Nelnet
Annual Report 2019

Plain-text annual report

2019 Annual Report At Nelnet, we live to serve others. It’s more than what we do – it’s who we are. February 27, 2020 Dear Shareholder: Nelnet was founded over 40 years ago with one simple idea: to serve others and make their educational dreams possible. Since then, we’ve grown to be one of the nation’s largest and most respected education loan servicers. We are one of the largest education technology, payment processing, and student information system providers in the marketplace, with an amazing growth story based on exceptional service and innovation. We’ve become a growing force in the origination and servicing of private education and consumer loans. We’re even the premier high-speed fiber internet provider in our home state of Nebraska. Over the past forty-plus years, Nelnet has diversified, launched new products, started new businesses, and acquired existing companies of varying sizes in a variety of industries and markets throughout the United States, Canada, Southeast Asia, and Australia. Our dedication to serving all of our constituents and helping make their dreams a reality has been woven into the fabric of the culture of Nelnet and is the primary consideration in all that we do. We have been closely following the more recent business press and public dialogue on companies advocating for balance among their stakeholders. These discussions make us smile – because our company, since the beginning of our existence, has been focused on serving our customers, associates, communities, and shareholders. Without a balance among those four areas, we believe a company will not be sustainable for the long term and, as we have stated publicly all along, we run our company focused on long-term value creation. In order to solidify alignment of all of our stakeholders with our purpose – to serve – we are in the process of renaming the four primary divisions of the company. They will be renamed to Nelnet Diversified Services, Nelnet Business Services, Nelnet Communications Services, and Nelnet Financial Services. We live to serve others. It’s why we started and it’s why we have succeeded. // Serving Our Communities and Customers Consider this interesting data point which demonstrates the positive effect we are having on students and families through our education loan finance business. Since its inception, Nelnet has financed roughly $64 billion in education loans, funding people’s educational dreams. The average student loan borrower exits college with $27,610 in debt. After graduation, the average bachelor’s degree holder has an annual wage premium of $25,566 over high school graduates (U.S. Census Bureau). Aggregating this data, we can estimate that Nelnet has financed education for over 2.3 million students; we can estimate a combined earnings increase of $59 billion per year for all the students we have helped obtain a college education. This rough estimate helps us understand the potentially profound impact we’re having on our customers and communities. 2019 Letter to Shareholders | Page 1 When you read our financial results, one of the new and growing investments we have made in serving our communities will become evident. We have made investments in solar renewable energy projects as a tax equity investor. The solar projects we have funded have become a great source of pride within our company because they are environmentally friendly and they provide for solid financial returns – as all good investment decisions should. We are proud to announce that, by our estimates, Nelnet has become a carbon-negative company – meaning that more energy is produced from our investments in renewable solar energy plants than the total energy we estimate is consumed by the entire company and our associates in their daily work lives. Since 2018, Nelnet has funded or committed to fund $124 million to build solar energy projects via tax equity financing. These projects currently consist of 76 sites, generating over 270,000 megawatt hours (MWh) per year in renewable energy. If you were to add up all of the energy Nelnet associates use in their households and in their daily commutes, business travel, and in all of our offices and data centers – we consume approximately 117,000 MWh per year in energy, making the company carbon- negative. Not only is Nelnet green our corporate color, it is taking on greater meaning throughout our communities. Another initiative that we are extremely excited to have launched to serve our customers and our communities is the application for Nelnet Bank. As we anticipated in our shareholder letter last year, we re-filed the application in November 2019. There is a large need for competition in the in-school and refinance education loan marketplaces. Competition in terms of rates, terms, and service will drive numerous benefits to Nelnet’s customers. We have invested in a talented senior management team to run the bank if a charter is granted. In the coming year, we look forward to making the public case for a new state-of-the-art online bank that leverages the capital, historical performance, infrastructure, and expertise – in other words, the power – of Nelnet. We are confident we can fund prime quality consumer and education loans profitably within a bank structure. Our confidence is bolstered by the fact that U-fi relaunched in 2019 in a marketing partnership with Union Bank & Trust (Union Bank). We originated over $100 million in new refinance education loans, creating an estimated $25 million in future interest savings over the life of the loans for those borrowers. In addition to the savings we provided, we delivered frictionless service to those customers, who gave Nelnet an impressive net promoter score (NPS) of 86. According to our research, that’s higher than the scores earned by Netflix, Starbucks, Amazon, and Airbnb, but still not quite to the level of Tesla’s NPS of 96. Matching Tesla’s astounding NPS may be a wee bit difficult—however, it’s always good to aim for the moon. We are also seeing a very low delinquency rate in the loan portfolio so far. Through this partnership with Union Bank, we are creating great value and providing amazing service for our customers and Union Bank’s customers. U-fi is a prime example of how we can collaborate with our lender clients to deliver a win-win for all parties involved. Driving more assets to our portfolio has been a priority where we’re seeing opportunities to couple great products with decades of expertise. We are investing significantly in our systems and services which will benefit all of our origination and servicing clients. We look forward to expanding our originations with Union Bank and taking best-in-class systems and services to our other partners in 2020. 2019 Letter to Shareholders | Page 2 // Serving Our Shareholders (Financial Outcomes and Corporate Highlights) It wouldn’t be a proper letter to our shareholders without talking about our performance as measured by financial outcomes and the over-arching corporate highlights from the year. In 2019, our total revenue from our three fee-for-services divisions (Diversified, Business, and Communications) increased to $797 million, up from $707 million in 2018 – which was up from $442 million in 2017. We increased our fiber business by over 10,000 residential customers. We service loans for 15.1 million borrowers, and we manage more than 2.5 million payment plans. As expected, we are seeing continued amortization of our Federal Family Education Loan Program (FFELP) portfolio. Our total loan portfolio, net of acquisitions, paid down by $1.7 billion during the year to $20.8 billion. We purchased $1.5 billion of FFELP loans, $72 million in private education loans, and $406 million in unsecured consumer loans. Corporate-wide during the year, we created GAAP net income of $142 million, adjusted net income of $200 million1, and we generated $299 million in cash from operating activities. We refinanced $1.05 billion of the securitizations we issued following the credit crisis that were primarily “Turbo” transactions; these transactions effectively trapped excess cash by paying down bonds in an expedited method when compared to our traditional asset-backed securities. Through our refinancing, we gained access to $387 million of previously trapped cash that we can now deploy as opportunities arise. We used the cash to significantly pay down our unsecured line of credit. We also increased and extended that line of credit to $455 million for 5 years. The combination of our cash position and available credit puts the company in a great position to capitalize on future business opportunities. We bought back approximately 726,000 shares of stock at an average price of $55.64 per share, and we increased our book value from $57.24 per share on January 1, 2019 to $60.07 per share on December 31, 2019. We increased our total dividends paid throughout 2018 and 2019 from $.66 per share to $.74 per share, respectively. Our equity rose to $2.4 billion at year end, giving us a 10.07% equity-to-assets ratio. Certain things don’t change, and we still frequently get the question of what we plan to do with the cash we generate. As explained in the past, I think the answer to this question is to look back at how we deployed capital in recent years. It provides a road map to management’s focus and thoughts on the best use of capital. Last year, we deployed almost $400 million in capital, which brings our 7-year total to $3.2 billion in capital deployed (including dividends, stock repurchases, and debt repurchases). One note: the capital investment in our ALLO Communications business may not be as large in 2020 as compared to previous years because the buildout to bring fiber to Lincoln, Nebraska is essentially complete. 1We prepare our financial statements and present our financial results in accordance with GAAP. However, we also provide additional non-GAAP financial information related to specific items management believes to be important in the evaluation of our operating results and performance. A reconciliation of our GAAP net income to net income, excluding derivative market value adjustments, and a discussion of why we believe providing this additional information is useful to investors can be found in our Annual Report on Form 10-K for the year ended Dec. 31, 2019, filed with the Securities and Exchange Commission on February 27, 2020. 2019 Letter to Shareholders | Page 3 Capital Deployment By Year (in millions) FFELP loan/residual acquisitions, net of financing Private and consumer loan acquisitions, net of financing Business acquisitions ALLO acquisition and capital expenditures Other capital expenditures (non-ALLO) Hudl investment Other investments (venture capital/real estate/solar) Debt repurchases Stock repurchases Dividends 2013 2014 2015 2016 2017 2018 2019 7-Year Total $38 $68 - - $17 - $20 $79 $13 $19 $127 $17 $47 - $26 $1 $45 $47 $16 $19 $140 $173 - $47 $17 $41 $53 $42 $96 $19 - $61 - $39 $29 - $22 $77 $69 $21 - $75 - $115 $41 $10 $19 $181 $69 $24 $105 $188 $153 $87 $38 - $67 $13 $45 $27 $71 $61 - $45 $48 - $103 - $40 $29 $481 $643 $200 $333 $216 $52 $329 $439 $348 $158 $254 $345 $628 $318 $534 $723 $397 $3,199 // Nelnet Diversified Services Our Diversified Services Division had an excellent year. For loan servicing, we typically get paid on a per borrower account basis. Our customers are the federal government, state agencies, banks, and Fintech companies. At year end, we were servicing $473 billion of loans for 15.1 million Federal Direct, FFELP, private education, and consumer loan borrower customers. Our revenue increased from $440 million in 2018 to $455 million in 2019 and net income increased from $54 million in 2018 to $59 million in 2019. NDS will incur additional costs in 2020 to meet increased service and security standards under the current Department of Education’s servicing contracts and to be responsive to the Department’s procurement. As a result, we currently expect a significant decrease in this segment’s operating margin and net income in 2020 from recent historical results. As we stated last year, the big unknown in the business is what the federal government will do with its procurement for a new loan system and the service providers that will operate that system. Well, that statement remains true for 2020. Here is what we know. Our current contract with the government has been extended to December 2020, with an option for the government to extend it up to an additional year. As you’ve read in my prior letters, the procurement process has seen multiple cancellations, reissues, and amendments, as recently as January of this year. The procurements that have the biggest potential impact on Nelnet remain the single NextGen Enhanced Processing Solution and the Business Process Operations, which is essentially the loan processing and customer service work that will be performed on the single system. In 2019 we continued to grow our Fintech consumer and private loan servicing business. The revenue in that line of business grew to $37 million in 2019, as we now serve over 680,000 consumer and private education loan customers. We launched our first new servicing client onto our leading-edge Velocity origination and servicing system, which will enable Fintech lenders to deliver a first-rate experience to their borrowers. 2019 Letter to Shareholders | Page 4 As evidenced by the non-stop news coverage, we have officially entered the year of the 2020 presidential election. As I stated last year, “In this highly polarized and politicized world we live in, student loan servicing often gets caught in the cross-fire of the critically important public debate around college cost and student debt levels. The systems and programs put in place to help finance education are extremely complex and difficult to understand for most people. As student debt levels continue to rise for most Americans, our role in helping students finance their education is a critical one. The negative impact of delinquency or defaulting on loans can be life-altering for people. Our mission is to help borrowers navigate one of the most complex and confusing consumer loan programs in the world. Every borrower has individual life circumstances and situations that are unique. We empower borrowers with digestible levels of information so they can navigate the vast array of repayment options available today. We remain very passionate about our borrower customers and helping them achieve success repaying their loans.” I don’t know how I could say it better one year later so I will stick by the same quote. // Nelnet Business Services Nelnet Business Services (NBS) is our education technology, services, and payment processing division, with core drivers of revenue in both payment processing (tuition payment plans) and SaaS revenue from software products and services. I am sure I sound like a broken record at this point, but it was another record year for NBS in 2019. This division earned gross revenue of $277 million – a 25% increase from $222 million in 2018, up from $193 million in 2017, and $176 million in 2016. We are very pleased with the growth rates we are seeing in this division. A large part of NBS’s success is due to their focus on excellent customer service and constant innovation in their primary markets. In 2019, we launched three new products: FACTS Family App, FACTS Giving, and our new cashiering system. Another key tenet to the future growth of NBS is international expansion. Intentional international expansion offers many opportunities for NBS. The addition of new higher education clients in Hong Kong, Malaysia, and Singapore is significant, and the addition of many new global Value Added Resellers for FACTS student information systems offers excellent future opportunities for international growth. NBS acquired Tuition Management Services (TMS) in November 2018. We made significant strides in 2019 and celebrated many accomplishments with our TMS clients and associates who are now NBS clients and associates. Retention of existing customers is always an important key focus. It offers a recurring revenue stream, affirms we are providing products and services that meet the expectations and needs of our clients, and also provides opportunities for organic growth through additional product offerings. This year, all of our NBS markets and products celebrated record retention rates! We are also very proud that our sales teams for FACTS (K-12) and Nelnet Campus Commerce (higher education) both achieved record new sales in 2019. We now work with more than 11,500 K-12 schools and more than 1,300 higher education institutions worldwide. Nelnet Business Services was the first to market in our industry with a Workday integration. NBS formed a key partnership with Workday, which is a leading provider of enterprise resource planning (ERP) applications that has built capability specifically for institutions of higher education. This partnership will provide many opportunities for Nelnet Campus Commerce to integrate with several new higher education institutions. Being first to market with this integration conveys our leading edge technology and strong commitment to the needs of the higher education industry. 2019 Letter to Shareholders | Page 5 To cap it all off – if record total revenue, record new sales, record client retention, and international expansion were not enough – the NBS division achieved 83% associate engagement survey scores, demonstrating our core value of making Nelnet an awesome place to work. // Nelnet Communication Services Change was the theme of 2019 for ALLO Communications, our fiber-to-the-premises communications and entertainment company. Not only is the industry changing through substantial infrastructure investments, technological evolution, and content delivery methods, ALLO’s operations are changing from an intensive construction focus to a balance of construction, customer acquisition, and ongoing customer service. ALLO’s purpose is to create, connect, and serve gigabit communities through values of local, honest, hassle-free and exceptional service. With community “provider of the year” awards, top ten national speed rankings, and continued high net promotor scores, ALLO’s investments in customer service, fiber, and technologies are appreciated by their communities and reflect the company’s purpose and values. In this highly competitive industry, the financial results also began to change. Leveraging past investments while maintaining customer focus and increasing market share will be the theme for 2020 and beyond. After our 2015 acquisition of ALLO, the significant investments in markets and building a much larger work force moved operating cash flows from positive to negative. With these investments, ALLO has now passed almost 141,000 households out of a total of over 160,000 households in 11 communities in Nebraska and Colorado. In 2019, a change to positive operating cash flow was achieved while continuing strong revenue growth. We fully acknowledge capital expenditures are a tangible part of growing the business; however, ALLO reduced its GAAP net loss to $24 million from $29 million in 2018, and turned its commonly used telecommunications industry measure of earnings (loss) before interest, income taxes, depreciation, and amortization (EBITDA) to a positive EBITDA of $6 million in 2019, compared with negative EBITDA of $4 million for 2018.2 Residential revenue increased to $48 million in 2019, a 45% increase from $33 million in 2018 – and residential customers increased by more than 10,000 from 2018, reaching a total of almost 48,000 in 2019, a 28% increase. In total, ALLO ended 2019 serving an estimated 73,000 business and residential lines, an increase of 30% from 2018. In 2020, customers are expected to continue to rapidly increase bandwidth consumption and demand services that the ALLO network is uniquely positioned to support. Cloud business and consumer services, gaming, next-generation managed Wi-Fi (Wi-Fi 6), 10 GIG residential service, and many other ever-changing customer solutions will be added to ALLO’s portfolio. The fiber needs of communities create the opportunity for adding to our regional footprint. ALLO will continue to change to meet customer demands. 2Earnings (loss) before interest, income taxes, depreciation, and amortization (EBITDA) is a supplemental non-GAAP performance measure that is frequently used in capital-intensive industries such as telecommunications. 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. We report EBITDA for ALLO because we believe that it provides useful additional information for investors regarding a key metric we use 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 ALLO’s net loss under GAAP can be found in our Annual Report on Form 10-K for the year ended Dec. 31, 2019, filed with the Securities and Exchange Commission on February 27, 2020. 2019 Letter to Shareholders | Page 6 // Nelnet Financial Services Our Nelnet Financial Services business is comprised of our on-balance sheet loan portfolio, interest rate hedging, and loan acquisitions teams that are reported in the Asset Generation and Management segment; and our investment management business and venture and angel capital, solar, and real estate portfolio that are reported in corporate activity. We now have three distinct loan asset categories that drive the majority of the revenue in the segment: FFELP government guaranteed education loans, private U-fi and other education loans, and third party sourced unsecured consumer loans. 2019 was an exciting year in FFELP as we achieved efficiencies across our portfolio. Due to the refinancing activity and the $1.5 billion in FFELP whole loans we purchased, we had the most active securitization year in our company’s history. While we are pleased with our continued progress in the FFELP market, we are more excited about the progress we made to diversify our loan portfolio. In 2019, we began marketing private education loans under our U-fi brand in partnership with Union Bank. Throughout the year we purchased a portion, or $68 million, of the loans from Union Bank. We also more than tripled our unsecured consumer loan purchases from 2018 to 2019 and contributed a portion of these loans to two third party securitizations, which we believe will achieve attractive risk adjusted returns. As we look to 2020, we see many possibilities to increase our portfolio. None of those is more important than our hopeful buildout of Nelnet Bank. If the bank charter is approved, we will begin originating U-fi loans directly on the bank’s balance sheet. For financial reporting purposes, Nelnet Bank will be a separate reportable segment. // Hudl We remain a significant and supportive investor in Hudl, which continued its impressive growth streak in 2019, building further on its offering to high school and college athletic departments, top-tier club organizations, and professional teams around the world. In May 2019, Hudl acquired Krossover, one of its primary competitors in the high school space. With the acquisition, Hudl added around 6,000 teams and grew its market penetration in high school basketball to over 80 percent. Hudl has also made big moves to grow its offering to professional soccer clubs around the world. In July, Hudl finalized the acquisition of Wyscout, the global leader in soccer scouting. Wyscout, based in Chiavari, Italy, captures and analyzes video from soccer matches around the globe. It boasts the largest soccer video archive in the world, with over 200,000 full matches analyzed across 52 countries, and more than 460,000 players profiled on the platform. More than 7,000 customers subscribe to Wyscout to scout top talent and prepare for upcoming matches. The company remains headquartered in Lincoln, Nebraska and has grown its team in Lincoln to more than 600 “Hudlies”. In total, the company has grown to more than 2,300 associates across 20 countries. We remain very optimistic about our investment in Hudl. 2019 Letter to Shareholders | Page 7 // Belief in Long-Term Value and a Fair Value Approach As you know, we don’t provide earnings guidance as we believe it creates a focus on short-term wins at the expense of long-term value creation. However, I can tell you what our management team will be focused on in 2020. We will be focused on improvements in customer service, our culture, communicating our purpose, the government procurement, the bank charter, integration of past acquisitions, new product innovation, technology build and enhancements, new customer acquisition, loan asset replacement, revenue and earnings growth, and capital allocation. Each year, we believe it is important to share Nelnet’s “fair value approach” with our shareholders. We feel it is a fundamental component to existing and potential shareholders’ understanding of how we lead our company and where it is going in the future. It is our goal for each Nelnet shareholder to record a gain or loss in market value proportional to the gain or loss in per-share fundamental value recorded by the company. To achieve this goal we strive to maintain a one-to-one relationship between the company’s fundamental value and the market price. As that implies, we would rather see Nelnet’s stock price at a fair level than at an artificial level. Our fair value approach may not be preferred by all investors, but we believe it aligns with Nelnet’s long-term approach to both our business model and market value. However, from time to time Mrs./Mr. Market can be irrational and will materially over value or under value what style they currently love. Nelnet’s Corporate Performance (Annual Percentage Change) Nelnet Per Share Book Value With Dividends Included Nelnet Per Share Market Value With Dividends Included S&P 500 With Dividends Included Net Income Reinvested3 (in millions) 2004 2005 2006 2007 2008 2009 2010 2011 2012 2013 2014 2015 2016 2017 2018 20194 CAGR/Total 49.2% 41.5% 6.3% (1.6%) 6.6% 21.0% 23.7% 22.6% 16.7% 26.1% 21.1% 16.0% 15.4% 8.8% 9.9% 6.2% 17.4% 20.2% 51.1% (32.7%) (52.5%) 13.3% 20.7% 41.6% 4.9% 27.5% 42.8% 10.9% (26.6%) 52.7% 9.1% (3.2%) 12.7% 7.5% 10.9% 4.9% 15.8% 5.5% (37.0%) 26.5% 15.1% 2.1% 16.0% 32.4% 13.7% 1.4% 12.0% 21.8% (4.4%) 31.5% 9.1% $157 $122 $22 ($82) $15 $154 $113 $170 $118 $241 $250 $135 $122 $92 $155 $130 $1,914 3We believe well-managed companies do not distribute to the shareholders all their earnings. Instead, they retain a part of their earnings and reinvest the capital to grow the business. Since going public in late 2003, the company has recognized $2.8 billion in cumulative net income (excluding derivative market value and foreign currency adjustments) and, of that amount, has reinvested $1.9 billion – or 68% of our earnings over time – back into the business. 4GAAP net income for the year ended December 31, 2019 was $142 million, or $3.54 per share. Net income in 2019, excluding derivative market value adjustments, was $200 million, or $4.99 per share. This $1.45 per share or 40% difference between GAAP net income and how we track earnings per share also has a big impact on our return on equity (ROE) for the year, which is calculated using GAAP net income. Using net income, excluding derivative market value adjustments, our return on book value in 2019 would have been 8.8%. In other words, the large drop in interest rates from the beginning of 2019 to the end of 2019 has had an abnormally outsized impact on our ROE calculation. 2019 Letter to Shareholders | Page 8 // Serving Our Associates Our purpose is to serve and we are very proud of the work that is being done by all of the talented “Nelneters” to help fulfill our mission of helping to make our customers’ dreams a reality. We recognize that our success comes from living out our core values – and we strive to keep these values in front of our associates each day. Nelnet’s Core Values: • Provide superior customer experiences • Create an awesome work environment • Pursue opportunities for diversification and growth • Communicate openly and honestly • Give back to the communities in which we live and work Our pledge to you is that we will remain continuously focused on the critical balance of serving our customers, associates, communities, and shareholders. Thank you for your continued investment in our company. Dream. Learn. Grow. Jeff Noordhoek, Chief Executive Officer 2019 Letter to Shareholders | Page 9 Forward-Looking and Cautionary Statements This letter to shareholders contains forward-looking statements within the meaning of federal securities laws. Statements about the company’s plans and expectations for future financial condition, results of operations or economic performance, or that address management’s plans and objectives for future operations, and statements that assume or are dependent upon future events, are forward-looking statements. The words “anticipate,” “believe,” “continue,” “could,” “expect,” “forecast,” “future,” “intend,” “may,” “plan,” “potential,” “should,” “would,” “will,” and similar expressions, as well statements in future tense, are intended to identify forward-looking statements. These statements are based on management’s current expectations as of the date of this letter and are subject to known and unknown risks and uncertainties that may cause actual results or performance to differ materially from those expressed or implied by the forward-looking statements. Such risks include, but are not limited to: risks related to the company’s loan portfolio, such as interest rate basis and repricing risk and changes in levels of loan repayment or default rates; the use of derivatives to manage exposure to interest rate fluctuations; the uncertain nature of expected benefits from FFEL Program, private education, and consumer loan purchases and initiatives to purchase additional FFEL Program, private education, and consumer loans; financing and liquidity risks, including risks of changes in the securitization and other financing markets for loans; risks related to the ability to successfully maintain and increase allocated volumes of student loans serviced under existing and any future servicing contracts with the Department; risks to the company related to the Department’s initiatives to procure new contracts for federal student loan servicing, including the risk that the company or company teams may not be successful in obtaining contracts; risks related to the development by the company of a new student loan servicing platform, including risks as to whether the expected benefits from the new platform will be realized; risks and uncertainties from changes in the educational credit and services marketplace resulting from changes in applicable laws, regulations, and government program and budgets, such as the expected decline over time in FFEL Program loan interest income and fee-based revenues due to the discontinuation of FFEL Program loan originations in 2010 and the resulting initiatives by the company to adjust to a post-FFEL Program environment; risks and uncertainties related to the ability of ALLO to successfully expand its fiber network and market share in existing service areas and additional communities and manage related construction risks; risks and uncertainties related to initiatives to pursue additional strategic investments, acquisitions, and other activities including activities that are intended to diversify the company both within and outside of its historical core education-related businesses, such as the risk that the company’s industrial bank charter application may not result in the grant of a charter and the uncertain nature of the expected benefits from obtaining an industrial bank charter, and risks related to investments in solar projects, including risks of not being able to realize tax credits which remain subject to recapture by taxing authorities; cybersecurity risks, including potential disruptions to systems, disclosure of confidential information, and/or damage to reputation resulting from cyber breaches; and changes in the general interest rate environment, including the availability of any relevant money-market index rate such as LIBOR or the relationship between the relevant money-market index rate and the rate at which the company’s assets and liabilities are priced. For more information, see the “Risk Factors” sections and other cautionary discussions of risks and uncertainties included in documents filed or furnished by the company with the Securities and Exchange Commission (SEC), including the most recent Form 10-K filed by the company with the SEC. All forward-looking statements in this letter are as of the date of this letter. Although the company may voluntarily update or revise its forward-looking statements from time to time to reflect actual results or changes in the company’s expectations, the company disclaims any commitment to do so except as required by securities laws. 2019 Letter to Shareholders | Page 10 10-K UNITED STATES SECURITIES AND EXCHANGE COMMISSION WASHINGTON, D.C. 20549 FORM 10-K (Mark One) ☒ ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 For the fiscal year ended December 31, 2019 or ☐ TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 For the transition period from to . COMMISSION FILE NUMBER 001-31924 NELNET, INC. (Exact name of registrant as specified in its charter) Nebraska (State or other jurisdiction of incorporation or organization) 121 South 13th Street, Suite 100 Lincoln, Nebraska (Address of principal executive offices) 84-0748903 (I.R.S. Employer Identification No.) 68508 (Zip Code) Registrant’s telephone number, including area code: (402) 458-2370 SECURITIES REGISTERED PURSUANT TO SECTION 12(b) OF THE ACT: Title of each class Trading Symbol Name of each exchange on which registered Class A Common Stock, Par Value $0.01 per Share NNI New York Stock Exchange SECURITIES REGISTERED PURSUANT TO SECTION 12(g) OF THE ACT: None Indicate by check mark if the registrant is a well-known seasoned issuer, as defined in Rule 405 of the Securities Act. Yes ☒ No ☐ Indicate by check mark if the registrant is not required to file reports pursuant to Section 13 or Section 15(d) of the Act. Yes ☐ No ☒ Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days. Yes [X] No ☐ Indicate by check mark whether the registrant has submitted electronically every Interactive Data File required to be submitted pursuant to Rule 405 of Regulation S-T (§232.405 of this chapter) during the preceding 12 months (or for such shorter period that the registrant was required to submit such files). Yes [X] No ☐ Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, a smaller reporting company, or an emerging growth company. See the definitions of “large accelerated filer,” “accelerated filer,” “smaller reporting company,” and "emerging growth company" in Rule 12b-2 of the Exchange Act. Large accelerated filer ☒ Non-accelerated filer ☐ Accelerated filer ☐ Smaller reporting company ☐ Emerging growth company ☐ If an emerging growth company, indicate by check mark if the registrant has elected not to use the extended transition period for complying with any new or revised financial accounting standards provided pursuant to Section 13(a) of the Exchange Act. ☐ Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Act). Yes ☐ No ☒ The aggregate market value of the registrant’s voting common stock held by non-affiliates of the registrant on June 28, 2019 (the last business day of the registrant’s most recently completed second fiscal quarter), based upon the closing sale price of the registrant’s Class A Common Stock on that date of $59.22 per share, was $1,195,786,762. The registrant’s Class B Common Stock is not listed for public trading on any exchange or market system, but shares of Class B Common Stock are convertible into shares of Class A Common Stock at any time on a share-for-share basis. For purposes of this calculation, shares of common stock beneficially owned by any director or executive officer of the registrant or by any person who beneficially owns greater than 10 percent of the Class A Common Stock or who is otherwise believed by the registrant to be in a control position have been excluded, since such persons may be deemed to be affiliates of the registrant. This determination of affiliate status is not conclusive for other purposes. As of January 31, 2020, there were 28,462,915 and 11,271,609 shares of Class A Common Stock and Class B Common Stock, par value $0.01 per share, outstanding, respectively (excluding 11,305,731 shares of Class A Common Stock held by wholly owned subsidiaries). Portions of the registrant’s definitive Proxy Statement to be filed for its 2020 Annual Meeting of Shareholders, scheduled to be held May 21, 2020, are incorporated by reference into Part III of this Form 10-K. DOCUMENTS INCORPORATED BY REFERENCE NELNET, INC. FORM 10-K TABLE OF CONTENTS December 31, 2019 Forward-Looking and Cautionary Statements............................................................................................ 2 PART I Item 1. Item 1A. Item 1B. Item 2. Item 3. Item 4. Item 5. Item 6. Item 7. Business.......................................................................................................................... Risk Factors..................................................................................................................... Unresolved Staff Comments........................................................................................... Properties........................................................................................................................ Legal Proceedings........................................................................................................... Mine Safety Disclosures................................................................................................. PART II Market for Registrant's Common Equity, Related Stockholder Matters, and Issuer Purchases of Equity Securities............................................................................... Selected Financial Data................................................................................................... Management's Discussion and Analysis of Financial Condition and Results of Operations.............................................................................................................. Item 7A. Quantitative and Qualitative Disclosures About Market Risk........................................ Item 8. Item 9. Item 9A. Item 9B. Item 10. Item 11. Item 12. Item 13. Item 14. Item 15. Item 16. Financial Statements and Supplementary Data............................................................... Changes in and Disagreements with Accountants on Accounting and Financial Disclosure............................................................................................................... Controls and Procedures................................................................................................. Other Information........................................................................................................... PART III Directors, Executive Officers, and Corporate Governance............................................. Executive Compensation................................................................................................. Security Ownership of Certain Beneficial Owners and Management and Related Stockholder Matters............................................................................................... Certain Relationships and Related Transactions, and Director Independence............... Principal Accounting Fees and Services......................................................................... PART IV Exhibits and Financial Statement Schedules.................................................................. Form 10-K Summary...................................................................................................... Signatures.................................................................................................................................................... 3 18 33 33 33 34 34 37 38 66 70 70 70 72 73 73 73 73 73 74 79 80 Appendix A Description of The Federal Family Education Loan Program........................................ A-1 FORWARD-LOOKING AND CAUTIONARY STATEMENTS This report contains forward-looking statements and information that are based on management's current expectations as of the date of this document. Statements that are not historical facts, including statements about the Company's plans and expectations for future financial condition, results of operations or economic performance, or that address management's plans and objectives for future operations, and statements that assume or are dependent upon future events, are forward-looking statements. The words “anticipate,” “assume,” “believe,” “continue,” “could,” “estimate,” “expect,” “forecast,” “future,” “intend,” “may,” “plan,” “potential,” “predict,” “scheduled,” “should,” “will,” “would,” and similar expressions, as well as statements in future tense, are intended to identify forward-looking statements. The forward-looking statements are based on assumptions and analyses made by management in light of management's experience and its perception of historical trends, current conditions, expected future developments, and other factors that management believes are appropriate under the circumstances. These statements are subject to known and unknown risks, uncertainties, assumptions, and other factors that may cause the actual results and performance to be materially different from any future results or performance expressed or implied by such forward-looking statements. These factors include, among others, the risks and uncertainties set forth in “Risk Factors” and elsewhere in this report, and include such risks and uncertainties as: • • • • • • • • • • loan portfolio risks such as interest rate basis and repricing risk resulting from the fact that the interest rate characteristics of the student loan assets do not match the interest rate characteristics of the funding for those assets, the risk of loss of floor income on certain student loans originated under the Federal Family Education Loan Program (the "FFEL Program" or "FFELP"), risks related to the use of derivatives to manage exposure to interest rate fluctuations, uncertainties regarding the expected benefits from purchased securitized and unsecuritized FFELP, private education, and consumer loans and initiatives to purchase additional FFELP, private education, and consumer loans, and risks from changes in levels of loan prepayment or default rates; financing and liquidity risks, including risks of changes in the general interest rate environment, including the availability of any relevant money market index rate such as LIBOR or the relationship between the relevant money market index rate and the rate at which the Company's assets and liabilities are priced, and in the securitization and other financing markets for loans, including adverse changes resulting from unanticipated repayment trends on student loans in FFELP securitization trusts that could accelerate or delay repayment of the associated bonds, which may increase the costs or limit the availability of financings necessary to purchase, refinance, or continue to hold student loans; risks from changes in the educational credit and services markets resulting from changes in applicable laws, regulations, and government programs and budgets, such as the expected decline over time in FFELP loan interest income and fee-based revenues due to the discontinuation of new FFELP loan originations in 2010 and potential government initiatives or legislative proposals to consolidate existing FFELP loans to the Federal Direct Loan Program or otherwise allow FFELP loans to be refinanced with Federal Direct Loan Program loans; the ability to successfully maintain and increase allocated volumes of student loans serviced under existing and any future servicing contracts with the U.S. Department of Education (the "Department"), which current contracts accounted for 30 percent of the Company's revenue in 2019, risks to the Company related to the Department's initiatives to procure new contracts for federal student loan servicing, including the risk that Company teams may not be successful in obtaining contracts, and risks related to the Company's ability to comply with agreements with third-party customers for the servicing of Federal Direct Loan Program, FFELP, and private education and consumer loans; risks related to a breach of or failure in the Company's operational or information systems or infrastructure, or those of third- party vendors, including cybersecurity risks related to the potential disclosure of confidential student loan borrower and other customer information, the potential disruption of the Company's systems or those of third-party vendors or customers, and/or the potential damage to the Company's reputation resulting from cyber-breaches; uncertainties inherent in forecasting future cash flows from student loan assets and related asset-backed securitizations; risks and uncertainties related to the ability of ALLO Communications LLC to successfully expand its fiber network and market share in existing service areas and additional communities and manage related construction risks; risks and uncertainties related to initiatives to pursue additional strategic investments, acquisitions, and other activities, including activities that are intended to diversify the Company both within and outside of its historical core education-related businesses, such as the risk that the Company's industrial bank charter application may not result in the grant of a charter and the uncertain nature of the expected benefits from obtaining an industrial bank charter; risks related to investments in solar projects, including risks of not being able to realize tax credits which remain subject to recapture by taxing authorities; and risks and uncertainties associated with litigation matters and with maintaining compliance with the extensive regulatory requirements applicable to the Company's businesses, reputational and other risks, including the risk of increased regulatory costs, resulting from the politicization of student loan servicing, and uncertainties inherent in the estimates and assumptions about future events that management is required to make in the preparation of the Company's consolidated financial statements. All forward-looking statements contained in this report are qualified by these cautionary statements and are made only as of the date of this document. Although the Company may from time to time voluntarily update or revise its prior forward-looking statements to reflect actual results or changes in the Company's expectations, the Company disclaims any commitment to do so except as required by securities laws. In this report, unless the context indicates otherwise, references to "Nelnet," "the Company," "we," "our," and "us" refer to Nelnet, Inc. and its subsidiaries. 2 ITEM 1. BUSINESS Overview PART I. Nelnet is a diverse company with a purpose to serve others and a vision to make customers' dreams possible by delivering customer focused products and services. The largest operating businesses engage in loan servicing; education technology, services, and payment processing; and communications. 