NELNET INC 10-Q

ITEM 2. MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS (Management’s Discussion and Analysis of Financial Condition and Results of Operations is for the three months ended March 31, 2022 and 2021. All dollars are in thousands, except per share amounts, unless otherwise noted.) The following discussion and analysis provides information that the Company’s management believes is relevant to an assessment and understanding of the consolidated results of operations and financial condition of the Company. The discussion should be read in conjunction with the Company’s consolidated financial statements included in the 2021 Annual Report. Forward-looking and cautionary statements This report contains forward-looking statements and information that are based on management's current expectations as of the date of this document. Statements that are not historical facts, including statements about the Company's plans and expectations for future financial condition, results of operations or economic performance, or that address management's plans and objectives for future operations, and statements that assume or are dependent upon future events, are forward-looking statements. The words “anticipate,” “assume,” “believe,” “continue,” “could,” “estimate,” “expect,” “forecast,” “future,” “intend,” “may,” “plan,” “potential,” “predict,” “scheduled,” “should,” “will,” “would,” and similar expressions, as well as statements in future tense, are intended to identify forward-looking statements. The forward-looking statements are based on assumptions and analyses made by management in light of management's experience and its perception of historical trends, current conditions, expected future developments, and other factors that management believes are appropriate under the circumstances. These statements are subject to known and unknown risks, uncertainties, assumptions, and other factors that may cause the actual results and performance to be materially different from any future results or performance expressed or implied by such forward-looking statements. These factors include, among others, the risks and uncertainties set forth in the “Risk Factors” section of the 2021 Annual Report, the "Risk Factors" section of this report, and elsewhere in this report, and include such risks and uncertainties as: • risks and uncertainties related to the severity, magnitude, and duration of the coronavirus disease 2019 (“COVID-19”) pandemic, including changes in the macroeconomic environment and consumer behavior, restrictions on business, educational, individual, or travel activities intended to combat the pandemic, and volatility in market conditions resulting from the pandemic, including interest rates, the value of equities, and other financial assets; • risks related to the ability to successfully maintain and increase allocated volumes of student loans serviced by the Company under existing and any future servicing contracts with the U.S. Department of Education (the "Department"), which current contracts accounted for 29 percent of the Company's revenue in 2021, risks to the Company related to the Department's initiatives to procure new contracts for federal student loan servicing, including the pending and uncertain nature of the Department's procurement process, risks that the Company may not be successful in obtaining any of such potential new contracts, and risks related to the Company's ability to comply with agreements with third-party customers for the servicing of Federal Direct Loan Program, Federal Family Education Loan Program (the "FFEL Program" or "FFELP"), private education, and consumer loans; • loan portfolio risks such as interest rate basis and repricing risk resulting from the fact that the interest rate characteristics of the student loan assets do not match the interest rate characteristics of the funding for those assets, the risk of loss of floor income on certain student loans originated under the FFEL Program, risks related to the use of derivatives to manage exposure to interest rate fluctuations, uncertainties regarding the expected benefits from purchased securitized and unsecuritized FFELP, private education, and consumer loans, or investment interests therein, and initiatives to purchase additional FFELP, private education, and consumer loans, and risks from changes in levels of loan prepayment or default rates; • financing and liquidity risks, including risks of changes in the interest rate environment, such as risks from the recent increases in interest rates resulting from inflationary pressures and the transition from LIBOR to an alternative reference rate, and changes in the securitization and other financing markets for loans, including adverse changes resulting from unanticipated repayment trends on student loans in the Company's securitization trusts that could accelerate or delay repayment of the associated bonds, which may increase the costs or limit the availability of financings necessary to purchase, refinance, or continue to hold student loans; • risks from changes in the terms of education loans and in the educational credit and services markets resulting from changes in applicable laws, regulations, and government programs and budgets, such as changes resulting from the Coronavirus Aid, Relief, and Economic Security Act (the "CARES Act") and the expected decline over time in FFELP loan interest income due to the discontinuation of new FFELP loan originations in 2010 and government initiatives or proposals to consolidate existing FFELP loans to Federal Direct Loan Program loans, otherwise encourage or allow 25 FFELP loans to be refinanced with Federal Direct Loan Program loans, and/or create additional loan forgiveness or broad debt cancellation programs; • risks related to a breach of or failure in the Company's operational or information systems or infrastructure, or those of third-party vendors, including cybersecurity risks related to a disclosure of confidential loan borrower and other customer information, the potential disruption of the Company's systems or those of third-party vendors or customers, and/or the potential damage to the Company's reputation resulting from cyber-breaches; • uncertainties inherent in forecasting future cash flows from student loan assets and related asset-backed securitizations; • risks and uncertainties of the expected benefits from the November 2020 launch of Nelnet Bank operations, including the ability to successfully conduct banking operations and achieve expected market penetration; • risks related to the expected benefits to the Company from its continuing investment in ALLO Holdings, LLC (referred to collectively with its subsidiary ALLO Communications LLC as "ALLO"), and risks related to investments in solar projects, including risks of not being able to realize tax credits which remain subject to recapture by taxing authorities; • risks and uncertainties related to other initiatives to pursue additional strategic investments (and anticipated income therefrom), acquisitions, and other activities, including activities that are intended to diversify the Company both within and outside of its historical core education-related businesses; • risks and uncertainties associated with climate change, including extreme weather events and related natural disasters, which could result in increased loan portfolio credit risks and other asset and operational risks, as well as risks and uncertainties associated with efforts to address climate change; and • risks and uncertainties associated with litigation matters and with maintaining compliance with the extensive regulatory requirements applicable to the Company's businesses, reputational and other risks, including the risk of increased regulatory costs resulting from the politicization of student loan servicing, and uncertainties inherent in the estimates and assumptions about future events that management is required to make in the preparation of the Company's consolidated financial statements. All forward-looking statements contained in this report are qualified by these cautionary statements and are made only as of the date of this document. Although the Company may from time to time voluntarily update or revise its prior forward-looking statements to reflect actual results or changes in the Company's expectations, the Company disclaims any commitment to do so except as required by law. 26 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). The Company is also actively expanding its private education and consumer loan portfolios, and in November 2020 launched Nelnet Bank. 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. Three months ended March 31, 2022 2021 GAAP net income attributable to Nelnet, Inc. $ 186,647 123,598 Realized and unrealized derivative market value adjustments (145,734) (38,809) Tax effect (a) 34,976 9,314 Net income attributable to Nelnet, Inc., excluding derivative market value adjustments (b) $ 75,889 94,103 Earnings per share: GAAP net income attributable to Nelnet, Inc. $ 4.91 3.20 Realized and unrealized derivative market value adjustments (3.83) (1.01) Tax effect (a) 0.91 0.25 Net income attributable to Nelnet, Inc., excluding derivative market value adjustments (b) $ 1.99 2.44 (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. 