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Item 7. Management’s Discussion and Analysis

2021-02-25 compared with 2020-02-27 · 538 added, 474 removed, 453 unchanged (69% of the section changed)

9 unchanged sentences

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.

The largest operating businesses engage in loan servicing and education technology, services, and payment processing, and the Company also has a significant investment in communications.

A significant portion of the Company's revenue is net interest income earned on a portfolio of federally insured student loans.

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However, it also provides additional non-GAAP financial information related to specific items management believes to be important in the evaluation of its operating results and performance.

A reconciliation of the Company's GAAP net income to net income, excluding derivative market value and foreign currency transaction adjustments, and a discussion of why the Company believes providing this additional information is useful to investors, is provided below.

A reconciliation of the Company's GAAP net income to net income, excluding derivative market value adjustments, and a discussion of why the Company believes providing this additional information is useful to investors, is provided below.

Year ended December 31,

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Tax effect (a)

(6,755) (18,287)

Net income attributable to Nelnet, Inc., excluding derivative market value adjustments (b)

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Tax effect (a)

(0.17) (0.45)

Net income attributable to Nelnet, Inc., excluding derivative market value adjustments (b)

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However, the net realized and unrealized gain or loss during any given reporting period fluctuates significantly from period to period.

The Company believes these point-in-time estimates of asset and liability values related to its derivative instruments that are subject to interest rate fluctuations are subject to volatility mostly due to timing and market factors beyond the control of management, and affect the period-to-period comparability of the results of operations.

The Comp any believes these point-in-time estimates of asset and liability values related to its derivative instruments that are subject to interest rate fluctuations are subject to volatility mostly due to timing and market factors beyond the control of management, and affect the period-to-period comparability of the results of operations.

Accordingly, the Company’s management utilizes operating results excluding these items for comparability purposes when making decisions regarding the Company’s performance and in presentations with credit rating agencies, lenders, and investors.

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There is no comprehensive, authoritative guidance for the presentation of such non-GAAP information, which is only meant to supplement GAAP results by providing additional information that management utilizes to assess performance.

GAAP net income decreased for the year ended December 31, 2019 compared to the same period in 2018 primarily due to the following factors:

• The recognition of a net loss during 2019 as compared to a net gain in 2018 due to changes in the fair values of derivative instruments that do not qualify for hedge accounting;

GAAP net income increased for the year ended December 31, 2020 compared to the same period in 2019 primarily due to the following factors:

• The recognition of a $258.6 million ($196.5 million after tax) gain from the deconsolidation of ALLO Communications LLC (“ALLO”) from the Company’s consolidated financial statements;

• The recognition of a $51.0 million ($38.8 million after tax) gain to adjust the carrying value of the Company's investment in Hudl to reflect Hudl's May 2020 equity raise transaction value;

• A decrease of $48.1 million ($36.5 million after tax) in net losses related to changes in the fair values of derivative instruments that do not qualify for hedge accounting in 2020 as compared to 2019;

• An increase of $30.2 million ($23.0 million after tax) in loan spread on the Company’s loan portfolio and related derivative settlements in 2020 as compared to 2019, primarily from an increase in fixed rate floor income;

• The recognition of $16.7 million ($12.7 million after tax) of expenses during 2019 to extinguish notes payable in certain asset-backed securitizations prior to the notes' contractual maturities;

• The decrease in the average balance of loans due to the amortization of the FFELP loan portfolio;

• The decrease in loan spread on the Company's loan portfolio and related derivative settlements;

• The increase in the provision for loan losses related to the Company's growing portfolio of consumer loans.

• An increase of $15.8 million ($12.0 million after tax) in gains from the sale of consumer loans in 2020 as compared to 2019.

These factors were partially offset by the following items:

• The contribution to net income from the Company's Loan Servicing and Systems and Education Technology, Services, and Payment Processing operating segments;

• The recognition of a $17.3 million ($13.1 million after tax) gain from the sale of consumer loans in 2019.

• An increase of $35.2 million ($26.8 million after tax) in non-cash losses related to the Company’s solar investments in 2020 as compared to 2019;

• The recognition of $24.7 million ($18.8 million after tax) of net provision and impairment charges in 2020 related to the Company's beneficial interest in consumer loan securitizations and certain venture capital investments, respectively, due to adverse economic conditions resulting from the COVID-19 pandemic;

• An increase of $24.4 million ($18.5 million after tax) in the provision for loan losses in 2020 as compared to 2019.

The provision for loan losses in 2020 was negatively impacted due to the COVID-19 pandemic;

• A decrease of $20.4 million ($15.5 million after tax) in net income due to the decrease in the average balance of loans in 2020 as compared to 2019 as a result of the amortization of the FFELP loan portfolio;

• A decrease of $18.2 million in net income from the Company's Loan Servicing and Systems operating segment in 2020 as compared to 2019 due to a decrease in revenue as a result of the COVID-19 pandemic and incurring additional costs to meet increased service and security standards under the Department servicing contracts.

Operating Results

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This segment is expected to generate a stable net interest margin and significant amounts of cash as the FFELP portfolio amortizes.

As of December 31, 2019, the Company had a $20.7 billion loan portfolio that management anticipates will amortize over the next approximately 20 years and has a weighted average remaining life of 8.8 years.

As of December 31, 2020, AGM had a $19.6 billion loan portfolio that management anticipates will amortize over the next approximately 20 years and has a weighted average remaining life of 9.8 years.

The Company actively works to maximize the amount and timing of cash flows generated by its FFELP portfolio and seeks to acquire additional loan assets to leverage its servicing scale and expertise to generate incremental earnings and cash flow.

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• Education Technology, Services, and Payment Processing ("ETS&PP") - referred to as Nelnet Business Services ("NBS")

• Communications - referred to as ALLO Communications ("ALLO")

Further, the Company earned communications revenue through ALLO, formerly a majority owned subsidiary of the Company prior to a recapitalization of ALLO resulting in the deconsolidation of ALLO from the Company’s financial statements on December 21, 2020.

The recapitalization of ALLO is not considered a strategic shift in the Company’s involvement with ALLO, and ALLO’s results of operations, prior to the deconsolidation, are presented by the Company as a reportable operating segment.

On November 2, 2020, the Company obtained final approval from the Federal Deposit Insurance Corporation ("FDIC") for federal deposit insurance and for a bank charter from the Utah Department of Financial Institutions ("UDFI") in connection with the establishment of Nelnet Bank, and Nelnet Bank launched operations.

Nelnet Bank operates as an internet Utah-chartered industrial bank franchise focused on the private education loan marketplace, with a home office in Salt Lake City, Utah.

Nelnet Bank’s operations are presented by the Company as a reportable operating segment.

Other business activities and operating segments that are not reportable are combined and included in Corporate and Other Activities ("Corporate").

Corporate and Other Activities also includes income earned on certain investments and interest expense incurred on unsecured debt transactions.

The information below provides the operating results for each reportable operating segment and Corporate and Other Activities for the years ended December 31, 2019 and 2018 (dollars in millions).

See "Results of Operations" for each reportable operating segment under this Item 7 for additional detail.

(a) Revenue includes intersegment revenue earned by LSS as a result of servicing loans for AGM.

(b) Total revenue includes "net interest income" and "total other income" from the Company's segment statements of income, excluding the impact from changes in fair values of derivatives.

Corporate and Other Activities also includes income earned on certain investments and interest expense incurred on unsecured and other corporate related debt transactions.

In addition, the Corporate segment includes direct incremental costs associated with Nelnet Bank prior to the UDFI’s approval for its bank charter and certain shared service and support costs incurred by the Company that will not be reflected in Nelnet Bank’s operating results through 2023 (the bank’s de novo period).

Such Nelnet Bank-related costs included in the Corporate segment totaled $5.9 million (pre-tax) and $1.7 million (pre-tax) in 2020 and 2019, respectively.

The information below provides the operating results for each reportable operating segment (excluding Nelnet Bank) for the years ended December 31, 2020 and 2019 (dollars in millions).

See "Results of Operations" for each such reportable operating segment under this Item 7 for additional detail.

LSS (a) ETS&PP ALLO (c) AGM (b)

(a) Revenue includes intersegment revenue.

(b) Total revenue includes "net interest income" and "total other income/expense" from the Company's segment statements of income, excluding the impact from changes in fair values of derivatives.

Net income excludes changes in fair values of derivatives, net of tax.

For information regarding the exclusion of the impact from changes in fair values of derivatives adjustments, see "GAAP Net Income and Non-GAAP Net Income, Excluding Adjustments" above.

Certain events and transactions from 2019 and 2018, which have impacted or will impact the operating results of the Company and its operating segments, are discussed below.

For information regarding the exclusion of the impact from changes in fair values of derivatives, see "GAAP Net Income and Non-GAAP Net Income, Excluding Adjustments" above.

Accordingly, the 2020 operating results for the Communications operating segment in the table above are for the period January 1, 2020 through December 21, 2020.

Certain events and transactions from 2020, which have impacted, will impact, or could impact the operating results of the Company, are discussed below.

Recapitalization and Additional Funding for ALLO

On October 1, 2020, the Company entered into various agreements with SDC Allo Holdings, LLC (“SDC”), a third party global digital infrastructure investor, and ALLO, then a majority owned communications subsidiary of the Company, to recapitalize and provide additional funding for ALLO.

On October 15, 2020, ALLO received proceeds of $197.0 million from SDC for the issuance of membership units of ALLO, and redeemed $160.0 million of non-voting preferred membership units of ALLO held by the Company.

As a result of the receipt of required regulatory approvals on December 21, 2020, SDC, the Company, and members of ALLO’s management own approximately 48 percent, 45 percent, and 7 percent, respectively, of the outstanding voting membership interests of ALLO, and the Company deconsolidated ALLO from the Company’s consolidated financial statements.

Upon the deconsolidation of ALLO, the Company recorded its 45 percent voting membership interests in ALLO at fair value, and accounts for such investment under the Hypothetical Liquidation at Book Value (“HLBV”) method of accounting.

In addition, the Company recorded its remaining non-voting preferred membership units in ALLO at fair value, and accounts for such investment as a separate equity investment.

As a result of the deconsolidation of ALLO, the Company recognized a gain of $258.6 million in the fourth quarter of 2020.

On January 19, 2021, ALLO closed on certain private debt financing facilities from unrelated third-party lenders providing for aggregate financing of up to $230.0 million.

With proceeds from this transaction, ALLO redeemed a portion of its non-voting preferred membership units held by the Company in exchange for an aggregate redemption price payment to the Company of $100.0 million.

The agreements among the Company, SDC, and ALLO provide that they will use commercially reasonable efforts (which expressly excludes requiring ALLO to raise any additional equity financing or sell any assets) to cause ALLO to redeem, on or before April 2024, the remaining non-voting preferred membership units of ALLO held by the Company, plus the amount of accrued and unpaid preferred return on such units.

As of January 19, 2021, the outstanding preferred membership units of ALLO held by the Company was $129.7 million.

The preferred membership units earn a preferred annual return of 6.25 percent.

As discussed above, subsequent to the recapitalization and deconsolidation of ALLO, the Company will account for its investment in ALLO under the HLBV method of accounting.

The HLBV method of accounting is used by the Company for equity method investments when the liquidation rights and priorities as defined by an equity investment agreement differ from what is reflected by the underlying percentage ownership or voting interests.

The Company applies the HLBV method using a balance sheet approach.

A calculation is prepared at each balance sheet date to determine the amount that the Company would receive if an equity investment entity were to liquidate its net assets and distribute that cash to the investors based on the contractually defined liquidation priorities.

The difference between the calculated liquidation distribution amounts at the beginning and the end of the reporting period, after adjusting for capital contributions and distributions, is the Company’s share of the earnings or losses from the equity investment for the period.

Because the Company will be able to utilize certain tax losses related to ALLO’s operations, the equity investment agreements for the Company have liquidation rights and priorities that are sufficiently different from the voting membership interests percentages such that the HLBV method of accounting was deemed appropriate.

Accordingly, the recognition of earnings or losses during any reporting period related to the Company’s equity investment in ALLO may or may not reflect its voting membership interests percentage and could vary substantially from those calculated based on the Company’s voting membership interests in ALLO.

Assuming ALLO continues its planned growth in existing and new communities, it will continue to invest substantial amounts in property and equipment to build the network and connect customers.

The resulting recognition of depreciation and development costs could result in net operating losses by ALLO under generally accepted accounting principles.

Applying the HLBV method of accounting, the Company will recognize a significant portion of ALLO’s anticipated losses over the next several years.

For additional information, see note 2, “Recent Developments - ALLO Recapitalization,” of the notes to consolidated financial statements included in this report.

Impacts of COVID-19 Pandemic

Beginning in March 2020, the coronavirus 2019 or COVID-19 (“COVID-19”) pandemic resulted in many businesses and schools closing or reducing hours throughout the U.S.

to combat the spread of COVID-19, and states and local jurisdictions implementing various containment efforts, including lockdowns on non-essential business and other business restrictions, stay-at-home orders, and shelter-in-place orders.

The COVID-19 pandemic has caused significant disruption to the U.S.

and world economies, including significantly higher unemployment and underemployment, significantly lower interest rates, and extreme volatility in the U.S.

and world markets.

As a result of the COVID-19 outbreak and federal, state, and local government responses to COVID-19, the Company has experienced and may in the future experience various disruptions and impacts to the Company's businesses and results of operations.

The following provides a summary of how COVID-19 has impacted and may impact the Company's business and operating results.

The Company has implemented adjustments to its operations designed to keep employees safe and comply with federal, state, and local guidelines, including those regarding social distancing.

As of March 25, 2020, the majority of our associates were working and continue to work from home.

Substantially all Company associates working from home are able to connect to their work environment virtually and continue to serve our customers.

The Company has investments in real estate, early-stage and emerging growth companies (venture capital investments), and renewable energy (solar).

The Company identified several venture capital investments that were negatively impacted by the distressed economic conditions resulting from the COVID-19 pandemic and recognized impairment charges on such investments of $7.8 million (pre-tax) during the first quarter of 2020.

Loan Servicing and Systems

• On February 7, 2018, the Company acquired Great Lakes.

The operating results of Great Lakes are reported in the Company's consolidated financial statements from the date of acquisition.

Thus, there are twelve months of Great Lakes' operations included in 2019 as compared to approximately eleven months of activity in 2018.

• Nelnet Servicing, LLC ("Nelnet Servicing") and Great Lakes Educational Loan Services, Inc.

("Great Lakes") have student loan servicing contracts awarded by the Department in June 2009 to provide servicing for loans owned by the Department.

As of December 31, 2019, Nelnet Servicing was servicing $183.8 billion of student loans for 5.6 million borrowers under its contract, and Great Lakes was servicing $240.0 billion of student loans for 7.4 million borrowers under its contract.

Nelnet Servicing and Great Lakes' servicing contracts with the Department previously provided for expiration on June 16, 2019.

On May 15, 2019, Nelnet Servicing and Great Lakes each received a contract extension from the Department's Office of Federal Student Aid ("FSA") pursuant to which FSA extended the expiration date of the current contracts to December 15, 2019.

On November 26, 2019, Nelnet Servicing and Great Lakes each received an additional extension from FSA on their contracts through December 14, 2020.

The contract extensions also provide the potential for two additional six-month extensions at the Department’s discretion through December 14, 2021.

FSA is conducting a contract procurement process entitled Next Generation Financial Services Environment (“NextGen”) for a new framework for the servicing of all student loans owned by the Department.

On January 15, 2019, FSA issued solicitations for three NextGen components:

• NextGen Enhanced Processing Solution ("EPS")

• NextGen Business Process Operations ("BPO")

• NextGen Optimal Processing Solution ("OPS")

On April 1, 2019 and October 4, 2019, the Company responded to the EPS component.

On January 16, 2020, FSA released an amendment to the EPS component and the Company responded on February 3, 2020.

In addition, on August 1, 2019, the Company responded to the BPO component.

On January 10, 2020, FSA released an amendment to the BPO component and the Company responded on January 30, 2020.

The Company is also part of a team that has

responded and intends to respond to various aspects of the OPS component;

however, on November 12, 2019, FSA put an indefinite hold on the OPS solicitation.

The EPS and BPO components are essentially for the loan processing and servicing to be performed on a new single system, which the Company believes could have the most significant potential impact on the Company.

The Company cannot predict the timing, nature, or outcome of these solicitations.

• The Loan Servicing and Systems segment will incur additional costs in 2020 to meet increased service and security standards under the current Department servicing contracts and to be responsive to the Department's procurement.

As a result, the Company currently expects a significant decrease in this segment's operating margin and net income in 2020 from recent historical results.

The CARES Act, which was signed into law on March 27, 2020, among other things, provides broad relief for federal student loan borrowers.

Under the CARES Act, federal student loan payments and interest accruals were suspended for all borrowers that have loans owned by the Department.

The benefits of the law were applied retroactively to March 13, 2020, when the President declared a state of emergency related to COVID-19, and these federal student loan borrower relief provisions have

been extended through September 30, 2021.