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. Substantially all revenue from external customers is earned, and all long-lived assets are located, in the United States. The Company was formed as a Nebraska corporation in 1978 to service federal student loans for two local banks. The Company built on this initial foundation as a servicer to become a leading originator, holder, and servicer of federal student loans, principally consisting of loans originated under the Federal Family Education Loan Program. A detailed description of the FFEL Program is included in Appendix A to this report. The Health Care and Education Reconciliation Act of 2010 (the “Reconciliation Act of 2010”) discontinued new loan originations under the FFEL Program, effective July 1, 2010, and requires that all new federal student loan originations be made directly by the Department through the Federal Direct Loan Program. This law does not alter or affect the terms and conditions of existing FFELP loans. As a result of the Reconciliation Act of 2010, the Company no longer originates new FFELP loans. However, a significant portion of the Company's income continues to be derived from its existing FFELP student loan portfolio. As of December 31, 2019, the Company had a $20.7 billion loan portfolio, consisting primarily of FFELP loans, that management anticipates will amortize over the next approximately 20 years and has a weighted average remaining life of 8.8 years. Interest income on the Company's existing FFELP loan portfolio will decline over time as the portfolio is paid down. However, since July 1, 2010, which is the effective date on and after which no new loans can be originated under the FFEL Program, the Company has purchased $26.6 billion of FFELP loans from other FFELP loan holders looking to exit or adjust their FFELP businesses. The Company believes there may be additional opportunities to purchase FFELP portfolios to generate incremental earnings and cash flow. However, since all FFELP loans will eventually run off, a key objective of the Company over the last several years is to reposition itself for the post-FFELP environment. To reduce its reliance on interest income from FFELP loans, the Company has expanded its services and products. This expansion has been accomplished through internal growth and innovation as well as business acquisitions. The Company is also actively expanding its private education and consumer loan portfolios. In addition, in 2009, the Company began servicing federally owned student loans for the Department. On November 12, 2019, the Company announced it filed an application with the Federal Deposit Insurance Corporation and the Utah Department of Financial Institutions to establish Nelnet Bank, a Utah-chartered industrial bank. If the charter is granted, Nelnet Bank would operate as an internet bank franchise with a home office in Salt Lake City and would leverage the Company's experience and expertise helping students and families plan and pay for their education. The Company cannot predict the timing of the application process, or if the Company will be successful in obtaining a charter. Operating Segments The Company has four reportable operating segments summarized below. Business activities and operating segments that are not reportable are combined and included in "Corporate and Other Activities." Loan Servicing and Systems (“LSS”) • • • Referred to as Nelnet Diversified Services (“NDS”) Focuses on student and consumer loan origination services and servicing, loan origination and servicing-related technology solutions, and outsourcing business services Includes the brands Nelnet Loan Servicing, Great Lakes Educational Loan Services, Inc. (“Great Lakes”), Firstmark Services, and Proxi 3 Education Technology, Services, and Payment Processing (“ETS&PP”) • • • Referred to as Nelnet Business Services (“NBS”) Includes the brands FACTS, Nelnet Campus Commerce, PaymentSpring, FACTS Education Solutions, Aware3, and Nelnet International Services include tuition payment plans and billing, financial needs assessment services, online payment and refund processing, school information system software, payment technologies, and professional development and educational instruction services Communications • • Includes the operations of ALLO Communications LLC (“ALLO”) within Nelnet Communications Services Focuses on providing fiber optic service directly to homes and businesses for internet, telephone, and television services Asset Generation and Management (“AGM”) • • Also referred to as Nelnet Financial Services Includes the acquisition and management of the Company's student and other loan assets A more detailed description of each of the Company's reportable operating segments and Corporate and Other Activities is provided below. Loan Servicing and Systems The primary service offerings of this operating segment include: • • • • • Servicing federally-owned student loans for the Department Servicing FFELP loans Originating and servicing private education and consumer loans Providing student loan servicing software and other information technology products and services Providing outsourced services including call center, processing, and marketing services On February 7, 2018, the Company acquired Great Lakes. The operating results of Great Lakes are included in the Loan Servicing and Systems operating segment from the date of acquisition. Nelnet Servicing, LLC (“Nelnet Servicing”), a subsidiary of the Company, and Great Lakes are two of the four large private sector companies (referred to as Title IV Additional Servicers, or “TIVAS”) that have student loan servicing contracts awarded by the Department in June 2009 to provide servicing for loans owned by the Department. As of the acquisition date, Great Lakes was servicing approximately $242 billion in government-owned student loans, approximately $11 billion in FFELP loans, and approximately $2 billion in private education loans. From the date of acquisition and going forward, Great Lakes and Nelnet Servicing have continued, and will continue, to service their respective government-owned portfolios on behalf of the Department, while maintaining their distinct brands, independent servicing operations, and teams. Likewise, each entity will continue to compete for new student loan volume under its respective existing contract with the Department. The Company has integrated, and will continue to integrate, technology as well as shared services and other activities to become more efficient and effective in meeting borrower needs. During the second quarter of 2018, the Company converted Great Lakes' FFELP and private education loan servicing volume to Nelnet Servicing's servicing platform to leverage the efficiencies of supporting more volume on fewer systems. As of December 31, 2019, the Company serviced $473.0 billion of loans for 15.1 million borrowers. See Part II, Item 7 - Management's Discussion and Analysis of Financial Condition and Results of Operations (the “MD&A”) - “Loan Servicing and Systems Operating Segment - Results of Operations - Student Loan Servicing Volumes” for additional information related to the Company's servicing volume. Servicing federally-owned student loans for the Department As discussed above, Nelnet Servicing and Great Lakes are two of four large private sector companies, or TIVAS, awarded student loan servicing contracts by the Department in June 2009 to provide additional servicing capacity for loans owned by the Department. These loans include Federal Direct Loan Program loans originated directly by the Department and FFEL Program loans purchased by the Department. Under the servicing contracts, Nelnet Servicing and Great Lakes earn a monthly fee from the Department for each unique borrower who has loans owned by the Department and serviced by Nelnet Servicing or Great Lakes, respectively. The amount paid per each unique borrower is dependent on the status of the borrower (e.g., in school or in repayment). As of December 31, 2019, Nelnet Servicing was servicing $183.8 billion of student loans for 5.6 million borrowers 4 under its contract, and Great Lakes was servicing $240.0 billion of student loans for 7.4 million borrowers under its contract. The Department is the Company's largest customer, representing 30 percent of the Company's revenue in 2019. Nelnet Servicing and Great Lakes' servicing contracts with the Department previously provided for expiration on June 16, 2019. On May 15, 2019, Nelnet Servicing and Great Lakes each received a contract extension from the Department's Office of Federal Student Aid (“FSA”) pursuant to which FSA extended the expiration date of the current contracts to December 15, 2019. On November 26, 2019, Nelnet Servicing and Great Lakes each received an additional extension from FSA on their contracts through December 14, 2020. The contract extensions also provide the potential for two additional six-month extensions at the Department’s discretion through December 14, 2021. FSA is conducting a contract procurement process entitled Next Generation Financial Services Environment (“NextGen”) for a new framework for the servicing of all student loans owned by the Department. On January 15, 2019, FSA issued solicitations for three NextGen components: • • • NextGen Enhanced Processing Solution (“EPS”) NextGen Business Process Operations (“BPO”) NextGen Optimal Processing Solution (“OPS”) On April 1, 2019 and October 4, 2019, the Company responded to the EPS component. On January 16, 2020, FSA released an amendment to the EPS component and the Company responded on February 3, 2020. In addition, on August 1, 2019, the Company responded to the BPO component. On January 10, 2020, FSA released an amendment to the BPO component and the Company responded on January 30, 2020. The Company is also part of a team that has responded and intends to respond to various aspects of the OPS component; however, on November 12, 2019, FSA put an indefinite hold on the OPS solicitation. The Company cannot predict the timing, nature, or outcome of these solicitations. The Department also has contracts with 31 not-for-profit (“NFP”) entities to service student loans, although five NFP servicers currently service the volume allocated to these 31 entities. The Company licenses its remote-hosted servicing software to three of the five NFP servicers. The Department currently allocates new loan volume among the TIVAS and NFP servicers based on the following performance metrics: • • Two metrics measure the satisfaction among separate customer groups, including borrowers (35 percent) and FSA personnel who work with the servicers (5 percent). Three metrics measure the success of keeping borrowers in an on-time repayment status and helping borrowers avoid default as reflected by the percentage of borrowers in current repayment status (30 percent), percentage of borrowers more than 90 days but fewer than 271 days delinquent (15 percent), and percentage of borrowers over 270 days and fewer than 361 days delinquent (15 percent). The loans are evaluated in 15 different loan portfolio stratifications to account for differences in portfolios. The allocation of ongoing volume is determined twice each year based on the performance of each servicer in relation to the other servicers. Quarterly results are compiled for each servicer. The average of the September and December quarter-end results are used to allocate volume for the period from March 1 to August 31, and the average of the March and June quarter- end results are used to allocate volume for the period from September 1 to February month end, of each year. Under the most recent publicly announced performance metrics measurements used by the Department for the quarterly periods January 1, 2019 through June 30, 2019, Great Lakes' and Nelnet Servicing's overall rankings among the nine current servicers for the Department were first and sixth, respectively. Based on these results, Great Lakes' and Nelnet Servicing's allocation of new student loan servicing volumes for the period September 1, 2019 through February 29, 2020 are 19 percent and 9 percent, respectively. Incremental revenue components earned by Nelnet Servicing or Great Lakes from the Department (in addition to loan servicing revenues) include: • Administration of the Total and Permanent Disability (TPD) Discharge program. Nelnet Servicing processes applications for the TPD discharge program and is responsible for discharge, monitoring, and servicing TPD loans. Individuals who are totally and permanently disabled may qualify for a discharge of their federal student loans, and the Company processes applications under the program and receives a fee from the Department on a per application basis, as well as a monthly servicing fee during the monitoring period. Nelnet Servicing is the exclusive provider of this service to the Department. 5 • Origination of consolidation loans. The Department outsources the origination of consolidation loans whereby each of the servicers receive Federal Direct Loan consolidation origination volume based on borrower choice. The Department pays the Company a fee for each completed consolidation loan application it processes. Nelnet Servicing and Great Lakes each service the consolidation volume it originates. Servicing FFELP loans NDS services the Company's student loan portfolio and the portfolios of third parties. The loan servicing activities include loan conversion activities, application processing, borrower updates, customer service, payment processing, due diligence procedures, funds management reconciliations, and claim processing. These activities are performed internally for the Company's portfolio, in addition to generating external fee revenue when performed for third-party clients. The Company uses proprietary systems to manage the servicing process. These systems provide for automated compliance with most of the federal student loan regulations adopted under Title IV of the Higher Education Act of 1965, as amended (the “Higher Education Act”). The Company serviced FFELP loans on behalf of 130 third-party servicing customers as of December 31, 2019. The Company's FFELP servicing customers include national and regional banks, credit unions, and various state and nonprofit secondary markets. The majority of the Company's external FFELP loan servicing activities are performed under “life of loan” contracts, which essentially provide that as long as the applicable loan exists, the Company shall be the sole servicer of that loan; however, the agreement may contain “deconversion” provisions where, for a fee, the lender may move the loan to another servicer. The discontinuation of new FFELP loan originations in July 2010 has caused and will continue to cause FFELP servicing revenue to decline as these loan portfolios are paid down. However, the Company believes there may be opportunities to service additional FFELP loan portfolios from current FFELP participants as the program winds down. Originating and servicing private education and consumer loans NDS conducts origination and servicing activities for private education and consumer loans. Private education loans are non- federal private credit loans made to students or their families; as such, the loans are not issued or guaranteed by the federal government. These loans are used primarily to bridge the gap between the cost of higher education and the amount funded through financial aid, federal loans, or the borrowers' personal resources. Although similar in terms of activities and functions as FFELP loan servicing (e.g., application processing, disbursement processing, payment processing, customer service, statement distribution, and reporting), private education loan servicing activities are not required to comply with provisions of the Higher Education Act and may be more customized to individual client requirements. The Company has invested and currently plans to continue to invest in modernizing key technologies and services to position its consumer loan servicing business for the long-term, expanding services to include personal loan products and other consumer installment assets. The Company is in the process of a complete modernization of its private education and consumer loan origination and repayment servicing systems. Improvements in systems will allow for diversified products to be both originated and serviced with state-of-the-art application and servicing platforms to drive growth for the Company's client partners. Presenting a very wide market opportunity of new entrants and existing players, consumer lending is expected to be a key growth area. In both back-up servicing and full servicing partnerships, the Company is a valuable resource for consumer lenders and asset holders as it allows for leveraged economies of scale, high compliance, and secure service to client partners. The Company serviced private education and consumer loans on behalf of 64 third-party servicing customers as of December 31, 2019. In addition, the Company provides back-up servicing arrangements to assist 14 entities for more than 3.7 million borrowers. For a monthly fee, these arrangements require a 30 to 90 day notice from a triggering event to transfer the customer's servicing volume to the Company's platform and becoming a full servicing customer. Providing student loan servicing software and other information technology products and services NDS provides data center services, student loan servicing software for servicing private education and federal loans, guaranty servicing software, and consulting and professional services to support the technology platforms. These proprietary software systems are used internally by the Company and/or licensed to third-party student loan holders and servicers. These software systems have been adapted so they can be offered as hosted servicing software solutions that can be used by third parties for guaranty servicing and to service various types of student loans, including Federal Direct Loan Program and FFEL Program loans. The Company earns a monthly fee from its remote hosting customers for each loan or unique borrower on the Company's platform, with a minimum monthly charge for most contracts. As of December 31, 2019, 6.4 million borrowers were hosted on the Company's hosted servicing software solution platforms. 6 Providing outsourced services including call center, processing, and marketing services The Company provides business process outsourcing primarily specializing in contact center management. The contact center solutions and services include taking inbound calls, helping with outreach campaigns and sales, and interacting with customers through multi-channels. Competition The Company's scalable servicing platform allows it to provide compliant, efficient, and reliable service at a low cost, giving the Company a competitive advantage over others in the industry. The principal competitor for existing and prospective FFELP and private education loan servicing business is Navient Corporation (“Navient”), which in 2018 entered into an agreement with First Data to provide technology solutions for servicing Navient's federal education loans in addition to the technology role they already played with respect to private education loans. Navient is the largest for-profit provider of servicing functions. In contrast to its competitors, the Company has segmented its private education loan servicing on a distinct platform, created specifically to meet the needs of private education student loan borrowers, their families, the schools they attend, and the lenders who serve them. This ensures access to specialized teams with a dedicated focus on servicing these borrowers. With the elimination of new loan originations under the FFEL Program, four TIVAS servicers, including Nelnet Servicing and Great Lakes, were named by the Department in 2009 as servicers of federally-owned loans. The two other TIVAS servicers are FedLoan Servicing (Pennsylvania Higher Education Assistance Agency (“PHEAA”)) and Navient. In addition, the Department has contracts with 31 NFP entities to service student loans that are serviced by 5 prime NFP servicers. The Company currently licenses its hosted servicing software to three prime NFP servicers that represent 13 NFP organizations. PHEAA is the only other TIVAS servicer offering a hosted Federal Direct Loan Program servicing solution to the NFP servicers. The Company is one of the leaders in the development of servicing software for guaranty agencies, consumer and private education loan programs, the Federal Direct Loan Program, and FFELP student loans. Many student loan lenders and servicers utilize the Company's software either directly or indirectly. The Company believes the investments it has made to scale its systems and to create a secure infrastructure to support the Department's servicing volume and requirements increase its competitive advantage as a long-term partner in the loan servicing market. Education Technology, Services, and Payment Processing NBS provides service and technology to administrators, teachers, students, and families of K-12 schools and higher education institutions. The Company’s payment processing services and technologies also serve customers outside of education. The Company's solutions include: • • • • Tuition payment plans Payment processing Advancement (giving management) Professional development • • • • School administration Financial management Enrollment and communications Instructional services The majority of this segment's customers are located in the United States; however, the Company also provides services and technology in Australia, New Zealand, and Southeast Asia, and currently believes there are opportunities to increase its customer base and revenues internationally. See the MD&A - “Education Technology, Services, and Payment Processing Operating Segment - Results of Operations” for a discussion of the seasonality of the business in this operating segment. K-12 In the K-12 market, FACTS comprehensive set of solutions includes (i) financial management, (ii) school administration solutions, (iii) advancement, (iv) enrollment and communications; (v) professional development and educational instruction services, and (vi) innovative technology products that aid in teacher and student evaluations. The Company provides services for more than 11,500 K-12 schools and serves nearly 4.2 million students and families. The Company is the market leader in education financial management services, including actively managed tuition payment plans, financial needs assessment (grant and aid), incidental billing, advanced accounting, and payment forms. K-12 educational institutions contract with the Company to administer tuition payment plans that allow families to make recurring payments generally over six to 12 months. The Company earns tuition payment plan services revenue by collecting a fee from either the institution or the payer to administer the plan. Additionally, the Company may earn revenue for payment processing fees when 7 families make tuition payments. The Company's grant and aid assessment service helps K-12 schools evaluate and determine the amount of financial aid to disburse to the families it serves. The Company earns service revenue by charging a fee for grant and aid applications processed. Under the FACTS brand, the Company provides actively managed tuition payment plans in Australia through Nelnet International. The Company’s school administration solutions include FACTS Student Information System (“SIS”), Family App, and Parent Alert. FACTS SIS automates the flow of information between school administrators, teachers, and parents and includes administrative processes such as admissions, enrollment, scheduling, cafeteria management, attendance, and grade book management. The Company’s information systems software is sold as a subscription service to schools. The Company also offers a streamlined, social, and fully integrated learning management system to enhance classroom instruction for both teachers and students. FACTS Family App provides families with mobile access to the information they need and Parent Alert allows for instant communication with families when needed. Prior to the re-branding effort in 2018, FACTS SIS was branded and known as RenWeb School Management Solutions. The Company offers student information systems to schools in Australia and New Zealand through Nelnet International. The combination of the Company’s school administration software and tuition management and grant and aid assessment services has significantly increased the value of the Company’s offerings in this area, allowing the Company to deliver a comprehensive suite of solutions to schools. The Company's advancement solution, FACTS Giving, is a comprehensive donation platform that streamlines donor information, and provides access to data analysis and reporting. Enrollment and communications, organizes donor communications solutions include School Site and Application and Enrollment. School Site offers website design and Application and Enrollment is a simple, cost effective admissions software. FACTS Education Solutions provides customized professional development services for teachers and school leaders as well as instructional services for students experiencing academic challenges. These services provide continuous advanced learning and professional development while helping private schools identify and attain equitable participation in federal education programs. FACTS Education Solutions also offers an innovative technology product that aids in both teacher and student evaluation. Higher Education In the higher education market, the Company (known as Nelnet Campus Commerce) offers solutions including (i) actively managed tuition payment plans and (ii) payments technology and processing. The newest product to launch in this market is CampusKey, which provides students with a mobile app to replace their plastic student ID card. The Company provides service for more than 1,300 colleges and universities worldwide and serves 7.6 million students and families. Higher education institutions contract with the Company to administer actively managed payment plans that allow the student and family to make recurring payments on either a semester or annual basis. The Company earns tuition payment plan services revenue by collecting a fee from either the student or family to administer the plan. Additionally, the Company may earn revenue for payment processing fees when families make tuition payments. technology solutions allow for electronic billing and payment of campus charges. Payment The Company's payment technologies includes cashiering for face-to-face transactions, campus-wide commerce management, and refunds management, among other activities. The Company earns revenue for e-billing, hosting and maintenance, credit card processing fees, and e- payment transaction fees, which are powered by the Company's secure payment processing systems. The Company's payment technology and processing solutions are sold as a subscription service to colleges and universities. The systems process payments through the appropriate channels in the banking or credit card networks to make deposits into the client's bank account. The systems can be further deployed to other departments around campus as requested (e.g., application fees, alumni giving, parking, events, etc.). Nelnet International also offers payments technology and processing solutions to higher education institutions in Australia, New Zealand, and Southeast Asia. Non-education services Under the brands PaymentSpring and Aware3, the Company has expanded its customer base to include both education and non- education customers. PaymentSpring offers technology and payment services including electronic transfer and credit card processing, reporting, billing and invoicing, mobile and virtual terminal solutions, and specialized integrations to business 8 software. Aware3 is a mobile first technology focused on increasing engagement, online giving, and communication for church and not-for-profit customers. Competition The Company is the largest provider of tuition management and financial needs assessment services to the private and faith- based K-12 market in the United States. Competitors include financial institutions, tuition management providers, financial needs assessment providers, accounting firms, and a myriad of software companies. In the higher education market, the Company targets business offices at colleges and universities. In this market, the primary competition is from a relatively small number of campus commerce and tuition payment providers, as well as solutions developed in-house by colleges and universities. The Company's principal competitive advantages are (i) the customer service it provides to institutions and consumers, (ii) the technology provided with the Company's service, and (iii) the Company's ability to integrate its technology with the institution clients and their third party service providers. The Company believes its clients select products primarily based on technology features, functionality, and the ability to integrate with other systems, but price and service also impact the selection process. Communications The Company provides communication services through ALLO, a majority owned subsidiary. ALLO derives its revenue primarily from the sale of telecommunication services, including internet, telephone, and television services, to business, governmental, and residential customers in Nebraska and Colorado, and specializes in high-speed internet and broadband services available through its all-fiber network. ALLO currently serves or has announced plans to serve the Scottsbluff, Gering, Bridgeport, North Platte, Ogallala, Alliance, Lincoln, Hastings, and Imperial communities in Nebraska, and Fort Morgan and Breckenridge, Colorado. Total households in these communities is approximately 161,000. As of December 31, 2019, the Company provided services to approximately 48,000 residential households, an increase of over 10,000, or 28 percent, from the prior year. ALLO plans to continue to increase market share and revenue in its existing markets and is currently evaluating opportunities to expand to additional communities. Internet and television services Internet and television services include data and video products and services to residential, governmental, and business subscribers. ALLO data services provide high-speed internet access over ALLO's all-fiber network at various symmetrical speeds up to 1 gigabit per second for residential customers, depending on the nature of the network facilities that are available, the level of service selected, and the geographic market availability. ALLO also offers a variety of data connectivity services for businesses and governmental entities, including Ethernet services capable of multiple connections over ALLO's fiber-based networks. ALLO's Internet Protocol Television Video (“IPTV”) services range from limited basic service to advanced television, which includes several plans, each with hundreds of local, national, and music channels, including premium and pay- per-view channels, as well as video on demand service. Subscribers may also subscribe to ALLO's advanced video services, which consist of high definition television, digital video recorders (“DVR”), and/or a whole home DVR. ALLO's whole home DVR gives customers the ability to watch recorded shows on any television in the house, record multiple shows at one time, and utilize an intuitive on-screen guide and user interface. ALLO expects that internet services will continue to increase as a more significant component of its overall services, and offset the anticipated decline in traditional residential telephone and television services. Telephone services Local calling services include a full suite of telephone services, including basic services, primary rate interface (“PRI”), and session initiation protocol (“SIP”). ALLO's service plans include options for voicemail and other enhanced custom calling features including hunting, caller ID, call forwarding, and call waiting, among others. Services are charged at a fixed monthly rate or can be bundled with selected services at a discounted rate. ALLO provides a hosted private branch exchange (“PBX”) package, which utilizes a soft switch and allows the customer the flexibility of utilizing new telephone technology and features without investing in a new telephone system. The package bundles local service, calling features, and internet protocol (“IP”) business telephones. Long-distance services include traditional domestic and international long distance, which enables customers to make calls that terminate outside their local calling area. These services also include toll-free calls and conference calling. ALLO offers a variety of long distance plans, including unlimited flat-rate calling plans, and offers a combination of subscription and usage fees. 9 Sales and marketing The key components of ALLO's overall marketing strategy include: • • • • • • • • Promoting the advantages of an all-fiber network connected directly to homes and businesses capable of delivering synchronous internet speeds of over one gigabit per second Building complete fiber communities by passing substantially all homes and businesses within its network Organizing sales and marketing activities around consumer, enterprise, and carrier customers Positioning ALLO as a single point of contact for customers’ communications needs Providing customers with a broad array of internet, television, and telephone services and bundling these services whenever possible Providing excellent local customer service, including 24/7/365 customer support to coordinate installation of new services, repair, and maintenance functions Developing and delivering new services to meet evolving customer needs and market demands Utilizing proven modern technology to deliver services ALLO currently offers services through social media platforms, direct marketing, call centers, its website, communication centers, and commissioned sales representatives. ALLO markets its services both individually and as bundled services, including its triple-play offering of internet, television, and telephone services. By bundling service offerings, ALLO is able to offer and sell a more complete and competitive package of services, which simultaneously increases its margin per customer and adds value for the consumer or business. ALLO also believes that bundling leads to increased customer loyalty and retention. Network architecture and technology ALLO has made significant investments in its technologically advanced telecommunications networks. As a result, ALLO is able to deliver high-quality, reliable internet, telephone, and television services through fiber optics. ALLO's wide-ranging network and extensive use of fiber provide an easy reach into existing and new areas. By bringing the fiber network to the customer premises, ALLO can increase its service offerings, quality, and bandwidth services. ALLO's existing fiber network enables it to efficiently respond and adapt to changes in technology and is capable of supporting the rising customer demand for bandwidth in order to support the growing number of internet devices in the home. ALLO's all-fiber network enhances its operating efficiencies by facilitating new network and technology choices that provide for lower costs to operate. ALLO's networks are supported by an advanced digital telephone switch and IPTV service platform. The digital switch provides all local telephone customers with access to a full suite of telecommunication products, custom calling features, and value-added services. ALLO's fiber network utilizes fiber-to-the-premise (“FTTP”) networks to offer bundled residential and commercial services. ALLO leverages its high definition IPTV headend equipment to distribute content across its network, allowing it to provide a sharp video picture and to better manage costs of future channel additions and upgrades. ALLO's network provides substantially all of its marketable homes and businesses with bandwidth of 1 gigabit per second or more. Growth strategy As discussed above, ALLO plans to increase its customer base with its superior all-fiber network by increasing its share in existing markets and potentially entering additional markets currently served by carriers using traditional copper and coaxial cable in their telecommunications networks. In addition, ALLO is focused on increasing revenues per customer by capitalizing on increased demand for bandwidth by commercial and residential customers and introducing new value add products. Competition Telecommunications businesses are highly competitive and continue to face increased competition as a result of technology changes and industry legislative and regulatory developments. ALLO faces actual or potential competition from many existing and emerging companies, including incumbent and competitive local telephone companies, long distance carriers and resellers, wireless companies, internet service providers (“ISPs”), satellite companies, cable television companies, and in some cases by new forms of providers who are able to offer competitive services through software applications, requiring a comparatively small initial investment. Due to consolidation and strategic alliances within the industry, ALLO cannot predict the number of competitors it will face at any given time. The wireless business has expanded significantly, causing many residential subscribers of traditional telephone services to discontinue those services and rely exclusively on wireless service. Consumers are finding individual television shows of interest to them through the internet and are watching content that is downloaded to 10 their computers. Some providers, including television and cable television content owners, have initiated what are referred to as “over-the-top” services that deliver video content to televisions and computers over the internet. The incumbent telephone carriers in the markets ALLO serves enjoy certain business advantages, including size, financial resources, favorable regulatory position, a more diverse product mix, brand recognition, and connection to virtually all of ALLO's customers and potential customers. The largest cable operators also enjoy certain business advantages, including size, financial resources, ownership of or superior access to desirable programming and other content, a more diverse product mix, brand recognition, and first-in-the- field advantages with a customer base that generates positive cash flow for their operations. ALLO's competitors continue to add features and adopt aggressive pricing and packaging for services comparable to the services ALLO offers. Their success in selling some services competitive with ALLO's can lead to revenue erosion in other related areas. ALLO faces intense competition in its markets for long distance, internet access, and other ancillary services that are important to ALLO's business and to its growth strategy. Asset Generation and Management AGM includes the acquisition, management, and ownership of the Company's loan assets. Loans consist of federally insured student loans (originated under the FFEL Program), private education loans, and consumer loans. Substantially all of the Company's loan portfolio (97.7 percent as of December 31, 2019) is federally insured. As of December 31, 2019, the Company's loan portfolio was $20.7 billion. The Company generates a substantial portion of its earnings from the spread, referred to as the Company's loan spread, between the yield it receives on its loan portfolio and the associated costs to finance such portfolio. See the MD&A - "Asset Generation and Management Operating Segment - Results of Operations - Loan Spread Analysis,” for further details related to the loan spread. The loan assets are held in a series of lending subsidiaries and associated securitization trusts designed specifically for this purpose. In addition to the loan spread earned on its portfolio, all costs and activity associated with managing the portfolio, such as servicing of the assets and debt maintenance, are included in this segment. The Company's portfolio of federally insured student loans is subject to minimal credit risk, as these loans are guaranteed by the Department at levels ranging from 97 percent to 100 percent. The Higher Education Act regulates every aspect of the federally insured student loan program, including certain communications with borrowers, loan originations, and default aversion. Failure to service a student loan properly could jeopardize the guarantee on federal student loans. In the case of death, disability, or bankruptcy of the borrower, the guarantee covers 100 percent of the loan's principal and accrued interest. FFELP loans are guaranteed by state agencies or nonprofit companies designated as guarantors, with the Department providing reinsurance to the guarantor. Guarantors are responsible for performing certain functions necessary to ensure the program's soundness and accountability. Generally, the guarantor is responsible for ensuring that loans are serviced in compliance with the requirements of the Higher Education Act. When a borrower defaults on a FFELP loan, the Company submits a claim to the guarantor, who provides reimbursements of principal and accrued interest, subject to the applicable risk share percentage. The Company's portfolios of private education loans and consumer loans are subject to credit risk and defaults may increase above current levels based on numerous factors, including a decline in the economy or an increase in unemployment. Origination and acquisition The Reconciliation Act of 2010 discontinued originations of new FFELP loans, effective July 1, 2010. However, the Company believes there will be ongoing opportunities to continue to purchase FFELP loan portfolios from current FFELP participants looking to exit or adjust their FFELP businesses. For example, from July 1, 2010 through December 31, 2019, the Company purchased a total of $26.6 billion of FFELP student loans from various third parties, including a total of $1.5 billion during 2019. However, since all FFELP loans will eventually pay off, a key objective of the Company over the last several years is to reposition itself for the post-FFELP environment. As such, the Company is actively expanding its private education and consumer loan portfolios. During 2019, the Company relaunched U-fi, a marketing partnership with Union Bank and Trust Company ("Union Bank"), a company under common control with the Company. U-fi is a refinance and private student loan product that helps people pay for their education and for those who have finished their education, to refinance and consolidate their debt. During 2019, U-fi generated $108.7 million in new refinance education loans for Union Bank. During 2019, the Company purchased $71.5 million of private education loans (including $67.7 million of U-fi loans from Union Bank) and $405.7 million of consumer loans. The Company's competition for the purchase of FFELP, private education, and consumer loan portfolios includes banks, hedge funds, and other finance companies. 