NELNET INC 10-Q

ITEM 2. MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS (Management’s Discussion and Analysis of Financial Condition and Results of Operations is for the three months ended March 31, 2021 and 2020. All dollars are in thousands, except per share amounts, unless otherwise noted.) The following discussion and analysis provides information that the Company’s management believes is relevant to an assessment and understanding of the consolidated results of operations and financial condition of the Company. The discussion should be read in conjunction with the Company’s consolidated financial statements included in the 2020 Annual Report. Forward-looking and cautionary statements This report contains forward-looking statements and information that are based on management's current expectations as of the date of this document. Statements that are not historical facts, including statements about the Company's plans and expectations for future financial condition, results of operations or economic performance, or that address management's plans and objectives for future operations, and statements that assume or are dependent upon future events, are forward-looking statements. The words “anticipate,” “assume,” “believe,” “continue,” “could,” “estimate,” “expect,” “forecast,” “future,” “intend,” “may,” “plan,” “potential,” “predict,” “scheduled,” “should,” “will,” “would,” and similar expressions, as well as statements in future tense, are intended to identify forward-looking statements. The forward-looking statements are based on assumptions and analyses made by management in light of management's experience and its perception of historical trends, current conditions, expected future developments, and other factors that management believes are appropriate under the circumstances. These statements are subject to known and unknown risks, uncertainties, assumptions, and other factors that may cause the actual results and performance to be materially different from any future results or performance expressed or implied by such forward-looking statements. These factors include, among others, the risks and uncertainties set forth in the “Risk Factors” section of the 2020 Annual Report and elsewhere in this report, and include such risks and uncertainties as: • risks and uncertainties related to the severity, magnitude, and duration of the coronavirus disease 2019 (“COVID-19”) pandemic, including changes in the macroeconomic environment and consumer behavior, restrictions on business, educational, individual, or travel activities intended to slow the spread of the pandemic, and volatility in market conditions resulting from the pandemic, including interest rates, the value of equities, and other financial assets; • risks related to the ability to successfully maintain and increase allocated volumes of student loans serviced by the Company under existing and any future servicing contracts with the U.S. Department of Education (the "Department"), which current contracts accounted for 27 percent of the Company's revenue in 2020, risks to the Company related to the Department's initiatives to procure new contracts for federal student loan servicing, including the pending and uncertain nature of the Department's NextGen and ISS procurement processes (under which awards of new NextGen contracts have been made to other service providers), the possibility that awards or evaluations of proposals may be challenged by various interested parties and may not be finalized or implemented for an extended period of time or at all, risks that the Company may not be successful in obtaining any of such potential new contracts, and risks related to the Company's ability to comply with agreements with third-party customers for the servicing of Federal Direct Loan Program, Federal Family Education Loan Program (the "FFEL Program" or "FFELP"), and private education and consumer loans; • loan portfolio risks such as interest rate basis and repricing risk resulting from the fact that the interest rate characteristics of the student loan assets do not match the interest rate characteristics of the funding for those assets, the risk of loss of floor income on certain student loans originated under the FFEL Program, risks related to the use of derivatives to manage exposure to interest rate fluctuations, uncertainties regarding the expected benefits from purchased securitized and unsecuritized FFELP, private education, and consumer loans, or investment interests therein, and initiatives to purchase additional FFELP, private education, and consumer loans, and risks from changes in levels of loan prepayment or default rates; • financing and liquidity risks, including risks of changes in the general interest rate environment, including the availability of any relevant money market index rate such as LIBOR or the relationship between the relevant money market index rate and the rate at which the Company's assets and liabilities are priced, and changes in the securitization and other financing markets for loans, including adverse changes resulting from unanticipated repayment trends on student loans in the Company's securitization trusts that could accelerate or delay repayment of the associated bonds, which may increase the costs or limit the availability of financings necessary to purchase, refinance, or continue to hold student loans; 26 • risks from changes in the terms of education loans and in the educational credit and services markets resulting from changes in applicable laws, regulations, and government programs and budgets, such as changes resulting from the Coronavirus Aid, Relief, and Economic Security Act (the "CARES Act") and the expected decline over time in FFELP loan interest income due to the discontinuation of new FFELP loan originations in 2010 and potential government initiatives or proposals to consolidate existing FFELP loans to the Federal Direct Loan Program, otherwise allow FFELP loans to be refinanced with Federal Direct Loan Program loans, or create additional loan forgiveness or broad debt cancellation programs; • risks related to a breach of or failure in the Company's operational or information systems or infrastructure, or those of third-party vendors, including cybersecurity risks related to the potential disclosure of confidential loan borrower and other customer information, the potential disruption of the Company's systems or those of third-party vendors or customers, and/or the potential damage to the Company's reputation resulting from cyber-breaches; • uncertainties inherent in forecasting future cash flows from student loan assets and related asset-backed securitizations; • risks and uncertainties of the expected benefits from the November 2020 launch of Nelnet Bank operations, including the ability to successfully conduct banking operations and achieve expected market penetration; • risks related to the expected benefits to the Company and to ALLO Communications LLC (“ALLO”) from the recapitalization and additional funding for ALLO and the Company’s continuing investment in ALLO, and risks related to investments in solar projects, including risks of not being able to realize tax credits which remain subject to recapture by taxing authorities; • risks and uncertainties related to other initiatives to pursue additional strategic investments, acquisitions, and other activities, such as the completed and additional planned transactions associated with the sale by Wells Fargo of its private education loan portfolio (including potential errors in converting loan servicing portfolio acquisitions to the Company's servicing platform), including activities that are intended to diversify the Company both within and outside of its historical core education-related businesses; and • risks and uncertainties associated with litigation matters and with maintaining compliance with the extensive regulatory requirements applicable to the Company's businesses, reputational and other risks, including the risk of increased regulatory costs resulting from the politicization of student loan servicing, and uncertainties inherent in the estimates and assumptions about future events that management is required to make in the preparation of the Company's consolidated financial statements. All forward-looking statements contained in this report are qualified by these cautionary statements and are made only as of the date of this document. Although the Company may from time to time voluntarily update or revise its prior forward-looking statements to reflect actual results or changes in the Company's expectations, the Company disclaims any commitment to do so except as required by law. OVERVIEW The Company is a diverse company with a purpose to serve others and a vision to make customers' dreams possible by delivering customer focused products and services. The largest operating businesses engage in loan servicing and education technology, services, and payment processing, and the Company also has a significant investment in communications. A significant portion of the Company's revenue is net interest income earned on a portfolio of federally insured student loans. The Company also makes investments to further diversify both within and outside of its historical core education-related businesses, including, but not limited to, investments in real estate, early-stage and emerging growth companies, and renewable energy. 27 GAAP Net Income and Non-GAAP Net Income, Excluding Adjustments The Company prepares its financial statements and presents its financial results in accordance with U.S. GAAP. However, it also provides additional non-GAAP financial information related to specific items management believes to be important in the evaluation of its operating results and performance. A reconciliation of the Company's GAAP net income (loss) to net income (loss), excluding derivative market value adjustments, and a discussion of why the Company believes providing this additional information is useful to investors, is provided below. Three months ended March 31, 2021 2020 GAAP net income (loss) attributable to Nelnet, Inc. $ 123,598 (40,532) Realized and unrealized derivative market value adjustments (38,809) 20,602 Tax effect (a) 9,314 (4,944) Net income (loss) attributable to Nelnet, Inc., excluding derivative market value adjustments (b) $ 94,103 (24,874) Earnings per share: GAAP net income (loss) attributable to Nelnet, Inc. $ 3.20 (1.01) Realized and unrealized derivative market value adjustments (1.01) 0.52 Tax effect (a) 0.25 (0.13) Net income (loss) attributable to Nelnet, Inc., excluding derivative market value adjustments (b) $ 2.44 (0.62) (a) The tax effects are calculated by multiplying the realized and unrealized derivative market value adjustments by the applicable statutory income tax rate. (b) "Derivative market value adjustments" includes both the realized portion of gains and losses (corresponding to variation margin received or paid on derivative instruments that are settled daily at a central clearinghouse) and the unrealized portion of gains and losses that are caused by changes in fair values of derivatives which do not qualify for "hedge treatment" under GAAP. "Derivative market value adjustments" does not include "derivative settlements" that represent the cash paid or received during the current period to settle with derivative instrument counterparties the economic effect of the Company's derivative instruments based on their contractual terms. The accounting for derivatives requires that changes in the fair value of derivative instruments be recognized currently in earnings, with no fair value adjustment of the hedged item, unless specific hedge accounting criteria