27 Operating Segments The Company's reportable operating segments are described in note 1 of the notes to consolidated financial statements included in the 2021 Annual Report. They include: • Loan Servicing and Systems ("LSS") - referred to as Nelnet Diversified Services ("NDS") • Education Technology, Services, and Payment Processing ("ETS&PP") - referred to as Nelnet Business Services ("NBS") • Asset Generation and Management ("AGM") • Nelnet Bank The Company earns fee-based revenue through its NDS and NBS operating segments. The Company earns net interest income on its loan portfolio, consisting primarily of FFELP loans, in its AGM operating segment. This segment is expected to generate significant amounts of cash as the FFELP portfolio amortizes. 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. 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. 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. The information below provides the operating results (net income before taxes) for each reportable operating segment and Corporate and Other Activities for the three months ended March 31, 2022 and 2021. See "Results of Operations" for each reportable operating segment under this Item 2 for additional detail. Three months ended March 31, 2022 2021 Certain Items Impacting Comparability (All dollar amounts below are pre-tax) NDS $ 12,094 16,084 NBS 33,113 30,974 AGM 213,429 141,609 • A net gain of $145.7 million related to changes in the fair values of derivative instruments that do not qualify for hedge accounting in the first quarter of 2022 as compared to a net gain of $38.8 million for the same period in 2021 • An increase of $6.5 million in investment interest income in 2022 as compared to 2021 primarily from beneficial interest investments • A decrease of $23.8 million in interest expense during the first quarter of 2021 as a result of the Company reversing a historical accrued interest liability on certain bonds, which liability the Company determined is no longer probable of being required to be paid • The recognition of $17.5 million negative provision for loan losses on AGM’s loan portfolio in the first quarter of 2021, as compared to a negative provision of $0.9 million for the same period in 2022 • A decrease of $8.2 million in net interest income due to the decrease in the average balance of loans and the decrease in fixed rate floor income in the first quarter of 2022 as compared to 2021 • The recognition of $3.0 million on the sale of loans during the first quarter of 2022 Nelnet Bank 961 (1,254) Corporate (19,013) (29,650) • The recognition of a net loss of $13.1 million for the first quarter of 2022 related to the Company’s investment in ALLO, as compared to a net loss of $22.2 million for the same period in 2021 Net income before taxes 240,583 157,765 Income tax expense (55,697) (34,861) Net loss attributable to noncontrolling interests 1,761 694 Net income $ 186,647 123,598 28 Recent Developments On April 19, 2022, the Department issued a press release, and the Department’s Office of Federal Student Aid (“FSA”) posted a related public announcement, which together announced, among other things, several adjustments, updates, and other changes under income-driven repayment (“IDR”) plans for federal student loans. In the announcements, the Department and FSA indicated that as part of these changes, any borrower with loans that have accumulated time in repayment, including time in certain forbearances and deferments, of at least 20 or 25 years will see automatic forgiveness, even if the borrower is not currently in an IDR plan, and that if a borrower has a commercially held FFEL Program loan, the borrower can only benefit from these changes if they consolidate their FFEL Program loan to a Federal Direct Loan Program loan before the Department completes implementation of these changes, which the Department estimates to be no sooner than January 1, 2023. The Company currently believes these announced changes could significantly increase FFEL Program loan prepayments. A significant increase in FFEL Program loan prepayments could have a materially adverse impact in future periods on the Company’s net interest income in its AGM operating segment, FFELP servicing revenue in the Company’s LSS operating segment, investment advisory services revenue earned by the Company’s SEC-registered investment advisor subsidiary (Whitetail Rock Capital Management, LLC) on FFELP loan asset-backed securities under management, and interest income earned on the Company’s FFELP loan asset-backed securities investments. In addition, student loan forgiveness under the Federal Direct Loan Program as a result of the changes described in the announcements could have a materially adverse impact on future revenue earned by the LSS operating segment under the Company’s government servicing contracts, including software services revenue earned by the Company in providing remote hosted services to other government servicers. See Part II, Item 1A, “Risk Factors” in this report for additional information. Impact of COVID-19 The COVID-19 pandemic is unprecedented and has had a significant impact on the economic environment globally and in the U.S. There is uncertainty as to the length and breadth of the impact to the U.S. economy and, consequently, on the Company. As a related matter, on April 6, 2022, the Department announced that the suspension under the CARES Act on federal student loan payments and interest accruals on all loans owned by the Department was extended through August 31, 2022. For a further overview discussion of the impact of the COVID-19 pandemic on the Company, see Part II, Item 7. "Management's Discussion and Analysis of Financial Condition and Results of Operations - Overview - Recent Transactions/Developments - COVID-19" in the 2021 Annual Report. In addition, for an additional discussion regarding the risks associated with COVID-19, see Part I, 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." in the 2021 Annual Report. 29 CONSOLIDATED RESULTS OF OPERATIONS An analysis of the Company's consolidated operating results for the three months ended March 31, 2022 compared to the same period in 2021 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 9 of the notes to consolidated financial statements included under Part I, Item 1 of this report. Since the Company monitors and assesses its operations and results based on these segments, the discussion following the consolidated results of operations is presented on a reportable segment basis. Three months ended March 31, 2022 2021 Additional information Loan interest $ 111,377 124,117 Decrease was due primarily to a decrease in the average balance of loans and in gross fixed rate floor income, partially offset by an increase in the gross yield earned on loans in 2022 as compared to 2021. Investment interest 13,819 4,986 Includes income from unrestricted interest-earning deposits and investments and funds in asset-backed securitizations. Increase was due to interest income earned on loan beneficial interest investments and an increase in interest rates in 2022 as compared to 2021. Total interest income 125,196 129,103 Interest expense 48,079 27,773 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. Excluding this reduction, interest expense decreased in 2022 as compared to 2021. This decrease was due to a decrease in the average balance of debt outstanding, partially offset by an increase in cost of funds. Net interest income 77,117 101,330 Less negative provision for loan losses (435) (17,048) The Company recorded a negative provision for loan losses for its federally insured loan portfolio for the three months ended March 31, 2022 due to the amortization of the portfolio and an increase in expected prepayments as a result of an initiative offered by the Department for FFELP borrowers to consolidate their loans into Federal Direct Loan Program loans with the Department by October 31, 2022 to qualify for loan forgiveness under the Public Service Loan Forgiveness program. This negative provision was partially offset by the Company recording a provision for loan losses for loans acquired and originated during the period. The Company recorded a negative provision for loan losses for the three months ended March 31, 2021 due to management's estimate of certain improved economic conditions as of March 31, 2021 in comparison to management's estimate of economic conditions used to determine the allowance for loan losses as of December 31, 2020. The negative provision recorded during the first quarter of 2021 was partially offset by the Company recording a provision expense for loans originated and acquired during the period as well as recording additional provision expense for its private education loan portfolio as a result of an increase of loans in forbearance. Net interest income after provision for loan losses 77,552 118,378 Other income/expense: LSS revenue 136,368 111,517 See LSS operating segment - results of operations. ETS&PP revenue 112,286 95,258 See ETS&PP operating segment - results of operations. Other 9,877 (2,168) See table below for the components of "other." Gain on sale of loans 2,989 — On January 26, 2022, the Company sold $18.1 million (par value) of consumer loans to an unrelated third party and recognized a gain of $3.0 million. Derivative settlements, net (2,809) (4,304) 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 145,734 38,809 Includes the realized and unrealized gains and losses that are caused by changes in fair values of derivatives which do not qualify for "hedge treatment" under GAAP. The majority of the derivative market value adjustments related to the changes in fair value of the Company's floor income interest rate swaps. An increase in the forward yield curve during the three months ended March 31, 2022 and 2021 resulted in an increase in the fair value of such swaps. Total other income/expense 404,445 239,112 Cost of services: Cost to provide education