11 Interest rate risk management Since the Company generates a significant portion of its earnings from its loan spread, the interest rate sensitivity of the Company's balance sheet is very important to its operations. The current and future interest rate environment can and will affect the Company's interest income and net income. The effects on the Company's results of operations as a result of the changing interest rate environments are further outlined in the MD&A - "Asset Generation and Management Operating Segment - Results of Operations - Loan Spread Analysis" and Part II, Item 7A, “Quantitative and Qualitative Disclosures About Market Risk - Interest Rate Risk.” Corporate and Other Activities Whitetail Rock Capital Management, LLC ("WRCM") As of December 31, 2019, WRCM, the Company's SEC-registered investment advisor subsidiary, had $1.41 billion in assets under management for third-party customers, consisting of student loan asset-backed securities and Nelnet stock. WRCM earns annual management fees of 25 basis points for asset-backed securities under management and up to 50 percent of the gains from the sale of securities or securities being called prior to the full contractual maturity for which it provides advisory services. WRCM earns annual management fees of five basis points for Nelnet stock under management. During 2019, WRCM earned $2.9 million in management fees and generated $0.1 million in performance fees. Assuming assets under management remain at their current levels, management fees should be relatively stable in future years. The Company currently anticipates that opportunities for WRCM to earn meaningful performance fees in future periods are more limited. Real estate and other investments The Company makes investments to further diversify itself both within and outside of its historical core education-related businesses, including investments in real estate and early-stage and emerging growth companies. Recent real estate investments have been focused on the development of commercial properties in the Midwest, and particularly in Lincoln, Nebraska, where the Company is headquartered. These investments include projects for the development of properties in Lincoln’s east downtown Telegraph District, where a new facility for the Company’s student loan servicing operations is located, and projects in Lincoln’s Haymarket District, including the new headquarters of Hudl, an online video analysis and coaching tools software company for athletes of all levels. The Company is also a tenant at Hudl's headquarters. David S. Graff, a member of the Company’s board of directors, is a co-founder, the chief executive officer, and a director of Hudl. In addition, the Company has a total equity investment in Hudl of $51.8 million. In addition, the Company invests in certain tax-advantaged projects promoting renewable energy resources (solar projects). The Company’s investments in these projects are designed to generate a return primarily through the realization of federal income tax credits, operating cash flows, and other tax benefits, over specified time periods. Regulation and Supervision The Company's operating segments and industry partners are heavily regulated by federal and state government regulatory agencies. The following provides a summary of the more significant existing and proposed legislation and regulations affecting the Company. A failure to comply with these laws and regulations could subject the Company to substantial fines, penalties, and remedial and other costs, restrictions on business, and the loss of business. Regulations and supervision can change rapidly, and changes could alter the Company's business plan and increase the Company's operating expenses as new or additional regulatory compliance requirements are addressed. Loan Servicing and Systems NDS, which services Federal Direct Loan Program, FFELP, and private education and consumer loans, is subject to federal and state consumer protection, privacy, and related laws and regulations. Some of the more significant federal laws and regulations include: • • • • The Higher Education Act, which establishes financial responsibility and administrative capability requirements that govern all third-party servicers of federally insured student loans The Telephone Consumer Protection Act (“TCPA”), which governs communication methods that may be used to contact customers The Truth-In-Lending Act (“TILA”) and Regulation Z, which govern disclosures of credit terms to consumer borrowers The Fair Credit Reporting Act (“FCRA”) and Regulation V, which govern the use and provision of information to consumer reporting agencies 12 • • • • • • • • The Equal Credit Opportunity Act (“ECOA”) and Regulation B, which prohibit discrimination on the basis of race, creed, or other prohibited factors in extending credit The Servicemembers Civil Relief Act (“SCRA”), which applies to all debts incurred prior to commencement of active military service and limits the amount of interest, including certain fees or charges that are related to the obligation or liability The Electronic Funds Transfer Act (“EFTA”) and Regulation E, which protect individual consumers engaged in electronic fund transfers (“EFTs”) The Gramm-Leach-Bliley Act (“GLBA”) and Regulation P, which govern a financial institution’s treatment of nonpublic personal information about consumers and require that an institution, under certain circumstances, notify consumers about its privacy policies and practices The General Data Protection Regulation (“GDPR”), a European Union (“EU”) regulation which places specific requirements on businesses that collect and process personal data of individuals residing in the EU, and provides for significant fines and other penalties for non-compliance The California Consumer Privacy Act (“CCPA”), which enhances the privacy rights and consumer protection for residents of California Laws prohibiting unfair, deceptive, or abusive acts or practices (“UDAAP”) Various laws, regulations, and standards that govern government contractors As a student loan servicer for the federal government and for financial institutions, including the Company’s FFELP student loan portfolio, the Company is subject to the Higher Education Act (“HEA”) and related laws, rules, regulations, and policies. The HEA regulates every aspect of the federally insured student loan program. Failure to comply with the HEA could result in fines, the loss of the insurance and related federal guarantees on affected FFELP loans, expenses required to cure servicing deficiencies, suspension or termination of the right to participate as a FFELP servicer, negative publicity, and potential legal claims. The Company has designed its servicing operations to comply with the HEA, and it regularly monitors the Company's operations to maintain compliance. While the HEA is required to be reviewed and reauthorized by Congress every five years, Congress has not reauthorized the HEA since 2008, choosing to temporarily extend the HEA each year since 2013 while Congress works on the next reauthorization. The Company continuously monitors for potential changes to HEA and evaluates possible impacts to its business operations. Under the TCPA, plaintiffs may seek actual monetary loss or damages of $500 per violation, and courts may treble the damage award for willful or knowing violations. In addition, TCPA lawsuits have asserted putative class action claims. The Dodd-Frank Wall Street Reform and Consumer Protection Act (the “Dodd-Frank Act”) established the Consumer Financial Protection Bureau (“CFPB”), which has broad authority to regulate a wide range of consumer financial products and services. The Company's student loan servicing business is subject to CFPB oversight authority. In 2015, the CFPB conducted a public inquiry into student loan servicing practices throughout the industry and issued a report discussing public comments submitted in response to the inquiry, and suggesting a framework to improve borrower outcomes and reduce defaults, including the creation of consistent, industry-wide standards for the entire servicing market. The CFPB has authority to draft new regulations implementing federal consumer financial protection laws, to enforce those laws and regulations, and to conduct examinations of the Company's operations to determine compliance. The CFPB’s authority includes the ability to assess financial penalties and fines and provide for restitution to consumers if it determines there have been violations of consumer financial protection laws. The CFPB also provides consumer financial education, tracks consumer complaints, requests data from industry participants, and promotes the availability of financial services to underserved consumers and communities. The CFPB has authority to prevent unfair, deceptive, or abusive acts or practices and to ensure that all consumers have access to fair, transparent, and competitive markets for consumer financial products and services. The CFPB’s scrutiny of financial services has impacted industry participants’ approach to their services, including how the Company interacts with consumers. The Dodd-Frank Act empowers state attorneys general and state regulators to bring civil actions to remedy violations of state law. Most states also have statutes that prohibit unfair and deceptive practices. To the extent states enact requirements that differ from federal standards or state officials and courts adopt interpretations of federal consumer laws that differ from those adopted by the CFPB under the Dodd-Frank Act, the Company's ability to offer the same products and services to consumers nationwide may be limited. As a third-party service provider to financial institutions, the Company is subject to periodic examination by the Federal Financial Institutions Examination Council (“FFIEC”). FFIEC is a formal interagency body of the U.S. government empowered 13 to prescribe uniform principles, standards, and report forms for the federal examination of financial institutions by the Federal Reserve Banks, the Federal Deposit Insurance Corporation (“FDIC”), and the CFPB, and to make recommendations to promote uniformity in the supervision of financial institutions. In 2019, several states enacted laws regulating and monitoring the activity of student loan servicers. Some of these laws stipulate additional licensing fees which increase the Company’s cost of doing business. Where the Company has obtained licenses, state licensing statutes may impose a variety of requirements and restrictions on the Company. In addition, these statutes may also subject the Company to the supervisory and examination authority of state regulators in certain cases, and the Company will be subject to and experience exams by state regulators. If the Company is found to not have complied with applicable laws, regulations, or requirements, it could: (i) lose one or more of its licenses or authorizations, (ii) become subject to a consent order or administrative enforcement action, (iii) face lawsuits (including class action lawsuits), sanctions, or penalties, or (iv) be in breach of certain contracts, which may void or cancel such contracts. The Company anticipates additional states adopting similar laws. Education Technology, Services, and Payment Processing NBS provides tuition management services and school information software for K-12 schools and tuition management services and payment processing solutions for higher education institutions. The Company also provides payment technologies and payment services for software platforms, businesses, and nonprofits beyond the K-12 and higher education space. As a service provider that takes payment instructions from institutions and their constituents and sends them to bank partners, the Company is directly or indirectly subject to a variety of federal and state laws and regulations. The Company's contracts with clients and bank partners require the Company to comply with these laws and regulations. The Company's payment processing services are subject to the EFTA and Regulation E, which govern automatic deposits to and withdrawals from deposit accounts and customers’ rights and liabilities arising from the use of debit cards and certain other electronic banking services. The Company assists bank partners with fulfilling their compliance obligations pursuant to these requirements. The Company's payment processing services are also subject to the National Automated Clearing House Association (“NACHA”) requirements, which include operating rules and sound risk management procedures to govern the use of the Automated Clearing House (“ACH”) Network. These rules are used to ensure that the ACH Network is efficient, reliable, and secure for its members. Because the ACH Network uses a batch process, the importance of proper submissions by NACHA members is magnified. The Company is also impacted by laws and regulations that affect the bankcard industry. The Company is registered with Visa, MasterCard, American Express, and the Discover Network as a service provider and is subject to their respective rules. The Company's higher education institution clients are subject to the Family Educational Rights and Privacy Act (“FERPA”), which protects the privacy of student education records. These clients disclose certain non-directory information concerning their students to the Company, including contact information, student identification numbers, and the amount of students’ credit balances pursuant to one or more exceptions under FERPA. Additionally, as the Company is indirectly subject to FERPA, it may not permit the transfer of any personally identifiable information to another party other than in a manner in which an educational institution may properly disclose it. While the Company believes that it has adequate policies and procedures in place to safeguard the privacy of such information, a breach of this prohibition could result in a five-year suspension of the Company's access to the related client’s records. The Company may also be subject to similar state laws and regulations that restrict higher education institutions from disclosing certain personally identifiable student information. Some of the Company's K-12 and higher education institution clients choose to charge convenience fees to students, parents, or other payers who make online payments using a credit or debit card. Laws and regulations related to such fees vary from state to state and certain states have laws that to varying degrees prohibit the imposition of a surcharge on a cardholder who elects to use a credit or debit card in lieu of cash, check, or other means. The Company's contracts with higher education institution clients also require the Company to comply with regulations promulgated by the Department regarding the handling of student financial aid funds received by institutions on behalf of their students under Title IV of the Higher Education Act. These regulations are designed to ensure students have convenient access to their Title IV funds, do not incur unreasonable fees, and are not led to believe they must open a financial account to receive such funds. 14 Communications The telecommunications business is subject to extensive federal, state, and local regulation. Under the Telecommunications Act of 1996 (“Telecommunications Act”), federal and state regulators share responsibility for implementing and enforcing statutes and regulations designed to encourage competition and to preserve and advance widely available, quality telephone service at affordable prices. At the federal level, the Federal Communications Commission (“FCC”) generally exercises jurisdiction over facilities and services of local exchange carriers to the extent they are used to provide, originate, or terminate interstate or international communications. The FCC has the authority to condition, modify, cancel, terminate, or revoke operating authority for failure to comply with applicable federal laws or FCC rules, regulations, and policies. State regulatory commissions generally exercise jurisdiction over carriers’ facilities and services to the extent they are used to provide, originate, or terminate intrastate communications. These regulatory commissions may dictate service standards and may require the payment of fees to remain in good standing with the applicable regulatory commission. In addition, municipalities and other local government agencies regulate the public rights-of-way necessary to install and operate networks. The Communications Act of 1934 (“Communications Act”) requires, among other things, that telecommunications carriers offer services at just and reasonable rates and on non-discriminatory terms and conditions. The 1996 amendments to the Communications Act, contained in the Telecommunications Act, dramatically changed, and likely will continue to change, the is to open local landscape of telecommunications markets to competition while enhancing universal service. The Telecommunications Act imposes a number of interconnection and other requirements on all local communications providers. All telecommunications carriers have a duty to interconnect directly or indirectly with the facilities and equipment of other telecommunications carriers. the telecommunications industry. The central aim of the Telecommunications Act Municipalities where ALLO operates may require ALLO to obtain permits for street opening and construction. These permits or other licenses or agreements typically require the payment of fees. In addition, ALLO's aerial and underground construction operations are subject to extensive laws and regulations relating to the maintenance of safe conditions in the workplace. Internet services The provision of internet access services is not significantly regulated by either the FCC or the state commissions. However, the FCC has in recent years taken some steps toward the imposition of some controls on the provision of internet access, and has asserted that it has jurisdictional authority in some areas related to the promotion of an open internet. The extent of the FCC’s jurisdiction with respect to the internet has not been resolved, and this lack of resolution could lead to increased costs for ALLO in connection with its provision of internet services and affect ALLO's ability to effectively compete. Internet services have become the subject of increasing regulatory interest. Congress and federal regulators have adopted a wide including, for example, consumer privacy, copyright range of measures directly or potentially affecting internet use, protections, defamation liability, taxation, obscenity, and unsolicited commercial email. ALLO's internet services are subject to the Communications Assistance for Law Enforcement Act (“CALEA”) requirements regarding law enforcement surveillance. Content owners are now seeking additional legal mechanisms to combat copyright infringement over the internet. Pending and future legislation in this area could adversely affect ALLO's operations as an internet service provider ("ISP") and relationship with internet customers. Additionally, the FCC and Congress are considering subjecting internet access services to the Universal Service funding requirements. These funding requirements could impose significant new costs on ALLO's high-speed internet service. State and local governmental organizations have also adopted internet-related regulations. These various governmental jurisdictions are also considering additional regulations in these and other areas, such as privacy, pricing, service and product quality, and taxation. The adoption of new internet regulations or the adaptation of existing laws to the internet could adversely affect ALLO's business. In 2015, an FCC Net Neutrality Order went into effect. On December 14, 2017, the FCC voted to repeal the Open Internet Order and effectively the net neutrality rules. The previous rules prohibited ISPs from engaging in blocking, throttling, and paid prioritization, and transparency rules compelling the disclosure of network management policies were enhanced. The FCC was also granted the authority under the rules to hear complaints and take enforcement action if it determined that the interconnection activities of ISPs were not just and reasonable, or if ISPs failed to meet general obligations not to harm consumers or what are referred to as edge providers. The final version of the net neutrality repeal order restores the Federal Trade Commission's jurisdiction over broadband internet access services. The uncertainty around how the Federal Trade Commission will respond and challenges to the FCC repeal could limit ALLO’s ability to efficiently manage internet service and respond to operational and competitive challenges. 15 Television services Federal regulations currently restrict the prices that cable systems charge for the minimum level of television programming service, referred to as “basic service,” and associated equipment. All other television service offerings are now universally exempt from rate regulation. Although basic service rate regulation operates pursuant to a federal formula, local governments, commonly referred to as local franchising authorities, are primarily responsible for administering this regulation. The majority of ALLO's local franchising authorities have never been certified to regulate basic service cable rates (and order rate reductions and refunds), but they generally retain the right to do so (subject to potential regulatory limitations under state franchising laws), except in those specific communities facing “effective competition,” as defined under federal law. There have been frequent calls to impose expanded rate regulation on the cable industry. As a result of rapidly increasing cable programming costs, it is possible that Congress may adopt new constraints on the retail pricing or packaging of cable programming. Federal rate regulations currently include certain marketing restrictions that could affect ALLO's pricing and packaging of service tiers and equipment. As ALLO attempts to respond to a changing marketplace with competitive pricing practices, it may face regulations that impede its ability to compete. IPTV operations require state or local franchise or other authorization in order to provide cable service to customers. ALLO is subject to regulation under a Communications Act framework that addresses such issues as the use of local streets and rights of way; the carriage of public, educational, and governmental channels; the provision of channel space for leased commercial access; the amount and payment of franchise fees; consumer protection; and similar issues. In addition, federal laws and FCC regulations place limits on the common ownership of cable systems and competing multichannel television distribution systems, and on the common ownership of cable systems and local telephone systems in the same geographic area. The FCC has recently expanded its oversight and regulation of cable television-related matters. Federal law and regulations also affect numerous issues related to television programming and other content. Under federal law, certain local television broadcast stations (both commercial and non-commercial) can elect, every three years, to take advantage of rules that require a cable operator to distribute the station’s content to the cable system’s customers without charge, or to forego this “must-carry” obligation and to negotiate for carriage on an arm’s length contractual basis, which typically involves the payment of a fee by the cable operator, and sometimes involves other considerations as well. The current three-year cycle began on January 1, 2018. ALLO has negotiated agreements with the local television broadcast stations that would have been eligible for “must carry” treatment in each of its current markets. The contractual relationships between cable operators and most providers of content who are not television broadcast stations generally are not subject to FCC oversight or other regulation. The Communications Act requires most utilities owning utility poles to provide access to poles and conduits, and subjects the rates charged for this access to either federal or state regulation. The FCC's pole attachment rules promote broadband deployment through the ability to access investor-owned utility poles on reasonable rates, terms, and conditions, subject to penalties in certain cases involving unauthorized attachments. ALLO's IPTV systems are subject to a federal copyright compulsory license covering carriage of television and radio broadcast signals. The possible modification or elimination of this copyright compulsory license is the subject of continuing legislative proposals and administrative review and could adversely affect ALLO's ability to obtain desired broadcast programming. Copyright clearances for non-broadcast programming services are arranged through private negotiations. IPTV operators also must obtain music rights for locally originated programming and advertising from the major music performing rights organizations. These licensing fees have been the source of litigation in the past, and license fee disputes may arise in the future. Telephone services ALLO offers voice communications services over a broadband network. The FCC has ruled that competitive telephone companies are entitled to interconnect with incumbent providers of traditional telecommunications services, which ensures that services can compete in the market. The FCC has also declared that certain services are not subject to traditional state public utility regulation. The full extent of the FCC preemption of state and local regulation of services is not yet clear. Asset Generation and Management The Dodd-Frank Act created a comprehensive regulatory framework for derivatives transactions, with regulatory authority allocated among the Commodity Futures Trading Commission (“CFTC”), other prudential regulators, and the SEC. This framework, among other things, subjects certain swap participants to capital and margin requirements, recordkeeping, and business conduct standards and imposes registration and regulation of swap dealers and major swap participants. Even where a securitization trust qualifies for an exemption, many of the Company's derivative counterparties are subject to capital, margin, and business conduct requirements and therefore the Company may be impacted. Where securitization trusts do not qualify for an exemption, the Company may be unable to enter into new swaps to hedge interest rate or currency risk or the costs 16 associated with such swaps may increase. With respect to existing securitization trusts, an inability to amend, novate, or otherwise materially modify existing swap contracts could result in a downgrade of outstanding asset-backed securities. As a result, the Company's business, ability to access the capital markets for financing, and costs may be impacted by these regulations. Corporate Governmental bodies in the United States and abroad have adopted, or are considering the adoption of, laws and regulations restricting the transfer and requiring the safeguarding of nonpublic personal information. For example, in the United States, the Company and its financial institution clients are, respectively, subject to the Federal Trade Commission’s and the federal banking regulators’ privacy and information safeguarding requirements under the GLBA. The GLBA requires financial institutions to periodically disclose their privacy policies and practices relating to sharing such information and enables customers to opt out of the Company’s ability to share information with unaffiliated third parties under certain circumstances. Other federal and state laws and regulations impact the Company’s ability to share certain information with affiliates and non- affiliates for marketing and/or non-marketing purposes, or to contact customers with marketing offers. The GLBA also requires financial institutions to implement a comprehensive information security program that includes administrative, technical, and physical safeguards to ensure the security and confidentiality of customer records and information. These security and privacy policies and procedures for the protection of personal and confidential information are in effect across all businesses and geographic locations. Federal law also makes it a criminal offense, except in limited circumstances, to obtain or attempt to obtain customer information of a financial nature by fraudulent or deceptive means. Data privacy and data protection are areas of increasing state legislative focus. For example, the California Consumer Privacy Act (the “CCPA”), which became effective on January 1, 2020, applies to for-profit businesses that conduct business in California and meet certain revenue or data collection thresholds. The CCPA gives consumers the right to request disclosure of information collected about them, and whether that information has been sold or shared with others, the right to request deletion of personal information (subject to certain exceptions), the right to opt out of the sale of the consumer’s personal information, and the right not to be discriminated against for exercising these rights. The CCPA contains several exemptions, including an exemption applicable to information that is collected, processed, sold, or disclosed pursuant to the GLBA. The California Attorney General has not yet adopted regulations implementing the CCPA, and the California State Legislature has amended the CCPA since its passage. In addition, similar laws may be adopted by other states where the Company does business. The federal government may also pass data privacy or data protection legislation. In addition, in the EU, privacy law is now governed by the GDPR, which is directly binding and applicable for each EU member state from May 25, 2018. The GDPR contains enhanced compliance obligations and increased penalties for non-compliance compared to the prior law governing data privacy in the EU. Intellectual Property The Company owns numerous trademarks and service marks (“Marks”) to identify its various products and services. As of December 31, 2019, the Company had 53 registered Marks. The Company actively asserts its rights to these Marks when it believes infringement may exist. The Company believes its Marks have developed and continue to develop strong brand-name recognition in the industry and the consumer marketplace. Each of the Marks has, upon registration, an indefinite duration so long as the Company continues to use the Mark on or in connection with such goods or services as the Mark identifies. In order to protect the indefinite duration, the Company makes filings to continue registration of the Marks. The Company owns one patent application that has been published, but has not yet been issued, and has also actively asserted its rights thereunder in situations where the Company believes its claims may be infringed upon. The Company owns many copyright protected works, including its various computer system codes and displays, websites, and marketing materials. The Company also has trade secret rights to many of its processes and strategies and its software product designs. The Company's software products are protected by both registered and common law copyrights, as well as strict confidentiality and ownership provisions placed in license agreements, which restrict the ability to copy, distribute, or improperly disclose the software products. The Company also has adopted internal procedures designed to protect the Company's intellectual property. The Company seeks federal and/or state protection of intellectual property when deemed appropriate, including patent, trademark/service mark, and copyright. The decision whether to seek such protection may depend on the perceived value of the intellectual property, the likelihood of securing protection, the cost of securing and maintaining that protection, and the potential for infringement. The Company's employees are trained in the fundamentals of intellectual property, intellectual property protection, and infringement issues. The Company's employees are also required to sign agreements requiring, among other things, confidentiality of trade secrets, assignment of inventions, and non-solicitation of other employees post- termination. Consultants, suppliers, and other business partners are also required to sign nondisclosure agreements to protect the Company's proprietary rights. 17 Employees As of December 31, 2019, the Company had approximately 6,600 employees. None of the Company's employees are covered by collective bargaining agreements. The Company is not involved in any material disputes with any of its employees, and the Company believes that relations with its employees are good. Available Information The Company's internet website address is www.nelnet.com, and the Company's investor relations website address is www.nelnetinvestors.com. Copies of the Company's annual reports on Form 10-K, quarterly reports on Form 10-Q, current reports on Form 8-K, and amendments to such reports are available on the Company's investor relations website free of charge as soon as reasonably practicable after such reports are filed with or furnished to the SEC. The Company routinely posts important information for investors on its investor relations website. The Company has adopted a Code of Ethics and Conduct that applies to directors, officers, and employees, including the Company's principal executive officer and its principal financial and accounting officer, and has posted such Code of Ethics and Conduct on its investor relations website. Amendments to and waivers granted with respect to the Company's Code of Ethics and Conduct relating to its executive officers and directors, which are required to be disclosed pursuant to applicable securities laws and stock exchange rules and regulations, will also be posted on its investor relations website. The Company's Corporate Governance Guidelines, Audit Committee Charter, People Development and Compensation Committee Charter, Nominating and Corporate Governance Committee Charter, Risk and Finance Committee Charter, and Compliance Committee Charter are also posted on its investor relations website. Information on the Company's websites is not incorporated by reference into this report and should not be considered part of this report. ITEM 1A. RISK FACTORS We operate our businesses in a highly competitive and regulated environment. We are subject to risks including, but not limited to, strategic, market, liquidity, credit, regulatory, technology, operational, security, and other business risks such as reputation damage related to negative publicity and dependencies on key personnel, customers, vendors, and systems. This section highlights specific risks that could adversely affect our financial results and condition and the value of, and return on, an investment in the Company. Although this section attempts to highlight key risk factors, other risks may emerge at any time and we cannot predict all risks or estimate the extent to which they may affect our financial performance. These risk factors should be read in conjunction with the other information included in this report. Loan Portfolio Our loan portfolio is subject to certain risks related to interest rates, our ability to manage the risks related to interest rates, prepayment, and credit risk, each of which could reduce the expected cash flows and earnings on our portfolio. Interest rate risk - basis and repricing risk We are exposed to interest rate risk in the form of basis risk and repricing risk because the interest rate characteristics of our loan assets do not always match the interest rate characteristics of the funding for those assets. We fund the majority of our FFELP student loan assets with one-month or three-month LIBOR indexed floating rate securities. Meanwhile, the interest earned on our FFELP student loan assets is indexed to one-month LIBOR, three-month commercial paper, and Treasury bill rates. The differing interest rate characteristics of our loan assets versus the liabilities funding these assets result in basis risk, which impacts the excess spread earned on our loans. We also face repricing risk due to the timing of the interest rate resets on our liabilities, which may occur as infrequently as once a quarter, in contrast to the timing of the interest rate resets on our assets, which generally occur daily. In a declining interest rate environment, this may cause our student loan spread to compress, while in a rising interest rate environment, it may cause the spread to increase. As of December 31, 2019, we had $18.9 billion, $0.8 billion, and $0.6 billion of FFELP loans indexed to the one-month LIBOR, three-month commercial paper, and three-month Treasury bill rate, respectively, all of which reset daily, and $7.5 billion of debt indexed to three-month LIBOR, which resets quarterly, and $11.0 billion of debt indexed to one-month LIBOR, which resets monthly. While these indices are all short term in nature with rate movements that are highly correlated over a longer period of time, there can be no assurance that the indices' historically high level of correlation will not be disrupted in the future due to capital market dislocations or other factors not within our control. In such circumstances, our earnings could be adversely affected, possibly to a material extent. 18 We have entered into basis swaps to hedge our basis and repricing risk. For these derivatives, we receive three-month LIBOR set discretely in advance and pay one-month LIBOR plus or minus a spread as defined in the agreements (the "1:3 Basis Swaps"). Interest rate risk - loss of floor income FFELP loans originated prior to April 1, 2006 generally earn interest at the higher of the borrower rate, which is fixed over a period of time, or a floating rate based on the Special Allowance Payments ("SAP") formula set by the Department. The SAP rate is based on an applicable index plus a fixed spread that depends on loan type, origination date, and repayment status. We generally finance our student loan portfolio with variable rate debt. In low and/or certain declining interest rate environments, when the fixed borrower rate is higher than the SAP rate, these student loans earn at a fixed rate while the interest on the variable rate debt typically continues to reflect the low and/or declining interest rates. In these interest rate environments, we may earn additional spread income that we refer to as floor income. Depending on the type of loan and when it was originated, the borrower rate is either fixed to term or is reset to an annual rate each July 1. As a result, for loans where the borrower rate is fixed to term, we may earn floor income for an extended period of time, which we refer to as fixed rate floor income, and for those loans where the borrower rate is reset annually on July 1, we may earn floor income to the next reset date, which we refer to as variable rate floor income. For the year ended December 31, 2019, we earned $89.9 million of fixed rate floor income, which includes $40.2 million of net settlement proceeds received related to derivatives used to hedge loans earning fixed rate floor income. Absent the use of derivative instruments, a rise in interest rates will reduce the amount of floor income received and this will have an impact on earnings due to interest margin compression caused by increased financing costs, until such time as the federally insured loans earn interest at a variable rate in accordance with their SAP formulas. In higher interest rate environments, where the interest rate rises above the borrower rate and fixed rate loans effectively convert to variable rate loans, the impact of the rate fluctuations is reduced. Interest rate risk - use of derivatives We utilize derivative instruments to manage interest rate sensitivity. Our derivative instruments are intended as economic hedges but do not qualify for hedge accounting; consequently, the change in fair value, called the “mark-to-market,” of these derivative instruments is included in our operating results. Changes or shifts in the forward yield curve can and have significantly impacted the valuation of our derivatives. Accordingly, changes or shifts in the forward yield curve will impact our results of operations. Although we believe our derivative instruments are highly effective, developing an effective strategy for dealing with movements in interest rates is complex, and no strategy can completely insulate us from risks associated with such fluctuations. Because many of our derivatives are not balance guaranteed to a particular pool of student loans and we may not elect to fully hedge our risk on a notional and/or duration basis, we are subject to the risk of being under or over hedged, which could result in material losses. In addition, our interest rate risk management activities could expose us to substantial mark-to-market losses if interest rates move in a materially different way than was expected based on the environment when the derivatives were entered into. As a result, there is no assurance that our economic hedging activities will effectively manage our interest rate sensitivity or have the desired beneficial impact on our results of operations or financial condition. The Dodd-Frank Act provides the CFTC with substantial authority to regulate over-the-counter derivative transactions. Since June 10, 2013, the CFTC has required over-the-counter derivative transactions to be executed through an exchange or central clearinghouse. Accordingly, all over-the-counter derivative contracts executed by us since that date are cleared post-execution at a regulated clearinghouse. Clearing is a process by which a third-party, the clearinghouse, steps in between the original counterparties and guarantees the performance of both, by requiring that each post substantial amounts of liquid collateral on an initial (initial margin) and mark-to-market (variation margin) basis to cover the clearinghouse's potential future exposure in the event of default. The clearing requirements require us to post substantial amounts of liquid collateral when executing new derivative instruments, which could negatively impact our liquidity and capital resources and may prevent or limit us from utilizing derivative instruments to manage interest rate sensitivity and risks. However, the clearing requirements reduce counterparty risk associated with over-the-counter derivative instruments executed by us after June 10, 2013. For derivatives executed on and prior to June 10, 2013 or not required to be executed through an exchange or central clearinghouse ("non-centrally cleared derivatives"), we are exposed to credit risk. However, the majority of our derivatives currently outstanding and anticipated to be executed in future periods are and will be executed and cleared at a regulated clearinghouse, thus, significantly reducing counterparty credit risk on our derivative portfolio. 19 Interest rate movements have an impact on the amount of collateral we are required to deposit with our derivative instrument counterparties (for non-centrally cleared derivatives) and variation margin payments with our clearinghouse (for centrally cleared derivatives). We attempt to manage market risk associated with interest rates by establishing and monitoring limits as to the types and degree of risk that may be undertaken. Our derivative portfolio and hedging strategy is reviewed periodically by our internal risk committee and our board of directors' Risk and Finance Committee. With our current derivative portfolio, which consists primarily of interest rate swaps to hedge floor income and basis swaps to hedge basis and repricing risk, we do not currently anticipate a near term movement in interest rates having a material impact on our liquidity or capital resources, nor expect future movements in interest rates to have a material impact on our ability to meet potential collateral deposit requirements with our counterparties and/or make variation margin payments to our clearinghouse. Based on the interest rate swaps outstanding as of December 31, 2019, if the forward interest rate curve was 50 basis points lower for the remaining duration of these derivatives, we would have been required to pay approximately $10 million in additional collateral and/or variation margin. In addition, if the forward basis curve between one-month and three- month LIBOR experienced a ten basis point reduction in spread for the remaining duration of our 1:3 Basis Swaps (in which we pay one-month LIBOR and receive three-month LIBOR), we would have been required to post approximately $25 million in additional collateral and/or variation margin. Due to the existing low interest rate environment, our exposure to downward movements in interest rates on our interest rate swaps is limited. In addition, we believe the historical high correlation between one-month and three-month LIBOR limits our exposure to interest rate movements on the 1:3 Basis Swaps. However, if interest rates move materially and negatively impact the fair value of our derivative portfolio, the replacement of LIBOR as a benchmark rate as discussed below has significant adverse impacts on our derivatives, or if we enter into additional derivatives in which the fair value of such derivatives becomes negative, we could be required to pay a significant amount of collateral to our derivative instrument counterparties and/or variation margin to our clearinghouse. These payments, if significant, could negatively impact our liquidity and capital resources. Interest rate risk - replacement of LIBOR as a benchmark rate The London Interbank Offered Rate (“LIBOR”) is a widely accepted interest rate benchmark referenced in financial contracts globally and is used to determine interest rates on commercial and consumer loans, bonds, derivatives, and numerous other financial instruments. As of December 31, 2019, the interest earned on a principal amount of $18.9 billion in our FFELP student loan asset portfolio was indexed to one-month LIBOR, and the interest paid on a principal amount of $18.4 billion of our FFELP student loan asset- backed debt securities was indexed to one-month or three-month LIBOR. In addition, the majority of our derivative financial instrument transactions used to manage LIBOR interest rate risks are indexed to LIBOR. In July 2017, the United Kingdom’s Financial Conduct Authority, which regulates LIBOR, announced that it intends to stop compelling banks to submit LIBOR rates after 2021. Accordingly, there is significant uncertainty regarding the availability of LIBOR as a benchmark rate after 2021. In April 2018, the Federal Reserve Bank of New York commenced publication of three reference rates based on overnight United States Treasury repurchase agreement transactions, including the Secured Overnight Financing Rate (“SOFR”), which has been recommended as an alternative to United States dollar LIBOR by the Alternative Reference Rates Committee. Uncertainty exists as to the transition process and broad acceptance of SOFR as the primary alternative to LIBOR, including what effect it would have on the value of LIBOR-based securities, financial contracts, and variable rate loans. Although the indentures for student loan asset-backed debt securities issued in our most recent LIBOR- indexed securitization transactions include new interest rate determination fallback provisions emerging in the market for new issuances of LIBOR-indexed debt securities, many of the contracts for our existing LIBOR-indexed assets, liabilities, and derivative instruments from historical transactions do not include provisions that contemplated the possibility of a permanent discontinuation of LIBOR and clearly specified a method for transitioning from LIBOR to an alternative benchmark rate, and it is not yet known how the market in general, specific counterparties in particular, the courts, or regulators will address the significant complexities and uncertainties involved in a transition away from LIBOR to an alternative benchmark rate. Specifically, the Department has not yet indicated any market transition away from the current LIBOR framework for paying special allowance payments to holders of FFELP assets. As a result, we cannot predict the impact that a transition from LIBOR to an alternative benchmark rate would have on our existing LIBOR-indexed assets, liabilities, and derivative instruments, but such impact could have material adverse effects on the value, performance, and related cash flows of such LIBOR-indexed items, including our funding costs, net interest income, loan and other asset values, and asset-liability management strategies. In particular, any such transition could: • adversely affect the interest rates paid or received on, the income and expenses associated with, and the pricing and value of our LIBOR-based assets and liabilities, which include the majority of our FFELP student loan assets and FFELP student loan asset-backed debt securities issued to fund those assets, as well as the majority of our derivative 20 financial instruments we use to manage LIBOR-based interest rate risks associated with such FFELP student loan- related assets and liabilities; • result in uncertainty or differences in the calculation of the applicable interest rate or payment amounts on our LIBOR- based assets and liabilities depending on the terms of the governing instruments, which in turn could result in disputes, litigation, or other actions with counterparties regarding the interpretation and enforceability of certain fallback language in LIBOR-based securities and contracts, and the potential renegotiation of previous contracts; • make future asset-backed securitizations more difficult to complete or more expensive until LIBOR or alternative benchmark rate uncertainties are resolved; and • result in basis risk if the alternative benchmark rate on our loan assets does not match the alternative benchmark rate for the funding for those assets. In addition, a transition away from LIBOR to an alternative benchmark rate or rates may impact our existing transaction data, systems, operations, pricing, and risk management processes, and require significant efforts to transition to or develop appropriate systems and analytics to reflect a new benchmark rate environment. There can be no assurance that such efforts will successfully mitigate the financial and operational risks associated with a transition away from LIBOR. Prepayment risk Higher rates of prepayments of student loans, including consolidations by the Department through the Federal Direct Loan Program or private refinancing programs, would reduce our interest income. Pursuant to the Higher Education Act, borrowers may prepay loans made under the FFEL Program at any time without penalty. Prepayments may result from consolidations of student loans by the Department through the Federal Direct Loan Program or by a lending institution through a private education or unsecured consumer loan, which historically tend to occur more frequently in low interest rate environments; from borrower defaults, which will result in the receipt of a guaranty payment; and from voluntary full or partial prepayments; among other things. Legislative risk exists as Congress evaluates proposals to reauthorize the Higher Education Act. If the federal government and the Department initiate additional loan forgiveness, other repayment options or plans, or consolidation loan programs, such initiatives could further increase prepayments and reduce interest income, and could also reduce servicing fees. The rate of prepayments of student loans may be influenced by a variety of