is met. Management has structured all of the Company’s derivative transactions with the intent that each is economically effective; however, the Company’s derivative instruments do not qualify for hedge accounting. As a result, the change in fair value of derivative instruments is reported in current period earnings with no consideration for the corresponding change in fair value of the hedged item. Under GAAP, the cumulative net realized and unrealized gain or loss caused by changes in fair values of derivatives in which the Company plans to hold to maturity will equal zero over the life of the contract. However, the net realized and unrealized gain or loss during any given reporting period fluctuates significantly from period to period. The 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. Consequently, the Company reports this non-GAAP information because the Company believes that it provides additional information regarding operational and performance indicators that are closely assessed by management. There is no comprehensive, authoritative guidance for the presentation of such non-GAAP information, which is only meant to supplement GAAP results by providing additional information that management utilizes to assess performance. GAAP net income increased for the three months ended March 31, 2021 compared to the same period in 2020 primarily due to the following factors: • The recognition of $97.1 million ($73.8 million after tax) of certain expenses during the first quarter of 2020 as a result of the COVID-19 pandemic, consisting of the recognition of an incremental provision for loan losses of $63.0 million ($47.9 million after tax), provision expense of $26.3 million ($20.0 million after tax) related to the Company's investment in certain consumer loan beneficial interest securitizations, and $7.8 million ($5.9 million after tax) impairment expense on certain venture capital investments. • An increase of $45.5 million ($34.6 million after tax) in net interest income due to improved loan spread (including derivative settlements) on the Company's loan portfolio in the first quarter of 2021 as compared to 2020, including an increase in fixed rate floor income. • A net gain of $38.8 million ($29.5 million after tax) related to changes in the fair values of derivative instruments that do not qualify for hedge accounting in the first quarter of 2021 as compared to a net loss of $20.6 million ($15.7 million after tax) in 2020. 28 • A decrease of $23.8 million ($18.1 million after tax) in interest expense during the first quarter of 2021 as a result of the Company reversing a historical accrued interest liability on certain bonds, which liability the Company determined is no longer probable of being required to be paid. The liability was initially recorded when certain asset-backed securitizations were acquired in 2011 and 2013. • The recognition of $17.0 million ($13.0 million after tax) negative provision for loan losses on the Company's loan portfolio in the first quarter of 2021 as a result of management's estimate of certain continued improved economic conditions as of March 31, 2021 in comparison to management's estimate of certain economic conditions used to determine the allowance for loan losses as of December 31, 2020. • The recognition of net investment gains during the first quarter of 2021 of $8.5 million ($6.5 million after tax), primarily from the sale of certain real estate investments. • The recognition of a net loss by ALLO of $7.3 million ($5.5 million after tax) during the three months ended March 31, 2020. ALLO was deconsolidated in December 2020. • An increase in net income in the first quarter of 2021 as compared to 2020 of $3.6 million ($2.8 million after tax) and $2.5 million ($1.9 million after tax) from the Education Technology, Services, and Payment Processing and Loan Servicing and Systems operating segments, respectively. These factors were partially offset by the following items: • The recognition of a net loss of $19.9 million ($15.1 million after tax) during the first quarter of 2021 related to the Company's investments in ALLO. • The recognition of a $18.2 million ($13.8 million after tax) gain from the sale of consumer loans in the first quarter of 2020. • A decrease of $10.4 million ($7.9 million after tax) in net interest income due to the decrease in the average balance of loans in the first quarter of 2021 as compared to 2020 as a result of the amortization of the FFELP loan portfolio. Operating Results The Company earns net interest income on its loan portfolio, consisting primarily of FFELP loans, in its Asset Generation and Management ("AGM") operating segment. This segment is expected to generate a stable net interest margin and significant amounts of cash as the FFELP portfolio amortizes. As of March 31, 2021, AGM had a $19.0 billion loan portfolio that management anticipates will amortize over the next approximately 20 years and has a weighted average remaining life of 9.5 years. The Company actively works to maximize the amount and timing of cash flows generated by its FFELP portfolio and seeks to acquire additional loan assets to leverage its servicing scale and expertise to generate incremental earnings and cash flow. However, due to the continued amortization of the Company’s FFELP loan portfolio, over time, the Company's net income generated by the AGM segment will continue to decrease. The Company currently believes that in the short-term it will most likely not be able to invest the excess cash generated from the FFELP loan portfolio into assets that immediately generate the rates of return historically realized from that portfolio. In addition, the Company earns fee-based revenue through the following reportable operating segments: • Loan Servicing and Systems ("LSS") - referred to as Nelnet Diversified Services ("NDS") • Education Technology, Services, and Payment Processing ("ETS&PP") - referred to as Nelnet Business Services ("NBS") Further, the Company earned communications revenue through ALLO, formerly a majority owned subsidiary of the Company prior to a recapitalization of ALLO resulting in the deconsolidation of ALLO from the Company’s financial statements on December 21, 2020. The recapitalization of ALLO was 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 for federal deposit insurance from the Federal Deposit Insurance Corporation ("FDIC") and for a bank charter from the Utah Department of Financial Institutions ("UDFI") in connection with the establishment of Nelnet Bank, and Nelnet Bank launched operations. Nelnet Bank operates as an internet Utah-chartered industrial bank franchise focused on the private education loan marketplace, with a home office in Salt Lake City, Utah. Nelnet Bank’s operations are presented by the Company as a reportable operating segment. Other business activities and operating segments that are not reportable are combined and included in Corporate and Other Activities ("Corporate"). Corporate and Other Activities also includes income earned on certain investments and interest expense incurred on unsecured and other corporate related debt transactions. In addition, the Corporate segment includes direct incremental costs associated with Nelnet Bank prior to the UDFI’s approval for its bank charter and certain shared service and 29 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 $0.7 million (pre-tax) and $1.2 million (pre-tax) for the three months ended March 31, 2021 and 2020, respectively. The information below provides the operating results for each reportable operating segment for the three months ended March 31, 2021 and 2020 (dollars in millions). See "Results of Operations" for each reportable operating segment (except ALLO) under this Item 2 for additional detail. LSS (a) ETS&PP ALLO (b) AGM (c) Bank (c) (a) Revenue includes intersegment revenue. (b) On December 21, 2020, the Company deconsolidated ALLO from the Company’s consolidated financial statements. See note 2 of the notes to consolidated financial statements included in the 2020 Annual Report for a description of the transaction and a summary of the deconsolidation impact. Accordingly, there are no operating results for the (former) Communications operating segment in 2021. (c) Total revenue includes "net interest income" and "total other income/expense" from the Company's segment statements of operations, excluding the impact from changes in fair values of derivatives. Net income (loss) excludes changes in fair values of derivatives, net of tax. For information regarding the exclusion of the impact from changes in fair values of derivatives, see "GAAP Net Income and Non-GAAP Net Income, Excluding Adjustments" above. COVID-19 Beginning in March 2020, the 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 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. While certain COVID-19 vaccines have been approved and have become widely available for use in the U.S., the Company is unable to predict how widely utilized the vaccines will be or how effective they will be in preventing the spread of COVID-19. As a result, although the economy has improved since the pandemic began, it is still uncertain when or if normal pre-pandemic economic activity and business operations will resume. The results of operations discussion below should be read in conjunction with the Company’s 2020 Annual Report, including the information included in “Risk Factors – Operations – The COVID-19 pandemic has adversely impacted our results of operations, and is expected to continue to adversely impact our results of operations, as well as adversely impact our businesses, financial condition, and/or cash flows” and “Management’s Discussion and Analysis of Financial Condition and Results of Operations – Overview – Impacts of COVID-19 Pandemic.” 30 CONSOLIDATED RESULTS OF OPERATIONS An analysis of the Company's operating results for the three months ended March 31, 2021 compared to the same period in 2020 is provided below. The Company’s operating results are primarily driven by the performance of its existing loan portfolio and the revenues generated by its fee-based businesses and the costs to provide such services. The performance of the Company’s portfolio is driven by net interest income (which includes financing costs) and losses related to credit quality of the assets, along with the cost to administer and service the assets and related debt. The Company operates as distinct reportable operating segments as described above. For a reconciliation of the reportable segment operating results to the consolidated results of operations, see note 10 of the notes to consolidated financial statements included under Part I, Item 1 of this report. Since the Company monitors and assesses its operations and results based on these segments, the discussion following the consolidated results of operations is presented on a reportable segment basis (except for ALLO, which was deconsolidated from the Company's consolidated financial statements in December 2020). Three months ended March 31, 2021 2020 Additional information Loan interest $ 124,117 181,793 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 2021 as compared to 2020. Investment interest 4,986 7,398 Includes income from unrestricted interest-earning deposits and investments and funds in asset-backed securitizations. Decrease was due to a decrease in interest rates. Total interest income 129,103 189,191 Interest expense 27,773 134,118 Decrease was due primarily to a decrease in cost of funds and a decrease in the average balance of debt outstanding. In addition, during the first quarter of 2021, the Company reduced interest expense by $23.8 million as a result of reversing