is not updated and the disclosures required under the new standard are not provided for dates and periods before January 1, 2019. The Company elected to utilize the ‘package of practical expedients’, which permitted it to not reassess under the new standard its prior conclusions about lease identification, lease classification, and initial direct costs.
The most significant impact of the standard relates to (1) the recognition of new ROU assets and lease liabilities on the Company's consolidated balance sheet; (2) the deconsolidation of assets and liabilities for certain sale-leaseback transactions arising from build-to-suit lease arrangements for which construction was completed and the Company is leasing the constructed assets that did not qualify for sale accounting prior to the adoption of the new standard; and (3) significant new disclosures about the Company’s leasing activities. The build-to-suit lease arrangements have been reassessed as operating leases as of the effective date under ASC Topic 842.
Adoption of the new standard resulted in recognizing lease liabilities of $33.7 million based on the present value of the remaining minimum rental payments. In addition, the Company recognized ROU assets of $32.8 million, which corresponds to the lease liabilities reduced by deferred rent expense as of the effective date. The Company also deconsolidated total assets of $43.8 million and total liabilities of $34.8 million for entities that had been consolidated due to sale-leaseback transactions that failed to qualify for recognition as sales under the prior guidance. Deconsolidation of these entities reduced noncontrolling
interests by $6.1 million. The cumulative effect of the changes made to the Company's consolidated balance sheet as of January 1, 2019 for the adoption of the new lease standard was as follows:
Adjustments from adoption of new lease standard
Balances at December 31, 2018ROU assets and lease liabilitiesDeconsolidation of sale-leaseback transactionsBalances at January 1, 2019
Assets
   