economic, social, political, and other factors affecting borrowers, including interest rates, federal budgetary pressures, and the availability of alternative financing. Our profits could be adversely affected by higher prepayments, which reduce the balance of loans outstanding and, therefore, the amount of interest income we receive. Credit risk Future losses due to defaults on loans held by us present credit risk which could adversely affect our earnings. The vast majority (97.7 percent) of our student loan portfolio is federally guaranteed. The allowance for loan losses from the federally insured loan portfolio is based on periodic evaluations of our loan portfolios, considering loans in repayment versus those in nonpaying status, delinquency status, trends in defaults in the portfolio based on Company and industry data, past experience, trends in student loan claims rejected for payment by guarantors, changes to federal student loan programs, current economic conditions, and other relevant qualitative factors. The federal government currently guarantees 97 percent of the principal and interest on federally insured student loans disbursed on and after July 1, 2006 (and 98 percent for those loans disbursed on and after October 1, 1993 and prior to July 1, 2006), which limits our loss exposure on the outstanding balance of our federally insured portfolio. Student loans disbursed prior to October 1, 1993 are fully insured for both principal and interest. Our private education and consumer loans are unsecured, with neither a government nor a private insurance guarantee. Accordingly, we bear the full risk of loss on these loans if the borrower and co-borrower, if applicable, default. In determining the adequacy of the allowance for loan losses on the private education and consumer loans, we consider several factors, including: loans in repayment versus those in a nonpaying status, delinquency status, type of program, and trends in defaults in the portfolio based on Company and industry data, past experience, current economic conditions, and other relevant qualitative factors. We place our private education and consumer loans on nonaccrual status when the collection of principal and interest is 90 days past due, and charge off the loan when the collection of principal and interest is 120 days or 180 days past due, depending on the type of loan program. We are actively expanding our acquisition of private education and consumer loan portfolios, which increases our exposure to credit risk. 21 The evaluation of the allowance for loan losses is inherently subjective, as it requires material estimates that may be subject to significant changes. As of December 31, 2019, our allowance for loan losses was $61.9 million. During the year ended December 31, 2019, we recognized a provision for loan losses of $39.0 million. The provision for loan losses reflects the activity for the applicable period and provides an allowance at a level that management believes is appropriate to cover probable losses inherent in the loan portfolio. In June 2016, the Financial Accounting Standards Board issued Accounting Standards Update (“ASU”) No. 2016-13, Financial Instruments — Credit Losses, which replaces the current “incurred loss” model for recognizing credit losses with an “expected loss” model referred to as the Current Expected Credit Loss (“CECL”) model. The new CECL standard became effective for us on January 1, 2020. Under the CECL model, we are required to measure and recognize an allowance for loan losses that estimates remaining expected credit losses for financial assets held at the reporting date. This will result in us presenting certain financial assets carried at amortized cost, such as our loans held for investment, at the net amount expected to be collected. The measurement of expected credit losses is to be based on information about past events, including historical experience, current conditions, and reasonable and supportable forecasts that affect the collectability of the reported amount. This measurement takes place at the time the financial asset is first added to the balance sheet and periodically thereafter. This differs significantly from the “incurred loss” model (the model used by us to recognize credit losses for all periods prior to January 1, 2020), which delays recognition until it is probable a loss has been incurred. See the MD&A - “Recent Accounting Pronouncements - Allowance for Loan Losses” for further details on the expected impact on our consolidated financial statements from the adoption of the CECL accounting standard. If future defaults on loans held by us are higher than anticipated, which could result from a variety of factors such as downturns in the economy, regulatory or operational changes, and other unforeseen future trends, or actual performance is significantly worse than currently estimated, our estimate of the allowance for loan losses and the related provision for loan losses in our statements of income would be materially affected. Liquidity and Funding The current maturities of our loan warehouse financing facilities do not match the maturities of the related funded loans, and we may not be able to modify and/or find alternative funding related to the loan collateral in these facilities prior to their expiration. The majority of our portfolio of student loans is funded through asset-backed securitizations that are structured to substantially match the maturities of the funded assets, and there are minimal liquidity issues related to these facilities. We also have loans funded in shorter term warehouse facilities. The current maturities of these facilities do not match the maturity of the related funded assets. Therefore, we will need to modify and/or find alternative funding related to the loan collateral in these facilities prior to their expiration. As of December 31, 2019, we maintained two FFELP warehouse facilities as described in note 4 of the notes to consolidated financial statements included in this report. The FFELP warehouse facilities have revolving financing structures supported by liquidity provisions, which expire in May 2020. In the event we are unable to renew the liquidity provisions for a facility, the facility would become a term facility at a stepped-up cost, with no additional student loans being eligible for financing, and we would be required to refinance the existing loans in the facility by the final maturity dates in May 2021 and May 2022, respectively. The FFELP warehouse facilities also contain financial covenants relating to levels of our consolidated net worth, ratio of recourse indebtedness to adjusted EBITDA, and unencumbered cash. Any noncompliance with these covenants could result in a requirement for the immediate repayment of any outstanding borrowings under the facilities. As of December 31, 2019, $778.1 million was outstanding under the FFELP warehouse facilities and $42.6 million was advanced as equity support. We also have a consumer loan warehouse facility that has an aggregate maximum financing amount available of $200.0 million, an advance rate of 70 or 75 percent depending on the type of collateral and subject to certain concentration limits, liquidity provisions to April 23, 2021, and a final maturity date of April 23, 2022. As of December 31, 2019, $116.6 million was outstanding and $41.3 million was advanced as equity support under this warehouse facility. In addition, on February 13, 2020, we closed on a private loan warehouse facility with an aggregate maximum financing amount available of $100.0 million, an advance rate of 90 percent, liquidity provisions through February 15, 2021, and a final maturity date of February 11, 2022. If we are unable to obtain cost-effective funding alternatives for the loans in the warehouse facilities prior to the facilities' maturities, our cost of funds could increase, adversely affecting our results of operations. If we cannot find any funding alternatives, we would lose our collateral, including the loan assets and cash advances, related to these facilities. 22 We are exposed to mark-to-formula collateral support risk on one of our FFELP warehouse facilities. One of our FFELP warehouse facilities has a static advance rate until the expiration date of the liquidity provisions (May 2020). 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. As of December 31, 2019, $489.3 million was outstanding under this warehouse facility and $21.7 million was advanced as equity support. In the event that the liquidity provisions are not renewed, a significant change in the valuation of loans could result in additional required equity funding support for this warehouse facility greater than what we can provide, which could result in an event of default resulting in termination of the facility and an acceleration of the repayment provisions. If we cannot find any funding alternatives, we would lose our collateral, including the student loan assets and cash advances, related to this facility. A default on the FFELP warehouse facility would also result in an event of default on our $455.0 million unsecured line of credit that would result in the outstanding balance on the line of credit becoming immediately due and payable. Changes in ratings on asset-backed securitization transactions, including those we sponsor, can have a material adverse impact on our ability to access the asset-backed securities market. After securitizations are initially issued, if their performance does not align with rating agencies' expectations at the time of issuance, or if the rating agencies modify their assumptions and methodologies used for rating student loan securitizations, it is possible that initial high quality ratings on our subsidiaries’ securitizations, or those of other asset-backed securities issuers, could be materially lowered. Such actions could adversely affect our ability to access the asset-backed securities market, or make new securitization transactions more expensive by requiring us to pay a higher spread over LIBOR when pricing new bonds. Operations Risks associated with our operations, as further discussed below, include those related to the importance of maintaining scale by retaining existing customers and attracting new business opportunities, our information technology systems and potential security and privacy breaches, and our ability to manage performance related to regulatory requirements. Our largest fee-based customer, the Department of Education, represented 30 percent of our revenue in 2019. Failure to extend the Department contracts or obtain new Department contracts for different components, our inability to consistently surpass competitor performance metrics, or unfavorable contract modifications or interpretations, could significantly lower loan servicing revenue and hinder future servicing opportunities. With the acquisition of Great Lakes, we are two of four TIVAS awarded a student loan servicing contract by the Department to provide additional servicing capacity for loans owned by the Department. The Department also has contracts with 31 NFP entities to service student loans, although currently five NFP servicers service the volume allocated to these 31 entities. As of December 31, 2019, Nelnet Servicing was servicing $183.8 billion of student loans for 5.6 million borrowers under its contract, and Great Lakes was servicing $240.0 billion of student loans for 7.4 million borrowers under its contract. For the year ended December 31, 2019, we recognized $343.6 million in revenue from the Department under these contracts, which represented 30 percent of our revenue. The current servicing contracts with the Department expire on December 14, 2020 and provide the potential for two additional six-month extensions at the Department’s discretion through December 14, 2021. The Department's Office of Federal Student Aid (“FSA”) is conducting a contract procurement process entitled Next Generation Financial Services Environment (“NextGen”) for a new framework for the servicing of all student loans owned by the Department. On January 15, 2019, FSA issued solicitations for three new NextGen components: • • • NextGen Enhanced Processing Solution (“EPS”) NextGen Business Process Operations (“BPO”) NextGen Optimal Processing Solution (“OPS”) On April 1, 2019 and October 4, 2019, the Company responded to the EPS component. On January 16, 2020 FSA released an amendment to the EPS component and the Company responded on February 3, 2020. In addition, on August 1, 2019, the Company responded to the BPO component. On January 10, 2020 FSA released an amendment to the BPO component and the Company responded on January 30, 2020. The Company is also part of a team that has responded and intends to respond to various aspects of the OPS component; however, on November 12, 2019, FSA put an indefinite hold on the OPS solicitation. 23 In the event that our servicing contracts are not extended beyond the current expiration date or we are not chosen as a subsequent servicer, loan servicing revenue would decrease significantly. There are significant risks and uncertainties regarding the current Department contracts and potential future Department contracts, including potential delays, cancellations, or material changes to the structure of the contract procurement process, and uncertainties as to the terms and requirements under a potential new contract or contracts with the Department. We cannot predict the timing or outcome of the Department's contract procurement solicitations. New loan volume is currently allocated among the four TIVAS and five NFP servicers based on certain performance metrics established by the Department and compared among all loan servicers in this group. The amount of future allocations of new loan volume could be negatively impacted if we are unable to consistently surpass comparable competitor and/or other performance metrics. In the event the current Department servicing contracts become subject to unfavorable modifications or interpretations by the Department, loan servicing revenue could decrease significantly. For example, as of January 2020, a change instituted by the Department required enrollment in the Ongoing Security Authorization (OSA) program that requires quarterly control assessments. The OSA program replaced the previous Authority to Operate (ATO) triennial assessment process. Because the OSA program is a novel process, we may encounter unforeseen issues with the Department, including differing interpretations on compliance controls and reporting requirements. Our inability to remediate any such issues to the satisfaction of the Department may cause a temporary or permanent injunction on servicing student loans under the contracts. Additionally, we are partially dependent on the existing Department contracts to broaden servicing operations with the Department, other federal and state agencies, and commercial clients. The size and importance of these contracts provide us the scale and infrastructure needed to profitably expand into new business opportunities. Failure to extend the Department contracts beyond the current expiration date, or obtain new Department contracts, could significantly hinder future opportunities, as well as result in potential impairment and restructuring charges that may be necessary to re-align our cost structure with our servicing operations. A failure of our operating systems or infrastructure could disrupt our businesses, cause significant losses, result in regulatory action, and damage our reputation. We operate many different businesses in diverse markets and depend on the efficient and uninterrupted operation of our computer network systems, software, datacenters, cloud services providers, telecommunications systems, and the rest of our operating systems and infrastructure to process and monitor large numbers of daily transactions in compliance with contractual, legal, regulatory, and our own standards. Such systems and infrastructure could be disrupted because of a cyberattack, spikes in transaction volume, power outages, telecommunications failures, degradation or loss of internet or website availability, natural disasters, political or social unrest, and terrorist acts. A significant adverse incident could damage our reputation and credibility, lead to customer dissatisfaction and loss of customers or revenue, and result in regulatory action, in addition to increased costs to service our customers and protect our network. Such event also could result in large expenditures to repair or replace the damaged properties, networks, or information systems or to protect them from similar events in the future. System redundancy may be ineffective or inadequate, and our business continuity plans may not be sufficient for all eventualities. Any significant loss of customers or revenue, or significant increase in costs of serving those customers, could adversely affect our growth, financial condition, and results of operations. Operating system and infrastructure risks continue to increase in part because of the proliferation of new technologies, the use of the internet and telecommunications technologies to support and process customer transactions, the increased number and complexity of transactions being processed, and the increased sophistication and activities of organized crime, hackers, terrorists, activists, and other external parties. In addition, to access our services and products, our customers may use personal smartphones, tablet PCs, and other mobile devices that are beyond our control systems. Malicious and abusive activities, such as the dissemination of computer viruses, worms, and other destructive or disruptive software, internal and external threats, computer hackings, social engineering, process breakdowns, denial of service attacks, ransomware or ransom demands to not expose vulnerabilities in systems, and other malicious activities have become more common. These activities could have adverse consequences on our network and our customers, including degradation of service, excessive call volume, and damage to our or our customers' equipment and data. Although to date we have not experienced a material loss relating to cyberattacks or system outage, there can be no assurance that we will not suffer such losses in the future or that there is not a current threat that remains undetected at this time. Our risk and exposure to these matters remains heightened because of, among other things, the evolving nature of these threats, and the size and scale of our services. We could also incur losses resulting from the risk of unauthorized access to our computer systems, the execution of unauthorized transactions by employees, errors relating to transaction processing and technology, breaches of the internal 24 control system and compliance requirements, and failures to properly execute business continuation and disaster recovery plans. In the event of a breakdown in the internal control system, improper operation of systems, or unauthorized employee actions, we could suffer financial loss, potential legal actions, fines, or civil monetary penalties that could arise as a result of an operational deficiency or as a result of noncompliance with applicable regulatory standards, adverse business decisions or their implementation, and customer attrition due to potential negative publicity and damage to our reputation. As a result of the above risks, we continue to develop and enhance our training, controls, processes, and practices designed to protect, monitor, and restore our systems, computers, software, data, and networks from attack, damage, or unauthorized access, and this remains a priority for us, each of our business segments, and our Board of Directors. Even though we maintain technology and telecommunication, professional services, media, network security, privacy, injury, and liability insurance coverage to offset costs that may be incurred as a result of a cyberattack, information security breach, or extended system outage, this insurance coverage may not cover all costs of such incidents. A security breach of our information technology systems could result in the disclosure of confidential customer and other information, significant financial losses and legal exposure, and damage to our reputation. Our operations rely on the secure processing, storage and transmission of personal, confidential and other information in our information technology systems, including customer, personnel, and vendor data. Although we devote significant resources to maintain and regularly upgrade our systems and processes that are designed to protect the security of our systems, software and networks and to protect the confidentiality, integrity and availability of information belonging to us and our customers, we experience increasingly numerous and more sophisticated daily attacks on our systems, and our security measures may not be entirely effective. We may not be able to anticipate or to implement effective preventive measures against all types of potential security breaches, because the techniques used change frequently, generally increase in sophistication, often are not recognized until launched, sometimes go undetected even when successful, and result in security attacks originating from a wide variety of sources, including organized crime, hackers, terrorists, activists, hostile foreign governments, and other external parties. Those parties may also attempt to fraudulently induce employees, customers, or other users of our systems to disclose sensitive information to gain access to our data or that of our customers, such as through “phishing” schemes. These risks may increase in the future as we continue to increase our mobile and internet-based product offerings and expand our internal usage of web-based products and applications. In addition, our customers often use their own devices, such as computers, smart phones, and tablet computers, to make payments and manage their accounts. We have limited ability to assure the safety and security of our customers’ transactions to the extent they are using their own devices, which could be subject to similar threats. A penetration or circumvention of our information security systems, or the intentional or unintentional disclosure, alteration or destruction by an authorized user of confidential information necessary for our operations, could result in serious negative consequences for us. These consequences may include violations of applicable privacy and other laws; financial loss to us or to our customers; loss of confidence in our security measures; customer dissatisfaction; significant litigation exposure; regulatory fines, penalties or intervention; reimbursement or other compensatory costs; additional compliance costs; significant disruption of our business operations; and harm to our reputation. Although to date we have not experienced a material loss relating to information security breaches, there can be no assurance that we will not suffer such losses in the future or that there is not a current threat that remains undetected at this time. In addition, we routinely transmit and receive large volumes of personal, confidential and proprietary information through third parties. Although we work to ensure that third parties with which we do business maintain information security systems and processes, those measures may not be entirely effective, and an information security breach of a third-party system may not be revealed to us in a timely manner, which could compromise our ability to respond effectively. An interception, misuse or mishandling of personal, confidential or proprietary information being sent to or received from a third party could result in material adverse legal liability, regulatory actions, disruptions, and reputational harm with respect to our businesses. We could suffer adverse consequences to the extent that natural disasters, terrorist activities, or international hostilities affect the financial markets or the economy in general or in any particular region. Natural disasters, terrorist activities, or international hostilities affecting the financial markets or the economy in general or in any particular region could lead, for example, to an increase in loan delinquencies, borrower bankruptcies, or defaults that could result in higher levels of nonperforming assets, net charge-offs, and provisions for credit losses. Our ability to mitigate the adverse consequences of these occurrences is in part dependent on the quality of our resiliency planning, and our ability, if any, to anticipate the nature of any such event that occurs. The adverse impact of natural disasters, terrorist activities, or international hostilities also could be increased to the extent that there is a lack of preparedness on the part of national or regional emergency responders or on the part of other organizations and businesses that we transact with, particularly those that we depend upon, but have no control over. Additionally, the force and frequency of natural disasters are increasing as the climate changes. 25 Negative publicity could damage our reputation and adversely impact business and financial results. Negative public opinion about the Company, our operating segments, or the industries in which we serve could adversely affect our ability to retain and attract customers and employees, and expose us to litigation and regulatory action. Negative public opinion can result from our actual or alleged conduct in any number of activities, including but not limited to lending practices, cybersecurity breaches, failures to safeguard personal information, loan servicing practices, corporate governance, sales and marketing practices, regulatory compliance, mergers and acquisitions, and actions taken by government regulators and community organizations in response to that conduct. Because most of our businesses operate under the Nelnet brand, actual or alleged conduct by one business can result in negative public opinion about other businesses that we operate. Although we take steps to minimize reputational risk in dealing with customers and other constituencies, we are inherently exposed to this risk. In addition, third parties with whom we have important relationships may take actions over which we have limited control that could negatively impact perceptions about us or the industries in which we serve. The proliferation of social media may increase the likelihood that negative public opinion from any of the events discussed above will impact our reputation and business. Our business may suffer if we are not able to retain and attract skilled and qualified employees. Our success depends, in large part, on our ability to continually attract and retain key employees. Competition for the best people in our industry can be intense. If we are not able to hire sufficient, qualified employees to support our technology and business operations, or to train, motivate, and retain our employees, it could have a material adverse effect on our financial results. We must adapt to rapid technological change. If we are unable to take advantage of technological developments, or if we adopt and implement them more slowly than our competitors, we may experience a decline in the demand for our products and services. Our long-term operating results depend substantially upon our ability to continually enhance, develop, introduce, and market new products and services. We must continually and cost-effectively maintain and improve our information technology systems and infrastructure in order to successfully deliver competitive and cost effective products and services to our customers. The widespread adoption of new technologies and market demands could require substantial expenditures to enhance system infrastructure and existing products and services. If we fail to enhance and scale our systems and operational infrastructure or products and services, our operating segments may lose their competitive advantage and this could adversely affect financial and operating results. Our software products may experience quality problems and development delays, which could damage client relations, our potential profitability, and expose us to liability. Our products, primarily in our NDS and NBS segments, are based on sophisticated software and computing systems that often encounter development delays, and the underlying software may contain undetected bugs or other defects that interfere with its intended operation. Quality problems with our software products and errors or delays in our processing of electronic transactions could result in additional development costs, diversion of technical and other resources from our other development efforts, loss of credibility with current or potential clients, harm to our reputation, or exposure to liability claims. In addition, we rely on technologies supplied to us by third parties that may also contain undetected errors or defects that could have a material adverse effect on our business, financial condition, and results of operations. We rely on third parties for a wide array of services for our customers, and to meet our contractual obligations. The failure of a third party with which we work could adversely affect our business performance and reputation. We rely on third parties for a wide array of critical operational services, technology, datacenter hosting facilities, cloud computing platforms, and software. We also rely upon data from external sources to maintain our proprietary databases, including data from customers, business partners, and various government sources. Our third-party service providers may be vulnerable to damage or interruption from earthquakes, floods, fires, power loss, cyberattacks, telecommunications failures, and similar events. They may also be subject to break-ins, sabotage, intentional acts of vandalism, and similar misconduct, as well as local administrative actions, changes to legal or permitting requirements, and litigation to stop, limit or delay operations. If a third-party service provider experiences an outage, we may temporarily lose the ability to conduct certain business activities, which could impact our ability to serve our customers and meet our contractual, legal or regulatory compliance obligations. Our businesses would also be harmed if our customers and potential customers believe our services are unreliable. Despite existing precautionary measures, the occurrence of a natural disaster or an act of terrorism, a decision to discontinue services without adequate notice to us, or other unanticipated problems with third-party service providers could result in lengthy interruptions in our services. Even with disaster recovery and business continuity arrangements, our services could be interrupted. Some of our third-party service providers may engage vendors of their own as 26 they provide services or technology solutions for our operations, which introduces the same risks that these “fourth parties” could be the source of operational failures. impact on counterparties or other market participants, In addition, interruptions at financial or other institutions engaged in data processing and important to the overall functioning of the financial system could also adversely affect, directly or indirectly, aspects of our businesses. The increasing consolidation, interdependence, and complexity of financial entities and technology systems means that a technology failure, cyberattack, or other breach that significantly degrades, deletes, or compromises the systems or data of one or more financial entities could including our businesses. This consolidation, have a material interconnectivity, and complexity increases the risk of operational failure, on both an entity-specific and an industry-wide basis. Third parties that facilitate our business activities, including exchanges, clearinghouses, payment networks, or financial intermediaries, could also be sources of operational risks to our businesses, including with respect to breakdowns or failures of their systems, misconduct by their employees, or cyberattacks that could affect their ability to deliver a product or service to us or result in the loss or compromise of our information or the information of our customers. Our ability to implement back-up systems or other safeguards with respect to third-party systems is limited. Furthermore, an attack on, or failure of, a third-party system may not be revealed to us in a timely manner, which could compromise our ability to respond effectively. While we have selected the third parties with which we do business carefully, we do not control their actions. Any problems caused by third-party service providers, including as a result of not providing their services for any reason or performing their services poorly, could adversely affect our ability to deliver services and products to our customers and otherwise to conduct business. Replacing third-party service providers could also entail significant delay and expense. In addition, failure of third- party service providers to handle current or higher volumes of use could adversely affect our ability to deliver services and products to our customers and otherwise to conduct business. If any of these third parties experiences financial difficulties, system interruptions, regulatory violations, database disruptions, security threats, or they cannot otherwise meet our specifications, our ability to provide some services may be materially adversely affected, in which case our businesses, results of operations, and financial condition may be adversely affected. We must satisfy certain requirements necessary to maintain the federal guarantees of our federally insured loans and the federally insured loans that we service for third parties, and we may incur penalties or lose our guarantees if we fail to meet these requirements. As of December 31, 2019, we serviced $33.2 billion of FFELP loans that maintained a federal guarantee, of which $17.5 billion and $15.7 billion were owned by the Company and third-party entities, respectively. We must meet various requirements in order to maintain the federal guarantee on federally insured loans. The federal guarantee on federally insured loans is conditional based on compliance with origination, servicing, and collection policies set by the Department and guaranty agencies. If the Company misinterprets Department guidance, or incorrectly applies the Higher Education Act, the Department could determine that the Company is not in compliance. Federally insured loans that are not originated, disbursed, or serviced in accordance with the Department's and guaranty agency regulations may risk partial or complete loss of the guarantee. If we experience a high rate of servicing deficiencies (including any deficiencies resulting from the conversion of loans from one servicing platform to another, errors in the loan origination process, establishment of the borrower's repayment status, and due diligence or claim filing processes), it could result in the loan guarantee being revoked or denied. In most cases we have the opportunity to cure these deficiencies by following a prescribed cure process which usually involves obtaining the borrower's reaffirmation of the debt. However, not all deficiencies can be cured. A guaranty agency may also assess an interest penalty upon claim payment if the deficiency does not result in a loan rejection. These interest penalties are not subject to cure provisions and are typically related to isolated instances of due diligence deficiencies. Additionally, we may become ineligible for special allowance payment benefits from the time of the first deficiency leading to the loan rejection through the date that the loan is cured. As FFELP loan holders, servicers, and guaranty agencies exit the loan program and consolidation within the industry takes place, this increases the complexity of servicing and claim filing due to the amount of loan servicing and loan guaranty transfers and the opportunity for errors at the time a claim is filed. Failure to comply with federal and guarantor regulations may result in fines, penalties, the loss of the insurance and related federal guarantees on affected FFELP loans, the loss of special allowance payment benefits, expenses required to cure servicing deficiencies, suspension or termination of the right to participate as a FFELP servicer, negative publicity, and potential legal claims, including potential claims by our servicing customers if they lose the federal guarantee on loans that we service for them. If the Company is subjected to significant fines, or loss of insurance or guarantees on a material number of FFELP loans, or if the Company loses its ability to service FFELP loans, it could have a material, negative impact on the Company's business, financial condition, or results of operations. 27 Our contracts with the Department of Education expose us to additional risks inherent in government contracts. The Federal government could engage in a prolonged debate linking the federal deficit, debt ceiling, government shutdown, and other budget issues. If U.S. lawmakers in the future fail to reach agreement on these issues, the federal government could stop or delay payment on its obligations. Further, legislation to address the federal deficit and spending could impose proposals that would adversely affect the FFEL and Federal Direct Loan Programs' servicing businesses. We contract with FSA to administer loans held by FSA in both the FFEL and Federal Direct Loan Programs, we own a portfolio of FFELP loans, and we service our FFELP loans and loans for third parties. These loan programs are authorized by the Higher Education Act and subject to periodic reauthorization and changes to the programs by the Administration and U.S. Congress. The latest round of reauthorization is taking place currently. We cannot predict what will or will not be in the final law. However, any changes, including the potential for borrowers to refinance loans via Direct Consolidation Loans, could have a material impact to our cash flows from servicing, interest income, and operating margins. Government entities in the United States often reserve the right to audit contract costs and conduct inquiries and investigations of business practices. These entities also conduct reviews and investigations and make inquiries regarding systems, including systems of third parties, used in connection with the performance of the contracts. Negative findings from audits, investigations, or inquiries could affect the contractor’s future revenues and profitability. If improper or illegal activities are found in the course of government audits or investigations, we could become subject to various civil and criminal penalties, including those under the civil U.S. False Claims Act. Additionally, we may be subject to administrative sanctions, which may include termination or non-renewal of contracts, forfeiture of profits, suspension of payments, fines and suspensions, or debarment from doing business with other agencies of that government. Due to the inherent limitations of internal controls, it may not be possible to detect or prevent all improper or illegal activities. The Government could change governmental policies, regulatory environments, spending sentiment, and many other factors and conditions, some of which could adversely impact our business, financial condition, and results of operations. We cannot predict how or what programs or policies will be impacted by the federal government. The conditions described above could impact not only our contracts with the Department, but also other existing or future contracts with government or commercial entities. Our ability to continue to grow and maintain our contracts with commercial businesses and government agencies is partly dependent on our ability to maintain compliance with various laws, regulations, and industry standards applicable to those contracts. We are subject to various laws, regulations, and industry standards related to our commercial and government contracts. In most cases, these contracts are subject to termination rights, audits, and investigations. The laws and regulations that impact our operating segments are outlined in Part I, Item 1, “Regulation and Supervision.” Additionally, our contracts with the federal government require that we maintain internal controls in accordance with the National Institute of Standards and Technologies (“NIST”) and our operating segments that utilize payment cards are subject to the Payment Card Industry Data Security Standards (“PCI DSS”). If we are found to be in noncompliance with the contract provisions or applicable laws, regulations, or standards, or the contracted party exercises its termination or other rights for that or other reasons, our reputation could be negatively affected, and our ability to compete for new contracts or maintain existing contracts could diminish. If this were to occur, our results of operations from existing contracts and future opportunities for new contracts could be negatively affected. We could face significant legal and reputational harm if we fail to safeguard the privacy of personal information. We are subject to complex and evolving laws and regulations, both inside and outside of the United States, governing the privacy and protection of personal information of individuals. The protected individuals can include our customers, employees, and the customers and employees of our clients, vendors, counterparties, and other third parties. Ensuring the collection, use, transfer, and storage of personal information complies with applicable laws and regulations in relevant jurisdictions can increase operating costs, impact the development of new products or services, and reduce operational efficiency. Any mishandling or misuse of the personal information of customers, employees, or others by the Company or a third party affiliate could expose us to litigation or regulatory fines, penalties, or other sanctions. Additional risks could arise if we or an affiliated third party do not provide adequate disclosure or transparency to our customers about the personal information collected from them and its use; fail to receive, document, and honor the privacy preferences expressed by customers; fail to protect personal information from unauthorized disclosure; or fail to maintain proper training on privacy practices for all employees or third parties who have access to personal data. Concerns regarding the effectiveness of our measures to safeguard personal information and abide by privacy preferences, or even the perception that those measures are inadequate, could cause the loss of existing or potential customers and thereby reduce our revenue. In addition, any failure or perceived failure to comply with applicable privacy or data protection laws and regulations could result in requirements to modify or cease certain operations or practices, and/or significant liabilities, regulatory fines, penalties, and other sanctions. The regulatory framework for privacy issues is evolving and is likely to continue doing so for the foreseeable future, which creates uncertainty. Because the 28 interpretation and application of privacy and data protection laws and privacy standards are still uncertain, it is possible that these laws or privacy standards may be interpreted and applied in a manner that is inconsistent with our practices. Any inability to adequately address privacy concerns, even if unfounded, or to comply with applicable privacy or data protection laws, regulations, and privacy standards, could result in additional cost and liability for us, damage our reputation, and harm our business. Our failure to successfully manage business and certain asset acquisitions and other investments could have a material adverse effect on our business, financial condition, and/or results of operations. The success of our acquisition of ALLO in December 2015 and continued investment in the communications business depends in large part on the ability of ALLO to successfully develop and expand fiber networks in existing service areas and additional communities within acceptable cost parameters, gain market share in communities in existing service areas, and obtain acceptable market share levels in additional communities that we do not yet serve. ALLO may not be able to achieve those objectives and we may not realize the expected benefits from ALLO. In addition, the expected benefits are subject to risks related to our ability to successfully maintain technological competitive advantages with respect to the offered telecommunications, internet, television, telephone, and other related services and minimize potential system disruptions to the availability, speed, and quality of such services; potential changes in the marketplace, including potential decreases in market pricing for telecommunications and related services; potential changes in the demand for fiber optic internet, television, and telephone services; and increases in transport and content costs as discussed below. We acquired Great Lakes on February 7, 2018. The success of our acquisition of Great Lakes depends on our ability to successfully integrate technology and other operating activities and successfully maintain and increase allocated volumes of student loans serviced by Great Lakes and Nelnet Servicing under existing and any future servicing contracts with the Department. Great Lakes and Nelnet Servicing have also been working to develop a new, state-of-the-art servicing system for government-owned student loans. The servicing platform under development will utilize modern technology to effectively scale for additional volume, protect customer information, and support enhanced borrower experience initiatives. The expected benefits from the servicing platform under development may not be realized. We may acquire other new businesses, products, and services, or enhance existing businesses, products, and services, or make other investments to further diversify our businesses both within and outside of our historical education-related businesses, through acquisitions of other companies, product lines, technologies, and personnel, or through investments in new asset classes. Any acquisition or investment is subject to a number of risks. Such risks may include diversion of management time and resources, disruption of our ongoing businesses, difficulties in integrating acquisitions, loss of key employees, degradation of services, difficulty expanding information technology systems and other business processes to incorporate the acquired businesses, extensive regulatory requirements, dilution to existing shareholders if our common stock is issued in consideration for an acquisition or investment, incurring or assuming indebtedness or other liabilities in connection with an acquisition, unexpected declines in real estate values or the failure to realize expected benefits from real estate development projects, lack of familiarity with new markets, and difficulties in supporting new product lines. Our failure to successfully manage acquisitions or investments, or successfully integrate acquisitions, could have a material adverse effect on our business, financial condition, and/or results of operations. Correspondingly, our expectations as to the accretive nature of the acquisitions or investments could be inaccurate. Transport and content costs related to ALLO’s video products and services are substantial and continue to increase. The cost of video transport and content costs is expected to continue to be one of ALLO’s largest operating costs associated with providing television service. Television programming content includes cable-oriented programming, as well as the programming of local over-the-air television stations that ALLO retransmits. In addition, on-demand programming is being made available in response to customer demand. In recent years, the cable industry has experienced rapid increases in the cost of programming, especially the costs for sports programming and for local broadcast station retransmission consent. Programming costs are generally assessed on a per-subscriber basis, and therefore are related directly to the number of subscribers to which the programming is provided. ALLO’s relatively small base of subscribers limits our ability to negotiate lower per-subscriber programming costs, whereas larger providers can often obtain discounts based on the number of their subscribers. This cost difference can cause ALLO to experience reduced operating margins relative to our competitors with a larger subscriber base. In addition, escalators in existing content agreements cause cost increases that are greater than general inflation. While ALLO expects these increases to continue, it may not be able to pass programming cost increases on to customers, particularly as an increasing amount of programming content becomes available via the internet at little or no cost. Also, some competitors (or their affiliates) own national content companies and ALLO may be unable to secure license rights to that programming. As ALLO’s programming contracts with content providers expire, there can be no assurance that they will be renewed on acceptable terms or at all, in which case ALLO may be unable to provide such television programming, causing business results to be adversely affected. 