a historical accrued interest liability on certain bonds, which liability the Company determined is no longer probable of being required to be paid. The liability was initially recorded when certain asset-backed securitizations were acquired in 2011 and 2013. Net interest income 101,330 55,073 See table below for additional analysis. Less (negative provision) provision for loan losses (17,048) 76,299 The Company recognized negative provision in the first quarter of 2021 due to management's estimate of improved economic conditions as of March 31, 2021 in comparison to management's estimate of economic conditions used to determine the allowance for loan losses as of December 31, 2020. During the first quarter of 2020, the Company recognized an incremental provision of $63.0 million as a result of an increase in expected defaults due to the COVID-19 pandemic. Net interest income after provision for loan losses 118,378 (21,226) Other income/expense: LSS revenue 111,517 112,735 See LSS operating segment - results of operations. ETS&PP revenue 95,258 83,675 See ETS&PP operating segment - results of operations. Communications revenue — 18,181 As discussed above, on December 21, 2020, the Company deconsolidated ALLO from the Company’s consolidated financial statements. Other (4,604) 8,281 See table below for the components of "other." Gain on sale of loans — 18,206 The Company sold a portfolio of consumer loans in January 2020 and recognized a gain of $18.2 million. Impairment expense and provision for beneficial interests, net 2,436 (34,087) During the first quarter of 2020, the Company recognized impairments of $26.3 million and $7.8 million related to beneficial interest in consumer loan securitization investments and several venture capital investments, respectively. Such impairments were the result of impacts from the COVID-19 pandemic. During the first quarter of 2021, the Company reversed the remaining allowance of $2.4 million related to the beneficial interest in consumer loan securitizations due to continued improved economic conditions. Derivative settlements, net (4,304) 4,237 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 38,809 (20,602) Includes the realized and unrealized gains and losses that are caused by changes in fair values of derivatives which do not qualify for "hedge treatment" under GAAP. The majority of the derivative market value adjustments related to the changes in fair value of the Company's floor income interest rate swaps. Such changes reflect that a decrease in the forward yield curve during a reporting period results in a decrease in the fair value of the Company's floor income interest rate swaps, and an increase in the forward yield curve during a reporting period results in an increase in the fair value of the Company's floor income interest rate swaps. Total other income/expense 239,112 190,626 Cost of services: Cost to provide education technology, services, and payment processing services 27,052 22,806 Represents primarily direct costs to provide payment processing and instructional services in the ETS&PP operating segment. Increase in 2021 compared to 2020 was primarily due to additional instructional services costs. Cost to provide communications services — 5,582 As discussed above, on December 21, 2020, the Company deconsolidated ALLO from the Company’s consolidated financial statements. Total cost of services 27,052 28,388 31 Operating expenses: Salaries and benefits 115,791 119,878 Decrease was due to a decrease in contact center operations and support in the LSS operating segment as a result of federal student loan payments being suspended under the CARES Act and the deconsolidation of ALLO from the Company's consolidated financial statements. These decreases were partially offset by an increase in expenses in the ETS&PP operating segment due to an increase in headcount to support the growth of its customer base, the investment in the development of new technologies, and businesses it acquired in December 2020. Depreciation and amortization 20,184 27,648 Decrease was primarily due to the deconsolidation of ALLO from the Company's consolidated financial statements on December 21, 2020, resulting in no depreciation expense being recorded in 2021 for ALLO. Other expenses 36,698 43,384 Other expenses includes expenses necessary for operations, such as postage and distribution, consulting and professional fees, occupancy, communications, and certain information technology-related costs. Decrease was due to (i) cost savings in the LSS segment from an increase in the adoption of electronic borrower statements and correspondence and a decrease in printing and postage while loan payments are suspended as a result of COVID-19 borrower relief efforts; (ii) reduction of travel in the ETS&PP segment; and (iii) the deconsolidation of ALLO in December 2020. See the LSS and ETS&PP operating segment results of operations discussions for additional information. Total operating expenses 172,673 190,910 Income (loss) before income taxes 157,765 (49,898) Income tax (expense) benefit (34,861) 10,133 The effective tax rate was 22.0% and 20.0% for the three months ended March 31, 2021 and 2020, respectively. The Company currently expects its effective tax rate for 2021 will range between 21 and 23 percent. Net income (loss) 122,904 (39,765) Net loss (income) attributable to noncontrolling interests 694 (767) Net income (loss) attributable to Nelnet, Inc. $ 123,598 (40,532) 32 The following table summarizes the components of “net interest income” and “derivative settlements, net.” Derivative settlements represent the cash paid or received during the current period to settle with derivative instrument counterparties the economic effect of the Company's derivative instruments based on their contractual terms. Derivative accounting requires that net settlements with respect to derivatives that do not qualify for "hedge treatment" under GAAP be recorded in a separate income statement line item below net interest income. The Company maintains an overall risk management strategy that incorporates the use of derivative instruments to reduce the economic effect of interest rate volatility. As such, management believes derivative settlements for each applicable period should be evaluated with the Company’s net interest income as presented in the table below. Net interest income (net of settlements on derivatives) is a non-GAAP financial measure, and the Company reports this non-GAAP information because the Company believes that it provides additional information regarding operational and performance indicators that are closely assessed by management. There is no comprehensive, authoritative guidance for the presentation of such non-GAAP information, which is only meant to supplement GAAP results by providing additional information that management utilizes to assess performance. See note 4 of the notes to consolidated financial statements included under Part I, Item 1 of 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 2021 and 2020 periods presented in the table under the caption "Consolidated Financial Statement Impact Related to Derivatives - Statements of Operations" in note 4 and in the table below. Three months ended March 31, 2021 2020 Additional information Variable loan interest margin $ 61,444 30,367 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. For the three months ended March 31, 2021, variable loan interest margin also includes a reduction of interest expense of $23.8 million as a result of reversing a historical accrued interest liability on certain bonds, which liability the Company determined is no longer probable of being required to be paid. The liability was initially recorded when certain asset-backed securitizations were acquired in 2011 and 2013. Settlements on associated derivatives (19) 2,112 Represents the net settlements (paid) received related to the Company’s 1:3 basis swaps. Variable loan interest margin, net of settlements on derivatives 61,425 32,479 Fixed rate floor income 35,539 18,758 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 3, "Quantitative and Qualitative Disclosures About Market Risk - Interest Rate Risk" for additional information. Settlements on associated derivatives (4,285) 2,125 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 31,254 20,883 Investment interest 4,986 7,398 Corporate debt interest expense (639) (1,450) Includes interest expense on the Company's unsecured line of credit, asset-backed securities participation agreement, and Junior Subordinated Hybrid Securities. Decrease was due to a decrease in interest rates and in the average balance outstanding on the Company's unsecured line of credit. In addition, in October 2020, the Company redeemed all the outstanding $20.4 million of Hybrid Securities. These items were 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) $ 97,026 59,310 33 The following table summarizes the components of "other" in "other income/expense" on the consolidated statements of operations. Three months ended March 31, 2021 2020 Income/gains from investments, net $ 8,498 (1,025) Investment advisory services (a) 2,697 2,802 ALLO preferred return (b) 2,321 — Management fee revenue (c) 1,113 2,630 Borrower late fee income (d) 442 3,188 Loss from ALLO voting membership interests investment (e) (22,219) — Loss from solar investments (f) (1,679) (2,839) Other 4,223 3,525 $ (4,604) 8,281 (a) 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 March 31, 2021, 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 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. (b) Represents the Company's income on its preferred membership interests in ALLO, which was deconsolidated from the Company's financial statements in December 2020. As of March 31, 2021, the amount of preferred membership interests held by the Company was $129.7 million and earns a preferred annual return of 6.25 percent. (c) Represents revenue earned from providing administrative support and marketing services primarily to Great Lakes’ former parent company under a contract that expired in January 2021. (d) Represents borrower late fees earned by the AGM operating segment. The decrease in borrower late fees for the three months ended March 31, 2021 as compared to the same period in 2020 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 loss on its voting membership interests in ALLO. The Company accounts for its voting membership interests investment in ALLO under the Hypothetical Liquidation at Book Value ("HLBV") method of accounting. Applying the HLBV method of accounting, the Company will continue to recognize a significant portion of ALLO’s anticipated losses over the next several years due to expected investments by ALLO of substantial amounts in property and equipment to build its communications network and connect customers. (f) Represents the Company's share of income or loss from solar investments accounted for using the 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. 