Beginning March 13, 2020, the Company received less servicing revenue per borrower from the Department based on the borrower forbearance status through September 30, 2020 than what was earned on such accounts prior to these provisions, and the Department further reduced the monthly rate paid to its servicers for those in a forbearance status for the period from October 1, 2020 through September 30, 2021 from $2.19 per borrower to $2.05 per borrower.

As a result of the extension of these CARES Act provisions through September 30, 2021, the Company currently anticipates Department servicing revenue will be lower in 2021 from recent historical periods due to the lower rates.

The Company currently anticipates revenue per borrower will return to pre-COVID levels when borrowers begin to re-enter repayment in the fourth quarter of 2021.

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

In addition, revenue from the Department for originating consolidation loans was adversely impacted as a result of borrowers receiving relief on their existing loans, thus not initiating a consolidation.

The Company currently anticipates this revenue will continue to be negatively impacted while student loan payments and interest accruals are suspended.

During 2020, FFELP, private education, and consumer loan servicing revenue was adversely impacted by the COVID-19 pandemic due to reduced or eliminated delinquency outreach to borrowers, holds on claim filings, and reduced or eliminated late fees processing.

In addition, origination fee revenue was negatively impacted as borrowers are less likely to refinance their loans when they are receiving certain relief measures from their current lender.

The Company currently anticipates this trend will continue in future periods that are impacted by the COVID-19 pandemic, with the magnitude based on the extent to which existing or additional borrower relief policies and activities are implemented or extended by servicing customers.

If the student loan borrower relief provisions of the CARES Act were potentially extended past September 30, 2021 and/or new legislative or regulatory student loan borrower relief measures similar to such provisions of the CARES Act were to become effective, the levels and timing of future servicing revenues could continue to be impacted in a similar manner through the extended period of time that such provisions or measures are in effect.

Due to decreased servicing and transaction activity as a result of suspended payments under the CARES Act as discussed above, the Company has been able to transition associates to help state agencies process unemployment claims and conduct certain health contact tracing support activities.

Revenue earned on these temporary contracts for the year ended December 31, 2020 was $21.9 million.

These contracts were awarded to the Company as a result of the Company's technology, security, compliance, and other capabilities needed to conduct such activities.

Education Technology, Services, and Payment Processing

• On November 20, 2018, the Company acquired Tuition Management Systems ("TMS"), a services company that offers tuition payment plans, billing services, payment technology solutions, and refund management to educational institutions.

The TMS acquisition added 380 higher education schools and 170 K-12 schools to the Company’s customer base.

The results of TMS’ operations are reported in the Company’s consolidated financial statements from the date of acquisition.

• For the years ended December 31, 2019 and 2018, before tax operating margin (income before income taxes divided by net revenue) was 31.8 percent and 20.6 percent, respectively.

The increase in the before tax operating margin in 2019 as compared to 2018 was due to operating leverage and cost reductions resulting from the Company's decision in October 2018 to terminate its investment in a proprietary payment processing platform.

This segment has been and will continue to be impacted by COVID-19 through lower interest rate levels, which reduce earnings for this business compared to recent historical results as the tuition funds held in custody for schools produce less interest earnings.

If interest rates remain at current levels, the Company anticipates this segment will earn minimal interest income in future periods.

In addition, as a result of COVID-19, demand for certain of the Company's products and services has been negatively impacted.

The Company currently anticipates this trend will continue through the 2020-2021 academic year and could extend longer as a result of trends and shifts in the industry that could be long term as a result of the COVID-19 pandemic.

Communications

• ALLO recognized losses of $23.5 million and $28.7 million for the years ended December 31, 2019 and 2018, respectively.

The decrease in ALLO's net loss in 2019, as compared to 2018, was primarily due to a decrease in interest expense.

ALLO recognized $10.0 million of interest expense to Nelnet, Inc.

(parent company) during the year ended December 31, 2018.

Subsequent to October 1, 2018, ALLO will not report interest expense in its income statement related to amounts contributed to ALLO from Nelnet, Inc.

due to a recapitalization of ALLO.

Excluding interest expense, the increase in ALLO's net loss in 2019 as compared to 2018 was due to an increase in depreciation from significant property and equipment purchases over the last several years to support the Lincoln, Nebraska network build-out that was substantially completed in 2019.

• ALLO's management uses earnings (loss) before interest, income taxes, depreciation, and amortization ("EBITDA") to eliminate certain non-cash and non-operating items in order to consistently measure performance from period to period.

For the years ended December 31, 2019 and 2018, ALLO had positive EBITDA of $6.2 million and negative EBITDA of $4.5 million, respectively.

EBITDA is a supplemental non-GAAP performance measure which the Company believes provides useful additional information regarding a key metric used by management to assess ALLO's performance.

See "Communications Operating Segment - Results of Operations - Summary and Comparison of Operating Results" below for additional information regarding the computation and use of EBITDA for ALLO.

• ALLO has made significant investments in its communications network and currently provides fiber directly to homes and businesses in communities in Nebraska and Colorado.

ALLO plans to continue to increase market share and revenue in its existing markets and is currently evaluating opportunities to expand to other communities in the Midwest.

ALLO began providing services in Lincoln, Nebraska in September 2016 as part of a multi-year project to pass substantially all commercial and residential properties in the community.

As of the end of the first quarter of 2019, the build-out of the Lincoln community was substantially complete.

For the year ended December 31, 2019, ALLO's capital expenditures were $45.0 million.

The Company anticipates total ALLO network capital expenditures in 2020 will be approximately $35.0 million to $45.0 million.

However, this amount could change based on customer demand for ALLO's services.

• The Company currently anticipates ALLO's operating results will be dilutive to the Company's consolidated earnings as it continues to develop and add customers to its network in Lincoln, Nebraska and other communities, due to large upfront capital expenditures and associated depreciation and upfront customer acquisition costs.

As a result of COVID-19, ALLO experienced increased demand from new and existing residential customers to support connectivity needs primarily for work and learn from home applications.

Along with offering 60 days free for eligible customers, ALLO partnered with school districts to provide more connectivity to students, often at discounted rates.

In view of the importance of ALLO's technicians being able to connect new customers while maintaining social distance and protecting community and associate health and safety, ALLO adjusted operational procedures by implementing associate health checks, following CDC and local health official safety protocols, facilitating customer screening, and adjusting the installation process to limit the time in the home or business as much as possible.

Asset Generation and Management

• For the year ended December 31, 2019, the AGM segment recognized net interest income of $238.6 million, compared with $249.1 million in 2018.

The Company maintains an overall risk management strategy that incorporates the use of derivative instruments to reduce the economic effect of interest rate volatility.

The AGM segment recognized income from derivative settlements of $45.4 million in 2019, compared with income of $70.5 million in 2018.

Derivative settlements for each applicable period should be evaluated with the Company's net interest income.

Net interest income and derivative settlements for the AGM segment totaled $284.0 million and $319.6 million in 2019 and 2018, respectively.

• The Company's average balance of loans decreased to $21.7 billion in 2019, compared with $22.6 billion in 2018.

Loan spread decreased to 0.96 percent in 2019, compared with 0.99 percent in 2018.

Core loan spread, which includes the impact of derivative settlements, decreased to 1.18 percent in 2019, compared with 1.32 percent in 2018.

Core loan spread, a non-GAAP measure, is computed as set forth in "Asset Generation and Management Operating Segment - Results of Operations - Loan Spread Analysis" below.

Management believes core loan spread is a useful supplemental non-GAAP measure that reflects adjustments for derivative settlements related to net interest income (loan spread).

However, there is no comprehensive authoritative guidance for the presentation of this measure, which is only meant to supplement GAAP results by providing additional information that management utilizes to assess performance.

The Company recognized $89.9 million and $121.7 million in fixed rate floor income in 2019 and 2018, respectively (which includes $40.2 million and $64.9 million, respectively, of settlement payments received on derivatives used to hedge student loans earning fixed rate floor income).

Fixed rate floor income contributed 41 basis points and 55 basis points of core loan spread in 2019 and 2018, respectively.

The decrease in gross fixed rate floor income was due to higher interest rates in 2019 as compared to 2018, and the decrease in derivative settlement payments received on derivatives used to hedge student loans earning fixed rate floor income was due to a decrease in the notional amount of derivatives outstanding in 2019 as compared to 2018, partially offset by higher interest rates.

• Provision for loan losses was $39.0 million and $23.0 million for 2019 and 2018, respectively.

Provision for loan losses for federally insured loans was $8.0 million and $14.0 million for 2019 and 2018, respectively.

During 2018, the Company determined an additional allowance was necessary related to portfolios of federally insured loans that were purchased in prior periods, and recognized $5.0 million in provision expense related to these loans.

Provision for loan losses for consumer loans was $31.0 million and $9.0 million for 2019 and 2018, respectively.

The increase in provision was a result of the increased amount of consumer loan purchases during 2019.

The Company purchased $405.7 million of consumer loans during 2019 compared to $120.5 million during 2018.

• The Company recognized $16.7 million (pre-tax) of expenses in 2019 related to the extinguishment of notes payable in certain asset-backed securitizations prior to the notes' contractual maturities (as further described below).

These expenses consisted of premium payments made by the Company of $14.0 million and the write-off of $2.7 million of debt issuance costs.

• During 2019, the Company sold $227.0 million (par value) of consumer loans to an unrelated third party who securitized such loans.

As partial consideration received for the consumer loans sold, the Company received a percentage interest of the residual interest of the consumer loan securitizations.

The Company recognized a gain of $17.3 million (pre-tax) from the sale of these loans.

Corporate and Other Activities

• The Company adopted a new lease accounting standard effective January 1, 2019.

The most significant impact of the standard to the Company relates to (1) the recognition of new right-of-use ("ROU") assets and lease liabilities on its balance sheet primarily for office, data center, and dark fiber operating leases;

(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.

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.

AGM's results were adversely impacted during the first quarter of 2020 as a result of COVID-19 due to:

• An incremental increase in the provision for loan losses of $63.0 million (pre-tax) resulting from an increase in expected life of loan defaults due to the COVID-19 pandemic.

• A $26.3 million (pre-tax) provision charge recognized on the Company's beneficial interest in consumer loan securitizations.

The Company's estimate of future cash flows from the beneficial interest in consumer loan

securitizations was lower than originally anticipated due to the expectation of increased consumer loan defaults within such securitizations due to the distressed economic conditions resulting from the COVID-19 pandemic.

As economic factors improved in the third and fourth quarters of 2020, a portion of the charges noted above were reversed.

The CARES Act, among other things, provides broad relief, effective March 13, 2020, for borrowers that have student loans owned by the Department.

This relief package excluded FFELP, private education, and consumer loans.

Although the Company’s loans are excluded from the provisions of the CARES Act, the Company is providing relief for its borrowers.

For the Company's federally insured and private education loans, effective March 13, 2020 through June 30, 2020, the Company proactively applied a 90 day natural disaster forbearance to any loan that was 31-269 days past due (for federally insured loans) and 80 days past due (for private education loans), and to any current loan upon request.

Beginning July 1, 2020, the Company discontinued proactively applying 90 day natural disaster forbearances on past due loans.

However, the Company will continue to apply a natural disaster forbearance in 90 day increments to any federally insured and private education loan upon request through September 30, 2021.

As of December 31, 2020, federally insured and private education loans in forbearance were $2.0 billion (or 10.3% of the portfolio) and $2.4 million (or 0.7% of the portfolio), respectively.

The amount of federally insured and private education loans in forbearance hit their peak in May 2020 at $6.0 billion and $38.6 million, respectively.

The Company anticipates that loans in forbearance will continue to decline in 2021, absent any intervening policy change, when borrowers are currently scheduled to exit forbearance.

Despite the COVID-19 pandemic, a large portion of borrowers continue to make payments according to their payment plans.

In addition, for both federally insured and private education loans, effective March 13, 2020, borrower late fees have been waived.

For the majority of the Company's consumer loans, borrowers are generally being offered, upon request and/or documented evidence of financial distress, up to a two-month deferral of payments, with an option of additional deferrals if the COVID-19 pandemic continues.

In addition, effective March 13, 2020, the majority of fees (non-sufficient funds, late charges, check fees) and credit bureau reporting have been suspended.

The specific relief terms on the Company's consumer loan portfolio vary depending on the loan program and servicer of such loans.

The Company will continue to review whether additional and/or extended borrower relief policies and activities are needed.

The Company is not contractually committed to acquire FFELP, private education, or consumer loans, so the Company has been and will continue to be selective as to which, if any, loans it purchases during the current period of economic uncertainty.

Other Risks and Uncertainties

The COVID-19 pandemic is unprecedented and continues to evolve.

The extent to which COVID-19 may impact the Company's businesses depends on future developments, which are highly uncertain, subject to various risks, and cannot be predicted with confidence, such as the ultimate spread, severity, and duration of the pandemic, travel restrictions, stay-at-home or other similar orders and social distancing in the United States and other countries, business and/or school closures and disruptions, and the effectiveness of actions taken in the United States and other countries to contain and treat the virus.

For additional information on the risks and uncertainties regarding the impacts of COVID-19, see Part I, Item 1A.

"Risk Factors - The COVID-19 pandemic has adversely impacted our results of operations, and is expected to continue to adversely impact our results of operations, as well as adversely impact our businesses, financial condition, and/or cash flows" in this report.

Investment in Agile Sports Technologies, Inc.

(doing business as "Hudl")

On May 20, 2020, the Company made an additional equity investment of approximately $26.0 million in Hudl, as one of the participants in an equity raise completed by Hudl.

As a result of Hudl’s equity raise, the Company recognized a $51.0 million (pre-tax) gain during the second quarter of 2020 to adjust its carrying value to reflect the May 20, 2020 transaction value.

Department of Education Servicing Contracts and Procurements for New Contracts

Nelnet Servicing, a subsidiary of the Company, earns loan servicing revenue from a servicing contract with the Department.

Revenue earned by Nelnet Servicing related to this contract was $146.8 million and $158.0 million for the years ended December 31, 2020 and 2019, respectively.

In addition, Great Lakes, which was acquired by the Company on February 7, 2018, also earns loan servicing revenue from a similar servicing contract with the Department.

Revenue earned by Great Lakes related to this contract was $179.9 million and $185.7 million for the years ended December 31, 2020 and 2019, respectively.

Nelnet Servicing and Great Lakes' servicing contracts with the Department are currently scheduled to expire on June 14, 2021, but provide the potential for an additional six-month extension at the Department’s discretion through December 14, 2021.

Department is conducting a contract procurement process for a new framework for the servicing of all student loans owned by the Department.

For information regarding recent developments related to and the current status of these servicing contracts, and the Department's procurement processes for new servicing contracts, see note 17 of the notes to consolidated financial statements included in this report.

Adoption of New Accounting Standard for Credit Losses

On January 1, 2020, the Company adopted ASU No.

2016-13 , Financial Instruments – Credit Losses (“ASC 326”), which replaces the incurred loss methodology with an expected loss methodology that is referred to as the current expected credit loss (“CECL”) methodology.

The CECL methodology utilizes a lifetime “expected credit loss” measurement objective for the recognition of credit losses for financial assets measured at amortized cost at the time the financial asset is originated or acquired.

The expected credit losses are adjusted each period for changes in expected lifetime credit losses.

The new guidance primarily impacted the allowance for loan losses related to the Company’s loan portfolio.

Upon adoption, the Company recorded an increase to the allowance for loan losses of $91.0 million, which included a reclassification of the non-accretable discount balance and premiums related to loans purchased with evidence of credit deterioration, and decreased retained earnings, net of tax, by $18.9 million.

Results for reporting periods beginning after January 1, 2020 are presented under ASC 326 (recognizing estimated credit losses expected to occur over the asset's remaining life) while prior period amounts continue to be reported in accordance with previously applicable GAAP (recognizing estimated credit losses using an incurred loss model);

therefore, the comparative information for 2019 is not comparable to the information presented for 2020.

Solar Investments

During the last three years, the Company has invested $148.6 million in tax equity investments in renewable energy solar partnerships to support the development and operations of solar projects throughout the country.

The projects are currently forecasted to generate more than 214 megawatts of power each year.

These investments provide a federal income tax credit under the Internal Revenue Code, currently at 26 percent (for projects commencing construction in 2020-2022) and 30 percent (for projects commencing construction prior to 2020) of the eligible project cost, with the tax credit available when the project is placed-in-service.

The Company is then allowed to reduce its tax estimates paid to the U.S.

Treasury based on the credits earned.

In addition to the credits, the Company structures the investments to receive quarterly distributions of cash from the operating earnings of the solar project for a period of at least five years (so the tax credits are not recaptured).

After that period, the contractual agreements typically provide for the Company’s interest in the projects to be purchased in an exit at the fair market value of the discounted forecasted future cash flows allocable to the Company.

Given the expected timing of cash flows, experience the Company has in underwriting these assets, and beneficial impact to the climate, the Company believes these investments are a great fit within its capital deployment initiatives.

These investments are structured such that a significant proportion of the cash distributions and tax items (including the income tax credit) are allocated back to the Company within the first eighteen months of the investment capital contribution, in order to achieve a target after tax return.

The cash distributions to the Company are then structured to flatten until exit, typically between years five and six.

Given the unique arrangement in which investors share in the profits and losses of the solar investment with cash and tax benefit allocations among the partners changing over the life of the project, the accounting guidance calls for the use of the Hypothetical Liquidation at Book Value (“HLBV”) method, which can result in non-linear GAAP income/loss allocation results.

