NELNET, INC.

(NNI)
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NELNET : MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS (form 10-K)

02/25/2021 | 05:16pm EDT
(Management's Discussion and Analysis of Financial Condition and Results of
Operations is for the years ended December 31, 2020 and 2019. All dollars are in
thousands, except share data, unless otherwise noted.)
The following discussion and analysis provides information that the Company's
management believes is relevant to an assessment and understanding of the
consolidated results of operations and financial condition of the Company. The
discussion and analysis should be read in conjunction with the Company's
consolidated financial statements and related notes included in this report.
This discussion and analysis contains forward-looking statements subject to
various risks and uncertainties and should be read in conjunction with the
disclosures and information contained in "Forward-Looking and Cautionary
Statements" and Item 1A "Risk Factors" included in this report.
A discussion related to the results of operations and changes in financial
condition for the year ended December 31, 2020 compared to the year ended
December 31, 2019 is presented below. A discussion related to the results of
operations and changes in financial condition for the year ended December 31,
2019 compared to the year ended December 31, 2018 can be found in Part II, Item
7. "Management's Discussion and Analysis of Financial Condition and Results of
Operations" in the Company's 2019 Annual Report on Form 10-K, which was filed
with the United States Securities and Exchange Commission on February 27, 2020.
OVERVIEW
The Company is a diverse company with a purpose to serve others and a vision to
make customers' dreams possible by delivering customer focused products and
services. The largest operating businesses engage in loan servicing and
education technology, services, and payment processing, and the Company also has
a significant investment in communications. A significant portion of the
Company's revenue is net interest income earned on a portfolio of federally
insured student loans. The Company also makes investments to further diversify
both within and outside of its historical core education-related businesses,
including, but not limited to, investments in real estate, early-stage and
emerging growth companies, and renewable energy.
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GAAP Net Income and Non-GAAP Net Income, Excluding Adjustments
The Company prepares its financial statements and presents its financial results
in accordance with GAAP. However, it also provides additional non-GAAP financial
information related to specific items management believes to be important in the
evaluation of its operating results and performance. A reconciliation of the
Company's GAAP net income to net income, excluding derivative market value
adjustments, and a discussion of why the Company believes providing this
additional information is useful to investors, is provided below.
                                                                     Year 

ended December 31,

                                                                   2020                   2019
GAAP net income attributable to Nelnet, Inc.                 $     352,443                 141,803

Realized and unrealized derivative market value adjustments 28,144

                 76,195
Tax effect (a)                                                      (6,755)                (18,287)

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

                      $     373,832                 199,711

Earnings per share:
GAAP net income attributable to Nelnet, Inc.                 $        9.02                    3.54
Realized and unrealized derivative market value adjustments           0.72                    1.90
Tax effect (a)                                                       (0.17)                  (0.45)

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

                      $        9.57                    4.99



(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 Company believes these point-in-time estimates of asset and liability values
related to its derivative instruments that are subject to interest rate
fluctuations are subject to volatility mostly due to timing and market factors
beyond the control of management, and affect the period-to-period comparability
of the results of operations. Accordingly, the Company's management utilizes
operating results excluding these items for comparability purposes when making
decisions regarding the Company's performance and in presentations with credit
rating agencies, lenders, and investors. Consequently, the Company reports this
non-GAAP information because the Company believes that it provides additional
information regarding operational and performance indicators that are closely
assessed by management. There is no comprehensive, authoritative guidance for
the presentation of such non-GAAP information, which is only meant to supplement
GAAP results by providing additional information that management utilizes to
assess performance.
GAAP net income increased for the year ended December 31, 2020 compared to the
same period in 2019 primarily due to the following factors:
•The recognition of a $258.6 million ($196.5 million after tax) gain from the
deconsolidation of ALLO Communications LLC ("ALLO") from the Company's
consolidated financial statements;
•The recognition of a $51.0 million ($38.8 million after tax) gain to adjust the
carrying value of the Company's investment in Hudl to reflect Hudl's May 2020
equity raise transaction value;
•A decrease of $48.1 million ($36.5 million after tax) in net losses related to
changes in the fair values of derivative instruments that do not qualify for
hedge accounting in 2020 as compared to 2019;
•An increase of $30.2 million ($23.0 million after tax) in loan spread on the
Company's loan portfolio and related derivative settlements in 2020 as compared
to 2019, primarily from an increase in fixed rate floor income;
•The recognition of $16.7 million ($12.7 million after tax) of expenses during
2019 to extinguish notes payable in certain asset-backed securitizations prior
to the notes' contractual maturities; and
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•An increase of $15.8 million ($12.0 million after tax) in gains from the sale
of consumer loans in 2020 as compared to 2019.
These factors were partially offset by the following items:
•An increase of $35.2 million ($26.8 million after tax) in non-cash losses
related to the Company's solar investments in 2020 as compared to 2019;
•The recognition of $24.7 million ($18.8 million after tax) of net provision and
impairment charges in 2020 related to the Company's beneficial interest in
consumer loan securitizations and certain venture capital investments,
respectively, due to adverse economic conditions resulting from the COVID-19
pandemic;
•An increase of $24.4 million ($18.5 million after tax) in the provision for
loan losses in 2020 as compared to 2019. The provision for loan losses in 2020
was negatively impacted due to the COVID-19 pandemic;
•A decrease of $20.4 million ($15.5 million after tax) in net income due to the
decrease in the average balance of loans in 2020 as compared to 2019 as a result
of the amortization of the FFELP loan portfolio; and
•A decrease of $18.2 million in net income from the Company's Loan Servicing and
Systems operating segment in 2020 as compared to 2019 due to a decrease in
revenue as a result of the COVID-19 pandemic and incurring additional costs to
meet increased service and security standards under the Department servicing
contracts.
Operating Results
The Company earns net interest income on its loan portfolio, consisting
primarily of FFELP loans in its Asset Generation and Management ("AGM")
operating segment. This segment is expected to generate a stable net interest
margin and significant amounts of cash as the FFELP portfolio amortizes. As of
December 31, 2020, AGM had a $19.6 billion loan portfolio that management
anticipates will amortize over the next approximately 20 years and has a
weighted average remaining life of 9.8 years. The Company actively works to
maximize the amount and timing of cash flows generated by its FFELP portfolio
and seeks to acquire additional loan assets to leverage its servicing scale and
expertise to generate incremental earnings and cash flow. However, due to the
continued amortization of the Company's FFELP loan portfolio, over time, the
Company's net income generated by the AGM segment will continue to decrease. The
Company currently believes that in the short-term it will most likely not be
able to invest the excess cash generated from the FFELP loan portfolio into
assets that immediately generate the rates of return historically realized from
that portfolio.
In addition, the Company earns fee-based revenue through the following
reportable operating segments:
•Loan Servicing and Systems ("LSS") - referred to as Nelnet Diversified Services
("NDS")
•Education Technology, Services, and Payment Processing ("ETS&PP") - referred to
as Nelnet Business Services ("NBS")
Further, the Company earned communications revenue through ALLO, formerly a
majority owned subsidiary of the Company prior to a recapitalization of ALLO
resulting in the deconsolidation of ALLO from the Company's financial statements
on December 21, 2020. The recapitalization of ALLO is not considered a strategic
shift in the Company's involvement with ALLO, and ALLO's results of operations,
prior to the deconsolidation, are presented by the Company as a reportable
operating segment.
On November 2, 2020, the Company obtained final approval from the Federal
Deposit Insurance Corporation ("FDIC") for federal deposit insurance and for a
bank charter from the Utah Department of Financial Institutions ("UDFI") in
connection with the establishment of Nelnet Bank, and Nelnet Bank launched
operations. Nelnet Bank operates as an internet Utah-chartered industrial bank
franchise focused on the private education loan marketplace, with a home office
in Salt Lake City, Utah. Nelnet Bank's operations are presented by the Company
as a reportable operating segment.
Other business activities and operating segments that are not reportable are
combined and included in Corporate and Other Activities ("Corporate"). Corporate
and Other Activities also includes income earned on certain investments and
interest expense incurred on unsecured and other corporate related debt
transactions. In addition, the Corporate segment includes direct incremental
costs associated with Nelnet Bank prior to the UDFI's approval for its bank
charter and certain shared service and support costs incurred by the Company
that will not be reflected in Nelnet Bank's operating results through 2023 (the
bank's de novo period). Such Nelnet Bank-related costs included in the Corporate
segment totaled $5.9 million (pre-tax) and $1.7 million (pre-tax) in 2020 and
2019, respectively.
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The information below provides the operating results for each reportable operating segment (excluding Nelnet Bank) for the years ended December 31, 2020 and 2019 (dollars in millions). See "Results of Operations" for each such reportable operating segment under this Item 7 for additional detail.

