NELNET INC 10-K

ITEM 7. MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS (Management’s Discussion and Analysis of Financial Condition and Results of Operations is for the years ended December 31, 2021 and 2020. All dollars are in thousands, except share data, unless otherwise noted.) The following discussion and analysis provides information that the Company’s management believes is relevant to an assessment and understanding of the consolidated results of operations and financial condition of the Company. The discussion and analysis should be read in conjunction with the Company’s consolidated financial statements and related notes included in this report. This discussion and analysis contains forward-looking statements subject to various risks and uncertainties and should be read in conjunction with the disclosures and information contained in "Forward-Looking and Cautionary Statements" and Item 1A "Risk Factors" included in this report. A discussion related to the results of operations and changes in financial condition for the year ended December 31, 2021 compared to the year ended December 31, 2020 is presented below. A discussion related to the results of operations and changes in financial condition for the year ended December 31, 2020 compared to the year ended December 31, 2019 can be found in Part II, Item 7. "Management's Discussion and Analysis of Financial Condition and Results of Operations" in the Company's 2020 Annual Report on Form 10-K, which was filed with the United States Securities and Exchange Commission on February 25, 2021. OVERVIEW The Company is a diverse, innovative company with a purpose to serve others and a vision to make dreams possible. 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 early-stage and emerging growth companies, real estate, and renewable energy (solar). 38 The Company was formed as a Nebraska corporation in 1978 to service federal student loans for two local banks. The Company built on this initial foundation as a servicer to become a leading originator, holder, and servicer of federal student loans, principally consisting of loans originated under the FFEL Program. The Reconciliation Act of 2010 discontinued new loan originations under the FFEL Program, effective July 1, 2010, and requires all new federal student loan originations be made directly by the Department through the Federal Direct Loan Program. As a result, the Company no longer originates FFELP loans. However, a significant portion of the Company's income continues to be derived from its existing FFELP student loan portfolio. Interest income on the Company's existing FFELP loan portfolio will decline over time as the portfolio is paid down. Since all FFELP loans will eventually run off, a key objective of the Company is to reposition itself for the post-FFELP environment. To reduce its reliance on interest income from FFELP loans, the Company has expanded its services and products. This expansion has been accomplished through internal growth and innovation as well as business and certain investment acquisitions. The Company is also actively expanding its private education and consumer loan portfolios, and in November 2020 launched Nelnet Bank. In addition, the Company has been servicing federally owned student loans for the Department since 2009. Liquidity The Company intends to use its strong liquidity position, as summarized below, to continue to provide and expand its products and services and 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. • As of December 31, 2021, the Company had cash and cash equivalents of $125.6 million. Cash held by Nelnet Bank is generally not available for Company activities outside of Nelnet Bank. Excluding Nelnet Bank, cash and cash equivalents as of December 31, 2021 was $99.4 million. • The Company has historically generated positive cash flow from operations. For the year ended December 31, 2021, the Company’s net cash provided by operating activities was $544.9 million. • The Company has a $495.0 million unsecured line of credit with a maturity date of September 22, 2026. As of December 31, 2021, there was no amount outstanding on the unsecured line of credit and $495.0 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 $737.5 million, subject to certain conditions. • The majority of the Company’s portfolio of student loans is funded in asset-backed securitizations that will generate significant earnings and cash flow over the life of these transactions. As of December 31, 2021, the Company currently expects future undiscounted cash flows from its securitization portfolio to be approximately $1.88 billion, of which approximately $1.29 billion will be generated over the next five years. 39 GAAP Net Income and Non-GAAP Net Income, Excluding Adjustments The Company prepares its financial statements and presents its financial results in accordance with GAAP. However, it also provides additional non-GAAP financial information related to specific items management believes to be important in the evaluation of its operating results and performance. A reconciliation of the Company's GAAP net income to net income, excluding derivative market value adjustments, and a discussion of why the Company believes providing this additional information is useful to investors, is provided below. Year ended December 31, 2021 2020 GAAP net income attributable to Nelnet, Inc. $ 393,286 352,443 Realized and unrealized derivative market value adjustments (92,813) 28,144 Tax effect (a) 22,275 (6,755) Net income attributable to Nelnet, Inc., excluding derivative market value adjustments (b) $ 322,748 373,832 Earnings per share: GAAP net income attributable to Nelnet, Inc. $ 10.20 9.02 Realized and unrealized derivative market value adjustments (2.41) 0.72 Tax effect (a) 0.58 (0.17) Net income attributable to Nelnet, Inc., excluding derivative market value adjustments (b) $ 8.37 9.57 (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. 40 Operating Segments The Company earns net interest income on its loan portfolio, consisting primarily of FFELP loans, in its Asset Generation and Management ("AGM") operating segment. This segment is expected to generate a stable net interest margin and significant amounts of cash as the FFELP portfolio amortizes. As of December 31, 2021, AGM had a $17.4 billion loan portfolio that management anticipates will amortize over the next approximately 15 years and has a weighted average remaining life of approximately 8 years. The Company actively works to maximize the amount and timing of cash flows generated by its FFELP portfolio and seeks to acquire additional loan assets to leverage its servicing scale and expertise to generate incremental earnings and cash flow. 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"), which includes the operations of Nelnet Servicing and Great Lakes • 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 industrial bank franchise focused on the private education loan marketplace, with a home office in Salt Lake City, Utah. Nelnet Bank’s operations are presented by the Company as a reportable operating segment. Other business activities and operating segments that are not reportable are combined and included in Corporate and Other Activities ("Corporate"). Corporate and Other Activities also includes income earned on certain investments and interest expense incurred on unsecured and other corporate related debt transactions. In addition, the Corporate segment includes direct incremental costs associated with Nelnet Bank prior to the UDFI’s approval for its bank charter, and certain shared service and support costs incurred by the Company that will not be reflected in Nelnet Bank’s operating results through 2023 (the bank’s de novo period). Such Nelnet Bank-related costs included in the Corporate segment totaled $3.4 million (pre-tax) and $6.0 million (pre-tax) in 2021 and 2020, respectively. 41 The information below provides the operating results (net income before taxes) for each reportable operating segment and Corporate and Other Activities for the years ended December 31, 2021 and 2020. See “Results of Operations” for each such reportable operating segment (except for ALLO, which was deconsolidated from the Company’s financial statements in December 2020). Year ended December 31, Certain Items Impacting Comparability (a) 2021 2020 Results in 2021 were impacted by: Results in 2020 were impacted by: NDS $ 62,445 53,375 • Impairment charges on owned buildings of $13.2 million due to continued evaluation of office space needs as employees continue to work from home due to COVID-19 NBS 72,713 66,200 • A full year of operating results from the December 31, 2020 acquisitions of HigherSchool and CD2 ALLO (prior to deconsolidation) — (33,188) AGM 423,616 162,703 • Income of $92.8 million related to changes in the fair value of derivative instruments that do not qualify for hedge accounting • Negative provision for loan losses of $13.2 million due primarily to improved economic conditions throughout 2021 as compared to December 31, 2020 • Gains from the sale of consumer loans of $18.7 million • A net gain of $32.9 million related to the Company’s joint venture to acquire Wells Fargo’s private education student loan portfolio. See “2021 Transactions Related to the Private Education Loan Portfolio Sold by Wells Fargo” below • A decrease of $23.8 million in interest expense as a result of reversing a historical accrued interest liability on certain bonds (initially recorded when certain asset-backed securitizations were acquired in 2011 and 2013), which liability the Company determined is no longer probable of being required to be paid • A loss of $28.1 million related to changes in the fair value of derivative instruments that do not qualify for hedge accounting • Provision expense for loan losses of $63.0 million as a result of the COVID-19 pandemic and its effects on economic conditions • Gains from the sale of consumer loans of $33.0 million • An impairment expense, net of recoveries, of $16.6 million related to the Company’s beneficial interest in consumer loan securitization investments as a result of the estimated impacts of the COVID-19 pandemic Nelnet Bank (792) (80) Corporate (55,875) 201,477 • Net investment gains and income of $58.7 million, including $28.8 million from venture capital investments, $22.3 million related to real estate, and $7.6 million related to asset-backed securities (bonds) and marketable equity securities • A loss of $42.1 million related to the Company’s voting membership interest investment in ALLO • A loss of $10.1 million from solar investments (b) • A gain of $50.1 million to adjust the carrying value of the Company’s investment in Hudl to reflect Hudl’s May 2020 equity raise transaction value • A gain of $258.6 million from the deconsolidation of ALLO • A loss of $37.4 million from solar investments (b) Net income before taxes 502,105 450,486 Income tax expense (115,822) (100,860) Net loss attributable to noncontrolling interests (b) 7,003 2,817 Net income $ 393,286 352,443 (a) All dollar amounts for those items impacting comparability in 2021 and 2020 are pre-tax. (b) Losses from solar investments in 2021 and 2020 include losses of $7.1 million and $3.8 million, respectively, attributable to third-party minority interest investors in solar projects that are included in “net loss attributable to noncontrolling interests” in the table above. 