Under this method, a balance sheet approach is utilized to determine what each investor would hypothetically receive at each balance sheet date under the liquidation provisions of the contractual agreements, assuming the net assets of the funding structures were liquidated at their recorded amounts determined in accordance with GAAP.

As the investor receives a majority of this return through the income tax credit and higher cash distributions at the beginning of the investment, as of the first period of the hypothetical liquidation, the investor’s remaining net claim on assets is relatively low compared to the initial cash contributed.

This difference between the initial cash contributions and the first period’s ending net claim on assets through the hypothetical liquidation causes significant GAAP losses on the investment to be recognized through the income statement within the initial periods of the investment.

After the carrying value of the investment on the balance sheet is written down to the hypothetical liquidation amount, subsequent year’s earnings are expected to align with and reflect the operating profits or losses of the investment.

The Company realizes that application of the HLBV method to its solar investments has a variable impact on its periodic earnings that in the early years is not reflective of the expected long-term economics of the investments.

Given the significant amount of investments made in the last couple of years and the associated ramp-up period, the negative impact to earnings in 2020 was significant as the Company recognized a $37.4 million pre-tax loss from these investments under the HLBV method.

However, as these investments mature and perform as forecasted, the Company expects to recoup that loss and realize additional income between now and the sale of each of its interests, likely 60 to 72 months from the date the project is placed in service.

Thus, the Company expects the economic gain from these investments to be realized in its future earnings, but, due to the hypothetical liquidation valuations as of the balance sheet dates

during the intended investment horizon, the HLBV method results in some volatility in the Company’s consolidated periodic earnings results.

Private Loan Servicing and Acquisition

In December of 2020, Wells Fargo announced the sale of its approximately $10 billion portfolio of private education student loans representing approximately 475,000 borrowers.

In conjunction with the sale, the Company was selected as servicer of the portfolio and will begin servicing the portfolio following a series of loan transfers during the first half of 2021.

In addition, the Company has entered into agreements to participate in a joint venture to acquire the portfolio.

The Company expects to own approximately 8 percent of the interest in the loans and, dependent upon financing, currently expects to invest approximately $100 million as part of the acquisition.

In addition, the Company will serve as the sponsor and administrator for loan securitizations on behalf of the purchaser group as the loans are securitized, and provide the required level of risk retention as the loans are permanently financed.

This transaction is expected to close during the first half of 2021, with the securitizations occurring subsequent to closing.

Liquidity and Capital Resources

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In addition, the Company had a portfolio of available-for-sale investments, consisting primarily of student loan asset-backed securities, with a fair value of $348.6 million as of December 31, 2020.

As of December 31, 2020, the Company has participated $118.6 million of these securities, and such participation is reflected as debt on the Company's consolidated balance sheet.

• The Company has historically generated positive cash flow from operations.

For the year ended December 31, 2020, the Company’s net cash provided by operating activities was $212.8 million.

• On December 16, 2019, the Company amended its unsecured line of credit to, among other things, extend the maturity date of the facility from June 22, 2023 to December 16, 2024 and increase the size of the facility from $382.5 million to $455.0 million.

As of December 31, 2019, the unsecured line of credit had $50.0 million outstanding and $405.0 million was available for future use.

• The Company has a $455.0 million unsecured line of credit with a maturity date of December 16, 2024.

As of December 31, 2020, the unsecured line of credit had $120.0 million outstanding.

Subsequent to December 31, 2020, the Company paid down the full balance outstanding on the line of credit, and as of February 25, 2021, $455.0 million was available for future use.

The line of credit provides that the Company may increase the aggregate financing commitments, through the existing lenders and/or through new lenders, up to a total of $550.0 million, subject to certain conditions.

• On November 2, 2020, Nelnet Bank launched operations.

Nelnet Bank was funded by the Company with an initial capital contribution of $100.0 million, consisting of $55.9 million of cash and $44.1 million of student loan asset-backed securities.

In addition, the Company made a pledged deposit of $40.0 million with Nelnet Bank, as required under an agreement with the FDIC.

• The majority of the Company’s portfolio of student loans is funded in asset-backed securitizations that will generate significant earnings and cash flow over the life of these transactions.

As of December 31, 2019, the Company currently expects future undiscounted cash flows from its securitization portfolio to be approximately $1.89 billion, of which approximately $1.28 billion will be generated over the next six years.

• Certain of the Company’s asset-backed securitizations were structured as “Turbo Transactions” which required all cash generated from the student loans (including excess spread) to be directed toward payment of interest and any outstanding principal generally until such time as all principal on the notes had been paid in full.

Once the notes in such transactions were paid in full, the remaining unencumbered student loans (and other remaining assets, if any) in the securitization would be released to the Company, at which time the Company would have the option to refinance or sell these assets, or retain them on the balance sheet as unencumbered assets.

During 2019, the Company extinguished a total of $1.05 billion of notes payable in certain asset-backed securitizations, including six of the Company's eight Turbo Transactions, prior to the notes' contractual maturities, resulting in the release of $1.45 billion in student loans and accrued interest receivable that were previously encumbered in the asset-backed securitizations.

Upon extinguishment of the notes payable throughout 2019, the Company refinanced the student loans in its FFELP warehouse facilities and new asset-backed securitizations, resulting in net cash proceeds of $387.1 million.

The cash proceeds generated by the debt extinguishments were used to pay down a significant portion of the outstanding balance on the Company's unsecured line of credit and provides the Company with increased liquidity and the opportunity to invest the previously underutilized capital at higher returns.

• In 2019, the Company obtained a consumer loan warehouse facility with an aggregate maximum financing amount available of $200.0 million and a final maturity date of April 23, 2022.

As of December 31, 2019, $116.6 million was outstanding under this facility and $83.4 million was available for future funding.

• During the year ended December 31, 2019, the Company completed seven FFELP asset-backed securitizations totaling $2.8 billion (par value).

The proceeds from these transactions were used primarily to refinance student loans included in the Company's FFELP warehouse facilities and unencumbered student loans from the extinguishment of certain asset-backed securitizations.

• On June 25, 2019, the Company completed a private education loan asset-backed securitization totaling $47.2 million (par value).

The proceeds from this transaction were used to refinance private education loans previously funded via a private loan repurchase agreement that was terminated on June 25, 2019.

• During 2019, the Company repurchased a total of 726,273 shares of Class A common stock for $40.4 million ($55.64 per share).

• On May 8, 2019, the Board of Directors authorized a new stock repurchase program to repurchase up to a total of five million shares of the Company's Class A common stock during the three-year period ending May 7, 2022.

December 31, 2019, 4.8 million shares remained authorized for repurchase under the Company's stock repurchase program.

As of December 31, 2020, the Company currently expects future undiscounted cash flows from its securitization portfolio to be approximately $2.30 billion, of which approximately $1.51 billion will be generated over the next five years.

• The Company has a stock repurchase program to purchase up to a total of five million shares of the Company’s Class A common stock during the three-year period ending May 7, 2022.

During 2020, the Company repurchased a total of 1,594,394 shares of stock for $73.4 million ($46.01 per share).

As of December 31, 2020, 3,246,732 shares remained authorized for repurchase under the Company's stock repurchase program.

• During 2020, the Company paid cash dividends totaling $31.8 million ($0.82 per share).

• The Company intends to use its liquidity position to capitalize on market opportunities, including FFELP, private education, and consumer loan acquisitions;

The Company intends to use its strong liquidity position to capitalize on market opportunities, including FFELP, private education, and consumer loan acquisitions;

strategic acquisitions and investments;

expansion of ALLO’s telecommunications network;

and capital management initiatives, including stock repurchases, debt repurchases, and dividend distributions.

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For a reconciliation of the reportable segment operating results to the consolidated results of operations, see note 15 of the notes to consolidated financial statements included in this report.

Since the Company monitors and assesses its operations and results based on these segments, the discussion following the consolidated results of operations is presented on a reportable segment basis.

Since the Company monitors and assesses its operations and results based on these segments, the discussion following the consolidated results of operations is presented on a reportable segment basis (except that Nelnet Bank’s results of operations are not discussed since such operations were launched in November 2020 and were not material to the Company’s 2020 consolidated results of operations).

Year ended December 31,

2020 2019 Additional information

Loan interest $ 914,256 897,666 Increase was due primarily to an increase in the gross yield earned on loans, partially offset by a decrease in the average balance of loans and a decrease in gross fixed rate floor income due to higher interest rates in 2019 as compared to 2018.

Loan interest $ 595,113 914,256 Decrease was due primarily to decreases in the gross yield earned on loans and the average balance of loans, partially offset by an increase in gross fixed rate floor income due to lower interest rates in 2020 as compared to 2019.

Investment interest 24,543 34,421 Includes income from unrestricted interest-earning deposits and investments and funds in asset-backed securitizations.

Increase was due to increases in interest-earning investments and interest rates.

Decrease was due to a decrease in interest rates.

Total interest income 619,656 948,677

Interest expense 699,327 669,906 Increase was due to an increase in cost of funds, partially offset by a decrease in the average balance of debt outstanding.

Interest expense 330,071 699,327 Decrease was due primarily to a decrease in cost of funds and a decrease in the average balance of debt outstanding.

Net interest income 289,585 249,350 See table below for additional analysis.

Less provision for loan losses 39,000 23,000 Represents the periodic expense of maintaining an allowance appropriate to absorb losses inherent in the portfolio of loans.

Less provision for loan losses 63,360 39,000 Increase was due to provision expense recognized in the first quarter of 2020 as a result of an increase in expected defaults due to the COVID-19 pandemic and an increased provision for loan losses on loans acquired in 2020 to reflect life of loan expected losses as compared to loans acquired in 2019 for which the provision for loan losses was recognized based upon an incurred loss methodology.

See AGM operating segment - results of operations.

Net interest income after provision for

loan losses 210,350 231,360

Other income:

Net interest income after provision for loan losses 226,225 210,350

Other income/expense:

LSS revenue 451,561 455,255 See LSS operating segment - results of operations.

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Communications revenue 76,643 64,269 See Communications operating segment - results of operations.

Other income 65,179 54,805 See table below for the components of "other income."

Derivative settlements, net

45,406 70,071 The Company maintains an overall risk management strategy that incorporates the use of derivative instruments to reduce the economic effect of interest rate volatility.

Other 57,561 47,918 See table below for components of “other income.”

Gain on sale of loans 33,023 17,261 Gain on sale of loans is from the sale of consumer loans.

Gain from deconsolidation of ALLO 258,588 — On December 21, 2020, the Company deconsolidated ALLO from the Company’s consolidated financial statements as a result of ALLO’s recapitalization.

See “Overview - Recapitalization and Additional Funding for ALLO” above for additional information.

Impairment expense and provision for beneficial interests (24,723) — During the first quarter of 2020, the Company recognized a provision expense of $26.3 million and an impairment charge of $7.8 million related to beneficial interest in consumer loan securitization investments and several venture capital investments, respectively.

Such charges were the result of impacts from the COVID-19 pandemic.

During the fourth quarter of 2020, the Company reversed $9.7 million of the provision related to beneficial interest in consumer loan securitization investments due to improved economic conditions.

Derivative settlements, net 3,679 45,406 The Company maintains an overall risk management strategy that incorporates the use of derivative instruments to reduce the economic effect of interest rate volatility.

Derivative settlements for each applicable period should be evaluated with the Company's net interest income.

See table below for additional analysis.

Derivative market value adjustments, net

(76,195) 1,014 Includes the realized and unrealized gains and losses that are caused by changes in fair values of derivatives which do not qualify for "hedge treatment" under GAAP.

The majority of the derivative market value adjustments related to the changes in fair value of the Company's floor income interest rate swaps.

Derivative market value adjustments, net (28,144) (76,195) Includes the realized and unrealized gains and losses that are caused by changes in fair values of derivatives which do not qualify for "hedge treatment" under GAAP.

The majority of the derivative market value adjustments were related to the changes in fair value of the Company's floor income interest rate swaps.

Such changes reflect that a decrease in the forward yield curve during a reporting period results in a decrease in the fair value of the Company's floor income interest rate swaps, and an increase in the forward yield curve during a reporting period results in an increase in the fair value of the Company's floor income interest rate swaps.

During 2019, there was a decrease in the forward yield curve resulting in a decrease in the fair value of the Company's floor income interest rate swaps that resulted in a significant loss in 2019 as compared to 2018.

Total other income 831,245 832,532

Total other income/expense 1,110,384 831,245

Cost of services:

Cost to provide education technology, services, and payment processing services

81,603 59,566 Represents primarily direct costs to provide payment processing services in the ETS&PP operating segment.

Cost to provide communications services

20,423 16,926 Represents costs of services primarily associated with television programming costs in the Communications operating segment.

Cost to provide education technology, services, and payment processing services 82,206 81,603 Represents primarily direct costs to provide payment processing services in the ETS&PP operating segment.

Cost to provide communications services 22,812 20,423 Represents costs of services primarily associated with television programming costs in the Communications operating segment.

Total cost of services 105,018 102,026

Operating expenses:

Salaries and benefits 463,503 436,179 Increase was due to (i) increases in personnel as a result of the TMS acquisition and to support the organic growth in revenue in the ETS&PP operating segment, (ii) increases in personnel at ALLO to support customer and network expansion, and (iii) increases in personnel as a result of the acquisition of Great Lakes on February 7, 2018 (twelve months of expenses in 2019 as compared to approximately eleven months in 2018).

These items were partially offset by a decrease in salaries and benefits in the ETS&PP operating segment due to the Company's decision in October 2018 to terminate its investment in a proprietary processing platform.

See each individual operating segment results of operations discussion for additional information.

Depreciation and amortization 105,049 86,896 Increase was primarily due to additional depreciation expense at ALLO as a result of significant property and equipment purchases to support the Lincoln, Nebraska network build-out that was substantially completed in 2019.

See each individual operating segment results of operations discussion for additional information.

Salaries and benefits 501,832 463,503 Increase was due to (i) increases in personnel in the LSS and corporate operating segments to meet increased service and security standards under the Department servicing contracts;

(ii) increases in personnel in the LSS operating segment to develop a new private education and consumer loan servicing system;

and (iii) increases in personnel to support the growth in the customer base and the development of new technologies in the ETS&PP operating segment.

In addition, on October 1, 2020 (prior to the deconsolidation of ALLO), ALLO recognized compensation expense of $9.3 million related to the modification of certain equity awards previously granted to members of ALLO’s management.

Depreciation and amortization 118,699 105,049 Increase was primarily due to additional depreciation expense in the corporate operating segment due to recent infrastructure capital expenditures to support the Company’s operating segments, as well as an increase in depreciation expense at ALLO as it continues to develop its network in existing and new markets..

Other expenses 160,574 194,272 Other expenses includes expenses necessary for operations, such as postage and distribution, consulting and professional fees, occupancy, communications, and certain information technology-related costs.

Increase was primarily due to the AGM operating segment recognizing $16.7 million of expenses in 2019 to extinguish notes payable from certain asset-backed securitizations prior to their contractual maturities.

Decrease was due to (i) cost savings in the LSS segment from an increase in the adoption of electronic borrower statements and correspondence and a decrease in printing and postage while loan payments are suspended as a result of COVID-19 borrower relief efforts;

(ii) reduction of travel expenses and the cancellation of on-site conferences in the ETS&PP segment;

and (iii) a decrease in servicing fees paid by the AGM segment to third parties.

In addition, the AGM segment recognized $16.7 million of expense during 2019 to extinguish asset-backed notes from certain securitizations prior to their contractual maturity.

See each individual operating segment results of operations discussion for additional information.

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Income tax expense 100,860 35,451 The effective tax rate was 22.3% and 20.0% for 2020 and 2019, respectively.

The increase in the effective tax rate in 2020 as compared to 2019 was due to the recognition of normal tax credit amounts relative to a much higher pre-tax book income in 2020.

The Company expects its future effective tax rate will range between 21 and 24 percent.

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Derivative market value adjustments, net 28,144 76,195

76,195 (1,014)

Tax effect (6,755) (18,287)

Net income attributable to Nelnet, Inc., excluding derivative market value adjustments $ 373,832 199,711

$ 199,711 227,142

The following table summarizes the components of "net interest income" and "derivative settlements, net."

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See note 5 of the notes to consolidated financial statements included in this report for additional information on the Company's derivative instruments, including the net settlement activity recognized by the Company for each type of derivative for the 2019 and 2018 periods presented in the table under the caption "Income Statement Impact" in note 5 and in the table below.

See note 6 of the notes to consolidated financial statements included in this report for additional information on the Company's derivative instruments, including the net settlement activity recognized by the Company for each type of derivative for the 2020 and 2019 periods presented in the table under the caption "Consolidated Financial Statement Impact Related to Derivatives - Statements of Income" in note 6 and in the table below.

Year ended December 31,

2020 2019 Additional information

Variable loan interest margin

$ 174,954 181,488 Represents the yield the Company receives on its loan portfolio less the cost of funding these loans.

Variable loan interest margin $ 144,871 174,954 Represents the yield the Company receives on its loan portfolio less the cost of funding these loans.