34 LOAN SERVICING AND SYSTEMS OPERATING SEGMENT – RESULTS OF OPERATIONS Loan Servicing Volumes As of December 31, 2019 March 31, 2020 June 30, 2020 September 30, 2020 December 31, 2020 March 31, 2021 Servicing volume (dollars in millions): Nelnet: Government $ 183,790 185,477 185,315 189,932 191,678 195,875 FFELP 33,185 32,326 31,392 31,122 30,763 30,084 Private and consumer 16,033 16,364 16,223 16,267 16,226 21,397 Great Lakes: Government 239,980 243,205 243,609 249,723 251,570 257,806 Total $ 472,988 477,372 476,539 487,044 490,237 505,162 Number of servicing borrowers: Nelnet: Government 5,574,001 5,498,872 5,496,662 5,604,685 5,645,946 5,664,094 FFELP 1,478,703 1,423,286 1,370,007 1,332,908 1,300,677 1,233,461 Private and consumer 682,836 670,702 653,281 649,258 636,136 882,477 Great Lakes: Government 7,396,657 7,344,509 7,346,691 7,542,679 7,605,984 7,637,270 Total 15,132,197 14,937,369 14,866,641 15,129,530 15,188,743 15,417,302 Number of remote hosted borrowers: 6,433,324 6,354,158 6,264,559 6,251,598 6,555,841 4,307,342 Government Loan Servicing Nelnet Servicing and Great Lakes' servicing contracts with the Department are currently scheduled to expire on June 14, 2021, but provide the potential for an additional six-month extension at the Department's discretion through December 14, 2021. The Consolidated Appropriations Act, 2021, signed into law on December 27, 2020, provides that the Department may extend the period of performance for the servicing contracts scheduled to expire on December 14, 2021 for up to two additional years to December 14, 2023. The Department is conducting a contract procurement process for a new framework for the servicing of all student loans owned by the Department. See note 12 of the notes to consolidated financial statements included under Part I, Item 1 of this report for additional information. Private Education Loan Servicing In December of 2020, Wells Fargo announced the sale of its approximately $10.0 billion portfolio of private education student loans representing approximately 445,000 borrowers. In conjunction with the sale, the Company was selected as servicer of the portfolio. During March 2021, approximately 261,000 borrowers were converted to the Company's servicing platform, with the remaining borrowers converted in April 2021. 35 Summary and Comparison of Operating Results Three months ended March 31, 2021 2020 Additional information Net interest income $ 11 273 Decrease was due to lower interest rates in 2021 as compared to 2020. Loan servicing and systems revenue 111,517 112,735 See table below for additional information. Intersegment servicing revenue 8,268 11,054 Represents revenue earned by the LSS operating segment as a result of servicing loans for the AGM and Nelnet Bank operating segments. Decrease in 2021 compared to 2020 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 1,113 2,630 Represents revenue earned from providing administrative support and marketing services primarily to Great Lakes’ former parent company under a contract that expired in January 2021. Total other income 120,898 126,419 Salaries and benefits 66,458 70,493 Decrease in 2021 compared to 2020 was due to a decrease in contact center operations and support as a result of federal student loan payments being suspended (through September 30, 2021) under the CARES Act. The Company currently expects salaries and benefits will increase as it prepares for the provisions of the CARES Act to expire. Depreciation and amortization 8,192 8,848 Decrease in 2021 compared to 2020 was due to certain purchases to integrate Great Lakes and expand servicing capacity becoming fully depreciated. Other expenses 13,285 17,489 Decrease in 2021 compared to 2020 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. The Company currently expects these costs will increase when the provisions of the CARES Act expire, currently scheduled for September 30, 2021. Decrease was also due to cost savings from an increase in the adoption of electronic borrower statements and correspondence. Intersegment expenses 16,890 16,239 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 104,825 113,069 Income before income taxes 16,084 13,623 Income tax expense (3,860) (3,269) Represents income tax expense at an effective tax rate of 24%. Net income $ 12,224 10,354 Before tax operating margin 13.3 % 10.8 % 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. Before tax operating margin increased in 2021 as compared to 2020 primarily due to operating expenses decreasing as a result of federal student loan payments being suspended under the CARES Act as discussed above. The Company currently expects these costs will increase as it prepares for the provisions of the CARES Act to expire. 36 Loan servicing and systems revenue Three months ended March 31, 2021 2020 Additional information Government servicing - Nelnet $ 34,872 38,650 Represents revenue from Nelnet Servicing's Department servicing contract. Decrease in 2021 compared to 2020 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. Government servicing - Great Lakes 43,302 46,446 Represents revenue from Great Lakes' Department servicing contract. Decrease in 2021 compared to 2020 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. Private education and consumer loan servicing 8,548 8,609 Decrease in 2021 compared to 2020 was due to a decrease in the number of legacy 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. The decrease was partially offset by an increase in borrowers as a result of the Wells Fargo private education loan conversion activity in March 2021. The private education loans converted in 2021 reflect revenue from the conversation date, and thus does not reflect a full quarter of revenue. See "Private Education Loan Servicing" included above under "Loan Servicing and Systems Operating Segment - Results of Operations." FFELP servicing 4,670 5,614 Decrease in 2021 compared to 2020 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. Over time, FFELP servicing revenue will continue to decrease as third-party customers' FFELP portfolios pay off. Software services 8,454 11,318 The decrease in revenue in 2021 as compared to 2020 was due to many of the services provided under the Company's remote hosted servicing and system support contract with Great Lakes' former parent, representing 2.3 million borrowers, decreasing and/or expiring in January 2021. This decrease in revenue was partially offset by an increase in the number of remote hosted servicing borrowers in 2021 as compared to 2020. Outsourced services 11,671 2,098 The majority of this revenue relates to providing contact center and back office operational outsourcing activities. Increase in 2021 compared to 2020 was due to shorter-term contracts with state agencies to process unemployment claims and conduct certain health tracing support activities (including vaccination registration support). Revenue from providing these services to state agencies was $9.7 million during the three months ended March 31, 2021. Loan servicing and systems revenue $ 111,517 112,735 37 EDUCATION TECHNOLOGY, SERVICES, AND PAYMENT PROCESSING OPERATING SEGMENT – RESULTS OF OPERATIONS As discussed further in the Company's 2020 Annual Report, this segment of the Company’s business is subject to seasonal fluctuations which correspond, or are related to, the traditional school year. Based on the timing of revenue recognition and when expenses are incurred, revenue and pre-tax operating margin are higher in the first quarter as compared to the remainder of the year. On December 31, 2020, the Company acquired HigherSchool Instructional Services, a services company that provides supplemental instructional services and educational professional development for K-12 schools in New York City, and CD2 LLC, a platform technology solution that includes learning management, collaboration/workflow, gamification, customer management/document storage, and employee boarding. The results of HigherSchool Instructional Services and CD2 LLC are reported in the Company’s consolidated financial statements from the date of acquisition. Revenue recognized by these acquisitions during the three months ended March 31, 2021 was $8.0 million. Summary and Comparison of Operating Results Three months ended March 31, 2021 2020 Additional information Net interest income $ 263 1,974 Represents interest income on tuition funds held in custody for schools. Decrease was due to a decrease in interest rates in 2021 as compared with 2020. 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 95,258 83,675 See table below for additional information. Intersegment revenue 3 11 Total other income 95,261 83,686 Cost to provide education technology, services, and payment processing services 27,052 22,806 See table below for additional information. Salaries and benefits 25,941 23,696 Increase in 2021 compared to 2020 was due to an increase in headcount to support the growth of the customer base, the investment in the development of new technologies, and the acquisitions of HigherSchool Instructional Services and CD2 LLC. Depreciation and amortization 3,071 2,387 Represents primarily amortization of intangible assets from prior business acquisitions. Amortization of intangible assets related to business acquisitions was $2.9 million and $2.2 million for the three months ended March 31, 2021 and 2020, respectively. Other expenses 4,822 6,092 Decrease in 2021 compared to 2020 was due to a reduction of travel expenses due to COVID-19. In addition, during the three months ended March 31, 2020, the Company recognized an additional expense to increase the allowance for doubtful accounts for the increased risk of uncollectible balances due to uncertain economic conditions resulting from the COVID-19 pandemic. Intersegment expenses, net 3,664 3,327 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 37,498 35,502 Income before income taxes 30,974 27,352 Income tax expense (7,434) (6,565) Represents income tax expense at an effective tax rate of 24%. Net income $ 23,540 20,787 38 Education technology, services, and payment processing revenue The following table provides disaggregated revenue by service offering and before tax operating margin for each reporting period. Three months ended March 31, 2021 2020 Additional information Tuition payment plan services $ 29,550 31,587 Revenue recognized during the first three months of 2021 was primarily related to payment plans for the 2020-2021 academic year for K-12 schools and the spring 2021 semester for institutions of higher education. Revenues from tuition payment plans for these terms were impacted by COVID-19 resulting in lower volumes of plans compared to historical periods. Payment processing 33,038 31,742 Payment volumes in the first quarter of 2021 increased as compared to 2020 in both the K-12 and higher education markets. The increase in volumes in the higher education market was driven primarily by growth in volumes from existing customers. Education technology and services 32,322 20,054 Increase in 2021 compared to 2020 was primarily the result of the 2020 acquisitions. Additionally, revenues from the Company’s application and enrollment products, grant and aid assessments, and FACTS Education instructional and professional development services increased compared to the prior year. Other 348 292 Education technology, services, and payment processing revenue 95,258 83,675 Cost to provide education technology, services, and payment processing services 27,052 22,806 Costs primarily relate to payment processing revenue and such costs decrease/increase in relationship to payment revenue. Costs to provide instructional services are also included as a component of this expense and were the primary driver in the increase in 2021 compared to 2020 due to the acquisition of HigherSchool Instructional Services and growth in the FACTS Education Solutions division. Net revenue $ 68,206 60,869 Before tax operating margin 45.4 % 44.9 % Before tax operating margin is a measure of before tax operating profitability as a percentage of revenue, and for the ETS&PP segment is calculated as income before income taxes divided by net revenue. The Company uses this metric to monitor and assess the segment’s performance, manage operating costs, identify and evaluate business trends affecting the segment, and make strategic decisions, and believes that it facilitates an understanding of the operating performance of the segment and provides a meaningful comparison of the results of operations between periods. Proposed Community College Legislation On April 28, 2021, President Biden announced the American Families Plan, which includes a proposal for Congress to approve funding to allow students to enroll in community college at no tuition cost. If such proposal were to become effective, this segment's revenue earned from community colleges would be adversely impacted. Community colleges represented approximately 10% of total segment revenues (and net revenue) for the year ended December 31, 2020. 