42 Recent Transactions / Developments 2021 Transactions Related to the Private Education Loan Portfolio Sold by Wells Fargo In December 2020, Wells Fargo announced the sale of its approximately $10.0 billion portfolio of private education loans representing approximately 445,000 borrowers. The Company entered into a joint venture with other investors to acquire the loans, and under the joint venture, the Company had an approximately 8 percent interest in the loans and has a corresponding 8 percent interest in residual interests in the 2021 securitizations of the loans discussed below. In conjunction with the sale, the Company was selected as servicer of the portfolio. During March and throughout the second quarter of 2021, the vast majority of the borrowers were converted to the Company’s servicing platform. The joint venture established a limited partnership that purchased the private education loans and funded such loans with a temporary warehouse facility. During 2021, the joint venture completed four asset-backed securitization transactions to permanently finance a total of $8.7 billion of the private education loans purchased by the joint venture (which represented the total remaining loans originally purchased from Wells Fargo, factoring in borrower payments from the date of purchase). The Company is accounting for its approximately 8 percent residual interest in these securitizations as held-to-maturity beneficial interest investments. These investments are reflected on the Company’s consolidated balance sheet as "investments." On behalf of the joint venture, the Company is the sponsor and administrator for these loan securitizations. As sponsor and administrator, the Company earns an annual fee of 10 to 10.75 basis points on the outstanding loan receivable balance in the securitizations. As sponsor, the Company is required to provide a certain level of risk retention, and the Company has purchased bonds issued in such securitizations to satisfy this requirement. The bonds purchased to satisfy the risk retention requirement are reflected on the Company’s consolidated balance sheet as "investments" and as of December 31, 2021, the fair value of these bonds was $412.6 million. The Company must retain these investment securities until the latest of (i) two years from the closing date of the securitization, (ii) the date the aggregate outstanding principal balance of the loans in the securitization is 33% or less of the initial loan balance, and (iii) the date the aggregate outstanding principal balance of the bonds is 33% or less of the aggregate initial outstanding principal balance of the bonds, at which time the Company can sell the investment securities (bonds) to a third party. The Company entered into repurchase agreements with third parties, the proceeds of which were used to purchase a portion of the asset-backed investments, and such investments serve as collateral on the repurchase obligations. As of December 31, 2021, $483.8 million was outstanding on the Company’s repurchase agreements, of which $313.2 million was borrowed to fund the private education loan securitization bonds subject to the Company’s risk retention requirement. The repurchase agreements have various maturity dates between May 27, 2022 and December 20, 2023, but are subject to early termination upon required notice provided by the Company or the applicable counterparty prior to the maturity dates. The Company pays interest on amounts outstanding on the repurchase agreements based on LIBOR plus an applicable spread, and the Company is also required to pay additional cash in the event the fair value of the securities subject to a repurchase agreement becomes less than the original purchase price of such securities. During the fourth quarter of 2021, the joint venture completed its fourth and final asset-backed securitization that permanently financed all remaining eligible loans temporarily funded in the joint venture limited partnership’s warehouse facility. The Company initially contributed $71.1 million in the joint venture. Cash distributions, the fair value of the Company’s portion of loans securitized as a result of securitizations, and the Company’s proportionate share of losses of this partnership were $52.1 million, $51.9 million, and $5.0 million, respectively, and reduced the Company’s carrying value of its limited partnership investment to a credit (negative) balance of $37.9 million. During the fourth quarter of 2021, the Company’s financial commitment to the limited partnership was terminated by the partners of the joint venture, and the Company recognized income of $37.9 million (pre-tax) associated with the termination. 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 and extreme volatility in the U.S. and world markets. These effects had an adverse impact on the Company’s results of operations and, if these effects result in sustained economic stress, they could have a future adverse impact on the Company in a number of ways, including wage inflation and cost of service delivery, rising interest rates due to market conditions or government policy or stimulus, and loan performance (where individual student and consumer borrowers experience financial hardship). Although certain business and economic conditions have improved since the pandemic began, significant uncertainties remain, including with respect to the effectiveness of vaccines against existing and new variant strains of the COVID-19 virus which could be vaccine resistant, the potential impacts of variations in vaccination rates among different geographical areas and demographic segments, vaccine mandates, booster vaccines, and the potential 43 impacts of potential additional future spikes in infection rates including through breakthrough infections among the fully vaccinated. In addition, a vast majority of the Company's employees continue to work from home, either full-time or dividing their work days between working from home and working in the office as the Company has offered employees flexibility in the amount of time they work in offices that were re-opened in 2021. The results of operations discussion below should be read in conjunction with the information included in Item 1A, “Risk Factors – Operations – The COVID-19 pandemic has adversely impacted our results of operations, and either directly or indirectly through impacts on economic conditions or government policy could adversely impact our results of operations, businesses, financial condition, and/or cash flows going forward.” CONSOLIDATED RESULTS OF OPERATIONS An analysis of the Company's operating results for the year ended December 31, 2021 compared to 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 15 of the notes to consolidated financial statements included in this report. Since the Company monitors and assesses its operations and results based on these segments, the discussion following the consolidated results of operations is presented on a reportable segment basis (except for ALLO, which was deconsolidated from the Company's consolidated financial statements in December 2020). Year ended December 31, 2021 2020 Additional information Loan interest $ 482,337 595,113 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. It is currently anticipated that interest rates may rise in 2022 as a result of inflationary pressures in the U.S. economy. Investment interest 41,498 24,543 Includes income from unrestricted interest-earning deposits and investments and funds in asset-backed securitizations. Increase was due to an increase of student loan asset-backed securities investments (bonds) and interest income earned on loan beneficial interest investments, partially offset by a decrease in interest rates in 2021 as compared to 2020. Total interest income 523,835 619,656 Interest expense 176,233 330,071 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 347,602 289,585 Less (negative provision) provision for loan losses (12,426) 63,360 Provision for loan losses in 2020 was impacted as a result of an increase in expected defaults due to the COVID-19 pandemic and its effects on economic conditions. During 2021, the Company recorded a negative provision for loan losses due to management’s estimate of certain continued improved economic conditions as of December 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 negative provision recognized in 2021 was partially offset by the establishment of an initial allowance for loans originated and acquired during 2021. Net interest income after provision for loan losses 360,028 226,225 Other income/expense: LSS revenue 486,363 451,561 See LSS operating segment - results of operations. ETS&PP revenue 338,234 282,196 See ETS&PP operating segment - results of operations. Communications revenue — 76,643 On December 21, 2020, the Company deconsolidated ALLO from the Company’s consolidated financial statements as a result of ALLO’s recapitalization. See note 2 “ALLO Recapitalization” in the notes to consolidated financial statements included in this report for additional information. Other 78,681 57,561 See table below for components of “other.” Gain on sale of loans 18,715 33,023 The Company sold $95.8 million (par value) and $185.0 million (par value) of consumer loans to an unrelated third party in 2021 and 2020, respectively, and recognized gains from such sales. Gain from deconsolidation of ALLO — 258,588 On December 21, 2020, the Company deconsolidated ALLO from the Company’s consolidated financial statements as a result of ALLO’s recapitalization. See note 2 “ALLO Recapitalization” in the notes to consolidated financial statements included in this report for additional information. 44 Impairment expense and provision for beneficial interests, net (16,360) (24,723) 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 estimated impacts from the COVID-19 pandemic. During the fourth quarter of 2020 and first quarter of 2021, the Company reversed $9.7 million and $2.4 million, respectively, of the provision related to the consumer loan securitization investments due to improved economic conditions. During the third quarter of 2021, the Company evaluated the use of office space as a large number of employees continue to work from home due to COVID-19. As a result of this evaluation, the Company recorded an impairment charge during the third quarter of 2021 of $14.2 million. The impairment charge related primarily to building and operating lease assets. In addition, during 2021, the Company recognized impairments of $4.6 million related to venture capital investments. Derivative settlements, net (21,367) 3,679 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 AGM operating segment - results of operations. Derivative market value adjustments, net 92,813 (28,144) Includes the realized and unrealized gains and losses that are caused by changes in fair values of derivatives which do not qualify for "hedge treatment" under GAAP. The majority of the derivative market value adjustments were related to the changes in fair value of the Company's floor income interest rate swaps. Such changes reflect that a decrease in the forward yield curve during a reporting period results in a decrease in the fair value of the Company's floor income interest rate swaps, and an increase in the forward yield curve during a reporting period results in an increase in the fair value of such swaps. Total other income/expense 977,079 1,110,384 Cost of services: Cost to provide education technology, services, and payment processing services 108,660 82,206 Represents primarily direct costs to provide payment processing and instructional services in the ETS&PP operating segment. See ETS&PP operating segment - results of operations. Cost to provide communications services — 22,812 As discussed above, on December 21, 2020, the Company deconsolidated ALLO from the Company’s consolidated financial statements. Total cost of services 108,660 105,018 Operating expenses: Salaries and benefits 507,132 501,832 Increase was due to an increase in headcount in the (i) LSS operating segment due to hiring contact center operations and support associates to prepare for the resumption of federal student loan payments and other activities after the CARES Act suspension expires on May 1, 2022 and to support the increase in private education and consumer loan volume primarily from the addition of the former Wells Fargo portfolio; and (ii) ETS&PP operating segment to support the growth of its customer base, the investment in the development of new technologies, and businesses it acquired in December 2020. These increases were partially offset by the deconsolidation of ALLO from the Company's consolidated financial statements on December 21, 2020. It is currently anticipated that salaries and benefits costs may rise in 2022 as a result of wage inflation due to a constrained labor market. Depreciation and amortization 73,741 118,699 Decrease was primarily due to the deconsolidation of ALLO from the Company's consolidated financial statements on December 21, 2020, resulting in no ALLO depreciation expense for the Company in 2021. Other expenses 145,469 160,574 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 operating segment as a result of a decrease in printing and postage while student loan payments are suspended as a result of COVID-19 borrower relief efforts and from an increase in the adoption of electronic borrower statements and correspondence; and (ii) the deconsolidation of ALLO on December 21, 2020. These items were partially offset by an increase in costs in the ETS&PP operating segment due to the business acquisitions completed in December 2020 and higher costs of consulting, professional fees, and technology services due to investments in new technologies. See each individual operating segment results of operations discussion for additional information. Total operating expenses 726,342 781,105 Income before income