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


                     [[Image Removed: nni-20201231_g2.jpg]]
                     [[Image Removed: nni-20201231_g3.jpg]]
(a)  Revenue includes intersegment revenue.
(b)  Total revenue includes "net interest income" and "total other
income/expense" from the Company's segment statements of income, excluding the
impact from changes in fair values of derivatives. Net income excludes changes
in fair values of derivatives, net of tax. For information regarding the
exclusion of the impact from changes in fair values of derivatives, see "GAAP
Net Income and Non-GAAP Net Income, Excluding Adjustments" above.
(c)  On December 21, 2020, the Company deconsolidated ALLO from the Company's
consolidated financial statements. Accordingly, the 2020 operating results for
the Communications operating segment in the table above are for the period
January 1, 2020 through December 21, 2020.
Certain events and transactions from 2020, which have impacted, will impact, or
could impact the operating results of the Company, are discussed below.
Recapitalization and Additional Funding for ALLO
On October 1, 2020, the Company entered into various agreements with SDC Allo
Holdings, LLC ("SDC"), a third party global digital infrastructure investor, and
ALLO, then a majority owned communications subsidiary of the Company, to
recapitalize and provide additional funding for ALLO. On October 15, 2020, ALLO
received proceeds of $197.0 million from SDC for the issuance of membership
units of ALLO, and redeemed $160.0 million of non-voting preferred membership
units of ALLO held by the Company. As a result of the receipt of required
regulatory approvals on December 21, 2020, SDC, the Company, and members of
ALLO's management own approximately 48 percent, 45 percent, and 7 percent,
respectively, of the outstanding voting membership interests of ALLO, and the
Company deconsolidated ALLO from the Company's consolidated financial
statements.
Upon the deconsolidation of ALLO, the Company recorded its 45 percent voting
membership interests in ALLO at fair value, and accounts for such investment
under the Hypothetical Liquidation at Book Value ("HLBV") method of accounting.
In addition, the Company recorded its remaining non-voting preferred membership
units in ALLO at fair value, and accounts for such investment as a separate
equity investment. As a result of the deconsolidation of ALLO, the Company
recognized a gain of $258.6 million in the fourth quarter of 2020.
On January 19, 2021, ALLO closed on certain private debt financing facilities
from unrelated third-party lenders providing for aggregate financing of up to
$230.0 million. With proceeds from this transaction, ALLO redeemed a portion of
its non-voting preferred membership units held by the Company in exchange for an
aggregate redemption price payment to the Company of $100.0 million.
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The agreements among the Company, SDC, and ALLO provide that they will use
commercially reasonable efforts (which expressly excludes requiring ALLO to
raise any additional equity financing or sell any assets) to cause ALLO to
redeem, on or before April 2024, the remaining non-voting preferred membership
units of ALLO held by the Company, plus the amount of accrued and unpaid
preferred return on such units. As of January 19, 2021, the outstanding
preferred membership units of ALLO held by the Company was $129.7 million. The
preferred membership units earn a preferred annual return of 6.25 percent.
As discussed above, subsequent to the recapitalization and deconsolidation of
ALLO, the Company will account for its investment in ALLO under the HLBV method
of accounting. The HLBV method of accounting is used by the Company for equity
method investments when the liquidation rights and priorities as defined by an
equity investment agreement differ from what is reflected by the underlying
percentage ownership or voting interests. The Company applies the HLBV method
using a balance sheet approach. A calculation is prepared at each balance sheet
date to determine the amount that the Company would receive if an equity
investment entity were to liquidate its net assets and distribute that cash to
the investors based on the contractually defined liquidation priorities. The
difference between the calculated liquidation distribution amounts at the
beginning and the end of the reporting period, after adjusting for capital
contributions and distributions, is the Company's share of the earnings or
losses from the equity investment for the period. Because the Company will be
able to utilize certain tax losses related to ALLO's operations, the equity
investment agreements for the Company have liquidation rights and priorities
that are sufficiently different from the voting membership interests percentages
such that the HLBV method of accounting was deemed appropriate. Accordingly, the
recognition of earnings or losses during any reporting period related to the
Company's equity investment in ALLO may or may not reflect its voting membership
interests percentage and could vary substantially from those calculated based on
the Company's voting membership interests in ALLO.
Assuming ALLO continues its planned growth in existing and new communities, it
will continue to invest substantial amounts in property and equipment to build
the network and connect customers. The resulting recognition of depreciation and
development costs could result in net operating losses by ALLO under generally
accepted accounting principles. Applying the HLBV method of accounting, the
Company will recognize a significant portion of ALLO's anticipated losses over
the next several years.
For additional information, see note 2, "Recent Developments - ALLO
Recapitalization," of the notes to consolidated financial statements included in
this report.
Impacts of COVID-19 Pandemic
Beginning in March 2020, the coronavirus 2019 or COVID-19 ("COVID-19") pandemic
resulted in many businesses and schools closing or reducing hours throughout the
U.S. to combat the spread of COVID-19, and states and local jurisdictions
implementing various containment efforts, including lockdowns on non-essential
business and other business restrictions, stay-at-home orders, and
shelter-in-place orders. The COVID-19 pandemic has caused significant disruption
to the U.S. and world economies, including significantly higher unemployment and
underemployment, significantly lower interest rates, and extreme volatility in
the U.S. and world markets. As a result of the COVID-19 outbreak and federal,
state, and local government responses to COVID-19, the Company has experienced
and may in the future experience various disruptions and impacts to the
Company's businesses and results of operations. The following provides a summary
of how COVID-19 has impacted and may impact the Company's business and operating
results.
Corporate
The Company has implemented adjustments to its operations designed to keep
employees safe and comply with federal, state, and local guidelines, including
those regarding social distancing. As of March 25, 2020, the majority of our
associates were working and continue to work from home. Substantially all
Company associates working from home are able to connect to their work
environment virtually and continue to serve our customers.
The Company has investments in real estate, early-stage and emerging growth
companies (venture capital investments), and renewable energy (solar). The
Company identified several venture capital investments that were negatively
impacted by the distressed economic conditions resulting from the COVID-19
pandemic and recognized impairment charges on such investments of $7.8 million
(pre-tax) during the first quarter of 2020.
Loan Servicing and Systems
The CARES Act, which was signed into law on March 27, 2020, among other things,
provides broad relief for federal student loan borrowers. Under the CARES Act,
federal student loan payments and interest accruals were suspended for all
borrowers that have loans owned by the Department. The benefits of the law were
applied retroactively to March 13, 2020, when the President declared a state of
emergency related to COVID-19, and these federal student loan borrower relief
provisions have
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been extended through September 30, 2021. Beginning March 13, 2020, the Company
received less servicing revenue per borrower from the Department based on the
borrower forbearance status through September 30, 2020 than what was earned on
such accounts prior to these provisions, and the Department further reduced the
monthly rate paid to its servicers for those in a forbearance status for the
period from October 1, 2020 through September 30, 2021 from $2.19 per borrower
to $2.05 per borrower. As a result of the extension of these CARES Act
provisions through September 30, 2021, the Company currently anticipates
Department servicing revenue will be lower in 2021 from recent historical
periods due to the lower rates. The Company currently anticipates revenue per
borrower will return to pre-COVID levels when borrowers begin to re-enter
repayment in the fourth quarter of 2021. While federal student loan payments are
suspended, the Company's operating expenses have been and will continue to be
lower due to a significant reduction of borrower statement printing and postage
costs. In addition, revenue from the Department for originating consolidation
loans was adversely impacted as a result of borrowers receiving relief on their
existing loans, thus not initiating a consolidation. The Company currently
anticipates this revenue will continue to be negatively impacted while student
loan payments and interest accruals are suspended.
During 2020, FFELP, private education, and consumer loan servicing revenue was
adversely impacted by the COVID-19 pandemic due to reduced or eliminated
delinquency outreach to borrowers, holds on claim filings, and reduced or
eliminated late fees processing. In addition, origination fee revenue was
negatively impacted as borrowers are less likely to refinance their loans when
they are receiving certain relief measures from their current lender. The
Company currently anticipates this trend will continue in future periods that
are impacted by the COVID-19 pandemic, with the magnitude based on the extent to
which existing or additional borrower relief policies and activities are
implemented or extended by servicing customers.
If the student loan borrower relief provisions of the CARES Act were potentially
extended past September 30, 2021 and/or new legislative or regulatory student
loan borrower relief measures similar to such provisions of the CARES Act were
to become effective, the levels and timing of future servicing revenues could
continue to be impacted in a similar manner through the extended period of time
that such provisions or measures are in effect.
Due to decreased servicing and transaction activity as a result of suspended
payments under the CARES Act as discussed above, the Company has been able to
transition associates to help state agencies process unemployment claims and
conduct certain health contact tracing support activities. Revenue earned on
these temporary contracts for the year ended December 31, 2020 was $21.9
million. These contracts were awarded to the Company as a result of the
Company's technology, security, compliance, and other capabilities needed to
conduct such activities.
Education Technology, Services, and Payment Processing
This segment has been and will continue to be impacted by COVID-19 through lower
interest rate levels, which reduce earnings for this business compared to recent
historical results as the tuition funds held in custody for schools produce less
interest earnings. If interest rates remain at current levels, the Company
anticipates this segment will earn minimal interest income in future periods. In
addition, as a result of COVID-19, demand for certain of the Company's products
and services has been negatively impacted. The Company currently anticipates
this trend will continue through the 2020-2021 academic year and could extend
longer as a result of trends and shifts in the industry that could be long term
as a result of the COVID-19 pandemic.
Communications
As a result of COVID-19, ALLO experienced increased demand from new and existing
residential customers to support connectivity needs primarily for work and learn
from home applications. Along with offering 60 days free for eligible customers,
ALLO partnered with school districts to provide more connectivity to students,
often at discounted rates.
In view of the importance of ALLO's technicians being able to connect new
customers while maintaining social distance and protecting community and
associate health and safety, ALLO adjusted operational procedures by
implementing associate health checks, following CDC and local health official
safety protocols, facilitating customer screening, and adjusting the
installation process to limit the time in the home or business as much as
possible.
Asset Generation and Management
AGM's results were adversely impacted during the first quarter of 2020 as a
result of COVID-19 due to:
•An incremental increase in the provision for loan losses of $63.0 million
(pre-tax) resulting from an increase in expected life of loan defaults due to
the COVID-19 pandemic.
•A $26.3 million (pre-tax) provision charge recognized on the Company's
beneficial interest in consumer loan securitizations. The Company's estimate of
future cash flows from the beneficial interest in consumer loan
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securitizations was lower than originally anticipated due to the expectation of
increased consumer loan defaults within such securitizations due to the
distressed economic conditions resulting from the COVID-19 pandemic.
As economic factors improved in the third and fourth quarters of 2020, a portion
of the charges noted above were reversed.
The CARES Act, among other things, provides broad relief, effective March 13,
2020, for borrowers that have student loans owned by the Department. This relief
package excluded FFELP, private education, and consumer loans. Although the
Company's loans are excluded from the provisions of the CARES Act, the Company
is providing relief for its borrowers.
For the Company's federally insured and private education loans, effective March
13, 2020 through June 30, 2020, the Company proactively applied a 90 day natural
disaster forbearance to any loan that was 31-269 days past due (for federally
insured loans) and 80 days past due (for private education loans), and to any
current loan upon request. Beginning July 1, 2020, the Company discontinued
proactively applying 90 day natural disaster forbearances on past due loans.
However, the Company will continue to apply a natural disaster forbearance in 90
day increments to any federally insured and private education loan upon request
through September 30, 2021. As of December 31, 2020, federally insured and
private education loans in forbearance were $2.0 billion (or 10.3% of the
portfolio) and $2.4 million (or 0.7% of the portfolio), respectively. The amount
of federally insured and private education loans in forbearance hit their peak
in May 2020 at $6.0 billion and $38.6 million, respectively. The Company
anticipates that loans in forbearance will continue to decline in 2021, absent
any intervening policy change, when borrowers are currently scheduled to exit
forbearance. Despite the COVID-19 pandemic, a large portion of borrowers
continue to make payments according to their payment plans.
In addition, for both federally insured and private education loans, effective
March 13, 2020, borrower late fees have been waived.
For the majority of the Company's consumer loans, borrowers are generally being
offered, upon request and/or documented evidence of financial distress, up to a
two-month deferral of payments, with an option of additional deferrals if the
COVID-19 pandemic continues. In addition, effective March 13, 2020, the majority
of fees (non-sufficient funds, late charges, check fees) and credit bureau
reporting have been suspended. The specific relief terms on the Company's
consumer loan portfolio vary depending on the loan program and servicer of such
loans.
The Company will continue to review whether additional and/or extended borrower
relief policies and activities are needed.
The Company is not contractually committed to acquire FFELP, private education,
or consumer loans, so the Company has been and will continue to be selective as
to which, if any, loans it purchases during the current period of economic
uncertainty.
Other Risks and Uncertainties
The COVID-19 pandemic is unprecedented and continues to evolve. The extent to
which COVID-19 may impact the Company's businesses depends on future
developments, which are highly uncertain, subject to various risks, and cannot
be predicted with confidence, such as the ultimate spread, severity, and
duration of the pandemic, travel restrictions, stay-at-home or other similar
orders and social distancing in the United States and other countries, business
and/or school closures and disruptions, and the effectiveness of actions taken
in the United States and other countries to contain and treat the virus. For
additional information on the risks and uncertainties regarding the impacts of
COVID-19, see Part I, Item 1A. "Risk Factors - The COVID-19 pandemic has
adversely impacted our results of operations, and is expected to continue to
adversely impact our results of operations, as well as adversely impact our
businesses, financial condition, and/or cash flows" in this report.
Investment in Agile Sports Technologies, Inc. (doing business as "Hudl")
On May 20, 2020, the Company made an additional equity investment of
approximately $26.0 million in Hudl, as one of the participants in an equity
raise completed by Hudl. As a result of Hudl's equity raise, the Company
recognized a $51.0 million (pre-tax) gain during the second quarter of 2020 to
adjust its carrying value to reflect the May 20, 2020 transaction value.
Department of Education Servicing Contracts and Procurements for New Contracts
Nelnet Servicing, a subsidiary of the Company, earns loan servicing revenue from
a servicing contract with the Department. Revenue earned by Nelnet Servicing
related to this contract was $146.8 million and $158.0 million for the years
ended December 31, 2020 and 2019, respectively. In addition, Great Lakes, which
was acquired by the Company on February 7, 2018, also earns loan servicing
revenue from a similar servicing contract with the Department. Revenue earned by
Great Lakes related to this contract was $179.9 million and $185.7 million for
the years ended December 31, 2020 and 2019, respectively.
Nelnet Servicing and Great Lakes' servicing contracts with the Department are
currently scheduled to expire on June 14, 2021, but provide the potential for an
additional six-month extension at the Department's discretion through December
14, 2021. The
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Department is conducting a contract procurement process for a new framework for
the servicing of all student loans owned by the Department. For information
regarding recent developments related to and the current status of these
servicing contracts, and the Department's procurement processes for new
servicing contracts, see note 17 of the notes to consolidated financial
statements included in this report.
Adoption of New Accounting Standard for Credit Losses
On January 1, 2020, the Company adopted ASU No. 2016-13, Financial Instruments -
Credit Losses ("ASC 326"), which replaces the incurred loss methodology with an
expected loss methodology that is referred to as the current expected credit
loss ("CECL") methodology. The CECL methodology utilizes a lifetime "expected
credit loss" measurement objective for the recognition of credit losses for
financial assets measured at amortized cost at the time the financial asset is
originated or acquired. The expected credit losses are adjusted each period for
changes in expected lifetime credit losses.
The new guidance primarily impacted the allowance for loan losses related to the
Company's loan portfolio. Upon adoption, the Company recorded an increase to the
allowance for loan losses of $91.0 million, which included a reclassification of
the non-accretable discount balance and premiums related to loans purchased with
evidence of credit deterioration, and decreased retained earnings, net of tax,
by $18.9 million. Results for reporting periods beginning after January 1, 2020
are presented under ASC 326 (recognizing estimated credit losses expected to
occur over the asset's remaining life) while prior period amounts continue to be
reported in accordance with previously applicable GAAP (recognizing estimated
credit losses using an incurred loss model); therefore, the comparative
information for 2019 is not comparable to the information presented for 2020.
Solar Investments
During the last three years, the Company has invested $148.6 million in tax
equity investments in renewable energy solar partnerships to support the
development and operations of solar projects throughout the country. The
projects are currently forecasted to generate more than 214 megawatts of power
each year. These investments provide a federal income tax credit under the
Internal Revenue Code, currently at 26 percent (for projects commencing
construction in 2020-2022) and 30 percent (for projects commencing construction
prior to 2020) of the eligible project cost, with the tax credit available when
the project is placed-in-service. The Company is then allowed to reduce its tax
estimates paid to the U.S. Treasury based on the credits earned. In addition to
the credits, the Company structures the investments to receive quarterly
distributions of cash from the operating earnings of the solar project for a
period of at least five years (so the tax credits are not recaptured). After
that period, the contractual agreements typically provide for the Company's
interest in the projects to be purchased in an exit at the fair market value of
the discounted forecasted future cash flows allocable to the Company. Given the
expected timing of cash flows, experience the Company has in underwriting these
assets, and beneficial impact to the climate, the Company believes these
investments are a great fit within its capital deployment initiatives.
These investments are structured such that a significant proportion of the cash
distributions and tax items (including the income tax credit) are allocated back
to the Company within the first eighteen months of the investment capital
contribution, in order to achieve a target after tax return. The cash
distributions to the Company are then structured to flatten until exit,
typically between years five and six. Given the unique arrangement in which
investors share in the profits and losses of the solar investment with cash and
tax benefit allocations among the partners changing over the life of the
project, the accounting guidance calls for the use of the Hypothetical
Liquidation at Book Value ("HLBV") method, which can result in non-linear GAAP
income/loss allocation results. Under this method, a balance sheet approach is
utilized to determine what each investor would hypothetically receive at each
balance sheet date under the liquidation provisions of the contractual
agreements, assuming the net assets of the funding structures were liquidated at
their recorded amounts determined in accordance with GAAP. As the investor
receives a majority of this return through the income tax credit and higher cash
distributions at the beginning of the investment, as of the first period of the
hypothetical liquidation, the investor's remaining net claim on assets is
relatively low compared to the initial cash contributed. This difference between
the initial cash contributions and the first period's ending net claim on assets
through the hypothetical liquidation causes significant GAAP losses on the
investment to be recognized through the income statement within the initial
periods of the investment. After the carrying value of the investment on the
balance sheet is written down to the hypothetical liquidation amount, subsequent
year's earnings are expected to align with and reflect the operating profits or
losses of the investment. The Company realizes that application of the HLBV
method to its solar investments has a variable impact on its periodic earnings
that in the early years is not reflective of the expected long-term economics of
the investments. Given the significant amount of investments made in the last
couple of years and the associated ramp-up period, the negative impact to
earnings in 2020 was significant as the Company recognized a $37.4 million
pre-tax loss from these investments under the HLBV method. However, as these
investments mature and perform as forecasted, the Company expects to recoup that
loss and realize additional income between now and the sale of each of its
interests, likely 60 to 72 months from the date the project is placed in
service. Thus, the Company expects the economic gain from these investments to
be realized in its future earnings, but, due to the hypothetical liquidation
valuations as of the balance sheet dates
                                       42
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during the intended investment horizon, the HLBV method results in some
volatility in the Company's consolidated periodic earnings results.
Private Loan Servicing and Acquisition
In December of 2020, Wells Fargo announced the sale of its approximately $10
billion portfolio of private education student loans representing approximately
475,000 borrowers. In conjunction with the sale, the Company was selected as
servicer of the portfolio and will begin servicing the portfolio following a
series of loan transfers during the first half of 2021. In addition, the Company
has entered into agreements to participate in a joint venture to acquire the
portfolio. The Company expects to own approximately 8 percent of the interest in
the loans and, dependent upon financing, currently expects to invest
approximately $100 million as part of the acquisition. In addition, the Company
will serve as the sponsor and administrator for loan securitizations on behalf
of the purchaser group as the loans are securitized, and provide the required
level of risk retention as the loans are permanently financed. This transaction
is expected to close during the first half of 2021, with the securitizations
occurring subsequent to closing.
Liquidity and Capital Resources
•As of December 31, 2020, the Company had cash and cash equivalents of $121.2
million. In addition, the Company had a portfolio of available-for-sale
investments, consisting primarily of student loan asset-backed securities, with
a fair value of $348.6 million as of December 31, 2020. As of December 31, 2020,
the Company has participated $118.6 million of these securities, and such
participation is reflected as debt on the Company's consolidated balance sheet.
•The Company has historically generated positive cash flow from operations. For
the year ended December 31, 2020, the Company's net cash provided by operating
activities was $212.8 million.
•The Company has a $455.0 million unsecured line of credit with a maturity date
of December 16, 2024. As of December 31, 2020, the unsecured line of credit had
$120.0 million outstanding. Subsequent to December 31, 2020, the Company paid
down the full balance outstanding on the line of credit, and as of February 25,
2021, $455.0 million was available for future use. The line of credit provides
that the Company may increase the aggregate financing commitments, through the
existing lenders and/or through new lenders, up to a total of $550.0 million,
subject to certain conditions.
•On November 2, 2020, Nelnet Bank launched operations. Nelnet Bank was funded by
the Company with an initial capital contribution of $100.0 million, consisting
of $55.9 million of cash and $44.1 million of student loan asset-backed
securities. In addition, the Company made a pledged deposit of $40.0 million
with Nelnet Bank, as required under an agreement with the FDIC.
•The majority of the Company's portfolio of student loans is funded in
asset-backed securitizations that will generate significant earnings and cash
flow over the life of these transactions. As of December 31, 2020, the Company
currently expects future undiscounted cash flows from its securitization
portfolio to be approximately $2.30 billion, of which approximately $1.51
billion will be generated over the next five years.
•The Company has a stock repurchase program to purchase up to a total of five
million shares of the Company's Class A common stock during the three-year
period ending May 7, 2022. During 2020, the Company repurchased a total of
1,594,394 shares of stock for $73.4 million ($46.01 per share). As of December
31, 2020, 3,246,732 shares remained authorized for repurchase under the
Company's stock repurchase program.
•During 2020, the Company paid cash dividends totaling $31.8 million ($0.82 per
share).
The Company intends to use its strong liquidity position to capitalize on market
opportunities, including FFELP, private education, and consumer loan
acquisitions; 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.
CONSOLIDATED RESULTS OF OPERATIONS
An analysis of the Company's operating results for the year ended December 31,
2020 compared to 2019 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.
                                       43
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The Company operates as distinct reportable operating segments as described
above. For a reconciliation of the reportable segment operating results to the
consolidated results of operations, see note 15 of the notes to consolidated
financial statements included in this report. Since the Company monitors and
assesses its operations and results based on these segments, the discussion
following the consolidated results of operations is presented on a reportable
segment basis (except that Nelnet Bank's results of operations are not discussed
since such operations were launched in November 2020 and were not material to
the Company's 2020 consolidated results of operations).
                                          Year ended December 31,
                                          2020                2019                          Additional information
                                                                            