technology, services, and payment processing services 35,545 27,052 Represents primarily direct costs to provide payment processing and instructional services in the ETS&PP operating segment. Increase in 2022 compared to 2021 was primarily due to additional instructional services costs. See ETS&PP operating segment - results of operations. Total cost of services 35,545 27,052 30 Operating expenses: Salaries and benefits 149,414 115,791 Increase was due to an increase in headcount in the (i) LSS operating segment as the Company prepares for the resumption of federal student loan payments and other activities after the CARES Act suspension expires on August 31, 2022; and (ii) ETS&PP operating segment to support the growth of its customer base and the investment in the development of new technologies. Depreciation and amortization 16,956 20,184 Includes depreciation of property and equipment and the amortization of intangibles from prior business acquisitions. Amortization of intangible assets for the three months ended March 31, 2022 and 2021 was $2.5 million and $8.4 million, respectively. The decrease in the amortization of intangibles during 2022 as compared to 2021 was due to the majority of intangible assets recorded from the acquisition of Great Lakes in February 2018 becoming fully amortized as of June 30, 2021. Other expenses 39,499 36,698 Other expenses includes expenses necessary for operations, such as postage and distribution, consulting and professional fees, occupancy, communications, and certain information technology-related costs. Increase was due to (i) an increase in expenses in the LSS operating segment due to costs associated with Nelnet Renewable Energy activities and technology costs associated with the growth of borrowers under the government servicing contracts; and (ii) an increase in expenses in the ETS&PP operating segment due to higher costs for consulting, professional fees, and technology services resulting from investments in new technologies. Total operating expenses 205,869 172,673 Income before income taxes 240,583 157,765 Income tax expense 55,697 34,861 The effective tax rate was 23% and 22% for the three months ended March 31, 2022 and 2021, respectively. The Company currently expects its effective tax rate for 2022 will range between 22 and 24 percent. Net income 184,886 122,904 Net loss attributable to noncontrolling interests 1,761 694 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. $ 186,647 123,598 The following table summarizes the components of "other" in "other income/expense" on the consolidated statements of income. Three months ended March 31, 2022 2021 Income/gains from investments, net (a) $ 11,856 8,498 Borrower late fee income (b) 2,431 442 ALLO preferred return (c) 2,117 2,321 Investment advisory services (d) 1,282 2,697 Negative provision for beneficial interests investment (e) — 2,436 Loss from ALLO voting membership interest investment (f) (13,130) (22,219) Loss from solar investments (g) (1,030) (1,679) Other 6,351 5,336 Other income $ 9,877 (2,168) (a) During the three months ended March 31, 2022, the Company recognized (pre-tax) realized and unrealized gains from certain real estate and venture capital investments of $4.4 million and $5.3 million, respectively. In addition, during 2022 the Company recognized income of $1.9 million from its investment in the joint venture that purchased the former Wells Fargo private education loan portfolio. During the three months ended March 31, 2021, the Company recognized (pre-tax) realized and unrealized gains from certain real estate and venture capital investments of $5.9 million and $2.5 million , respectively. (b) Represents borrower late fees earned by the AGM operating segment. The increase in borrower late fees for the three months ended March 31, 2022 as compared to the same period in 2021 was due to the Company suspending substantially all 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 in May 2021 (for private education loans) and October 2021 (for federally insured student loans). (c) Represents the Company's income on its preferred membership interests in ALLO, which was deconsolidated from the Company's financial statements in December 2020. As of March 31, 2022, the amount of preferred membership interests held by the Company was $137.3 million, which earns a preferred annual return of 6.25 percent. (d) 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 March 31, 2022, the outstanding balance of asset-backed securities under management subject to these arrangements was $2.2 billion, of which all of such securities were FFELP student loan 31 asset-backed securities. 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). (e) In the first quarter of 2021, due to improved economic conditions, the Company recorded a negative provision of $2.4 million related to its remaining allowance on a consumer loan securitization beneficial interest investment. Such allowance was initially recorded in March 2020 as a result of the COVID-19 pandemic. (f) Represents the Company's share of loss on its voting membership interests in ALLO. See note 5 of the notes to consolidated financial statements included under Part I, Item 1 of 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. Losses from solar investments in 2022 and 2021 include losses of $1.8 million and $0.6 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. 32 LOAN SERVICING AND SYSTEMS OPERATING SEGMENT – RESULTS OF OPERATIONS Loan Servicing Volumes As of December 31, 2020 March 31, 2021 June 30, 2021 September 30, 2021 December 31, 2021 March 31, 2022 Servicing volume (dollars in millions): Nelnet Servicing: Government $ 191,678 195,875 195,030 198,743 215,797 243,011 FFELP 30,763 30,084 29,361 28,244 26,916 25,646 Private and consumer 16,226 21,397 24,758 24,229 23,702 23,433 Great Lakes: Government 251,570 257,806 257,420 262,311 262,605 264,642 Total $ 490,237 505,162 506,569 513,527 529,020 556,732 Number of servicing borrowers: Nelnet Servicing: Government 5,645,946 5,664,094 5,636,781 5,791,521 6,399,414 6,978,548 FFELP 1,300,677 1,233,461 1,198,863 1,150,214 1,092,066 1,034,913 Private and consumer 636,136 882,477 1,039,537 1,097,252 1,065,439 1,030,863 Great Lakes: Government 7,605,984 7,637,270 7,616,270 7,778,535 7,797,106 7,749,312 Total 15,188,743 15,417,302 15,491,451 15,817,522 16,354,025 16,793,636 Number of remote hosted borrowers: 6,555,841 4,307,342 4,338,570 4,548,541 4,799,368 5,487,943 Government Loan Servicing Nelnet Servicing's and Great Lakes' current student loan servicing contracts with the Department are 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. All applicable student loans serviced for the Department by PHEAA will be transferred to successor servicers by December 2022. At the time of this announcement, PHEAA serviced approximately 8.5 million borrowers under its contract. As of March 31, 2022, approximately 1,175,000 PHEAA borrowers have been transitioned to Nelnet Servicing’s platform (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. On April 6, 2022, the Department extended the student loan payment pause under the CARES Act from May 1, 2022 to August 31, 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 receives less servicing revenue per borrower from the Department based on the borrower forbearance status than what was earned on such accounts prior to these provisions. The Company currently anticipates revenue per borrower from the Department will increase to pre-CARES Act levels beginning September 1, 2022. During the fourth quarter of 2021 and first quarter of 2022, 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 Department paused supplemental outreach with the additional extension of the CARES Act student loan payment pause from May 1, 2022 to August 31, 2022. 33 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. Summary and Comparison of Operating Results Three months ended March 31, 2022 2021 Additional information Net interest income $ 43 11 Loan servicing and systems revenue 136,368 111,517 See table below for additional information. Intersegment servicing revenue 8,480 8,268 Represents revenue earned by the LSS operating segment from servicing loans for the AGM and Nelnet Bank operating segments. Increase was due to ending COVID-19 pandemic borrower relief policies which increased servicing activities performed for AGM in the first quarter of 2022 as compared to the same period in 2021. Increase was partially offset by 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 740 1,113 Represents revenue earned from providing administrative support and marketing services, which primarily was to Great Lakes’ former parent company under a contract that expired on January 31, 2021. Total other income 145,588 120,898 Salaries and benefits 91,972 66,458 Increase in 2022 compared to 2021 was due to the Company 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. The CARES Act suspension was originally expected to expire on January 31, 2022 and has been extended two additional times to May 1, 2022 and again to August 31, 2022. The Company currently expects salaries and benefits to continue to be higher throughout 2022 as compared to the same periods in 2021 as it continues to stand ready for the suspension provisions of the CARES Act to expire on August 31, 2022. Depreciation and amortization 4,954 8,192 Includes amortization of intangibles from the Great Lakes acquisition in February 2018 and depreciation on property and equipment. Amortization of intangible assets for the three months ended March 31, 2022 and 2021 was $0.4 million and $5.5 million, respectively. The majority of the