Variable loan spread is also impacted by the amortization/accretion of loan premiums and discounts and the 1.05% per year consolidation loan rebate fee paid to the Department.

See AGM operating segment - results of operations.

Settlements on associated derivatives

5,214 5,577 Represents the net settlements received related to the Company’s 1:3 basis swaps.

Settlements on associated derivatives 10,378 5,214 Represents the net settlements received related to the Company’s 1:3 basis swaps.

Variable loan interest margin, net of settlements on derivatives 155,249 180,168

180,168 187,065

Fixed rate floor income

49,677 56,811 The Company has a portfolio of student loans that are earning interest at a fixed borrower rate which exceeds the statutorily defined variable lender rates, generating fixed rate floor income.

Fixed rate floor income 123,460 49,677 The Company has a portfolio of student loans that are earning interest at a fixed borrower rate which exceeds the statutorily defined variable lender rates, generating fixed rate floor income.

See Item 7A, "Quantitative and Qualitative Disclosures About Market Risk - Interest Rate Risk" for additional information.

Settlements on associated derivatives

40,192 64,901 Represents the net settlements received related to the Company’s floor income interest rate swaps.

Fixed rate floor income, net of

settlements on derivatives 89,869 121,712

Settlements on associated derivatives (6,699) 40,192 Represents the net settlements (paid) received related to the Company’s floor income interest rate swaps.

Fixed rate floor income, net of settlements on derivatives 116,761 89,869

Investment interest 24,543 34,421

Corporate debt interest expense (9,702) (10,539) Includes interest expense on the Junior Subordinated Hybrid Securities and unsecured line of credit.

Non-portfolio related derivative

settlements — (407) Represents the net settlements paid related to the Company’s hybrid debt hedges.

Corporate debt interest expense (3,289) (9,702) Includes interest expense on the Junior Subordinated Hybrid Securities, unsecured line of credit, and the asset-backed securities participation agreement.

Decrease was due to a decrease in interest rates and in the average balance outstanding on the Company's unsecured line of credit, partially offset by interest expense incurred on the asset-backed securities participation agreement that was executed in May of 2020.

Net interest income (net of settlements on derivatives) $ 293,264 294,756

$ 294,756 324,431

The following table summarizes the components of "other income."

Year ended December 31,

Gain on sale of loans (a) $ 17,261 —

Borrower late fee income 12,884 12,302

Management fee revenue (b) 8,838 6,497

Gain on investments and notes receivable, net of losses 6,136 9,579

Investment advisory services (c) 2,941 6,009

Gain on remeasurement of HUDL investment (a) $ 51,018 —

Investment advisory services (b) 10,875 2,941

Management fee revenue (c) 9,421 9,736

Borrower late fee income (d) 5,194 12,884

Income/gains from investments, net 2,205 8,356

Loss from solar investments (e) (37,423) (2,220)

Other 16,271 16,221

Other income $ 57,561 47,918

(a) During 2019, the Company sold $227.0 million (par value) of consumer loans to an unrelated third party who securitized such loans.

(b) Represents revenue earned from providing administrative support and marketing services primarily to Great Lakes’ former parent company in accordance with a contract that expires in February 2021.

The increase in 2019 compared to 2018 was due to twelve months of revenue under this contract in 2019 as compared to approximately eleven months of revenue (from the Great Lakes acquisition date) in 2018.

Amount also includes revenue earned from marketing services provided to existing clients, which increased in 2019 compared to 2018 as a result of an increase in marketing services provided to such clients.

(c) The Company provides investment advisory services through Whitetail Rock Capital Management, LLC ("WRCM"), the Company's SEC-registered investment advisor subsidiary, under various arrangements.

(a) During the second quarter of 2020, the Company recognized a $51.0 million (pre-tax) gain to adjust the carrying value of its investment in Hudl to reflect Hudl's May 2020 equity raise transaction value.

(b) The Company provides investment advisory services through Whitetail Rock Capital Management, LLC ("WRCM"), the Company's SEC-registered investment advisor subsidiary, under various arrangements.

WRCM earns annual fees of 25 basis points on the majority of the outstanding balance of asset-backed securities under management and up to 50 percent of the gains from the sale of asset-backed securities or asset-backed securities being called prior to the full contractual maturity for which it provides advisory services.

As of December 31, 2019, the outstanding balance of asset-backed securities under management subject to these arrangements was $983.0 million.

As of December 31, 2020, the outstanding balance of asset-backed securities under management subject to these arrangements was $1.4 billion.

In addition, WRCM earns annual management fees of five basis points for certain other investments under management.

The decrease in advisory fees in 2019 as compared to 2018 was the result of a decrease in performance fees earned.

The increase in advisory fees in 2020 as compared to 2019 was the result of an increase in assets under management and performance fees earned.

The Company currently anticipates that assets under management will decrease from current levels and that opportunities to earn meaningful performance fees in future periods will be more limited.

(c) Represents revenue earned from providing administrative support and marketing services primarily to Great Lakes’ former parent company in accordance with a contract that expired in January 2021.

(d) Represents borrower late fees earned by the AGM operating segment.

The decrease in borrower late fees in 2020 as compared to 2019 was due to the Company suspending borrower late fees effective March 13, 2020 to provide borrowers relief as a result of the COVID-19 pandemic.

(e) Represents the Company's share of income or loss from solar investments accounted for using the Hypothetical Liquidation at Book Value ("HLBV") method of accounting.

For the majority of the Company's solar investments, the HLBV method of accounting results in accelerated losses in the initial years of investment.

LOAN SERVICING AND SYSTEMS OPERATING SEGMENT – RESULTS OF OPERATIONS

The Company purchased Great Lakes on February 7, 2018.

The results of Great Lakes' operations are reported in the Company's consolidated financial statements from the date of acquisition.

Loan Servicing Volumes

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Government 232,694 237,050 236,500 240,268 239,980 243,205 243,609 249,723 251,570

FFELP (a) — 11,136 — — — — — — —

Private and consumer (a) — 1,927 31 — — — — — —

Total $ 464,615 472,125 469,210 474,934 472,988 477,372 476,539 487,044 490,237

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Government 7,458,684 7,385,284 7,300,691 7,430,165 7,396,657 7,344,509 7,346,691 7,542,679 7,605,984

FFELP (a) — 461,553 — — — — — — —

Private and consumer (a) — 118,609 3,987 — — — — — —

Total 15,637,393 15,444,419 15,175,620 15,296,509 15,132,197 14,937,369 14,866,641 15,129,530 15,188,743

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6,393,151 6,332,261 6,211,132 6,457,296 6,433,324 6,354,158 6,264,559 6,251,598 6,555,841

(a) During the second quarter of 2018, the Company converted Great Lakes' FFELP and private education servicing volume to Nelnet Servicing's platform to leverage the efficiencies of supporting more volume on fewer systems.

The Consolidated Appropriations Act, 2021, signed into law on December 27, 2020, provides that the Department may extend the period of performance for the servicing contracts scheduled to expire on December 14, 2021 for up to two additional years to December 14, 2023.

The Department is conducting a contract procurement process for a new framework for the servicing of all student loans owned by the Department.

See note 17 of the notes to consolidated financial statements included in this report for additional information.

The Department currently allocates new loan volume among its servicers based on certain performance metrics that measure the satisfaction among separate customer groups, including borrowers and Department personnel who work with the servicers, and that measure the success of keeping borrowers in an on-time repayment status and helping borrowers avoid default.

Under the most recently publicly announced performance metric measurements used by the Department for the quarterly periods January 1, 2020 through June 30, 2020, Great Lakes’ and Nelnet Servicing’s overall rankings among the nine then-current servicers for the Department at that time were first and tied for fifth, respectively.

Based on these results, Great Lakes’ and Nelnet Servicing’s allocation of new student loan servicing volumes for the period September 1, 2020 through February 28, 2021 are 20 percent and 10 percent, respectively.

In October 2020, the Department communicated to its servicers that a not-for-profit servicer requested to end its contract with the Department.

Effective October 23, 2020, the percent of allocated new student loan servicing volume that previously was awarded to this servicer will be split among the remaining servicers, resulting in Great Lakes' allocation to increase by two percent and each remaining servicer to obtain an additional one percent allocation.

Summary and Comparison of Operating Results

1 unchanged sentence

2020 2019 Additional information

Net interest income $ 1,916 1,351 Increase was due to additional interest earnings on cash deposits due to a higher balance of cash deposits and higher interest rates in 2019 as compared to 2018.

Loan servicing and systems revenue

455,255 440,027 See table below for additional analysis.

Intersegment servicing revenue 46,751 47,082 Represents revenue earned by the LSS operating segment as a result of servicing loans for the AGM operating segment.

Decrease in 2019 compared to 2018 was due to the expected amortization of the FFELP portfolio.

The decrease was partially offset by the purchase of FFELP loan portfolios by the AGM segment.

Over time, FFELP intersegment servicing revenue will decrease as AGM's FFELP portfolio pays off.

Other income 9,736 7,284 Represents revenue earned from providing administrative support and marketing services primarily to Great Lakes’ former parent company in accordance with a contract that expires in February 2021.

Increase in 2019 compared to 2018 was due to twelve months of revenue in 2019 as compared to approximately eleven months of revenue (from the Great Lakes acquisition date) in 2018 and an increase in marketing services provided to other customers.

Net interest income $ 315 1,916 Decrease was due to lower interest rates in 2020 as compared to 2019.

Loan servicing and systems revenue 451,561 455,255 See table below for additional analysis.

Intersegment servicing revenue 36,520 46,751 Represents revenue earned by the LSS operating segment as a result of servicing loans for the AGM and Nelnet Bank operating segments.

Decrease in 2020 compared to 2019 was due to the impact of borrower relief policies implemented by AGM in response to the COVID-19 pandemic and the expected amortization of AGM's FFELP portfolio.

FFELP intersegment servicing revenue will continue to decrease as AGM's FFELP portfolio pays off.

Other income 9,421 9,736 Represents revenue earned from providing administrative support and marketing services primarily to Great Lakes’ former parent company in accordance with a contract that expired in January 2021.

Total other income 497,502 511,742

Salaries and benefits 276,136 267,458 Increase in 2019 compared to 2018 was due to twelve months of salaries and benefits from the Great Lakes acquisition included in 2019 as compared to approximately eleven months of expenses (from the Great Lakes acquisition date) in 2018, partially offset by a reduction of expenses from executing certain integration activities related to the Great Lakes acquisition.

Depreciation and amortization 34,755 32,074 Increase in 2019 as compared to 2018 was primarily due to the acquisition of Great Lakes on February 7, 2018.

Other expenses 71,064 67,336 Excluding a $3.9 million impairment charge related to external software development costs recognized by the Company in 2018, other expenses were $71.1 million and $63.4 million for 2019 and 2018, respectively.

Increase was due to the Great Lakes acquisition on February 7, 2018.

Salaries and benefits 285,526 276,136 Increase was due to an increase in headcount to provide enhanced service levels to borrowers under the Department servicing contracts, and to develop a new private education and consumer loan servicing system.

Depreciation and amortization 37,610 34,755 Increase was due to capital expenditures to support the recent extension of the government servicing contracts.

Other expenses 57,420 71,064 Decrease was due to cost savings as a result of the impact of the COVID-19 pandemic and the resulting CARES Act, primarily associated with the fact that while student loan payments are suspended there is a significant reduction of borrower statement printing and postage costs.

See "Overview - Impacts of COVID-19 Pandemic - Loan Servicing and Systems" above for additional information.

Decrease was also due to cost savings from an increase in the adoption of electronic borrower statements and correspondence, and a decrease in expenses related to travel and the provision for servicing losses.

Intersegment expenses 63,886 54,325 Intersegment expenses represent costs for certain corporate activities and services that are allocated to each operating segment based on estimated use of such activities and services.

Decrease in 2019 as compared to 2018 was due to the completion of certain integration activities related to the Great Lakes acquisition.

Increase in 2020 as compared to 2019 was due to an increase in security service levels related to the Department servicing contracts.

Total operating expenses 444,442 436,280

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53,375 77,378

Income tax expense (18,571) (16,954) Reflects income tax expense at an effective tax rate of 24% on income before taxes and the net loss attributable to noncontrolling interest.

Income tax expense (12,810) (18,571) Reflects income tax expense at an effective tax rate of 24%.

Net income 40,565 58,807

Net loss attributable to noncontrolling interest

— 808 Represented 50 percent of the net loss of the GreatNet joint venture that was attributable to Great Lakes prior to the Company's acquisition of Great Lakes on February 7, 2018.

Net income attributable to Nelnet, Inc.

$ 58,807 53,688

Before tax and noncontrolling interest operating margin

15.1 % 14.3 % Excluding the impairment of external software development costs recognized in 2018 as discussed above, before tax and noncontrolling interest operating margin (income before income taxes and noncontrolling interest divided by total revenue) was 15.0% for 2018.

The LSS segment will incur additional costs in 2020 to meet increased service and security standards under the Department servicing contracts and to be responsive to the Department's procurement.

As a result, the Company currently expects a significant decrease in this segment’s operating margin and net income in 2020 from recent historical results.

Before tax operating margin 10.7 % 15.1 % Before tax operating margin is a measure of before tax operating profitability as a percentage of revenue, and for the LSS segment is calculated as income before income taxes divided by the total of loan servicing and systems revenue, intersegment servicing revenue, and other income revenue.

The Company uses this metric to monitor and assess the segment’s performance, manage operating costs, identify and evaluate business trends affecting the segment, and make strategic decisions, and believes that it facilitates an understanding of the operating performance of the segment and provides a meaningful comparison of the results of operations between periods.

The LSS segment incurred additional costs during 2020 to meet increased service and security standards under the Department servicing contracts.

In addition, servicing revenue in 2020 has been negatively impacted as a result of the COVID-19 pandemic.

As a result, the segment's net income and operating margin decreased in 2020 as compared to 2019.

Loan servicing and systems revenue

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Government servicing - Nelnet $ 146,798 157,991 Represents revenue from Nelnet Servicing's Department servicing contract.

Increase in 2019 as compared to 2018 was due to an increase in revenue from the administration of the Total and Permanent Disability (TPD) Discharge program and fees earned from the Department from originating consolidation loans.

These items were partially offset by a decrease in borrower servicing revenue due to a decrease in the number of servicing borrowers.

Decrease in 2020 compared to 2019 was due to a decrease in revenue from the administration of the Total and Permanent Disability (TPD) Discharge program, decrease in fees earned from the Department for originating consolidation loans, and decrease in revenue earned per borrower as a result of certain provisions included in the CARES Act.

See "Overview - Impacts of COVID-19 Pandemic - Loan Servicing and Systems" above for additional information.

Government servicing - Great Lakes 179,872 185,656 Represents revenue from the Great Lakes' Department servicing contract.

Increase in revenue was due to twelve months of revenue in 2019 as compared to approximately eleven months (from the Great Lakes acquisition date) of revenue in 2018.

Private education and consumer loan servicing

36,788 41,474 Excluding $4.6 million in revenue earned in 2018 related to a private loan customer deconverting from the Great Lakes servicing platform subsequent to the Company’s acquisition of Great Lakes on February 7, 2018, private education and consumer loan servicing revenue was $36.8 million and $36.9 million in 2019 and 2018, respectively.

FFELP servicing 25,043 31,542 Decrease was due to portfolio amortization.

Decrease in 2020 compared to 2019 was due to a decrease in fees earned from the Department for originating consolidation loans and decrease in revenue earned per borrower as a result of certain provisions included in the CARES Act.

See "Overview - Impacts of COVID-19 Pandemic - Loan Servicing and Systems" above for additional information.

Private education and consumer loan servicing 32,492 36,788 Decrease was due to a decrease in the number of borrowers serviced, a decrease in origination fees, and the impact of borrower relief policies implemented by private lenders in response to the COVID-19 pandemic.

See "Overview - Impacts of COVID-19 Pandemic - Loan Servicing and Systems" above for additional information.

The Company expects that private education loan servicing revenue will increase beginning in the first half of 2021 as a result of the Company being selected to service all of the approximately $10 billion portfolio of private education loans that Wells Fargo announced in December 2020 it had agreed to sell to investors.

FFELP servicing 20,183 25,043 Decrease was due to a decrease in the number of borrowers serviced and the impact of borrower relief policies implemented by lenders in response to the COVID-19 pandemic.

See "Overview - Impacts of COVID-19 Pandemic - Loan Servicing and Systems" above for additional information.

Over time, FFELP servicing revenue will continue to decrease as third-party customers' FFELP portfolios pay off.

The decrease in 2019 as compared to 2018 was also due to purchases by the Company's AGM operating segment of third-party FFELP portfolios that are serviced by the LSS operating segment.

Revenue earned by the LSS operating segment for servicing loans for the AGM operating segment is included in "intersegment servicing revenue." The decreases in revenue were partially offset by the acquisition of Great Lakes (twelve months of revenue in 2019 as compared to eleven months (from the Great Lakes acquisition date) of revenue in 2018).

Software services 41,077 32,929 Historically, the majority of software services revenue related to providing hosted student loan servicing.

As a result of the Great Lakes acquisition, LSS added a significant unrelated third-party FFELP guaranty hosted servicing customer.