taxes 502,105 450,486 Income tax expense 115,822 100,860 The effective tax rate was 22.75% and 22.25% for 2021 and 2020, respectively. The Company expects its future effective tax rate will range between 22 and 24 percent. Net income 386,283 349,626 Net loss attributable to noncontrolling interests 7,003 2,817 Amounts for noncontrolling interests reflect the net income/loss attributable to the holders of minority membership interests in WRCM and multiple solar entities. Net income attributable to Nelnet, Inc. $ 393,286 352,443 Additional information: Net income attributable to Nelnet, Inc. $ 393,286 352,443 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. Derivative market value adjustments, net (92,813) 28,144 Tax effect 22,275 (6,755) Net income attributable to Nelnet, Inc., excluding derivative market value adjustments $ 322,748 $ 373,832 45 The following table summarizes the components of "other" in "other income/expense." Year ended December 31, 2021 2020 Income/gains from investments, net (a) $ 91,593 56,402 ALLO preferred return (b) 8,427 386 Investment advisory services (c) 7,773 10,875 Borrower late fee income (d) 3,444 5,194 Management fee revenue (e) 3,307 9,421 Loss from ALLO voting membership interest investment (f) (42,148) (3,565) Loss from solar investments (g) (10,132) (37,423) (Loss) gain on debt repurchased (h) (6,775) 1,924 Other 23,192 14,347 Other income $ 78,681 57,561 (a) During the second quarter of 2020, the Company recognized a $51.0 million (pre-tax) gain to adjust the carrying value of its investment in Hudl to reflect Hudl’s May 2020 equity raise transaction value. During 2021, the Company recognized net investment income and gains of $91.6 million, including $32.9 million from the Company’s joint venture to acquire Wells Fargo’s private education student loan portfolio, $28.8 million from venture capital investments, $22.3 million related to real estate investments, and $7.6 million related to investments in asset-backed securities (bonds) and marketable equity securities. As the Company expects its investment portfolio will continue to grow, the Company also anticipates fluctuations in future periodic earnings resulting from investment valuation adjustments from time to time. (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 December 31, 2021, the amount of preferred membership interests held by the Company was $137.3 million, which earns a preferred annual return of 6.25 percent. (c) The Company provides investment advisory services through Whitetail Rock Capital Management, LLC ("WRCM"), the Company's SEC-registered investment advisor subsidiary, under various arrangements. WRCM earns annual fees of 10 basis points to 25 basis points on the majority of the outstanding balance of asset-backed securities under management and a share of the gains from the sale of asset-backed securities or asset-backed securities being called prior to the full contractual maturity for which it provides advisory services. As of December 31, 2021, the outstanding balance of asset-backed securities under management subject to these arrangements was $2.0 billion. In addition, WRCM earns annual management fees of five basis points for Nelnet stock under management (with the Nelnet stock primarily shares of Class B common stock held in various trust estates). During 2021, WRCM earned $4.2 million in management fees and generated $3.6 million in performance fees, as compared to $3.6 million in management fees and $7.3 million in performance fees in 2020. (d) Represents borrower late fees earned by the AGM operating segment. The decrease in borrower late fees in 2021 as compared to 2020 was due to the Company suspending substantially all borrower late fees effective March 13, 2020 through May 1, 2021 (for private education loans) and October 1, 2021 (for federally insured student loans), to provide borrowers relief as a result of the COVID-19 pandemic. (e) Represents revenue earned from providing administrative support and marketing services, which primarily was to Great Lakes’ former parent company under a contract that expired in January 2021. (f) Represents the Company's share of loss on its voting membership interests in ALLO. See note 7 of the notes to consolidated financial statements included in this report for additional information regarding the accounting for and income statement impact of this investment. (g) Represents the Company's share of income or loss from solar investments under the Hypothetical Liquidation at Book Value ("HLBV") method of accounting. For the majority of the Company's solar investments, the HLBV method of accounting results in accelerated losses in the initial years of investment. The Company made substantial solar investments in 2019 and 2020. Losses from solar investments in 2021 and 2020 include losses of $7.1 million and $3.8 million, respectively, attributable to third-party minority interest investors that are included in “net loss attributable to noncontrolling interests” in the consolidated statements of income. (h) Represents gains/losses from the Company’s repurchase of its own debt. See note 5 of the notes to consolidated financial statements included in this report for additional information. 46 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 June 30, 2021 September 30, 2021 December 31, 2021 Servicing volume (dollars in millions): Nelnet: Government $ 183,790 185,477 185,315 189,932 191,678 195,875 195,030 198,743 215,797 FFELP 33,185 32,326 31,392 31,122 30,763 30,084 29,361 28,244 26,916 Private and consumer 16,033 16,364 16,223 16,267 16,226 21,397 24,758 24,229 23,702 Great Lakes: Government 239,980 243,205 243,609 249,723 251,570 257,806 257,420 262,311 262,605 Total $ 472,988 477,372 476,539 487,044 490,237 505,162 506,569 513,527 529,020 Number of servicing borrowers: Nelnet: Government 5,574,001 5,498,872 5,496,662 5,604,685 5,645,946 5,664,094 5,636,781 5,791,521 6,399,414 FFELP 1,478,703 1,423,286 1,370,007 1,332,908 1,300,677 1,233,461 1,198,863 1,150,214 1,092,066 Private and consumer 682,836 670,702 653,281 649,258 636,136 882,477 1,039,537 1,097,252 1,065,439 Great Lakes: Government 7,396,657 7,344,509 7,346,691 7,542,679 7,605,984 7,637,270 7,616,270 7,778,535 7,797,106 Total 15,132,197 14,937,369 14,866,641 15,129,530 15,188,743 15,417,302 15,491,451 15,817,522 16,354,025 Number of remote hosted borrowers: 6,433,324 6,354,158 6,264,559 6,251,598 6,555,841 4,307,342 4,338,570 4,548,541 4,799,368 Government Loan Servicing Nelnet Servicing's and Great Lakes' current student loan servicing contracts with the Department are currently scheduled to expire on December 14, 2023. In 2017, the Department initiated a contract procurement process referred to as the Next Generation Financial Services Environment ("NextGen") for a new framework for the servicing of all student loans owned by the Department. The Consolidated Appropriations Act, 2021 contains provisions directing certain aspects of the NextGen process, including that any new federal student loan servicing environment is required to provide for the participation of multiple student loan servicers and the allocation of borrower accounts to eligible student loan servicers based on performance. The Company cannot predict the timing, nature, or ultimate outcome of NextGen or any other contract procurement process by the Department. Nelnet Servicing and Great Lakes are two of the current seven private sector entities that have student loan servicing contracts with the Department. In July 2021, the Pennsylvania Higher Education Assistance Agency ("PHEAA"), a servicer for the Department, announced that it will exit the federal student loan servicing business. PHEAA notified the Department it would not be accepting a long-term extension of its student loan servicing contract beyond what was needed to ensure a smooth transition for borrowers. In November 2021, PHEAA and the Department agreed to a short-term extension that will expire in December 2022. All applicable student loans serviced by PHEAA will be transferred to successor servicers prior to the end of this contract extension. At the time of its announcement, PHEAA serviced approximately 8.5 million borrowers under its contract. A portion of the PHEAA servicing volume has been and will be transitioned prior to May 1, 2022, which is the date on which the suspension of federal student loan payments under the CARES Act is scheduled to expire. Approximately 850,000 PHEAA borrowers have been transitioned to Nelnet Servicing’s platform as of the date of this filing (of which approximately 603,000 were converted prior to December 31, 2021). The Company anticipates additional PHEAA volume to be transitioned to its platform during the remainder of 2022, but cannot currently estimate the number of additional borrowers that will be transferred and/or the timing of such transfers. In addition, the New Hampshire Higher Education Association Foundation Network (“Granite State”) exited the federal student loan servicing business in 2021. Granite State’s servicing volume of approximately 1.3 million borrowers was transitioned to Edfinancial Services, LLC ("Edfinancial"), a current servicer for the Department, during the third and fourth quarters of 2021. Edfinancial utilizes Nelnet Servicing's platform to service their loans for the Department, as did Granite State prior to its exit. The Department currently allocates new loan volume among its servicers based on certain performance metrics that measured the satisfaction among separate customer groups, including borrowers and Department personnel who work with the servicers. 47 The metrics also measure the success of keeping borrowers in an on-time repayment status and helping borrowers avoid default. Under the most recent publicly announced performance metrics used by the Department for the quarterly periods January 1, 2021 through June 30, 2021, Great Lakes’ and Nelnet Servicing’s overall rankings among the six go-forward servicers for the Department (which excludes PHEAA) were third and fifth, respectively. Based on these results, Great Lakes’ and Nelnet Servicing’s allocation of new student loan servicing volumes beginning September 1, 2021 are 18 percent and 12 percent, respectively. Servicing contract amendments entered into with the Department in September 2021 to extend the contracts through December 14, 2023, also amended the methodology for performance measurements and new loan volume allocations, in part by reflecting additional service level performance metrics under which, along with portfolio performance metrics, the Department will evaluate each servicer and make new loan volume allocations on a quarterly basis. The CARES Act, among other things, provides broad relief for federal student loan borrowers through May 1, 2022. Under the CARES Act, beginning in March 2020, federal student loan payments and interest accruals were suspended for all borrowers that had loans owned by the Department. As a result of the CARES Act, the Company received less servicing revenue per borrower from the Department based on the borrower forbearance status through September 30, 2020 than what was earned on such accounts prior to these provisions, and the Department further reduced the monthly rate to its servicers for those in forbearance status for the period from October 1, 2020 through May 1, 2022. The Company currently anticipates revenue per borrower from the Department will increase to pre-CARES Act levels beginning May 2, 2022. During the fourth quarter of 2021, the Company earned additional revenue from the Department based on incremental work being performed by the Company to support the Department borrowers coming out of forbearance, including outbound engagement. The Company currently anticipates earning additional incremental revenue during the first half of 2022 by continuing to provide outbound engagement activity and also providing extended hours of service as borrowers come out of forbearance status. Private Education Loan Servicing In December 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 vast majority of the remaining borrowers converted in the second quarter of 2021. 