Decrease was due primarily to decreases in the gross

yield earned on loans and the average balance of

loans, partially offset by an increase in gross fixed

rate floor income due to lower interest rates in 2020 Loan interest

                        $   595,113            914,256         

as compared to 2019.

Includes income from unrestricted interest-earning

deposits and investments and funds in asset-backed

securitizations. Decrease was due to a decrease in Investment interest

                       24,543             34,421          interest rates.
Total interest income                    619,656            948,677
                                                                            

Decrease was due primarily to a decrease in cost of

funds and a decrease in the average balance of debt Interest expense

                         330,071            699,327         

outstanding.

Net interest income                      289,585            249,350         

See table below for additional analysis.

Increase was due to provision expense recognized in

the first quarter of 2020 as a result of an increase

in expected defaults due to the COVID-19 pandemic and

an increased provision for loan losses on loans

acquired in 2020 to reflect life of loan expected

losses as compared to loans acquired in 2019 for

which the provision for loan losses was recognized

                                                                             based upon an incurred loss methodology. See AGM
Less provision for loan losses            63,360             39,000          operating segment - results of operations.
Net interest income after provision
for loan losses                          226,225            210,350
Other income/expense:
LSS revenue                              451,561            455,255         

See LSS operating segment - results of operations. ETS&PP revenue

                           282,196            277,331         

See ETS&PP operating segment - results of operations.

See Communications operating segment - results of Communications revenue

                    76,643             64,269         

operations.

Other                                     57,561             47,918         

See table below for components of "other income."

Gain on sale of loans is from the sale of consumer Gain on sale of loans

                     33,023             17,261         

loans.

On December 21, 2020, the Company deconsolidated ALLO

from the Company's consolidated financial statements

as a result of ALLO's recapitalization. See "Overview

- Recapitalization and Additional Funding for ALLO" Gain from deconsolidation of ALLO 258,588

                  -         

above for additional information.

During the first quarter of 2020, the Company

recognized a provision expense of $26.3 million and

an impairment charge of $7.8 million related to

beneficial interest in consumer loan securitization

investments and several venture capital investments,

respectively. Such charges were the result of impacts

from the COVID-19 pandemic. During the fourth quarter

of 2020, the Company reversed $9.7 million of the

provision related to beneficial interest in consumer Impairment expense and provision for

                                         loan securitization investments due to improved
beneficial interests                     (24,723)                 -         

economic conditions.

The Company maintains an overall risk management

strategy that incorporates the use of derivative

instruments to reduce the economic effect of interest

rate volatility. Derivative settlements for each

applicable period should be evaluated with the

Company's net interest income. See table below for Derivative settlements, net

                3,679             45,406         

additional analysis.

Includes the realized and unrealized gains and losses

that are caused by changes in fair values of

derivatives which do not qualify for "hedge

treatment" under GAAP. The majority of the derivative

market value adjustments were related to the changes

in fair value of the Company's floor income interest

rate swaps. Such changes reflect that a decrease in

the forward yield curve during a reporting period

results in a decrease in the fair value of the

Company's floor income interest rate swaps, and an

increase in the forward yield curve during a

reporting period results in an increase in the fair Derivative market value adjustments,

                                         value of the Company's floor income interest rate
net                                      (28,144)           (76,195)         swaps.
Total other income/expense             1,110,384            831,245
Cost of services:
Cost to provide education
technology, services, and payment                                           

Represents primarily direct costs to provide payment processing services

                       82,206             81,603         

processing services in the ETS&PP operating segment.

Represents costs of services primarily associated Cost to provide communications

                                               with television programming costs in the
services                                  22,812             20,423          Communications operating segment.
Total cost of services                   105,018            102,026

Operating expenses:

Increase was due to (i) increases in personnel in the

LSS and corporate operating segments to meet

increased service and security standards under the

Department servicing contracts; (ii) increases in

personnel in the LSS operating segment to develop a

new private education and consumer loan servicing

system; and (iii) increases in personnel to support

the growth in the customer base and the development

of new technologies in the ETS&PP operating segment.

In addition, on October 1, 2020 (prior to the

deconsolidation of ALLO), ALLO recognized

compensation expense of $9.3 million related to the

                                                                             modification of certain equity awards previously
Salaries and benefits                    501,832            463,503         

granted to members of ALLO's management.

                                       44
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Increase was primarily due to additional depreciation

                                                                    expense 

in the corporate operating segment due to

                                                                    recent 

infrastructure capital expenditures to support

                                                                    the 

Company's operating segments, as well as an

increase in depreciation expense at ALLO as it

continues to develop its network in existing and new Depreciation and amortization 118,699

            105,049          

markets..


                                                                    Other 

expenses includes expenses necessary for

operations, such as postage and distribution,

consulting and professional fees, occupancy,

communications, and certain information

technology-related costs. Decrease was due to (i) cost

                                                                    savings 

in the LSS segment from an increase in the

adoption of electronic borrower statements and

correspondence and a decrease in printing and postage

                                                                    while 

loan payments are suspended as a result of

COVID-19 borrower relief efforts; (ii) reduction of

                                                                    travel 

expenses and the cancellation of on-site

conferences in the ETS&PP segment; and (iii) a

decrease in servicing fees paid by the AGM segment to

                                                                    third 

parties. In addition, the AGM segment recognized

                                                                    $16.7 

million of expense during 2019 to extinguish

asset-backed notes from certain securitizations prior

                                                                    to 

their contractual maturity. See each individual

                                                                    operating segment results of operations discussion for
Other expenses                  160,574            194,272          additional information.
Total operating expenses        781,105            762,824
Income before income taxes      450,486            176,745
                                                                    The

effective tax rate was 22.3% and 20.0% for 2020

                                                                    and 

2019, respectively. The increase in the effective

                                                                    tax 

rate in 2020 as compared to 2019 was due to the

recognition of normal tax credit amounts relative to a

                                                                    much 

higher pre-tax book income in 2020. The Company

                                                                    expects its future effective tax rate will range
Income tax expense              100,860             35,451          between 21 and 24 percent.
Net income                      349,626            141,294
Net loss attributable to
noncontrolling interests          2,817                509
Net income attributable to
Nelnet, Inc.                  $ 352,443            141,803

Additional information:
Net income attributable to                                          See "Overview - GAAP Net Income and Non-GAAP Net
Nelnet, Inc.                  $ 352,443            141,803          Income, Excluding Adjustments" above for additional
Derivative market value                                             information about non-GAAP net income, excluding
adjustments, net                 28,144             76,195          derivative market value adjustments.
Tax effect                       (6,755)           (18,287)
Net income attributable to
Nelnet, Inc., excluding
derivative market value
adjustments                   $ 373,832            199,711



The following table summarizes the components of "net interest income" and
"derivative settlements, net."
Derivative settlements represent the cash paid or received during the current
period to settle with derivative instrument counterparties the economic effect
of the Company's derivative instruments based on their contractual terms.
Derivative accounting requires that net settlements with respect to derivatives
that do not qualify for "hedge treatment" under GAAP be recorded in a separate
income statement line item below net interest income. The Company maintains an
overall risk management strategy that incorporates the use of derivative
instruments to reduce the economic effect of interest rate volatility. As such,
management believes derivative settlements for each applicable period should be
evaluated with the Company's net interest income as presented in the table
below. Net interest income (net of settlements on derivatives) is a non-GAAP
financial measure, and the Company reports this non-GAAP information because the
Company believes that it provides additional information regarding operational
and performance indicators that are closely assessed by management. There is no
comprehensive, authoritative guidance for the presentation of such non-GAAP
information, which is only meant to supplement GAAP results by providing
additional information that management utilizes to assess performance. See note
6 of the notes to consolidated financial statements included in this report for
additional information on the Company's derivative instruments, including the
net settlement activity recognized by the Company for each type of derivative
for the 2020 and 2019 periods presented in the table under the caption
"Consolidated Financial Statement Impact Related to Derivatives - Statements of
Income" in note 6 and in the table below.
                                       45
--------------------------------------------------------------------------------

                                      Year ended December 31,
                                      2020                2019                             Additional information
                                                                          

Represents the yield the Company receives on its loan

portfolio less the cost of funding these loans. Variable

loan spread is also impacted by the

amortization/accretion of loan premiums and discounts and

the 1.05% per year consolidation loan rebate fee paid to

the Department. See AGM operating segment - results of Variable loan interest margin $ 144,871

             174,954          

operations.

Settlements on associated                                                 

Represents the net settlements received related to the derivatives

                           10,378               5,214          Company's 1:3 basis swaps.
Variable loan interest margin,
net of settlements on
derivatives                          155,249             180,168
                                                                          

The Company has a portfolio of student loans that are

earning interest at a fixed borrower rate which exceeds

the statutorily defined variable lender rates, generating

fixed rate floor income. See Item 7A, "Quantitative and

Qualitative Disclosures About Market Risk - Interest Rate Fixed rate floor income

              123,460              49,677          Risk" for additional information.
Settlements on associated                                                 

Represents the net settlements (paid) received related to derivatives

                           (6,699)             40,192          the Company's floor income interest rate swaps.
Fixed rate floor income, net of
settlements on derivatives           116,761              89,869
Investment interest                   24,543              34,421
                                                                          

Includes interest expense on the Junior Subordinated

Hybrid Securities, unsecured line of credit, and the

asset-backed securities participation agreement. Decrease

was due to a decrease in interest rates and in the

average balance outstanding on the Company's unsecured

line of credit, partially offset by interest expense

incurred on the asset-backed securities participation Corporate debt interest expense (3,289)

             (9,702)         

agreement that was executed in May of 2020.

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


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

                                                          Year ended 

December 31,

                                                             2020                 2019
  Gain on remeasurement of HUDL investment (a)    $                 51,018            -
  Investment advisory services (b)                                  10,875        2,941
  Management fee revenue (c)                                         9,421        9,736
  Borrower late fee income (d)                                       5,194       12,884
  Income/gains from investments, net                                 2,205        8,356

  Loss from solar investments (e)                                  (37,423)      (2,220)
  Other                                                             16,271       16,221
   Other income                                   $                 57,561       47,918



(a)  During the second quarter of 2020, the Company recognized a $51.0 million
(pre-tax) gain to adjust the carrying value of its investment in Hudl to reflect
Hudl's May 2020 equity raise transaction value.
(b)  The Company provides investment advisory services through Whitetail Rock
Capital Management, LLC ("WRCM"), the Company's SEC-registered investment
advisor subsidiary, under various arrangements. WRCM earns annual fees of 25
basis points on the majority of the outstanding balance of asset-backed
securities under management and up to 50 percent of the gains from the sale of
asset-backed securities or asset-backed securities being called prior to the
full contractual maturity for which it provides advisory services. As of
December 31, 2020, the outstanding balance of asset-backed securities under
management subject to these arrangements was $1.4 billion. In addition, WRCM
earns annual management fees of five basis points for certain other investments
under management. The increase in advisory fees in 2020 as compared to 2019 was
the result of an increase in assets under management and performance fees
earned. The Company currently anticipates that assets under management will
decrease from current levels and that opportunities to earn meaningful
performance fees in future periods will be more limited.
(c)  Represents revenue earned from providing administrative support and
marketing services primarily to Great Lakes' former parent company in accordance
with a contract that expired in January 2021.
(d)  Represents borrower late fees earned by the AGM operating segment. The
decrease in borrower late fees in 2020 as compared to 2019 was due to the
Company suspending borrower late fees effective March 13, 2020 to provide
borrowers relief as a result of the COVID-19 pandemic.
(e)  Represents the Company's share of income or loss from solar investments
accounted for using the Hypothetical Liquidation at Book Value ("HLBV") method
of accounting. For the majority of the Company's solar investments, the HLBV
method of accounting results in accelerated losses in the initial years of
investment.