Increase in 2019 as compared to 2018 was due to an increase in providing hosted guaranty services to the new guaranty servicing customer.

In addition, the increase was due to twelve months of revenue from the new guaranty hosted servicing customer in 2019 as compared to approximately eleven months (from the Great Lakes acquisition date) of revenue in 2018.

Outsourced services and other 8,700 8,693 The majority of this revenue relates to providing contact center outsourcing activities.

Software services 41,999 41,077 Increase in 2020 compared to 2019 was due to increased contract programming revenue for services provided related to hosted FFELP guarantee activities and an increase in remote hosted borrowers.

These items were partially offset due to the negative impact in 2020 of COVID-19 forbearances on loans serviced by the Company's Direct Servicing hosted clients.

The Company’s remote hosted servicing and system support contract with Great Lakes’ former parent, representing 2.3 million borrowers, expired in January 2021.

Revenue recognized from providing these services during 2020 was $16.3 million.

Outsourced services and other 30,217 8,700 The majority of this revenue relates to providing contact center and back office operational outsourcing activities.

Increase in 2020 compared to 2019 was due to providing temporary outsourcing services to state agencies to process unemployment claims and conduct certain health contact tracing support activities.

Revenue from providing these temporary services was $21.9 million in 2020.

See "Overview - Impacts of COVID-19 Pandemic - Loan Servicing and Systems" above for additional information.

Loan servicing and systems revenue $ 451,561 455,255

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Based on the timing of revenue recognition and when expenses are incurred, revenue and pre-tax operating margin are higher in the first quarter as compared to the remainder of the year.

On November 20, 2018, the Company acquired TMS, a services company that offers tuition payment plans, billing services, payment technology solutions, and refund management to educational institutions.

The TMS acquisition added 380 higher education schools and 170 K-12 schools to the Company's customer base.

The results of TMS' operations are reported in the Company's consolidated financial statements from the date of acquisition.

On December 31, 2020, the Company acquired HigherSchool Instructional Services, a services company that provides supplemental instructional services and educational professional development for K-12 schools in New York City, and CD2 LLC, a platform technology solution that includes learning management, collaboration/workflow, gamification, customer management/document storage, and employee boarding.

The results of HigherSchool Instructional Services and CD2 LLC will be reported in the Company’s consolidated financial statements from the date of acquisition.

Summary and Comparison of Operating Results

1 unchanged sentence

2020 2019 Additional information

Net interest income $ 9,198 4,444 Increase was due to additional interest earnings on cash deposits due to a higher balance of cash deposits and higher interest rates in 2019 as compared to 2018.

Net interest income $ 2,982 9,198 Represents interest income on tuition funds held in custody for schools.

Decrease was due to a decrease in interest rates in 2020 as compared with 2019.

If interest rates remain at current levels, the Company anticipates this segment will earn minimal interest income in future periods.

Education technology, services, and

payment processing revenue 282,196 277,331 See table below for additional information.

Intersegment revenue 20 —

Other income 373 259

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services 82,206 81,603 See table below for additional information.

Salaries and benefits 94,666 81,080 Increase was due to the acquisition of TMS along with additional personnel to support the increase in services provided to customers, partially offset by cost reductions due to the Company's decision in October 2018 to terminate its investment in a proprietary payment processing platform.

Depreciation and amortization 12,820 13,484 Amortization of intangible assets related to business acquisitions was $12.1 million and $11.4 million for 2019 and 2018, respectively.

Other expenses 22,027 28,137 Decrease was due to the Company's decision in October 2018 to terminate its investment in a proprietary payment processing platform which resulted in the Company recognizing a $7.8 million impairment charge in 2018.

Additional cost savings were also realized as a result of the decision resulting in total savings of approximately $3 million in 2019 as compared to 2018.

These decreases were partially offset by an increase in other expenses as a result of the acquisition of TMS and additional costs to support the increase in services provided to customers.

Salaries and benefits 98,847 94,666 Increase in 2020 compared to 2019 was due to an increase in headcount to support the growth of the customer base and investment in the development of new technologies.

Depreciation and amortization 9,459 12,820 Represents primarily amortization of intangible assets from prior business acquisitions.

Amortization of intangible assets related to business acquisitions was $8.7 million and $12.1 million for 2020 and 2019, respectively.

Other expenses 14,566 22,027 Decrease in 2020 compared to 2019 was due to a reduction of travel expenses and the cancellation of on-site conferences as a result of the COVID-19 pandemic.

Intersegment expenses, net 14,293 13,405 Intersegment expenses represent costs for certain corporate activities and services that are allocated to each operating segment based on estimated use of such activities and services.

1 unchanged sentence

Income before income taxes 66,200 62,267

62,267 33,458

Income tax expense (15,888) (14,944) Represents income tax expense at an effective tax rate of 24%.

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2020 2019 Additional information

Tuition payment plan services $ 106,682 85,381 Increase was due to an increase in the number of managed tuition payment plans resulting from the acquisition of TMS and the addition of new school customers.

Payment processing

110,848 84,289 Increase was due to the acquisition of TMS and an increase in payments volume from new and existing school and non-education customers.

Education technology and services

58,578 51,155 Increase was due to an increase in the number of customers using the Company’s school administration software and services, higher revenues from financial needs assessment services, and the acquisition of TMS.

Additionally, FACTS Education Solutions has experienced growth in the number of students and teachers receiving its professional development and educational instruction services.

Tuition payment plan services $ 100,674 106,682 Decrease in 2020 compared to 2019 was due to the COVID-19 pandemic.

Revenue recognized during the first six months of 2020 was primarily related to payment plans for the 2019-2020 academic year for K-12 schools and the spring and summer 2020 semester for institutions of higher education.

As a result, fees for the majority of payment plans for these periods were received and were based on school enrollments prior to the conditions arising from the COVID-19 pandemic.

Revenue recognized during the second six months of 2020 was related to the 2020-2021 academic year and was negatively impacted due to the COVID-19 pandemic.

Payment processing 114,304 110,848 Increase in 2020 compared to 2019 was due to an increase in payments volume from new school customers, partially offset by the decline in payment volume for certain of the Company’s existing customers as a result of the COVID-19 pandemic.

Education technology and services 65,885 58,578 Increase in 2020 compared to 2019 was due to an increase from FACTS Student Information System (“SIS”) software subscriptions, online application and enrollment services, and financial needs assessment services as a result of an increase in the number of students and customers using these products.

Other 1,333 1,223

Education technology, services, and payment processing revenue 282,196 277,331

277,331 221,962

Cost to provide education technology, services, and payment processing services

81,603 59,566 Costs primarily relate to payment processing revenue.

Increase was due to the acquisition of TMS and an increase in payments volume from new and existing school and non-education customers.

$ 195,728 162,396

Before tax operating margin

31.8 % 20.6 % Excluding the impairment charge of $7.8 million in 2018 related to the Company's decision to terminate its investment in a proprietary payment processing platform, as discussed above, before tax operating margin (income before income taxes divided by net revenue) was 25.4% in 2018.

The increase in margin in 2019 as compared to 2018 was due to operating leverage and the Company's decision to terminate its investment in a proprietary payment processing platform.

Cost to provide education technology, services, and payment processing services 82,206 81,603 Costs primarily relate to payment processing revenue and such costs decrease/increase in relationship to payment revenue.

Net revenue $ 199,990 195,728

Before tax operating margin 33.1 % 31.8 % Before tax operating margin is a measure of before tax operating profitability as a percentage of revenue, and for the ETS&PP segment is calculated as income before income taxes divided by net revenue.

COMMUNICATIONS OPERATING SEGMENT - RESULTS OF OPERATIONS

On December 21, 2020, the Company deconsolidated ALLO from the Company’s consolidated financial statements.

See note 2, “Recent Developments - ALLO Recapitalization,” of the notes to consolidated financial statements included in this report for additional information.

Accordingly, the operating results for the Communications operating segment for 2020 are from January 1, 2020 through December 21, 2020.

Summary and Comparison of Operating Results

Year ended December 31,

Period from January 1 to December 21, 2020 Year ended December 31, 2019

Additional information

Net interest income (expense)

$ 3 (9,983) See note (a) below for additional information.

Communications revenue

64,269 44,653 Communications revenue is derived primarily from the sale of pure fiber optic services to residential and business customers in Nebraska and Colorado, including internet, television, and telephone services.

Net interest income $ 2 3

Communications revenue 76,643 64,269 Communications revenue is derived primarily from the sale of pure fiber optic services to residential and business customers in Nebraska and Colorado, including internet, television, and telephone services.

Increase was due to additional residential households and businesses served as a result of the completion of the Lincoln, Nebraska network build out in 2019 and continued maturity of ALLO's existing markets.

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Other costs include connectivity, franchise, and other regulatory costs directly related to providing internet and voice services.

Salaries and benefits

21,004 18,779 For the years ended December 31, 2019 and 2018, ALLO's average number of employees was 540 and 508, respectively.

ALLO also uses temporary employees in the normal course of business.

Certain costs qualify for capitalization as ALLO develops its network.

Depreciation and amortization

37,173 23,377 Depreciation reflects the allocation of the costs of ALLO's property and equipment over the period in which such assets are used.

A significant amount of property and equipment purchases have been made to support the Lincoln, Nebraska network expansion.

The gross property and equipment balances related to this segment as of December 31, 2019, 2018, and 2017 were $315.3 million, $273.9 million, and $186.4 million, respectively.

Amortization reflects the allocation of costs related to intangible assets recorded at fair value as of the date the Company acquired ALLO over their estimated useful lives.

Salaries and benefits 30,935 21,004 On October 1, 2020 (prior to the deconsolidation of ALLO), ALLO recognized compensation expense of $9.3 million related to the modification of certain ALLO equity awards previously granted to members of ALLO’s management.

Depreciation and amortization 42,588 37,173 Depreciation reflects the allocation of the costs of ALLO's property and equipment over the period in which such assets are used.

A significant amount of property and equipment purchases have been made to support ALLO’s network expansion, which has increased depreciation expense in 2020 as compared to 2019.

Amortization reflects the allocation of costs related to intangible assets recorded at fair value as of the date the Company acquired ALLO in 2015 over their estimated useful lives.

Other expenses 13,327 15,165 Other expenses includes selling, general, and administrative expenses necessary for operations, such as advertising, occupancy, professional services, construction materials, and personal property taxes.

Increase was due to expansion of new markets and increase in the number of households and businesses served.

Intersegment expenses

2,962 2,578 Intersegment expenses represent costs for certain corporate activities and services that are allocated to each operating segment based on estimated use of such activities and services.

Decrease in 2020 as compared to 2019 was due to a reduction in certain construction costs and travel expenses as a result of the COVID-19 pandemic.

Intersegment expenses 1,732 2,962 Intersegment expenses represent costs for certain corporate activities and services that are allocated to each operating segment based on estimated use of such activities and services.

Total operating expenses 88,582 76,304

76,304 56,634

Loss before income taxes (33,188) (30,946)

(30,946) (37,815)

Income tax benefit 7,965 7,427 Represents income tax benefit at an effective tax rate of 24%.

Net loss $ (23,519) (28,740) The Company anticipates this operating segment will be dilutive to consolidated earnings as it continues to develop and add customers to its network in Lincoln, Nebraska and other communities, due to large upfront capital expenditures and associated depreciation and upfront customer acquisition costs.

Net loss $ (25,223) (23,519) As ALLO grows in current and new markets, it incurs large upfront capital expenditures and associated depreciation and upfront customer acquisition costs.

M anagement uses EBITDA to compare ALLO's performance to that of its competitors and to eliminate certain non-cash and non-operating items in order to consistently measure performance from period to period.

See additional information below.

Additional Information:

$ (23,519) (28,740)

Net interest (income) expense

Net loss $ (25,223) (23,519)

Net interest income (2) (3)

Income tax benefit (7,965) (7,427)

(7,427) (9,075)

Depreciation and amortization 42,588 37,173

37,173 23,377

Earnings (loss) before interest, income taxes, depreciation, and amortization (EBITDA)

$ 6,224 (4,455) For additional information regarding this non-GAAP measure, see the table below.

(a) Nelnet, Inc.

(parent company) previously provided a line of credit to ALLO for network capital expenditures and related expenses.

In 2016 and 2017, the outstanding amount owed by ALLO to Nelnet, Inc.

and the related interest expense incurred by ALLO and the interest income recognized by Nelnet, Inc.

under the line of credit was eliminated in the Company's consolidated financial statements.

On January 1, 2018, Nelnet, Inc.

contributed equity to ALLO with an associated guaranteed payment and ALLO used the proceeds from this capital contribution to pay off all of the outstanding balance on the line of credit, including all accrued and unpaid interest.

For financial reporting purposes, the guaranteed payment recorded by ALLO was classified as debt and such debt and the guaranteed return paid to Nelnet, Inc.

(reflected as interest expense for ALLO) was eliminated in the consolidated financial statements.

On October 1, 2018, the guaranteed payment was replaced with a yield-based preferred return of future earnings on the contributed equity.

For financial reporting purposes, the preferred interest recorded by ALLO is classified as equity and the preferred return on the preferred interest is not treated by ALLO as interest expense.

Accordingly, subsequent to October 1, 2018, ALLO will not report interest expense in its income statement related to amounts contributed to ALLO from Nelnet, Inc.

Earnings before interest, income taxes, depreciation, and amortization (EBITDA) $ 9,398 6,224 For additional information regarding this non-GAAP measure, see the table below.

Certain financial and operating data for ALLO is summarized in the tables below.

Year ended December 31,

Period from January 1 to December 21, 2020 Year ended December 31, 2019

Residential revenue $ 58,029 75.7 % $ 48,344 75.2 %

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Capital expenditures 47,957 44,988

September 30,

December 21, 2020 September 30, 2020 June 30, 2020 March 31, 2020 December 31, 2019 September 30, 2019 June 30, 2019 March 31, 2019 December 31, 2018

Residential customer information:

2 unchanged sentences

Households served/passed 39.6 % 38.6 % 36.6 % 34.6 % 33.9 % 32.9 % 32.2 % 31.7 % 30.5 %

Total households in current markets and new markets announced (c) 160,884 159,974 159,974 152,840 152,840 142,602 137,500 137,500 137,500

(a) Earnings (loss) before interest, income taxes, depreciation, and amortization ("EBITDA") is a supplemental non-GAAP performance measure that is frequently used in capital-intensive industries such as telecommunications.

Total households in current markets 171,121 171,121 171,121 171,121 160,884 159,974 159,974 152,840 152,840

(a) Earnings before interest, income taxes, depreciation, and amortization ("EBITDA") is a supplemental non-GAAP performance measure that is frequently used in capital-intensive industries such as telecommunications.

ALLO's management uses EBITDA to compare ALLO's performance to that of its competitors and to eliminate certain non-cash and non-operating items in order to consistently measure performance from period to period.

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(b) Represents the number of single residence homes, apartments, and condominiums that ALLO already serves and those in which ALLO has the capacity to connect to its network distribution system without further material extensions to the transmission lines, but have not been connected.

During the fourth quarter of 2018, ALLO began providing services in Hastings, Nebraska.

During the second quarter of 2019, ALLO announced plans to expand its network to make services available in Breckenridge, Colorado.

During the fourth quarter of 2019, ALLO announced plans to expand its network to make services available in Imperial, Nebraska.

ALLO is now in eleven communities, including nine in Nebraska and two in Colorado.

ASSET GENERATION AND MANAGEMENT OPERATING SEGMENT – RESULTS OF OPERATIONS

Loan Portfolio

As of December 31, 2019, the Company had a $20.7 billion loan portfolio, consisting primarily of federally insured loans, that management anticipates will amortize over the next approximately 20 years and has a weighted average remaining life of 8.8 years.

As of December 31, 2020, the AGM operating segment had a $19.6 billion loan portfolio, consisting primarily of federally insured loans, that management anticipates will amortize over the next approximately 20 years and has a weighted average remaining life of 9.8 years.

For a summary of the Company's loan portfolio as of December 31, 2020 and 2019, see note 4 of the notes to consolidated financial statements included in this report.

Loan Activity

The following table sets forth the activity of loans:

The following table sets forth the activity of AGM’s loan portfolio:

Year ended December 31,

8 unchanged sentences

Consumer loans sold (185,028) (226,981)

Other loans sold — (23,712)

Ending balance $ 19,559,108 20,798,719

The Company has also purchased partial ownership in certain federally insured and consumer loan securitizations.

As of the latest remittance reports filed by the various trusts prior to December 31, 2020, the Company’s ownership correlates to approximately $500 million and $280 million of federally insured and consumer loans, respectively, included in these securitizations.

Allowance for Loan Losses and Loan Delinquencies

The Company maintains an allowance that management believes is appropriate to absorb losses, net of recoveries, inherent in the portfolio of loans, which results in periodic expense provisions for loan losses.

Delinquencies have the potential to adversely impact the Company’s earnings through increased servicing and collection costs and account charge-offs.

For a summary of the activity in the allowance for loan losses for 2019 and 2018, and a summary of the Company's loan delinquency amounts as of December 31, 2019 and 2018, see note 3 of the notes to consolidated financial statements included in this report.