29 If ALLO cannot obtain and maintain necessary rights-of-way for its communications network, ALLO's operations may be interrupted and it would likely face increased costs. ALLO is dependent on easements, franchises, pole attachments, and licenses from various private parties such as established telephone companies and other utilities, railroads, and long-distance companies, and from state highway authorities, local governments, and transit authorities for access to aerial pole space, underground conduits, and other rights-of-way in order to construct and operate its networks. Some agreements relating to rights-of-way may be short-term or revocable at will, and ALLO cannot be certain that it will continue to have access to existing rights-of-way after the governing agreements are terminated or expire. If any of ALLO's right-of-way agreements were terminated or could not be renewed, it may be forced to remove network facilities from the affected areas, relocate, or abandon networks, which would interrupt operations and force ALLO to find alternative rights-of-way, and make unexpected capital expenditures. If ALLO cannot successfully manage construction risks and uncertainties, the expansion of its communications networks may not be achieved within acceptable cost parameters or result in desired levels of market share. The success of our investment in ALLO depends on the ability of ALLO to successfully execute its current efforts and plans to construct expanded fiber communications networks to make its services available to additional homes and businesses. The construction of communications networks is subject to various risks and uncertainties, including risks and uncertainties related to the determination of the precise locations of easements and other rights-of-way necessary to construct and operate the networks, and the management of such construction in a manner that reasonably minimizes the disruption to other private property owners, including minimizing any unintended damage to property or equipment owned or utilized by private parties. If ALLO is not successful in managing these and similar construction risks, it could experience higher than expected costs and reputational damage that adversely impacts market share and future revenues, and the currently expected benefits from its expansion efforts and plans may not be realized. ALLO may incur liabilities or suffer negative financial impact relating to occupational, health, and safety matters or failure to comply with safety or environmental laws. Aerial and underground construction of new networks and service requires employees and contractors to work in the proximity of gas, electric, water, sewer, and other competitors’ utility services, and ALLO's operations are subject to extensive laws and regulations relating to the maintenance of safe conditions in the workplace. While ALLO has invested, and will continue to invest, substantial resources in its robust occupational, health, and safety programs, ALLO's business involves a high degree of operational risk, and there can be no assurance that it will avoid significant exposure. These hazards can cause personal injury and loss of life, severe damage to or destruction of property and equipment, and other consequential damages and could lead to suspension of operations, large damage claims and, in extreme cases, criminal liability. ALLO could also be subject to potential liabilities in the event it causes a release of hazardous substances or other environmental damage resulting from underground objects it encounters. Environmental laws and regulations can impose significant fines and criminal sanctions for violations. Costs associated with the discharge of hazardous substances may include clean-up costs and related damages or liabilities. These costs could be significant and could adversely affect ALLO's results of operations and cash flows. Industry changes and competitive pressures may harm revenues and profit margins, including future revenues and profit margins of our communications business through ALLO. We face aggressive price competition for our products and services and, as a result, we may have to lower our product and service prices to stay competitive, while at the same time, expand market share and maintain profit margins. Even if we maintain or increase market share for a product or service, revenue or profit margins could decline because the product or service is in a maturing market or market conditions have changed due to economic, political, or regulatory pressures. The internet, television, and telecommunications businesses are highly competitive. For a discussion of the competitive factors faced by ALLO, see Part I, Item I, "Communications - Competition." ALLO may not be able to successfully anticipate and respond to many of these various competitive factors affecting the industry, including regulatory changes that may affect competitors and ALLO differently, new technologies, services, and applications that may be introduced, and changes in consumer preferences, demographic trends, and discount or bundled pricing strategies by competitors which are larger and have more resources than ALLO. If ALLO does not compete effectively, it could lose customers, revenue, and market share; customers may reduce their usage of ALLO's services or switch to a less profitable service; and ALLO may need to lower prices or increase marketing efforts to remain competitive. Our enterprise risk management framework may not be effective in mitigating all risks. Our enterprise risk management framework seeks to mitigate risk and loss. Our established framework includes policies, processes, personnel, and control systems to identify, measure, monitor, control, and report risks. This framework is designed to 30 mitigate and appropriately balance risk exposure with the Company’s strategic objectives and desired returns. However, there may be risks that exist, or that develop in the future, that we have not anticipated, identified, or mitigated. If our enterprise risk management framework does not effectively identify and manage these risks, we could suffer litigation and negative regulatory consequences, unexpected losses, and our results of operations, cash flow, or financial condition could be materially adversely affected. Regulatory and Legal Federal and state laws and regulations can restrict our businesses and result in increased compliance expenses, and noncompliance with these laws and regulations could result in penalties, litigation, reputation damage, and a loss of customers. Our operating segments are heavily regulated by federal and state government regulatory agencies. See Part I, Item 1, "Regulation and Supervision." The laws and regulations enforced by these agencies are proposed or enacted to protect consumers and the financial industry as a whole, not necessarily the Company, our operating segments, or our shareholders. We have procedures and controls in place to monitor compliance with numerous federal and state laws and regulations. However, because these laws and regulations are complex, differ between jurisdictions, and are often subject to interpretation, or as a result of unintended errors, we may, from time to time, inadvertently be in non-compliance with these laws and regulations. Compliance with these laws and regulations is expensive and requires the time and attention of management. These costs divert capital and focus away from efforts intended to grow our business. If we do not successfully comply with laws, regulations, or policies, we could incur fines or penalties, lose existing or new customer contracts or other business, and suffer damage to our reputation. Changes in these laws and regulations can significantly alter our business environment, limit business operations, and increase costs of doing business, and we cannot predict the impact such changes would have on our profitability. The Consumer Financial Protection Bureau (CFPB) has the authority to supervise and examine large nonbank student loan servicers, including us. If in the course of such an examination the CFPB were to determine that we were not in compliance with applicable laws, regulations, and CFPB guidance, it is possible that this could result in material adverse consequences, including, without limitation, settlements, fines, penalties, public enforcement action, adverse regulatory actions, changes in our business practices, or other actions. In 2015, the CFPB conducted a public inquiry into student loan servicing practices and issued a report recommending the creation of consistent, industry-wide standards for the entire servicing market. The CFPB has also announced that it may issue student loan servicing rules in the future. There is significant uncertainty regarding how the CFPB's recommendations, strategies, and priorities will impact our businesses and our results of operations going forward. Actions by the CFPB could result in requirements to alter our services, causing them to be less attractive or effective and impair our ability to offer them profitably. In the event that the CFPB changes regulations adopted in the past by other regulators, or modifies past regulatory guidance, our compliance costs and litigation exposure could increase. Several states have enacted laws regulating and monitoring the activity of student loan servicers. Some of these laws stipulate additional licensing fees which increase our cost of doing business. Where we have obtained licenses, state licensing statutes may impose a variety of requirements and restrictions on us. In addition, these statutes may also subject us to the supervisory and examination authority of state regulators in certain cases, and we will be subject to and experience exams by state regulators. If we are found to not have complied with applicable laws, regulations, or requirements, we could: (i) lose one or more of our licenses or authorizations, (ii) become subject to a consent order or administrative enforcement action, (iii) face lawsuits (including class action lawsuits), sanctions, or penalties, or (iv) be in breach of certain contracts, which may void or cancel such contracts. We anticipate additional states adopting similar laws. As a result of the Reconciliation Act of 2010, interest income on our existing FFELP loan portfolio, as well as revenue from FFELP servicing and FFELP loan servicing software licensing and consulting fees, will continue to decline over time as our and our third-party lender clients' FFELP loan portfolios are paid down and FFELP clients exit the market. The Reconciliation Act of 2010 discontinued new loan originations under the FFEL Program effective July 1, 2010, and requires that all new federal loan originations be made through the Federal Direct Loan Program. Although the law did not alter or affect the terms and conditions of existing FFELP loans, interest income and revenue streams related to existing FFELP loans will continue to decline over time as existing FFELP loans are paid down, refinanced, or repaid by guaranty agencies after default. During the years ended December 31, 2019, 2018, and 2017, we recognized approximately $206 million, $230 million, and $290 million, respectively, of net interest income on our FFELP loan portfolio, and approximately $25 million, $32 million, and $16 million, respectively, in guaranty and third-party FFELP servicing revenue. In addition, the Company recognized 31 approximately $5 million in each of the last three years in FFELP loan servicing software licensing and consulting fees related to the FFEL Program. The 2018 increase in FFELP servicing revenue was due to the acquisition of Great Lakes, and these amounts will otherwise continue to decline over time as our and our third-party lender clients' FFELP loan portfolios are paid down and FFELP clients exit the market. If we are unable to grow or develop new revenue streams, our consolidated revenue and operating margin will decrease as a result of the decline in FFELP loan volume outstanding. Exposure related to certain tax issues could decrease our net income. Federal and state income tax laws and regulations are often complex and require interpretation. From time to time, we engage in transactions in which the tax consequences may be subject to uncertainty. Significant judgment is required in assessing and estimating the tax consequences of these transactions. We prepare and file tax returns based on the interpretation of tax laws and regulations. In the normal course of business, our tax returns are subject to examination by various taxing authorities. Such examinations may result in future tax and interest assessments by these taxing authorities. In accordance with authoritative accounting guidance, we establish reserves for tax contingencies related to deductions and credits that we may be unable to sustain. Differences between the reserves for tax contingencies and the amounts ultimately owed are recorded in the period they become known. Adjustments to our reserves could have a material effect on our financial statements. We may also be impacted by changes in tax laws, including tax rate changes, new tax laws, and subsequent interpretations of tax laws by federal and state tax authorities. In addition to corporate tax matters, as both a lender and servicer of student loans, we are required to report student loan interest received and cancellation of indebtedness to individuals and the Internal Revenue Service on an annual basis. These informational forms assist individuals in complying with their federal and state income tax obligations. The statutory and regulatory guidance regarding the calculations, recipients, and timing are complex and we know that interpretations of these rules vary across the industry. The complexity and volume associated with these informational forms creates a risk of error which could result in penalties or damage to our reputation. The Company invests in certain tax-advantaged projects promoting renewable energy resources (solar projects). The Company’s investments in these projects are designed to generate a return primarily through the realization of federal income tax credits, operating cash flows, and other tax benefits, over specified time periods. The Company’s investments in these projects may not generate returns as anticipated and may have an adverse impact on the Company’s financial results. The Company is subject to the risk that tax credits recorded currently and previously, which remain subject to recapture by taxing authorities based on compliance features required to be met at the project level, will fail to meet certain government compliance requirements and will not be able to be realized. The possible inability to realize these tax credits and other tax benefits can have a negative impact on the Company’s financial results. The risk of not being able to realize the tax credits and other tax benefits depends on many factors outside of the Company’s control, including changes in the applicable tax code and the ability of the projects to continue operation. Principal Shareholder and Related Party Transactions Our Executive Chairman beneficially owns 81.9 percent of the voting rights of our shareholders and effectively has control over all matters at our Company. Michael S. Dunlap, our Executive Chairman and a principal shareholder, beneficially owns 81.9 percent of the voting rights of our shareholders. Accordingly, each member of the Board of Directors and each member of management has been elected or effectively appointed by Mr. Dunlap and can be removed by Mr. Dunlap. As a result, Mr. Dunlap, as Executive Chairman and controlling shareholder, has control over all matters at our Company and has the ability to take actions that benefit him, but may not benefit other minority shareholders, and may otherwise exercise his control in a manner with which other minority shareholders may not agree or which they may not consider to be in their best interests. Our contractual arrangements and transactions with Union Bank and Trust Company ("Union Bank"), which is under common control with us, present conflicts of interest and pose risks to our shareholders that the terms may not be as favorable to us as we could receive from unrelated third parties. Union Bank is controlled by Farmers & Merchants Investment Inc. ("F&M"), which owns 81.4 percent of Union Bank's common stock and 15.4 percent of Union Bank's non-voting non-convertible preferred stock. Mr. Dunlap, a significant shareholder, as well as Executive Chairman, and a member of our Board of Directors, along with his spouse and children, owns or controls a total of 33.0 percent of the stock of F&M, including a total of 48.6 percent of the outstanding voting common stock of F&M, and Mr. Dunlap's sister, Angela L. Muhleisen, along with her spouse and children, owns or controls a total of 32 31.7 percent of F&M stock, including a total of 47.5 percent of the outstanding voting common stock of F&M. Mr. Dunlap serves as a Director and Chairman of F&M, and as a Director of Union Bank. Ms. Muhleisen serves as a Director and Chief Executive Officer of F&M and as a Director, Chairperson, President, and Chief Executive Officer of Union Bank. Union Bank is deemed to have beneficial ownership of a significant number of shares of Nelnet because it serves in a capacity of trustee or account manager for various trusts and accounts holding shares of Nelnet, and may share voting and/or investment power with respect to such shares. As of December 31, 2019, Union Bank was deemed to beneficially own 10.0 percent of the voting rights of our outstanding common stock. As of December 31, 2019, Mr. Dunlap and Ms. Muhleisen beneficially owned 81.9 percent and 12.0 percent, respectively, of the voting rights of our outstanding common stock (with certain shares deemed under applicable SEC rules to be beneficially owned by both Mr. Dunlap and Ms. Muhleisen). We have entered into certain contractual arrangements with Union Bank, including loan purchases, loan servicing, loan participations, banking and lending services, 529 Plan administration services, lease arrangements, trustee services, and various other investment and advisory services. The net aggregate impact on our consolidated statements of income for the years ended December 31, 2019, 2018, and 2017 related to the transactions with Union Bank was income (before income taxes) of $9.7 million, $9.2 million, and $12.5 million, respectively. See note 20 of the notes to consolidated financial statements included in this report for additional information related to the transactions between us and Union Bank. Transactions between Union Bank and us are generally based on available market information for comparable assets, products, and services and are extensively negotiated. In addition, all related party transactions between Union Bank and us are approved by both the Union Bank Board of Directors and our Board of Directors. Furthermore, Union Bank is subject to regulatory oversight and review by the FDIC, the Federal Reserve, and the State of Nebraska Department of Banking and Finance. The FDIC and the State of Nebraska Department of Banking and Finance regularly review Union Bank's transactions with affiliates. The regulatory standard applied to the bank falls under Regulation W, which places restrictions on certain “covered” transactions with affiliates. We intend to maintain our relationship with Union Bank, which our management believes provides certain benefits to us. Those benefits include Union Bank's knowledge of and experience in the FFELP industry, its willingness to provide services, and at times liquidity and capital resources, on an expedient basis, and the proximity of Union Bank to our corporate headquarters located in Lincoln, Nebraska. The majority of the transactions and arrangements with Union Bank are not offered to unrelated third parties or subject to competitive bids. Accordingly, these transactions and arrangements not only present conflicts of interest, but also pose the risk to our shareholders that the terms of such transactions and arrangements may not be as favorable to us as we could receive from unrelated third parties. Moreover, we may have and/or may enter into contracts and business transactions with related parties that benefit Mr. Dunlap and his sister, as well as other related parties, that may not benefit us and/or our minority shareholders. ITEM 1B. UNRESOLVED STAFF COMMENTS The Company has no unresolved comments from the staff of the Securities and Exchange Commission regarding its periodic or current reports under the Securities Exchange Act of 1934. ITEM 2. PROPERTIES The Company's headquarters are located in Lincoln, Nebraska. The Company owns or leases office space facilities primarily in Nebraska, Wisconsin, and Colorado. ALLO's physical assets consist of network plant and fiber, including signal receiving, encoding and decoding devices, headend reception facilities, distribution systems, and customer-located property. The network plant and fiber assets are generally attached to utility poles under pole rental agreements with local public utilities and telephone companies, or are buried in underground ducts or trenches, generally in utility easements. ALLO owns or leases real property for signal reception sites, and owns its own vehicles. ALLO's headend reception facilities and most offices are located on leased property. Additionally, ALLO leases office and warehouse facilities in most communities where it operates. The Company believes its existing office space facilities and equipment, which are used by all reportable segments, are in good operating condition and are suitable for the conduct of its business. ITEM 3. LEGAL PROCEEDINGS The Company is subject to various claims, lawsuits, and proceedings that arise in the normal course of business. These matters frequently involve claims by student loan borrowers disputing the manner in which their student loans have been serviced or the accuracy of reports to credit bureaus, claims by student loan borrowers or other consumers alleging that state or Federal 33 consumer protection laws have been violated in the process of collecting loans or conducting other business activities, and disputes with other business entities. In addition, from time to time the Company receives information and document requests from state or federal regulators concerning its business practices. The Company cooperates with these inquiries and responds to the requests. While the Company cannot predict the ultimate outcome of any regulatory examination, inquiry, or investigation, the Company believes its activities have materially complied with applicable law, including the Higher Education Act, the rules and regulations adopted by the Department thereunder, and the Department's guidance regarding those rules and regulations. On the basis of present information, anticipated insurance coverage, and advice received from counsel, it is the opinion of the Company's management that the disposition or ultimate determination of these claims, lawsuits, and proceedings will not have a material adverse effect on the Company's business, financial position, or results of operations. ITEM 4. MINE SAFETY DISCLOSURES Not applicable. PART II. ITEM 5. MARKET FOR REGISTRANT'S COMMON EQUITY, RELATED STOCKHOLDER MATTERS, AND ISSUER PURCHASES OF EQUITY SECURITIES The Company's Class A common stock is listed and traded on the New York Stock Exchange under the symbol “NNI,” while its Class B common stock is not publicly traded. The number of holders of record of the Company's Class A common stock and Class B common stock as of January 31, 2020 was 1,248 and 62, respectively. The record holders of the Class B common stock are Michael S. Dunlap, Shelby J. Butterfield, the estate of Stephen F. Butterfield, a family limited liability company controlled by Mr. Dunlap, an entity controlled by Mr. Dunlap and the Butterfield Family Trust, various members of the Dunlap and Butterfield families, and various other estate planning trusts established by them. Because many shares of the Company's Class A common stock are held by brokers and other institutions on behalf of shareholders, the Company is unable to estimate the total number of beneficial owners represented by these record holders. The Company paid quarterly cash dividends on its Class A and Class B common stock during the years ended December 31, 2018 and 2019 in amounts totaling $0.66 per share and $0.74 per share, respectively. The Company currently plans to continue making comparable regular quarterly dividend payments, subject to future earnings, capital requirements, financial condition, and other factors. 34 Performance Graph The following graph compares the change in the cumulative total shareholder return on the Company's Class A common stock to that of the cumulative return of the S&P 500 Index and the S&P 500 Financials Index. The graph assumes that the value of an investment in the Company's Class A common stock and each index was $100 on December 31, 2014 and that all dividends, if applicable, were reinvested. The performance shown in the graph represents past performance and should not be considered an indication of future performance. Company/Index 12/31/2014 12/31/2015 12/31/2016 12/31/2017 12/31/2018 12/31/2019 Nelnet, Inc. S&P 500 S&P 500 Financials $ 100.00 $ 73.25 $ 112.15 $ 122.55 $ 118.45 $ 100.00 100.00 101.38 98.47 113.51 120.92 138.29 147.75 132.23 128.50 133.42 173.86 169.78 The preceding information under the caption “Performance Graph” shall be deemed to be “furnished” but not “filed” with the Securities and Exchange Commission. 35 Period October 1 - October 31, 2019 November 1 - November 30, 2019 December 1 - December 31, 2019 Total (a) (b) Stock Repurchases The following table summarizes the repurchases of Class A common stock during the fourth quarter of 2019 by the Company or any “affiliated purchaser” of the Company, as defined in Rule 10b-18(a)(3) under the Securities Exchange Act of 1934. Total number of shares purchased (a) Average price paid per share $ 90 45 2,306 2,441 $ 60.03 61.13 61.31 61.26 Total number of shares purchased as part of publicly announced plans or programs (b) Maximum number of shares that may yet be purchased under the plans or programs (b) — — — — 4,803,877 4,803,877 4,803,877 The total number of shares consist of shares owned and tendered by employees to satisfy tax withholding obligations upon the vesting of restricted shares. Unless otherwise indicated, shares owned and tendered by employees to satisfy tax withholding obligations were purchased at the closing price of the Company’s shares on the date of vesting. On May 8, 2019, the Company announced that its Board of Directors authorized a new stock repurchase program to repurchase up to a total of five million shares of the Company's Class A common stock during the three-year period ending May 7, 2022. Equity Compensation Plans For information regarding the securities authorized for issuance under the Company's equity compensation plans, see Part III, Item 12 of this report. 36 ITEM 6. SELECTED FINANCIAL DATA The following table sets forth selected financial and other operating information of the Company. The selected financial data in the table is derived from the consolidated financial statements of the Company. The following selected financial data should be read in conjunction with the consolidated financial statements, the related notes, and the MD&A included in this report. Operating Data: Net interest income Loan servicing and systems revenue Education technology, services, and payment processing revenue Communications revenue Other income Net income attributable to Nelnet, Inc. Earnings per common share attributable to Nelnet, Inc. shareholders - basic and diluted: Dividends per common share Other Data: Fixed rate floor income, net of derivative settlements Core loan spread (a) Acquisition of loans (par value) $ $ $ Year ended December 31, 2019 2018 2017 2016 2015 (Dollars in thousands, except share data) 249,350 455,255 277,331 64,269 65,179 141,803 3.54 0.74 254,360 440,027 221,962 44,653 54,805 227,913 5.57 0.66 305,238 223,000 193,188 25,700 55,728 173,166 4.14 0.58 372,563 214,846 175,682 17,659 66,236 256,751 6.02 0.50 431,899 239,858 120,365 — 103,488 267,979 5.89 0.42 89,869 1.18 % 121,712 1.32 % 2,007,563 3,897,007 117,272 1.23 % 330,251 152,336 1.28 % 356,110 184,746 1.43 % 4,036,333 Loan servicing volume ($) (at end of period) 472,987,628 464,615,053 211,413,959 194,821,646 176,436,497 ALLO - residential households served 47,744 37,351 20,428 9,814 7,600 Balance Sheet Data: Cash and cash equivalents Loans receivable, net Goodwill and intangible assets, net Total assets Bonds and notes payable Nelnet, Inc. shareholders' equity Tangible Nelnet, Inc. shareholders' equity (b) Outstanding common shares Book value per common share Tangible book value per common share (b) Ratios: As of December 31, 2019 2018 2017 2016 2015 (Dollars in thousands, except share data) $ 133,906 121,347 66,752 69,654 63,529 20,669,371 22,377,142 21,814,507 24,903,724 28,324,552 238,444 23,708,970 20,529,054 2,386,712 2,148,268 271,202 25,220,968 22,218,740 2,304,464 2,033,262 177,186 23,964,435 21,356,573 2,149,529 1,972,343 195,125 27,193,095 24,668,490 2,061,655 1,866,530 197,062 30,419,144 28,105,921 1,884,432 1,687,370 39,730,104 40,258,105 40,810,104 42,105,044 43,953,460 60.07 54.07 57.24 50.51 52.67 48.33 48.96 44.33 42.87 38.39 Shareholders' equity to total assets 10.07 % 9.14 % 8.97 % 7.58 % 6.19 % (a) Core loan spread is a non-GAAP measure. See the MD&A - "Asset Generation and Management Operating Segment - Results of Operations - Loan Spread Analysis" for information on how core loan spread is computed and why management believes it is a useful measure, and a reconciliation to loan spread for 2019 and 2018. (b) Tangible Nelnet, Inc. shareholders' equity, a non-GAAP measure, equals "Nelnet, Inc. shareholders' equity" less "Goodwill and intangible assets, net." Management believes tangible shareholders' equity and the corresponding tangible book value per common share are useful supplemental non-GAAP measures to evaluate the strength of the Company's capital position and facilitate comparisons with other companies in the financial services industry. However, there is no comprehensive authoritative guidance for the presentation of these measures, and similarly titled measures may be calculated differently by other companies. 37 ITEM 7. MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS (Management’s Discussion and Analysis of Financial Condition and Results of Operations is for the years ended December 31, 2019 and 2018. 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, 2019 compared to the year ended December 31, 2018 is presented below. A discussion related to the results of operations and changes in financial condition for the year ended December 31, 2018 compared to the year ended December 31, 2017 can be found in Part II, Item 7. "Management's Discussion and Analysis of Financial Condition and Results of Operations" in the Company's 2018 Annual Report on Form 10-K, which was filed with the United States Securities and Exchange Commission on February 27, 2019. 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; education technology, services, and payment processing; and 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. 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 and foreign currency transaction adjustments, and a discussion of why the Company believes providing this additional information is useful to investors, is provided below. Year ended December 31, 2019 2018 GAAP net income attributable to Nelnet, Inc. $ 141,803 Realized and unrealized derivative market value adjustments Tax effect (a) 76,195 (18,287) 227,913 (1,014) 243 Net income attributable to Nelnet, Inc., excluding derivative market value adjustments (b) Earnings per share: GAAP net income attributable to Nelnet, Inc. Realized and unrealized derivative market value adjustments Tax effect (a) Net income attributable to Nelnet, Inc., excluding derivative market value adjustments (b) $ $ $ 199,711 227,142 3.54 1.90 (0.45) 4.99 5.57 (0.02) — 5.55 (a) (b) The tax effects are calculated by multiplying the realized and unrealized derivative market value adjustments by the applicable statutory income tax rate. "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. 38 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 decreased for the year ended December 31, 2019 compared to the same period in 2018 primarily due to the following factors: • • • • • The recognition of a net loss during 2019 as compared to a net gain in 2018 due to changes in the fair values of derivative instruments that do not qualify for hedge accounting; The recognition of $16.7 million ($12.7 million after tax) of expenses during 2019 to extinguish notes payable in certain asset-backed securitizations prior to the notes' contractual maturities; The decrease in the average balance of loans due to the amortization of the FFELP loan portfolio; The decrease in loan spread on the Company's loan portfolio and related derivative settlements; and The increase in the provision for loan losses related to the Company's growing portfolio of consumer loans. These factors were partially offset by the following items: • • The contribution to net income from the Company's Loan Servicing and Systems and Education Technology, Services, and Payment Processing operating segments; and The recognition of a $17.3 million ($13.1 million after tax) gain from the sale of consumer loans in 2019. 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, 2019, the Company had a $20.7 billion loan portfolio that management anticipates will amortize over the next approximately 20 years and has a weighted average remaining life of 8.8 years. 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") Communications - referred to as ALLO Communications ("ALLO") Other business activities and operating segments that are not reportable are combined and included in Corporate and Other Activities ("Corporate"). Corporate and Other Activities also includes income earned on certain investments and interest expense incurred on unsecured debt transactions. 39 The information below provides the operating results for each reportable operating segment and Corporate and Other Activities for the years ended December 31, 2019 and 2018 (dollars in millions). See "Results of Operations" for each reportable operating segment under this Item 7 for additional detail. (a) (b) Revenue includes intersegment revenue earned by LSS as a result of servicing loans for AGM. Total revenue includes "net interest income" and "total other income" from the Company's segment statements of income, excluding the impact from changes in fair values of derivatives. Net income excludes changes in fair values of derivatives, net of tax. For information regarding the exclusion of the impact from changes in fair values of derivatives adjustments, see "GAAP Net Income and Non-GAAP Net Income, Excluding Adjustments" above. Certain events and transactions from 2019 and 2018, which have impacted or will impact the operating results of the Company and its operating segments, are discussed below. Loan Servicing and Systems • • On February 7, 2018, the Company acquired Great Lakes. The operating results of Great Lakes are reported in the Company's consolidated financial statements from the date of acquisition. Thus, there are twelve months of Great Lakes' operations included in 2019 as compared to approximately eleven months of activity in 2018. Nelnet Servicing, LLC ("Nelnet Servicing") and Great Lakes Educational Loan Services, Inc. ("Great Lakes") have student loan servicing contracts awarded by the Department in June 2009 to provide servicing for loans owned by the Department. As of December 31, 2019, Nelnet Servicing was servicing $183.8 billion of student loans for 5.6 million borrowers under its contract, and Great Lakes was servicing $240.0 billion of student loans for 7.4 million borrowers under its contract. Nelnet Servicing and Great Lakes' servicing contracts with the Department previously provided for expiration on June 16, 2019. On May 15, 2019, Nelnet Servicing and Great Lakes each received a contract extension from the Department's Office of Federal Student Aid ("FSA") pursuant to which FSA extended the expiration date of the current contracts to December 15, 2019. On November 26, 2019, Nelnet Servicing and Great Lakes each received an additional extension from FSA on their contracts through December 14, 2020. The contract extensions also provide the potential for two additional six-month extensions at the Department’s discretion through December 14, 2021. FSA is conducting a contract procurement process entitled Next Generation Financial Services Environment (“NextGen”) for a new framework for the servicing of all student loans owned by the Department. On January 15, 2019, FSA issued solicitations for three NextGen components: • • • NextGen Enhanced Processing Solution ("EPS") NextGen Business Process Operations ("BPO") NextGen Optimal Processing Solution ("OPS") On April 1, 2019 and October 4, 2019, the Company responded to the EPS component. On January 16, 2020, FSA released an amendment to the EPS component and the Company responded on February 3, 2020. In addition, on August 1, 2019, the Company responded to the BPO component. On January 10, 2020, FSA released an amendment to the BPO component and the Company responded on January 30, 2020. The Company is also part of a team that has 40 responded and intends to respond to various aspects of the OPS component; however, on November 12, 2019, FSA put an indefinite hold on the OPS solicitation. The EPS and BPO components are essentially for the loan processing and servicing to be performed on a new single system, which the Company believes could have the most significant potential impact on the Company. The Company cannot predict the timing, nature, or outcome of these solicitations. • The Loan Servicing and Systems segment will incur additional costs in 2020 to meet increased service and security standards under the current Department servicing contracts and to be responsive to the Department's procurement. As a result, the Company currently expects a significant decrease in this segment's operating margin and net income in 2020 from recent historical results. Education Technology, Services, and Payment Processing • • On November 20, 2018, the Company acquired Tuition Management Systems ("TMS"), a services company that offers tuition payment plans, billing services, payment to educational institutions. The TMS acquisition added 380 higher education schools and 170 K-12 schools to the Company’s customer base. The results of TMS’ operations are reported in the Company’s consolidated financial statements from the date of acquisition. technology solutions, and refund management For the years ended December 31, 2019 and 2018, before tax operating margin (income before income taxes divided by net revenue) was 31.8 percent and 20.6 percent, respectively. The increase in the before tax operating margin in 2019 as compared to 2018 was due to operating leverage and cost reductions resulting from the Company's decision in October 2018 to terminate its investment in a proprietary payment processing platform. Communications • • • • ALLO recognized losses of $23.5 million and $28.7 million for the years ended December 31, 2019 and 2018, respectively. The decrease in ALLO's net loss in 2019, as compared to 2018, was primarily due to a decrease in interest expense. ALLO recognized $10.0 million of interest expense to Nelnet, Inc. (parent company) during the year ended December 31, 2018. Subsequent to October 1, 2018, ALLO will not report interest expense in its income statement related to amounts contributed to ALLO from Nelnet, Inc. due to a recapitalization of ALLO. Excluding interest expense, the increase in ALLO's net loss in 2019 as compared to 2018 was due to an increase in depreciation from significant property and equipment purchases over the last several years to support the Lincoln, Nebraska network build-out that was substantially completed in 2019. ALLO's management uses earnings (loss) before interest, income taxes, depreciation, and amortization ("EBITDA") to eliminate certain non-cash and non-operating items in order to consistently measure performance from period to period. For the years ended December 31, 2019 and 2018, ALLO had positive EBITDA of $6.2 million and negative EBITDA of $4.5 million, respectively. EBITDA is a supplemental non-GAAP performance measure which the Company believes provides useful additional information regarding a key metric used by management to assess ALLO's performance. See "Communications Operating Segment - Results of Operations - Summary and Comparison of Operating Results" below for additional information regarding the computation and use of EBITDA for ALLO. ALLO has made significant investments in its communications network and currently provides fiber directly to homes and businesses in communities in Nebraska and Colorado. ALLO plans to continue to increase market share and revenue in its existing markets and is currently evaluating opportunities to expand to other communities in the Midwest. ALLO began providing services in Lincoln, Nebraska in September 2016 as part of a multi-year project to pass substantially all commercial and residential properties in the community. As of the end of the first quarter of 2019, the build-out of the Lincoln community was substantially complete. For the year ended December 31, 2019, ALLO's capital expenditures were $45.0 million. The Company anticipates total ALLO network capital expenditures in 2020 will be approximately $35.0 million to $45.0 million. However, this amount could change based on customer demand for ALLO's services. The Company currently anticipates ALLO's operating results will be dilutive to the Company's consolidated earnings as it continues to develop and add customers to its network in Lincoln, Nebraska and other communities, due to large upfront capital expenditures and associated depreciation and upfront customer acquisition costs. 