                                       46
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LOAN SERVICING AND SYSTEMS OPERATING SEGMENT - RESULTS OF OPERATIONS
Loan Servicing Volumes
                                                                                                                                             As of
                              December 31,              March 31,                 June 30,                September 30,                December 31,                March 31,                 June 30,                September 30,                December 31,
                                  2018                     2019                     2019                       2019                        2019                       2020                     2020                       2020                        2020
Servicing volume
(dollars in millions):
Nelnet:
Government                  $      179,507                183,093                  181,682                    184,399                      183,790                   185,477                  185,315                    189,932                      191,678
FFELP                               36,748                 35,917                   35,003                     33,981                       33,185                    32,326                   31,392                     31,122                       30,763
Private and consumer                15,666                 16,065                   16,025                     16,286                       16,033                    16,364                   16,223                     16,267                       16,226
Great Lakes:
Government                         232,694                237,050                  236,500                    240,268                      239,980                   243,205                  243,609                    249,723                      251,570

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

Number of servicing
borrowers:
Nelnet:
Government                       5,771,923              5,708,582                5,592,989                  5,635,653                    5,574,001                 5,498,872                5,496,662                  5,604,685                    5,645,946
FFELP                            1,709,853              1,650,785                1,588,530                  1,529,392                    1,478,703                 1,423,286                1,370,007                  1,332,908                    1,300,677
Private and consumer               696,933                699,768                  693,410                    701,299                      682,836                   670,702                  653,281                    649,258                      636,136
Great Lakes:
Government                       7,458,684              7,385,284                7,300,691                  7,430,165                    7,396,657                 7,344,509                7,346,691                  7,542,679                    7,605,984

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

Number of remote hosted
borrowers:                       6,393,151              6,332,261                6,211,132                  6,457,296                    6,433,324                 6,354,158                6,264,559                  6,251,598                    6,555,841



Nelnet Servicing and Great Lakes' servicing contracts with the Department are
currently scheduled to expire on June 14, 2021, but provide the potential for an
additional six-month extension at the Department's discretion through
December 14, 2021. The Consolidated Appropriations Act, 2021, signed into law on
December 27, 2020, provides that the Department may extend the period of
performance for the servicing contracts scheduled to expire on December 14, 2021
for up to two additional years to December 14, 2023. The Department is
conducting a contract procurement process for a new framework for the servicing
of all student loans owned by the Department. See note 17 of the notes to
consolidated financial statements included in this report for additional
information.
The Department currently allocates new loan volume among its servicers based on
certain performance metrics that measure the satisfaction among separate
customer groups, including borrowers and Department personnel who work with the
servicers, and that measure the success of keeping borrowers in an on-time
repayment status and helping borrowers avoid default. Under the most recently
publicly announced performance metric measurements used by the Department for
the quarterly periods January 1, 2020 through June 30, 2020, Great Lakes' and
Nelnet Servicing's overall rankings among the nine then-current servicers for
the Department at that time were first and tied for fifth, respectively. Based
on these results, Great Lakes' and Nelnet Servicing's allocation of new student
loan servicing volumes for the period September 1, 2020 through February 28,
2021 are 20 percent and 10 percent, respectively.
In October 2020, the Department communicated to its servicers that a
not-for-profit servicer requested to end its contract with the Department.
Effective October 23, 2020, the percent of allocated new student loan servicing
volume that previously was awarded to this servicer will be split among the
remaining servicers, resulting in Great Lakes' allocation to increase by two
percent and each remaining servicer to obtain an additional one percent
allocation.
                                       47
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Summary and Comparison of Operating Results

                                          Year ended December 31,
                                        2020                   2019                            Additional information
                                                                           

Decrease was due to lower interest rates in 2020 Net interest income

               $      315                      1,916          as compared to 2019.
Loan servicing and systems
revenue                              451,561                    455,255          See table below for additional analysis.
                                                                                 Represents revenue earned by the LSS operating
                                                                                 segment as a result of servicing loans for the AGM
                                                                                 and Nelnet Bank operating segments. Decrease in
                                                                                 2020 compared to 2019 was due to the impact of
                                                                                 borrower relief policies implemented by AGM in
                                                                                 response to the COVID-19 pandemic and the expected
                                                                                 amortization of AGM's FFELP portfolio. FFELP
                                                                           

intersegment servicing revenue will continue to Intersegment servicing revenue 36,520

                     46,751          decrease as AGM's FFELP portfolio pays off.
                                                                                 Represents revenue earned from providing
                                                                                 administrative support and marketing services
                                                                                 primarily to Great Lakes' former parent company in
                                                                           

accordance with a contract that expired in January Other income

                           9,421                      9,736     

2021.

Total other income                   497,502                    511,742
                                                                                 Increase was due to an increase in headcount to
                                                                                 provide enhanced service levels to borrowers under
                                                                                 the Department servicing contracts, and to develop
                                                                                 a new private education and consumer loan
Salaries and benefits                285,526                    276,136          servicing system.
                                                                                 Increase was due to capital expenditures to
                                                                           

support the recent extension of the government Depreciation and amortization 37,610

                     34,755          servicing contracts.
                                                                                 Decrease was due to cost savings as a result of
                                                                                 the impact of the COVID-19 pandemic and the
                                                                                 resulting CARES Act, primarily associated with the
                                                                                 fact that while student loan payments are
                                                                                 suspended there is a significant reduction of
                                                                                 borrower statement printing and postage costs. See
                                                                                 "Overview - Impacts of COVID-19 Pandemic - Loan
                                                                                 Servicing and Systems" above for additional
                                                                                 information. Decrease was also due to cost savings
                                                                                 from an increase in the adoption of electronic
                                                                                 borrower statements and correspondence, and a
                                                                           

decrease in expenses related to travel and the Other expenses

                        57,420                     71,064          provision for servicing losses.
                                                                                 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 2020 as compared to 2019 was due to an
                                                                           

increase in security service levels related to the Intersegment expenses

                 63,886                     54,325          Department servicing contracts.
Total operating expenses             444,442                    436,280
Income before income taxes            53,375                     77,378
                                                                                 Reflects income tax expense at an effective tax
Income tax expense                   (12,810)                   (18,571)         rate of 24%.
Net income                            40,565                     58,807

                                                                                 Before tax operating margin is a measure of before
                                                                                 tax operating profitability as a percentage of
                                                                                 revenue, and for the LSS segment is calculated as
                                                                                 income before income taxes divided by the total of
                                                                                 loan servicing and systems revenue, intersegment
                                                                                 servicing revenue, and other income revenue. The
                                                                                 Company uses this metric to monitor and assess the
                                                                                 segment's performance, manage operating costs,
                                                                                 identify and evaluate business trends affecting
                                                                                 the segment, and make strategic decisions, and
                                                                                 believes that it facilitates an understanding of
                                                                                 the operating performance of the segment and
                                                                                 provides a meaningful comparison of the results of
                                                                                 operations between periods.

                                                                                 The LSS segment incurred additional costs during
                                                                                 2020 to meet increased service and security
                                                                                 standards under the Department servicing
                                                                                 contracts. In addition, servicing revenue in 2020
                                                                                 has been negatively impacted as a result of the
                                                                                 COVID-19 pandemic. As a result, the segment's net
                                                                                 income and operating margin decreased in 2020 as
Before tax operating margin             10.7     %                 15.1  %       compared to 2019.




                                       48
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Loan servicing and systems revenue

                                     Year ended December 31,
                                     2020                2019               

Additional information

Represents revenue from Nelnet Servicing's

Department servicing contract. Decrease in 2020

compared to 2019 was due to a decrease in revenue

from the administration of the Total and

Permanent Disability (TPD) Discharge program,

decrease in fees earned from the Department for

originating consolidation loans, and decrease in

revenue earned per borrower as a result of

certain provisions included in the CARES Act. See

"Overview - Impacts of COVID-19 Pandemic - Loan

                                                                         Servicing and Systems" above for additional
Government servicing - Nelnet   $   146,798             157,991          

information.

Represents revenue from the Great Lakes'

Department servicing contract. Decrease in 2020

compared to 2019 was due to a decrease in fees

earned from the Department for originating

consolidation loans and decrease in revenue

earned per borrower as a result of certain

provisions included in the CARES Act. See

                                                                         "Overview - Impacts of COVID-19 Pandemic - Loan
Government servicing - Great                                             Servicing and Systems" above for additional
Lakes                               179,872             185,656          

information.

Decrease was due to a decrease in the number of

borrowers serviced, a decrease in origination

fees, and the impact of borrower relief policies

implemented by private lenders in response to the

COVID-19 pandemic. See "Overview - Impacts of

COVID-19 Pandemic - Loan Servicing and Systems"

above for additional information. The Company

expects that private education loan servicing

revenue will increase beginning in the first half

                                                                         of 

2021 as a result of the Company being selected

                                                                         to 

service all of the approximately $10 billion

                                                                         portfolio of private education loans that Wells
Private education and consumer                                           Fargo announced in December 2020 it had agreed to
loan servicing                       32,492              36,788          

sell to investors.

Decrease was due to a decrease in the number of

borrowers serviced and the impact of borrower

relief policies implemented by lenders in

response to the COVID-19 pandemic. See "Overview

                                                                         - 

Impacts of COVID-19 Pandemic - Loan Servicing

and Systems" above for additional information.

Over time, FFELP servicing revenue will continue

                                                                         to decrease as third-party customers' FFELP
FFELP servicing                      20,183              25,043          

portfolios pay off.

Increase in 2020 compared to 2019 was due to

increased contract programming revenue for

services provided related to hosted FFELP

guarantee activities and an increase in remote

hosted borrowers. These items were partially

offset due to the negative impact in 2020 of

COVID-19 forbearances on loans serviced by the

Company's Direct Servicing hosted clients. The

Company's remote hosted servicing and system

support contract with Great Lakes' former parent,

representing 2.3 million borrowers, expired in

                                                                         January 2021. Revenue recognized from providing
Software services                    41,999              41,077          

these services during 2020 was $16.3 million.

The majority of this revenue relates to providing

contact center and back office operational

outsourcing activities. Increase in 2020 compared

                                                                         to 

2019 was due to providing temporary

outsourcing services to state agencies to process

unemployment claims and conduct certain health

contact tracing support activities. Revenue from

providing these temporary services was $21.9

million in 2020. See "Overview - Impacts of

                                                                         COVID-19 Pandemic - Loan Servicing and Systems"
Outsourced services and other        30,217               8,700          above for additional information.
Loan servicing and systems
revenue                         $   451,561             455,255



                                       49
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EDUCATION TECHNOLOGY, SERVICES, AND PAYMENT PROCESSING OPERATING SEGMENT -
RESULTS OF OPERATIONS
This segment of the Company's business is subject to seasonal fluctuations which
correspond, or are related to, the traditional school year. Tuition management
revenue is recognized over the course of the academic term, but the peak
operational activities take place in summer and early fall. Higher amounts of
revenue are typically recognized during the first quarter due to fees related to
grant and aid applications as well as online applications and enrollment
services. The Company's operating expenses do not follow the seasonality of the
revenues. This is primarily due to generally fixed year-round personnel costs
and seasonal marketing costs. Based on the timing of revenue recognition and
when expenses are incurred, revenue and pre-tax operating margin are higher in
the first quarter as compared to the remainder of the year.
On December 31, 2020, the Company acquired HigherSchool Instructional Services,
a services company that provides supplemental instructional services and
educational professional development for K-12 schools in New York City, and CD2
LLC, a platform technology solution that includes learning management,
collaboration/workflow, gamification, customer management/document storage, and
employee boarding. The results of HigherSchool Instructional Services and CD2
LLC will be reported in the Company's consolidated financial statements from the
date of acquisition.
Summary and Comparison of Operating Results
                                       Year ended December 31,
                                      2020                2019                         Additional information
                                                                          

Represents interest income on tuition funds held

in custody for schools. Decrease was due to a

decrease in interest rates in 2020 as compared

with 2019. If interest rates remain at current

                                                                          levels, the Company anticipates this segment will
Net interest income               $    2,982               9,198          earn minimal interest income in future periods.
Education technology, services,
and
payment processing revenue           282,196             277,331          See table below for additional information.
Intersegment revenue                      20                   -
Other income                             373                 259
Total other income                   282,589             277,590
Cost to provide education
technology,
services, and payment processing
services                              82,206              81,603          

See table below for additional information.

Increase in 2020 compared to 2019 was due to an

increase in headcount to support the growth of

                                                                          the customer base and investment in the
Salaries and benefits                 98,847              94,666          

development of new technologies.

Represents primarily amortization of intangible

assets from prior business acquisitions.

Amortization of intangible assets related to

                                                                          business acquisitions was $8.7 million and $12.1
Depreciation and amortization          9,459              12,820          

million for 2020 and 2019, respectively.

Decrease in 2020 compared to 2019 was due to a

reduction of travel expenses and the cancellation

                                                                          of on-site conferences as a result of the
Other expenses                        14,566              22,027          

COVID-19 pandemic.

Intersegment expenses represent costs for certain

corporate activities and services that are

                                                                          allocated to each operating segment based on
Intersegment expenses, net            14,293              13,405          estimated use of such activities and services.
Total operating expenses             137,165             142,918
Income before income taxes            66,200              62,267
                                                                          Represents income tax expense at an effective tax
Income tax expense                   (15,888)            (14,944)         rate of 24%.
Net income                        $   50,312              47,323




                                       50
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Education technology, services, and payment processing revenue The following table provides disaggregated revenue by service offering and before tax operating margin for each reporting period.