Great Lakes intangible assets became fully amortized as of June 30, 2021. Excluding amortization of intangible assets, the increase in 2022 compared to 2021 was due to scaling of the Nelnet servicing platform for the PHEAA loan volume transferred to Nelnet's platform. Other expenses 16,213 13,285 Increase in 2022 compared to 2021 was due to costs associated with Nelnet Renewable Energy activities and technology costs associated with the growth of borrowers under the government servicing contracts. Intersegment expenses 20,398 16,890 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 2022 as compared to 2021 was due to the Company hiring contact center operations and support associates throughout 2021 and 2022 in preparation for the federal student loan payment pause under the CARES Act to expire. The Company currently expects intersegment expenses to be higher throughout 2022 as compared to the same periods in 2021 as it continues to stand ready for the payment pause to expire on August 31, 2022. Total operating expenses 133,537 104,825 Income before income taxes 12,094 16,084 Income tax expense (2,903) (3,860) Represents income tax expense at an effective tax rate of 24%. Net income $ 9,191 12,224 Before tax operating margin 8.3 % 13.3 % Before tax operating margin is a measure of before tax operating profitability as a percentage of revenue, and for the LSS segment is calculated as income before income taxes divided by the total of loan servicing and systems revenue, intersegment servicing revenue, and other income revenue. The Company uses this metric to monitor and assess the segment’s performance, manage operating costs, identify and evaluate business trends affecting the segment, and make strategic decisions, and believes that it 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 decreased in 2022 as compared to 2021 due to increased operating expenses as the Company prepared for a January 31, 2022 expiration of the federal student loan payment pause under the CARES Act, which was extended to May 1, 2022 (and then again to August 31, 2022). 34 Loan servicing and systems revenue Three months ended March 31, 2022 2021 Additional information Government servicing - Nelnet $ 61,049 34,872 Represents revenue from Nelnet Servicing's Department servicing contract. Increase in 2022 compared to 2021 was due to (i) an increase in the number of borrowers serviced, including PHEAA borrowers transferred to Nelnet Servicing’s platform; (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) the recognition of $6.7 million of revenue in the first quarter of 2022 for incremental work related primarily to CARES Act forbearance exit outreach activities to borrowers; and (iv) the recognition of $10.5 million of revenue in the first quarter of 2022 related to the discharge of borrowers under the Total and Permanent Disability ("TPD") discharge program. Nelnet Servicing earns revenue per each borrower that satisfies the requirements for their loan to be discharged under the TPD discharge program. The revenue earned by Nelnet Servicing for the discharge of TPD borrowers and CARES Act forbearance exit outreach is expected to be minimal for the remainder of 2022. Government servicing - Great Lakes 48,076 43,302 Represents revenue from the Great Lakes' Department servicing contract. Increase in 2022 compared to 2021 was due to (i) an increase in the number of borrowers serviced; (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; and (iii) the recognition of $2.4 million of revenue in the first quarter of 2022 for incremental work related to CARES Act forbearance exit outreach activities to borrowers. The revenue earned by Great Lakes for CARES Act forbearance exit outreach is expected to be minimal for the remainder of 2022. Private education and consumer loan servicing 12,873 8,548 Increase in 2022 compared to 2021 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 2022 decreased compared to 2021. The decrease in revenue was due to a decrease in client requested enhanced delinquency services. FFELP servicing 4,248 4,670 Decrease in 2022 compared to 2021 was due to a decrease in the number of borrowers serviced. Over time, FFELP servicing revenue will continue to decrease as third-party customers' FFELP portfolios pay off. Software services 7,400 8,454 Decrease in 2022 compared to 2021 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, expiring on January 31, 2021. This decrease in revenue was partially offset by an increase in 2022 as compared to 2021 in the number of remote hosted servicing borrowers from the Company's remaining customers. Outsourced services and other 2,722 11,671 The majority of this revenue relates to providing contact center and back office operational outsourcing services, including services to state agencies to assist with COVID-19 specific activities that have been performed under shorter-term contracts. Revenue from providing COVID-19 related services to state agencies was $0.3 million and $9.7 million for the three months ended March 31, 2022 and 2021, respectively. Outsourcing activities provided for these activities decreased in 2022 as the needs for such services have decreased from prior periods. Loan servicing and systems revenue $ 136,368 111,517 35 EDUCATION TECHNOLOGY, SERVICES, AND PAYMENT PROCESSING OPERATING SEGMENT – RESULTS OF OPERATIONS As discussed further in the Company's 2021 Annual Report, this segment of the Company’s business is subject to seasonal fluctuations which correspond, or are related to, the traditional school year. Based on the timing of revenue recognition and when expenses are incurred, revenue and pre-tax operating margin are higher in the first quarter as compared to the remainder of the year. Summary and Comparison of Operating Results Three months ended March 31, 2022 2021 Additional information Net interest income $ 339 263 Represents interest income on tuition funds held in custody for schools. Education technology, services, and payment processing revenue 112,286 95,258 See table below for additional information. Intersegment revenue 3 3 Total other income 112,289 95,261 Cost of services 35,545 27,052 See table below for additional information. Salaries and benefits 31,286 25,941 Increase in 2022 compared to 2021 was due to an increase in headcount to support the growth of the customer base, and the investment in the development of new technologies. Depreciation and amortization 2,315 3,071 Represents primarily amortization of intangible assets from prior business acquisitions. Amortization of intangible assets related to business acquisitions was $2.1 million and $2.9 million for the three months ended March 31, 2022 and 2021, respectively. Other expenses 5,764 4,822 Increase was due to higher costs for consulting, professional fees, and technology services resulting from investments in new technologies. Intersegment expenses, net 4,605 3,664 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 43,970 37,498 Income before income taxes 33,113 30,974 Income tax expense (7,947) (7,434) Represents income tax expense at an effective tax rate of 24%. Net income $ 25,166 23,540 36 Education technology, services, and payment processing revenue The following table provides disaggregated revenue by service offering and before tax operating margin for each reporting period. Three months ended March 31, 2022 2021 Additional information Tuition payment plan services $ 30,716 29,550 Revenue increased in 2022 as compared to 2021 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. Payment processing 38,071 33,038 Payment volumes in 2022 increased as compared to 2021 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 43,251 32,527 Increase in 2022 compared to 2021 was due to an increase in revenues from the Company’s school information system software, enrollment and communication products, and FACTS Education Solutions instructional and professional development services. FACTS Education Solutions instructional services revenue was the largest component of this increase driven by the Emergency Assistance to Non-Public Schools (“EANS”) program which provides funds to non-public schools to address the impact the COVID-19 pandemic has had or continues to have on school students and teachers. Other 248 143 Education technology, services, and payment processing revenue 112,286 95,258 Cost of services 35,545 27,052 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 the primary driver in the increase in 2022 compared to 2021 due to the increase in instructional services resulting from the EANS program as noted for Education technology and services revenue above. Net revenue $ 76,741 68,206 Before tax operating margin 43.1 % 45.4 % 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 2022 as compared to 2021 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 be lower throughout 2022 as compared to the same periods in 2021 as the Company continues to invest in these areas. 