Provision for loan losses for federally insured loans was $8.0 million and $14.0 million, in 2019 and 2018, respectively.

During 2018, the Company determined an additional allowance was necessary related to portfolios of federally insured loans that were purchased in prior periods and recognized $5.0 million in provision expense related to such loans.

The Company did not record provision expense for private education loans in 2019 and 2018.

Provision for loan losses for consumer loans was $31.0 million and $9.0 million in 2019 and 2018, respectively.

The increase in the provision in 2019 as compared to 2018 was a result of the increased amount of consumer loan purchases during 2019 as reflected in the "Loan Activity" table above.

On January 1, 2020, the Company adopted ASU No.

The expected credit losses are adjusted each period for changes in expected lifetime credit losses.

therefore, the comparative information for 2019 is not comparable to the information presented for 2020.

Management has determined that each of AGM’s federally insured, private education, and consumer loan portfolios meet the definition of a portfolio segment, which is defined as the level at which an entity develops and documents a systematic method for determining its allowance for credit losses.

AGM’s total allowance for loan losses of $175.4 million at December 31, 2020 represents reserves equal to 0.7% of AGM's federally insured loans (or 26.3% of the risk sharing component of the loans that is not covered by the federal guaranty), 6.1% of AGM's private education loans, and 24.9% of AGM's consumer loans.

For a summary of the Company’s activity in the allowance for loan losses for 2020 and 2019, and a summary of the Company's loan status and delinquency amounts as of December 31, 2020 and 2019, see note 4 of the notes to consolidated financial statements included in this report.

Loan Spread Analysis

The following table analyzes the loan spread on the Company’s portfolio of loans, which represents the spread between the yield earned on loan assets and the costs of the liabilities and derivative instruments used to fund the assets.

The spread amounts included in the following table are calculated by using the notional dollar values found in the table under the caption "Net interest income, net of settlements on derivatives" below, divided by the average balance of student loans or debt outstanding.

The following table analyzes the loan spread on AGM’s portfolio of loans, which represents the spread between the yield earned on loan assets and the costs of the liabilities and derivative instruments used to fund the assets.

The spread amounts included in the following table are calculated by using the notional dollar values found in the table under the caption "Net interest income after provision for loan losses, net of settlements on derivatives" below, divided by the average balance of loans or debt outstanding.

Year ended December 31,

9 unchanged sentences

Fixed rate floor income, net of settlements on derivatives 0.58 0.41

Core loan spread (d) 1.18 % 1.32 %

Average balance of loans $ 21,698,094 22,596,436

Average balance of debt outstanding 21,259,309 22,181,932

A reconciliation of core loan spread, which includes the impact of derivative settlements on loan spread, to loan spread without derivative settlements follows.

Year ended December 31,

Core loan spread 1.33 % 1.18 %

Derivative settlements (1:3 basis swaps) (0.03) (0.03)

Derivative settlements (fixed rate floor income) (0.19) (0.30)

Loan spread 0.96 % 0.99 %

Average balance of AGM’s loans $ 20,163,876 21,698,094

Average balance of AGM’s debt outstanding 19,964,813 21,259,309

(a) Derivative settlements represent the cash paid or received during the current period to settle with derivative instrument counterparties the economic effect of the Company's derivative instruments based on their contractual terms.

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A reconciliation of core loan spread, which includes the impact of derivative settlements on loan spread, to loan spread without derivative settlements follows.

Year ended December 31,

Core loan spread 1.33 % 1.18 %

Derivative settlements (1:3 basis swaps) (0.05) (0.03)

Derivative settlements (fixed rate floor income) 0.03 (0.19)

Loan spread 1.31 % 0.96 %

(b) Derivative settlements consist of net settlements received related to the Company’s 1:3 basis swaps.

(c) Derivative settlements consist of net settlements received related to the Company’s floor income interest rate swaps.

(d) Core loan spread, excluding consumer loans, would have been 1.09% and 1.27% in 2019 and 2018, respectively.

Other than consumer loans funded in the Company's consumer loan warehouse facility that was obtained on January 11, 2019, consumer loans were and continue to be funded by the Company using operating cash, until they can be funded in a secured financing transaction.

Consumer loans funded with operating cash do not have a cost of funds (debt) associated with them.

The average balance of consumer loans outstanding in 2019 and 2018 was $219.1 million, and $90.9 million, respectively.

The average balance outstanding on the consumer loan warehouse facility in 2019 was $98.2 million.

A trend analysis of the Company's core and variable loan spreads by calendar year quarter is summarized below.

(a) The interest earned on a large portion of the Company's FFELP student loan assets is indexed to the one-month LIBOR rate.

The Company funds a portion of its assets with three-month LIBOR indexed floating rate securities.

The relationship between the indices in which the Company earns interest on its loans and fu nds such loans has a significant impact on loan spread.

This table (the right axis) shows the difference between the Company's liability base rate and the one-month LIBOR rate by quarter.

See Item 7A, “Quantitative and Qualitative Disclosures About Market Risk - Interest Rate Risk,” which provides additional detail on the Company’s FFELP student loan assets and related funding for those assets.

Variable l oan spread remained constant for the year ended December 31, 2019 as compared to 2018 due to the impact of the Company's consumer loan portfolio.

Variable loan spread without consumer loans was 0.67% and 0.71% for the years ended December 31, 2019 and 2018, respectively.

This decrease was due to the widening in the basis between the asset and debt indices in which the Company earns interest on its loans and funds such loans (as reflected in the table above).

The difference between variable loan spread and core loan spread is fixed rate floor income earned on a portion of the Company's federally insured student loan portfolio.

(c) Derivative settlements consist of net settlements (paid) received related to the Company’s floor income interest rate swaps.

A trend analysis of AGM’s core and variable loan spreads by calendar year quarter is summarized below.

(a) The interest earned on a large portion of AGM's FFELP student loan assets is indexed to the one-month LIBOR rate.

AGM funds a portion of its assets with three-month LIBOR indexed floating rate securities.

The relationship between the indices in which AGM earns interest on its loans and funds such loans has a significant impact on loan spread.

This table (the right axis) shows the difference between AGM's liability base rate and the one-month LIBOR rate by quarter.

See Item 7A, “Quantitative and Qualitative Disclosures About Market Risk - Interest Rate Risk,” which provides additional detail on AGM’s FFELP student loan assets and related funding for those assets.

Variable loan spread was compressed during the first and second quarters of 2020 due to a widening of the basis between the asset and debt indices in which the Company earns interest on its loans and funds such loans (as reflected in the table above).

The significant widening during the first and second quarters of 2020 was the result of the significant decrease in interest rates during March 2020 and the first half of the second quarter of 2020.

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

During the third and fourth quarters of 2020, as the Company's debt reset at lower interest rates, the Company's variable loan spread increased.

The difference between variable loan spread and core loan spread is fixed rate floor income earned on a portion of AGM's federally insured student loan portfolio.

A summary of fixed rate floor income and its contribution to core loan spread follows:

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Fixed rate floor income contribution to spread, net 0.58 % 0.41 %

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

The decrease in gross fixed rate floor income in 2019 compared to 2018 was due to higher interest rates in 2019 as compared to 2018.

The Company has a portfolio of derivative instruments in which the Company pays a fixed rate and receives a floating rate to economically hedge loans earning fixed rate floor income.

See Item 7A, “Quantitative and Qualitative Disclosures About Market Risk - Interest Rate Risk,” which provides additional detail on the Company’s portfolio earning fixed rate floor income and the derivatives used by the Company to hedge these loans.

(a) Derivative settlements consist of net settlements (paid) received related to the Company's derivatives used to hedge student loans earning fixed rate floor income.

Gross fixed rate floor income increased in 2020 as compared to 2019 due to lower interest rates in 2020 as compared to 2019.

The Company has a portfolio of derivative instruments in which the Company pays a fixed rate and receives a floating rate to economically hedge a portion of loans earning fixed rate floor income.

The decrease in net derivative settlements (paid)

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

The Company added $2.75 billion (notional amount) of additional derivatives during the fourth quarter of 2020, resulting in a total of $4.5 billion (notional amount) of derivatives outstanding as of December 31, 2020, to hedge loans earning fixed rate floor income.

See Item 7A, “Quantitative and Qualitative Disclosures About Market Risk - Interest Rate Risk,” which provides additional detail on AGM’s portfolio earning fixed rate floor income and the derivatives used by the Company to hedge these loans.

Interest Rate Risk - Replacement of LIBOR as a Benchmark Rate

As of December 31, 2020, the interest earned on a principal amount of $17.8 billion in the Company’s FFELP student loan asset portfolio was indexed to one-month LIBOR, and the interest paid on a principal amount of $17.1 billion of the Company’s FFELP student loan asset-backed debt securities was indexed to one-month or three-month LIBOR.

In addition, the majority of the Company’s derivative financial instrument transactions used to manage LIBOR interest rate risks are indexed to LIBOR.

A market transition away from the current LIBOR framework could result in significant changes to the interest rate characteristics of the Company's LIBOR-indexed assets and funding for those assets, as well as the Company’s LIBOR-indexed derivative instruments.

See Item 1A, "Risk Factors - Loan Portfolio - Interest rate risk - replacement of LIBOR as a benchmark rate."

Summary and Comparison of Operating Results

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2020 2019 Additional information

Net interest income after

provision for loan losses $ 199,588 226,142 See table below for additional analysis.

Other income 30,349 12,723 The Company sold two portfolios of consumer loans during 2019 and recognized total gains of $17.3 million.

The remaining component of other income is primarily earned from borrower late fees.

Net interest income after provision for loan losses $ 220,288 199,588 See table below for additional analysis.

Other income 7,189 13,088 Represents primarily borrower late fees.

The decrease in borrower late fees in 2020 compared to 2019 was due to the Company suspending borrower late fees effective March 13, 2020 to provide borrowers relief as a result of the COVID-19 pandemic.

See "Overview - Impacts of COVID-19 Pandemic - Asset Generation and Management" above for additional information.

Gain on sale of loans 33,023 17,261 The Company sold $185.0 million and $227.0 million of consumer loans in 2020 and 2019, respectively.

Impairment expense and provision for beneficial interests (16,607) — In March 2020, the Company recognized a provision expense of $26.3 million related to its beneficial interest in consumer loan securitization investments as a result of the expected impacts of the COVID-19 pandemic.

During the fourth quarter of 2020, the Company reversed $9.7 million of such provision due to improved economic conditions.

See note 7 of the notes to consolidated financial statements included in this report.

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During 2019, there was a significant decrease in the forward yield curve resulting in a decrease in the fair value of the Company's floor income interest rate swaps that resulted in a larger loss in 2019 as compared to 2018.

Total other income (440) 81,042

Total other income/expense (860) (440)

Salaries and benefits 1,747 1,545

Other expenses 34,445 15,961 The Company recognized $16.7 million of expenses in 2019 to extinguish asset-backed notes from certain securitizations prior to their contractual maturities.

The remaining component of other expenses is primarily servicing fees paid to third parties.

Third party loan servicing fees increased in 2019 due to increased consumer loan volume.

Other expenses 15,806 34,445 The Company recognized $16.7 million of expenses in 2019 to extinguish asset-backed notes from certain securitizations prior to their contractual maturity.

Excluding these costs, other expenses were $17.7 million in 2019.

Other than the debt extinguishment costs, the primary component of other expenses is servicing fees paid to third parties.

The decrease in servicing fees in 2020 as compared to 2019 was due to a decrease in the Company's loan portfolio.

Intersegment expenses 39,172 47,362 Amounts include fees paid to the LSS operating segment for the servicing of the Company’s loan portfolio.

These amounts exceed the actual cost of servicing the loans.

The decrease in servicing fees in 2020 compared to 2019 was due to the expected amortization of the Company's FFELP portfolio and a decrease in certain servicing activities due to borrower relief initiatives and policies as a result of the COVID-19 pandemic.

Intersegment expenses also include costs for certain corporate activities and services that are allocated to each operating segment based on estimated use of such activities and services.

Total operating expenses 83,352 65,357 Excluding the expenses recognized by the Company related to the extinguishment of debt securities prior to their contractual maturities (as described above), total operating expenses were 31 basis points and 29 basis points of the average balance of loans in 2019 and 2018, respectively.

Total operating expenses 56,725 83,352 Total operating expenses, excluding the $16.7 million of expenses in 2019 related to the extinguishment of debt prior to their contractual maturity (as described above), were 28 basis points and 31 basis points of the average balance of loans in 2020 and 2019, respectively.

Income before income taxes 162,703 115,796

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Net income $ 123,654 88,004 See "Overview - GAAP Net Income and Non-GAAP Net Income, Excluding Adjustments" above for additional information about non-GAAP net income, excluding derivative market value adjustments.

The decrease in net income, excluding derivative market value adjustments, in 2019 as compared to 2018 was due to debt extinguishment costs incurred in 2019, a decrease in the average balance of loans outstanding, a decrease in core loan spread, and an increase in provision for loan losses for consumer loans as a result of the increased amount of consumer loan purchases in 2019 as compared to 2018.

These items were partially offset by the gains recognized in 2019 for the sale of consumer loan portfolios.

The decrease in non-GAAP net income in 2020 compared to 2019 was due to (i) the provision expense recognized by the Company in 2020 related to beneficial interest in consumer loan securitizations;

(ii) the decrease in the average balance of loans in 2020 as compared to 2019;

(iii) an incremental provision for loan losses in 2020 related to the increase in expected defaults as a result of the COVID-19 pandemic;

and (iv) a decrease in borrower late fees.

These items were partially offset by (i) an increase in core loan spread;

(ii) an increase in gains from the sale of consumer loan portfolios in 2020 as compared to 2019;

and (iii) recognizing expenses for the early extinguishment of debt in 2019.

Derivative market value adjustments, net 28,144 76,195

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Net income, excluding derivative market value adjustments $ 145,043 145,912

$ 145,912 185,430

Net interest income, net of settlements on derivatives

Net interest income after provision for loan losses, net of settlements on derivatives

The following table summarizes the components of "net interest income after provision for loan losses" and "derivative settlements, net."

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2020 2019 Additional information

Variable interest income, gross

$ 1,040,785 1,021,326 Increase in 2019 as compared to 2018 was due to an increase in the gross yield earned on loans, partially offset by a decrease in the average balance of loans.

Variable interest income, gross $ 637,979 1,040,785 Decrease in 2020 compared to 2019 was due to a decrease in the gross yield earned on loans and a decrease in the average balance of loans.

Consolidation rebate fees (168,933) (180,701) Decrease was due to a decrease in the average consolidation loan balance.

Discount accretion, net of premium and deferred origination costs amortization

4,495 9,879 Net discount accretion is due to the Company's purchases of loans at a net discount over the last several years.

However, due to more recent purchases at a net premium, the net discount accretion decreased in 2019 as compared to 2018.

Discount accretion, net of premium and deferred origination costs amortization 2,578 4,495 Net discount accretion is due to the Company's purchases of loans at a net discount over the last several years.

Variable interest income, net 471,624 864,579

Interest on bonds and notes payable (689,625) (659,367) Increase in 2019 as compared to 2018 was due to an increase in cost of funds, partially offset by a decrease in the average balance of debt outstanding.

Derivative settlements, net (a)

5,214 5,577 Derivative settlements include the net settlements received related to the Company’s 1:3 basis swaps.

Variable loan interest margin, net of settlements on derivatives (a)

Interest on bonds and notes payable (326,753) (689,625) Decrease in 2020 compared to 2019 was due to a decrease in cost of funds and a decrease in the average balance of debt outstanding.

Derivative settlements, net (a) 10,378 5,214 Derivative settlements include the net settlements received related to the Company’s 1:3 basis swaps.

Variable loan interest margin,

net of settlements on derivatives (a)

155,249 180,168

Fixed rate floor income, gross

49,677 56,811 Fixed rate floor income decreased due to higher interest rates in 2019 as compared to 2018.

Derivative settlements, net (a) 40,192 64,901 Derivative settlements include the settlements received related to the Company's floor income interest rate swaps.

The decrease in settlements in 2019 as compared to 2018 was due to a decrease in the notional amount of derivatives outstanding, partially offset by higher interest rates in 2019 as compared to 2018.

Fixed rate floor income, gross 123,460 49,677 Fixed rate floor income increased due to lower interest rates in 2020 as compared to 2019.

Derivative settlements, net (a) (6,699) 40,192 Derivative settlements include the settlements (paid) received related to the Company's floor income interest rate swaps.

Fixed rate floor income, net of settlements on derivatives 116,761 89,869

89,869 121,712

Core loan interest income (a) 272,010 270,037

Investment interest 17,707 13,836 Increase was due to a higher balance of interest-earning investments and higher interest rates in 2019 as compared to 2018.

Intercompany interest (3,750) (2,993)

Provision for loan losses - federally

insured loans (8,000) (14,000) See "Allowance for Loan Losses and Loan Delinquencies" included above under "Asset Generation and Management Operating Segment - Results of Operations."

Provision for loan losses - consumer

loans (31,000) (9,000)

Net interest income after provision for loan losses (net of settlements on derivatives) (a)

$ 244,994 296,620

Investment interest 16,390 17,707 Decrease was due to lower interest rates and lower weighted average cash and restricted cash balances in 2020 as compared to 2019.