                                    Year ended December 31,
                                   2020                  2019               

Additional information

Decrease in 2020 compared to 2019 was due

to the COVID-19 pandemic. Revenue

recognized during the first six months of

2020 was primarily related to payment

plans for the 2019-2020 academic year for

K-12 schools and the spring and summer

2020 semester for institutions of higher

education. As a result, fees for the

majority of payment plans for these

periods were received and were based on

school enrollments prior to the

conditions arising from the COVID-19

pandemic. Revenue recognized during the

second six months of 2020 was related to

                                                                          the 2020-2021 academic year and was
Tuition payment plan                                                      negatively impacted due to the COVID-19
services                     $   100,674                 106,682          

pandemic.

Increase in 2020 compared to 2019 was due

to an increase in payments volume from

new school customers, partially offset by

the decline in payment volume for certain

                                                                          of the Company's existing customers as a
Payment processing               114,304                 110,848          

result of the COVID-19 pandemic.

Increase in 2020 compared to 2019 was due

to an increase from FACTS Student

Information System ("SIS") software

subscriptions, online application and

enrollment services, and financial needs

                                                                          assessment services as a result of an
Education technology and                                                  increase in the number of students and
services                          65,885                  58,578          customers using these products.
Other                              1,333                   1,223
Education technology,
services, and payment
processing revenue               282,196                 277,331
                                                                          Costs primarily relate to payment
Cost to provide education                                                 processing revenue and such costs
technology, services, and                                                 decrease/increase in relationship to
payment processing services       82,206                  81,603          payment revenue.
Net revenue                  $   199,990                 195,728
                                                                          

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
Before tax operating margin         33.1    %               31.8  %       

results of operations between periods.

                                       51
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COMMUNICATIONS OPERATING SEGMENT - RESULTS OF OPERATIONS
On December 21, 2020, the Company deconsolidated ALLO from the Company's
consolidated financial statements. See note 2, "Recent Developments - ALLO
Recapitalization," of the notes to consolidated financial statements included in
this report for additional information. Accordingly, the operating results for
the Communications operating segment for 2020 are from January 1, 2020 through
December 21, 2020.
Summary and Comparison of Operating Results
                                     Period from
                                     January 1 to
                                     December 21,          Year ended December 31,
                                         2020                       2019                                Additional information
Net interest income                $           2                             3
                                                                                          Communications revenue is derived primarily from
                                                                                          the sale of pure fiber optic services to
                                                                                          residential and business customers in Nebraska and
                                                                                          Colorado, including internet, television, and
                                                                                          telephone services. Increase was due to additional
                                                                                          residential households and businesses served as a
                                                                                          result of the completion of the Lincoln, Nebraska
                                                                                          network build out in 2019 and continued maturity
                                                                                          of ALLO's existing markets. See additional
                                                                                          financial and operating data for ALLO in the
Communications revenue                    76,643                        64,269            tables below.
Other income                               1,561                         1,509
Total other income                        78,204                        65,778
                                                                                          Cost of services are primarily associated with
                                                                                          television programming costs. Other costs include
                                                                                          connectivity, franchise, and other regulatory
Cost to provide communications                                                            costs directly related to providing internet and
services                                  22,812                        20,423            voice services.
                                                                                          On October 1, 2020 (prior to the deconsolidation
                                                                                          of ALLO), ALLO recognized compensation expense of
                                                                                          $9.3 million related to the modification of
                                                                                          certain ALLO equity awards previously granted to
Salaries and benefits                     30,935                        21,004            members of ALLO's management.
                                                                                          Depreciation reflects the allocation of the costs
                                                                                          of ALLO's property and equipment over the period
                                                                                          in which such assets are used. A significant
                                                                                          amount of property and equipment purchases have
                                                                                          been made to support ALLO's network expansion,
                                                                                          which has increased depreciation expense in 2020
                                                                                          as compared to 2019. Amortization reflects the
                                                                                          allocation of costs related to intangible assets
                                                                                          recorded at fair value as of the date the Company
                                                                                          acquired ALLO in 2015 over their estimated useful
Depreciation and amortization             42,588                        37,173            lives.
                                                                                          Other expenses includes selling, general, and
                                                                                          administrative expenses necessary for operations,
                                                                                          such as advertising, occupancy, professional
                                                                                          services, construction materials, and personal
                                                                                          property taxes. Decrease in 2020 as compared to
                                                                                          2019 was due to a reduction in certain
                                                                                          construction costs and travel expenses as a result
Other expenses                            13,327                        15,165            of the COVID-19 pandemic.
                                                                                          Intersegment expenses represent costs for certain
                                                                                          corporate activities and services that are
                                                                                          allocated to each operating segment based on
Intersegment expenses                      1,732                         2,962            estimated use of such activities and services.
Total operating expenses                  88,582                        76,304
Loss before income taxes                 (33,188)                      (30,946)
                                                                                          Represents income tax benefit at an effective tax
Income tax benefit                         7,965                         7,427            rate of 24%.
                                                                                          As ALLO grows in current and new markets, it
                                                                                          incurs large upfront capital expenditures and
                                                                                          associated depreciation and upfront customer
                                                                                          acquisition costs. Management uses EBITDA to
                                                                                          compare ALLO's performance to that of its
                                                                                          competitors and to eliminate certain non-cash and
                                                                                          non-operating items in order to consistently
                                                                                          measure performance from period to period. See
Net loss                           $     (25,223)                      (23,519)           additional information below.
Additional Information:
Net loss                           $     (25,223)                      (23,519)
Net interest income                           (2)                           (3)
Income tax benefit                        (7,965)                       (7,427)
Depreciation and amortization             42,588                        

37,173

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



                                       52
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Certain financial and operating data for ALLO is summarized in the tables below.
                                             Period from January 1 to December 21,
                                                             2020                             Year ended December 31, 2019
Residential revenue                         $       58,029                  75.7  %       $     48,344                  75.2  %
Business revenue                                    18,038                  23.5                15,689                  24.4
Other revenue                                          576                   0.8                   236                   0.4
Communications revenue                      $       76,643                 100.0  %       $     64,269                 100.0  %

Internet                                    $       48,362                  63.1  %       $     38,239                  59.5  %
Television                                          17,091                  22.3                16,196                  25.2
Telephone                                           11,037                  14.4                 9,705                  15.1
Other                                                  153                   0.2                   129                   0.2
Communications revenue                      $       76,643                 100.0  %       $     64,269                 100.0  %

Net loss                                    $      (25,223)                               $    (23,519)
EBITDA (a)                                           9,398                                       6,224

Capital expenditures                                47,957                                      44,988



                                                                                                                                    As of
                                                  September 30,                                                                                         September 30,
                        December 21, 2020             2020                 June 30, 2020             March 31, 2020           December 31, 2019             2019                 June 30, 2019             March 31, 2019           December 31, 2018
Residential customer
information:
Households served               59,274                  56,787                    53,067                      49,684                  47,744                  45,228                    42,760                      40,338                  37,351
Households passed (b)          149,622                 147,087                   144,869                     143,505                 140,986                 137,269                   132,984                     127,253                 122,396
Households
served/passed                     39.6  %                 38.6  %                   36.6  %                     34.6  %                 33.9  %                 32.9  %                   32.2  %                     31.7  %                 30.5  %
Total households in
current markets                171,121                 171,121                   171,121                     171,121                 160,884                 159,974                   159,974                     152,840                 152,840


(a)  Earnings before interest, income taxes, depreciation, and amortization
("EBITDA") is a supplemental non-GAAP performance measure that is frequently
used in capital-intensive industries such as telecommunications. ALLO's
management uses EBITDA to compare ALLO's performance to that of its competitors
and to eliminate certain non-cash and non-operating items in order to
consistently measure performance from period to period. EBITDA excludes interest
and income taxes because these items are associated with a company's particular
capitalization and tax structures. EBITDA also excludes depreciation and
amortization expense because these non-cash expenses primarily reflect the
impact of historical capital investments, as opposed to the cash impacts of
capital expenditures made in recent periods, which may be evaluated through cash
flow measures. The Company reports EBITDA for ALLO because the Company believes
that it provides useful additional information for investors regarding a key
metric used by management to assess ALLO's performance. There are limitations to
using EBITDA as a performance measure, including the difficulty associated with
comparing companies that use similar performance measures whose calculations may
differ from ALLO's calculations. In addition, EBITDA should not be considered a
substitute for other measures of financial performance, such as net income or
any other performance measures derived in accordance with GAAP. A reconciliation
of EBITDA from net income (loss) under GAAP is presented under "Summary and
Comparison of Operating Results" in the table above.
(b)  Represents the number of single residence homes, apartments, and
condominiums that ALLO already serves and those in which ALLO has the capacity
to connect to its network distribution system without further material
extensions to the transmission lines, but have not been connected.


                                       53
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ASSET GENERATION AND MANAGEMENT OPERATING SEGMENT - RESULTS OF OPERATIONS
Loan Portfolio
As of December 31, 2020, the AGM operating segment had a $19.6 billion loan
portfolio, consisting primarily of federally insured loans, that management
anticipates will amortize over the next approximately 20 years and has a
weighted average remaining life of 9.8 years. For a summary of the Company's
loan portfolio as of December 31, 2020 and 2019, see note 4 of the notes to
consolidated financial statements included in this report.
Loan Activity
The following table sets forth the activity of AGM's loan portfolio:
                                                                            

Year ended December 31,

                                                                        2020                     2019
Beginning balance                                                 $  20,798,719                 22,520,498
Loan acquisitions:
Federally insured student loans                                       1,327,690                  1,530,294
Private education loans                                                 152,048                     71,543
Consumer loans                                                          136,985                    405,726
Total loan acquisitions                                               1,616,723                  2,007,563
Repayments, claims, capitalized interest, and other                  (1,999,095)                (2,511,641)
Consolidation loans lost to external parties                           (672,211)                  (990,720)
Consumer loans sold                                                    (185,028)                  (226,981)

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



The Company has also purchased partial ownership in certain federally insured
and consumer loan securitizations. As of the latest remittance reports filed by
the various trusts prior to December 31, 2020, the Company's ownership
correlates to approximately $500 million and $280 million of federally insured
and consumer loans, respectively, included in these securitizations.
Allowance for Loan Losses and Loan Delinquencies
On January 1, 2020, the Company adopted ASU No. 2016-13, Financial Instruments -
Credit Losses ("ASC 326"), which replaces the incurred loss methodology with an
expected loss methodology that is referred to as the current expected credit
loss ("CECL") methodology.
The CECL methodology utilizes a lifetime "expected credit loss" measurement
objective for the recognition of credit losses for financial assets measured at
amortized cost at the time the financial asset is originated or acquired. The
expected credit losses are adjusted each period for changes in expected lifetime
credit losses.
Upon adoption, the Company recorded an increase to the allowance for loan losses
of $91.0 million, which included a reclassification of the non-accretable
discount balance and premiums related to loans purchased with evidence of credit
deterioration, and decreased retained earnings, net of tax, by $18.9 million.
Results for reporting periods beginning after January 1, 2020 are presented
under ASC 326 (recognizing estimated credit losses expected to occur over the
asset's remaining life) while prior period amounts continue to be reported in
accordance with previously applicable GAAP (recognizing estimated credit losses
using an incurred loss model); therefore, the comparative information for 2019
is not comparable to the information presented for 2020.
Management has determined that each of AGM's federally insured, private
education, and consumer loan portfolios meet the definition of a portfolio
segment, which is defined as the level at which an entity develops and documents
a systematic method for determining its allowance for credit losses.
AGM's total allowance for loan losses of $175.4 million at December 31, 2020
represents reserves equal to 0.7% of AGM's federally insured loans (or 26.3% of
the risk sharing component of the loans that is not covered by the federal
guaranty), 6.1% of AGM's private education loans, and 24.9% of AGM's consumer
loans.
For a summary of the Company's activity in the allowance for loan losses for
2020 and 2019, and a summary of the Company's loan status and delinquency
amounts as of December 31, 2020 and 2019, see note 4 of the notes to
consolidated financial statements included in this report.
                                       54
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Loan Spread Analysis
The following table analyzes the loan spread on AGM's portfolio of loans, which
represents the spread between the yield earned on loan assets and the costs of
the liabilities and derivative instruments used to fund the assets. The spread
amounts included in the following table are calculated by using the notional
dollar values found in the table under the caption "Net interest income after
provision for loan losses, net of settlements on derivatives" below, divided by
the average balance of loans or debt outstanding.
                                                                            

Year ended December 31,

                                                                         2020                       2019
Variable loan yield, gross                                                  3.17  %                        4.80  %
Consolidation rebate fees                                                  (0.84)                         (0.83)

Discount accretion, net of premium and deferred origination costs amortization

                                                                0.01                           0.02
Variable loan yield, net                                                    2.34                           3.99
Loan cost of funds - interest expense                                      (1.64)                         (3.25)
Loan cost of funds - derivative settlements (a) (b)                         0.05                           0.03
Variable loan spread                                                        0.75                           0.77
Fixed rate floor income, gross                                              0.61                           0.22
Fixed rate floor income - derivative settlements (a) (c)                   (0.03)                          0.19
Fixed rate floor income, net of settlements on derivatives                  0.58                           0.41
Core loan spread                                                            1.33  %                        1.18  %

Average balance of AGM's loans                                     $  20,163,876                     21,698,094
Average balance of AGM's debt outstanding                             19,964,813                     21,259,309



(a)  Derivative settlements represent the cash paid or received during the
current period to settle with derivative instrument counterparties the economic
effect of the Company's derivative instruments based on their contractual terms.
Derivative accounting requires that net settlements with respect to derivatives
that do not qualify for "hedge treatment" under GAAP be recorded in a separate
income statement line item below net interest income. The Company maintains an
overall risk management strategy that incorporates the use of derivative
instruments to reduce the economic effect of interest rate volatility. As such,
management believes derivative settlements for each applicable period should be
evaluated with the Company's net interest income (loan spread) as presented in
this table. The Company reports this non-GAAP information because it believes
that it provides additional information regarding operational and performance
indicators that are closely assessed by management. There is no comprehensive,
authoritative guidance for the presentation of such non-GAAP information, which
is only meant to supplement GAAP results by providing additional information
that management utilizes to assess performance. See note 6 of the notes to
consolidated financial statements included in this report for additional
information on the Company's derivative instruments, including the net
settlement activity recognized by the Company for each type of derivative for
the 2020 and 2019 periods presented in the table under the caption "Consolidated
Financial Statement Impact Related to Derivatives - Statements of Income" in
note 6 and in 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.
                                                           Year ended December 31,
                                                              2020                2019
 Core loan spread                                                    1.33  %      1.18  %
 Derivative settlements (1:3 basis swaps)                           (0.05)  

(0.03)

 Derivative settlements (fixed rate floor income)                    0.03        (0.19)
 Loan spread                                                         1.31  %      0.96  %



(b)  Derivative settlements consist of net settlements received related to the
Company's 1:3 basis swaps.
(c)  Derivative settlements consist of net settlements (paid) received related
to the Company's floor income interest rate swaps.