37 ASSET GENERATION AND MANAGEMENT OPERATING SEGMENT – RESULTS OF OPERATIONS Loan Portfolio As of March 31, 2022, the AGM operating segment had a $16.6 billion loan portfolio, consisting primarily of federally insured loans. For a summary of the Company’s loan portfolio as of March 31, 2022 and December 31, 2021, see note 2 of the notes to consolidated financial statements included under Part I, Item 1 of this report. Loan Activity The following table sets forth the activity of loans in the AGM operating segment: Three months ended March 31, 2022 2021 Beginning balance $ 17,441,790 19,559,108 Loan acquisitions: Federally insured student loans 10,202 64,731 Private education loans 1,026 23,038 Consumer loans 18,522 19,456 Total loan acquisitions 29,750 107,225 Repayments, claims, capitalized interest, participations, and other, net (447,140) (406,565) Loans lost to external parties (387,648) (229,545) Consumer loans sold (18,125) — Ending balance $ 16,618,627 19,030,223 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 March 31, 2022, the Company’s ownership correlates to approximately $680 million, $190 million, and $450 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. Allowance for Loan Losses and Loan Delinquencies AGM's total allowance for loan losses of $116.3 million at March 31, 2022 represents reserves equal to 0.59% of AGM's federally insured loans (or 21.6% of the risk sharing component of the loans that is not covered by the federal guaranty), 5.25% of AGM's private education loans, and 12.77% of AGM's consumer loans. For a summary of the allowance as a percentage of the ending balance for each of AGM's loan portfolios as of March 31, 2022 and December 31, 2021, the activity in AGM's allowance for loan losses for the three months ended March 31, 2022 and 2021, and a summary of AGM's loan status and delinquency amounts as of March 31, 2022, December 31, 2021, and March 31, 2021, see note 2 of the notes to consolidated financial statements included under Part I, Item 1 of this report. 38 Loan Spread Analysis The following table analyzes the loan spread on AGM’s portfolio of loans, which represents the spread between the yield earned on loan assets and the costs of the liabilities and derivative instruments used to fund the assets. The spread amounts included in the following table are calculated by using the notional dollar values found in the table under the caption "Net interest income after provision for loan losses, net of settlements on derivatives" below, divided by the average balance of loans or debt outstanding. Three months ended March 31, 2022 2021 Variable loan yield, gross 2.75 % 2.71 % Consolidation rebate fees (0.85) (0.84) Discount accretion, net of premium and deferred origination costs amortization 0.03 0.00 Variable loan yield, net 1.93 1.87 Loan cost of funds - interest expense (a) (1.09) (1.07) Loan cost of funds - derivative settlements (b) (c) 0.01 (0.00 ) Variable loan spread 0.85 0.80 Fixed rate floor income, gross 0.68 0.74 Fixed rate floor income - derivative settlements (b) (d) (0.08) (0.09) Fixed rate floor income, net of settlements on derivatives 0.60 0.65 Core loan spread 1.45 % 1.45 % Average balance of AGM's loans $ 17,208,909 19,494,002 Average balance of AGM's debt outstanding 16,773,698 19,156,797 (a) In the first quarter of 2021, the Company reversed a historical accrued interest liability of $23.8 million on certain bonds, which liability the Company determined is no longer probable of being required to be paid. The liability was initially recorded when certain asset-backed securitizations were acquired in 2011 and 2013. The reduction of this liability is reflected in (a reduction of) "interest expense 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. (b) Derivative settlements represent the cash paid or received during the current period to settle with derivative instrument counterparties the economic effect of the Company's derivative instruments based on their contractual terms. Derivative accounting requires that net settlements with respect to derivatives that do not qualify for "hedge treatment" under GAAP be recorded in a separate income statement line item below net interest income. The Company maintains an overall risk management strategy that incorporates the use of derivative instruments to reduce the economic effect of interest rate volatility. As such, management believes derivative settlements for each applicable period should be evaluated with the Company’s net interest income (loan spread) as presented in this table. The Company reports this non-GAAP information because the Company believes that it provides additional information regarding operational and performance indicators that are closely assessed by management. There is no comprehensive, authoritative guidance for the presentation of such non-GAAP information, which is only meant to supplement GAAP results by providing additional information that management utilizes to assess performance. See note 4 of the notes to consolidated financial statements included under Part I, Item 1 of this report for additional information on the Company's derivative instruments, including the net settlement activity recognized by the Company for each type of derivative for the 2022 and 2021 periods presented in the table under the caption "Consolidated Financial Statement Impact Related to Derivatives - Statements of Income" in note 4 and in this table. A reconciliation of core loan spread, which includes the impact of derivative settlements on loan spread, to loan spread without derivative settlements follows. Three months ended March 31, 2022 2021 Core loan spread 1.45 % 1.45 % Derivative settlements (1:3 basis swaps) (0.01) 0.00 Derivative settlements (fixed rate floor income) 0.08 0.09 Loan spread 1.52 % 1.54 % (c) Derivative settlements consist of net settlements received (paid) related to the Company’s 1:3 basis swaps. (d) Derivative settlements consist of net settlements paid related to the Company’s floor income interest rate swaps. 39 A trend analysis of AGM's core and variable loan spreads is summarized below. (a) The interest earned on a large portion of AGM's FFELP student loan assets is indexed to the one-month LIBOR rate. AGM funds a portion of its assets with three-month LIBOR indexed floating rate securities. The relationship between the indices in which AGM earns interest on its loans and funds such loans has a significant impact on loan spread. This table (the right axis) shows the difference between AGM's liability base rate and the one-month LIBOR rate by quarter. See Item 3, “Quantitative and Qualitative Disclosures About Market Risk - Interest Rate Risk - 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 three months ended March 31, 2022 compared to the same period in 2021 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). In an increasing interest rate environment, student loan spread increases due to the timing of interest rate resets on the Company's assets occurring daily in contrast to the timing of the interest resets on the Company's debt that occurs either monthly or quarterly. See Item 3, “Quantitative and Qualitative Disclosures About Market Risk - Interest Rate Risk - AGM Operating Segment,” which provides additional detail on AGM’s FFELP student loan assets and related funding for those assets. The difference between variable loan spread and core loan spread is fixed rate floor income earned on a portion of AGM's federally insured student loan portfolio. A summary of fixed rate floor income and its contribution to core loan spread follows: Three months ended March 31, 2022 2021 Fixed rate floor income, gross $ 28,993 35,539 Derivative settlements (a) (3,205) (4,285) Fixed rate floor income, net $ 25,788 31,254 Fixed rate floor income contribution to spread, net 0.60 % 0.65 % (a) Derivative settlements consist of net settlements paid related to the Company's derivatives used to hedge student loans earning fixed rate floor income. 40 The decrease in gross fixed rate floor income for the three months ended March 31, 2022 compared to the same period in 2021 was due to higher interest rates in 2022 as compared to 2021. On May 4, 2022, the Federal Reserve increased interest rates, and it is currently anticipated that interest rates may continue to rise in 2022 as a result of inflationary pressures in the U.S. economy; increases in interest rates will reduce the amount of gross fixed rate floor income the Company is currently receiving. The Company has a portfolio of derivative instruments in which the Company pays a fixed rate and receives a floating rate to economically hedge a portion of loans earning fixed rate floor income. The decrease in derivative settlements paid for the three months ended March 31, 2022 compared to the same period in 2021 was due to an increase in interest rates and a decrease in the notional amount of derivatives outstanding. See Item 3, “Quantitative and Qualitative Disclosures About Market Risk - Interest Rate Risk - AGM Operating Segment,” which provides additional detail on the Company’s portfolio earning fixed rate floor income and the derivatives used by the Company to hedge these loans. Interest Rate Risk - Replacement of LIBOR as a Benchmark Rate As of March 31, 2022, the interest earned on a principal amount of $15.2 billion of AGM's FFELP student loan asset portfolio was indexed to one-month LIBOR, and the interest paid on a principal amount of $15.1 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" in the Company's 2021 Annual Report for additional information. On March 15, 2022, the President signed into law, as part of the Consolidated Appropriations Act, 2022, the Adjustable Interest Rate (LIBOR) Act (the "LIBOR Act"), which provides a framework for addressing the discontinuation of LIBOR under federal law. The LIBOR Act provides a statutory mechanism to automatically replace LIBOR with a benchmark rate based on the Secured Overnight Financing Rate ("SOFR"), including any applicable tenor adjustment, for certain contracts that reference LIBOR and do not contain sufficient fallback provisions. The LIBOR Act preempts and supersedes any state law or regulation relating to the selection or use of a benchmark rate replacement for LIBOR, such as similar legislation enacted by the State of New York in April 2021. Parties remain free to agree on a different benchmark replacement rate, and the Company has worked and will continue to work with its asset-backed securitization investors to amend transaction documents to address the discontinuation of LIBOR. The LIBOR Act also amends the Higher Education Act to substitute the current special allowance payment rate-setting mechanism for FFELP loans from the one-month LIBOR to the 30-day average SOFR in effect for each of the days in an applicable quarter, adjusted daily by adding a tenor spread adjustment. Transition of the rate-setting mechanism for special allowance payments from LIBOR to SOFR is expected to occur prior to June 30, 2023. 