39 ASSET GENERATION AND MANAGEMENT OPERATING SEGMENT – RESULTS OF OPERATIONS Loan Portfolio As of March 31, 2021, the AGM operating segment had a $19.0 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 9.5 years. For a summary of the Company’s loan portfolio as of March 31, 2021 and December 31, 2020, see note 2 of the notes to consolidated financial statements included under Part I, Item 1 of this report. Loan Activity The following table sets forth the activity of loans: Three months ended March 31, 2021 2020 Beginning balance $ 19,559,108 20,798,719 Loan acquisitions: Federally insured student loans 64,731 349,061 Private education loans 23,038 47,605 Consumer loans 19,456 62,831 Total loan acquisitions 107,225 459,497 Repayments, claims, capitalized interest, and other (406,565) (312,579) Consolidation loans lost to external parties (229,545) (216,327) Consumer loans sold — (124,245) Ending balance $ 19,030,223 20,605,065 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 March 31, 2021, the Company’s ownership correlates to approximately $500 million and $230 million of federally insured and consumer loans, respectively, included in these securitizations. The Company's federally insured student loan acquisitions include the purchase of rehabilitated loans purchased from guaranty agencies. After a guaranty agency rehabilitates a federally insured student loan, the agency sells the rehabilitated loan to a private lender, such as the Company. On March 30, 2021, the Department suspended collections on defaulted federally insured student loans held by guaranty agencies and reduced the interest rate on such loans to zero percent, effectively suspending interest payments. The collections pause and adjusted interest rate are both retroactive to March 13, 2020, when the President first declared a national emergency for the COVID-19 pandemic. The Company currently believes these relief efforts will negatively impact the amount of rehabilitated loans the Company will have the opportunity to purchase in future periods. Allowance for Loan Losses and Loan Delinquencies For a summary of the Company's activity in the allowance for loan losses for the three months ended March 31, 2021 and 2020, and a summary of the Company's loan status and delinquency amounts as of March 31, 2021, December 31, 2020, and March 31, 2020, see note 2 of the notes to consolidated financial statements included under Part I, Item 1 of this report. The Company recorded a negative provision for loan losses for its federally insured and consumer loan portfolios of $7.5 million and $11.4 million, respectively, for the three months ended March 31, 2021 due to management's estimate of certain continued improved economic conditions (including the improvement in certain macroeconomic variables (unemployment rates, gross domestic product, and consumer price index) used in the Company's loan loss models) as of March 31, 2021 in comparison to management's estimate of economic conditions used to determine the allowance for loan losses as of December 31, 2020. The Company recorded a $1.4 million provision expense on its private education loan portfolio during the three months ended March 31, 2021 as a result of an increase of loans in forbearance, which was partially offset by management's estimate of certain continued improved economic conditions as of March 31, 2021 in comparison to management's estimate of economic conditions used to determine the allowance for loan losses as of December 31, 2020. AGM's total allowance for loan losses of $156.7 million at March 31, 2021 represents reserves equal to 0.7% of AGM's federally insured loans (or 25.5% of the risk sharing component of the loans that is not covered by the federal guaranty), 6.6% of AGM's private education loans, and 12.8% of AGM's consumer loans. 40 Loan Spread Analysis The following table analyzes the loan spread on AGM’s portfolio of loans, which represents the spread between the yield earned on loan assets and the costs of the liabilities and derivative instruments used to fund the assets. The spread amounts included in the following table are calculated by using the notional dollar values found in the table under the caption "Net interest income after provision for loan losses, net of settlements on derivatives" below, divided by the average balance of loans or debt outstanding. Three months ended March 31, 2021 2020 Variable loan yield, gross 2.71 % 3.98 % Consolidation rebate fees (0.84) (0.83) Discount accretion, net of premium and deferred origination costs amortization 0.00 0.01 Variable loan yield, net 1.87 3.16 Loan cost of funds - interest expense (a) (1.07) (2.58) Loan cost of funds - derivative settlements (b) (c) (0.00 ) 0.04 Variable loan spread 0.80 0.62 Fixed rate floor income, gross 0.74 0.36 Fixed rate floor income - derivative settlements (b) (d) (0.09) 0.04 Fixed rate floor income, net of settlements on derivatives 0.65 0.40 Core loan spread 1.45 % 1.02 % Average balance of AGM's loans $ 19,494,002 20,793,758 Average balance of AGM's debt outstanding 19,156,797 20,616,771 (a) In the first quarter of 2021, the Company reversed a historical accrued interest liability of $23.8 million on certain bonds, which liability the Company determined is no longer probable of being required to be paid. The liability was initially recorded when certain asset-backed securitizations were acquired in 2011 and 2013. The reduction of this liability is reflected in (a reduction of) "interest on bonds and notes payable and bank deposits" in the consolidated statements of operations and the impact of this reduction to interest expense was excluded in the table above. (b) Derivative settlements represent the cash paid or received during the current period to settle with derivative instrument counterparties the economic effect of the Company's derivative instruments based on their contractual terms. Derivative accounting requires that net settlements with respect to derivatives that do not qualify for "hedge treatment" under GAAP be recorded in a separate income statement line item below net interest income. The Company maintains an overall risk management strategy that incorporates the use of derivative instruments to reduce the economic effect of interest rate volatility. As such, management believes derivative settlements for each applicable period should be evaluated with the Company’s net interest income (loan spread) as presented in this table. The Company reports this non-GAAP information because it believes that it provides additional information regarding operational and performance indicators that are closely assessed by management. There is no comprehensive, authoritative guidance for the presentation of such non-GAAP information, which is only meant to supplement GAAP results by providing additional information that management utilizes to assess performance. See note 4 of the notes to consolidated financial statements included under Part I, Item 1 of 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 2021 and 2020 periods presented in the table under the caption "Consolidated Financial Statement Impact Related to Derivatives - Statements of Operations" in note 4 and in this table. A reconciliation of core loan spread, which includes the impact of derivative settlements on loan spread, to loan spread without derivative settlements follows. Three months ended March 31, 2021 2020 Core loan spread 1.45 % 1.02 % Derivative settlements (1:3 basis swaps) 0.00 (0.04) Derivative settlements (fixed rate floor income) 0.09 (0.04) Loan spread 1.54 % 0.94 % (c) Derivative settlements consist of net settlements (paid) received related to the Company’s 1:3 basis swaps. (d) Derivative settlements consist of net settlements (paid) received related to the Company’s floor income interest rate swaps. 41 A trend analysis of AGM's core and variable loan spreads 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 3, “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 increased during the three months ended March 31, 2021 compared to the same period in 2020 due to a narrowing 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 quarter of 2020 was the result of a significant decrease in interest rates during March 2020. In a declining interest rate environment, 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 resets on the Company's debt that occurs either monthly or quarterly. See Item 3, “Quantitative and Qualitative Disclosures About Market Risk - Interest Rate Risk,” which provides additional detail on the AGM’s FFELP student loan assets and related funding for those assets. The difference between variable loan spread and core loan spread is fixed rate floor income earned on a portion of AGM's federally insured student loan portfolio. A summary of fixed rate floor income and its contribution to core loan spread follows: Three months ended March 31, 2021 2020 Fixed rate floor income, gross $ 35,539 18,758 Derivative settlements (a) (4,285) 2,125 Fixed rate floor income, net $ 31,254 20,883 Fixed rate floor income contribution to spread, net 0.65 % 0.40 % (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. The increase in gross fixed rate floor income for the three months ended March 31, 2021 compared to the same period in 2020 was due to lower interest rates in 2021 as compared to 2020. The Company has a portfolio of derivative instruments in which 42 the Company pays a fixed rate and receives a floating rate to economically hedge a portion of loans earning fixed rate floor income. The change from being in a net positive settlement position on such derivatives during the first quarter of 2020 to being in a net negative settlement position during the first quarter of 2021 was due to a decrease in interest rates. See Item 3, “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. Interest Rate Risk - Replacement of LIBOR as a Benchmark Rate On March 5, 2021, the ICE Benchmark Administration Limited (the “IBA”), which administers LIBOR, published the results of a consultation confirming its intention to cease the publication of LIBOR (i) after June 30, 2023 in the case of U.S. Dollar LIBOR rates for one-month, three-month, and certain other tenors, and (ii) after December 31, 2021 in all other cases. Also on March 5, 2021, the United Kingdom’s Financial Conduct Authority, which regulates the IBA, announced that it does not intend to sustain LIBOR by requiring panel banks to continue providing quotations of LIBOR beyond the dates for which they have notified their departure from IBA’s LIBOR quotation scheme, or to require IBA to publish LIBOR beyond such dates. As a result, immediately after the announced LIBOR discontinuation dates specified above, respectively, LIBOR will no longer be representative of the underlying market and economic reality that the rates are intended to measure. As of March 31, 2021, the interest earned on a principal amount of $17.3 billion of the Company’s FFELP student loan asset portfolio was indexed to one-month LIBOR, and the interest paid on a principal amount of $16.7 billion of the Company’s FFELP student loan asset-backed debt securities was indexed to one-month or three-month LIBOR. In addition, the Company’s derivative financial instrument transactions used to manage LIBOR interest rate risks are indexed to LIBOR. New LIBOR contracts are generally not expected to be entered into after December 31, 2021. 