48 Summary and Comparison of Operating Results Year ended December 31, 2021 2020 Additional information Net interest income $ 43 315 Decrease was due to lower interest rates in 2021 as compared to 2020. Loan servicing and systems revenue 486,363 451,561 See table below for additional information. Intersegment servicing revenue 33,956 36,520 Represents revenue earned by the LSS operating segment from 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 in March 2020 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 3,307 9,421 Represents revenue earned from providing administrative support and marketing services, which primarily was to Great Lakes’ former parent company under a contract that expired in January 2021. Impairment expense (13,243) — During the third quarter of 2021, the Company evaluated use of office space as a large number of employees continue to work from home due to COVID-19. As a result of this evaluation, the Company recorded a non-cash impairment charge during the third quarter of 2021. The impairment charge recognized by the LSS operating segment related primarily to building and building improvement assets. Total other income 510,383 497,502 Salaries and benefits 297,406 285,526 Increase in 2021 compared to 2020 was due to the Company hiring contact center operations and support associates to (i) prepare for the resumption of federal student loan payments and other activities after the CARES Act suspension expires on May 1, 2022; and (ii) support the increase in private education and consumer loan volume, primarily from the addition of the former Wells Fargo portfolio. The Company currently expects salaries and benefits to continue to increase due to continued preparations for the expiration of the CARES Act suspension. Depreciation and amortization 25,649 37,610 Includes amortization of intangibles from the Great Lakes acquisition in February 2018 and depreciation on property and equipment. Amortization of intangible assets for 2021 and 2020 was $12.3 million and $20.9 million, respectively. The majority of the Great Lakes intangible assets became fully amortized as of June 30, 2021. Excluding amortization of intangible assets, the decrease in 2021 compared to 2020 was due to certain purchases to integrate Great Lakes and expand servicing capacity becoming fully depreciated. Other expenses 52,720 57,420 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 (which became effective March 13, 2020), primarily through a significant reduction of borrower statement printing and postage costs while student loan payments are suspended. The Company currently expects these costs will increase when the provisions of the CARES Act expire, scheduled for May 1, 2022. Decrease was also due to cost savings from an increase in the adoption of electronic borrower statements and correspondence. Intersegment expenses 72,206 63,886 Intersegment expenses represent costs for certain corporate activities and services that are allocated to each operating segment based on estimated use of such activities and services. Increase in 2021 as compared to 2020 was due to the Company hiring contact center operations and support associates during the second half of 2021 in preparation for the expiration of the CARES Act suspension on May 1, 2022. The Company currently expects intersegment expenses to continue to increase as it prepares for the expiration of the CARES Act suspension. Total operating expenses 447,981 444,442 Income before income taxes 62,445 53,375 Income tax expense (14,987) (12,810) Reflects income tax expense at an effective tax rate of 24%. Net income $ 47,458 40,565 GAAP before tax operating margin 11.9 % 10.7 % Before tax operating margin, excluding impairment and amortization expense, is a non-GAAP measure of before tax operating profitability as a percentage of revenue, and for the LSS segment is calculated as income before income taxes (excluding impairment and amortization expense) 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 provides additional information to facilitate 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, excluding impairment and amortization expense, increased for 2021 as compared to 2020 due to operating expenses being lower throughout the first half of 2021 as a result of the suspension of federal student loan payments under the CARES Act as discussed above. Impairment expense 2.5 — Amortization expense 2.3 4.2 Non-GAAP before tax operating margin, excluding impairment and amortization expense 16.8 % 14.9 % 49 Loan servicing and systems revenue Year ended December 31, 2021 2020 Additional information Government servicing - Nelnet $ 167,579 146,798 Represents revenue from Nelnet Servicing's Department servicing contract. Increase in 2021 compared to 2020 was due to (i) an increase in the number of borrowers serviced, including PHEAA borrowers transferred to Nelnet Servicing’s platform during the fourth quarter of 2021; (ii) a per borrower rate increase beginning September 1, 2021 to reflect the increase in the cost of labor (Economic Cost Index) per the provisions of the contract; (iii) incremental work performed during the fourth quarter of 2021 related to CARES Act forbearance exit outreach activities to borrowers; and (iv) the discharge of nearly 170,000 TPD borrowers in the fourth quarter of 2021. Nelnet Servicing earns revenue per each TPD borrower that satisfies the requirements for their loan to be discharged. The revenue earned by Nelnet Servicing for CARES Act forbearance exit outreach is non-recurring and will have a less significant contribution in 2022. These increases are partially offset by the decrease in revenue earned per borrower as a result of the suspension of federal student loan payments under the CARES Act. Government servicing - Great Lakes 193,214 179,872 Represents revenue from the Great Lakes' Department servicing contract. Changes among the current and comparable prior period were due to the same factors as discussed immediately above for Nelnet Servicing, except that Great Lakes did not receive any PHEAA volume in 2021 and does not administer the TPD discharge program. Private education and consumer loan servicing 47,302 32,492 Increase was due to the addition of the former Wells Fargo private education loan borrowers converted to the Company's servicing platform during March and the second quarter of 2021. Excluding revenue earned on the former Wells Fargo portfolio, revenue for 2021 decreased compared to 2020. The decrease in revenue was due to a decrease in the number of legacy borrowers serviced, a decrease in origination fee revenue, and the impact of borrower relief policies implemented by private lenders in response to the COVID-19 pandemic. FFELP servicing 18,281 20,183 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 34,600 41,999 Decrease in 2021 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, which expired 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. In addition, the Company earned deconversion fees in the fourth quarter of 2021 from Granite State, a remote hosted servicing customer, when they exited the federal student loan servicing business and transferred their loan volume to a third party. Outsourced services 25,387 30,217 The majority of this revenue relates to providing contact center and back office operational outsourcing services. During 2020, the Company began providing services to state agencies to process unemployment claims and conduct certain health tracing support activities (including vaccination registration support). Outsourcing activities provided to state agencies are performed under shorter-term contracts. Revenue from providing these services to state agencies was $17.3 million and $22.0 million during 2021 and 2020, respectively. Outsourcing activities provided to state agencies decreased during 2021 as the needs for such services have decreased from the prior period. Loan servicing and systems revenue $ 486,363 451,561 50 EDUCATION TECHNOLOGY, SERVICES, AND PAYMENT PROCESSING OPERATING SEGMENT – RESULTS OF OPERATIONS This segment of the Company’s business is subject to seasonal fluctuations which correspond, or are related to, the traditional school year. Tuition management revenue is recognized over the course of the academic term, but the peak operational activities take place in summer and early fall. Higher amounts of revenue are typically recognized during the first quarter due to fees related to grant and aid applications as well as online applications and enrollment services. The Company’s operating expenses do not follow the seasonality of the revenues. This is primarily due to generally fixed year-round personnel costs and seasonal marketing costs. Based on the timing of revenue recognition and when expenses are incurred, revenue and pre-tax operating margin are higher in the first quarter as compared to the remainder of the year. On December 31, 2020, the Company acquired HigherSchool Instructional Services (“HigherSchool”), a services company that provides supplemental instructional services and educational professional development for K-12 schools in New York City, and CD2 LLC (“CD2”), a platform technology solution that includes learning management, collaboration/workflow, gamification, customer management/document storage, and employee boarding. The results of HigherSchool and CD2 are reported in the Company’s consolidated financial statements from the date of acquisition. Revenue recognized by these acquisitions during the year ended December 31, 2021 was $26.0 million. Summary and Comparison of Operating Results Year ended December 31, 2021 2020 Additional information Net interest income $ 1,075 2,982 Represents interest income on tuition funds held in custody for schools. Decrease was due to a significant decrease in interest rates in March 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 338,234 282,196 See table below for additional information. Intersegment revenue 12 20 Other income — 373 Total other income 338,246 282,589 Cost to provide education technology, services, and payment processing services 108,660 82,206 See table below for additional information. Salaries and benefits 112,046 98,847 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 and CD2. Depreciation and amortization 11,404 9,459 Represents primarily amortization of intangible assets from prior business acquisitions. Amortization of intangible assets related to business acquisitions was $10.7 million and $8.7 million for 2021 and 2020, respectively. The increase in 2021 compared to 2020 was due to the acquisitions of HigherSchool and CD2. Other expenses 19,318 14,566 Increase was due to higher costs for consulting, professional fees, and technology services due to investments in new technologies and the acquisitions of HigherSchool and CD2. Intersegment expenses, net 15,180 14,293 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 157,948 137,165 Income before income taxes 72,713 66,200 Income tax expense (17,451) (15,888) Represents income tax expense at an effective tax rate of 24%. Net income $ 55,262 50,312 51 Education technology, services, and payment processing revenue The following table provides disaggregated revenue by service offering and before tax operating margin for each reporting period. Year ended December 31, 2021 2020 Additional information Tuition payment plan services $ 103,970 100,674 Revenue increased for 2021 as compared to 2020 as a result of a higher number of payment plans in the K-12 market, partially offset by lower revenues for institutions of higher education as a result of lower enrollment trends and the COVID-19 pandemic. Payment processing 127,080 114,304 Payment volumes in 2021 increased as compared to 2020 in both the K-12 and higher education markets. The increase in payments volume is driven by both new customers and an increase in volume from existing customers. Education technology and services 105,186 65,885 Increase in 2021 compared to 2020 was primarily the result of the HigherSchool and CD2 acquisitions. Additionally, revenues from the Company’s school information system software, enrollment and communication products, grant and aid assessments, and FACTS Education Solutions instructional and professional development services increased compared to the prior year. Other 1,998 1,333 Education technology, services, and payment processing revenue 338,234 282,196 Cost to provide education technology, services, and payment processing services 108,660 82,206 Costs primarily relate to payment processing revenue and such costs decrease/increase in relationship to payment volumes. Costs to provide instructional services are also included as a component of this expense and were a driver in the increase in 2021 compared to 2020 due to the acquisition of HigherSchool and growth in the FACTS Education Solutions division. Net revenue $ 229,574 199,990 Before tax operating margin 31.7 % 33.1 % 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. The decrease in margin for 2021 as compared to 2020 was due to investments in i) the development of new services and technologies; and ii) superior customer experiences to align with the Company’s strategies to grow, retain, and diversify revenues. The Company currently anticipates before tax operating margin will continue to decrease from current levels as the Company continues to invest in these areas. 