What changed in this filing

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Item 1A. Risk Factors

2020-08-06 compared with 2020-05-07 · 67 added, 41 removed, 70 unchanged (61% of the section changed)

The following risk factors provide supplements and updates to the risk factors described in the Company’s Annual Report on Form 10-K for the year ended December 31, 2019 in response to Item 1A of Part I of such Form 10-K, and the Company's Quarterly Report on Form 10-Q for the quarter ended March 31, 2020 in response to Item 1A of Part II of such Form 10-Q:

The COVID-19 pandemic has adversely impacted our results of operations, and could continue to adversely impact our results of operations, as well as adversely impact our businesses, financial condition, and/or cash flows.

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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 equity market valuations, and extreme volatility in the U.S.

and world economies, including significantly higher unemployment and underemployment, significantly lower interest rates and equity market valuations, and extreme volatility in

and world markets.

These effects have adversely impacted our results of operations for the three months ended March 31, 2020, and if these effects continue for a prolonged period or result in sustained economic stress or recession, they could have a material adverse impact on us in a number of ways related to credit, interest rates, operations, and other risks as described in more detail below.

These effects have adversely impacted our results of operations for the six months ended June 30, 2020, and if these effects continue for a prolonged period or result in sustained economic stress or recession, they could have a material adverse impact on us in a number of ways related to credit, interest rates, operations, and other risks as described in more detail below.

COVID-19 is having far reaching, negative impacts on individuals, businesses, and, consequently, the overall economy.

Specifically, COVID-19 has materially disrupted business operations, resulting in significantly higher levels of unemployment or underemployment.

As a result, we expect many individual student and consumer borrowers will experience financial hardship, making it difficult, if not impossible, to meet loan payment obligations without temporary assistance.

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 as early warning indicators 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.

Due to these circumstances, for the three months ended March 31, 2020, we recognized an increase to the expense provision for loan losses of $63.0 million (pre-tax) and a $26.3 million (pre-tax) impairment charge on our beneficial interest in consumer loans securitizations.

Due to these circumstances, in the first quarter of 2020, we recognized an increase to the expense provision for loan losses of $63.0 million (pre-tax) and an impairment charge on our beneficial interest in consumer loans securitizations of $26.3 million (pre-tax).

The increase in the provision for loan losses and impairment expense were based on an evaluation of current and forecasted economic conditions, directly taking into consideration the negative impact of COVID-19 on the U.S.

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We also considered the characteristics of our loan portfolios and their expected behavior in the forecasted economic scenarios.

We update our evaluation of current and forecasted economic conditions each reporting period and adjust our allowance for loan losses as 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.

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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.

For example, during the three months ended March 31, 2020, we experienced a decrease in variable loan spread due to a significant widening of the basis between the asset and debt indices in which we earn interest on our loans and funds such loans.

This widening was the result of a significant decrease in interest rates during March 2020 as a result of COVID-19.

For example, during the three and six months ended June 30, 2020, we experienced a decrease in variable loan spread due to a significant widening of the basis between the asset and debt indices in which we earn interest on our loans and fund such loans.

This widening was the result of a significant decrease in interest rates beginning in March 2020 as a result of COVID-19.

In a declining interest rate environment, student loan spread is compressed, due to the timing of interest rate resets on our assets occurring daily in contrast to the timing of the interest resets on our debt that occurs either monthly or quarterly.

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Unanticipated issues arising from handling personal, confidential, and other information from a less efficient work-from-home environment could adversely impact our operations and lead to greater risks for us, including cybersecurity risks.

Schools have largely moved to on-line classes for their students.

It is unclear at this time whether schools will be back to on-campus learning beginning with the 2020/2021 academic year.

Student loan application volumes have begun to decrease and our current expectation is that new student loan volumes will decline in 2020 compared with 2019.

Beginning in March 2020, schools largely moved to on-line classes for their students.

It is unclear at this time how many schools will be back to on-campus learning beginning with the 2020/2021 academic year and/or if schools decide to conduct on-campus learning, if they will have to move back to on-line classes during the academic term if the COVID-19 pandemic increases in severity.

Student loan application volumes have begun to decrease and our current expectation is that new student

loan volumes will decline in 2020 compared with 2019.

The magnitude of the expected decline depends upon many factors, including the economic impact caused by the pandemic coupled with uncertainty regarding on-line versus in person classes.

A decline in school enrollments could also reduce demand for our education technologies, services, and payment processing products and services.

A decline in school enrollments has also reduced demand for our education technologies, services, and payment processing products and services, and continued declines over subsequent academic periods could have a similar impact.

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 of Education (the “Department”) until September 30, 2020.

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Although we will receive less servicing revenue per borrower through September 30, 2020 based on borrower status, we currently anticipate more borrowers being in a current status subsequent to September 30, 2020, at which time our revenue per borrower is expected to increase.

We do not currently anticipate an adverse impact from the CARES Act on the total amount of revenue to be earned for the remainder of 2020 under our Department servicing contracts.