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" in the Company's 2020 Annual Report for additional information. Summary and Comparison of Operating Results Three months ended March 31, 2021 2020 Additional information Net interest income (expense) after provision for loan losses $ 116,922 (23,622) See table below for additional analysis. Other income 445 3,215 Represents primarily borrower late fees. The decrease in borrower late fees in 2021 compared to 2020 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. Gain on sale of loans — 18,206 The Company sold a portfolio of consumer loans in January 2020 and recognized a gain of $18.2 million. Impairment expense and provision for beneficial interests, net 2,436 (26,303) 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 first quarter of 2021, $2.4 million of such provision was reversed due to improved economic conditions. Derivative settlements, net (4,304) 4,237 The Company maintains an overall risk management strategy that incorporates the use of derivative instruments to reduce the economic effect of interest rate volatility. Derivative settlements for each applicable period should be evaluated with the Company's net interest income as reflected in the table below. Derivative market value adjustments, net 38,809 (20,602) Includes the realized and unrealized gains and losses that are caused by changes in fair values of derivatives which do not qualify for "hedge treatment" under GAAP. The majority of the derivative market value adjustments related to the changes in fair value of the Company's floor income interest rate swaps. Such changes reflect that a decrease in the forward yield curve during a reporting period results in a decrease in the fair value of the Company's floor income interest rate swaps, and an increase in the forward yield curve during a reporting period results in an increase in the fair value of the Company's floor income interest rate swaps. Total other income/expense 37,386 (21,247) Salaries and benefits 495 443 Other expenses 3,777 3,717 The primary component of other expenses is servicing fees paid to third parties. Intersegment expenses 8,427 11,916 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 2021 compared to 2020 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. 43 Total operating expenses 12,699 16,076 Total operating expenses were 26 basis points and 31 basis points of the average balance of loans for the three months ended March 31, 2021 and 2020, respectively. The decrease in 2021 as compared to 2020 was due to a decrease in certain servicing activities due to borrower relief initiatives and policies as a result of the COVID-19 pandemic. Income (loss) before income taxes 141,609 (60,945) Income tax (expense) benefit (33,987) 14,627 Represents income tax (expense) benefit at an effective tax rate of 24%. Net income (loss) $ 107,622 (46,318) Additional information: Net income (loss) $ 107,622 (46,318) 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 increase in GAAP and non-GAAP net income was due to (i) an increase in core loan spread; (ii) a decrease in interest expense in 2021 as a result of reversing a historical accrued interest liability on certain bonds; and (iii) the recognition of a negative provision in the first quarter of 2021 related to loans and consumer loan residual investments as compared to provision expense on such assets in 2020 as a result of the COVID-19 pandemic. These items were partially offset by (i) a decrease in the average balance of loans in 2021 as compared to 2020 and (ii) a gain in 2020 from the sale of consumer loans. Derivative market value adjustments, net (38,809) 20,602 Tax effect 9,314 (4,944) Net income (loss), excluding derivative market value adjustments $ 78,127 (30,660) 44 Net interest income after provision for loan losses, net of settlements on derivatives The following table summarizes the components of "net interest income (expense) after provision for loan losses" and "derivative settlements, net." Three months ended March 31, 2021 2020 Additional information Variable interest income, gross $ 129,170 205,512 Decrease in 2021 compared to 2020 was due to a decrease in the gross yield earned on loans and a decrease in the average balance of loans. Consolidation rebate fees (41,073) (43,137) Decrease in 2021 compared to 2020 was due to a decrease in the average consolidation loan balance. Discount accretion, net of premium and deferred origination costs amortization 118 660 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 88,215 163,035 Interest on bonds and notes payable (26,771) (132,668) Decrease in 2021 compared to 2020 was due to a decrease in cost of funds and a decrease in the average balance of debt outstanding. In addition, during the first quarter of 2021, the Company reduced interest expense by $23.8 million as a result of reversing a historical accrued interest liability on certain bonds. Derivative settlements, net (a) (19) 2,112 Derivative settlements include the net settlements (paid) received related to the Company’s 1:3 basis swaps. Variable loan interest margin, net of settlements on derivatives (a) 61,425 32,479 Fixed rate floor income, gross 35,539 18,758 Fixed rate floor income increased in 2021 compared to 2020 due to lower interest rates in 2021 as compared to 2020. Derivative settlements, net (a) (4,285) 2,125 Derivative settlements include the settlements (paid) received related to the Company's floor income interest rate swaps. The change from being in a net positive settlement position on such derivatives during the first quarter of 2020 to being in a net negative settlement position during the first quarter of 2021 was due to a decrease in interest rates. Fixed rate floor income, net of settlements on derivatives 31,254 20,883 Core loan interest income (a) 92,679 53,362 Investment interest 2,648 4,133 Decrease in 2021 compared to 2020 was due to lower interest rates and lower weighted average cash and restricted cash balances in 2021 as compared to 2020. Intercompany interest (179) (581) Decrease in 2021 compared to 2020 was due to lower interest rates and lower weighted average debt outstanding in 2021 as compared to 2020. Provision for loan losses - federally insured loans 7,483 (39,323) 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 (1,431) (9,800) Provision for loan losses - consumer loans 11,418 (27,176) Net interest income (loss) after provision for loan losses (net of settlements on derivatives) (a) $ 112,618 (19,385) Increase in 2021 as compared to 2020 was due to (i) an increase in core loan spread; (ii) a decrease in interest expense in 2021 as a result of reversing a historical accrued interest liability on certain bonds; and (iii) the recognition of a negative provision for loan losses in 2021 as compared to provision for loan losses in 2020 as a result of the COVID-19 pandemic. These items were partially offset by a decrease in the average balance of loans. (a) Derivative settlements represent the cash paid or received during the current period to settle with derivative instrument counterparties the economic effect of the Company's derivative instruments based on their contractual terms. Derivative accounting requires that net settlements on derivatives that do not qualify for "hedge treatment" under GAAP be recorded in a separate income statement line item below net interest income. The Company maintains an overall risk management strategy that incorporates the use of derivative instruments to reduce the economic effect of interest rate volatility. As such, management believes derivative settlements for each applicable period should be evaluated with the Company’s net interest income as presented in this table. Core loan interest income and net interest income after provision for loan losses (net of settlements on derivatives) are non-GAAP financial measures, and the Company reports this non-GAAP information because the Company believes that it provides additional information regarding operational and performance indicators that are closely assessed by management. There is no comprehensive, authoritative guidance for the presentation of such non-GAAP information, which is only meant to supplement GAAP results by providing additional information that management utilizes to assess performance.. See note 4 of the notes to consolidated financial statements included under Part I, Item 1 of 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 2021 and 2020 periods presented in the table under the caption "Consolidated Financial Statement Impact Related to Derivatives - Statements of Operations" in note 4 and in this table. 45 NELNET BANK OPERATING SEGMENT – RESULTS OF OPERATIONS Loan Portfolio As of March 31, 2021, Nelnet Bank had a $79.2 million loan portfolio, consisting of private education loans. As of March 31, 2021, Nelnet Bank's allowance for loan losses on its portfolio was $0.7 million, which represents a reserve equal to 0.9% of Nelnet Bank's private education loan portfolio. There were no charge offs recognized by the bank during the three months ended March 31, 2021. The following table sets forth the activity in Nelnet Bank's loan portfolio: Three months ended March 31, 2021 Beginning balance: $ 17,543 Originations 64,909 Repayments (1,995) Sales to AGM segment (1,226) Ending balance: $ 79,231 Deposits As of March 31, 2021, Nelnet Bank had $190.3 million of deposits. All of Nelnet Bank’s deposits are interest-bearing deposits and consist of brokered certificates of deposit (CDs), intercompany savings deposits, and retail and other savings deposits and CDs. The intercompany deposits are deposits from Nelnet, Inc. (Parent Company) and its subsidiaries and include a pledged deposit of $40.0 million from Nelnet, Inc. (Parent Company), as required under the Capital and Liquidity Maintenance Agreement with the FDIC, deposits required for intercompany transactions, operating deposits, and Nelnet Business Services custodial deposits consisting of tuition payments collected which are subsequently remitted to the appropriate school. Retail and other deposits include savings deposits from Educational 529 College Savings and Health Savings plans and commercial and institutional CDs. Union Bank and Trust Company ("Union Bank"), a related party, is the program manager for the College Savings plans. Average Balance Sheet The following table reflects the rates earned on interest-earning assets and paid on interest-bearing liabilities. Three months ended March 31, 2021 Balance Rate Average assets Private education loans $ 43,746 3.37 % Cash and investments 215,613 1.91 Total interest-earning assets 259,359 2.15 % Non-interest-earning assets 6,541 Total assets $ 265,900 Average liabilities and equity Brokered deposits 2,984 0.55 % Intercompany deposits 56,684 0.28 Retail and other deposits 101,462 0.60 Total interest-bearing liabilities 161,130 0.49 % Non-interest-bearing liabilities 2,870 Equity 101,900 Total liabilities and equity $ 265,900 46 Regulatory Capital Requirements Under the regulatory framework for prompt corrective action, Nelnet Bank is subject to various regulatory capital requirements administered by the FDIC and the UDFI and must meet specific capital standards. Failure to meet minimum capital requirements can initiate certain mandatory and possibly additional discretionary actions by regulators that, if undertaken, could have a direct material