52 ASSET GENERATION AND MANAGEMENT OPERATING SEGMENT – RESULTS OF OPERATIONS Loan Portfolio As of December 31, 2021, the AGM operating segment had a $17.4 billion loan portfolio, consisting primarily of federally insured loans, that management anticipates will amortize over the next approximately 15 years and has a weighted average remaining life of approximately 8 years. For a summary of the Company's loan portfolio as of December 31, 2021 and 2020, see note 4 of the notes to consolidated financial statements included in this report. Loan Activity The following table sets forth the activity of loans in the AGM’s operating segment: Year ended December 31, 2021 2020 Beginning balance $ 19,559,108 20,798,719 Loan acquisitions: Federally insured student loans 904,088 1,327,690 Private education loans 89,308 152,048 Consumer loans 81,923 136,985 Total loan acquisitions 1,075,319 1,616,723 Repayments, claims, capitalized interest, participations, and other, net (2,126,708) (1,999,095) Consolidation loans lost to external parties (964,822) (672,211) Consumer and other loans sold (101,107) (185,028) Ending balance $ 17,441,790 19,559,108 The Company has also purchased partial ownership in certain private education, consumer, and federally insured student loan securitizations that are accounted for as held-to-maturity beneficial interest investments and included in "investments" in the Company's consolidated financial statements. As of the latest remittance reports filed by the various trusts prior to or as of December 31, 2021, the Company’s ownership correlates to approximately $688 million, $195 million, and $445 million of private education, consumer, and federally insured student loans, respectively, included in these securitizations. The loans held in these securitizations are not included in the above table. 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 AGM’s total allowance for loan losses of $126.0 million at December 31, 2021 represents reserves equal to 0.6% of AGM's federally insured loans (or 22.2% of the risk sharing component of the loans that is not covered by the federal guaranty), 5.4% of AGM's private education loans, and 12.6% of AGM's consumer loans. For a summary of AGM’s activity in the allowance for loan losses for 2021 and 2020, and a summary of AGM's loan status and delinquency amounts as of December 31, 2021 and 2020, see note 4 of the notes to consolidated financial statements included in this report. 53 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. Year ended December 31, 2021 2020 Variable loan yield, gross 2.64 % 3.17 % Consolidation rebate fees (0.85) (0.84) Discount accretion, net of premium and deferred origination costs amortization (a) 0.02 0.01 Variable loan yield, net 1.81 2.34 Loan cost of funds - interest expense (b) (c) (1.04) (1.64) Loan cost of funds - derivative settlements (d) (e) (0.01) 0.05 Variable loan spread 0.76 0.75 Fixed rate floor income, gross 0.76 0.61 Fixed rate floor income - derivative settlements (d) (f) (0.11) (0.03) Fixed rate floor income, net of settlements on derivatives 0.65 0.58 Core loan spread 1.41 % 1.33 % Average balance of AGM’s loans $ 18,900,038 20,163,876 Average balance of AGM’s debt outstanding 18,610,144 19,964,813 (a) During the fourth quarter of 2021, the Company changed its estimate of the constant prepayment rate used to amortize/accrete federally insured loan premium/discounts for its consolidation loans from 3 percent to 4 percent, which resulted in a $6.2 million increase to the Company’s net loan discount balance and a corresponding decrease to interest income. The impact of this adjustment was excluded from the above table. (b) 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 income and the impact of this reduction to interest expense was excluded from the table above. (c) In the third quarter of 2021, the Company redeemed certain asset-backed debt securities prior to their legal maturity, resulting in the recognition of $1.5 million in interest expense from the write-off of all remaining debt issuance costs related to the initial issuance of such bonds. This expense was excluded from the table above. (d) 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 the Company believes that it provides additional information regarding operational and performance indicators that are closely assessed by management. There is no comprehensive, authoritative guidance for the presentation of such non-GAAP information, which is only meant to supplement GAAP results by providing additional information that management utilizes to assess performance. See note 6 of the notes to consolidated financial statements included in this report for additional information on the Company's derivative instruments, including the net settlement activity recognized by the Company for each type of derivative for the 2021 and 2020 periods presented in the table under the caption "Consolidated Financial Statement Impact Related to Derivatives - Statements of Income" in note 6 and in this table. 54 A reconciliation of core loan spread, which includes the impact of derivative settlements on loan spread, to loan spread without derivative settlements follows. Year ended December 31, 2021 2020 Core loan spread 1.41 % 1.33 % Derivative settlements (1:3 basis swaps) 0.01 (0.05) Derivative settlements (fixed rate floor income) 0.11 0.03 Loan spread 1.53 % 1.31 % (e) Derivative settlements consist of net settlements (paid) received related to the Company’s 1:3 basis swaps. (f) Derivative settlements consist of net settlements paid related to the Company’s floor income interest rate swaps. A trend analysis of AGM’s core and variable loan spreads by calendar year quarter is summarized below. (a) The interest earned on a large portion of AGM's FFELP student loan assets is indexed to the one-month LIBOR rate. AGM funds a portion of its assets with three-month LIBOR indexed floating rate securities. The relationship between the indices in which AGM earns interest on its loans and funds such loans has a significant impact on loan spread. This table (the right axis) shows the difference between AGM's liability base rate and the one-month LIBOR rate by quarter. See Item 7A, “Quantitative and Qualitative Disclosures About Market Risk - Interest Rate Risk - AGM Operating Segment,” which provides additional detail on AGM’s FFELP student loan assets and related funding for those assets. Variable loan spread increased during the year ended December 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 and second quarters of 2020 was the result of a significant decrease in interest rates during March 2020 and the first half of the second quarter of 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 rate resets on the Company's debt that occurs either monthly or quarterly. During the third and fourth quarters of 2020, as the Company's debt reset at lower interest rates, the Company's variable loan spread increased. See Item 7A, “Quantitative and Qualitative Disclosures About Market Risk - Interest Rate Risk - AGM Operating Segment,” which provides additional detail on AGM’s FFELP student loan assets and related funding for those assets. 55 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: Year ended December 31, 2021 2020 Fixed rate floor income, gross $ 142,606 123,460 Derivative settlements (a) (19,729) (6,699) Fixed rate floor income, net $ 122,877 116,761 Fixed rate floor income contribution to spread, net 0.65 % 0.58 % (a) Derivative settlements consist of net settlements paid related to the Company's derivatives used to hedge student loans earning fixed rate floor income. Gross fixed rate floor income increased in 2021 as compared to 2020 due to lower interest rates in 2021 as compared to 2020. The Company has a portfolio of derivative instruments in which the Company pays a fixed rate and receives a floating rate to economically hedge a portion of loans earning fixed rate floor income. The increase in net derivative settlements paid on the floor income interest rate swaps in 2021 as compared to 2020 was due to a decrease in interest rates and increase in the weighted average of notional amount of derivatives outstanding in 2021 as compared to 2020. See Item 7A, “Quantitative and Qualitative Disclosures About Market Risk - Interest Rate Risk - AGM Operating Segment,” which provides additional detail on AGM’s portfolio earning fixed rate floor income and the derivatives used by the Company to hedge these loans. Interest Rate Risk - Replacement of LIBOR as a Benchmark Rate As of December 31, 2021, the interest earned on a principal amount of $15.9 billion of AGM's FFELP student loan asset portfolio was indexed to one-month LIBOR, and the interest paid on a principal amount of $15.9 billion of AGM’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. The market transition away from the 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" for additional information. 56 Summary and Comparison of Operating Results Year ended December 31, 2021 2020 Additional information Net interest income after provision for loan losses $ 347,203 220,288 See table below for additional analysis. Other income, net 34,306 7,189 During 2021, the Company recognized $32.9 million related to its investment in a joint venture to purchase and securitize private education loans sold by Wells Fargo. The Company also earned $3.7 million in 2021 as the administrator and sponsor for the securitizations completed by the joint venture to fund these loans. Other income for 2021 also includes $3.4 million of borrower late fees. For 2021, other income was partially offset by a $6.8 million loss recognized by the Company as a result of purchasing back its own debt. The majority of other income recognized by the Company in 2020 related to $5.2 million of borrower late fees. The decrease in borrower late fees in 2021 as 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. The Company began to recognize borrower late fees again on May 1, 2021 (for private education loans) and October 1, 2021 (for federally insured student loans). Gain on sale of loans 18,715 33,023 The Company sold $95.8 million (par value) and $185.0 million (par value) of consumer loans to an unrelated third party in 2021 and 2020, respectively, and recognized gains from such sales. Impairment expense and provision for beneficial interests, net 2,436 (16,607) In March 2020, the Company recognized a provision expense of $26.3 million related to its beneficial interest in consumer loan securitization investments as a result of the estimated impacts of the COVID-19 pandemic. During the fourth quarter of 2020 and first quarter of 2021, the Company reversed $9.7 million and $2.4 million, respectively, of such provision due to improved economic conditions. Derivative settlements, net (21,367) 3,679 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 92,813 (28,144) 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 during 2021 and 2020 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 such swaps. Total other income/expense 126,903 (860) Salaries and benefits 2,135 1,747 Other expenses 13,487 15,806 The primary component of other expenses is servicing fees paid to third parties. The decrease in 2021 as compared to 2020 was due to a decrease in AGM's loan portfolio. Intersegment expenses 34,868 39,172 Amounts include fees paid to the LSS operating segment for the servicing of AGM’s loan portfolio. These amounts exceed the actual cost of servicing the loans. The decrease in servicing fees for 2021 as compared to 2020 was due to the expected amortization of AGM's FFELP portfolio and a decrease in certain servicing activities due to borrower relief initiatives and policies as a result of the COVID-19 pandemic. Intersegment expenses also include costs for certain corporate activities and services that are allocated to each operating segment based on estimated use of such activities and services. Total operating expenses 50,490 56,725 Total operating expenses were 27 basis points and 28 basis points of the average balance of loans in 2021 and 2020, respectively. The decrease for 2021 as compared to 2020 was due to a decrease in certain servicing activities beginning in March 2020 due to borrower relief initiatives and policies as a result of the COVID-19 pandemic. Income before income taxes 423,616 162,703 Income tax expense (101,668) (39,049) Represents income tax expense at an effective tax rate of 24%. Net income $ 321,948 123,654 Additional information: Net income $ 321,948 123,654 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. Derivative market value adjustments, net (92,813) 28,144 Tax effect 22,275 (6,755) Net income, excluding derivative market value adjustments $ 251,410 145,043 57 Net interest income after provision for loan losses, net of settlements on derivatives The following table summarizes the components of "net interest income after provision for loan losses" and "derivative settlements, net." Year ended December 31, 2021 2020 Additional information Variable interest income, gross $ 499,698 637,979 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 (160,228) (168,933) Decrease was due to a decrease in the average consolidation loan balance. Discount accretion, net of premium and deferred origination costs amortization (3,347) 2,578 During the fourth quarter of 2021, the Company changed its estimate of the constant prepayment rate used to amortize/accrete federally insured loan premium/discounts for its consolidation loans from 3 percent to 4 percent, which resulted in a $6.2 million increase to the Company’s net loan discount balance and a corresponding decrease to the net accretion discount (decrease to interest income). Excluding this adjustment, the Company recognized a discount accretion (net) of $2.8 million. 