                                       55
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A trend analysis of AGM's core and variable loan spreads by calendar year
quarter is summarized below.
[[Image Removed: nni-20201231_g4.jpg]]
(a)  The interest earned on a large portion of AGM's FFELP student loan assets
is indexed to the one-month LIBOR rate. AGM funds a portion of its assets with
three-month LIBOR indexed floating rate securities. The relationship between the
indices in which AGM earns interest on its loans and funds such loans has a
significant impact on loan spread. This table (the right axis) shows the
difference between AGM's liability base rate and the one-month LIBOR rate by
quarter. See Item 7A, "Quantitative and Qualitative Disclosures About Market
Risk - Interest Rate Risk," which provides additional detail on AGM's FFELP
student loan assets and related funding for those assets.
Variable loan spread was compressed during the first and second quarters of 2020
due to a widening of the basis between the asset and debt indices in which the
Company earns interest on its loans and funds such loans (as reflected in the
table above). The significant widening during the first and second quarters of
2020 was the result of the significant decrease in interest rates during March
2020 and the first half of the second quarter of 2020. In a declining interest
rate environment, variable student loan spread is compressed, due to the timing
of interest rate resets on the Company's assets occurring daily in contrast to
the timing of the interest rate resets on the Company's debt that occurs either
monthly or quarterly. During the third and fourth quarters of 2020, as the
Company's debt reset at lower interest rates, the Company's variable loan spread
increased. See Item 7A, "Quantitative and Qualitative Disclosures About Market
Risk - Interest Rate Risk," which provides additional detail on AGM's FFELP
student loan assets and related funding for those assets.
The difference between variable loan spread and core loan spread is fixed rate
floor income earned on a portion of AGM's federally insured student loan
portfolio. A summary of fixed rate floor income and its contribution to core
loan spread follows:
                                                                             Year ended December 31,
                                                                       2020                           2019
Fixed rate floor income, gross                               $            123,460                          49,677
Derivative settlements (a)                                                 (6,699)                         40,192
Fixed rate floor income, net                                 $            116,761                          89,869
Fixed rate floor income contribution to spread, net                          0.58    %                       0.41  %


(a)  Derivative settlements consist of net settlements (paid) received related
to the Company's derivatives used to hedge student loans earning fixed rate
floor income.
Gross fixed rate floor income increased in 2020 as compared to 2019 due to lower
interest rates in 2020 as compared to 2019. The Company has a portfolio of
derivative instruments in which the Company pays a fixed rate and receives a
floating rate to economically hedge a portion of loans earning fixed rate floor
income. The decrease in net derivative settlements (paid)
                                       56
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received from the floor income interest rate swaps in 2020 as compared to 2019
was due to a decrease in the weighted average of notional amount of derivatives
outstanding in 2020 as compared to 2019 and a decrease in interest rates. The
Company added $2.75 billion (notional amount) of additional derivatives during
the fourth quarter of 2020, resulting in a total of $4.5 billion (notional
amount) of derivatives outstanding as of December 31, 2020, to hedge loans
earning fixed rate floor income. See Item 7A, "Quantitative and Qualitative
Disclosures About Market Risk - Interest Rate Risk," which provides additional
detail on AGM's portfolio earning fixed rate floor income and the derivatives
used by the Company to hedge these loans.
Interest Rate Risk - Replacement of LIBOR as a Benchmark Rate
As of December 31, 2020, the interest earned on a principal amount of $17.8
billion in the Company's FFELP student loan asset portfolio was indexed to
one-month LIBOR, and the interest paid on a principal amount of $17.1 billion of
the Company's FFELP student loan asset-backed debt securities was indexed to
one-month or three-month LIBOR. In addition, the majority of the Company's
derivative financial instrument transactions used to manage LIBOR interest rate
risks are indexed to LIBOR. A market transition away from the current LIBOR
framework could result in significant changes to the interest rate
characteristics of the Company's LIBOR-indexed assets and funding for those
assets, as well as the Company's LIBOR-indexed derivative instruments. See Item
1A, "Risk Factors - Loan Portfolio - Interest rate risk - replacement of LIBOR
as a benchmark rate."
























                                       57
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Summary and Comparison of Operating Results

                                        Year ended December 31,
                                        2020                2019                          Additional information
Net interest income after
provision for loan losses          $   220,288            199,588          

See table below for additional analysis.

Represents primarily borrower late fees. The decrease

in borrower late fees in 2020 compared to 2019 was

due to the Company suspending borrower late fees

effective March 13, 2020 to provide borrowers relief

as a result of the COVID-19 pandemic. See "Overview -

Impacts of COVID-19 Pandemic - Asset Generation and Other income

                             7,189             13,088          

Management" above for additional information.

The Company sold $185.0 million and $227.0 million of Gain on sale of loans

                   33,023             17,261          

consumer loans in 2020 and 2019, respectively.

In March 2020, the Company recognized a provision

expense of $26.3 million related to its beneficial

interest in consumer loan securitization investments

as a result of the expected impacts of the COVID-19

pandemic. During the fourth quarter of 2020, the

Company reversed $9.7 million of such provision due

to improved economic conditions. See note 7 of the Impairment expense and provision

notes to consolidated financial statements included for beneficial interests

               (16,607)                 -          

in this report.

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
Derivative settlements, net              3,679             45,406          

table below.

Includes the realized and unrealized gains and losses

that are caused by changes in fair values of

derivatives which do not qualify for "hedge

treatment" under GAAP. The majority of the derivative

market value adjustments related to the changes in

fair value of the Company's floor income interest

rate swaps. Such changes reflect that a decrease in

the forward yield curve during a reporting period

results in a decrease in the fair value of the

Company's floor income interest rate swaps, and an

increase in the forward yield curve during a

reporting period results in an increase in the fair Derivative market value

                                                    value of the Company's floor income interest rate
adjustments, net                       (28,144)           (76,195)         swaps.
Total other income/expense                (860)              (440)
Salaries and benefits                    1,747              1,545

                                                                          

The Company recognized $16.7 million of expenses in

2019 to extinguish asset-backed notes from certain

securitizations prior to their contractual maturity.

Excluding these costs, other expenses were $17.7

million in 2019. Other than the debt extinguishment

costs, the primary component of other expenses is

servicing fees paid to third parties. The decrease in

servicing fees in 2020 as compared to 2019 was due to Other expenses

                          15,806             34,445          

a decrease in the Company's loan portfolio.

Amounts include fees paid to the LSS operating

segment for the servicing of the Company's loan

portfolio. These amounts exceed the actual cost of

servicing the loans. The decrease in servicing fees

in 2020 compared to 2019 was due to the expected

amortization of the Company's FFELP portfolio and a

decrease in certain servicing activities due to

borrower relief initiatives and policies as a result

of the COVID-19 pandemic. Intersegment expenses also

include costs for certain corporate activities and

services that are allocated to each operating segment

                                                                           based on estimated use of such activities and
Intersegment expenses                   39,172             47,362          

services.

Total operating expenses, excluding the $16.7 million

of expenses in 2019 related to the extinguishment of

debt prior to their contractual maturity (as

described above), were 28 basis points and 31 basis

points of the average balance of loans in 2020 and Total operating expenses

                56,725             83,352          2019, respectively.
Income before income taxes             162,703            115,796
                                                                           Represents income tax expense at an effective tax
Income tax expense                     (39,049)           (27,792)         rate of 24%.
Net income                         $   123,654             88,004

Additional information:
                                                                          

See "Overview - GAAP Net Income and Non-GAAP Net

Income, Excluding Adjustments" above for additional

information about non-GAAP net income, excluding

derivative market value adjustments. The decrease in Net income

                         $   123,654             88,004          

non-GAAP net income in 2020 compared to 2019 was due

to (i) the provision expense recognized by the

Company in 2020 related to beneficial interest in

consumer loan securitizations; (ii) the decrease in Derivative market value

the average balance of loans in 2020 as compared to adjustments, net

                        28,144             76,195          

2019; (iii) an incremental provision for loan losses

in 2020 related to the increase in expected defaults

as a result of the COVID-19 pandemic; and (iv) a

decrease in borrower late fees. These items were

                                                                           partially offset by (i) an increase in core loan
Tax effect                              (6,755)           (18,287)         

spread; (ii) an increase in gains from the sale of

consumer loan portfolios in 2020 as compared to 2019;

and (iii) recognizing expenses for the early

                                                                           extinguishment of debt in 2019.
Net income, excluding derivative
market value adjustments           $   145,043            145,912



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

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

                                         Year ended December 31,
                                        2020                 2019                          Additional information
                                                                            

Decrease in 2020 compared to 2019 was due to a

decrease in the gross yield earned on loans and a Variable interest income, gross $ 637,979

            1,040,785         

decrease in the average balance of loans.

                                                                             Decrease was due to a decrease in the average
Consolidation rebate fees             (168,933)            (180,701)         consolidation loan balance.
Discount accretion, net of premium                                           Net discount accretion is due to the Company's
and deferred origination costs                                              

purchases of loans at a net discount over the last amortization

                             2,578                4,495          several years.
Variable interest income, net          471,624              864,579
                                                                             Decrease in 2020 compared to 2019 was due to a
Interest on bonds and notes                                                  decrease in cost of funds and a decrease in the
payable                               (326,753)            (689,625)        

average balance of debt outstanding.

Derivative settlements include the net settlements Derivative settlements, net (a) 10,378

                5,214          received related to the Company's 1:3 basis swaps.
Variable loan interest margin,
net of settlements on derivatives
(a)                                    155,249              180,168
                                                                             Fixed rate floor income increased due to lower
Fixed rate floor income, gross         123,460               49,677         

interest rates in 2020 as compared to 2019.

Derivative settlements include the settlements

                                                                             (paid) received related to the Company's floor
Derivative settlements, net (a)         (6,699)              40,192          income interest rate swaps.
Fixed rate floor income, net of
settlements on derivatives             116,761               89,869
Core loan interest income (a)          272,010              270,037
                                                                            

Decrease was due to lower interest rates and lower

weighted average cash and restricted cash balances Investment interest

                     16,390               17,707         

in 2020 as compared to 2019.

Decrease was due to lower interest rates and lower

                                                                             weighted average debt outstanding in 2020 as
Intercompany interest                   (1,404)              (3,750)        

compared to 2019.


Provision for loan losses -                                                  See "Allowance for Loan Losses and Loan
federally insured loans                (18,691)              (8,000)         Delinquencies" included above under "Asset
Provision for loan losses -                                                  Generation and Management Operating Segment -
private education loans                 (6,155)                   -          Results of Operations.
Provision for loan losses -
consumer loans                         (38,183)             (31,000)
                                                                           

Net interest income (net of settlements on

derivatives - and excluding provision for loan

losses) for 2020 and 2019 was $287.0 million and

$284.0 million, respectively. The increase in 2020 Net interest income after

as compared to 2019 was due to an increase in core provision for loan losses (net of

loan spread, partially offset by a decrease in the settlements on derivatives) (a) $ 223,967

              244,994         

average balance of loans.