However, the revenue recognized in the second and third quarters of 2020 is expected to be lower and revenue in the fourth quarter of 2020 is expected to be higher, than in corresponding prior periods.

While federal student loan payments are suspended, we anticipate a decrease in operating expenses due to a significant reduction of borrower statement printing and postage costs.

We do not currently anticipate an adverse impact from the CARES Act on the total amount of revenue to be earned during 2020 under our Department servicing contracts.

However, servicing revenue was negatively impacted in the second quarter of 2020, is expected to be lower in the third quarter of 2020, and is currently expected to be higher in the fourth quarter of 2020, than in corresponding prior periods.

While federal student loan payments are suspended, our operating expenses have been and will continue to be lower due to a significant reduction of borrower statement printing and postage costs.

In addition, during the second quarter of 2020, 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.

Beginning in the second quarter of 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 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.

If the student loan borrower relief provisions of the CARES Act were potentially extended past September 30, 2020 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.

Although the CARES Act does not apply to our FFELP loans, private education loans, or consumer loans, several states have announced various initiatives to suspend payment obligations for private education loan borrowers in those states, and we are proactively providing relief for our FFELP, private education, and consumer loan borrowers.

In addition, there currently are federal legislative proposals that would provide borrower relief with respect to privately-held FFELP loans, such as our FFELP loans.

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.

We anticipate a decrease in FFELP, private education, and consumer loan servicing revenue in future periods that are 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.

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 payment instructions, and special credit reporting.

Such changes involve additional regulatory and other complexities, uncertainties, and matters of interpretation.

Currently, we are defending a putative class action brought by student loan borrowers alleging that Great Lakes furnishing of certain information to credit reporting agencies was inaccurate under the CARES Act.

We deny any wrongdoing.

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.

Liquidity and Capital Resources

We currently believe our liquidity and capital resources position is strong, and we expect to be able to fund our business operations in 2020.

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, 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 business, 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 and duration of the pandemic;

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.

We have historically funded student loans by completing asset-backed securitizations.

Fitch Ratings, Standard & Poor's, and Moody’s Investors Service have recently downgraded and placed numerous tranches of FFELP securitizations by various issuers, including certain tranches of prior FFELP securitizations issued by us, on review for potential downgrade due to principal payments and prepayments on the underlying student loans coming in slower than initial expectations, and the resulting risk that certain principal maturities on those FFELP securitizations may not be met by the final maturity dates, which could result in an event of default under the underlying securitization agreements.

The decrease in principal payments and prepayments is due to significant increases in forbearances resulting from a contraction in economic activity and an increase in unemployment due to the COVID-19 pandemic.

Such rating actions have caused the spreads on FFELP securitizations in general to widen and have reduced the liquidity in the secondary market for FFELP securitizations.

Such actions could adversely affect our ability to access the asset-backed securities market, or make new securitization transactions more expensive by requiring us to pay a higher spread over LIBOR when pricing new bonds.

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;

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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 business could be material and adverse.

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.

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Our largest fee-based customer, the Department of Education, represented 30 percent of our revenue in 2019.

Failure to extend the Department contracts or obtain new Department contracts for different components, our inability to consistently surpass competitor performance metrics, or unfavorable contract modifications or interpretations, could significantly lower servicing revenue and hinder future service opportunities.

Failure to extend the Department contracts or obtain new Department contracts in the Department's NextGen procurement process, 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.

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The Department also has contracts with 31 not-for-profit (“NFP”) entities to service student loans, although currently five NFP servicers service the volume allocated to these 31 entities.

As of March 31, 2020, Nelnet Servicing was servicing $185.5 billion of student loans for 5.5 million borrowers under its contract, and Great Lakes was servicing $243.2 billion of student loans for 7.3 million borrowers under its contract.

As of June 30, 2020, Nelnet Servicing was servicing $185.3 billion of student loans for 5.5 million borrowers under its contract, and Great Lakes was servicing $243.6 billion of student loans for 7.3 million borrowers under its contract.

For the year ended December 31, 2019, we recognized a total of $343.6 million in revenue from the Department under these contracts, which represented 30 percent of our revenue.

For the three months ended March 31, 2020, we recognized a total of $85.1 million in revenue from the Department under these contracts.

For the three and six months ended June 30, 2020, we recognized a total of $82.6 million and $167.7 million in revenue from the Department under these contracts, respectively.

The current servicing contracts with the Department expire on December 14, 2020 and provide the potential for two additional six-month extensions at the Department’s discretion through December 14, 2021.

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On January 10, 2020, the Department released an amendment to the BPO solicitation component and we responded on January 30, 2020.

EPS is the transitional technology system and certain processing functions the Department planned to use under NextGen to service the Department's student loan customers for a period of time before eventually moving to OPS in the future.

However, on April 3, 2020, the Department cancelled the OPS

solicitation component.

BPO is the back office and call center operational functions for servicing the Department's student loan customers.