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 336,123 471,624 Interest on bonds and notes payable (171,320) (326,753) 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) (1,638) 10,378 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) 163,165 155,249 Fixed rate floor income, gross 142,606 123,460 Fixed rate floor income increased due to lower interest rates in 2021 as compared to 2020. It is currently anticipated that interest rates may rise in 2022 as a result of inflationary pressures in the U.S. economy, and an increase in future interest rates will reduce the amount of fixed rate floor income the Company is currently receiving. Derivative settlements, net (a) (19,729) (6,699) Derivative settlements include the settlements paid related to the Company's floor income interest rate swaps. The increase in net settlements paid in 2021 as compared to 2020 was due to a decrease in interest rates and an increase in the notional amount of derivatives outstanding. Fixed rate floor income, net of settlements on derivatives 122,877 116,761 Core loan interest income (a) 286,042 272,010 Investment interest 28,172 16,390 Increase in 2021 compared to 2020 was due to an increase in interest income on the Company's loan beneficial interest investments, partially offset by lower interest rates in 2021 as compared to 2020. Intercompany interest (1,598) (1,404) Increase was due to an increase in the weighted average intercompany debt outstanding in 2021 as compared to 2020, partially offset by lower interest rates in 2021 as compared to 2020. Negative provision (provision) for loan losses - federally insured loans 7,343 (18,691) See "Allowance for Loan Losses and Loan Delinquencies" included above under "Asset Generation and Management Operating Segment - Results of Operations. Negative provision (provision) for loan losses - private education loans 1,333 (6,155) Negative provision (provision) for loan losses - consumer loans 4,544 (38,183) Net interest income after provision for loan losses (net of settlements on derivatives) (a) $ 325,836 223,967 Increase for 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; (iii) an increase in interest income on the Company's loan beneficial interest investments; and (iv) 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) Core loan interest income and net interest income after provision for loan losses (net of settlements on derivatives) are non-GAAP financial measures. For an explanation of GAAP accounting for derivative settlements and the reasons why the Company reports these non-GAAP measures (and the limitations thereof), see footnote (d) to the table immediately under the caption “Loan Spread Analysis” above. See note 6 of the notes to consolidated financial statements included in this report for additional information on the Company's derivative instruments, including the net settlement activity recognized by the Company for each type of derivative referred to in the "Additional information" column of this table, for the 2021 and 2020 periods presented in the table under the caption "Consolidated Financial Statement Impact Related to Derivatives - Statements of Income" in note 6 and in this table. 58 NELNET BANK OPERATING SEGMENT – RESULTS OF OPERATIONS Loan Portfolio As of December 31, 2021, Nelnet Bank had a $257.9 million loan portfolio, consisting of $169.9 million of private education loans and $88.0 million of FFELP loans. As of December 31, 2021, Nelnet Bank's allowance for loan losses on its portfolio was $1.1 million, which represents reserves equal to 0.3% of Nelnet Bank's federally insured loans (or 12.1% of the risk sharing component of the loans that is not covered by the federal guaranty) and 0.5% of Nelnet Bank's private education loans. For a summary of Nelnet Bank's activity in the allowance for loan losses for the year ended December 31, 2021, and a summary of Nelnet Bank's loan status and delinquency amounts as of December 31, 2021 and 2020, see note 4 of the notes to consolidated financial statements included in this report. The following table sets forth the activity in Nelnet Bank's loan portfolio: Year ended December 31, 2021 2020 Beginning balance $ 17,543 — Federally insured student loan acquisitions 99,973 — Private education loan originations 179,749 17,660 Repayments (36,181) (117) Sales to AGM segment (3,183) — Ending balance $ 257,901 17,543 Deposits As of December 31, 2021, Nelnet Bank had $425.4 million of deposits, of which $81.1 million were deposits from Nelnet, Inc. (the parent company) and its subsidiaries (intercompany), and thus eliminated for consolidated financial reporting purposes. All of Nelnet Bank’s deposits are interest-bearing deposits and consist of brokered certificates of deposit (CDs) and retail and other savings deposits and CDs. Retail and other deposits include savings deposits from Educational 529 College Savings and Health Savings plans and commercial and institutional CDs. Union Bank, a related party, is the program manager for the College Savings plans. The intercompany deposits include a pledged deposit of $40.0 million from Nelnet, Inc. as required under the Capital and Liquidity Maintenance Agreement with the FDIC, deposits required for intercompany transactions, operating and savings deposits, and Nelnet Business Services custodial deposits consisting of collected tuition payments which are subsequently remitted to the appropriate school. 59 Average Balance Sheet The following table reflects the rates earned on interest-earning assets and paid on interest-bearing liabilities. Year ended December 31, 2021 Period from November 2, 2020 (Nelnet Bank inception) - December 31, 2020 Balance Rate Balance Rate Average assets Federally insured student loans $ 64,873 1.36 % — — % Private education loans 86,285 3.16 5,019 3.54 Cash and investments 220,735 1.86 159,908 1.46 Total interest-earning assets 371,893 2.08 % 164,927 1.53 % Non-interest-earning assets 10,195 5,767 Total assets $ 382,088 170,694 Average liabilities and equity Brokered deposits 61,208 0.84 % 1,198 0.55 % Intercompany deposits 81,064 0.25 46,504 0.30 Retail and other deposits 132,010 0.60 21,207 0.50 Total interest-bearing liabilities 274,282 0.55 % 68,909 0.36 % Non-interest-bearing liabilities 4,705 1,410 Equity 103,101 100,375 Total liabilities and equity $ 382,088 170,694 Summary of Operating Results On November 2, 2020, Nelnet Bank launched operations, which 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 $3.4 million and $6.0 million for the years ended December 31, 2021 and 2020, respectively. Year ended December 31, 2021 2020 Additional information Total interest income $ 7,721 414 Represents interest earned on Nelnet Bank's FFELP and private education student loans, cash, and investments. Interest expense 1,507 41 Represents interest expense on deposits. Net interest income 6,214 373 Provision for loan losses 794 330 Net interest income after provision for loan losses 5,420 43 Other income 713 48 Salaries and benefits 5,042 36 Represents salaries and benefits of Nelnet Bank associates and third-party contract labor. Other expenses 1,776 135 Represents various expenses such as consulting and professional fees, Nelnet Bank director fees, occupancy, certain information technology-related costs, insurance, marketing, and other operating expenses. Intersegment expenses 107 — Represents primarily servicing costs paid to the LSS operating segment. Total operating expenses 6,925 171 Loss before income taxes (792) (80) Income tax benefit 175 20 Represents income tax benefit at an effective tax rate of 22.1% and 23.7% for the years ended December 31, 2021 and 2020, respectively. Net loss $ (617) (60) 60 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 and the Company's other initiatives to pursue additional strategic investments. The Company may issue equity and debt securities in the future in order to improve capital, increase liquidity, refinance upcoming maturities, or provide for general corporate purposes. Moreover, the Company may from time-to-time repurchase certain amounts of its outstanding secured debt securities, including debt securities which the Company may issue in the future, for cash and/or through exchanges for other securities. Such repurchases or exchanges may be made in open market transactions, privately negotiated transactions, or otherwise. Any such repurchases or exchanges will depend on prevailing market conditions, the Company’s liquidity requirements, contractual restrictions, compliance with securities laws, and other factors. The amounts involved in any such transactions may be material. The Company has historically utilized operating cash flow, secured financing transactions (which include warehouse facilities and asset-backed securitizations), operating lines of credit, and other borrowing arrangements to fund its Asset Generation and Management operations and loan acquisitions. In addition, the Company has used operating cash flow, borrowings on its unsecured line of credit, repurchase agreements, and unsecured debt offerings to fund corporate activities; business acquisitions; solar, real estate, and other investments; repurchases of common stock; and repurchases of its own debt. Sources of Liquidity The Company has historically generated positive cash flow from operations. For the years ended December 31, 2021 and 2020, the Company's net cash provided by operating activities was $544.9 million and $212.8 million, respectively. As of December 31, 2021, the Company had cash and cash equivalents of $125.6 million. Cash held by Nelnet Bank is generally not available for Company activities outside of Nelnet Bank. Excluding Nelnet Bank, cash and cash equivalents as of December 31, 2021 was $99.4 million. The Company also has a $495.0 million unsecured line of credit that matures on September 22, 2026. As of December 31, 2021, there was no amount outstanding on the unsecured line of credit and $495.0 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 $737.5 million, subject to certain conditions. In addition, the Company has retained certain of its own asset-backed securities upon their initial issuance or repurchased certain of its own asset-backed securities (bonds and notes payable) in the secondary market. For accounting purposes, these notes are eliminated in consolidation and are not included in the Company’s consolidated financial statements. However, these securities remain legally outstanding at the trust level and the Company could sell these notes to third parties or redeem the notes at par as cash is generated by the trust estate. Upon a sale of these notes to third parties, the Company would obtain cash proceeds equal to the market value of the notes on the date of such sale. As of December 31, 2021, the Company holds $381.2 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 year ended December 31, 2021, the Company generated $544.9 million from operating activities, compared to $212.8 million for the same period in 2020. The increase in such cash flows from operating activities was due to: • An increase in net income; • Adjustments to net income for the impact of the gain from the 2020 deconsolidation of ALLO and the non-cash change in deferred income taxes; • A decrease in loan discount accretion in 2021 as compared to 2020; • Net proceeds from the Company’s clearinghouse for margin payments on derivatives in 2021 compared to net payments to the clearing house in 2020; and 61 • The impact of changes to the due to customers liability account and loan and investment accrued interest receivable in 2021 as compared to 2020. These factors were partially offset by: • The adjustments to net income for derivative market value adjustments; • Adjustments to net income for the impact of the non-cash provision for loan losses, beneficial interests, and impairment charges and depreciation and amortization; • Purchases of equity securities; and • The impact of changes to accounts receivable and other assets in 2021 as compared to 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 year ended December 31, 2021 was $1.19 billion and $1.49 billion, respectively. Cash provided by investing activities and used in financing activities for the year ended December 31, 2020 was $621.2 million and $1.10 billion, respectively. 