(a)  Derivative settlements represent the cash paid or received during the
current period to settle with derivative instrument counterparties the economic
effect of the Company's derivative instruments based on their contractual terms.
Derivative accounting requires that net settlements on derivatives that do not
qualify for "hedge treatment" under GAAP be recorded in a separate income
statement line item below net interest income. The Company maintains an overall
risk management strategy that incorporates the use of derivative instruments to
reduce the economic effect of interest rate volatility. As such, management
believes derivative settlements for each applicable period should be evaluated
with the Company's net interest income as presented in this table. Core loan
interest income and net interest income after provision for loan losses (net of
settlements on derivatives) are non-GAAP financial measures, and the Company
reports this non-GAAP information because the Company believes that it provides
additional information regarding operational and performance indicators that are
closely assessed by management. There is no comprehensive, authoritative
guidance for the presentation of such non-GAAP information, which is only meant
to supplement GAAP results by providing additional information that management
utilizes to assess performance. See note 6 of the notes to consolidated
financial statements included in this report for additional information on the
Company's derivative instruments, including the net settlement activity
recognized by the Company for each type of derivative referred to in the
"Additional information" column of this table, for the 2020 and 2019 periods
presented in the table under the caption "Consolidated Financial Statement
Impact Related to Derivatives - Statements of Income" in note 6 and in this
table.
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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.
The Company may issue equity and debt securities in the future in order to
improve capital, increase liquidity, refinance upcoming maturities, or provide
for general corporate purposes. Moreover, the Company may from time-to-time
repurchase certain amounts of its outstanding secured debt securities, including
debt securities which the Company may issue in the future, for cash and/or
through exchanges for other securities. Such repurchases or exchanges may be
made in open market transactions, privately negotiated transactions, or
otherwise. Any such repurchases or exchanges will depend on prevailing market
conditions, the Company's liquidity requirements, contractual restrictions,
compliance with securities laws, and other factors. The amounts involved in any
such transactions may be material.
The Company has historically utilized operating cash flow, secured financing
transactions (which include warehouse facilities and asset-backed
securitizations), operating lines of credit, and other borrowing arrangements to
fund its Asset Generation and Management operations and loan acquisitions. In
addition, the Company has used operating cash flow, borrowings on its unsecured
line of credit, repurchase agreements, and unsecured debt offerings to fund
corporate activities; business acquisitions; solar, real estate, and other
investments; repurchases of common stock; and repurchases of its own debt.
Recent Developments
As discussed above under "Overview - Recapitalization and Additional Funding for
ALLO," on October 1, 2020, the Company entered into various agreements with SDC,
a third party global digital infrastructure investor, and ALLO, for various
transactions contemplated by the parties in connection with a recapitalization
and additional funding for ALLO. As part of the transactions, on October 15,
2020, ALLO received proceeds of $197.0 million from SDC as the purchase price
payment by SDC for the issuance of membership units of ALLO, and redeemed $160.0
million of non-voting preferred membership units of ALLO held by the Company.
Upon the receipt of regulatory approvals on December 21, 2020, SDC, the Company,
and members of ALLO's management own approximately 48 percent, 45 percent, and 7
percent, respectively, of the outstanding voting membership interests of ALLO,
and the Company deconsolidated ALLO from the Company's consolidated financial
statements.
On January 19, 2021, ALLO closed on certain private debt financing facilities
from unrelated third-party lenders providing for aggregate financing of up to
$230.0 million. With proceeds from this transaction, ALLO redeemed a portion of
its non-voting preferred membership units held by the Company in exchange for an
aggregate redemption price payment to the Company of $100.0 million.
The agreements among the Company, SDC, and ALLO provide that they will use
commercially reasonable efforts (which expressly excludes requiring ALLO to
raise any additional equity financing or sell any assets) to cause ALLO to
redeem, on or before April 2024, the remaining preferred membership units of
ALLO held by the Company, plus the amount of accrued and unpaid preferred return
on such units. As of January 19, 2021, the outstanding preferred membership
units of ALLO held by the Company was $129.7 million. The preferred membership
units earn a preferred annual return of 6.25 percent.
If ALLO needs additional capital to support its growth in existing or new
markets, the Company has the option to contribute additional capital to maintain
its voting equity interest. However, ALLO has obtained third-party debt
financing to support its current growth plans, and thus the Company currently
believes additional equity contributions to ALLO are not likely in the immediate
future.
As part of the ALLO recapitalization transaction, the Company and SDC entered
into an agreement, in which the Company has a contingent payment obligation to
pay SDC a contingent payment amount of $25.0 million to $35.0 million in the
event the Company disposes of its voting membership units of ALLO that it holds
and realizes from such disposition certain targeted return levels. The Company
recognized the estimated fair value of the contingent payment obligation as of
December 31, 2020 to be $2.3 million, which is included in "other liabilities"
on the consolidated balance sheet.
Nelnet Bank
On November 2, 2020, the Company obtained final approval from the FDIC for
federal deposit insurance and for a bank charter from the UDFI in connection
with the establishment of Nelnet Bank, and Nelnet Bank launched operations.
Nelnet Bank was funded by the Company with an initial capital contribution of
$100.0 million, consisting of $55.9 million of cash and $44.1
                                       60
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million of student loan asset-backed securities. In addition, the Company made a
pledged deposit of $40.0 million with Nelnet Bank, as required under an
agreement with the FDIC discussed below.
Prior to FDIC approval, Nelnet Bank, Nelnet, Inc. (the parent), and Michael S.
Dunlap (Nelnet, Inc.'s controlling shareholder) entered into a Capital and
Liquidity Maintenance Agreement and a Parent Company Agreement with the FDIC in
connection with Nelnet, Inc.'s role as a source of financial strength for Nelnet
Bank. As part of the Capital and Liquidity Maintenance Agreement, Nelnet, Inc.
is obligated to (i) contribute capital to Nelnet Bank for it to maintain capital
levels that meet FDIC requirements for a "well capitalized" bank, including a
leverage ratio of capital to total assets of at least 12 percent; (ii) provide
and maintain an irrevocable asset liquidity takeout commitment for the benefit
of Nelnet Bank in an amount equal to the greater of either 10 percent of Nelnet
Bank's total assets or such additional amount as agreed to by Nelnet Bank and
Nelnet, Inc.; (iii) provide additional liquidity to Nelnet Bank in such amount
and duration as may be necessary for Nelnet Bank to meet its ongoing liquidity
obligations; and (iv) establish and maintain a pledged deposit of $40.0 million
with Nelnet Bank.
Based on the current business plan for Nelnet Bank and its strong financial
condition after the first few months of operations, the Company currently
believes that the initial capital contribution of $100.0 million and pledged
deposit of $40.0 million should provide sufficient capital and liquidity to
Nelnet Bank for the next two to three years.
Sources of Liquidity
The Company has historically generated positive cash flow from operations. For
the years ended December 31, 2020 and 2019, the Company's net cash provided by
operating activities was $212.8 million and $298.9 million, respectively.
As of December 31, 2020, the Company had cash and cash equivalents of $121.2
million. The Company also had a portfolio of available-for-sale investments,
consisting primarily of student loan asset-backed securities, with a fair value
of $348.6 million as of December 31, 2020. As of December 31, 2020, the Company
had participated $118.6 million of these securities, and such participation is
reflected as debt on the Company's consolidated balance sheet.
The Company also has a $455.0 million unsecured line of credit that matures on
December 16, 2024. As of December 31, 2020, there was $120.0 million outstanding
on the unsecured line of credit and $335.0 million was available for future use.
Subsequent to December 31, 2020, the Company paid down the full balance
outstanding on the line of credit, and as of February 25, 2021, $455.0 million
was available for future use. The line of credit provides that the Company may
increase the aggregate financing commitments, through the existing lenders
and/or through new lenders, up to a total of $550.0 million, subject to certain
conditions. In addition, the Company has a $22.0 million secured line of credit
agreement that matures on May 30, 2022. As of December 31, 2020, the secured
line of credit had $5.0 million outstanding with $17.0 million available for
future use.
In addition, the Company has retained certain of its own asset-backed securities
upon their initial issuance or repurchased certain of its own asset-backed
securities (bonds and notes payable) in the secondary market. For accounting
purposes, these notes are eliminated in consolidation and are not included in
the Company's consolidated financial statements. However, these securities
remain legally outstanding at the trust level and the Company could sell these
notes to third parties or redeem the notes at par as cash is generated by the
trust estate. Upon a sale of these notes to third parties, the Company would
obtain cash proceeds equal to the market value of the notes on the date of such
sale. As of December 31, 2020, the Company holds $40.1 million (par value) of
its own asset-backed securities.
The Company intends to use its liquidity position to capitalize on market
opportunities, including FFELP, private education, and consumer loan
acquisitions; strategic acquisitions and investments; and capital management
initiatives, including stock repurchases, debt repurchases, and dividend
distributions. The timing and size of these opportunities will vary and will
have a direct impact on the Company's cash and investment balances.
Cash Flows
During the year ended December 31, 2020, the Company generated $212.8 million
from operating activities, compared to $298.9 million for the same period in
2019. The decrease in cash flows from operating activities was due to:
•The adjustments to net income for derivative market value adjustments;
•Adjustments to net income for the impact of the gains from the deconsolidation
of ALLO and sale of loans and investments; and
•The impact of changes to other liabilities and the due to customers liability
account in 2020 as compared to 2019.
                                       61
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These factors were partially offset by:
•The increase in net income;
•Adjustments to net income for the impact of the non-cash provision for loan
losses and impairment charges;
•A decrease in net payments to the Company's clearinghouse for margin payments
on derivatives; and
•The impact of changes to accounts receivable and other assets in 2020 as
compared to 2019.
The primary items included in the statement of cash flows for investing
activities are the purchase and repayment of loans. The primary items included
in financing activities are the proceeds from the issuance of and payments on
bonds and notes payable used to fund loans. Cash provided by investing
activities and used in financing activities for the year ended December 31, 2020
was $621.2 million and $1.10 billion, respectively. Cash provided by investing
activities and used in financing activities for the year ended December 31, 2019
was $1.52 billion and $1.79 billion, respectively. Investing and financing
activities are further addressed in the discussion that follows.
Liquidity Needs and Sources of Liquidity Available to Satisfy Debt Obligations
Secured by Loan Assets and Related Collateral
The following table shows the Company's debt obligations outstanding that are
secured by loan assets and related collateral.
                                                                            

As of December 31, 2020

                                                                 Carrying amount               Final maturity

Bonds and notes issued in asset-backed securitizations $ 18,886,920

              5/27/25 - 10/25/68
FFELP, private education, and consumer loan warehouse
facilities                                                              428,371               2/13/22 - 2/26/23
                                                                $    19,315,291