On March 30, 2020, we received a letter from the Department notifying us that our proposal in response to the EPS component has been determined to be outside of the competitive range and will receive no further consideration for an award.

The EPS solicitation component was for a transitional

technology system and certain processing functions the Department planned to use under NextGen to service the Department's student loan customers for a period of time before eventually moving to OPS in the future.

However, on April 3, 2020, the Department cancelled the OPS solicitation component.

The BPO solicitation component is for the back office and call center operational functions for servicing the Department's student loan customers.

On March 30, 2020, we received a letter from the Department notifying us that our proposal in response to the EPS component had been determined to be outside of the competitive range and would receive no further consideration for an award.

On April 13, 2020, we filed a protest with the Government Accountability Office ("GAO") challenging the Department's decision to cancel the OPS solicitation component without amending the EPS solicitation component.

In addition, on April 27, 2020, we filed a supplemental protest challenging on a number of bases the Department’s competitive range exclusion of our proposal from the EPS solicitation component and requesting that the GAO restore our ability to participate in the EPS solicitation.

The Department has not yet awarded a contract for the EPS component.

Under applicable law, as of the date of the Company's initial protest filing, the Department is subject to a stay from awarding a contract until all protests are resolved.

We cannot predict the timing or nature of the outcome of our protests.

The Department has not yet made an award for the BPO component and we cannot predict the timing, nature, or outcome of the BPO solicitation.

If the Department's EPS decision stands, Nelnet Servicing and Great Lakes will eventually be required to migrate their portfolios onto another provider's system after an award is made, and we would ultimately need to restructure our loan servicing segment for long-term success.

If we are awarded a BPO contract for operational services, it would partially mitigate the impact of not being awarded the EPS component.

On April 27, 2020, we filed a supplemental protest challenging a number of bases for the Department's competitive range exclusion of our proposal from the EPS solicitation component.

On July 10, 2020, the Department cancelled the solicitation for the EPS component.

In its cancellation description, the Department indicated that it continues to be committed to the goals and vision of NextGen, and that it will be introducing a new solicitation to continue the NextGen strategy in the future.

Based on the Department's cancellation of the EPS procurement, on July 14, 2020, the GAO dismissed our protests as moot.

We fully intend to compete for the servicing system solution as the Department proceeds with their NextGen strategy.

On June 18, 2020, we received a letter from the Department notifying us that our proposal in response to the BPO solicitation component was determined to be ineligible for award, claiming our response did not meet certain requirements related to small business participation.

We immediately requested a debriefing regarding the Department's basis for this decision.

Prior to providing us a debriefing, on June 24, 2020, the Department awarded and signed contracts with five other companies in connection with the BPO solicitation.

On July 13, 2020, we filed a protest with the GAO challenging on a number of bases the Department's determination that our BPO response did not meet small business participation requirements.

In addition, on July 20, 2020, we filed a supplemental protest challenging the Department's decision to proceed with awards of contracts for the BPO component, when it cancelled the EPS component and a new EPS solicitation is expected to be released.

On July 24, 2020, the Department provided us a debriefing regarding the Department's June 18, 2020 decision to eliminate us from the BPO competition.

On July 28, 2020, we filed a second supplemental protest challenging the Department's BPO decision.

Under applicable law, contract awards to other parties for the BPO component are subject to a stay of performance until the protests are resolved.

A decision by the GAO is due on or before October 22, 2020.

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 pending and uncertain nature of the Department’s current 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 may be challenged by various interested parties and may not be finalized within the currently anticipated time frame or at all;

the uncertain timing and nature of the outcome of our protests related to the EPS component;

There are significant risks to us and uncertainties regarding the current Department contracts and potential future Department contracts, including the pending and uncertain nature of the Department's awards of new contracts to other service providers and its current NextGen contract procurement process and the impact of the cancellation by the Department of the EPS component, which could be subject to potential delays, further cancellations, or material changes to the structure of the contract procurement process;

the uncertain timing and nature of the outcome of our protests related to the BPO component and a protest by another interested party regarding the BPO solicitation;

the possibility that new contract awards and other evaluations of proposals may be challenged by various interested parties and may not be finalized or implemented within the currently anticipated time frame 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 or outcome of the Department's contract procurement solicitations.

We cannot predict the outcome of the current protests regarding the BPO component, or the timing, nature, or ultimate outcome of the Department's NextGen contract procurement process.

New loan volume is currently allocated among the four TIVAS and five NFP 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 Department servicing contracts become subject to unfavorable modifications or interpretations by the Department, loan servicing revenue could decrease significantly.

In the event the current Department servicing contracts become subject to unfavorable modifications or interpretations by the Department, loan servicing revenue could decrease significantly and/or operating costs to serve the contracts could increase significantly.

For example, as of January 2020, a change instituted by the Department required enrollment in the Ongoing Security Authorization (OSA) program that requires quarterly control assessments.

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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.

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.

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

What changed 10-Q

Item 1A. Risk Factors