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 AGM’s debt obligations outstanding that are secured by loan assets and related collateral. As of December 31, 2021 Carrying amount Final maturity Bonds and notes issued in asset-backed securitizations $ 16,969,211 5/27/25 - 9/25/69 FFELP and private education loan warehouse facilities 112,059 2/13/23 / 5/22/23 $ 17,081,270 Bonds and Notes Issued in Asset-backed Securitizations The majority of AGM’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 AGM receives on the loans and cost of financing within these transactions, and (ii) the servicing and administration fees AGM earns from these transactions, AGM has created a portfolio that will generate earnings and significant cash flow over the life of these transactions. As of December 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, AGM currently expects future undiscounted cash flows from its portfolio to be approximately $1.88 billion as detailed below. The forecasted cash flow presented below includes all loans funded in asset-backed securitizations as of December 31, 2021. As of December 31, 2021, AGM had $17.1 billion of loans included in asset-backed securitizations, which represented 98.3 percent of its total loan portfolio. The forecasted cash flow does not include cash flows that the Company expects to receive related to loans funded in its warehouse facilities as of December 31, 2021, private education and consumer loans funded with operating cash, loans acquired subsequent to December 31, 2021, loans owned by Nelnet Bank, and cash flows relating to the Company's ownership of beneficial interest in loan securitizations (such beneficial interest investments are classified as "investments" on the Company's consolidated balance sheets). 62 Asset-backed Securitization Cash Flow Forecast $1.88 billion (dollars in millions) The forecasted future undiscounted cash flows of approximately $1.88 billion include approximately $1.14 billion (as of December 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 $0.74 billion, or approximately $0.56 billion after income taxes based on the estimated effective tax rate, is expected to be accretive to the Company's December 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 $120 million to $150 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 $60 million to $80 million. As the percentage of the Company's outstanding debt financed by three-month LIBOR declines, the Company's basis risk will be reduced. In addition, the Company attempts to mitigate the 63 impact of this basis risk by entering into certain derivative instruments. See Item 7A, "Quantitative and Qualitative Disclosures About Market Risk — Interest Rate Risk - AGM Operating Segment." LIBOR is in the process of being discontinued as a benchmark rate, and the market transition away from the current LIBOR framework could result in significant changes to the forecasted cash flows from the Company's asset-backed securitizations. See Item 1A, "Risk Factors - Loan Portfolio - Interest rate risk - replacement of LIBOR as a benchmark rate." The Company uses the current forward interest rate yield curve to forecast cash flows. A change in the forward interest rate curve would impact the future cash flows generated from the portfolio. An increase in future interest rates will reduce the amount of fixed rate floor income the Company is currently receiving. The Company attempts to mitigate the impact of a rise in short-term rates by hedging interest rate risks. The forecasted cash flow does not include cash flows the Company expects to pay/receive related to derivative instruments used by the Company to manage interest rate risk. See Item 7A, "Quantitative and Qualitative Disclosures About Market Risk — Interest Rate Risk - AGM Operating Segment." Warehouse Facilities The Company funds a portion of its FFELP loan acquisitions using its FFELP warehouse facility. Student loan warehousing allows the Company to buy and manage student loans prior to transferring them into more permanent financing arrangements. As of December 31, 2021, the Company’s FFELP warehouse facility had a maximum financing amount available of $60.0 million, of which $5.0 million was outstanding and $55.0 million was available for additional funding. The warehouse facility has a static advance rate until the expiration date of the liquidity provisions (May 23, 2022). 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 22, 2023). As of December 31, 2021, the Company had $0.3 million advanced as equity support on this facility. The Company has a private education loan warehouse facility that, as of December 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 December 31, 2021, $107.0 million was outstanding under this warehouse facility, $68.0 million was available for future funding, and $11.8 million was advanced as equity support. This facility was amended on January 28, 2022 to extend the liquidity provisions and final maturity to June 30, 2022 and June 30, 2023, respectively. Upon termination or expiration of the warehouse facilities, the Company would expect to access the securitization market, obtain replacement warehouse facilities, use operating cash, consider the sale of assets, or transfer collateral to satisfy any remaining obligations. Other Uses of Liquidity The Company no longer originates 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). The Company plans to fund additional loan acquisitions and related investments using current cash and investments; using its unsecured line of credit, Union Bank student loan participation agreement, Union Bank student loan asset-backed securities participation agreement, and third-party repurchase agreements (each as described below), and/or establishing similar secured and unsecured 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. Private Education Loan Investment During 2021, the Company sponsored four asset-backed securitization transactions to permanently finance a total of $8.7 billion of the private education loans sold by Wells Fargo. For further information about these transactions, see “Overview – Recent Transactions / Developments - 2021 Transactions Related to the Private Education Loan Portfolio Sold by Wells Fargo” above. As sponsor, the Company is required to provide a certain level of risk retention, and has purchased bonds issued in such securitizations to satisfy this requirement. The bonds purchased to satisfy the risk retention requirement are reflected on the Company's consolidated balance sheet as "investments" and as of December 31, 2021, the fair value of these bonds was $412.6 million. The Company must retain these investment securities until the expiration of a holding period discussed above under “Overview – Recent Transactions / Developments – 2021 Transactions Related to the Private Education Loan Portfolio Sold by Wells Fargo.” The Company entered into repurchase agreements with third parties, the proceeds of which were used to purchase a portion of the asset-backed investments, and such investments serve as collateral on the repurchase obligations. 64 As of December 31, 2021, $483.8 million was outstanding on the Company’s repurchase agreements, of which $313.2 million was borrowed to fund private education loan securitization bonds subject to the Company’s risk retention requirement. The repurchase agreements have various maturity dates between May 27, 2022 and December 20, 2023, but are subject to early termination upon required notice provided by the Company or the applicable counterparty prior to the maturity dates. The Company is required to pay additional cash in the event the fair value of the securities subject to a repurchase agreement becomes less than the original purchase price of such securities. Upon termination or expiration of the repurchase agreements, the Company would use cash and/or cash proceeds from its unsecured line of credit to satisfy any outstanding obligations subject to the repurchase agreements. Union Bank Participation Agreement The Company maintains an agreement with Union Bank, a related party, as trustee for various grantor trusts, under which Union Bank has agreed to purchase from the Company participation interests in student loans. As of December 31, 2021, $967.5 million of loans were subject to outstanding participation interests held by Union Bank, as trustee, under this agreement. The agreement automatically renews annually and is terminable by either party upon five business days' notice. This agreement provides beneficiaries of Union Bank’s grantor trusts with access to investments in interests in student loans, while providing liquidity to the Company. The Company can participate loans to Union Bank to the extent of availability under the grantor trusts, up to $900.0 million or an amount in excess of $900.0 million if mutually agreed to by both parties. Loans participated under this agreement have been accounted for by the Company as loan sales. Accordingly, the participation interests sold are not included on the Company’s consolidated balance sheets. Asset-backed Securities Transactions During 2021, the Company completed two FFELP asset-backed securitizations totaling $1.3 billion (par value). The proceeds from these transactions were used primarily to finance student loans purchased during the period and refinance student loans included in the Company's FFELP warehouse facilities and other asset-backed securitizations. See note 5 of the notes to consolidated financial statements included in this report for additional information on these securitizations. The Company, through its subsidiaries, has historically funded student loans by completing asset-backed securitizations. Depending on market conditions, the Company currently anticipates continuing to access the asset-backed securitization market. Such asset-backed securitization transactions would be used to refinance student loans included in its warehouse facilities, loans purchased from third parties, and/or student loans in its existing asset-backed securitizations. Liquidity Impact Related to Nelnet Bank Nelnet Bank launched operations in November 2020. 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 Nelnet Bank’s launch of operations, 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. 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 Office of the Comptroller of the Currency, 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 65 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 December 31, 2021 with a leverage ratio of 22.4%. 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. Based on Nelnet Bank's business plan and current financial condition, 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 years. Liquidity Impact Related to ALLO Upon the deconsolidation of ALLO on December 21, 2020, the Company recorded its 45 percent voting membership interests in ALLO at fair value, and accounts for such investment under the HLBV method of accounting. In addition, the Company recorded its remaining non-voting preferred membership units of ALLO at fair value, and accounts for such investment as a separate equity investment. As of December 31, 2021, the outstanding preferred membership interests of ALLO held by the Company was $137.3 million that earns a preferred annual return of 6.25 percent. 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 the redemption, on or before April 2024, of the remaining non-voting preferred membership interests in ALLO held by the Company, plus the amount of accrued and unpaid preferred return on such interests. 