Cash and cash equivalents$121,347  —  (646) 120,701  
Investments and notes receivable249,370  —  (23,134) 226,236  
Accounts receivable59,531  —  (89) 59,442  
Property and equipment, net344,784  —  (16,974) 327,810  
Other assets45,533  32,831  (27) 78,337  
Liabilities
Bonds and notes payable
22,218,740  —  (33,182) 22,185,558  
Other liabilities256,092  32,831  (1,611) 287,312  
Equity
Noncontrolling interests10,315  —  (6,077) 4,238  
Reclassifications
Certain amounts previously reported within the Company’s consolidated statements of income have been reclassified to conform to the current period presentation. These reclassifications include:
Reclassifying “gain from debt repurchases” to “other income”; and
Reclassifying “loan servicing fees to third parties” to “other expenses.”
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.
ALLO Communications LLC - On December 31, 2015, the Company purchased 92.5 percent of the ownership interests in ALLO. On January 1, 2016, the Company sold a 1.0 percent ownership interest in ALLO to a non-related third party. Subsequently, the Company contributed additional equity to increase its ownership interest in ALLO to 98.9 percent. Per ALLO's operating agreement, currently all operating results of ALLO are allocated to the Company.
In addition, the Company has established 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, 2019 and 2018.
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. The 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 30 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 6 years.
Allowance for Loan Losses
The allowance for loan losses represents management's estimate of probable losses on loans. The provision for loan losses reflects the activity for the applicable period and provides an allowance at a level that the Company's management believes is appropriate to cover probable losses inherent in the loan portfolio. The Company evaluates 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 are subject to numerous judgments and uncertainties including the selection of loss rates over time and determination of the loss emergence period.
The allowance for the federally insured loan portfolio is based on periodic evaluations of the Company's loan portfolios considering 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, current economic conditions, and other relevant qualitative factors. The federal government guarantees 97 percent of the principal of and the interest on federally insured student loans disbursed on and after July 1, 2006 (and 98 percent for those loans disbursed on and after October 1, 1993 and prior to July 1, 2006), which limits the Company's loss exposure on the outstanding balance of the Company's federally insured portfolio. Student loans disbursed prior to October 1, 1993 are fully insured.
In determining the appropriate allowance for loan losses on the private education and consumer loans, the Company considers several factors, including: loans in repayment versus those in a nonpaying status, delinquency status, type of program, trends in defaults in the portfolio based on Company and industry data, past experience, current economic conditions, and other relevant qualitative factors. The Company places private education and 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.
Management has determined that each of the 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. Accordingly, the portfolio segment disclosures are presented on this basis in note 3 for each of these portfolios. The Company does not disaggregate its portfolio segment loan portfolios into classes of financing receivables. The Company collectively evaluates loans for impairment and as of December 31, 2019 and 2018, the Company did not have any impaired loans as defined in the Receivables Topic of the FASB Accounting Standards Codification.
For loans purchased where there is evidence of credit deterioration since the origination of the loan, the Company records a credit discount, separate from the allowance for loan losses, which is non-accretable to interest income. Remaining discounts and premiums for purchased loans are recognized in interest income over the remaining estimated lives of the loans. The Company continues to evaluate credit losses associated with purchased loans based on current information and changes in expectations to determine the need for any additional allowance for loan losses.
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 $112.9 million and $181.0 million in 2019 and 2018, respectively. The amount of purchased loan accrued interest in 2017 was not significant.
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 temporary 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. Other-than-temporary impairment is evaluated by considering several factors, including the length of time and extent to which the fair value has been less than the amortized cost basis, the financial condition and near-term prospects of the issuer of the security (considering factors such as adverse conditions specific to the security and ratings agency actions), and the intent and ability of the Company to retain the investment to allow for any anticipated recovery in fair value. The entire fair value loss on a security that has experienced an other-than-temporary impairment is recorded in earnings if the Company intends to sell the security or if it is more likely than not that the Company will be required to sell the security before the expected recovery of the loss. However, if the impairment is other-than-temporary, and either of those two conditions does not exist, the portion of the impairment related to credit losses is recorded in earnings and the impairment related to other factors is recorded in other comprehensive income. When an investment is sold, the cost basis is determined through specific identification of the security sold.
The Company classifies its residual interest in 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.
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.
For periods prior to January 1, 2018, equity securities with readily determinable fair values were primarily classified as available-for-sale and stated at fair value with unrealized gains and losses reported as a separate component of accumulated other comprehensive income, net of tax. Equity securities without readily determinable fair values were recorded at cost less impairment, if any.
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 counterparties and 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 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 (in the fourth quarter) 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 (described below), 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.
If the Company elects to not perform a qualitative assessment or if the Company determines it is more likely than not that the fair value of a reporting unit is less than the carrying amount, then the Company performs a quantitative impairment test on goodwill. In the quantitative test, the Company compares the fair value of each reporting unit to its carrying value. If the fair value of the reporting unit exceeds the carrying value of the net assets assigned to that unit, goodwill is considered not impaired
and the Company is not required to perform further testing. If the carrying value of the net assets assigned to the reporting unit exceeds the fair value of the reporting unit, then the Company would record an impairment loss equal to the difference.
Determining the fair value of a reporting unit involves the use of significant estimates and assumptions. These estimates and assumptions include revenue growth rates and operating margins used to calculate projected future cash flows, risk-adjusted discount rates, future economic and market conditions, and determination of appropriate market comparables. Actual future results may differ from those estimates.
See note 9, "Goodwill," for information regarding the Company's annual goodwill impairment review.
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 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 dark fiber to support its telecommunications operations and 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 has elected to utilize the practical expedient to account for lease and non-lease components together as a single, combined lease component for its office and data center space. In addition, the Company has identified itself as the lessor in its Communications operating segment for services provided to customers that include customer-premise equipment. The Company has also elected to utilize the practical expedient to account 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 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 15, "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 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 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. 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, and records the underlying daily changes in the market value of such derivative contracts that result in such receipts or payments on its consolidated statements of income as realized derivative market value adjustments in "derivative market value and foreign currency transaction adjustments and derivative settlements, net."
The Company records derivative instruments that are not required to be cleared at a clearinghouse (non-centrally cleared derivatives) in the consolidated balance sheets on a gross basis as either an asset or liability measured at its fair value. Certain non-centrally cleared derivatives are subject to right of offset provisions with counterparties. For these derivatives, the Company does not offset fair value amounts executed with the same counterparty under a master netting arrangement. In addition, the Company does not offset fair value amounts recognized for derivative instruments with respect to the right to reclaim cash collateral (a receivable) or the obligation to return cash collateral (a payable).
The Company determines the fair value for its derivative instruments using either (i) pricing models that consider current market conditions and the contractual terms of the derivative instrument or (ii) counterparty valuations. The factors that impact the fair value of the Company's derivatives include interest rates, time value, forward interest rate curve, and volatility factors. Pricing models and their underlying assumptions impact the amount and timing of realized and unrealized gains and losses recognized, and the use of different pricing models or assumptions could produce different financial results. 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. Changes or shifts in the forward yield curve can significantly impact the valuation of the Company’s derivatives, and therefore impact the financial position and results of operations of the Company. Any proceeds received or payments made by the Company to terminate a derivative in advance of its expiration date, or to amend the terms of an existing derivative, are included in the Company's consolidated statements of income and are accounted for as a change in fair value of such derivative. The changes in fair value of derivative instruments, as well as the settlement payments made on such derivatives, are included in “derivative market value and foreign currency adjustments and derivative settlements, net” on the consolidated statements of income.
Foreign Currency
During 2006, the Company issued Euro-denominated bonds, which were included in “bonds and notes payable” on the consolidated balance sheets. Transaction gains and losses resulting from exchange rate changes when re-measuring these bonds to U.S. dollars at the balance sheet date were included in “derivative market value and foreign currency adjustments and derivative settlements, net” on the consolidated statements of income. The Company entered into a cross-currency interest rate swap in connection with the issuance of the Euro-denominated bonds. On October 25, 2017, the Company completed a remarketing of its Euro notes which reset the principal amount outstanding on the notes to U.S. dollars and the Company terminated the cross-currency interest rate swap.
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 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.
v3.19.3.a.u2
Loans Receivable and Allowance for Loan Losses
12 Months Ended
Dec. 31, 2019
Receivables [Abstract]  
Loans Receivable and Allowance for Loan Losses Loans Receivable and Allowance for Loan Losses
Loans receivable consisted of the following:
As of December 31,
 20192018
Federally insured student loans:
Stafford and other$4,684,314  4,969,667  
Consolidation15,644,229  17,186,229  
Total20,328,543  22,155,896  
Private education loans244,258  225,975  
Consumer loans225,918  138,627  
 20,798,719  22,520,498  
Loan discount, net of unamortized loan premiums and deferred origination costs
(35,036) (53,572) 
Non-accretable discount (a)(32,398) (29,396) 
Allowance for loan losses:
Federally insured loans(36,763) (42,310) 
Private education loans(9,597) (10,838) 
Consumer loans(15,554) (7,240) 
 $20,669,371  22,377,142  
(a) At December 31, 2019 and 2018, the non-accretable discount related to purchased loan portfolios of $5.4 billion and $5.7 billion, respectively.
On May 1, 2019 and October 17, 2019, the Company sold $47.7 million (par value) and $179.3 million (par value) of consumer loans, respectively, to an unrelated third party who securitized such loans. The Company recognized a $1.7 million (pre-tax) and $15.6 million (pre-tax) gain, respectively, as part of these transactions. As partial consideration received for the consumer loans sold, the Company received an 11.0 percent and 28.7 percent residual interest, respectively, in the consumer loan securitizations that are included in "investments and notes receivable" on the Company's consolidated balance sheet.
Activity in the Allowance for Loan Losses
The provision for loan losses represents the periodic expense of maintaining an allowance sufficient to absorb losses, net of recoveries, inherent in the portfolio of loans. Activity in the allowance for loan losses is shown below.
 Balance at beginning of periodProvision for loan lossesCharge-offsRecoveriesLoan sale and otherBalance at end of period
Year ended December 31, 2019  
Federally insured loans$42,310  8,000  (13,547) —  —  36,763  
Private education loans10,838  —  (1,965) 724  —  9,597  
Consumer loans7,240  31,000  (12,498) 812  (11,000) 15,554  
$60,388  39,000  (28,010) 1,536  (11,000) 61,914  
Year ended December 31, 2018
Federally insured loans$38,706  14,000  (11,396) —  1,000  42,310  
Private education loans12,629  —  (2,415) 624  —  10,838  
Consumer loans3,255  9,000  (5,056) 41  —  7,240  
$54,590  23,000  (18,867) 665  1,000  60,388  
Year ended December 31, 2017
Federally insured loans$37,268  13,000  (11,562) —  —  38,706  
Private education loans14,574  (2,000) (1,313) 768  600  12,629  
Consumer loans—  3,450  (195) —  —  3,255  
$51,842  14,450  (13,070) 768  600  54,590  
Student Loan Status and Delinquencies
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 delinquency amounts.
As of December 31,
 201920182017
Federally insured loans:
    