41 Asset Generation and Management • • For the year ended December 31, 2019, the AGM segment recognized net interest income of $238.6 million, compared with $249.1 million in 2018. The Company maintains an overall risk management strategy that incorporates the use of derivative instruments to reduce the economic effect of interest rate volatility. The AGM segment recognized income from derivative settlements of $45.4 million in 2019, compared with income of $70.5 million in 2018. Derivative settlements for each applicable period should be evaluated with the Company's net interest income. Net interest income and derivative settlements for the AGM segment totaled $284.0 million and $319.6 million in 2019 and 2018, respectively. The Company's average balance of loans decreased to $21.7 billion in 2019, compared with $22.6 billion in 2018. Loan spread decreased to 0.96 percent in 2019, compared with 0.99 percent in 2018. Core loan spread, which includes the impact of derivative settlements, decreased to 1.18 percent in 2019, compared with 1.32 percent in 2018. Core loan spread, a non-GAAP measure, is computed as set forth in "Asset Generation and Management Operating Segment - Results of Operations - Loan Spread Analysis" below. Management believes core loan spread is a useful supplemental non-GAAP measure that reflects adjustments for derivative settlements related to net interest income (loan spread). However, there is no comprehensive authoritative guidance for the presentation of this measure, which is only meant to supplement GAAP results by providing additional information that management utilizes to assess performance. The Company recognized $89.9 million and $121.7 million in fixed rate floor income in 2019 and 2018, respectively (which includes $40.2 million and $64.9 million, respectively, of settlement payments received on derivatives used to hedge student loans earning fixed rate floor income). Fixed rate floor income contributed 41 basis points and 55 basis points of core loan spread in 2019 and 2018, respectively. The decrease in gross fixed rate floor income was due to higher interest rates in 2019 as compared to 2018, and the decrease in derivative settlement payments received on derivatives used to hedge student loans earning fixed rate floor income was due to a decrease in the notional amount of derivatives outstanding in 2019 as compared to 2018, partially offset by higher interest rates. • Provision for loan losses was $39.0 million and $23.0 million for 2019 and 2018, respectively. Provision for loan losses for federally insured loans was $8.0 million and $14.0 million for 2019 and 2018, respectively. During 2018, the Company determined an additional allowance was necessary related to portfolios of federally insured loans that were purchased in prior periods, and recognized $5.0 million in provision expense related to these loans. Provision for loan losses for consumer loans was $31.0 million and $9.0 million for 2019 and 2018, respectively. The increase in provision was a result of the increased amount of consumer loan purchases during 2019. The Company purchased $405.7 million of consumer loans during 2019 compared to $120.5 million during 2018. • • The Company recognized $16.7 million (pre-tax) of expenses in 2019 related to the extinguishment of notes payable in certain asset-backed securitizations prior to the notes' contractual maturities (as further described below). These expenses consisted of premium payments made by the Company of $14.0 million and the write-off of $2.7 million of debt issuance costs. During 2019, the Company sold $227.0 million (par value) of consumer loans to an unrelated third party who securitized such loans. As partial consideration received for the consumer loans sold, the Company received a percentage interest of the residual interest of the consumer loan securitizations. The Company recognized a gain of $17.3 million (pre-tax) from the sale of these loans. Corporate and Other Activities • The Company adopted a new lease accounting standard effective January 1, 2019. The most significant impact of the standard to the Company relates to (1) the recognition of new right-of-use ("ROU") assets and lease liabilities on its balance sheet primarily for office, data center, and dark fiber operating leases; (2) the deconsolidation of assets and liabilities for certain sale-leaseback transactions arising from build-to-suit lease arrangements for which construction was completed and the Company is leasing the constructed assets that did not qualify for sale accounting prior to the adoption of the new standard; and (3) significant new disclosures about the Company’s leasing activities. Adoption of the new standard resulted in recognizing lease liabilities of $33.7 million based on the present value of the remaining minimum rental payments. In addition, the Company recognized ROU assets of $32.8 million, which corresponds to the lease liabilities reduced by deferred rent expense as of the effective date. The Company also deconsolidated total assets of $43.8 million and total liabilities of $34.8 million for entities that had been consolidated 42 due to sale-leaseback transactions that failed to qualify for recognition as sales under the prior guidance. Deconsolidation of these entities reduced noncontrolling interests by $6.1 million. Liquidity and Capital Resources • • • • • • • • • • As of December 31, 2019, the Company had cash and cash equivalents of $133.9 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 $52.7 million as of December 31, 2019. The Company has historically generated positive cash flow from operations. For the year ended December 31, 2019, the Company’s net cash provided by operating activities was $298.9 million. On December 16, 2019, the Company amended its unsecured line of credit to, among other things, extend the maturity date of the facility from June 22, 2023 to December 16, 2024 and increase the size of the facility from $382.5 million to $455.0 million. As of December 31, 2019, the unsecured line of credit had $50.0 million outstanding and $405.0 million was available for future use. The 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. The majority of the Company’s portfolio of student loans is funded in asset-backed securitizations that will generate significant earnings and cash flow over the life of these transactions. As of December 31, 2019, the Company currently expects future undiscounted cash flows from its securitization portfolio to be approximately $1.89 billion, of which approximately $1.28 billion will be generated over the next six years. Certain of the Company’s asset-backed securitizations were structured as “Turbo Transactions” which required all cash generated from the student loans (including excess spread) to be directed toward payment of interest and any outstanding principal generally until such time as all principal on the notes had been paid in full. Once the notes in such transactions were paid in full, the remaining unencumbered student loans (and other remaining assets, if any) in the securitization would be released to the Company, at which time the Company would have the option to refinance or sell these assets, or retain them on the balance sheet as unencumbered assets. During 2019, the Company extinguished a total of $1.05 billion of notes payable in certain asset-backed securitizations, including six of the Company's eight Turbo Transactions, prior to the notes' contractual maturities, resulting in the release of $1.45 billion in student loans and accrued interest receivable that were previously encumbered in the asset-backed securitizations. Upon extinguishment of the notes payable throughout 2019, the Company refinanced the student loans in its FFELP warehouse facilities and new asset-backed securitizations, resulting in net cash proceeds of $387.1 million. The cash proceeds generated by the debt extinguishments were used to pay down a significant portion of the outstanding balance on the Company's unsecured line of credit and provides the Company with increased liquidity and the opportunity to invest the previously underutilized capital at higher returns. In 2019, the Company obtained a consumer loan warehouse facility with an aggregate maximum financing amount available of $200.0 million and a final maturity date of April 23, 2022. As of December 31, 2019, $116.6 million was outstanding under this facility and $83.4 million was available for future funding. During the year ended December 31, 2019, the Company completed seven FFELP asset-backed securitizations totaling $2.8 billion (par value). The proceeds from these transactions were used primarily to refinance student loans included in the Company's FFELP warehouse facilities and unencumbered student loans from the extinguishment of certain asset-backed securitizations. On June 25, 2019, the Company completed a private education loan asset-backed securitization totaling $47.2 million (par value). The proceeds from this transaction were used to refinance private education loans previously funded via a private loan repurchase agreement that was terminated on June 25, 2019. During 2019, the Company repurchased a total of 726,273 shares of Class A common stock for $40.4 million ($55.64 per share). On May 8, 2019, the Board of Directors authorized a new stock repurchase program to repurchase up to a total of five million shares of the Company's Class A common stock during the three-year period ending May 7, 2022. As of 43 • • December 31, 2019, 4.8 million shares remained authorized for repurchase under the Company's stock repurchase program. During 2019, the Company paid cash dividends totaling $29.5 million ($0.74 per share). 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; expansion of ALLO’s telecommunications network; 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, 2019 compared to 2018 is provided below. The Company’s operating results are primarily driven by the performance of its existing loan portfolio and the revenues generated by its fee-based businesses and the costs to provide such services. The performance of the Company’s portfolio is driven by net interest income (which includes financing costs) and losses related to credit quality of the assets, along with the cost to administer and service the assets and related debt. The Company operates as distinct reportable operating segments as described above. For a reconciliation of the reportable segment operating results to the consolidated results of operations, see note 14 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. Year ended December 31, 2019 2018 Loan interest $ 914,256 897,666 Investment interest Total interest income Interest expense Net interest income 34,421 948,677 699,327 249,350 26,600 924,266 669,906 Additional information Increase was due primarily to an increase in the gross yield earned on loans, partially offset by a decrease in the average balance of loans and a decrease in gross fixed rate floor income due to higher interest rates in 2019 as compared to 2018. Includes income from unrestricted interest-earning deposits and investments and funds in asset- backed securitizations. Increase was due to increases in interest-earning investments and interest rates. Increase was due to an increase in cost of funds, partially offset by a decrease in the average balance of debt outstanding. 254,360 See table below for additional analysis. Less provision for loan losses 39,000 23,000 Net interest income after provision for loan losses 210,350 231,360 Represents the periodic expense of maintaining an allowance appropriate to absorb losses inherent in the portfolio of loans. See AGM operating segment - results of operations. Other income: LSS revenue ETS&PP revenue Communications revenue Other income 455,255 277,331 64,269 65,179 440,027 See LSS operating segment - results of operations. 221,962 See ETS&PP operating segment - results of operations. 44,653 See Communications operating segment - results of operations. 54,805 See table below for the components of "other income." Derivative settlements, net 45,406 70,071 The Company maintains an overall risk management strategy that incorporates the use of derivative instruments to reduce the economic effect of interest rate volatility. Derivative settlements for each applicable period should be evaluated with the Company's net interest income. See table below for 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 related to the changes in fair value of the Company's floor income interest rate swaps. Such changes reflect that a decrease in the forward yield curve during a reporting period results in a decrease in the fair value of the Company's floor income interest rate swaps, and an increase in the forward yield curve during a reporting period results in an increase in the fair value of the Company's floor income interest rate swaps. During 2019, there was a decrease in the forward yield curve resulting in a decrease in the fair value of the Company's floor income interest rate swaps that resulted in a significant loss in 2019 as compared to 2018. Derivative market value adjustments, net Total other income Cost of services: Cost to provide education technology, services, and payment processing services (76,195) 831,245 1,014 832,532 81,603 59,566 Represents primarily direct costs to provide payment processing services in the ETS&PP operating segment. Cost to provide communications services Total cost of services 20,423 102,026 16,926 76,492 Represents costs of services primarily associated with television programming costs in the Communications operating segment. 44 Operating expenses: Salaries and benefits 463,503 436,179 Depreciation and amortization 105,049 86,896 Other expenses Total operating expenses Income before income taxes Income tax expense Net income 194,272 762,824 176,745 35,451 141,294 178,031 701,106 286,294 58,770 227,524 Net loss attributable to noncontrolling interests 509 389 Net income attributable to Nelnet, Inc. $ 141,803 227,913 Additional information: Net income attributable to Nelnet, Inc. $ 141,803 227,913 Derivative market value adjustments, net Tax effect Net income attributable to Nelnet, Inc., excluding derivative market value adjustments 76,195 (18,287) (1,014) 243 $ 199,711 227,142 Increase was due to (i) increases in personnel as a result of the TMS acquisition and to support the organic growth in revenue in the ETS&PP operating segment, (ii) increases in personnel at ALLO to support customer and network expansion, and (iii) increases in personnel as a result of the acquisition of Great Lakes on February 7, 2018 (twelve months of expenses in 2019 as compared to approximately eleven months in 2018). These items were partially offset by a decrease in salaries and benefits in the ETS&PP operating segment due to the Company's decision in October 2018 to terminate its investment in a proprietary processing platform. See each individual operating segment results of operations discussion for additional information. Increase was primarily due to additional depreciation expense at ALLO as a result of significant property and equipment purchases to support the Lincoln, Nebraska network build-out that was substantially completed in 2019. See each individual operating segment results of operations discussion for additional information. Other expenses includes expenses necessary for operations, such as postage and distribution, consulting and professional fees, occupancy, communications, and certain information technology- related costs. Increase was primarily due to the AGM operating segment recognizing $16.7 million of expenses in 2019 to extinguish notes payable from certain asset-backed securitizations prior to their contractual maturities. See each individual operating segment results of operations discussion for additional information. The effective tax rate was 20.0% and 20.5% for 2019 and 2018, respectively. The Company expects its future effective tax rate will range between 20 and 23 percent. 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 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 5 of the notes to consolidated financial statements included in this report for additional information on the Company's derivative instruments, including the net settlement activity recognized by the Company for each type of derivative for the 2019 and 2018 periods presented in the table under the caption "Income Statement Impact" in note 5 and in the table below. 45 Year ended December 31, 2019 2018 Variable loan interest margin $ 174,954 181,488 Settlements on associated derivatives 5,214 5,577 Variable loan interest margin, net of settlements on derivatives 180,168 187,065 Fixed rate floor income 49,677 56,811 Settlements on associated derivatives 40,192 64,901 Fixed rate floor income, net of settlements on derivatives Investment interest 89,869 34,421 121,712 26,600 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 operations. Represents the net settlements received related to the Company’s 1:3 basis swaps. The Company has a portfolio of student loans that are earning interest at a fixed borrower rate which exceeds the statutorily defined variable lender rates, generating fixed rate floor income. See Item 7A, "Quantitative and Qualitative Disclosures About Market Risk - Interest Rate Risk" for additional information. Represents the net settlements received related to the Company’s floor income interest rate swaps. Corporate debt interest expense (9,702) (10,539) Includes interest expense on the Junior Subordinated Hybrid Securities and unsecured line of credit. Non-portfolio related derivative settlements Net interest income (net of settlements on derivatives) — Represents the net settlements paid related to the Company’s hybrid debt hedges. (407) $ 294,756 324,431 The following table summarizes the components of "other income." Gain on sale of loans (a) Borrower late fee income Management fee revenue (b) Gain on investments and notes receivable, net of losses Investment advisory services (c) Other Other income Year ended December 31, 2019 2018 $ $ 17,261 12,884 8,838 6,136 2,941 17,119 65,179 — 12,302 6,497 9,579 6,009 20,418 54,805 (a) (b) (c) During 2019, the Company sold $227.0 million (par value) of consumer loans to an unrelated third party who securitized such loans. Represents revenue earned from providing administrative support and marketing services primarily to Great Lakes’ former parent company in accordance with a contract that expires in February 2021. The increase in 2019 compared to 2018 was due to twelve months of revenue under this contract in 2019 as compared to approximately eleven months of revenue (from the Great Lakes acquisition date) in 2018. Amount also includes revenue earned from marketing services provided to existing clients, which increased in 2019 compared to 2018 as a result of an increase in marketing services provided to such clients. The Company provides investment advisory services through Whitetail Rock Capital Management, LLC ("WRCM"), the Company's SEC-registered investment advisor subsidiary, under various arrangements. WRCM earns annual fees of 25 basis points on the majority of the outstanding balance of asset-backed securities under management and up to 50 percent of the gains from the sale of asset-backed securities or asset-backed securities being called prior to the full contractual maturity for which it provides advisory services. As of December 31, 2019, the outstanding balance of asset- backed securities under management subject to these arrangements was $983.0 million. In addition, WRCM earns annual management fees of five basis points for certain other investments under management. The decrease in advisory fees in 2019 as compared to 2018 was the result of a decrease in performance fees earned. 46 LOAN SERVICING AND SYSTEMS OPERATING SEGMENT – RESULTS OF OPERATIONS The Company purchased Great Lakes on February 7, 2018. The results of Great Lakes' operations are reported in the Company's consolidated financial statements from the date of acquisition. Loan Servicing Volumes December 31, 2017 March 31, 2018 June 30, 2018 September 30, 2018 December 31, 2018 March 31, 2019 June 30, 2019 September 30, 2019 December 31, 2019 As of Servicing volume (dollars in millions): Nelnet: Government FFELP Private and consumer Great Lakes: Government FFELP (a) Private and consumer (a) $ 172,669 176,605 176,179 27,262 11,483 26,969 12,116 37,599 15,016 179,283 37,459 15,466 179,507 183,093 181,682 36,748 15,666 35,917 16,065 35,003 16,025 184,399 33,981 16,286 183,790 33,185 16,033 — — — 242,063 241,902 232,741 232,694 237,050 236,500 240,268 239,980 11,136 1,927 — 31 — — — — — — — — — — — — Total $ 211,414 470,816 470,727 464,949 464,615 472,125 469,210 474,934 472,988 Number of servicing borrowers: Nelnet: Government FFELP 5,877,414 5,819,286 5,745,181 1,420,311 1,399,280 1,787,419 Private and consumer 502,114 508,750 672,520 5,805,307 1,754,247 692,763 5,771,923 5,708,582 5,592,989 1,709,853 1,650,785 1,588,530 696,933 699,768 693,410 5,635,653 1,529,392 701,299 5,574,001 1,478,703 682,836 Great Lakes: Government FFELP (a) Private and consumer (a) — — — 7,456,830 7,378,875 7,486,311 7,458,684 7,385,284 7,300,691 7,430,165 7,396,657 461,553 118,609 — 3,987 — — — — — — — — — — — — Total 7,799,839 15,764,308 15,587,982 15,738,628 15,637,393 15,444,419 15,175,620 15,296,509 15,132,197 Number of remote hosted borrowers: 2,812,713 6,207,747 6,145,981 6,406,923 6,393,151 6,332,261 6,211,132 6,457,296 6,433,324 (a) During the second quarter of 2018, the Company converted Great Lakes' FFELP and private education servicing volume to Nelnet Servicing's platform to leverage the efficiencies of supporting more volume on fewer systems. 47 Summary and Comparison of Operating Results Year ended December 31, 2019 2018 Net interest income $ 1,916 1,351 Additional information Increase was due to additional interest earnings on cash deposits due to a higher balance of cash deposits and higher interest rates in 2019 as compared to 2018. Loan servicing and systems revenue 455,255 440,027 See table below for additional analysis. Intersegment servicing revenue 46,751 47,082 Other income Total other income 9,736 7,284 511,742 494,393 Salaries and benefits 276,136 267,458 Depreciation and amortization 34,755 32,074 Other expenses 71,064 67,336 Intersegment expenses Total operating expenses Income before income taxes Income tax expense Net income 54,325 436,280 77,378 59,042 425,910 69,834 (18,571) (16,954) 58,807 52,880 Net loss attributable to noncontrolling interest — Net income attributable to Nelnet, Inc. $ 58,807 808 53,688 Before tax and noncontrolling interest operating margin 15.1 % 14.3 % Represents revenue earned by the LSS operating segment as a result of servicing loans for the AGM operating segment. Decrease in 2019 compared to 2018 was due to the expected amortization of the FFELP portfolio. The decrease was partially offset by the purchase of FFELP loan portfolios by the AGM segment. Over time, FFELP intersegment servicing revenue will decrease as AGM's FFELP portfolio pays off. Represents revenue earned from providing administrative support and marketing services primarily to Great Lakes’ former parent company in accordance with a contract that expires in February 2021. Increase in 2019 compared to 2018 was due to twelve months of revenue in 2019 as compared to approximately eleven months of revenue (from the Great Lakes acquisition date) in 2018 and an increase in marketing services provided to other customers. Increase in 2019 compared to 2018 was due to twelve months of salaries and benefits from the Great Lakes acquisition included in 2019 as compared to approximately eleven months of expenses (from the Great Lakes acquisition date) in 2018, partially offset by a reduction of expenses from executing certain integration activities related to the Great Lakes acquisition. Increase in 2019 as compared to 2018 was primarily due to the acquisition of Great Lakes on February 7, 2018. Excluding a $3.9 million impairment charge related to external software development costs recognized by the Company in 2018, other expenses were $71.1 million and $63.4 million for 2019 and 2018, respectively. Increase was due to the Great Lakes acquisition on February 7, 2018. Intersegment expenses represent costs for certain corporate activities and services that are allocated to each operating segment based on estimated use of such activities and services. Decrease in 2019 as compared to 2018 was due to the completion of certain integration activities related to the Great Lakes acquisition. Reflects income tax expense at an effective tax rate of 24% on income before taxes and the net loss attributable to noncontrolling interest. Represented 50 percent of the net loss of the GreatNet joint venture that was attributable to Great Lakes prior to the Company's acquisition of Great Lakes on February 7, 2018. Excluding the impairment of external software development costs recognized in 2018 as discussed above, before tax and noncontrolling interest operating margin (income before income taxes and noncontrolling interest divided by total revenue) was 15.0% for 2018. The LSS segment will incur additional costs in 2020 to meet increased service and security standards under the Department servicing contracts and to be responsive to the Department's procurement. As a result, the Company currently expects a significant decrease in this segment’s operating margin and net income in 2020 from recent historical results. 48 Loan servicing and systems revenue Year ended December 31, 2019 2018 Government servicing - Nelnet $ 157,991 157,091 Government servicing - Great Lakes 185,656 168,298 Private education and consumer loan servicing 36,788 41,474 FFELP servicing 25,043 31,542 Software services 41,077 32,929 Outsourced services and other 8,700 8,693 Loan servicing and systems revenue $ 455,255 440,027 Additional information Represents revenue from Nelnet Servicing's Department servicing contract. Increase in 2019 as compared to 2018 was due to an increase in revenue from the administration of the Total and Permanent Disability (TPD) Discharge program and fees earned from the Department from originating consolidation loans. These items were partially offset by a decrease in borrower servicing revenue due to a decrease in the number of servicing borrowers. Represents revenue from the Great Lakes' Department servicing contract. Increase in revenue was due to twelve months of revenue in 2019 as compared to approximately eleven months (from the Great Lakes acquisition date) of revenue in 2018. Excluding $4.6 million in revenue earned in 2018 related to a private loan customer deconverting from the Great Lakes servicing platform subsequent to the Company’s acquisition of Great Lakes on February 7, 2018, private education and consumer loan servicing revenue was $36.8 million and $36.9 million in 2019 and 2018, respectively. Decrease was due to portfolio amortization. Over time, FFELP servicing revenue will continue to decrease as third-party customers' FFELP portfolios pay off. The decrease in 2019 as compared to 2018 was also due to purchases by the Company's AGM operating segment of third-party FFELP portfolios that are serviced by the LSS operating segment. Revenue earned by the LSS operating segment for servicing loans for the AGM operating segment is included in "intersegment servicing revenue." The decreases in revenue were partially offset by the acquisition of Great Lakes (twelve months of revenue in 2019 as compared to eleven months (from the Great Lakes acquisition date) of revenue in 2018). Historically, the majority of software services revenue related to providing hosted student loan servicing. As a result of the Great Lakes acquisition, LSS added a significant unrelated third-party FFELP guaranty hosted servicing customer. Increase in 2019 as compared to 2018 was due to an increase in providing hosted guaranty services to the new guaranty servicing customer. In addition, the increase was due to twelve months of revenue from the new guaranty hosted servicing customer in 2019 as compared to approximately eleven months (from the Great Lakes acquisition date) of revenue in 2018. The majority of this revenue relates to providing contact center outsourcing activities. 49 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 November 20, 2018, the Company acquired TMS, a services company that offers tuition payment plans, billing services, payment technology solutions, and refund management to educational institutions. The TMS acquisition added 380 higher education schools and 170 K-12 schools to the Company's customer base. The results of TMS' operations are reported in the Company's consolidated financial statements from the date of acquisition. Summary and Comparison of Operating Results Year ended December 31, 2019 2018 Net interest income $ 9,198 4,444 Additional information Increase was due to additional interest earnings on cash deposits due to a higher balance of cash deposits and higher interest rates in 2019 as compared to 2018. Education technology, services, and payment processing revenue 277,331 221,962 See table below for additional information. Other income 259 — Total other income 277,590 221,962 Cost to provide education technology, services, and payment processing services 81,603 59,566 See table below for additional information. Increase was due to the acquisition of TMS along with additional personnel to support the increase in services provided to customers, partially offset by cost reductions due to the Company's decision in October 2018 to terminate its investment in a proprietary payment processing platform. Amortization of intangible assets related to business acquisitions was $12.1 million and $11.4 million for 2019 and 2018, respectively. Decrease was due to the Company's decision in October 2018 to terminate its investment in a proprietary payment processing platform which resulted in the Company recognizing a $7.8 million impairment charge in 2018. Additional cost savings were also realized as a result of the decision resulting in total savings of approximately $3 million in 2019 as compared to 2018. These decreases were partially offset by an increase in other expenses as a result of the acquisition of TMS and additional costs to support the increase in services provided to customers. 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. Salaries and benefits 94,666 81,080 Depreciation and amortization 12,820 13,484 Other expenses 22,027 28,137 Intersegment expenses, net Total operating expenses Income before income taxes Income tax expense Net income 13,405 142,918 62,267 10,681 133,382 33,458 (14,944) (8,030) Represents income tax expense at an effective tax rate of 24%. $ 47,323 25,428 50 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, 2019 2018 Tuition payment plan services $ 106,682 85,381 Payment processing 110,848 84,289 Education technology and services Other Education technology, services, and payment processing revenue Cost to provide education technology, services, and payment processing services Net revenue 58,578 1,223 51,155 1,137 277,331 221,962 81,603 $ 195,728 59,566 162,396 Before tax operating margin 31.8 % 20.6 % Additional information Increase was due to an increase in the number of managed tuition payment plans resulting from the acquisition of TMS and the addition of new school customers. Increase was due to the acquisition of TMS and an increase in payments volume from new and existing school and non-education customers. Increase was due to an increase in the number of customers using the Company’s school administration software and services, higher revenues from financial needs assessment services, and the acquisition of TMS. Additionally, FACTS Education Solutions has experienced growth in the number of students and teachers receiving its professional development and educational instruction services. Costs primarily relate to payment processing revenue. Increase was due to the acquisition of TMS and an increase in payments volume from new and existing school and non-education customers. Excluding the impairment charge of $7.8 million in 2018 related to the Company's decision to terminate its investment in a proprietary payment processing platform, as discussed above, before tax operating margin (income before income taxes divided by net revenue) was 25.4% in 2018. The increase in margin in 2019 as compared to 2018 was due to operating leverage and the Company's decision to terminate its investment in a proprietary payment processing platform. 51 COMMUNICATIONS OPERATING SEGMENT - RESULTS OF OPERATIONS Summary and Comparison of Operating Results Net interest income (expense) $ 3 (9,983) See note (a) below for additional information. Year ended December 31, 2019 2018 Additional information Communications revenue Other income Total other income 64,269 1,509 65,778 44,653 1,075 45,728 Cost to provide communications services 20,423 16,926 Salaries and benefits 21,004 18,779 Depreciation and amortization 37,173 23,377 Other expenses 15,165 11,900 Intersegment expenses Total operating expenses 2,962 76,304 2,578 56,634 Loss before income taxes (30,946) (37,815) 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 tables below. Cost of services are primarily associated with television programming costs. Other costs include connectivity, franchise, and other regulatory costs directly related to providing internet and voice services. For the years ended December 31, 2019 and 2018, ALLO's average number of employees was 540 and 508, respectively. ALLO also uses temporary employees in the normal course of business. Certain costs qualify for capitalization as ALLO develops its network. Depreciation reflects the allocation of the costs of ALLO's property and equipment over the period in which such assets are used. A significant amount of property and equipment purchases have been made to support the Lincoln, Nebraska network expansion. The gross property and equipment balances related to this segment as of December 31, 2019, 2018, and 2017 were $315.3 million, $273.9 million, and $186.4 million, respectively. Amortization reflects the allocation of costs related to intangible assets recorded at fair value as of the date the Company acquired ALLO over their estimated useful lives. Other expenses includes selling, general, and administrative expenses necessary for operations, services, construction materials, and personal property taxes. Increase was due to expansion of new markets and increase in the number of households and businesses served. advertising, occupancy, professional such as 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. Income tax benefit 7,427 9,075 Represents income tax benefit at an effective tax rate of 24%. Net loss $ (23,519) (28,740) Additional Information: Net loss $ (23,519) (28,740) The Company anticipates this operating segment will be dilutive to consolidated earnings as it continues to develop and add customers to its network in Lincoln, Nebraska and other communities, due to large upfront capital expenditures and associated depreciation and upfront customer acquisition costs. Net interest (income) expense Income tax benefit Depreciation and amortization Earnings (loss) before interest, income taxes, depreciation, and amortization (EBITDA) (3) (7,427) 37,173 9,983 (9,075) 23,377 $ 6,224 (4,455) For additional information regarding this non-GAAP measure, see the table below. (a) Nelnet, Inc. (parent company) previously provided a line of credit to ALLO for network capital expenditures and related expenses. In 2016 and 2017, the outstanding amount owed by ALLO to Nelnet, Inc. and the related interest expense incurred by ALLO and the interest income recognized by Nelnet, Inc. under the line of credit was eliminated in the Company's consolidated financial statements. On January 1, 2018, Nelnet, Inc. contributed equity to ALLO with an associated guaranteed payment and ALLO used the proceeds from this capital contribution to pay off all of the outstanding balance on the line of credit, including all accrued and unpaid interest. For financial reporting purposes, the guaranteed payment recorded by ALLO was classified as debt and such debt and the guaranteed return paid to Nelnet, Inc. (reflected as interest expense for ALLO) was eliminated in the consolidated financial statements. On October 1, 2018, the guaranteed payment was replaced with a yield-based preferred return of future earnings on the contributed equity. For financial reporting purposes, the preferred interest recorded by ALLO is classified as equity and the preferred return on the preferred interest is not treated by ALLO as interest expense. Accordingly, subsequent to October 1, 2018, ALLO will not report interest expense in its income statement related to amounts contributed to ALLO from Nelnet, Inc. 52 Certain financial and operating data for ALLO is summarized in the tables below. Residential revenue Business revenue Other revenue Communications revenue Internet Television Telephone Other Communications revenue Net loss EBITDA (a) Capital expenditures Year ended December 31, 2019 2018 $ $ $ $ $ 48,344 15,689 236 64,269 38,239 16,196 9,705 129 64,269 (23,519) 6,224 44,988 75.2 % $ 24.4 0.4 33,434 10,976 243 74.9 % 24.6 0.5 100.0 % $ 44,653 100.0 % 59.5 % $ 25.2 15.1 0.2 24,069 12,949 7,546 89 53.9 % 29.0 16.9 0.2 100.0 % $ 44,653 100.0 % $ (28,740) (4,455) 87,466 As of December 31, 2019 As of September 30, 2019 As of June 30, 2019 As of March 31, 2019 As of December 31, 2018 As of September 30, 2018 As of June 30, 2018 As of March 31, 2018 As of December 31, 2017 Residential customer information: Households served Households passed (b) Households served/passed Total households in current markets and new markets announced (c) 47,744 45,228 42,760 40,338 37,351 32,529 27,643 23,541 20,428 140,986 137,269 132,984 127,253 122,396 110,687 98,538 84,475 71,426 33.9 % 32.9 % 32.2 % 31.7 % 30.5 % 29.4 % 28.1 % 27.9 % 28.6 % 160,884 159,974 159,974 152,840 152,840 142,602 137,500 137,500 137,500 (a) (b) (c) Earnings (loss) before interest, income taxes, depreciation, and amortization ("EBITDA") is a supplemental non-GAAP performance measure that is frequently used in capital-intensive industries such as telecommunications. 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. Represents the number of single residence homes, apartments, and condominiums that ALLO already serves and those in which ALLO has the capacity to connect to its network distribution system without further material extensions to the transmission lines, but have not been connected. During the third quarter of 2018, ALLO began providing services in Fort Morgan, Colorado. During the fourth quarter of 2018, ALLO began providing services in Hastings, Nebraska. During the second quarter of 2019, ALLO announced plans to expand its network to make services available in Breckenridge, Colorado. During the fourth quarter of 2019, ALLO announced plans to expand its network to make services available in Imperial, Nebraska. ALLO is now in eleven communities, including nine in Nebraska and two in Colorado. 53 ASSET GENERATION AND MANAGEMENT OPERATING SEGMENT – RESULTS OF OPERATIONS Loan Portfolio As of December 31, 2019, the Company had a $20.7 billion loan portfolio, consisting primarily of federally insured loans, that management anticipates will amortize over the next approximately 20 years and has a weighted average remaining life of 8.8 years. For a summary of the Company's loan portfolio as of December 31, 2019 and 2018, see note 3 of the notes to consolidated financial statements included in this report. Loan Activity The following table sets forth the activity of loans: Beginning balance Loan acquisitions: Federally insured student loans Private education loans Consumer loans Total loan acquisitions Repayments, claims, capitalized interest, and other Consolidation loans lost to external parties Consumer loans sold Other loans sold Ending balance Year ended December 31, 2019 2018 $ 22,520,498 21,995,877 1,530,294 3,708,188 71,543 405,726 2,007,563 (2,511,641) (990,720) (226,981) — 68,337 120,482 3,897,007 (2,282,631) (1,066,043) — (23,712) $ 20,798,719 22,520,498 Allowance for Loan Losses and Loan Delinquencies The Company maintains an allowance that management believes is appropriate to absorb losses, net of recoveries, inherent in the portfolio of loans, which results in periodic expense provisions for loan losses. Delinquencies have the potential to adversely impact the Company’s earnings through increased servicing and collection costs and account charge-offs. For a summary of the activity in the allowance for loan losses for 2019 and 2018, and a summary of the Company's loan delinquency amounts as of December 31, 2019 and 2018, see note 3 of the notes to consolidated financial statements included in this report. Provision for loan losses for federally insured loans was $8.0 million and $14.0 million, in 2019 and 2018, respectively. During 2018, the Company determined an additional allowance was necessary related to portfolios of federally insured loans that were purchased in prior periods and recognized $5.0 million in provision expense related to such loans. The Company did not record provision expense for private education loans in 2019 and 2018. Provision for loan losses for consumer loans was $31.0 million and $9.0 million in 2019 and 2018, respectively. The increase in the provision in 2019 as compared to 2018 was a result of the increased amount of consumer loan purchases during 2019 as reflected in the "Loan Activity" table above. 54 Loan Spread Analysis The following table analyzes the loan spread on the Company’s portfolio of loans, which represents the spread between the yield earned on loan assets and the costs of the liabilities and derivative instruments used to fund the assets. The spread amounts included in the following table are calculated by using the notional dollar values found in the table under the caption "Net interest income, net of settlements on derivatives" below, divided by the average balance of student loans or debt outstanding. Variable loan yield, gross Consolidation rebate fees Discount accretion, net of premium and deferred origination costs amortization Variable loan yield, net Loan cost of funds - interest expense Loan cost of funds - derivative settlements (a) (b) Variable loan spread Fixed rate floor income, gross Fixed rate floor income - derivative settlements (a) (c) Fixed rate floor income, net of settlements on derivatives Core loan spread (d) Average balance of loans Average balance of debt outstanding Year ended December 31, 2019 2018 4.80 % (0.83) 0.02 3.99 (3.25) 0.03 0.77 0.22 0.19 0.41 4.52 % (0.84) 0.04 3.72 (2.98) 0.03 0.77 0.25 0.30 0.55 1.18 % 1.32 % $ 21,698,094 21,259,309 22,596,436 22,181,932 A reconciliation of core loan spread, which includes the impact of derivative settlements on loan spread, to loan spread without derivative settlements follows. Core loan spread Derivative settlements (1:3 basis swaps) Derivative settlements (fixed rate floor income) Loan spread Year ended December 31, 2019 2018 1.18 % (0.03) (0.19) 0.96 % 1.32 % (0.03) (0.30) 0.99 % (a) (b) (c) (d) Derivative settlements represent the cash paid or received during the current period to settle with derivative instrument counterparties the economic effect of the Company's derivative instruments based on their contractual terms. Derivative accounting requires that net settlements with respect to derivatives that do not qualify for "hedge treatment" under GAAP be recorded in a separate income statement line item below net interest income. The Company maintains an overall risk management strategy that incorporates the use of derivative instruments to reduce the economic effect of interest rate volatility. As such, management believes derivative settlements for each applicable period should be evaluated with the Company’s net interest income (loan spread) as presented in this table. The Company reports this non-GAAP information because it believes that it provides additional that are closely assessed by management. There is no comprehensive, authoritative guidance for the presentation of such non-GAAP information, which is information that management utilizes to assess only meant performance. See note 5 of the notes to consolidated financial statements included in this report for additional information on the Company's derivative instruments, including the net settlement activity recognized by the Company for each type of derivative for the 2019 and 2018 periods presented in the table under the caption "Income Statement Impact" in note 5 and in this table. information regarding operational and performance indicators to supplement GAAP results by providing additional Derivative settlements consist of net settlements received related to the Company’s 1:3 basis swaps. Derivative settlements consist of net settlements received related to the Company’s floor income interest rate swaps. Core loan spread, excluding consumer loans, would have been 1.09% and 1.27% in 2019 and 2018, respectively. Other than consumer loans funded in the Company's consumer loan warehouse facility that was obtained on January 11, 2019, consumer loans were and continue to be funded by the Company using operating cash, until they can be funded in a secured financing transaction. Consumer loans funded with operating cash do not have a cost of funds (debt) associated with them. The average balance of consumer loans outstanding in 2019 and 2018 was $219.1 million, and $90.9 million, respectively. The average balance outstanding on the consumer loan warehouse facility in 2019 was $98.2 million. 55 A trend analysis of the Company's core and variable loan spreads by calendar year quarter is summarized below. (a) The interest earned on a large portion of the Company's FFELP student loan assets is indexed to the one-month LIBOR rate. The Company funds a portion of its assets with three-month LIBOR indexed floating rate securities. The relationship between the indices in which the Company earns interest on its loans and funds such loans has a significant impact on loan spread. This table (the right axis) shows the difference between the Company's liability base rate and the one-month LIBOR rate by quarter. See Item 7A, “Quantitative and Qualitative Disclosures About Market Risk - Interest Rate Risk,” which provides additional detail on the Company’s FFELP student loan assets and related funding for those assets. Variable loan spread remained constant for the year ended December 31, 2019 as compared to 2018 due to the impact of the Company's consumer loan portfolio. Variable loan spread without consumer loans was 0.67% and 0.71% for the years ended December 31, 2019 and 2018, respectively. This decrease was due to the widening in the basis between the asset and debt indices in which the Company earns interest on its loans and funds such loans (as reflected in the table above). The difference between variable loan spread and core loan spread is fixed rate floor income earned on a portion of the Company's federally insured student loan portfolio. A summary of fixed rate floor income and its contribution to core loan spread follows: Fixed rate floor income, gross Derivative settlements (a) Fixed rate floor income, net Fixed rate floor income contribution to spread, net Year ended December 31, 2019 2018 $ $ 49,677 40,192 89,869 0.41 % 56,811 64,901 121,712 0.55 % (a) Includes settlement payments on derivatives used to hedge student loans earning fixed rate floor income. The decrease in gross fixed rate floor income in 2019 compared to 2018 was due to higher interest rates in 2019 as compared to 2018. The Company has a portfolio of derivative instruments in which the Company pays a fixed rate and receives a floating rate to economically hedge loans earning fixed rate floor income. See Item 7A, “Quantitative and Qualitative Disclosures About Market Risk - Interest Rate Risk,” which provides additional detail on the Company’s portfolio earning fixed rate floor income and the derivatives used by the Company to hedge these loans. 56 Summary and Comparison of Operating Results Year ended December 31, 2019 2018 Additional information Net interest income after provision for loan losses $ 199,588 226,142 See table below for additional analysis. Other income 30,349 12,723 Derivative settlements, net 45,406 70,478 Derivative market value adjustments, net Total other income Salaries and benefits (76,195) (2,159) (440) 1,545 81,042 1,526 Other expenses 34,445 15,961 Intersegment expenses 47,362 47,870 Total operating expenses Income before income taxes 83,352 115,796 65,357 241,827 The Company sold two portfolios of consumer loans during 2019 and recognized total gains of $17.3 million. The remaining component of other income is primarily earned from borrower late fees. The Company maintains an overall risk management strategy that incorporates the use of derivative instruments to reduce the economic effect of interest rate volatility. Derivative settlements for each applicable period should be evaluated with the Company's net interest income as reflected in the table below. Includes the realized and unrealized gains and losses that are caused by changes in fair values of derivatives which do not qualify for "hedge treatment" under GAAP. The majority of the derivative market value adjustments related to the changes in fair value of the Company's floor income interest rate swaps. Such changes reflect that a decrease in the forward yield curve during a reporting period results in a decrease in the fair value of the Company's floor income interest rate swaps, and an increase in the forward yield curve during a reporting period results in an increase in the fair value of the Company's floor income interest rate swaps. During 2019, there was a significant decrease in the forward yield curve resulting in a decrease in the fair value of the Company's floor income interest rate swaps that resulted in a larger loss in 2019 as compared to 2018. The Company recognized $16.7 million of expenses in 2019 to extinguish asset- backed notes from certain securitizations prior to their contractual maturities. The remaining component of other expenses is primarily servicing fees paid to third parties. Third party loan servicing fees increased in 2019 due to increased consumer loan volume. 