41 Summary and Comparison of Operating Results Three months ended March 31, 2022 2021 Additional information Net interest income after provision for loan losses $ 73,459 116,922 See table below for additional analysis. Other income 6,511 2,881 Other income includes borrower late fees, which were $2.4 million and $0.4 million during the three months ended March 31, 2022 and 2021, respectively. The Company suspended borrower late fees in March 2020 to provide borrowers relief as a result of the COVID-19 pandemic. The Company began to recognize borrower late fees again in May 2021 (for private education loans) and October 2021 (for federally insured student loans). The Company also recognized revenue of $2.1 million in the first quarter of 2022 as administrator and sponsor for the securitizations completed by the joint venture to purchase and securitize private education loans sold by Wells Fargo and recognized income of $1.9 million in the first quarter of 2022 related to its investment in the joint venture. In the first quarter of 2021, due to improved economic conditions, the Company recorded a negative provision of $2.4 million related to its remaining allowance on a consumer loan securitization beneficial interest investment. Such allowance was initially recorded in March 2020 as a result of the COVID-19 pandemic. Gain on sale of loans 2,989 — On January 26, 2022, the Company sold $18.1 million (par value) of consumer loans to an unrelated third party and recognized a gain of $3.0 million. Derivative settlements, net (2,809) (4,304) 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 145,734 38,809 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 the three months ended March 31, 2022 and 2021 related to the changes in fair value of the Company's floor income interest rate swaps. An increase in the forward yield curve during the three months ended March 31, 2022 and 2021 resulted in an increase in the fair value of such swaps. Total other income/expense 152,425 37,386 Salaries and benefits 591 495 Other expenses 3,033 3,777 The primary component of other expenses is servicing fees paid to third parties. The decrease in 2022 as compared to 2021 was due to a decrease in AGM's loan portfolio. Intersegment expenses 8,831 8,427 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 increase in servicing fees in 2022 as compared to 2021 was due to ending COVID-19 pandemic borrower relief policies which increased servicing activities in the first quarter of 2022 as compared to the same period in 2021. These increases were partially offset by the expected amortization of AGM's FFELP portfolio. 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 12,455 12,699 Total operating expenses were 29 basis points and 26 basis points of the average balance of loans for the three months ended March 31, 2022 and 2021, respectively. The increase in operating expenses as a percent of the average balance of loans in 2022 as compared to 2021 was due to ending COVID-19 pandemic borrower relief policies which increased servicing activities in the first quarter of 2022 as compared to the same period in 2021. Income before income taxes 213,429 141,609 Income tax expense (51,223) (33,987) Represents income tax expense at an effective tax rate of 24%. Net income $ 162,206 107,622 Additional information: Net income $ 162,206 107,622 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 (145,734) (38,809) Tax effect 34,976 9,314 Net income, excluding derivative market value adjustments $ 51,448 78,127 42 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." Three months ended March 31, 2022 2021 Additional information Variable interest income, gross $ 115,753 129,170 Decrease in 2022 compared to 2021 was due to a decrease in the average balance of loans, partially offset by an increase in the gross yield earned on loans. Consolidation rebate fees (36,771) (41,073) Decrease in 2022 compared to 2021 was due to a decrease in the average consolidation loan balance. Discount accretion, net of premium and deferred origination costs amortization 1,459 118 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 80,441 88,215 Interest on bonds and notes payable (45,209) (26,771) 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. Excluding this adjustment, interest expense decreased in 2022 as compared to 2021. This decrease was due to a decrease in the average balance of debt outstanding, partially offset by an increase in cost of funds. Derivative settlements, net (a) 396 (19) Derivative settlements include the net settlements received (paid) related to the Company’s 1:3 basis swaps. Variable loan interest margin, net of settlements on derivatives (a) 35,628 61,425 Fixed rate floor income, gross 28,993 35,539 Decrease in 2022 compared to 2021 was due to higher interest rates in 2022 as compared to 2021. On May 4, 2022, the Federal Reserve increased interest rates, and it is currently anticipated that interest rates may continue to rise in 2022 as a result of inflationary pressures in the U.S. economy; increases in interest rates will reduce the amount of fixed rate floor income the Company is currently receiving. Derivative settlements, net (a) (3,205) (4,285) Derivative settlements include the settlements paid related to the Company's floor income interest rate swaps. The decrease in net settlements paid in 2022 as compared to 2021 was due to an increase in interest rates and a decrease in the notional amount of derivatives outstanding. Fixed rate floor income, net of settlements on derivatives 25,788 31,254 Core loan interest income (a) 61,416 92,679 Investment interest 9,164 2,648 Increase in 2022 compared to 2021 was due primarily to an increase in interest income on the Company's loan beneficial interest investments. Intercompany interest (794) (179) Negative provision for loan losses - federally insured loans 2,748 7,483 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 400 (1,431) (Provision) negative provision for loan losses - consumer loans (2,284) 11,418 Net interest income after provision for loan losses (net of settlements on derivatives) (a) $ 70,650 112,618 Decrease in 2022 as compared to 2021 was due to (i) a decrease in the average balance of loans; (ii) the reversal of a historical accrued interest liability on certain bonds in 2021; and (iii) the Company recognizing a larger negative provision for loan losses in 2021 as compared to 2022. These items were partially offset by an increase in interest income on the Company's loan beneficial interest investments in 2022 as compared to 2021. (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 (b) to the table immediately under the caption “Loan Spread Analysis” above. See note 4 of the notes to consolidated financial statements included under Part I, Item 1 of this report for additional information on the Company's derivative instruments, including the net settlement activity recognized by the Company for each type of derivative referred to in the "Additional information" column of this table, for the 2022 and 2021 periods presented in the table under the caption "Consolidated Financial Statement Impact Related to Derivatives - Statements of Income" in note 4 and in this table. Future levels of net interest income can be affected by the levels of prepayments with respect to the Company's loan portfolios. See Part II, Item 1A, "Risk Factors" in this report for information regarding the potential impact on prepayments of recent government announcements related to student loan income-driven repayment forgiveness. 