Loans in-school/grace/deferment (a)$1,074,678   $1,298,493   $1,260,394  
Loans in forbearance (b)1,339,821   1,430,291   1,774,405  
Loans in repayment status:  
Loans current15,410,993  86.0 %16,882,252  86.9 %16,477,004  88.2 %
Loans delinquent 31-60 days (c)650,796  3.6  683,084  3.5  682,586  3.7  
Loans delinquent 61-90 days (c)428,879  2.4  427,764  2.2  374,534  2.0  
Loans delinquent 91-120 days (c)310,851  1.7  283,831  1.5  287,922  1.5  
Loans delinquent 121-270 days (c)812,107  4.5  806,692  4.2  629,480  3.4  
Loans delinquent 271 days or greater (c)(d)300,418  1.8  343,489  1.7  235,281  1.2  
Total loans in repayment17,914,044  100.0 %19,427,112  100.0 %18,686,807  100.0 %
Total federally insured loans$20,328,543   $22,155,896   $21,721,606  
Private education loans:
Loans in-school/grace/deferment (a)$4,493  $4,320  $6,053  
Loans in forbearance (b)3,108  1,494  2,237  
Loans in repayment status:
Loans current227,013  95.9 %208,977  95.0 %196,720  96.5 %
Loans delinquent 31-60 days (c)2,814  1.2  3,626  1.6  1,867  0.9  
Loans delinquent 61-90 days (c)1,694  0.7  1,560  0.7  1,052  0.5  
Loans delinquent 91 days or greater (c)5,136  2.2  5,998  2.7  4,231  2.1  
Total loans in repayment236,657  100.0 %220,161  100.0 %203,870  100.0 %
Total private education loans$244,258   $225,975   $212,160  
Consumer loans:
Loans in repayment status:
Loans current$220,404  97.5 %$136,130  98.2 %$61,344  98.7 %
Loans delinquent 31-60 days (c)2,046  0.9  1,012  0.7  289  0.5  
Loans delinquent 61-90 days (c)1,545  0.7  832  0.6  198  0.3  
Loans delinquent 91 days or greater (c)1,923  0.9  653  0.5  280  0.5  
Total loans in repayment225,918  100.0 %138,627  100.0 %62,111  100.0 %
Total consumer loans$225,918  $138,627  $62,111  