adverse effect on Nelnet Bank's business, results of operations, and financial condition. On January 1, 2020, the Community Bank Leverage Ratio ("CBLR") framework, as issued jointly by the OCC, the Federal Reserve Board, and the FDIC, became effective. Any banking organization with total consolidated assets of less than $10 billion, limited amounts of certain types of assets and off-balance sheet exposures, and a community bank leverage ratio greater than 9% may opt into the CBLR framework quarterly. The CBLR framework allows banks to satisfy capital standards and be considered "well capitalized" under the prompt corrective action framework if their leverage ratio is greater than 9%, unless the banking organization's federal banking agency determines that the banking organization's risk profile warrants a more stringent leverage ratio. The FDIC has ordered Nelnet Bank to maintain at least a 12% leverage ratio. Nelnet Bank has opted into the CBLR framework for the quarter ended March 31, 2021 with a leverage ratio of 38.6%. Nelnet Bank intends to maintain at all times regulatory capital levels that meet both the minimum level necessary to be considered “well capitalized” under the FDIC’s prompt corrective action framework and the minimum level required by the FDIC. Summary of Operating Results On November 2, 2020, Nelnet Bank obtained final approval for federal deposit insurance from the FDIC and for a bank charter from the UDFI and Nelnet Bank launched operations. Nelnet Bank's operations are presented by the Company as a reportable operating segment. Costs associated with Nelnet Bank prior to November 2, 2020 are included in the Corporate operating segment. In addition, certain shared service and support costs incurred by the Company are not and will not be reflected as part of the Nelnet Bank operating segment through 2023 (the bank's de novo period). The shared service and support costs incurred by the Company related to Nelnet Bank and not reflected in the bank's operating segment were $0.7 million for the three months ended March 31, 2021. Three months ended March 31, 2021 Additional information Total interest income $ 1,376 Represents interest earned on Nelnet Bank's private education student loans and investments. Interest expense 194 Represents interest expense on deposits. Net interest income 1,182 Less: Provision for loan losses 422 Represents provision expense during the period, primarily related to loans originated during the current period. Net interest income after provision for loan losses 760 Other income 22 Salaries and benefits 1,488 Represents salaries and benefits of Nelnet Bank associates and third-party contract labor. Other expenses 545 Represents various expenses such as postage, consulting and professional fees, occupancy, certain information technology-related costs, insurance, marketing, and other operating expenses. Intersegment expenses 3 Represents servicing costs paid to the LSS operating segment. Total operating expenses 2,036 Loss before income taxes (1,254) Income tax benefit 286 Represents income tax benefit at an effective tax rate of 22.8%. Net loss $ (968) 47 LIQUIDITY AND CAPITAL RESOURCES The Company’s Loan Servicing and Systems, and Education Technology, Services, and Payment Processing operating segments are non-capital intensive and both produce positive operating cash flows. As such, a minimal amount of debt and equity capital is allocated to these segments and any liquidity or capital needs are satisfied using cash flow from operations. Therefore, the Liquidity and Capital Resources discussion is concentrated on the Company’s liquidity and capital needs to meet existing debt obligations in the Asset Generation and Management operating segment. Sources of Liquidity The Company has historically generated positive cash flow from operations. For the year ended December 31, 2020 and the three months ended March 31, 2021, the Company’s net cash provided by operating activities was $212.8 million and $48.7 million, respectively. As of March 31, 2021, the Company had cash and cash equivalents of $144.2 million. The Company also had a portfolio of student loan asset-backed securities (classified as available-for-sale) with a fair value of $379.2 million as of March 31, 2021. The Company invests excess cash in student loan asset-backed securities, and the cash proceeds from the sale of these securities could be used for operating and/or other investing opportunities. Cash and investments held by Nelnet Bank are generally not available for Company activities outside of Nelnet Bank. Excluding Nelnet Bank, cash and cash equivalents and the fair value of student-loan asset backed securities as of March 31, 2021 was $120.5 million and $187.9 million, respectively. As of March 31, 2021, the Company had participated $113.5 million of its student-loan asset backed 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 March 31, 2021, there was no amount outstanding on the unsecured line of credit and $455.0 million was available for future use. The line of credit provides that the Company may increase the aggregate financing commitments, through the existing lenders and/or through new lenders, up to a total of $550.0 million, subject to certain conditions. In addition, the Company has a $22.0 million secured line of credit agreement that matures on May 30, 2022. As of March 31, 2021, the secured line of credit had $5.0 million outstanding and $17.0 million was available for future use. In addition, the Company has retained certain of its own asset-backed securities upon their initial issuance or repurchased certain of its own asset-backed securities (bonds and notes payable) in the secondary market. For accounting purposes, these notes are eliminated in consolidation and are not included in the Company's consolidated financial statements. However, these securities remain legally outstanding at the trust level and the Company could sell these notes to third parties or redeem the notes at par as cash is generated by the trust estate. Upon a sale of these notes to third parties, the Company would obtain cash proceeds equal to the market value of the notes on the date of such sale. As of March 31, 2021, the Company holds $24.3 million (par value) of its own asset-backed securities. The Company intends to use its liquidity position to capitalize on market opportunities, including FFELP, private education, and consumer loan acquisitions (or investment interests therein); strategic acquisitions and investments; and capital management initiatives, including stock repurchases, debt repurchases, and dividend distributions. The timing and size of these opportunities will vary and will have a direct impact on the Company's cash and investment balances. Cash Flows During the three months ended March 31, 2021, the Company generated $48.7 million in operating activities, compared to using $144.5 million for the same period in 2020. The increase in such cash flows from operating activities was due to: • The increase in net income; • Adjustments to net income for the impact of gains from the sale of loans during the three months ended March 31, 2020 and the non-cash change in deferred income taxes; • Proceeds from the Company's clearinghouse for margin payments on derivatives for the three months ended March 31, 2021 compared to payments to the clearinghouse in 2020; and • The impact of changes to the due to customers liability account, other liabilities, and accrued interest receivable during the three months ended March 31, 2021 as compared to the same period in 2020. These factors were partially offset by: • The adjustments to net income for derivative market value adjustments; 48 • Adjustments to net income for the impact of the non-cash provision for loan losses, beneficial interests, and impairment charges; and • The impact of changes to accounts receivable, other assets, and accrued interest payable during the three months ended March 31, 2021 as compared to the same period in 2020. 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 three months ended March 31, 2021 was $468.4 million and $528.1 million, respectively. Cash provided by investing activities and used in financing activities for the three months ended March 31, 2020 was $105.7 million and $83.5 million, respectively. Investing and financing activities are further addressed in the discussion that follows. Liquidity Needs and Sources of Liquidity Available to Satisfy Debt Obligations Secured by Loan Assets and Related Collateral The following table shows the Company's debt obligations outstanding that are secured by loan assets and related collateral. As of March 31, 2021 Carrying amount Final maturity Bonds and notes issued in asset-backed securitizations $ 18,459,431 5/27/25 - 10/25/68 FFELP and private education loan warehouse facilities 405,215 5/20/22 - 2/26/24 $ 18,864,646 Bonds and Notes Issued in Asset-backed Securitizations The majority of the Company’s portfolio of student loans is funded in asset-backed securitizations that are structured to substantially match the maturity of the funded assets, thereby minimizing liquidity risk. Cash generated from student loans funded in asset-backed securitizations provide the sources of liquidity to satisfy all obligations related to the outstanding bonds and notes issued in such securitizations. In addition, due to (i) the difference between the yield the Company receives on the loans and cost of financing within these transactions, and (ii) the servicing and administration fees the Company earns from these transactions, the Company has created a portfolio that will generate earnings and significant cash flow over the life of these transactions. As of March 31, 2021, based on cash flow models developed to reflect management’s current estimate of, among other factors, prepayments, defaults, deferment, forbearance, and interest rates, the Company currently expects future undiscounted cash flows from its portfolio to be approximately $2.17 billion as detailed below. The forecasted cash flow presented below includes all loans funded in asset-backed securitizations as of March 31, 2021. As of March 31, 2021, the Company had $18.4 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 March 31, 2021, private education and consumer loans funded with operating cash, loans acquired subsequent to March 31, 2021, and loans owned by Nelnet Bank. 49 Asset-backed Securitization Cash Flow Forecast $2.17 billion (dollars in millions) The forecasted future undiscounted cash flows of approximately $2.17 billion include approximately $1.19 billion (as of March 31, 2021) of overcollateralization included in the asset-backed securitizations. These excess net asset positions are included in the consolidated balance sheets and included in the balances of "loans and accrued interest receivable" and "restricted cash." The difference between the total estimated future undiscounted cash flows and the overcollateralization of approximately $0.98 billion, or approximately $0.74 billion after income taxes based on the estimated effective tax rate, is expected to be accretive to the Company's March 31, 2021 balance of consolidated shareholders' equity. The Company uses various assumptions, including prepayments and future interest rates, when preparing its cash flow forecast. These assumptions are further discussed below. Prepayments : The primary variable in establishing a life of loan estimate is the level and timing of prepayments. Prepayment rates equal the amount of loans that prepay annually as a percentage of the beginning of period balance, net of scheduled principal payments. A number of factors can affect estimated prepayment rates, including the level of