Intercompany interest (1,404) (3,750) Decrease was due to lower interest rates and lower weighted average debt outstanding in 2020 as compared to 2019.

Provision for loan losses - federally insured loans (18,691) (8,000) See "Allowance for Loan Losses and Loan Delinquencies" included above under "Asset Generation and Management Operating Segment - Results of Operations.

Provision for loan losses - private education loans (6,155) —

Provision for loan losses - consumer loans (38,183) (31,000)

Net interest income after provision for loan losses (net of settlements on derivatives) (a) $ 223,967 244,994 Net interest income (net of settlements on derivatives - and excluding provision for loan losses) for 2020 and 2019 was $287.0 million and $284.0 million, respectively.

The increase in 2020 as compared to 2019 was due to an increase in core loan spread, partially offset by a decrease in the average balance of loans.

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See note 5 of the notes to consolidated financial statements included in this report for additional information on the Company's derivative instruments, including the net settlement activity recognized by the Company for each type of derivative referred to in the "Additional information" column of this table, for the 2019 and 2018 periods presented in the table under the caption "Income Statement Impact" in note 5 and in this table.

As of December 31, 2019, the interest earned on a principal amount of $18.9 billion in the Company’s FFELP student loan asset portfolio was indexed to one-month LIBOR, and the interest paid on a principal amount of $18.4 billion of the Company’s FFELP student loan asset-backed debt securities was indexed to one-month or three-month LIBOR.

In addition, the majority of the Company’s derivative financial instrument transactions used to manage LIBOR interest rate risks are indexed to LIBOR.

There is significant uncertainty regarding the availability of LIBOR as a benchmark rate after 2021, and any market transition away from the current LIBOR framework could result in significant changes to the interest rate characteristics of the Company's LIBOR-indexed assets and funding for those assets, as well as the Company’s LIBOR-indexed derivative instruments.

See Item 1A, "Risk Factors - Loan Portfolio - Interest rate risk - replacement of LIBOR as a benchmark rate."

See note 6 of the notes to consolidated financial statements included in this report for additional information on the Company's derivative instruments, including the net settlement activity recognized by the Company for each type of derivative referred to in the "Additional information" column of this table, for the 2020 and 2019 periods presented in the table under the caption "Consolidated Financial Statement Impact Related to Derivatives - Statements of Income" in note 6 and in this table.

LIQUIDITY AND CAPITAL RESOURCES

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As such, a minimal amount of debt and equity capital is allocated to these segments and any liquidity or capital needs are satisfied using cash flow from operations.

Therefore, the Liquidity and Capital Resources discussion is concentrated on the Company’s liquidity and capital needs to meet existing debt obligations in the Asset Generation and Management operating segment and capital needs to expand ALLO's communications network in the Company's Communications operating segment.

The Company may issue equity and debt securities in the future in order to improve capital, increase liquidity, refinance upcoming maturities, or provide for general corporate purposes.

Moreover, the Company may from time-to-time repurchase certain amounts of its outstanding secured and unsecured debt securities, including debt securities which the Company may issue in the future, for cash and/or through exchanges for other securities.

Moreover, the Company may from time-to-time repurchase certain amounts of its outstanding secured debt securities, including debt securities which the Company may issue in the future, for cash and/or through exchanges for other securities.

Such repurchases or exchanges may be made in open market transactions, privately negotiated transactions, or otherwise.

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The amounts involved in any such transactions may be material.

The Company has historically utilized operating cash flow, secured financing transactions (which include warehouse facilities, asset-backed securitizations, and liquidity programs offered by the Department), operating lines of credit, and other borrowing arrangements to fund its Asset Generation and Management operations and loan acquisitions.

In addition, the Company has used operating cash flow, borrowings on its unsecured line of credit, repurchase agreements, and unsecured debt offerings to fund corporate activities, business acquisitions, repurchases of common stock, repurchases of its own debt, and expansion of ALLO's fiber network.

The Company has historically utilized operating cash flow, secured financing transactions (which include warehouse facilities and asset-backed securitizations), operating lines of credit, and other borrowing arrangements to fund its Asset Generation and Management operations and loan acquisitions.

In addition, the Company has used operating cash flow, borrowings on its unsecured line of credit, repurchase agreements, and unsecured debt offerings to fund corporate activities;

business acquisitions;

solar, real estate, and other investments;

repurchases of common stock;

and repurchases of its own debt.

Recent Developments

As discussed above under “Overview - Recapitalization and Additional Funding for ALLO,” on October 1, 2020, the Company entered into various agreements with SDC, a third party global digital infrastructure investor, and ALLO, for various transactions contemplated by the parties in connection with a recapitalization and additional funding for ALLO.

As part of the transactions, on October 15, 2020, ALLO received proceeds of $197.0 million from SDC as the purchase price payment by SDC for the issuance of membership units of ALLO, and redeemed $160.0 million of non-voting preferred membership units of ALLO held by the Company.

Upon the receipt of regulatory approvals on December 21, 2020, SDC, the Company, and members of ALLO’s management own approximately 48 percent, 45 percent, and 7 percent, respectively, of the outstanding voting membership interests of ALLO, and the Company deconsolidated ALLO from the Company’s consolidated financial statements.

On January 19, 2021, ALLO closed on certain private debt financing facilities from unrelated third-party lenders providing for aggregate financing of up to $230.0 million.

The agreements among the Company, SDC, and ALLO provide that they will use commercially reasonable efforts (which expressly excludes requiring ALLO to raise any additional equity financing or sell any assets) to cause ALLO to redeem, on or before April 2024, the remaining preferred membership units of ALLO held by the Company, plus the amount of accrued and unpaid preferred return on such units.

As of January 19, 2021, the outstanding preferred membership units of ALLO held by the Company was $129.7 million.

The preferred membership units earn a preferred annual return of 6.25 percent.

If ALLO needs additional capital to support its growth in existing or new markets, the Company has the option to contribute additional capital to maintain its voting equity interest.

However, ALLO has obtained third-party debt financing to support its current growth plans, and thus the Company currently believes additional equity contributions to ALLO are not likely in the immediate future.

As part of the ALLO recapitalization transaction, the Company and SDC entered into an agreement, in which the Company has a contingent payment obligation to pay SDC a contingent payment amount of $25.0 million to $35.0 million in the event the Company disposes of its voting membership units of ALLO that it holds and realizes from such disposition certain targeted return levels.

The Company recognized the estimated fair value of the contingent payment obligation as of December 31, 2020 to be $2.3 million, which is included in “other liabilities” on the consolidated balance sheet.

On November 2, 2020, the Company obtained final approval from the FDIC for federal deposit insurance and for a bank charter from the UDFI in connection with the establishment of Nelnet Bank, and Nelnet Bank launched operations.

Nelnet Bank was funded by the Company with an initial capital contribution of $100.0 million, consisting of $55.9 million of cash and $44.1

million of student loan asset-backed securities.

In addition, the Company made a pledged deposit of $40.0 million with Nelnet Bank, as required under an agreement with the FDIC discussed below.

Prior to FDIC approval, Nelnet Bank, Nelnet, Inc.

(the parent), and Michael S.

Dunlap (Nelnet, Inc.’s controlling shareholder) entered into a Capital and Liquidity Maintenance Agreement and a Parent Company Agreement with the FDIC in connection with Nelnet, Inc.’s role as a source of financial strength for Nelnet Bank.

As part of the Capital and Liquidity Maintenance Agreement, Nelnet, Inc.

is obligated to (i) contribute capital to Nelnet Bank for it to maintain capital levels that meet FDIC requirements for a “well capitalized” bank, including a leverage ratio of capital to total assets of at least 12 percent;

(ii) provide and maintain an irrevocable asset liquidity takeout commitment for the benefit of Nelnet Bank in an amount equal to the greater of either 10 percent of Nelnet Bank’s total assets or such additional amount as agreed to by Nelnet Bank and Nelnet, Inc.;

(iii) provide additional liquidity to Nelnet Bank in such amount and duration as may be necessary for Nelnet Bank to meet its ongoing liquidity obligations;

and (iv) establish and maintain a pledged deposit of $40.0 million with Nelnet Bank.

Based on the current business plan for Nelnet Bank and its strong financial condition after the first few months of operations, the Company currently believes that the initial capital contribution of $100.0 million and pledged deposit of $40.0 million should provide sufficient capital and liquidity to Nelnet Bank for the next two to three years.

Sources of Liquidity

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The Company also had a portfolio of available-for-sale investments, consisting primarily of student loan asset-backed securities, with a fair value of $348.6 million as of December 31, 2020.

As of December 31, 2020, the Company had participated $118.6 million of these securities, and such participation is reflected as debt on the Company's consolidated balance sheet.

The Company also has a $455.0 million unsecured line of credit that matures on December 16, 2024.

As of December 31, 2020, there was $120.0 million outstanding on the unsecured line of credit and $335.0 million was available for future use.

Subsequent to December 31, 2020, the Company paid down the full balance outstanding on the line of credit, and as of February 25, 2021, $455.0 million was available for future use.

In addition, on May 30, 2019, the Company entered into a $22.0 million secured line of credit agreement that matures on May 30, 2022.

In addition, the Company has a $22.0 million secured line of credit agreement that matures on May 30, 2022.

As of December 31, 2020, the secured line of credit had $5.0 million outstanding with $17.0 million available for future use.

In addition, the Company has repurchased certain of its own asset-backed securities (bonds and notes payable) in the secondary market.

In addition, the Company has retained certain of its own asset-backed securities upon their initial issuance or repurchased certain of its own asset-backed securities (bonds and notes payable) in the secondary market.

For accounting purposes, these notes are eliminated in consolidation and are not included in the Company’s consolidated financial statements.

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strategic acquisitions and investments;

expansion of ALLO's telecommunications network;

and capital management initiatives, including stock repurchases, debt repurchases, and dividend distributions.

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During the year ended December 31, 2020, the Company generated $212.8 million from operating activities, compared to $298.9 million for the same period in 2019.

The increase in cash flows from operating activities was due to:

The decrease in cash flows from operating activities was due to:

• The adjustments to net income for derivative market value adjustments;

• The impact of changes to accrued interest receivable and other liabilities in 2019 as compared to 2018.

• Adjustments to net income for the impact of the gains from the deconsolidation of ALLO and sale of loans and investments;

• The impact of changes to other liabilities and the due to customers liability account in 2020 as compared to 2019.

These factors were partially offset by:

• The decrease in net income;

• Adjustments to net income for the impact of deferred taxes;

• Net payments to the derivative clearinghouse in 2019 of $70.7 million compared to net proceeds received in 2018 of $40.4 million related to the Company's derivative portfolio;

• Net payments to derivative counterparties to terminate derivatives in 2019 of $12.5 million compared to net proceeds received in 2018 of $10.3 million;

• The impact of changes to accounts receivable and accrued interest payable in 2019 as compared to 2018.

• The increase in net income;

• Adjustments to net income for the impact of the non-cash provision for loan losses and impairment charges;

• A decrease in net payments to the Company's clearinghouse for margin payments on derivatives;

• The impact of changes to accounts receivable and other assets in 2020 as compared to 2019.

The primary items included in the statement of cash flows for investing activities are the purchase and repayment of loans.

The primary items included in financing activities are the proceeds from the issuance of and payments on bonds and notes payable used to fund loans.

Cash provided by investing activities and used in financing activities for the year ended December 31, 2019 was $1,524.6 million and $1,793.3 million, respectively.

Cash used in investing activities and provided by financing activities for the year ended December 31, 2018 was $732.4 million and $711.8 million, respectively.

Cash provided by investing activities and used in financing activities for the year ended December 31, 2020 was $621.2 million and $1.10 billion, respectively.

Cash provided by investing activities and used in financing activities for the year ended December 31, 2019 was $1.52 billion and $1.79 billion, respectively.

Investing and financing activities are further addressed in the discussion that follows.

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Bonds and notes issued in asset-backed securitizations $ 18,886,920 5/27/25 - 10/25/68

FFELP and consumer loan warehouse facilities 894,664 5/20/21 - 5/31/22

FFELP, private education, and consumer loan warehouse facilities 428,371 2/13/22 - 2/26/23

Bonds and Notes Issued in Asset-backed Securitizations

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As of December 31, 2020, the Company had $19.0 billion of loans included in asset-backed securitizations, which represented 96.8 percent of its total loan portfolio.

The forecasted cash flow does not include cash flows that the Company expects to receive related to loans funded in its warehouse facilities as of December 31, 2019, private education and consumer loans funded with operating cash, and loans acquired subsequent to December 31, 2019.

The forecasted cash flow does not include cash flows that the Company expects to receive related to loans funded in its warehouse facilities as of December 31, 2020, private education and consumer loans funded with operating cash, loans acquired subsequent to December 31, 2020, and loans owned by Nelnet Bank.

Asset-backed Securitization Cash Flow Forecast

$2.30 billion

(dollars in millions)

The forecasted future undiscounted cash flows of approximately $2.30 billion include approximately $1.19 billion (as of December 31, 2020) of overcollateralization included in the asset-backed securitizations.

These excess net asset positions are reflected variously in the following balances on the consolidated balance sheet:

"loans receivable," "restricted cash," and "accrued interest receivable." The difference between the total estimated future undiscounted cash flows and the overcollateralization of approximately $0.88 billion, or approximately $0.67 billion after income taxes based on the estimated effective tax rate, is expected to be accretive to the Company's December 31, 2019 balance of consolidated shareholders' equity.

Two of the Company’s asset-backed securitizations as of December 31, 2019 are structured as “Turbo Transactions” which require all cash generated from the student loans (including excess spread) to be directed toward payment of interest and any outstanding principal generally until such time as all principal on the notes has been paid in full.

Once the notes in such transactions are paid in full, the remaining unencumbered student loans (and other remaining assets, if any) in the securitizations will be released to the Company, at which time the Company will have the option to refinance or sell these assets, or retain them on the balance sheet as unencumbered assets.

These excess net asset positions are included in the consolidated balance sheets and included in the balances of "loans and accrued interest receivable" and "restricted cash." The difference between the total estimated future undiscounted cash flows and the overcollateralization of approximately $1.11 billion, or approximately $0.84 billion after income taxes based on the estimated effective tax rate, is expected to be accretive to the Company's December 31, 2020 balance of consolidated shareholders' equity.

The Company uses various assumptions, including prepayments and future interest rates, when preparing its cash flow forecast.

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The different interest rate characteristics of the Company’s loan assets and liabilities funding these assets result in basis risk.

The Company’s cash flow forecast assumes three-month LIBOR will exceed one-month LIBOR by 12 basis points for the

life of the portfolio, which approximates the historical relationship between these indices.

The Company’s cash flow forecast assumes three-month LIBOR will exceed one-month LIBOR by 12 basis points for the life of the portfolio, which approximates the historical relationship between these indices.

If the forecast is computed assuming a spread of 24 basis points between three-month and one-month LIBOR for the life of the portfolio, the cash flow forecast would be reduced by approximately $55 million to $75 million.

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There is significant uncertainty regarding the availability of LIBOR as a benchmark rate after 2021, and any market transition away from the current LIBOR framework could result in significant changes to the forecasted cash flows from the Company's asset-backed securitizations.

See Item 1A, "Risk Factors - Loan Portfolio - Interest rate risk - replacement of LIBOR as a benchmark rate."

In addition, the COVID-19 pandemic may impact forecasted cash flows from the Company's asset-

backed securitizations.

See Item 1A, "Risk Factors - Loan Portfolio - Interest rate risk - replacement of LIBOR as a benchmark rate," and "Risk Factors - The COVID-19 pandemic has adversely impacted our results of operations, and is expected to continue to adversely impact our results of operations, as well as adversely impact our businesses, financial condition, and/or cash flows.”

The Company uses the current forward interest rate yield curve to forecast cash flows.

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See Item 7A, "Quantitative and Qualitative Disclosures About Market Risk — Interest Rate Risk."

Extinguishment of Certain Asset-Backed Securitizations (Including Turbo Transactions)

During 2019, the Company extinguished $1.05 billion of notes payable in certain asset-backed securitizations, including six of the Company's eight Turbo Transactions (prior to the notes' contractual maturities).

These transactions resulted in the release of $1.45 billion in student loans and accrued interest receivable that were previously encumbered in the asset-backed securitizations.

To extinguish the notes, the Company paid premiums of $14.0 million and wrote off $2.7 million of debt issuance costs associated with these securitizations.

In total, the Company recognized $16.7 million in expenses in 2019 to extinguish these notes.

Warehouse Facilities

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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 with an aggregate maximum financing amount available of $1.1 billion, of which $0.8 billion was outstanding and $0.3 billion was available for additional funding.

As of December 31, 2020, the Company had two FFELP warehouse facilities with an aggregate maximum financing amount available of $310.0 million, of which $252.2 million was outstanding and $57.8 million was available for additional funding.

One warehouse facility has a static advance rate until the expiration date of the liquidity provisions (May 20, 2021).

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For further discussion of the Company's FFELP warehouse facilities outstanding at December 31, 2020, see note 5 of the notes to consolidated financial statements included in this report.