(a) 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.

(b) 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.

(c) 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.

(d) 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.
v3.19.3.a.u2
Bonds and Notes Payable
12 Months Ended
Dec. 31, 2019
Debt Disclosure [Abstract]  
Bonds and Notes Payable Bonds and Notes Payable
The following tables summarize the Company’s outstanding debt obligations by type of instrument:
 As of December 31, 2019  
Carrying
amount
Interest rate
range
Final maturity
Variable-rate bonds and notes issued in FFELP loan asset-backed securitizations:
   
Bonds and notes based on indices$18,428,998  1.98% - 3.61%  5/27/25 - 1/25/68
Bonds and notes based on auction768,626  2.75% - 3.60%  3/22/32 - 11/26/46
Total FFELP variable-rate bonds and notes19,197,624  
Fixed-rate bonds and notes issued in FFELP loan asset-backed
securitizations
512,836  2.00% - 3.45%  10/25/67 / 11/25/67
FFELP warehouse facilities778,094  1.98% / 2.07%  5/20/21 / 5/31/22
Consumer loan warehouse facility116,570  1.99%  4/23/22
Variable-rate bonds and notes issued in private education loan asset-backed securitizations
73,308  3.15% / 3.54%  12/26/40 / 6/25/49
Fixed-rate bonds and notes issued in private education loan asset-backed securitization
49,367  3.60% / 5.35%  12/26/40 / 12/28/43
Unsecured line of credit50,000  3.29%  12/16/24
Unsecured debt - Junior Subordinated Hybrid Securities20,381  5.28%  9/15/61
Other borrowings5,000  3.44%  5/30/22
 20,803,180    
Discount on bonds and notes payable and debt issuance costs(274,126) 
Total$20,529,054  
 
 As of December 31, 2018  
Carrying
amount
Interest rate
range
Final maturity
Variable-rate bonds and notes issued in FFELP loan asset-backed securitizations:
   
Bonds and notes based on indices$20,192,123  2.59% - 4.52%  11/25/24 - 2/25/67
Bonds and notes based on auction793,476  2.84% - 3.55%  3/22/32 - 11/26/46
Total FFELP variable-rate bonds and notes20,985,599  
FFELP warehouse facilities986,886  2.65% / 2.71%  5/20/20 / 5/31/21
Variable-rate bonds and notes issued in private education loan asset-backed securitization
50,720  4.26%  12/26/40
Fixed-rate bonds and notes issued in private education loan asset-backed securitization
63,171  3.60% / 5.35%  12/26/40 / 12/28/43
Unsecured line of credit310,000  3.92% - 4.01%  6/22/23
Unsecured debt - Junior Subordinated Hybrid Securities20,381  6.17%  9/15/61
Other borrowings120,342  3.05% - 5.22%  1/3/19 - 12/15/45
 22,537,099    
Discount on bonds and notes payable and debt issuance costs(318,359) 
Total$22,218,740  
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, 2019, the Company had two FFELP warehouse facilities as summarized below.
NFSLW-INHELP-IITotal
Maximum financing amount
$550,000  500,000  1,050,000  
Amount outstanding489,303  288,791  778,094  
Amount available$60,697  211,209  271,906  
Expiration of liquidity provisions
May 20, 2020May 31, 2020
Final maturity dateMay 20, 2021May 31, 2022
Advanced as equity support$21,670  20,882  42,552  
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.
Asset-backed securitizations
The following tables summarize the asset-backed securitization transactions completed in 2019 and 2018.
Securitizations completed during the year ended December 31, 2019
2019-12019-2Private education loan
2019-A
2019-32019-42019-52019-62019-7Total
Class A-1 NotesClass A-2 Notes2019-1 totalClass A-1 NotesClass A-2 Notes2019-7 total
Date securities issued2/27/192/27/192/27/194/30/196/25/197/24/198/22/199/25/1910/30/1912/19/1912/19/1912/19/19
Total original principal amount$35,700  448,000  496,800  416,100  47,159  498,300  418,600  374,500  145,200  210,300  200,000  420,800