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. Although ALLO has obtained third-party debt financing to fund a large portion of its current growth plans, the Company contributed an additional $34.7 million of additional equity to ALLO on February 25, 2022. As a result of this equity contribution, the Company’s voting membership interests percentage did not materially change. Liquidity Impact Related to Hedging Activities The Company utilizes derivative instruments to manage interest rate sensitivity. By using derivative instruments, the Company is exposed to market risk which could impact its liquidity. Based on the derivative portfolio outstanding as of December 31, 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 6 of the notes to consolidated financial statements included in this report for additional information on the Company's derivative portfolio. Other Debt Facilities As discussed above, the Company has a $495.0 million unsecured line of credit with a maturity date of September 22, 2026. As of December 31, 2021, the unsecured line of credit had no amount outstanding and $495.0 million was available for future use. Upon the maturity date of this facility, there can be no assurance that the Company will be able to maintain this line of credit, increase the amount outstanding under the line, 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 federally insured student loan asset-backed securities. As of December 31, 2021, $254.0 million (par value) of student loan asset-backed securities were subject to outstanding participation interests held by Union Bank, as trustee, under this agreement. This participation agreement has been accounted for by the Company as a secured borrowing. Upon termination or expiration of this agreement, the Company would expect to use operating cash, consider the sale of assets, or transfer collateral to satisfy any remaining obligations. For further discussion of these debt facilities described above, see note 5 of the notes to consolidated financial statements included in this report. 66 Debt Repurchases Due to the Company’s positive liquidity position and opportunities in the capital markets, the Company has repurchased its own debt over the last several years, and may continue to do so in the future. For accounting purposes, these notes are eliminated in consolidation and are not included in the Company’s consolidated financial statements. However, these securities remain legally outstanding at the trust level and the Company could sell these notes to third parties or redeem the notes at par as cash is generated by the trust estate. Upon a sale of these notes to third parties, the Company would obtain cash proceeds equal to the market value of the notes on the date of such sale. As of December 31, 2021, the Company holds $381.2 million (par value) of its own asset-backed securities. See note 5 of the notes to consolidated financial statements included in this report for information on debt repurchased by the Company during the last three years. Stock Repurchases The Board of Directors has authorized a stock repurchase program to repurchase up to a total of five million shares of the Company's Class A common stock during the three-year period ending May 7, 2022. As of December 31, 2021, 2,571,680 shares remained authorized for repurchase under the Company's stock repurchase program. Shares may be repurchased from time to time on the open market, in private transactions (including with related parties), or otherwise, depending on various factors, including share prices and other potential uses of liquidity. Shares repurchased by the Company during 2021 and 2020 are shown below. Certain of these repurchases were made pursuant to trading plans adopted by the Company in accordance with Rule 10b5-1 under the Securities Exchange Act of 1934. Total shares repurchased Purchase price (in thousands) Average price of shares repurchased (per share) Year ended December 31, 2021 713,274 $ 58,111 $ 81.47 Year ended December 31, 2020 1,594,394 73,358 46.01 Included in the shares repurchased during 2020 in the table above are a total of 100,000 shares of Class A common stock the Company purchased on May 27, 2020 from Shelby J. Butterfield, a significant shareholder of the Company. Included in the shares repurchased during 2021 are a total of 337,717 shares of Class A common stock the Company purchased on August 10, 2021 from various estate planning trusts associated with Shelby J. Butterfield. The shares purchased in 2020 and 2021 were purchased at a discount to the closing market price of the Company's Class A common stock as of May 27, 2020 and August 9, 2021, respectively, and the transactions were separately approved by the Company's Board of Directors and its Nominating and Corporate Governance Committee. Immediately prior to the Company's repurchase of such shares, certain of the repurchased shares were shares of the Company's Class B common stock that were converted to shares of Class A common stock. Dividends Dividends of $0.22 per share on the Company’s Class A and Class B common stock were paid on March 15, 2021, June 14, 2021, and September 15, 2021, respectively, and a dividend of $0.24 per share was paid on December 15, 2021. The Company's Board of Directors declared a first quarter 2022 cash dividend on the Company's Class A and Class B common stock of $0.24 per share. The dividend will be paid on March 15, 2022, to shareholders of record at the close of business on March 1, 2022. The Company currently plans to continue making regular quarterly dividend payments, subject to future earnings, capital requirements, financial condition, and other factors. CRITICAL ACCOUNTING POLICIES AND ESTIMATES This Management’s Discussion and Analysis of Financial Condition and Results of Operations discusses the Company’s consolidated financial statements, which have been prepared in accordance with accounting principles generally accepted in the United States. The preparation of these financial statements requires management to make estimates and assumptions that affect the reported amounts of assets and liabilities and the reported amounts of income and expenses during the reporting periods. The Company bases its estimates and judgments on historical experience and on various other factors that the Company believes are reasonable under the circumstances. Actual results may differ from these estimates under varying assumptions or conditions. Note 3 of the notes to consolidated financial statements included in this report includes a summary of the significant accounting policies and methods used in the preparation of the consolidated financial statements. 67 On an on-going basis, management evaluates its estimates and judgments, particularly as they relate to accounting policies that management believes are most "critical" — that is, they are most important to the portrayal of the Company’s financial condition and results of operations and they require management’s most difficult, subjective, or complex judgments, often as a result of the need to make estimates about the effect of matters that are inherently uncertain. Management has identified the allowance for loan losses as a critical accounting policy. Allowance for Loan Losses The allowance for loan losses represents the Company’s estimate of the expected lifetime credit losses inherent in loan receivables as of the balance sheet date. The adequacy of the allowance for loan losses is assessed quarterly and the assumptions and models used in establishing the allowance are evaluated regularly. Because credit losses can vary substantially over time, estimating credit losses requires a number of assumptions about matters that are uncertain. Such assumptions are discussed below, and such uncertainty is due in part to the fact that loans in the Company’s portfolio mature over the next 15 years (with a weighted average remaining life of approximately 8 years), and actual credit losses will be affected by, among other things, future economic conditions and future personal financial situations for borrowers, over that extended time frame. Changes in the Company’s assumptions affect “provision for loan losses” on the Company’s consolidated income statements and the “allowance for loan losses” contained within “loans and accrued interest receivable, net of allowance for loan losses” on the Company’s consolidated balance sheets. For additional information regarding our allowance for loan losses, see notes 3 and 4 of the notes to consolidated financial statements included in this report. The Company estimates the allowance for loan losses for receivables that share similar risk characteristics based on a collective assessment using a combination of measurement models and management judgment. The models consider factors such as historical trends in credit losses, recent portfolio performance, and forward-looking macroeconomic conditions. The models vary by portfolio type including FFELP, private education, and consumer loans. If management does not believe the models reflect lifetime expected credit losses for the portfolio, an adjustment is made to reflect management judgment regarding qualitative factors including economic uncertainty, observable changes in portfolio performance, and other relevant factors. The Company’s allowance for loan losses is based on various assumptions including: probability of default; loss given default; exposure at default; net loss rates for its consumer portfolio; contractual terms, including prepayments; forecast period; reversion method; reversion period; and macroeconomic factors, including unemployment rates, gross domestic product, and the consumer price index. The allowance for loan losses is made at a specific point in time and based on relevant information as discussed above. The allowance for loan losses is maintained at a level management believes is appropriate to provide for expected lifetime credit losses inherent in loan receivables as of the balance sheet date. This evaluation is inherently subjective because it requires numerous estimates made by management. These estimates are subjective in nature and involve uncertainties and matters of significant judgement. Changes in estimates could significantly affect the Company's recorded balance for the allowance for loan losses. For additional information regarding changes in the Company’s allowance for loan losses for the years ended December 31, 2021, 2020, and 2019, see the caption “Activity in the Allowance for Loan Losses” in note 4 of the notes to consolidated financial statements included in this report. The Company considers a range of economic scenarios in its determination of the allowance for loan losses. These scenarios are constructed with interrelated projections of multiple economic variables, and loss estimates are produced that consider the historical correlation of those economic variables with credit losses, and also the expectation that conditions will eventually normalize over the longer run. Scenarios worse than the Company’s expected outcome at December 31, 2021 include risks that the COVID-19 pandemic significantly worsens from the relatively improved conditions at December 31, 2021, or that government stimulus programs related to the pandemic are less effective than expected or have collateral adverse consequences for the economy, any of which could lead to a prolonged downturn in economic activity, reducing the number of businesses that are able to conduct normal operations until after conditions improve, which could impact borrowers’ ability to pay on their loans held with us. Under the range of economic scenarios considered, the allowance for loan losses would have been lower by $7 million (6 percent) or higher by $13 million (10 percent). This range reflects the sensitivity of the allowance for loan losses specifically related to the scenarios and weights considered as of December 31, 2021, and does not consider other potential adjustments that could increase or decrease loss estimates calculated using alternative economic scenarios. Because several quantitative and qualitative factors are considered in determining the allowance for loan losses, these sensitivity analyses do not necessarily reflect the nature and extent of future changes in the allowance for loan losses. They are intended to provide insights into the impact of adverse changes in the economy on the Company’s modeled loss estimates for the loan portfolio and do not imply any expectation of future deterioration in loss rates. Given current processes employed by 68 the Company, management believes the loss model estimates currently assigned are appropriate. It is possible that others, given the same information, may at any point in time reach different reasonable conclusions that could be significant to the Company’s financial statements.