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. Intersegment expenses also include costs for certain corporate activities and services that are allocated to each operating segment based on estimated use of such activities and services. expenses Excluding the recognized by the Company related to the extinguishment of debt securities prior to their contractual maturities (as described above), total operating expenses were 31 basis points and 29 basis points of the average balance of loans in 2019 and 2018, respectively. Income tax expense Net income Additional information: (27,792) (58,038) Represents income tax expense at an effective tax rate of 24%. $ 88,004 183,789 Net income $ 88,004 183,789 Derivative market value adjustments, net Tax effect Net income, excluding derivative market value adjustments 76,195 (18,287) 2,159 (518) $ 145,912 185,430 See "Overview - GAAP Net Income and Non-GAAP Net Income, Excluding Adjustments" above for additional information about non-GAAP net income, excluding derivative market value adjustments. The decrease in net income, excluding derivative market value adjustments, in 2019 as compared to 2018 was due to debt extinguishment costs incurred in 2019, a decrease in the average balance of loans outstanding, a decrease in core loan spread, and an increase in provision for loan losses for consumer loans as a result of the increased amount of consumer loan purchases in 2019 as compared to 2018. These items were partially offset by the gains recognized in 2019 for the sale of consumer loan portfolios. 57 Net interest income, 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, 2019 2018 Variable interest income, gross $ 1,040,785 1,021,326 Additional information Increase in 2019 as compared to 2018 was due to an increase in the gross yield earned on loans, partially offset by a decrease in the average balance of loans. Consolidation rebate fees (180,701) (190,350) Decrease was due to a decrease in the average consolidation loan balance. Discount accretion, net of premium and deferred origination costs amortization 4,495 9,879 Net discount accretion is due to the Company's purchases of loans at a net discount over the last several years. However, due to more recent purchases at a net premium, the net discount accretion decreased in 2019 as compared to 2018. Variable interest income, net 864,579 840,855 Interest on bonds and notes payable (689,625) (659,367) Derivative settlements, net (a) 5,214 5,577 Variable loan interest margin, net of settlements on derivatives (a) 180,168 187,065 Fixed rate floor income, gross 49,677 56,811 Derivative settlements, net (a) 40,192 64,901 Fixed rate floor income, net of settlements on derivatives Core loan interest income (a) Investment interest Intercompany interest Provision for loan losses - federally insured loans Provision for loan losses - consumer loans Net interest income after provision for loan losses (net of settlements on derivatives) (a) 89,869 270,037 121,712 308,777 17,707 (3,750) 13,836 (2,993) (8,000) (14,000) (31,000) (9,000) $ 244,994 296,620 Increase in 2019 as compared to 2018 was due to an increase in cost of funds, partially offset by a decrease in the average balance of debt outstanding. Derivative settlements include the net settlements received related to the Company’s 1:3 basis swaps. Fixed rate floor income decreased due to higher interest rates in 2019 as compared to 2018. Derivative settlements include the settlements received related to the Company's floor income interest rate swaps. The decrease in settlements in 2019 as compared to 2018 was due to a decrease in the notional amount of derivatives outstanding, partially offset by higher interest rates in 2019 as compared to 2018. Increase was due to a higher balance of interest-earning investments and higher interest rates in 2019 as compared to 2018. See "Allowance for Loan Losses and Loan Delinquencies" included above under "Asset Generation and Management Operating Segment - Results of Operations." (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 5 of the notes to consolidated financial statements included in this report for additional information on the Company's derivative instruments, including the net settlement activity recognized by the Company for each type of derivative referred to in the "Additional information" column of this table, for the 2019 and 2018 periods presented in the table under the caption "Income Statement Impact" in note 5 and in this table. As of December 31, 2019, the interest earned on a principal amount of $18.9 billion in the Company’s FFELP student loan asset portfolio was indexed to one-month LIBOR, and the interest paid on a principal amount of $18.4 billion of the Company’s FFELP student loan asset-backed debt securities was indexed to one-month or three-month LIBOR. In addition, the majority of the Company’s derivative financial instrument transactions used to manage LIBOR interest rate risks are indexed to LIBOR. There is significant uncertainty regarding the availability of LIBOR as a benchmark rate after 2021, and any market transition away from the current LIBOR framework could result in significant changes to the interest rate characteristics of the Company's LIBOR-indexed assets and funding for those assets, as well as the Company’s LIBOR-indexed derivative instruments. See Item 1A, "Risk Factors - Loan Portfolio - Interest rate risk - replacement of LIBOR as a benchmark rate." 58 LIQUIDITY AND CAPITAL RESOURCES The Company’s Loan Servicing and Systems and Education Technology, Services, and Payment Processing operating segments are non-capital intensive and both produce positive operating cash flows. As such, a minimal amount of debt and equity capital is allocated to these segments and any liquidity or capital needs are satisfied using cash flow from operations. Therefore, the Liquidity and Capital Resources discussion is concentrated on the Company’s liquidity and capital needs to meet existing debt obligations in the Asset Generation and Management operating segment and capital needs to expand ALLO's communications network in the Company's Communications operating segment. The Company may issue equity and debt securities in the future in order to improve capital, increase liquidity, refinance upcoming maturities, or provide for general corporate purposes. Moreover, the Company may from time-to-time repurchase certain amounts of its outstanding secured and unsecured debt securities, including debt securities which the Company may issue in the future, for cash and/or through exchanges for other securities. 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, asset-backed securitizations, and liquidity programs offered by the Department), operating lines of credit, and other borrowing arrangements to fund its Asset Generation and Management operations and loan acquisitions. In addition, the Company has used operating cash flow, borrowings on its unsecured line of credit, repurchase agreements, and unsecured debt offerings to fund corporate activities, business acquisitions, repurchases of common stock, repurchases of its own debt, and expansion of ALLO's fiber network. Sources of Liquidity The Company has historically generated positive cash flow from operations. For the years ended December 31, 2019 and 2018, the Company's net cash provided by operating activities was $298.9 million and $270.9 million, respectively. As of December 31, 2019, the Company had cash and cash equivalents of $133.9 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 $52.7 million as of December 31, 2019. The Company also has a $455.0 million unsecured line of credit that matures on December 16, 2024. As of December 31, 2019, there was $50.0 million outstanding on the unsecured line of credit and $405.0 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, on May 30, 2019, the Company entered into a $22.0 million secured line of credit agreement that matures on May 30, 2022. As of December 31, 2019, the secured line of credit had $5.0 million outstanding with $17.0 million available for future use. In addition, the Company has repurchased certain of its own asset-backed securities (bonds and notes payable) in the secondary market. For accounting purposes, 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, 2019, the Company holds $15.0 million (par value) of its own asset-backed securities. these notes are eliminated in consolidation and are not 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; expansion of ALLO's telecommunications network; 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. 59 Cash Flows During the year ended December 31, 2019, the Company generated $298.9 million from operating activities, compared to $270.9 million for the same period in 2018. The increase in cash flows from operating activities was due to: • • The adjustments to net income for derivative market value adjustments; and The impact of changes to accrued interest receivable and other liabilities in 2019 as compared to 2018. These factors were partially offset by: • • • • • The decrease in net income; Adjustments to net income for the impact of deferred taxes; Net payments to the derivative clearinghouse in 2019 of $70.7 million compared to net proceeds received in 2018 of $40.4 million related to the Company's derivative portfolio; Net payments to derivative counterparties to terminate derivatives in 2019 of $12.5 million compared to net proceeds received in 2018 of $10.3 million; and The impact of changes to accounts receivable and accrued interest payable in 2019 as compared to 2018. The primary items included in the statement of cash flows for investing activities are the purchase and repayment of loans. The primary items included in financing activities are the proceeds from the issuance of and payments on bonds and notes payable used to fund loans. Cash provided by investing activities and used in financing activities for the year ended December 31, 2019 was $1,524.6 million and $1,793.3 million, respectively. Cash used in investing activities and provided by financing activities for the year ended December 31, 2018 was $732.4 million and $711.8 million, respectively. 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: Bonds and notes issued in asset-backed securitizations FFELP and consumer loan warehouse facilities Bonds and Notes Issued in Asset-backed Securitizations As of December 31, 2019 Carrying amount Final maturity $ $ 19,833,135 5/27/25 - 01/25/68 894,664 5/20/21 - 5/31/22 20,727,799 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, 2019, 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 $1.89 billion as detailed below. The forecasted cash flow presented below includes all loans funded in asset-backed securitizations as of December 31, 2019. As of December 31, 2019, the Company had $19.7 billion of loans included in asset-backed securitizations, which represented 94.8 percent of its total loan portfolio. The forecasted cash flow does not include cash flows that the Company expects to receive related to loans funded in its warehouse facilities as of December 31, 2019, private education and consumer loans funded with operating cash, and loans acquired subsequent to December 31, 2019. 60 The forecasted future undiscounted cash flows of approximately $1.89 billion include approximately $1.01 billion (as of December 31, 2019) of overcollateralization included in the asset-backed securitizations. These excess net asset positions are reflected variously in the following balances on the consolidated balance sheet: "loans receivable," "restricted cash," and receivable." The difference between the total estimated future undiscounted cash flows and the "accrued interest overcollateralization of approximately $0.88 billion, or approximately $0.67 billion after income taxes based on the estimated effective tax rate, is expected to be accretive to the Company's December 31, 2019 balance of consolidated shareholders' equity. Two of the Company’s asset-backed securitizations as of December 31, 2019 are structured as “Turbo Transactions” which require all cash generated from the student loans (including excess spread) to be directed toward payment of interest and any outstanding principal generally until such time as all principal on the notes has been paid in full. Once the notes in such transactions are paid in full, if any) in the securitizations will be released to the Company, at which time the Company will have the option to refinance or sell these assets, or retain them on the balance sheet as unencumbered assets. the remaining unencumbered student loans (and other remaining assets, 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 $135 million to $165 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 61 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 $75 million to $95 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. See Item 1A, "Risk Factors - Loan Portfolio - Interest rate risk - replacement of LIBOR as a benchmark rate." The Company uses the current forward interest rate yield curve to forecast cash flows. A change in the forward interest rate curve would impact the future cash flows generated from the portfolio. An increase in future interest rates will reduce the amount of fixed rate floor income the Company is currently receiving. The Company attempts to mitigate the impact of a rise in short-term rates by hedging interest rate risks. The forecasted cash flow does not include cash flows the Company expects to pay/receive related to derivative instruments used by the Company to manage interest rate risk. See Item 7A, "Quantitative and Qualitative Disclosures About Market Risk — Interest Rate Risk." Extinguishment of Certain Asset-Backed Securitizations (Including Turbo Transactions) During 2019, the Company extinguished $1.05 billion of notes payable in certain asset-backed securitizations, including six of the Company's eight Turbo Transactions (prior to the notes' contractual maturities). These transactions resulted in the release of $1.45 billion in student loans and accrued interest receivable that were previously encumbered in the asset-backed securitizations. To extinguish the notes, the Company paid premiums of $14.0 million and wrote off $2.7 million of debt issuance costs associated with these securitizations. In total, the Company recognized $16.7 million in expenses in 2019 to extinguish these notes. Upon extinguishment of the notes payable throughout 2019, the Company refinanced the student loans in its FFELP warehouse facilities and new asset-backed securitizations, resulting in net cash proceeds of $387.1 million. The cash proceeds generated by the debt extinguishments were used to pay down a significant portion of the outstanding balance on the Company's unsecured line of credit and provides the Company with increased liquidity and the opportunity to invest the previously underutilized capital at higher returns. 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, 2019, the Company had two FFELP warehouse facilities with an aggregate maximum financing amount available of $1.1 billion, of which $0.8 billion was outstanding and $0.3 billion was available for additional funding. One warehouse facility has a static advance rate until the expiration date of the liquidity provisions (May 20, 2020). 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, 2021). 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, 2019, the Company had $42.6 million advanced as equity support on these facilities. For further discussion of the Company's FFELP warehouse facilities outstanding at December 31, 2019, see note 4 of the notes to consolidated financial statements included in this report. On January 11, 2019, the Company obtained a consumer loan warehouse facility that has an aggregate maximum financing amount available of $200.0 million, an advance rate of 70 or 75 percent depending on the type of collateral and subject to certain concentration limits, liquidity provisions to April 23, 2021, and a final maturity date of April 23, 2022. As of December 31, 2019, $116.6 million was outstanding under this facility and $83.4 million was available for future funding. Additionally, as of December 31, 2019, the Company had $41.3 million advanced as equity support under this facility. On January 31, 2020, the Company sold $124.2 (par value) of consumer loans to an unrelated third party. A portion of such loans were funded in the consumer loan warehouse. After completion of this loan sale, the outstanding balance under the consumer loan warehouse was $61.5 million, $138.5 million was available for future funding, and $1.3 million was advanced as equity support. On February 13, 2020, the Company closed on a private loan warehouse facility with an aggregate maximum financing amount available of $100.0 million, with an additional $100.0 million available at the request of the Company and approval of the lender, an advance rate of 90 percent, liquidity provisions through February 15, 2021, and a final maturity date of February 11, 2022. The Company currently anticipates funding approximately $110 million of private loan assets in this facility. 62 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. The Company plans to fund additional loan acquisitions using current cash and investments; using its Union Bank participation agreement (as described below); using its existing warehouse facilities (as described above); 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, 2019, $749.6 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 2019, the Company completed seven FFELP asset-backed securitizations totaling $2.8 billion (par value). The proceeds from these transactions were used primarily to refinance student loans included in the Company's FFELP warehouse facilities and unencumbered student loans from the extinguishment of certain asset-backed securitizations. On June 25, 2019, the Company completed a private education loan asset-backed securitization totaling $47.2 million (par value). The proceeds from this transaction were used to refinance private education loans previously funded via a private loan repurchase agreement that was terminated on June 25, 2019. See note 4 of the notes to consolidated financial statements included in this report for additional information on these securitizations. Depending on future market conditions, the Company currently anticipates continuing to access the asset-backed securitization market. Such asset-backed securitization transactions would be used to refinance loans included in its warehouse facilities, loans purchased from third parties, and/or student loans in its existing asset-backed securitizations. 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, 2019, the Company does not currently anticipate any movement in interest rates having a material impact on its capital or liquidity profile, nor does the Company expect that any movement in interest rates would have a material impact on its ability to meet potential collateral deposits with its counterparties and/or make variation margin payments to its third-party clearinghouse. However, if interest rates move materially and negatively impact the fair value of the Company's derivative portfolio, the replacement of LIBOR as a benchmark rate has significant adverse impacts on our derivatives, or if the Company enters into additional derivatives for which the fair value becomes negative, the Company could be required to deposit additional collateral with its derivative instrument counterparties and/or make variation margin payments to its third-party clearinghouse. The collateral deposits or variation margin, if significant, could negatively impact the Company's liquidity and capital resources. 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 5 of the notes to consolidated financial statements included in this report for additional information on the Company's derivative portfolio. 63 Liquidity Impact Related to the Communications Operating Segment ALLO has made significant investments in its communications network and currently provides fiber directly to homes and businesses in communities in Nebraska and Colorado. ALLO plans to continue to increase market share and revenue in its existing markets and is currently evaluating opportunities to expand to other communities in the Midwest. In 2019, ALLO's capital expenditures were $45.0 million. The Company anticipates total ALLO network capital expenditures in 2020 will be approximately $35.0 million to $45.0 million. However, this amount could change based on customer demand for ALLO's services. The Company currently plans to use cash from operating activities and its third-party unsecured line of credit to fund ALLO's capital expenditures, as well as potentially other third-party financing alternatives. Other Debt Facilities 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, 2019, the unsecured line of credit had $50.0 million outstanding and $405.0 million was available for future use. On May 30, 2019, the Company entered into a $22.0 million secured line of credit agreement with a maturity date of May 30, 2022. As of December 31, 2019, 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. The Company has issued Junior Subordinated Hybrid Securities (the "Hybrid Securities") that have a final maturity of September 15, 2061. The Hybrid Securities are unsecured obligations of the Company. As of December 31, 2019, the Company had $20.4 million of Hybrid Securities that remain outstanding. For further discussion of these debt facilities described above, see note 4 of the notes to consolidated financial statements included in this report. Stock Repurchases The Board of Directors has authorized a stock repurchase program to repurchase up to a total of five million shares of the Company's Class A common stock during the three-year period ending May 7, 2022. As of December 31, 2019, 4,803,877 shares remain authorized for purchase under the Company's repurchase program. 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 2019 and 2018 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. Year ended December 31, 2019 Year ended December 31, 2018 Total shares repurchased Purchase price (in thousands) Average price of shares repurchased (per share) 726,273 $ 868,147 40,411 $ 45,331 55.64 52.22 Included in the shares repurchased during 2019 in the table above are a total of 180,000 shares of Class A common stock the Company purchased on June 17, 2019 from one of the Company's significant shareholders, Shelby J. Butterfield, the widow of Stephen F. Butterfield, the Company's former Vice-Chairman and significant shareholder who passed away in April 2018, and from the Butterfield Family Trust, an estate planning trust for the family of Mr. Butterfield. The shares were purchased at a discount to the closing market price of the Company's Class A common stock as of June 17, 2019, and the transaction was separately approved by the Company's Board of Directors. 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 $0.18 per share on the Company’s Class A and Class B common stock were paid on March 15, 2019, June 14, 2019, and September 13, 2019, respectively, and a dividend of $0.20 per share was paid on December 13, 2019. The Company's Board of Directors declared a first quarter 2020 cash dividend on the Company's Class A and Class B common stock of $0.20 per share. The dividend will be paid on March 13, 2020, to shareholders of record at the close of business on February 28, 2020. 64 The Company currently plans to continue making regular quarterly dividend payments, subject to future earnings, capital requirements, financial condition, and other factors. In addition, the payment of dividends is subject to the terms of the Company’s outstanding Hybrid Securities, which generally provide that if the Company defers interest payments on those securities it cannot pay dividends on its capital stock. Off-Balance Sheet Arrangements 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. Contractual Obligations The Company’s contractual obligations were as follows: Bonds and notes payable (a) Operating lease liabilities Total As of December 31, 2019 Total 20,803,180 38,883 20,842,063 $ $ Less than 1 year — 10,178 10,178 1 to 3 years 3 to 5 years 899,664 11,557 911,221 50,000 6,207 56,207 More than 5 years 19,853,516 10,941 19,864,457 (a) Amounts exclude interest as substantially all bonds and notes payable carry variable rates of interest. As of December 31, 2019, the Company had a reserve of $15.9 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 2 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 management’s estimate of probable losses on loans. This evaluation process is subject to numerous estimates and judgments. The Company evaluates the appropriateness of the allowance for loan losses separately on each of its federally insured, private education, and consumer loan portfolios. The allowance for the federally insured student loan portfolio is based on periodic evaluations of the Company’s loan portfolios considering loans in repayment versus those in a nonpaying status, delinquency status, trends in defaults in the portfolio based on Company and industry data, past experience, trends in student loan claims rejected for payment by guarantors, changes to federal student loan programs, current economic conditions, and other relevant qualitative factors. In determining the appropriateness of the allowance for loan losses on the private education and consumer loans, the Company considers several factors including: loans in repayment versus those in a nonpaying status, delinquency status, type of program, trends in defaults in the portfolio based on Company and industry data, past experience, current economic conditions, and other relevant qualitative factors. The Company places a private education or consumer loan on nonaccrual status when the collection 65 of principal and interest is 90 days past due and charges off the loan and accrued interest when the collection of principal and interest is 120 days or 180 days past due, depending on the type of loan program. The allowance for loan losses is made at a specific point in time and based on relevant information as discussed above. The allowance for loan losses is maintained at a level management believes is appropriate to provide for estimated probable credit losses inherent in the loan portfolios. 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. RECENT ACCOUNTING PRONOUNCEMENTS Allowance for Loan Losses In June 2016, the FASB issued accounting guidance regarding the measurement of credit losses on financial instruments, which changed the way entities recognize impairment of many financial assets by requiring immediate recognition of estimated credit losses expected to occur over the asset's remaining life. The estimate of credit losses under the new guidance considers historical experience, current conditions, and reasonable and supportable forecasts of future conditions. The new guidance provides significant flexibility and permits companies to use judgment in selecting the approach that is most appropriate in their circumstances. This guidance was effective for the Company beginning January 1, 2020. Prior to the effective date, the Company used an incurred loss model when calculating its allowance for loan losses. The new guidance will primarily impact the allowance for loan losses related to the Company’s federally insured student loans, which represented approximately 97.7 percent of the Company’s total loan portfolio as of December 31, 2019 and for which the Company’s loss exposure is limited by the applicable federal government guarantee, private education loans, and consumer loans. To calculate the allowance for loan losses, the Company has aggregated loans with similar risk characteristics into homogeneous pools based primarily on loan type and expects to use undiscounted cash flow and remaining life methodologies, which incorporate historical loss rates. The historical loss rates are adjusted for reasonable and supportable economic forecasts over a specific period, then reverting to the historical loss average using a straight line method. The national unemployment rate and the year over year change in gross domestic product are the key macroeconomic factors that are relevant to the Company's loan portfolio. The Company also adjusts the historical loss rates for qualitative factors to bring the allowance for loan losses to the level management believes is appropriate. The Company currently expects the impact upon adoption to increase the allowance for loan losses by $60 million to $80 million, which includes a reclassification of the non-accretable discount balance and premiums related to loans purchased with evidence of credit deterioration, and decrease retained earnings, net of tax, by $10 million to $20 million. The Company is in the process of finalizing the review of the loss models, economic forecasts, and qualitative adjustments and the models will be refined as needed. Future allowance for loan loss levels will depend on the characteristics of the Company's loan portfolio, economic conditions and forecasts, and other management judgments. ITEM 7A. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK (All dollars are in thousands, except share amounts, unless otherwise noted) Interest Rate Risk The Company’s primary market risk exposure arises from fluctuations in its borrowing and lending rates, the spread between which could impact the Company due to shifts in market interest rates. The following table sets forth the Company’s loan assets and debt instruments by rate characteristics: Fixed-rate loan assets Variable-rate loan assets Total Fixed-rate debt instruments Variable-rate debt instruments Total As of December 31, 2019 As of December 31, 2018 Dollars Percent Dollars Percent $ $ $ $ 3,647,365 17,151,354 20,798,719 562,203 20,240,977 20,803,180 17.5 % $ 2,792,734 82.5 19,727,764 100.0 % $ 22,520,498 2.7 % $ 88,128 97.3 22,448,971 100.0 % $ 22,537,099 12.4 % 87.6 100.0 % 0.4 % 99.6 100.0 % FFELP loans originated prior to April 1, 2006 generally earn interest at the higher of the borrower rate, which is fixed over a period of time, or a floating rate based on the special allowance payment ("SAP") formula set by the Department. The SAP rate 66 is based on an applicable index plus a fixed spread that depends on loan type, origination date, and repayment status. The Company generally finances its student loan portfolio with variable rate debt. In low and/or declining interest rate environments, when the fixed borrower rate is higher than the SAP rate, the Company’s student loans earn at a fixed rate while the interest on the variable rate debt typically continues to reflect the low and/or declining interest rates. In these interest rate environments, the Company may earn additional spread income that it refers to as floor income. Depending on the type of loan and when it was originated, the borrower rate is either fixed to term or is reset to an annual rate each July 1. As a result, for loans where the borrower rate is fixed to term, the Company may earn floor income for an extended period of time, which the Company refers to as fixed rate floor income, and for those loans where the borrower rate is reset annually on July 1, the Company may earn floor income to the next reset date, which the Company refers to as variable rate floor income. All FFELP loans first originated on or after April 1, 2006 effectively earn at the SAP rate, since lenders are required to rebate fixed rate floor income and variable rate floor income for those loans to the Department. No variable-rate floor income was earned by the Company during the years ended December 31, 2019 and 2018. A summary of fixed rate floor income earned by the Company during these years follows. Fixed rate floor income, gross Derivative settlements (a) Fixed rate floor income, net Year ended December 31, 2019 2018 $ $ 49,677 40,192 89,869 56,811 64,901 121,712 (a) Includes settlement payments on derivatives used to hedge student loans earning fixed rate floor income. Gross fixed rate floor income decreased in 2019 as compared to 2018 due to higher interest rates in 2019 as compared to 2018. Absent the use of derivative instruments, a rise in interest rates will reduce the amount of floor income received and has an impact on earnings due to interest margin compression caused by increasing financing costs, until such time as the federally insured loans earn interest at a variable rate in accordance with their SAP formulas. In higher interest rate environments, where the interest rate rises above the borrower rate and fixed rate loans effectively become variable rate loans, the impact of the rate fluctuations is reduced. The decrease in derivative settlements from the floor income interest rate swaps in 2019 as compared to 2018 was due to a decrease in the notional amount of derivatives outstanding, partially offset by higher interest rates in 2019 as compared to 2018. The following graph depicts fixed rate floor income for a borrower with a fixed rate of 6.75% and a SAP rate of 2.64%: 67 The following table shows the Company’s federally insured student loan assets that were earning fixed rate floor income as of December 31, 2019: Fixed interest rate range Borrower/lender weighted average yield Estimated variable conversion rate (a) Loan balance 4.5 - 4.99% 5.0 - 5.49% 5.5 - 5.99% 6.0 - 6.49% 6.5 - 6.99% 7.0 - 7.49% 7.5 - 7.99% 8.0 - 8.99% > 9.0% 4.72% 5.22% 5.67% 6.19% 6.70% 7.17% 7.71% 8.18% 9.05% $ 2.08% 2.58% 3.03% 3.55% 4.06% 4.53% 5.07% 5.54% 6.41% 727,086 470,843 320,031 367,409 357,842 125,674 224,635 525,108 197,829 $ 3,316,457 (a) The estimated variable conversion rate is the estimated short-term interest rate at which loans would convert to a variable rate. As of December 31, 2019, the weighted average estimated variable conversion rate was 3.72% and the short-term interest rate was 182 basis points. The following table summarizes the outstanding derivative instruments as of December 31, 2019 used by the Company to economically hedge loans earning fixed rate floor income. Maturity Notional amount Weighted average fixed rate paid by the Company (a) 2020 2021 2022 (b) 2023 $ $ 1,500,000 600,000 250,000 150,000 2,500,000 1.01 % 2.15 1.65 2.25 1.42 % (a) (b) For all interest rate derivatives, the Company receives discrete three-month LIBOR. These derivatives have forward effective start dates in June 2021. 68 The Company is also exposed to interest rate risk in the form of basis risk and repricing risk because the interest rate characteristics of the Company’s assets do not match the interest rate characteristics of the funding for those assets. The following table presents the Company’s FFELP student loan assets and related funding for those assets arranged by underlying indices as of December 31, 2019: Index 1 month LIBOR (a) 3 month H15 financial commercial paper 3 month Treasury bill 1 month LIBOR 3 month LIBOR (a) Asset-backed commercial paper (b) Auction-rate (c) Fixed rate Other (d) Frequency of variable resets Daily Daily Daily Monthly Quarterly Varies Varies — — Assets $ 18,871,312 842,100 615,131 — — — — — 1,360,457 21,689,000 $ Funding of student loan assets — — — 10,956,371 7,472,627 778,094 768,626 512,836 1,200,446 21,689,000 (a) The Company has certain basis swaps outstanding in which the Company receives three-month LIBOR and pays one-month LIBOR plus or minus a spread as defined in the agreements (the "1:3 Basis Swaps"). The Company entered into these derivative instruments to better match the interest rate characteristics on its student loan assets and the debt funding such assets. The following table summarizes the 1:3 Basis Swaps outstanding as of December 31, 2019. Maturity Notional amount (i) 2020 2021 2022 (ii) 2023 2024 2026 2027 $ $ 1,000,000 250,000 2,000,000 750,000 1,750,000 1,150,000 250,000 7,150,000 (i) (ii) The weighted average rate paid by the Company on the 1:3 Basis Swaps as of December 31, 2019 was one-month LIBOR plus 9.7 basis points. $750 million of the notional amount of these derivatives have forward effective start dates in May 2020. (b) (c) (d) The interest rates on the Company's warehouse facilities are indexed to asset-backed commercial paper rates. As of December 31, 2019, the Company was sponsor for $768.6 million of outstanding asset-backed securities that were set and provide for interest rates to be periodically reset via a "dutch auction" (“Auction Rate Securities”). Since the auction feature has essentially been inoperable for substantially all auction rate securities since 2008, the Auction Rate Securities generally pay interest to the holder at a maximum rate as defined by the indenture. While these rates will vary, they will generally be based on a spread to LIBOR or Treasury Securities, or the Net Loan Rate as defined in the financing documents. Assets include accrued interest receivable and restricted cash. Funding represents overcollateralization (equity) and other liabilities included in FFELP asset-backed securitizations and warehouse facilities. There is significant uncertainty regarding the availability of LIBOR as a benchmark rate after 2021, and any market transition away from the current LIBOR framework could result in significant changes to the interest rate characteristics of the Company's LIBOR-indexed assets and funding for those assets. See Item 1A, "Risk Factors - Loan Portfolio - Interest rate risk - replacement of LIBOR as a benchmark rate." 69 Sensitivity Analysis The following tables summarize the effect on the Company’s earnings, based upon a sensitivity analysis performed by the Company assuming hypothetical increases in interest rates of 100 basis points and 300 basis points while funding spreads remain constant. In addition, a sensitivity analysis was performed assuming the funding index increases 10 basis points and 30 basis points while holding the asset index constant, if the funding index is different than the asset index. The sensitivity analysis was performed on the Company’s variable rate assets (including loans earning fixed rate floor income) and liabilities. The analysis includes the effects of the Company’s derivative instruments in existence during these periods. Interest rates Asset and funding index mismatches Change from increase of 100 basis points Change from increase of 300 basis points Increase of 10 basis points Increase of 30 basis points Dollars Percent Dollars Percent Dollars Percent Dollars Percent Year ended December 31, 2019 Effect on earnings: Decrease in pre-tax net income before impact of derivative settlements $ (23,199) (13.1)% $ (43,368) (24.5)% $ (9,462) (5.3)% $ (28,385) (16.1)% Impact of derivative settlements 28,793 16.3 86,380 48.8 6,780 3.8 20,340 11.5 Increase (decrease) in net income before taxes Increase (decrease) in basic and diluted earnings per share $ $ Effect on earnings: Decrease in pre-tax net income before 5,594 3.2 % $ 43,012 24.3 % $ (2,682) (1.5)% $ (8,045) (4.6)% 0.11 $ 0.82 $ (0.05) $ (0.15) Year ended December 31, 2018 impact of derivative settlements $ (20,162) (7.0)% $ (35,592) (12.4)% $ (11,769) (4.1)% $ (35,306) (12.3)% Impact of derivative settlements 62,310 21.8 186,927 65.3 7,775 2.7 23,326 8.1 Increase (decrease) in net income before taxes Increase (decrease) in basic and diluted earnings per share $ 42,148 14.8 % $ 151,335 52.9 % $ (3,994) (1.4)% $ (11,980) (4.2)% $ 0.78 $ 2.81 $ (0.07) $ (0.22) Financial Statement Impact – Derivatives including the For a table summarizing the effect of derivative instruments in the consolidated statements of income, components of "derivative market value and foreign currency transaction adjustments and derivative settlements, net" included in the consolidated statements of income, see note 5 of the notes to consolidated financial statements included in this report. ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA Reference is made to the consolidated financial statements listed under the heading “(a) 1. Consolidated Financial Statements” of Item 15 of this report, which consolidated financial statements are incorporated into this report by reference in response to this Item 8. ITEM 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND FINANCIAL DISCLOSURE None. ITEM 9A. CONTROLS AND PROCEDURES Disclosure Controls and Procedures The Company’s management, with the participation of the Company's principal executive and principal financial officers, evaluated the effectiveness of the Company's disclosure controls and procedures (as defined in Rules 13a-15(e) and 15d-15(e) under the Securities Exchange Act of 1934) as of December 31, 2019. Based on this evaluation, the Company’s principal executive and principal financial officers concluded that the Company's disclosure controls and procedures were effective as of December 31, 2019. 70 Changes in Internal Control over Financial Reporting There were no changes in the Company's internal control over financial reporting during the fiscal quarter ended December 31, 2019 that have materially affected, or are reasonably likely to materially affect, the Company's internal control over financial reporting. Effective January 1, 2019, the Company implemented ASC Topic 842, Leases. As a result, management made the following significant modifications to its internal control over financial reporting environment, including changes to accounting policies and procedures, operational processes, and documentation practices: (a) (b) (c) (d) Updated policies and procedures related to accounting for lease assets and liabilities and related income and expense. Modified contract review controls to consider the new criteria for determining whether a contract is or contains a lease, specifically to clarify the definition of a lease and align with the concept of control. Added controls for reevaluating significant assumptions and judgments regarding leases on a quarterly basis. Added controls to address related required disclosures regarding leases, judgments used in applying ASC Topic 842. including significant assumptions and Management's Report on Internal Control over Financial Reporting Management is responsible for establishing and maintaining adequate internal control over financial reporting (as defined in Rule 13a-15(f) under the Securities Exchange Act of 1934) for the Company. The Company's internal control system is designed to provide reasonable assurance to the Company's management and board of directors regarding the reliability of financial reporting and the preparation and fair presentation of published financial statements in accordance with U.S. generally accepted accounting principles. Management assessed the effectiveness of the Company's internal control over financial reporting as of December 31, 2019 based on the criteria for effective internal control described in Internal Control - Integrated Framework (2013) issued by the Committee of Sponsoring Organizations of the Treadway Commission. Based on this assessment, management believes that, as of December 31, 2019, the Company's internal control over financial reporting is effective. The effectiveness of the Company's internal control over financial reporting as of December 31, 2019 has been audited by KPMG LLP, the Company's independent registered public accounting firm, as stated in their report included herein. Inherent Limitations on Effectiveness of Internal Controls The Company's management, including the chief executive and chief financial officers, understands that the disclosure controls and procedures and internal control over financial reporting are subject to certain limitations, including the exercise of judgment in designing, implementing, and evaluating the controls and procedures, the assumptions used in identifying the likelihood of future events, and the inability to eliminate misconduct completely. Because of its inherent limitations, internal control over financial reporting may not prevent or detect misstatements. Also, projections of any evaluation of effectiveness to future periods are subject to the risk that controls may become inadequate because of changes in conditions, or that the degree of compliance with the policies or procedures may deteriorate. 71 Report of Independent Registered Public Accounting Firm To the Shareholders and Board of Directors Nelnet, Inc.: Opinion on Internal Control Over Financial Reporting We have audited Nelnet, Inc. and subsidiaries’ (the Company) internal control over financial reporting as of December 31, 2019, based on criteria established in Internal Control – Integrated Framework (2013) issued by the Committee of Sponsoring Organizations of the Treadway Commission. In our opinion, the Company maintained, in all material respects, effective internal control over financial reporting as of December 31, 2019, based on criteria established in Internal Control – Integrated Framework (2013) issued by the Committee of Sponsoring Organizations of the Treadway Commission. We also have audited, in accordance with the standards of the Public Company Accounting Oversight Board (United States) (PCAOB), the consolidated balance sheets of the Company as of December 31, 2019 and 2018, the related consolidated statements of income, comprehensive income, shareholders’ equity, and cash flows for each of the years in the three-year period ended December 31, 2019, and the related notes (collectively, the consolidated financial statements), and our report dated February 27, 2020 expressed an unqualified opinion on those consolidated financial statements. Basis for Opinion The Company’s management is responsible for maintaining effective internal control over financial reporting and for its assessment of the effectiveness of internal control over financial reporting, included in the accompanying Management's Report on Internal Control over Financial Reporting. Our responsibility is to express an opinion on the Company’s internal control over financial reporting based on our audit. We are a public accounting firm registered with the PCAOB and are required to be independent with respect to the Company in accordance with the U.S. federal securities laws and the applicable rules and regulations of the Securities and Exchange Commission and the PCAOB. We conducted our audit in accordance with the standards of the PCAOB. Those standards require that we plan and perform the audit to obtain reasonable assurance about whether effective internal control over financial reporting was maintained in all material respects. Our audit of internal control over financial reporting included obtaining an understanding of internal control over financial reporting, assessing the risk that a material weakness exists, and testing and evaluating the design and operating effectiveness of internal control based on the assessed risk. Our audit also included performing such other procedures as we considered necessary in the circumstances. We believe that our audit provides a reasonable basis for our opinion. Definition and Limitations of Internal Control Over Financial Reporting A company’s internal control over financial reporting is a process designed to provide reasonable assurance regarding the reliability of financial reporting and the preparation of financial statements for external purposes in accordance with generally accepted accounting principles. A company’s internal control over financial reporting includes those policies and procedures that (1) pertain to the maintenance of records that, in reasonable detail, accurately and fairly reflect the transactions and dispositions of the assets of the company; (2) provide reasonable assurance that transactions are recorded as necessary to permit preparation of financial statements in accordance with generally accepted accounting principles, and that receipts and expenditures of the company are being made only in accordance with authorizations of management and directors of the company; and (3) provide reasonable assurance regarding prevention or timely detection of unauthorized acquisition, use, or disposition of the company’s assets that could have a material effect on the financial statements. Because of its inherent limitations, internal control over financial reporting may not prevent or detect misstatements. Also, projections of any evaluation of effectiveness to future periods are subject to the risk that controls may become inadequate because of changes in conditions, or that the degree of compliance with the policies or procedures may deteriorate. /s/ KPMG LLP Lincoln, Nebraska February 27, 2020 ITEM 9B. OTHER INFORMATION During the fourth quarter of 2019, no information was required to be disclosed in a report on Form 8-K, but not reported. 