consolidation activity, borrower default rates, and utilization of debt management options such as income-based repayment, deferments, and forbearance. Should any of these factors change, management may revise its assumptions, which in turn would impact the projected future cash flow. The Company’s cash flow forecast above assumes prepayment rates that are generally consistent with those utilized in the Company’s recent asset-backed securitization transactions. If management used a prepayment rate assumption two times greater than what was used to forecast the cash flow, the cash flow forecast would be reduced by approximately $140 million to $175 million. Interest rates : The Company funds a large portion of its student loans with three-month LIBOR indexed floating rate securities. Meanwhile, the interest earned on the Company’s student loan assets is indexed primarily to a one-month LIBOR rate. The different interest rate characteristics of the Company’s loan assets and liabilities funding these assets result in basis risk. The Company’s cash flow forecast assumes three-month LIBOR will exceed one-month LIBOR by 12 basis points for the life of the portfolio, which approximates the historical relationship between these indices. If the forecast is computed assuming a spread of 24 basis points between three-month and one-month LIBOR for the life of the portfolio, the cash flow forecast would be reduced by approximately $45 million to $70 million. As the percentage of the Company's outstanding debt financed by three-month LIBOR declines, the Company's basis risk will be reduced. LIBOR is in the process of being discontinued as a benchmark rate, 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 "Interest Rate Risk - Replacement of LIBOR as a Benchmark Rate" above and Item 1A, "Risk Factors - Loan Portfolio - 50 Interest rate risk - replacement of LIBOR as a benchmark rate" in the Company's 2020 Annual Report for additional information. The Company uses the current forward interest rate yield curve to forecast cash flows. A change in the forward interest rate curve would impact the future cash flows generated from the portfolio. An increase in future interest rates will reduce the amount of fixed rate floor income the Company is currently receiving. The Company attempts to mitigate the impact of a rise in short-term rates by hedging interest rate risks. The forecasted cash flow does not include cash flows the Company expects to pay/receive related to derivative instruments used by the Company to manage interest rate risk. See Item 3, "Quantitative and Qualitative Disclosures About Market Risk — Interest Rate Risk." Warehouse Facilities The Company funds a portion of its FFELP loan acquisitions using its FFELP warehouse facilities. Student loan warehousing allows the Company to buy and manage student loans prior to transferring them into more permanent financing arrangements. As of March 31, 2021, the Company had two FFELP warehouse facilities with an aggregate maximum financing amount available of $310.0 million, of which $247.0 million was outstanding and $63.0 million was available for additional funding. One warehouse facility has a static advance rate until the expiration date of the liquidity provisions (May 20, 2021). In the event the liquidity provisions are not extended, the valuation agent has the right to perform a one-time mark to market on the underlying loans funded in this facility, subject to a floor. The loans would then be funded at this new advance rate until the final maturity date of the facility (May 20, 2022). The other warehouse facility has a static advance rate that requires initial equity for loan funding and does not require increased equity based on market movements. As of March 31, 2021, the Company had $20.5 million advanced as equity support on these facilities. For further discussion of the Company's FFELP warehouse facilities outstanding at March 31, 2021, see note 3 of the notes to consolidated financial statements included under Part I, Item 1 of this report. The Company has a private education loan warehouse facility that, as of March 31, 2021, had an aggregate maximum financing amount available of $175.0 million, an advance rate of 80 to 90 percent, liquidity provisions through February 13, 2022, and a final maturity date of February 13, 2023. As of March 31, 2021, $158.2 million was outstanding under this warehouse facility, $16.8 million was available for future funding, and $17.0 million was 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. The Company had a $100.0 million consumer loan warehouse facility that was terminated on March 31, 2021. The Company used operating cash to pay off the $20.7 million outstanding balance on this facility upon its termination. Other Uses of Liquidity The Company no longer originates new FFELP loans, but continues to acquire FFELP loan portfolios from third parties and believes additional loan purchase opportunities exist, including opportunities to purchase private education and consumer loans (or investment interests therein). In December of 2020, Wells Fargo announced the sale of its approximately $10.0 billion portfolio of private education student loans representing approximately 445,000 borrowers. In conjunction with the sale, the Company was selected as servicer of the portfolio. During March 2021, approximately 261,000 borrowers were converted to the Company's servicing platform, with the remaining borrowers converted in April 2021. In addition, the Company has entered into agreements to participate in a joint venture to acquire the portfolio. In total (during March and April 2021), the Company has invested approximately $70 million in the joint venture for an approximate 8 percent of the interest in the loans. 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. 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 student loan participation agreement (as described below); using its Union Bank student loan asset-backed securities participation agreement (as described below) and/or establishing similar secured borrowing facilities; using its existing warehouse facilities (as described above); increasing the capacity under existing and/or establishing new warehouse facilities; and continuing to access the asset-backed securities market. Union Bank Participation Agreement The Company maintains an agreement with Union Bank, a related party, as trustee for various grantor trusts, under which Union Bank has agreed to purchase from the Company participation interests in student loans. As of March 31, 2021, $945.8 51 million of loans were subject to outstanding participation interests held by Union Bank, as trustee, under this agreement. The agreement automatically renews annually and is terminable by either party upon five business days' notice. This agreement provides beneficiaries of Union Bank’s grantor trusts with access to investments in interests in student loans, while providing liquidity to the Company. The Company can participate loans to Union Bank to the extent of availability under the grantor trusts, up to $900.0 million or an amount in excess of $900.0 million if mutually agreed to by both parties. Loans participated under this agreement have been accounted for by the Company as loan sales. Accordingly, the participation interests sold are not included on the Company’s consolidated balance sheets. Asset-backed Securities Transactions 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. There were no asset-backed securitization transactions completed during the first three months of 2021. Liquidity Impact Related to Nelnet Bank On November 2, 2020, the Company obtained final approval for federal deposit insurance from the FDIC 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. Liquidity Impact Related to ALLO Communications LLC As previously disclosed, 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. After completion of the initial transactions subject to these agreements, 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 upon the receipt of regulatory approvals for the transactions on December 21, 2020 the Company deconsolidated ALLO from the Company's consolidated financial statements. In addition, 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 interests 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 interests of ALLO held by the Company, plus the amount of accrued and unpaid preferred return on such interests. As of March 31, 2021, the outstanding preferred membership interests and accrued and unpaid preferred return of ALLO held by the Company was $131.2 million. The non-voting preferred membership interests 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 52 current growth plans, and thus the Company currently believes additional equity contributions to ALLO are not likely in the immediate future. Liquidity Impact Related to Hedging Activities The Company utilizes derivative instruments to manage interest rate sensitivity. By using derivative instruments, the Company is exposed to market risk which could impact its liquidity. Based on the derivative portfolio outstanding as of March 31, 2021, 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 4 of the notes to consolidated financial statements included under Part I, Item 1 of this report for additional information on the Company's derivative portfolio. Other Debt Facilities As discussed above, the Company has a $455.0 million unsecured line of credit with a maturity date of December 16, 2024. As of March 31, 2021, the unsecured line of credit had no amount outstanding 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 March 31, 2021, the secured line of credit had $5.0 million outstanding with $17.0 million available for future use. The line of credit is secured by several Company-owned properties. Upon the maturity date of these facilities, there can be no assurance that the Company will be able to maintain these lines of credit, increase the amount outstanding under the lines, or find alternative funding if necessary. During 2020, the Company entered into an agreement with Union Bank, as trustee for various grantor trusts, under which Union Bank has agreed to purchase from the Company participation interests in student loan asset-backed securities. As of March 31, 2021, $113.5 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. 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 March 31, 2021, 3,246,732 shares remained authorized for repurchase under the Company's stock repurchase program. Shares may be repurchased from time to time depending on various factors, including share prices and other potential uses of liquidity. Shares repurchased by the Company during the three months ended March 31, 2021 are shown below. Such shares were repurchased from employees to satisfy tax withholding obligations upon the vesting of restricted stock, and not as part of the stock repurchase program. Total shares repurchased Purchase price (in thousands) Average price of shares repurchased (per share) Quarter ended March 31, 2021 26,199 $ 2,009 76.70 Dividends On March 15, 2021, the Company paid a first quarter 2021 cash dividend on the Company's Class A and Class B common stock of $0.22 per share. In addition, the Company's Board of Directors has declared a second quarter 2021 cash dividend on the Company's outstanding shares of Class A and Class B common stock of $0.22 per share. The second quarter cash dividend will be paid on June 14, 2021 to shareholders of record at the close of business on May 31, 2021. The Company currently plans to continue making regular quarterly dividend payments, subject to future earnings, capital requirements, financial condition, and other factors. 53