43 NELNET BANK OPERATING SEGMENT – RESULTS OF OPERATIONS Loan Portfolio As of March 31, 2022, Nelnet Bank had a $368.3 million loan portfolio, consisting of $285.5 million of private education loans and $82.8 million of FFELP loans. As of March 31, 2022, Nelnet Bank's allowance for loan losses on its portfolio was $1.5 million, which represents reserves equal to 0.30% of Nelnet Bank's federally insured loans (or 11.8% of the risk sharing component of the loans that is not covered by the federal guaranty), and 0.44% of Nelnet Bank's private education loans. For a summary of the allowance as a percentage of the ending balance of each of Nelnet Bank's loan portfolios as of March 31, 2022 and December 31, 2021, the activity in Nelnet Bank's allowance for loan losses for the three months ended March 31, 2022 and 2021, and a summary of Nelnet Bank's loan status, delinquency amounts, and other key credit quality indicators as of March 31, 2022, December 31, 2021, and March 31, 2021, see note 2 of the notes to consolidated financial statements included under Part I, Item 1 of this report. The following table sets forth the activity in Nelnet Bank's loan portfolio: Three months ended March 31, 2022 2021 Beginning balance: $ 257,901 17,543 Private education loan originations 130,342 64,909 Repayments (18,394) (1,995) Sales to AGM segment (1,592) (1,226) Ending balance: $ 368,257 79,231 Deposits As of March 31, 2022, Nelnet Bank had $546.7 million of deposits, of which $62.6 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. Average Balance Sheet The following table reflects the rates earned on interest-earning assets and paid on interest-bearing liabilities. Three months ended March 31, 2022 2021 Balance Rate Balance Rate Average assets Federally insured student loans $ 85,266 1.42 % — — % Private education loans 228,934 2.91 43,746 3.37 Cash and investments 265,101 1.66 215,613 1.91 Total interest-earning assets 579,301 2.12 % 259,359 2.15 % Non-interest-earning assets 15,275 6,541 Total assets $ 594,576 265,900 Average liabilities and equity Brokered deposits 144,527 1.20 % 2,984 0.55 % Intercompany deposits 70,576 0.20 56,684 0.28 Retail and other deposits 269,027 0.59 101,462 0.60 Total interest-bearing liabilities 484,130 0.72 % 161,130 0.49 % Non-interest-bearing liabilities 6,427 2,870 Equity 104,019 101,900 Total liabilities and equity $ 594,576 265,900 44 Summary and Comparison of Operating Results Three months ended March 31, 2022 2021 Additional information Total interest income $ 3,030 1,376 Represents interest earned on Nelnet Bank's FFELP and private education student loans, cash, and investments. Increase is due to an increase of these balances in 2022 as compared to 2021. Interest expense 856 194 Represents interest expense on deposits. Increase is due to an increase of deposits and interest rates in 2022 as compared to 2021. Net interest income 2,174 1,182 Provision for loan losses 429 422 Net interest income after provision for loan losses 1,745 760 Other income 1,500 22 Represents primarily income and gains from investments. During the first quarter of 2022, Nelnet Bank recognized gains of approximately $1.1 million on certain asset-backed securities that were sold or called during the quarter. Salaries and benefits 1,554 1,488 Represents salaries and benefits of Nelnet Bank associates and third-party contract labor. Depreciation 3 — Other expenses 682 545 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 45 3 Represents primarily servicing costs paid to the LSS operating segment. Certain shared service and support costs incurred by the Company to support Nelnet Bank are not and will not be reflected as part of the Nelnet Bank operating segment through 2023 (when the bank's de novo period will end). The shared service and support costs incurred by the Company related to Nelnet Bank and not reflected in the bank's operating segment were $1.3 million and $0.7 million for the three months ended March 31, 2022 and 2021, respectively. Total operating expenses 2,284 2,036 Income (loss) before income taxes 961 (1,254) Income tax (expense) benefit (223) 286 Represents income tax (expense) benefit at an effective tax rate of 23.2% and 22.8% for the three months ended March 31, 2022 and 2021, respectively. Net income (loss) $ 738 (968) 45 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. Sources of Liquidity The Company has historically generated positive cash flow from operations. For the year ended December 31, 2021 and the three months ended March 31, 2022, the Company’s net cash provided by operating activities was $544.9 million and $185.5 million, respectively. As of March 31, 2022, the Company had cash and cash equivalents of $162.8 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 March 31, 2022 was $144.8 million. The Company also has a $495.0 million unsecured line of credit that matures on September 22, 2026. As of March 31, 2022, 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 March 31, 2022, the Company holds $398.1 million (par value) of its own asset-backed securities. As of March 31, 2022, $45.7 million of the Company's repurchased asset-backed securities were financed with proceeds from the Company's repurchase agreements and such amount is included in "bonds and notes payable" on the Company's consolidated balance sheet as of March 31, 2022. The Company intends to use its liquidity position to capitalize on market opportunities, including FFELP, private education, and consumer loan acquisitions (or investment interests therein); strategic acquisitions and investments; and capital management initiatives, including stock repurchases, debt repurchases, and dividend distributions. The timing and size of these opportunities will vary and will have a direct impact on the Company's cash and investment balances. Cash Flows During the three months ended March 31, 2022, the Company generated $185.5 million in operating activities, compared to generating $48.7 million for the same period in 2021. 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 provision for loan losses and the non-cash change in deferred income taxes; • An increase in proceeds from the Company's clearinghouse for margin payments on derivatives for the three months ended March 31, 2022 compared to the same period in 2021; • Proceeds from the sale of equity securities for the three months ended March 31, 2022 compared to purchases in the same period in 2021; and • The impact of changes to accrued interest receivable, accounts receivable, and accrued interest payable during the three months ended March 31, 2022 as compared to the same period in 2021. These factors were partially offset by: • The adjustments to net income for derivative market value adjustments; • Adjustments to net income for the impact of losses recognized on certain investments; and • The impact of changes to the due to customers liability account during the three months ended March 31, 2022 as compared to the same period in 2021. 46 The primary items included in the statement of cash flows for investing activities are the purchase, origination, 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 and deposits used to fund loans. Cash provided by investing activities and used in financing activities for the three months ended March 31, 2022 was $603.1 million and $805.2 million, respectively. Cash provided by investing activities and used in financing activities for the three months ended March 31, 2021 was $468.4 million and $528.1 million, respectively. 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 March 31, 2022 Carrying amount Final maturity Bonds and notes issued in asset-backed securitizations $ 16,160,699 5/27/25 - 9/25/69 FFELP and private education loan warehouse facilities 101,731 5/22/23 - 6/30/23 $ 16,262,430 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 March 31, 2022, 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 $1.83 billion as detailed below. The forecasted cash flow presented below includes all loans funded in asset-backed securitizations as of March 31, 2022. As of March 31, 2022, AGM had $16.3 billion of loans included in asset-backed securitizations, which represented 98.4 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, private education and consumer loans funded with operating cash, loans acquired subsequent to March 31, 2022, 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). 47 Asset-backed Securitization Cash Flow Forecast $1.83 billion (dollars in millions) The forecasted future undiscounted cash flows of approximately $1.83 billion include approximately $1.11 billion (as of March 31, 2022) 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 $0.72 billion, or approximately $0.55 billion after income taxes based on the estimated effective tax rate, represents estimated future net interest income (earnings) from the portfolio and is expected to be accretive to the Company's March 31, 2022 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 of 4 percent for consolidation loans and 5 percent for all other loan types. These prepayment rates are generally consistent with those utilized in the Company’s recent asset-backed securitization transactions. On April 19, 2022, the Department issued a press release, and the Department's Office of Federal Student Aid ("FSA") posted a related public announcement, which together announced, among other things, several adjustments, updates, and other changes under income-driven repayment ("IDR") plans for federal student loans. In the announcements, the Department and FSA indicated that as part of these changes, any borrower with loans that have accumulated time in repayment, including time in certain forbearances and deferments, of at least 20 or 25 years will see automatic forgiveness, even if the borrower is not currently in an IDR plan, and that if a borrower has a commercially held FFEL Program loan, the borrower can only benefit from these changes if they consolidate their FFEL Program loan to a Federal Direct Loan Program loan. The Company 48 currently believes these announced changes could significantly increase FFEL Program loan prepayments. See Part II, Item 1A, "Risk Factors" in this report for additional information related to these announcements. The following table summarizes the estimated impact to the above forecasted cash flows if prepayments were greater than the prepayment rate assumptions used to calculate the forecasted cash flows. Increase in prepayment rate Reduction in forecasted cash flow from table above Forecasted cash flow using increased prepayment rate 2x $0.13 billion $1.70 billion 4x $0.35 billion $1.48 billion 10x $0.63 billion $1.20 billion If the entire AGM student loan portfolio prepaid, the Company would receive the full amount of overcollateralization included in the asset-backed securitizations of approximately $1.11 billion (as of March 31, 2022); however, the Company would not receive the $0.72 billion ($0.55 billion after tax) of estimated future earnings from the portfolio. The forecasted cash flow presented below includes the $1.83 