Bonds and Notes Issued in Asset-backed Securitizations
The majority of the Company's portfolio of student loans is funded in
asset-backed securitizations that are structured to substantially match the
maturity of the funded assets, thereby minimizing liquidity risk. Cash generated
from student loans funded in asset-backed securitizations provide the sources of
liquidity to satisfy all obligations related to the outstanding bonds and notes
issued in such securitizations. In addition, due to (i) the difference between
the yield the Company receives on the loans and cost of financing within these
transactions, and (ii) the servicing and administration fees the Company earns
from these transactions, the Company has created a portfolio that will generate
earnings and significant cash flow over the life of these transactions.
As of December 31, 2020, based on cash flow models developed to reflect
management's current estimate of, among other factors, prepayments, defaults,
deferment, forbearance, and interest rates, the Company currently expects future
undiscounted cash flows from its portfolio to be approximately $2.30 billion as
detailed below.
The forecasted cash flow presented below includes all loans funded in
asset-backed securitizations as of December 31, 2020. As of December 31, 2020,
the Company had $19.0 billion of loans included in asset-backed securitizations,
which represented 96.8 percent of its total loan portfolio. The forecasted cash
flow does not include cash flows that the Company expects to receive related to
loans funded in its warehouse facilities as of December 31, 2020, private
education and consumer loans funded with operating cash, loans acquired
subsequent to December 31, 2020, and loans owned by Nelnet Bank.
                                       62
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                 Asset-backed Securitization Cash Flow Forecast
                                 $2.30 billion
                             (dollars in millions)
                     [[Image Removed: nni-20201231_g5.jpg]]
The forecasted future undiscounted cash flows of approximately $2.30 billion
include approximately $1.19 billion (as of December 31, 2020) of
overcollateralization included in the asset-backed securitizations. These excess
net asset positions are included in the consolidated balance sheets and included
in the balances of "loans and accrued interest receivable" and "restricted
cash." The difference between the total estimated future undiscounted cash flows
and the overcollateralization of approximately $1.11 billion, or approximately
$0.84 billion after income taxes based on the estimated effective tax rate, is
expected to be accretive to the Company's December 31, 2020 balance of
consolidated shareholders' equity.
The Company uses various assumptions, including prepayments and future interest
rates, when preparing its cash flow forecast. These assumptions are further
discussed below.
Prepayments: The primary variable in establishing a life of loan estimate is the
level and timing of prepayments. Prepayment rates equal the amount of loans that
prepay annually as a percentage of the beginning of period balance, net of
scheduled principal payments. A number of factors can affect estimated
prepayment rates, including the level of consolidation activity, borrower
default rates, and utilization of debt management options such as income-based
repayment, deferments, and forbearance. Should any of these factors change,
management may revise its assumptions, which in turn would impact the projected
future cash flow. The Company's cash flow forecast above assumes prepayment
rates that are generally consistent with those utilized in the Company's recent
asset-backed securitization transactions. If management used a prepayment rate
assumption two times greater than what was used to forecast the cash flow, the
cash flow forecast would be reduced by approximately $185 million to $215
million.
Interest rates: The Company funds a large portion of its student loans with
three-month LIBOR indexed floating rate securities. Meanwhile, the interest
earned on the Company's student loan assets is indexed primarily to a one-month
LIBOR rate. The different interest rate characteristics of the Company's loan
assets and liabilities funding these assets result in basis risk. The Company's
cash flow forecast assumes three-month LIBOR will exceed one-month LIBOR by 12
basis points for the life of the portfolio, which approximates the historical
relationship between these indices. If the forecast is computed assuming a
spread of 24 basis points between three-month and one-month LIBOR for the life
of the portfolio, the cash flow forecast would be reduced by approximately $55
million to $75 million. As the percentage of the Company's outstanding debt
financed by three-month LIBOR declines, the Company's basis risk will be
reduced.
There is significant uncertainty regarding the availability of LIBOR as a
benchmark rate after 2021, and any market transition away from the current LIBOR
framework could result in significant changes to the forecasted cash flows from
the Company's asset-backed securitizations. In addition, the COVID-19 pandemic
may impact forecasted cash flows from the Company's asset-
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backed securitizations. See Item 1A, "Risk Factors - Loan Portfolio - Interest
rate risk - replacement of LIBOR as a benchmark rate," and "Risk Factors - The
COVID-19 pandemic has adversely impacted our results of operations, and is
expected to continue to adversely impact our results of operations, as well as
adversely impact our businesses, financial condition, and/or cash flows."
The Company uses the current forward interest rate yield curve to forecast cash
flows. A change in the forward interest rate curve would impact the future cash
flows generated from the portfolio. An increase in future interest rates will
reduce the amount of fixed rate floor income the Company is currently receiving.
The Company attempts to mitigate the impact of a rise in short-term rates by
hedging interest rate risks. The forecasted cash flow does not include cash
flows the Company expects to pay/receive related to derivative instruments used
by the Company to manage interest rate risk. See Item 7A, "Quantitative and
Qualitative Disclosures About Market Risk - Interest Rate Risk."
Warehouse Facilities
The Company funds a portion of its FFELP loan acquisitions using its FFELP
warehouse facilities. Student loan warehousing allows the Company to buy and
manage student loans prior to transferring them into more permanent financing
arrangements. As of December 31, 2020, the Company had two FFELP warehouse
facilities with an aggregate maximum financing amount available of $310.0
million, of which $252.2 million was outstanding and $57.8 million was available
for additional funding. One warehouse facility has a static advance rate until
the expiration date of the liquidity provisions (May 20, 2021). In the event the
liquidity provisions are not extended, the valuation agent has the right to
perform a one-time mark to market on the underlying loans funded in this
facility, subject to a floor. The loans would then be funded at this new advance
rate until the final maturity date of the facility (May 20, 2022). The other
warehouse facility has a static advance rate that requires initial equity for
loan funding and does not require increased equity based on market movements. As
of December 31, 2020, the Company had $21.2 million advanced as equity support
on these facilities. For further discussion of the Company's FFELP warehouse
facilities outstanding at December 31, 2020, see note 5 of the notes to
consolidated financial statements included in this report.
The Company has a private education loan warehouse facility that, as of December
31, 2020, had an aggregate maximum financing amount available of $200.0 million,
an advance rate of 80 to 90 percent, liquidity provisions through February 13,
2021, and a final maturity date of February 13, 2022. As of December 31, 2020,
$150.4 million was outstanding under this warehouse facility, $49.6 million was
available for future funding, and $16.4 million was advanced as equity support.
On February 12, 2021, the liquidity provisions on this facility were extended to
February 13, 2022, the final maturity was extended to February 13, 2023, and the
maximum facility amount was decreased to $175.0 million.
The Company has a consumer loan warehouse facility that has an aggregate maximum
financing amount available of $100.0 million, an advance rate of 70 or 75
percent depending on the type of collateral and subject to certain concentration
limits, liquidity provisions to April 23, 2021, and a final maturity date of
April 23, 2022. As of December 31, 2020, $25.8 million was outstanding under
this facility, $74.2 million was available for future funding, and $11.5 million
advanced as equity support.
Upon termination or expiration of the warehouse facilities, the Company would
expect to access the securitization market, obtain replacement warehouse
facilities, use operating cash, consider the sale of assets, or transfer
collateral to satisfy any remaining obligations.
Other Uses of Liquidity
The Company no longer originates new FFELP loans, but continues to acquire FFELP
loan portfolios from third parties and believes additional loan purchase
opportunities exist, including opportunities to purchase private education and
consumer loans.
In December of 2020, Wells Fargo announced the sale of its approximately $10
billion portfolio of private education student loans representing approximately
475,000 borrowers. In conjunction with the sale, the Company was selected as
servicer of the portfolio and will begin servicing the portfolio following a
series of loan transfers during the first half of 2021. In addition, the Company
has entered into agreements to participate in a joint venture to acquire the
portfolio. The Company expects to own approximately 8 percent of the interest in
the loans and, dependent upon financing, currently expects to invest
approximately $100 million as part of the acquisition. In addition, the Company
will serve as the sponsor and administrator for loan securitizations on behalf
of the purchaser group as the loans are securitized, and provide the required
level of risk retention as the loans are permanently financed. This transaction
is expected to close during the first half of 2021, with the securitizations
occurring subsequent to closing.
The Company plans to fund additional loan acquisitions and related investments
using current cash and investments; using its unsecured line of credit, using
its Union Bank participation agreement (as described below); using its existing
warehouse
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facilities (as described above); increasing the capacity under existing and/or
establishing new warehouse facilities; and continuing to access the asset-backed
securities market.
Union Bank Participation Agreement
The Company maintains an agreement with Union Bank, a related party, as trustee
for various grantor trusts, under which Union Bank has agreed to purchase from
the Company participation interests in student loans. As of December 31, 2020,
$874.2 million of loans were subject to outstanding participation interests held
by Union Bank, as trustee, under this agreement. The agreement automatically
renews annually and is terminable by either party upon five business days'
notice. This agreement provides beneficiaries of Union Bank's grantor trusts
with access to investments in interests in student loans, while providing
liquidity to the Company. The Company can participate loans to Union Bank to the
extent of availability under the grantor trusts, up to $900.0 million or an
amount in excess of $900.0 million if mutually agreed to by both parties. Loans
participated under this agreement have been accounted for by the Company as loan
sales. Accordingly, the participation interests sold are not included on the
Company's consolidated balance sheets.
Asset-backed Securities Transactions
During 2020, the Company completed five FFELP asset-backed securitizations
totaling $1.6 billion (par value). The proceeds from these transactions were
used primarily to refinance student loans included in the Company's FFELP
warehouse facilities. See note 5 of the notes to consolidated financial
statements included in this report for additional information on these
securitizations.
The Company, through its subsidiaries, has historically funded student loans by
completing asset-backed securitizations. Depending on market conditions, the
Company currently anticipates continuing to access the asset-backed
securitization market. Such asset-backed securitization transactions would be
used to refinance student loans included in its warehouse facilities, loans
purchased from third parties, and/or student loans in its existing asset-backed
securitizations.
Liquidity Impact Related to Hedging Activities
The Company utilizes derivative instruments to manage interest rate sensitivity.
By using derivative instruments, the Company is exposed to market risk which
could impact its liquidity. Based on the derivative portfolio outstanding as of
December 31, 2020, the Company does not currently anticipate any movement in
interest rates having a material impact on its capital or liquidity profile, nor
does the Company expect that any movement in interest rates would have a
material impact on its ability to make variation margin payments to its
third-party clearinghouse. However, if interest rates move materially and
negatively impact the fair value of the Company's derivative portfolio, the
replacement of LIBOR as a benchmark rate has significant adverse impacts on the
Company's derivatives, or if the Company enters into additional derivatives for
which the fair value becomes negative, the Company could be required to make
variation margin payments to its third-party clearinghouse. The variation
margin, if significant, could negatively impact the Company's liquidity and
capital resources. In addition, clearing rules require the Company to post
amounts of liquid collateral when executing new derivative instruments, which
could prevent or limit the Company from utilizing additional derivative
instruments to manage interest rate sensitivity and risks. See note 6 of the
notes to consolidated financial statements included in this report for
additional information on the Company's derivative portfolio.
Other Debt Facilities
As discussed above, the Company has a $455.0 million unsecured line of credit
with a maturity date of December 16, 2024. As of December 31, 2020, the
unsecured line of credit had $120.0 million outstanding and $335.0 million was
available for future use. As of February 25, 2021, no amounts were outstanding
on the line of credit and $455.0 million was available for future use. The
Company also has a $22.0 million secured line of credit agreement with a
maturity date of May 30, 2022. As of December 31, 2020, the secured line of
credit had $5.0 million outstanding with $17.0 million available for future use.
The line of credit is secured by several Company-owned properties. Upon the
maturity date of these facilities, there can be no assurance that the Company
will be able to maintain these lines of credit, increase the amount outstanding
under the lines, or find alternative funding if necessary.
During 2020, the Company entered into an agreement with Union Bank, as trustee
for various grantor trusts, under which Union Bank has agreed to purchase from
the Company participation interests in student loan asset-backed securities. As
of December 31, 2020, $118.6 million of student loan asset-backed securities
were subject to outstanding participation interests held by Union Bank, as
trustee, under this agreement. This participation agreement has been accounted
for by the Company as a secured borrowing. Upon termination or expiration of
this agreement, the Company would expect to use operating cash, consider the
sale of assets, or transfer collateral to satisfy any remaining obligations.
                                       65
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For further discussion of these debt facilities described above, see note 5 of
the notes to consolidated financial statements included in this report.
Debt Repurchases
Due to the Company's positive liquidity position and opportunities in the
capital markets, the Company has repurchased its own debt over the last several
years, and may continue to do so in the future. See note 5 of the notes to
consolidated financial statements included in this report for information on
debt repurchased by the Company during the last three years.
Stock Repurchases
The Board of Directors has authorized a stock repurchase program to repurchase
up to a total of five million shares of the Company's Class A common stock
during the three-year period ending May 7, 2022. As of December 31, 2020,
3,246,732 shares remain authorized for repurchase under the Company's stock
repurchase program. Shares may be repurchased from time to time depending on
various factors, including share prices and other potential uses of liquidity.
Shares repurchased by the Company during 2020 and 2019 are shown below. Certain
of these repurchases were made pursuant to a trading plan adopted by the Company
in accordance with Rule 10b5-1 under the Securities Exchange Act of 1934.
                                                                           

Purchase price (in Average price of shares

                                        Total shares repurchased               thousands)            repurchased (per share)
Year ended December 31, 2020                     1,594,394                 $         73,358          $               46.01
Year ended December 31, 2019                       726,273                           40,411                          55.64



Included in the shares repurchased during 2019 in the table above are a total of
180,000 shares of Class A common stock the Company purchased on June 17, 2019
from Shelby J. Butterfield, a significant shareholder of the Company, and from
the Butterfield Family Trust, an estate planning trust for the family of Stephen
F. Butterfield, the Company's former Vice-Chairman. Included in the shares
repurchased during 2020 are a total of 100,000 shares of Class A common stock
the Company purchased on May 27, 2020 from Shelby J. Butterfield. The shares
purchased in 2019 and 2020 were purchased at a discount to the closing market
price of the Company's Class A common stock as of June 17, 2019, and May 27,
2020, respectively, and the transactions were separately approved by the
Company's Board of Directors. Immediately prior to the Company's purchase of
such shares from Ms. Butterfield and the Butterfield Family Trust, the purchased
shares were shares of the Company's Class B common stock that Ms. Butterfield
and the Butterfield Family Trust converted to shares of Class A common stock.
Dividends
Dividends of $0.20 per share on the Company's Class A and Class B common stock
were paid on March 13, 2020, June 15, 2020, and September 15, 2020,
respectively, and a dividend of $0.22 per share was paid on December 15, 2020.
The Company's Board of Directors declared a first quarter 2021 cash dividend on
the Company's Class A and Class B common stock of $0.22 per share. The dividend
will be paid on March 15, 2021, to shareholders of record at the close of
business on March 1, 2021.
The Company currently plans to continue making regular quarterly dividend
payments, subject to future earnings, capital requirements, financial condition,
and other factors.
Off-Balance Sheet Arrangements
The Company does not have any off-balance sheet arrangements that have or are
reasonably likely to have a current or future effect on its financial condition,
revenues or expenses, results of operations, liquidity, capital expenditures, or
capital resources that are material to investors.
                                       66
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Contractual Obligations
The Company's contractual obligations were as follows:
                                                                            

As of December 31, 2020

                                      Total                Less than 1 year             1 to 3 years             3 to 5 years            More than 5 years
Bonds and notes payable (a)      $  19,558,849                 118,558                    433,371                  218,761                 18,788,159
Operating lease liabilities             20,796                   6,578                      6,795                    2,986                      4,437
Total                            $  19,579,645                 125,136                    440,166                  221,747                 18,792,596



(a)  Amounts exclude interest as substantially all bonds and notes payable carry
variable rates of interest.
As of December 31, 2020, the Company had a reserve of $16.0 million for
uncertain income tax positions (including the federal benefit received from
state positions). This obligation is not included in the above table as the
timing and resolution of the income tax positions cannot be reasonably estimated
at this time.
CRITICAL ACCOUNTING POLICIES AND ESTIMATES
This Management's Discussion and Analysis of Financial Condition and Results of
Operations discusses the Company's consolidated financial statements, which have
been prepared in accordance with accounting principles generally accepted in the
United States. The preparation of these financial statements requires management
to make estimates and assumptions that affect the reported amounts of assets and
liabilities and the reported amounts of income and expenses during the reporting
periods. The Company bases its estimates and judgments on historical experience
and on various other factors that the Company believes are reasonable under the
circumstances. Actual results may differ from these estimates under varying
assumptions or conditions. Note 3 of the notes to consolidated financial
statements included in this report includes a summary of the significant
accounting policies and methods used in the preparation of the consolidated
financial statements.
On an on-going basis, management evaluates its estimates and judgments,
particularly as they relate to accounting policies that management believes are
most "critical" - that is, they are most important to the portrayal of the
Company's financial condition and results of operations and they require
management's most difficult, subjective, or complex judgments, often as a result
of the need to make estimates about the effect of matters that are inherently
uncertain. Management has identified the allowance for loan losses as a critical
accounting policy.
Allowance for Loan Losses
The allowance for loan losses represents the Company's estimate of the expected
lifetime credit losses inherent in loan receivables as of the balance sheet
date. The adequacy of the allowance for loan losses is assessed quarterly and
the assumptions and models used in establishing the allowance are evaluated
regularly. Because credit losses can vary substantially over time, estimating
credit losses requires a number of assumptions about matters that are uncertain.
Such assumptions are discussed below, and such uncertainty is due in part to the
fact that loans in the Company's portfolio mature over the next 20 years (with a
weighted average remaining life of 9.8 years), and actual credit losses will be
affected by, among other things, future economic conditions and future personal
financial situations for borrowers, over that extended time frame. Changes in
the Company's assumptions affect "provision for loan losses" on the Company's
consolidated income statements and the "allowance for loan losses" contained
within "loans and accrued interest receivable, net of allowance for loan losses"
on the Company's consolidated balance sheets. For additional information
regarding our allowance for loan losses, see note 3 of the notes to consolidated
financial statements included in this report.
The Company estimates the allowance for loan losses for receivables that share
similar risk characteristics based on a collective assessment using a
combination of measurement models and management judgment. The models consider
factors such as historical trends in credit losses, recent portfolio
performance, and forward-looking macroeconomic conditions. The models vary by
portfolio type including FFELP, private education, and consumer loans. If
management does not believe the models reflect lifetime expected credit losses
for the portfolio, an adjustment is made to reflect management judgment
regarding qualitative factors including economic uncertainty, observable changes
in portfolio performance, and other relevant factors.
The Company's allowance for credit losses is based on various assumptions
including: probability of default; loss given default; exposure at default; net
loss rates for its consumer portfolio; contractual terms, including prepayments;
forecast period; reversion method; reversion period; and macroeconomic factors,
including unemployment rates, gross domestic product, and the consumer price
index.
                                       67

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The allowance for loan losses is made at a specific point in time and based on
relevant information as discussed above. The allowance for loan losses is
maintained at a level management believes is appropriate to provide for expected
lifetime credit losses inherent in loan receivables as of the balance sheet
date. This evaluation is inherently subjective because it requires numerous
estimates made by management. These estimates are subjective in nature and
involve uncertainties and matters of significant judgement. Changes in estimates
could significantly affect the Company's recorded balance for the allowance for
loan losses.
ACCOUNTING STANDARDS ISSUED BUT NOT YET ADOPTED
The following standard may have an impact on the Company's consolidated
financial statements and disclosures.
ASU 2019-12, Simplifying the Accounting for Income Taxes. In December 2019, the
Financial Accounting Standards Board issued a new accounting standard that
simplifies the accounting for income taxes by removing several exceptions in the
current standard and adding guidance to reduce complexity in certain areas. The
new standard clarifies that an entity may elect to, but is not required to,
reflect an allocation of consolidated current and deferred tax expense for
non-taxable legal entities that are treated as disregarded by taxing authorities
in their separately issued financial statements. The new standard is effective
for fiscal years, and interim periods within those fiscal years, beginning after
December 15, 2020. The Company has determined to not reflect the allocation of
income taxes in the financial statements of its disregarded entities, and thus
the Company currently believes this standard will not have a significant impact
on the Company's consolidated financial statements.

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