On January 11, 2019, the Company obtained a consumer loan warehouse facility that has an aggregate maximum financing amount available of $200.0 million, an advance rate of 70 or 75 percent depending on the type of collateral and subject to certain concentration limits, liquidity provisions to April 23, 2021, and a final maturity date of April 23, 2022.

As of December 31, 2019, $116.6 million was outstanding under this facility and $83.4 million was available for future funding.

Additionally, as of December 31, 2019, the Company had $41.3 million advanced as equity support under this facility.

On January 31, 2020, the Company sold $124.2 (par value) of consumer loans to an unrelated third party.

A portion of such loans were funded in the consumer loan warehouse.

After completion of this loan sale, the outstanding balance under the consumer loan warehouse was $61.5 million, $138.5 million was available for future funding, and $1.3 million was advanced as equity support.

On February 13, 2020, the Company closed on a private loan warehouse facility with an aggregate maximum financing amount available of $100.0 million, with an additional $100.0 million available at the request of the Company and approval of the lender, an advance rate of 90 percent, liquidity provisions through February 15, 2021, and a final maturity date of February 11, 2022.

The Company currently anticipates funding approximately $110 million of private loan assets in this facility.

The Company has a private education loan warehouse facility that, as of December 31, 2020, had an aggregate maximum financing amount available of $200.0 million, an advance rate of 80 to 90 percent, liquidity provisions through February 13, 2021, and a final maturity date of February 13, 2022.

As of December 31, 2020, $150.4 million was outstanding under this warehouse facility, $49.6 million was available for future funding, and $16.4 million was advanced as equity support.

On February 12, 2021, the liquidity provisions on this facility were extended to February 13, 2022, the final maturity was extended to February 13, 2023, and the maximum facility amount was decreased to $175.0 million.

The Company has a consumer loan warehouse facility that has an aggregate maximum financing amount available of $100.0 million, an advance rate of 70 or 75 percent depending on the type of collateral and subject to certain concentration limits, liquidity provisions to April 23, 2021, and a final maturity date of April 23, 2022.

As of December 31, 2020, $25.8 million was outstanding under this facility, $74.2 million was available for future funding, and $11.5 million advanced as equity support.

Upon termination or expiration of the warehouse facilities, the Company would expect to access the securitization market, obtain replacement warehouse facilities, use operating cash, consider the sale of assets, or transfer collateral to satisfy any remaining obligations.

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The Company no longer originates new FFELP loans, but continues to acquire FFELP loan portfolios from third parties and believes additional loan purchase opportunities exist, including opportunities to purchase private education and consumer loans.

The Company plans to fund additional loan acquisitions using current cash and investments;

using its Union Bank participation agreement (as described below);

using its existing warehouse facilities (as described above);

In December of 2020, Wells Fargo announced the sale of its approximately $10 billion portfolio of private education student loans representing approximately 475,000 borrowers.

In conjunction with the sale, the Company was selected as servicer of the portfolio and will begin servicing the portfolio following a series of loan transfers during the first half of 2021.

In addition, the Company has entered into agreements to participate in a joint venture to acquire the portfolio.

The Company expects to own approximately 8 percent of the interest in the loans and, dependent upon financing, currently expects to invest approximately $100 million as part of the acquisition.

This transaction is expected to close during the first half of 2021, with the securitizations occurring subsequent to closing.

The Company plans to fund additional loan acquisitions and related investments using current cash and investments;

using its unsecured line of credit, using its Union Bank participation agreement (as described below);

using its existing warehouse

facilities (as described above);

increasing the capacity under existing and/or establishing new warehouse facilities;

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Asset-backed Securities Transactions

During 2019, the Company completed seven FFELP asset-backed securitizations totaling $2.8 billion (par value).

On June 25, 2019, the Company completed a private education loan asset-backed securitization totaling $47.2 million (par value).

The proceeds from this transaction were used to refinance private education loans previously funded via a private loan repurchase agreement that was terminated on June 25, 2019.

During 2020, the Company completed five FFELP asset-backed securitizations totaling $1.6 billion (par value).

The proceeds from these transactions were used primarily to refinance student loans included in the Company's FFELP warehouse facilities.

See note 5 of the notes to consolidated financial statements included in this report for additional information on these securitizations.

Depending on future market conditions, the Company currently anticipates continuing to access the asset-backed securitization market.

Such asset-backed securitization transactions would be used to refinance loans included in its warehouse facilities, loans purchased from third parties, and/or student loans in its existing asset-backed securitizations.

The Company, through its subsidiaries, has historically funded student loans by completing asset-backed securitizations.

Depending on market conditions, the Company currently anticipates continuing to access the asset-backed securitization market.

Such asset-backed securitization transactions would be used to refinance student loans included in its warehouse facilities, loans purchased from third parties, and/or student loans in its existing asset-backed securitizations.

Liquidity Impact Related to Hedging Activities

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By using derivative instruments, the Company is exposed to market risk which could impact its liquidity.

Based on the derivative portfolio outstanding as of December 31, 2019, the Company does not currently anticipate any movement in interest rates having a material impact on its capital or liquidity profile, nor does the Company expect that any movement in interest rates would have a material impact on its ability to meet potential collateral deposits with its counterparties and/or make variation margin payments to its third-party clearinghouse.

However, if interest rates move materially and negatively impact the fair value of the Company's derivative portfolio, the replacement of LIBOR as a benchmark rate has significant adverse impacts on our derivatives, or if the Company enters into additional derivatives for which the fair value becomes negative, the Company could be required to deposit additional collateral with its derivative instrument counterparties and/or make variation margin payments to its third-party clearinghouse.

The collateral deposits or variation margin, if significant, could negatively impact the Company's liquidity and capital resources.

Based on the derivative portfolio outstanding as of December 31, 2020, the Company does not currently anticipate any movement in interest rates having a material impact on its capital or liquidity profile, nor does the Company expect that any movement in interest rates would have a material impact on its ability to make variation margin payments to its third-party clearinghouse.

However, if interest rates move materially and negatively impact the fair value of the Company's derivative portfolio, the replacement of LIBOR as a benchmark rate has significant adverse impacts on the Company's derivatives, or if the Company enters into additional derivatives for which the fair value becomes negative, the Company could be required to make variation margin payments to its third-party clearinghouse.

The variation margin, if significant, could negatively impact the Company's liquidity and capital resources.

In addition, clearing rules require the Company to post amounts of liquid collateral when executing new derivative instruments, which could prevent or limit the Company from utilizing additional derivative instruments to manage interest rate sensitivity and risks.

See note 6 of the notes to consolidated financial statements included in this report for additional information on the Company's derivative portfolio.

Liquidity Impact Related to the Communications Operating Segment

ALLO has made significant investments in its communications network and currently provides fiber directly to homes and businesses in communities in Nebraska and Colorado.

ALLO plans to continue to increase market share and revenue in its existing markets and is currently evaluating opportunities to expand to other communities in the Midwest.

In 2019, ALLO's capital expenditures were $45.0 million.

The Company anticipates total ALLO network capital expenditures in 2020 will be approximately $35.0 million to $45.0 million.

However, this amount could change based on customer demand for ALLO's services.

The Company currently plans to use cash from operating activities and its third-party unsecured line of credit to fund ALLO's capital expenditures, as well as potentially other third-party financing alternatives.

Other Debt Facilities

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As of December 31, 2020, the unsecured line of credit had $120.0 million outstanding and $335.0 million was available for future use.

On May 30, 2019, the Company entered into a $22.0 million secured line of credit agreement with a maturity date of May 30, 2022.

As of February 25, 2021, no amounts were outstanding on the line of credit and $455.0 million was available for future use.

The Company also has a $22.0 million secured line of credit agreement with a maturity date of May 30, 2022.

As of December 31, 2020, the secured line of credit had $5.0 million outstanding with $17.0 million available for future use.

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Upon the maturity date of these facilities, there can be no assurance that the Company will be able to maintain these lines of credit, increase the amount outstanding under the lines, or find alternative funding if necessary.

The Company has issued Junior Subordinated Hybrid Securities (the "Hybrid Securities") that have a final maturity of September 15, 2061.

The Hybrid Securities are unsecured obligations of the Company.

As of December 31, 2019, the Company had $20.4 million of Hybrid Securities that remain outstanding.

During 2020, the Company entered into an agreement with Union Bank, as trustee for various grantor trusts, under which Union Bank has agreed to purchase from the Company participation interests in student loan asset-backed securities.

As of December 31, 2020, $118.6 million of student loan asset-backed securities were subject to outstanding participation interests held by Union Bank, as trustee, under this agreement.

This participation agreement has been accounted for by the Company as a secured borrowing.

Upon termination or expiration of this agreement, the Company would expect to use operating cash, consider the sale of assets, or transfer collateral to satisfy any remaining obligations.

For further discussion of these debt facilities described above, see note 5 of the notes to consolidated financial statements included in this report.

Debt Repurchases

Due to the Company’s positive liquidity position and opportunities in the capital markets, the Company has repurchased its own debt over the last several years, and may continue to do so in the future.

See note 5 of the notes to consolidated financial statements included in this report for information on debt repurchased by the Company during the last three years.

Stock Repurchases

The Board of Directors has authorized a stock repurchase program to repurchase up to a total of five million shares of the Company's Class A common stock during the three-year period ending May 7, 2022.

As of December 31, 2019, 4,803,877 shares remain authorized for purchase under the Company's repurchase program.

As of December 31, 2020, 3,246,732 shares remain authorized for repurchase under the Company's stock repurchase program.

Shares may be repurchased from time to time depending on various factors, including share prices and other potential uses of liquidity.

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Year ended December 31, 2019 726,273 40,411 55.64

Included in the shares repurchased during 2019 in the table above are a total of 180,000 shares of Class A common stock the Company purchased on June 17, 2019 from one of the Company's significant shareholders, Shelby J.

Butterfield, the widow of Stephen F.

Butterfield, the Company's former Vice-Chairman and significant shareholder who passed away in April 2018, and from the Butterfield Family Trust, an estate planning trust for the family of Mr.

The shares were purchased at a discount to the closing market price of the Company's Class A common stock as of June 17, 2019, and the transaction was separately approved by the Company's Board of Directors.

Included in the shares repurchased during 2019 in the table above are a total of 180,000 shares of Class A common stock the Company purchased on June 17, 2019 from Shelby J.

Butterfield, a significant shareholder of the Company, and from the Butterfield Family Trust, an estate planning trust for the family of Stephen F.

Butterfield, the Company's former Vice-Chairman.

Included in the shares repurchased during 2020 are a total of 100,000 shares of Class A common stock the Company purchased on May 27, 2020 from Shelby J.

The shares purchased in 2019 and 2020 were purchased at a discount to the closing market price of the Company's Class A common stock as of June 17, 2019, and May 27, 2020, respectively, and the transactions were separately approved by the Company's Board of Directors.

Immediately prior to the Company's purchase of such shares from Ms.

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The Company's Board of Directors declared a first quarter 2021 cash dividend on the Company's Class A and Class B common stock of $0.22 per share.

The dividend will be paid on March 13, 2020, to shareholders of record at the close of business on February 28, 2020.

The dividend will be paid on March 15, 2021, to shareholders of record at the close of business on March 1, 2021.

The Company currently plans to continue making regular quarterly dividend payments, subject to future earnings, capital requirements, financial condition, and other factors.

In addition, the payment of dividends is subject to the terms of the Company’s outstanding Hybrid Securities, which generally provide that if the Company defers interest payments on those securities it cannot pay dividends on its capital stock.

Off-Balance Sheet Arrangements

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Allowance for Loan Losses

The allowance for loan losses represents management’s estimate of probable losses on loans.

This evaluation process is subject to numerous estimates and judgments.

The Company evaluates the appropriateness of the allowance for loan losses separately on each of its federally insured, private education, and consumer loan portfolios.

The allowance for the federally insured student 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.

In determining the appropriateness of the 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 a private education or consumer loan on nonaccrual status when the collection

of principal and interest is 90 days past due and charges off the loan and accrued interest when the collection of principal and interest is 120 days or 180 days past due, depending on the type of loan program.

The allowance for loan losses represents the Company’s estimate of the expected lifetime credit losses inherent in loan receivables as of the balance sheet date.

The adequacy of the allowance for loan losses is assessed quarterly and the assumptions and models used in establishing the allowance are evaluated regularly.

Because credit losses can vary substantially over time, estimating credit losses requires a number of assumptions about matters that are uncertain.

Such assumptions are discussed below, and such uncertainty is due in part to the fact that loans in the Company’s portfolio mature over the next 20 years (with a weighted average remaining life of 9.8 years), and actual credit losses will be affected by, among other things, future economic conditions and future personal financial situations for borrowers, over that extended time frame.

Changes in the Company’s assumptions affect “provision for loan losses” on the Company’s consolidated income statements and the “allowance for loan losses” contained within “loans and accrued interest receivable, net of allowance for loan losses” on the Company’s consolidated balance sheets.

For additional information regarding our allowance for loan losses, see note 3 of the notes to consolidated financial statements included in this report.

The Company estimates the allowance for loan losses for receivables that share similar risk characteristics based on a collective assessment using a combination of measurement models and management judgment.

The models consider factors such as historical trends in credit losses, recent portfolio performance, and forward-looking macroeconomic conditions.

The models vary by portfolio type including FFELP, private education, and consumer loans.

If management does not believe the models reflect lifetime expected credit losses for the portfolio, an adjustment is made to reflect management judgment regarding qualitative factors including economic uncertainty, observable changes in portfolio performance, and other relevant factors.

The Company’s allowance for credit losses is based on various assumptions including:

probability of default;

loss given default;

exposure at default;

net loss rates for its consumer portfolio;

contractual terms, including prepayments;

forecast period;

reversion method;

reversion period;

and macroeconomic factors, including unemployment rates, gross domestic product, and the consumer price index.

The allowance for loan losses is made at a specific point in time and based on relevant information as discussed above.

The allowance for loan losses is maintained at a level management believes is appropriate to provide for estimated probable credit losses inherent in the loan portfolios.

The allowance for loan losses is maintained at a level management believes is appropriate to provide for expected lifetime credit losses inherent in loan receivables as of the balance sheet date.

This evaluation is inherently subjective because it requires numerous estimates made by management.

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Changes in estimates could significantly affect the Company's recorded balance for the allowance for loan losses.

RECENT ACCOUNTING PRONOUNCEMENTS

Allowance for Loan Losses

In June 2016, the FASB issued accounting guidance regarding the measurement of credit losses on financial instruments, which changed the way entities recognize impairment of many financial assets by requiring immediate recognition of estimated credit losses expected to occur over the asset's remaining life.

The estimate of credit losses under the new guidance considers historical experience, current conditions, and reasonable and supportable forecasts of future conditions.

The new guidance provides significant flexibility and permits companies to use judgment in selecting the approach that is most appropriate in their circumstances.

This guidance was effective for the Company beginning January 1, 2020.

Prior to the effective date, the Company used an incurred loss model when calculating its allowance for loan losses.

The new guidance will primarily impact the allowance for loan losses related to the Company’s federally insured student loans, which represented approximately 97.7 percent of the Company’s total loan portfolio as of December 31, 2019 and for which the Company’s loss exposure is limited by the applicable federal government guarantee, private education loans, and consumer loans.

To calculate the allowance for loan losses, the Company has aggregated loans with similar risk characteristics into homogeneous pools based primarily on loan type and expects to use undiscounted cash flow and remaining life methodologies, which incorporate historical loss rates.

The historical loss rates are adjusted for reasonable and supportable economic forecasts over a specific period, then reverting to the historical loss average using a straight line method.

The national unemployment rate and the year over year change in gross domestic product are the key macroeconomic factors that are relevant to the Company's loan portfolio.

The Company also adjusts the historical loss rates for qualitative factors to bring the allowance for loan losses to the level management believes is appropriate.

The Company currently expects the impact upon adoption to increase the allowance for loan losses by $60 million to $80 million, which includes a reclassification of the non-accretable discount balance and premiums related to loans purchased with evidence of credit deterioration, and decrease retained earnings, net of tax, by $10 million to $20 million.

The Company is in the process of finalizing the review of the loss models, economic forecasts, and qualitative adjustments and the models will be refined as needed.

Future allowance for loan loss levels will depend on the characteristics of the Company's loan portfolio, economic conditions and forecasts, and other management judgments.

ACCOUNTING STANDARDS ISSUED BUT NOT YET ADOPTED

The following standard may have an impact on the Company’s consolidated financial statements and disclosures.

ASU 2019-12, Simplifying the Accounting for Income Taxes .

In December 2019, the Financial Accounting Standards Board issued a new accounting standard that simplifies the accounting for income taxes by removing several exceptions in the current standard and adding guidance to reduce complexity in certain areas.

The new standard clarifies that an entity may elect to, but is not required to, reflect an allocation of consolidated current and deferred tax expense for non-taxable legal entities that are treated as disregarded by taxing authorities in their separately issued financial statements.

The new standard is effective for fiscal years, and interim periods within those fiscal years, beginning after December 15, 2020.

The Company has determined to not reflect the allocation of income taxes in the financial statements of its disregarded entities, and thus the Company currently believes this standard will not have a significant impact on the Company’s consolidated financial statements.

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-K

Item 7. Management’s Discussion and Analysis