billion estimated cash flow as presented in the above cash flow forecast table, and the estimated cash flow assuming a 10 times increase in prepayments on the Company's FFELP asset-backed securities transactions. Asset-backed Securitization Cash Flow Forecast (dollars in millions) 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 $70 million to $90 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 impact of this basis risk by entering into certain derivative instruments. See Item 3, "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 "Interest Rate Risk - Replacement of LIBOR as a Benchmark Rate" above and Item 1A, "Risk Factors - Loan Portfolio - 49 Interest rate risk - replacement of LIBOR as a benchmark rate" in the Company's 2021 Annual Report for additional information. The Company uses the current forward interest rate yield curve to forecast cash flows. A change in the forward interest rate curve would impact the future cash flows generated from the portfolio. An increase in future interest rates will reduce the amount of fixed rate floor income the Company is currently receiving. The Company attempts to mitigate the impact of a rise in short-term rates by hedging interest rate risks. The forecasted cash flow does not include cash flows the Company expects to pay/receive related to derivative instruments used by the Company to manage interest rate risk. See Item 3, "Quantitative and Qualitative Disclosures About Market Risk - Interest Rate Risk - 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 March 31, 2022, the Company's 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 March 31, 2022, 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 March 31, 2022, had an aggregate maximum financing amount available of $175.0 million, an advance rate of 80 to 90 percent, liquidity provisions through June 30, 2022, and a final maturity date of June 30, 2023. As of March 31, 2022, $96.7 million was outstanding under this warehouse facility, $78.3 million was available for future funding, and $10.6 million was advanced as equity support. Upon termination or expiration of the warehouse facilities, the Company would expect to access the securitization market, obtain replacement warehouse facilities, use operating cash, consider the sale of assets, or transfer collateral to satisfy any remaining obligations. 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 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. 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 Company sponsored four asset-backed securitization transactions to permanently finance a total of $8.7 billion of private education loans sold by Wells Fargo (which represented the total remaining loans originally purchased from Wells Fargo, factoring in borrower payments from the date of purchase). 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 March 31, 2022, the fair value of these bonds was $371.9 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 its investment securities (bonds) to a third party. The Company entered into repurchase agreements with third 50 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 March 31, 2022, $384.3 million was outstanding on the Company's repurchase agreements, of which $338.6 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 (as of March 31, 2022) between April 14, 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 March 31, 2022, $917.5 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 The Company, through its subsidiaries, has historically funded student loans by completing asset-backed securitizations. Depending on market conditions, the Company currently anticipates continuing to access the asset-backed securitization market. Such asset-backed securitization transactions would be used to refinance student loans included in its warehouse facilities, loans purchased from third parties, and/or student loans in its existing asset-backed securitizations. There were no asset-backed securitization transactions completed during the first three months of 2022. 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 51 greater than 9%, unless the banking organization's federal banking agency determines that the banking organization's risk profile warrants a more stringent leverage ratio. The FDIC has ordered Nelnet Bank to maintain at least a 12% leverage ratio. Nelnet Bank has opted into the CBLR framework for the quarter ended March 31, 2022 with a leverage ratio of 17.2%. 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 for growth and current financial condition, the Company currently believes additional capital contributions to Nelnet Bank may be required during the fourth quarter of 2022 and/or during 2023. 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 March 31, 2022, 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 (a third party global digital infrastructure investor), 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 $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 March 31, 2022, the Company does not currently anticipate any movement in interest rates having a material impact on its capital or liquidity profile, nor does the Company expect that any movement in interest rates would have a material impact on its ability to make variation margin payments to its third-party clearinghouse. However, if interest rates move materially and negatively impact the fair value of the Company's derivative portfolio, the replacement of LIBOR as a benchmark rate has significant adverse impacts on the Company's derivatives, or if the Company enters into additional derivatives for which the fair value becomes negative, the Company could be required to make variation margin payments to its third-party clearinghouse. The variation margin, if significant, could negatively impact the Company's liquidity and capital resources. In addition, clearing rules require the Company to post amounts of liquid collateral when executing new derivative instruments, which could prevent or limit the Company from utilizing additional derivative instruments to manage interest rate sensitivity and risks. See note 4 of the notes to consolidated financial statements included 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 March 31, 2022, 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 March 31, 2022, $267.5 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. Stock Repurchases In 2019, the Board of Directors 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 ended May 7, 2022. On May 9, 2022, the Board of Directors authorized a new stock repurchase program to repurchase up to a total of five million shares of the Company's Class A common stock during the three-year period ending May 8, 2025. The five million shares authorized under the new program include the 52 remaining unpurchased shares from the prior program, which the new program replaced. As of March 31, 2022, 2,222,859 shares remained authorized for repurchase under the Company's prior 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 the three months ended March 31, 2022 are shown below. For additional information on stock repurchases during the first quarter of 2022, see "Stock Repurchases" under Part II, Item 2 of this report. Total shares repurchased Purchase price (in thousands) Average price of shares repurchased (per share) Quarter ended March 31, 2022 380,053 $ 32,899 86.56 Subsequent to March 31, 2022 (through May 9, 2022), the Company repurchased an additional 253,838 Class A common shares for $21.2 million (average price of $83.62 per share). Dividends On March 15, 2022, the Company paid a first quarter 2022 cash dividend on the Company's Class A and Class B common stock of $0.24 per share. In addition, the Company's Board of Directors has declared a second quarter 2022 cash dividend on the Company's outstanding shares of Class A and Class B common stock of $0.24 per share. The second quarter cash dividend will be paid on June 15, 2022 to shareholders of record at the close of business on June 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 the Company’s 2021 Annual Report includes a summary of the significant accounting policies and methods used in the preparation of the consolidated financial statements. 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 and estimate, as discussed further under Part II, Item 7, “Management’s Discussion and Analysis of Financial Condition and Results of Operations – Critical Accounting Policies and Estimates – Allowance for Loan Losses” in the Company’s 2021 Annual Report. For additional information regarding changes in the Company’s allowance for loan losses for the three months ended March 31, 2022 and 2021, see the caption “Activity in the Allowance for Loan Losses” in note 2 of the notes to consolidated financial statements included under Part I, Item 1 of this report. There have been no material changes to the Company’s critical accounting policy and estimate since December 31, 2021. RECENT ACCOUNTING PRONOUNCEMENTS Financial Instruments - Credit Losses In March 2022, the FASB issued accounting guidance which eliminates the troubled debt restructurings recognition and measurement guidance and instead requires an entity to evaluate whether the modification represents a new loan or a continuation of an existing loan. The guidance also enhances the disclosure requirements for certain modifications of receivables made to borrowers experiencing financial difficulty. This guidance will be effective for the Company beginning January 1, 2023 with early adoption permitted. The Company is evaluating the impact this pronouncement will have on its ongoing financial reporting. 53