72 PART III. ITEM 10. DIRECTORS, EXECUTIVE OFFICERS, AND CORPORATE GOVERNANCE The information as to the directors, executive officers, and corporate governance of the Company set forth under the captions “PROPOSAL 1 - ELECTION OF DIRECTORS,” “EXECUTIVE OFFICERS,” and “CORPORATE GOVERNANCE,” and the information as to any delinquent report under Section 16(a) of the Securities Exchange Act of 1934 set forth under the caption “SECURITY OWNERSHIP OF DIRECTORS, EXECUTIVE OFFICERS, AND PRINCIPAL SHAREHOLDERS - Delinquent Section 16(a) Reports," to the extent any such disclosure is required, in the definitive Proxy Statement to be filed on Schedule 14A with the SEC, no later than 120 days after the end of the Company's fiscal year, relating to the Company's 2020 Annual Meeting of Shareholders scheduled to be held on May 21, 2020 (the “Proxy Statement”), is incorporated herein by reference. ITEM 11. EXECUTIVE COMPENSATION The information set forth under the captions “CORPORATE GOVERNANCE” and “EXECUTIVE COMPENSATION” in the Proxy Statement is incorporated herein by reference. ITEM 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT AND RELATED STOCKHOLDER MATTERS The information set forth under the caption “SECURITY OWNERSHIP OF DIRECTORS, EXECUTIVE OFFICERS, AND PRINCIPAL SHAREHOLDERS - Stock Ownership” in the Proxy Statement is incorporated herein by reference. There are no arrangements known to the Company, the operation of which may at a subsequent date result in a change in the control of the Company. The following table summarizes information about compensation plans under which equity securities are authorized for issuance. Equity Compensation Plan Information As of December 31, 2019 Number of shares to be issued upon exercise of outstanding options, warrants, and rights (a) Weighted-average exercise price of outstanding options, warrants, and rights (b) Number of shares remaining available for future issuance under equity compensation plans (excluding securities reflected in column (a)) (c) — — — — — — 1,962,539 (1) — 1,962,539 Plan category Equity compensation plans approved by shareholders Equity compensation plans not approved by shareholders Total (1) Includes 1,435,213, 97,698, and 429,628 shares of Class A Common Stock remaining available for future issuance under the Nelnet, Inc. Restricted Stock Plan, Nelnet, Inc. Directors Stock Compensation Plan, and Nelnet, Inc. Employee Share Purchase Plan, respectively. ITEM 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS, AND DIRECTOR INDEPENDENCE the captions “CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS,” The information set “CORPORATE GOVERNANCE - Board Composition and Director Independence,” and “CORPORATE GOVERNANCE - Board Committees” in the Proxy Statement is incorporated herein by reference. forth under ITEM 14. PRINCIPAL ACCOUNTING FEES AND SERVICES The information set forth under the caption “PROPOSAL 2 - RATIFICATION OF APPOINTMENT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM - Independent Accountant Fees and Services” in the Proxy Statement is incorporated herein by reference. 73 ITEM 15. EXHIBITS AND FINANCIAL STATEMENT SCHEDULES (a) 1. Consolidated Financial Statements PART IV. The following consolidated financial statements of Nelnet, Inc. and its subsidiaries and the Report of Independent Registered Public Accounting Firm thereon are included in Item 8 above: Report of Independent Registered Public Accounting Firm Consolidated Balance Sheets as of December 31, 2019 and 2018 Consolidated Statements of Income for the years ended December 31, 2019, 2018, and 2017 Consolidated Statements of Comprehensive Income for the years ended December 31, 2019, 2018, and 2017 Consolidated Statements of Shareholders' Equity for the years ended December 31, 2019, 2018, and 2017 Consolidated Statements of Cash Flows for the years ended December 31, 2019, 2018, and 2017 Notes to Consolidated Financial Statements 2. Financial Statement Schedules Page F-2 F-4 F-5 F-6 F-7 F-8 F-10 All schedules are omitted because they are not applicable or the required information is shown in the consolidated financial statements or notes thereto. 3. Exhibits The exhibits listed in the accompanying index to exhibits are filed, furnished, or incorporated by reference as part of this report. (b) Exhibits Exhibit No. Description Exhibit Index 2.1 ++ Stock Purchase Agreement dated as of October 18, 2017, among Nelnet Diversified Solutions, LLC, as Purchaser, Nelnet, Inc., as Purchaser Parent, and Great Lakes Higher Education Corporation, as Seller, filed as Exhibit 2.1 to the registrant's Annual Report on Form 10-K for the year ended December 31, 2017 and incorporated herein by reference. 2.2 2.3 3.1 3.2 4.1* 4.2 First Amendment to Stock Purchase Agreement dated as of February 1, 2018, among Nelnet Diversified Solutions, LLC, as Purchaser, Nelnet, Inc., as Purchaser Parent, and Great Lakes Higher Education Corporation, as Seller, filed as Exhibit 2.2 to the registrant's Annual Report on Form 10-K for the year ended December 31, 2017 and incorporated herein by reference. Second Amendment to Stock Purchase Agreement dated as of February 1, 2018, among Nelnet Diversified Solutions, LLC, as Purchaser, Nelnet, Inc., as Purchaser Parent, and Great Lakes Higher Education Corporation, as Seller, filed as Exhibit 2.3 to the registrant's Annual Report on Form 10-K for the year ended December 31, 2017 and incorporated herein by reference. Composite Third Amended and Restated Articles of Incorporation of Nelnet, Inc., as amended on May 23, 2019, filed as Exhibit 3.2 to the registrant's Quarterly Report on Form 10-Q for the quarter ended June 30, 2019 and incorporated herein by reference. Ninth Amended and Restated Bylaws of Nelnet, Inc., as amended as of May 24, 2018, filed as Exhibit 3.2 to the registrant's Current Report on Form 8-K filed on May 24, 2018 and incorporated herein by reference. Description of Securities Registered Under Section 12 of the Securities Exchange Act of 1934. Form of Class A Common Stock Certificate of Nelnet, Inc., filed on November 24, 2003 as Exhibit 4.1 to the registrant’s Registration Statement on Form S-1 (Registration No. 333-108070) and incorporated herein by reference. 74 4.3 4.4 10.1 10.2 10.3 10.4 10.5 10.6 10.7 10.8 10.9 10.10+ 10.11 10.12 10.13 Certain instruments, including indentures of trust, defining the rights of holders of long-term debt of the registrant and its consolidated subsidiaries, none of which instruments authorizes a total amount of indebtedness thereunder in excess of 10 percent of the total assets of the registrant and its subsidiaries on a consolidated basis, are omitted from this Exhibit Index pursuant to Item 601(b)(4)(iii)(A) of Regulation S-K. Many of such instruments have been previously filed with the Securities and Exchange Commission, and the registrant hereby agrees to furnish a copy of any such instrument to the Commission upon request. Registration Rights Agreement, dated as of December 16, 2003, by and among Nelnet, Inc. and the shareholders of Nelnet, Inc. signatory thereto, filed on November 24, 2003 as Exhibit 4.11 to the registrant’s Registration Statement on Form S-1 (Registration No. 333-108070) and incorporated herein by reference. Composite Form of Amended and Restated Participation Agreement, dated as of June 1, 2001, between NELnet, Inc. (subsequently renamed National Education Loan Network, Inc.) and Union Bank and Trust Company, as amended by the First Amendment thereto dated as of December 19, 2001 through the Cancellation of the Fifteenth Amendment thereto dated as of March 16, 2011 (such Participation Agreement and each amendment through the Cancellation of the Fifteenth Amendment thereto have been previously filed as set forth in the Exhibit Index for the registrant’s Annual Report on Form 10-K for the year ended December 31, 2012, and are incorporated herein by reference), filed as Exhibit 10.1 to the registrant's Annual Report on Form 10-K for the year ended December 31, 2013 and incorporated herein by reference. Sixteenth Amendment of Amended and Restated Participation Agreement, dated as of March 23, 2012, by and between Union Bank and Trust Company and National Education Loan Network, Inc., filed as Exhibit 10.3 to the registrant's Quarterly Report on Form 10-Q for the quarter ended March 31, 2012 and incorporated herein by reference. Seventeenth Amendment of Amended and Restated Participation Agreement, dated as of August 1, 2019, by and between Union Bank and Trust Company and National Education Loan Network, Inc., filed as Exhibit 10.2 to the registrant's Quarterly Report on Form 10-Q for the quarter ended September 30, 2019 and incorporated herein by reference. Guaranteed Purchase Agreement, dated as of March 19, 2001, by and between NELnet, Inc. (subsequently renamed National Education Loan Network, Inc.) and Union Bank and Trust Company, filed on September 25, 2003 as Exhibit 10.36 to the registrant’s Registration Statement on Form S-1 (Registration No. 333-108070) and incorporated herein by reference. First Amendment of Guaranteed Purchase Agreement, dated as of February 1, 2002, by and between NELnet, Inc. (subsequently renamed National Education Loan Network, Inc.) and Union Bank and Trust Company, filed on September 25, 2003 as Exhibit 10.37 to the registrant’s Registration Statement on Form S-1 (Registration No. 333-108070) and incorporated herein by reference. Second Amendment of Guaranteed Purchase Agreement, dated as of December 1, 2002, by and between Nelnet, Inc. (f/k/a/ NELnet, Inc.) (subsequently renamed National Education Loan Network, Inc.) and Union Bank and Trust Company, filed on September 25, 2003 as Exhibit 10.38 to the registrant’s Registration Statement on Form S-1 (Registration No. 333-108070) and incorporated herein by reference. Guaranteed Purchase Agreement, dated as of September 1, 2010, by and between Nelnet, Inc. and Union Bank and Trust Company, filed as Exhibit 10.3 to the registrant's Quarterly Report on Form 10-Q for the quarter ended September 30, 2010 and incorporated herein by reference. First Amendment of Guaranteed Purchase Agreement, dated as of March 22, 2011, by and between Nelnet, Inc. and Union Bank and Trust Company, filed as Exhibit 10.2 to the registrant's Quarterly Report on Form 10-Q for the quarter ended March 31, 2011 and incorporated herein by reference. Amendment of Agreements dated as of February 4, 2005, by and between National Education Loan Network, Inc. and Union Bank and Trust Company, filed as Exhibit 10.1 to the registrant’s Current Report on Form 8-K filed on February 10, 2005 and incorporated herein by reference. Nelnet, Inc. Employee Share Purchase Plan, as amended through March 17, 2011, filed as Exhibit 10.4 to the registrant's Quarterly Report on Form 10-Q for the quarter ended March 31, 2011 and incorporated herein by reference. Office Building Lease dated June 21, 1996 between Miller & Paine and Union Bank and Trust Company, filed as Exhibit 10.3 to the registrant's Current Report on Form 8-K filed on October 16, 2006 and incorporated herein by reference. Amendment to Office Building Lease dated June 11, 1997 between Miller & Paine and Union Bank and Trust Company, filed as Exhibit 10.4 to the registrant's Current Report on Form 8-K filed on October 16, 2006 and incorporated herein by reference. Lease Amendment Number Two dated February 8, 2001 between Miller & Paine and Union Bank and Trust Company, filed as Exhibit 10.5 to the registrant's Current Report on Form 8-K filed on October 16, 2006 and incorporated herein by reference. 75 10.14 10.15 10.16 10.17 10.18 10.19 Lease Amendment Number Three dated May 23, 2005 between Miller & Paine, LLC and Union Bank and Trust Company, filed as Exhibit 10.6 to the registrant's Current Report on Form 8-K filed on October 16, 2006 and incorporated herein by reference. Lease Amendment Number Four dated November 13, 2007 between M & P Building, LLC and Union Bank and Trust Company, filed as Exhibit 10.14 to the registrant's Annual Report on Form 10-K for the year ended December 31, 2017 and incorporated herein by reference. Lease Amendment Number Five entered into in September 2008 between M & P Building, LLC and Union Bank and Trust Company, filed as Exhibit 10.15 to the registrant's Annual Report on Form 10-K for the year ended December 31, 2017 and incorporated herein by reference. Lease Amendment Number Six dated December 15, 2017 between Nelnet Real Estate Ventures, Inc. and Union Bank and Trust Company, filed as Exhibit 10.16 to the registrant's Annual Report on Form 10-K for the year ended December 31, 2017 and incorporated herein by reference. Lease Agreement dated May 20, 2005 between Miller & Paine, LLC and Union Bank and Trust Company, filed as Exhibit 10.7 to the registrant's Current Report on Form 8-K filed on October 16, 2006 and incorporated herein by reference. Office Sublease dated April 30, 2001 between Union Bank and Trust Company and Nelnet, Inc., filed as Exhibit 10.8 to the registrant's Current Report on Form 8-K filed on October 16, 2006 and incorporated herein by reference. 10.20+ Nelnet, Inc. Restricted Stock Plan, as amended through May 22, 2014, filed as Exhibit 10.1 to the registrant's Current Report on Form 8-K filed on May 28, 2014 and incorporated herein by reference. 10.21*+ Amendment to Nelnet, Inc. Restricted Stock Plan, effective as of February 11, 2020. 10.22+ 10.23+ 10.24 10.25 10.26 10.27 10.28 10.29 10.30 10.31 Nelnet, Inc. Directors Stock Compensation Plan, as amended through March 21, 2018, filed as Exhibit 10.1 to the registrant's Current Report on Form 8-K filed on May 24, 2018 and incorporated herein by reference. Nelnet, Inc. Executive Officers Incentive Compensation Plan, effective as of January 1, 2019, filed as Exhibit 10.1 to the registrant's Current Report on Form 8-K filed on May 23, 2019 and incorporated herein by reference. Loan Purchase Agreement, dated as of November 25, 2008, by and between Nelnet Education Loan Funding, Inc., f/k/a NEBHELP, INC., acting, where applicable, by and through Wells Fargo Bank, National Association, not individually but as Eligible Lender Trustee for the Seller under the Warehouse Agreement or Eligible Lender Trust Agreement, and Union Bank and Trust Company, acting in its individual capacity and as trustee, filed as Exhibit 10.71 to the registrant's Annual Report on Form 10-K for the year ended December 31, 2008 and incorporated herein by reference. Student Loan Servicing Contract between the United States Department of Education and Nelnet Servicing, LLC, filed as Exhibit 10.1 to the registrant's Quarterly Report on Form 10-Q for the quarter ended June 30, 2010 and incorporated herein by reference. Modification of Contract dated effective as of June 17, 2014 for Student Loan Servicing Contract between the United States Department of Education and Nelnet Servicing, LLC, filed as Exhibit 10.1 to the registrant's Current Report on Form 8-K filed on June 18, 2014 and incorporated herein by reference. Modification of Contract dated effective as of September 1, 2014 for Student Loan Servicing Contract between the United States Department of Education and Nelnet Servicing, LLC, filed as Exhibit 10.1 to the registrant's Current Report on Form 8-K filed on September 2, 2014 and incorporated herein by reference. Modification of Contract dated effective as of June 16, 2019 for Student Loan Servicing Contract between the United States Department of Education and Nelnet Servicing, LLC, filed as Exhibit 10.1 to the registrant's Current Report on Form 8-K filed on May 17, 2019 and incorporated herein by reference. Modification of Contract dated effective as of November 25, 2019 for Student Loan Servicing Contract between the United States Department of Education and Nelnet Servicing, LLC, filed as Exhibit 10.1 to the registrant's Current Report on Form 8-K filed on November 27, 2019 and incorporated herein by reference. Student Loan Servicing Contract between the United States Department of Education and Great Lakes Educational Loan Services, Inc., filed as Exhibit 10.6 to the registrant's Current Report on Form 8-K filed on May 17, 2019 and incorporated herein by reference. Modification of Contract dated effective as of May 21, 2014 for Student Loan Servicing Contract between the United States Department of Education and Great Lakes Educational Loan Services, Inc., filed as Exhibit 10.7 to the registrant's Current Report on Form 8-K filed on May 17, 2019 and incorporated herein by reference. 76 10.32 10.33 10.34 10.35 10.36 10.37 10.38 10.39 10.40 10.41 10.42 10.43 10.44 10.45 10.46 10.47 Modification of Contract dated effective as of September 1, 2014 for Student Loan Servicing Contract between the United States Department of Education and Great Lakes Educational Loan Services, Inc., filed as Exhibit 10.8 to the registrant's Current Report on Form 8-K filed on May 17, 2019 and incorporated herein by reference. Modification of Contract dated effective as of June 16, 2019 for Student Loan Servicing Contract between the United States Department of Education and Great Lakes Educational Loan Services, Inc., filed as Exhibit 10.2 to the registrant's Current Report on Form 8-K filed on May 17, 2019 and incorporated herein by reference. Modification of Contract dated effective as of November 25, 2019 for Student Loan Servicing Contract between the United States Department of Education and Great Lakes Educational Loan Services, Inc., filed as Exhibit 10.2 to the registrant's Current Report on Form 8-K filed on November 27, 2019 and incorporated herein by reference. Management Agreement, dated effective as of May 1, 2011, by Whitetail Rock Capital Management, LLC and Union Bank and Trust Company, filed as Exhibit 10.3 to the registrant's Quarterly Report on Form 10-Q for the quarter ended March 31, 2011 and incorporated herein by reference. Management Agreement, dated effective as of January 20, 2012, by and between Union Bank and Trust Company and Whitetail Rock Capital Management, LLC, filed as Exhibit 10.58 to the registrant's Annual Report on Form 10-K for the year ended December 31, 2011 and incorporated herein by reference. Management Agreement, dated effective as of October 27, 2015, by and between Union Bank and Trust Company and Whitetail Rock Capital Management, LLC, filed as Exhibit 10.25 to the registrant's Annual Report on Form 10-K for the year ended December 31, 2015 and incorporated herein by reference. Management Agreement, dated effective as of January 4, 2016, by and between Union Bank and Trust Company and Whitetail Rock Capital Management, LLC, filed as Exhibit 10.1 to the registrant's Quarterly Report on Form 10-Q for the quarter ended March 31, 2016 and incorporated herein by reference. Management Agreement, dated effective as of March 23, 2017, by and between Union Bank and Trust Company and Whitetail Rock Capital Management, LLC, filed as Exhibit 10.1 to the registrant's Quarterly Report on Form 10-Q for the quarter ended March 31, 2017 and incorporated herein by reference. Amended Appendix A, dated May 8, 2019, to Management Agreement, dated effective as of March 23, 2017, by and between Union Bank and Trust Company and Whitetail Rock Capital Management, LLC, filed as Exhibit 10.3 to the registrant's Quarterly Report on Form 10-Q for the quarter ended March 31, 2019 and incorporated herein by reference. Investment Management Agreement, dated effective as of February 10, 2012, by and among Whitetail Rock SLAB Fund I, LLC, Whitetail Rock Fund Management, LLC, and Whitetail Rock Capital Management, LLC, filed as Exhibit 10.4 to the registrant's Quarterly Report on Form 10-Q for the quarter ended March 31, 2012 and incorporated herein by reference. Investment Management Agreement, dated effective as of February 14, 2013, by and among Whitetail Rock SLAB Fund III, LLC, Whitetail Rock Fund Management, LLC, and Whitetail Rock Capital Management, LLC, filed as Exhibit 10.31 to the registrant's Annual Report on Form 10-K for the year ended December 31, 2013 and incorporated herein by reference. Form of Custodian Agreement for Whitetail Rock SLAB Funds by and among the Fund, Whitetail Rock Fund Management, LLC, and Union Bank and Trust Company, filed as Exhibit 10.27 to the registrant's Annual Report on Form 10-K for the year ended December 31, 2014 and incorporated herein by reference. Form of Administrative Services Agreement for Whitetail Rock SLAB Funds by and among the Fund, Whitetail Rock Fund Management, LLC, Adminisystems, Inc., and Union Bank and Trust Company, filed as Exhibit 10.28 to the registrant's Annual Report on Form 10-K for the year ended December 31, 2014 and incorporated herein by reference. Management Agreement dated as of August 8, 2019 between 1867 – Riley Road, LLC (of which Farmers & Merchants Investment Inc., North Central Bancorp, Inc., and Nelnet Solar, LLC are members) and 1867 Capital-1, LLC (a wholly owned subsidiary of Nelnet, Inc.), filed as Exhibit 10.3 to the registrant's Quarterly Report on Form 10-Q for the quarter ended September 30, 2019 and incorporated herein by reference. Subordination Agreement effective as of July 26, 2019, by and between Union Bank and Trust Company, Nelnet, Inc., and Agile Sports Technologies, Inc., filed as Exhibit 10.7 to the registrant's Quarterly Report on Form 10-Q for the quarter ended June 30, 2019 and incorporated herein by reference. Second Amended and Restated Credit Agreement dated as of December 16, 2019, among Nelnet, Inc., U.S. Bank National Association, as Administrative Agent; Wells Fargo Bank, National Association, as Syndication Agent; Citibank, N.A. and Royal Bank of Canada, as Co-Documentation Agents; U.S. Bank National Association and Wells Fargo Securities, LLC, as Joint Lead Arrangers and Joint Book Runners; and various lender parties thereto, filed as Exhibit 10.1 to the registrant's Current Report on Form 8-K filed on December 16, 2019 and incorporated herein by reference. 77 10.48 10.49 10.50 10.51 10.52 10.53 10.54± 10.55± Second Amended and Restated Guaranty dated as of December 16, 2019, by each of the subsidiaries of Nelnet, Inc. signatories thereto, in favor of U.S. Bank National Association, As Administrative Agent, filed as Exhibit 10.2 to the registrant's Current Report on Form 8-K filed on December 16, 2019 and incorporated herein by reference. Agreement for Purchase and Sale of Interest in Aircraft dated as of December 31, 2018, by and between National Education Loan Network, Inc. and Union Financial Services, Inc., filed as Exhibit 10.42 to the registrant's Annual Report on Form 10-K for the year ended December 31, 2018 and incorporated herein by reference. Aircraft Joint Ownership Agreement dated as of January 1, 2019, by and between National Education Loan Network, Inc. and MSD711, LLC, filed as Exhibit 10.43 to the registrant's Annual Report on Form 10-K for the year ended December 31, 2018 and incorporated herein by reference. Aircraft Management Agreement, dated as of January 1, 2019, by and between Duncan Aviation, Inc. and National Education Loan Network, Inc. and MSD711, LLC, filed as Exhibit 10.44 to the registrant's Annual Report on Form 10-K for the year ended December 31, 2018 and incorporated herein by reference. Amended and Restated Consulting and Services Agreement made and entered into as of October 1, 2013, by and between Nelnet, Inc. and Union Bank and Trust Company, filed as Exhibit 10.2 to the registrant's Quarterly Report on Form 10-Q for the quarter ended September 30, 2013 and incorporated herein by reference. Master Private Loan Program Agreement dated as of August 22, 2018, by and between Union Bank and Trust Company and Nelnet, Inc., filed as Exhibit 10.1 to the registrant's Quarterly Report on Form 10-Q for the quarter ended September 30, 2018 and incorporated herein by reference. Education Loan Marketing Agreement dated as of August 22, 2018, by and between Nelnet Consumer Finance, Inc. and Union Bank and Trust Company, filed as Exhibit 10.2 to the registrant's Quarterly Report on Form 10-Q for the quarter ended September 30, 2018 and incorporated herein by reference. Private Student Loan Origination and Servicing Agreement dated as of August 22, 2018, by and between Nelnet Servicing, LLC, d/b/a Firstmark Services, and Union Bank and Trust Company, filed as Exhibit 10.3 to the registrant's Quarterly Report on Form 10-Q for the quarter ended September 30, 2018 and incorporated herein by reference. 10.56*±± Private Student Loan Purchase Agreement dated as of November 19, 2019, by and among National Education Loan Network, Inc., as Purchaser, Union Bank and Trust Company, and Purchaser Lender Trustee, and Union Bank and Trust Company, as Seller. 10.57 10.58 10.59 10.60 10.61 10.62 10.63 Private Loan Sale Agreement dated as of October 9, 2014, by and between Nelnet, Inc. and Union Bank and Trust Company, filed as Exhibit 10.47 to the registrant's Annual Report on Form 10-K for the year ended December 31, 2014 and incorporated herein by reference. Private Student Loan Servicing Agreement dated as of October 9, 2014, by and between Nelnet Servicing, LLC and Union Bank and Trust Company, filed as Exhibit 10.48 to the registrant's Annual Report on Form 10-K for the year ended December 31, 2014 and incorporated herein by reference. First Amendment of Loan Servicing Agreement dated as of September 27, 2013, by and between Nelnet, Inc. and Union Bank and Trust Company, filed as Exhibit 10.49 to the registrant's Annual Report on Form 10-K for the year ended December 31, 2014 and incorporated herein by reference. Private Loan Servicing Letter Agreement dated as of February 27, 2017, by and between Nelnet Servicing, LLC and Union Bank and Trust Company, filed as Exhibit 10.54 to the registrant's Annual Report on Form 10-K for the year ended December 31, 2017 and incorporated herein by reference. Form of Trust/Custodial/Safekeeping Agreement by and between National Education Loan Network, Inc., as Principal, and Union Bank and Trust Company, as Trustee, filed as Exhibit 10.55 to the registrant's Annual Report on Form 10-K for the year ended December 31, 2017 and incorporated herein by reference. Form of Special Investment Directions by National Education Loan Network, Inc. and its affiliates, as Principal under the Form of Trust/Custodial/Safekeeping Agreement between Principal and Union Bank and Trust Company, as Trustee, filed as Exhibit 10.56 to the registrant's Annual Report on Form 10-K for the year ended December 31, 2017 and incorporated herein by reference. Loan Participation Agreement dated as of January 1, 2018 between Union Bank and Trust Company and Union Bank and Trust Company as trustee for National Education Loan Network, Inc., filed as Exhibit 10.1 to the registrant's Quarterly Report on Form 10-Q for the quarter ended March 31, 2018 and incorporated herein by reference. 78 10.64 10.65±± 10.66±± 21.1* 23.1* 31.1* 31.2* 32** Amended and Restated Trust Agreement dated as of December 21, 2018 among Nelnet Private Student Loan Financing Corporation, as Depositor, Union Bank and Trust Company, as Trustee, and U.S. Bank Trust National Association, as Delaware Trustee, filed as Exhibit 10.57 to the registrant's Annual Report on Form 10-K for the year ended December 31, 2018 and incorporated herein by reference. Amended and Restated Trust Agreement, dated effective as of January 11, 2019, by and among Nelnet Private Student Loan Financing Corporation, as Depositor, Union Bank and Trust Company, as Trustee, National Education Loan Network, Inc., as Administrator, and U.S. Bank Trust National Association, as Delaware Trustee, filed as Exhibit 10.1 to the registrant's Quarterly Report on Form 10-Q for the quarter ended June 30, 2019 and incorporated herein by reference. Interim Trust Agreement, dated effective as of January 11, 2019, by and among ACM F Acquisition, LLC, as ACM Seller, National Education Loan Network, Inc., as NELN Seller, and Union Bank and Trust Company, as Interim Trustee, filed as Exhibit 10.2 to the registrant's Quarterly Report on Form 10-Q for the quarter ended June 30, 2019 and incorporated herein by reference. Subsidiaries of Nelnet, Inc. Consent of KPMG LLP, Independent Registered Public Accounting Firm. Certification Pursuant to Section 302 of the Sarbanes-Oxley Act of 2002 of Chief Executive Officer Jeffrey R. Noordhoek. Certification Pursuant to Section 302 of the Sarbanes-Oxley Act of 2002 of Chief Financial Officer James D. Kruger. Certification Pursuant to 18 U.S.C. Section 1350, as Adopted Pursuant to Section 906 of the Sarbanes-Oxley Act of 2002. 101.INS* Inline XBRL Instance Document - the instance document does not appear in the Interactive Data File because its XBRL tags are embedded within the Inline XBRL document. 101.SCH* Inline XBRL Taxonomy Extension Schema Document 101.CAL* Inline XBRL Taxonomy Extension Calculation Linkbase Document 101.DEF* Inline XBRL Taxonomy Extension Definition Linkbase Document 101.LAB* Inline XBRL Taxonomy Extension Label Linkbase Document 101.PRE* Inline XBRL Taxonomy Extension Presentation Linkbase Document 104* Cover Page Interactive Data File (formatted as Inline XBRL and contained in Exhibit 101). Indicates a management contract or compensatory plan or arrangement contemplated by Item 15(a)(3) of Form 10-K. * Filed herewith ** Furnished herewith + ++ Pursuant to Item 601(a)(5) of Regulation S-K, certain schedules and similar attachments to the exhibit have been omitted. The exhibit is not intended to be, and should not be relied upon as, including disclosures regarding any facts and circumstances relating to the registrant or any of its subsidiaries or affiliates. The exhibit contains representations and warranties by the registrant and the other parties that were made only for purposes of the agreement set forth in the exhibit and as of specified dates. The representations, warranties, and covenants in the agreement were made solely for the benefit of the parties to the agreement, may be subject to limitations agreed upon by the contracting parties (including being qualified by confidential disclosures made for the purposes of allocating contractual risk between the parties to the agreement instead of establishing these matters as facts), and may apply contractual standards of materiality or material adverse effect that generally differ from those applicable to investors. In addition, information concerning the subject matter of the representations, warranties, and covenants may change after the date of the agreement, which subsequent information may or may not be fully reflected in the registrant's public disclosures. ± Certain portions of this exhibit have been redacted and are subject to a confidential treatment order granted by the U.S. Securities and Exchange Commission pursuant to Rule 24b-2 under the Securities Exchange Act of 1934. ±± Certain portions of this exhibit have been omitted pursuant to Item 601(b)(10)(iv) of Regulation S-K because the information in such portions is both not material and would likely cause competitive harm to the registrant if publicly disclosed. ITEM 16. FORM 10-K SUMMARY The Company has elected not to include an optional summary of information required by Form 10-K. 79 Pursuant to the requirements of Section 13 or 15(d) of the Securities Exchange Act of 1934, the registrant has duly caused this report to be signed on its behalf by the undersigned, thereunto duly authorized. SIGNATURES Dated: February 27, 2020 NELNET, INC. By: /s/ JEFFREY R. NOORDHOEK Name: Jeffrey R. Noordhoek Title: Chief Executive Officer (Principal Executive Officer) Pursuant to the requirements of the Securities Exchange Act of 1934, this report has been signed below by the following persons on behalf of the registrant and in the capacities and on the dates indicated. Signature Title Date /s/ JEFFREY R. NOORDHOEK Jeffrey R. Noordhoek Chief Executive Officer (Principal Executive Officer) February 27, 2020 /s/ JAMES D. KRUGER James D. Kruger Chief Financial Officer (Principal Financial Officer and Principal Accounting Officer) February 27, 2020 /s/ MICHAEL S. DUNLAP Executive Chairman February 27, 2020 Michael S. Dunlap /s/ JAMES P. ABEL James P. Abel /s/ PREETA D. BANSAL Preeta D. Bansal /s/ WILLIAM R. CINTANI William R. Cintani /s/ KATHLEEN A. FARRELL Kathleen A. Farrell /s/ DAVID S. GRAFF David S. Graff /s/ THOMAS E. HENNING Thomas E. Henning /s/ KIMBERLY K. RATH Kimberly K. Rath /s/ MICHAEL D. REARDON Michael D. Reardon February 27, 2020 February 27, 2020 February 27, 2020 February 27, 2020 February 27, 2020 February 27, 2020 February 27, 2020 February 27, 2020 Director Director Director Director Director Director Director Director 80 NELNET, INC. AND SUBSIDIARIES Index to Consolidated Financial Statements Report of Independent Registered Public Accounting Firm Consolidated Balance Sheets as of December 31, 2019 and 2018 Consolidated Statements of Income for the years ended December 31, 2019, 2018, and 2017 Consolidated Statements of Comprehensive Income for the years ended December 31, 2019, 2018, and 2017 Consolidated Statements of Shareholders' Equity for the years ended December 31, 2019, 2018, and 2017 Consolidated Statements of Cash Flows for the years ended December 31, 2019, 2018, and 2017 Notes to Consolidated Financial Statements Page F-2 F-4 F-5 F-6 F-7 F-8 F-10 F - 1 Report of Independent Registered Public Accounting Firm To the Shareholders and Board of Directors Nelnet, Inc.: Opinion on the Consolidated Financial Statements We have audited the accompanying consolidated balance sheets of Nelnet, Inc. and subsidiaries (the Company) as of December 31, 2019 and 2018, the related consolidated statements of income, comprehensive income, shareholders’ equity, and cash flows for each of the years in the three-year period ended December 31, 2019, and the related notes (collectively, the consolidated financial statements). In our opinion, the consolidated financial statements present fairly, in all material respects, the financial position of the Company as of December 31, 2019 and 2018, and the results of its operations and its cash flows for each of the years in the three-year period ended December 31, 2019, in conformity with U.S. generally accepted accounting principles. We also have audited, in accordance with the standards of the Public Company Accounting Oversight Board (United States) (PCAOB), the Company’s internal control over financial reporting as of December 31, 2019, based on criteria established in Internal Control – Integrated Framework (2013) issued by the Committee of Sponsoring Organizations of the Treadway Commission, and our report dated February 27, 2020 expressed an unqualified opinion on the effectiveness of the Company’s internal control over financial reporting. Basis for Opinion These consolidated financial statements are the responsibility of the Company’s management. Our responsibility is to express an opinion on these consolidated financial statements based on our audits. We are a public accounting firm registered with the PCAOB and are required to be independent with respect to the Company in accordance with the U.S. federal securities laws and the applicable rules and regulations of the Securities and Exchange Commission and the PCAOB. We conducted our audits in accordance with the standards of the PCAOB. Those standards require that we plan and perform the audit to obtain reasonable assurance about whether the consolidated financial statements are free of material misstatement, whether due to error or fraud. Our audits included performing procedures to assess the risks of material misstatement of the consolidated financial statements, whether due to error or fraud, and performing procedures that respond to those risks. Such procedures included examining, on a test basis, evidence regarding the amounts and disclosures in the consolidated financial statements. Our audits also included evaluating the accounting principles used and significant estimates made by management, as well as evaluating the overall presentation of the consolidated financial statements. We believe that our audits provide a reasonable basis for our opinion. Critical Audit Matter The critical audit matter communicated below is a matter arising from the current period audit of the consolidated financial statements that was communicated or required to be communicated to the audit committee and that: (1) relates to accounts or disclosures that are material to the consolidated financial statements and (2) involved our especially challenging, subjective, or complex judgment. The communication of a critical audit matter does not alter in any way our opinion on the consolidated financial statements, taken as a whole, and we are not, by communicating the critical audit matter below, providing a separate opinion on the critical audit matter or on the accounts or disclosures to which it relates. Assessment of the allowance for loan losses for loans collectively evaluated for impairment As discussed in Notes 2 and 3 to the consolidated financial statements, the Company’s allowance for loan losses related to the Company’s loans collectively evaluated for impairment (ALL) was $61.9 million as of December 31, 2019. The Company estimated the ALL using a historical loss rate methodology adjusted for qualitative factors. The federally insured loans ALL is based on periodic evaluations of the loans considering loans in repayment versus those in a nonpaying status, delinquency status, trends in defaults in the portfolio based on Company and industry data, past experience, trends in student loan claims rejected for payment by guarantors, changes to federal student loan programs, current economic conditions, and other relevant qualitative factors. The private education and consumer loans ALL is based on periodic evaluations of the loans considering loans in repayment versus those in a nonpaying status, delinquency status, type of program, trends in defaults in the portfolio based on Company and industry data, past experience, current economic conditions, and other relevant qualitative factors. F - 2 We identified the assessment of the ALL as a critical audit matter because it involved significant measurement uncertainty requiring complex auditor judgment, and knowledge and experience in the industry. This assessment encompassed the evaluation of the ALL methodology, inclusive of the factors and assumptions used to estimate the historical loss rates, including (1) historical losses in the portfolio over time, (2) the loss emergence period, and (3) qualitative factor adjustments. The primary procedures we performed to address the critical audit matter included the following. We tested certain internal controls related to the Company’s ALL process, including controls over the (1) development and approval of the ALL methodology, (2) determination of the key factors and assumptions used to estimate historical loss rates and qualitative factor adjustments, and (3) analysis of the ALL results, trends, and ratios. We tested the Company’s process to develop the ALL estimate. Specifically, we tested the sources of data, factors, and assumptions that the Company used and considered the relevance and reliability of such data, factors, and assumptions. We tested the historical losses over time by evaluating (1) if loss data in the historical loss period was representative of the credit characteristics of the current portfolio and (2) the sufficiency of loss data within the historical loss period. We tested the loss emergence period assumptions by (1) testing the accuracy of those calculations and inputs, (2) considering the Company’s credit risk policies, and (3) testing observable loss data. We evaluated the methodology used to develop the resulting qualitative adjustments and the effect of those adjustments on the ALL compared with relevant credit risk factors and consistency with credit trends. /s/ KPMG LLP We have served as the Company’s auditor since 1998. Lincoln, Nebraska February 27, 2020 F - 3 NELNET, INC. AND SUBSIDIARIES Consolidated Balance Sheets As of December 31, 2019 and 2018 Assets: Loans receivable (net of allowance for loan losses of $61,914 and $60,388 respectively) Cash and cash equivalents: Cash and cash equivalents - not held at a related party Cash and cash equivalents - held at a related party Total cash and cash equivalents Investments and notes receivable Restricted cash Restricted cash - due to customers Accrued interest receivable Accounts receivable (net of allowance for doubtful accounts of $4,455 and $3,271, respectively) Goodwill Intangible assets, net Property and equipment, net Other assets Fair value of derivative instruments Total assets Liabilities: Bonds and notes payable Accrued interest payable Other liabilities Due to customers Total liabilities Commitments and contingencies Equity: Nelnet, Inc. shareholders' equity: Preferred stock, $0.01 par value. Authorized 50,000,000 shares; no shares issued or outstanding Common stock: Class A, $0.01 par value. Authorized 600,000,000 shares; issued and outstanding 28,458,495 shares and 28,798,464 shares, respectively Class B, convertible, $0.01 par value. Authorized 60,000,000 shares; issued and outstanding 11,271,609 shares and 11,459,641 shares, respectively Additional paid-in capital Retained earnings Accumulated other comprehensive earnings Total Nelnet, Inc. shareholders' equity Noncontrolling interests Total equity Total liabilities and equity Supplemental information - assets and liabilities of consolidated education and other lending variable interest entities: Loans receivable Restricted cash Loan accrued interest receivable and other assets Bonds and notes payable Accrued interest payable and other liabilities Net assets of consolidated education and other lending variable interest entities See accompanying notes to consolidated financial statements. F - 4 2019 2018 (Dollars in thousands, except share data) $ 20,669,371 22,377,142 13,922 119,984 133,906 246,973 650,939 437,756 733,623 115,391 156,912 81,532 348,259 134,308 — 23,708,970 20,529,054 47,285 303,781 437,756 21,317,876 — 285 113 5,715 2,377,627 2,972 2,386,712 4,382 2,391,094 23,708,970 9,472 111,875 121,347 249,370 701,366 369,678 679,197 59,531 156,912 114,290 344,784 45,533 1,818 25,220,968 22,218,740 61,679 256,092 369,678 22,906,189 — 288 115 622 2,299,556 3,883 2,304,464 10,315 2,314,779 25,220,968 20,664,126 639,816 735,286 (20,742,798) (158,067) 1,138,363 22,359,655 677,611 679,735 (22,146,374) (163,327) 1,407,300 $ $ $ $ $ NELNET, INC. AND SUBSIDIARIES Consolidated Statements of Income Years ended December 31, 2019, 2018, and 2017 2019 2018 2017 (Dollars in thousands, except share data) Interest income: Loan interest Investment interest Total interest income Interest expense: Interest on bonds and notes payable Net interest income Less provision for loan losses Net interest income after provision for loan losses Other income: Loan servicing and systems revenue Education technology, services, and payment processing revenue Communications revenue Other income Derivative market value and foreign currency transaction adjustments and derivative settlements, net Total other income Cost of services: Cost to provide education technology, services, and payment processing services Cost to provide communications services Total cost of services Operating expenses: Salaries and benefits Depreciation and amortization Other expenses Total operating expenses Income before income taxes Income tax expense Net income Net loss attributable to noncontrolling interests Net income attributable to Nelnet, Inc. Earnings per common share: Net income attributable to Nelnet, Inc. shareholders - basic and diluted $ $ $ 914,256 34,421 948,677 699,327 249,350 39,000 210,350 455,255 277,331 64,269 65,179 (30,789) 831,245 81,603 20,423 102,026 463,503 105,049 194,272 762,824 176,745 35,451 141,294 509 141,803 897,666 26,600 924,266 669,906 254,360 23,000 231,360 440,027 221,962 44,653 54,805 71,085 832,532 59,566 16,926 76,492 436,179 86,896 178,031 701,106 286,294 58,770 227,524 389 227,913 757,731 12,695 770,426 465,188 305,238 14,450 290,788 223,000 193,188 25,700 55,728 (18,554) 479,062 48,678 9,950 58,628 301,885 39,541 143,112 484,538 226,684 64,863 161,821 11,345 173,166 3.54 5.57 4.14 Weighted average common shares outstanding - basic and diluted 40,047,402 40,909,022 41,791,941 See accompanying notes to consolidated financial statements. F - 5 NELNET, INC. AND SUBSIDIARIES Consolidated Statements of Comprehensive Income Years ended December 31, 2019, 2018, and 2017 Net income Other comprehensive (loss) income: Available-for-sale securities: Unrealized holding (losses) gains arising during period, net Reclassification adjustment for gains recognized in net income, net of losses Income tax effect Total other comprehensive (loss) income Comprehensive income Comprehensive loss attributable to noncontrolling interests Comprehensive income attributable to Nelnet, Inc. See accompanying notes to consolidated financial statements. 2019 2018 (Dollars in thousands) 2017 $ 141,294 227,524 161,821 (1,199) — 288 (911) 1,056 (978) (69) 9 140,383 227,533 509 389 $ 140,892 227,922 2,349 (2,528) 66 (113) 161,708 11,345 173,053 F - 6 NELNET, INC. AND SUBSIDIARIES Consolidated Statements of Shareholders' Equity Years ended December 31, 2019, 2018, and 2017 Nelnet, Inc. Shareholders Preferred stock shares Common stock shares Class A Class B Preferred stock Class A common stock Class B common stock Additional paid-in capital Retained earnings Accumulated other comprehensive earnings Noncontrolling interests Total equity (Dollars in thousands, except share data) 306 115 420 2,056,084 4,730 9,270 2,070,925 Balance as of December 31, 2016 — 30,628,112 11,476,932 $ Issuance of noncontrolling interests Net income (loss) Other comprehensive loss Distribution to noncontrolling interests Cash dividends on Class A and Class B common stock - $0.58 per share Issuance of common stock, net of forfeitures Compensation expense for stock based awards — — — — — — — — — — — — 178,114 — Repurchase of common stock — (1,473,054) — — — — — — — — Conversion of common stock — 8,345 (8,345) Balance as of December 31, 2017 — 29,341,517 11,468,587 Issuance of noncontrolling interests Net income (loss) Other comprehensive income Distribution to noncontrolling interests Cash dividends on Class A and Class B common stock - $0.66 per share Issuance of common stock, net of forfeitures Compensation expense for stock based awards Repurchase of common stock Impact of adoption of new accounting standards Acquisition of noncontrolling interest Conversion of common stock — — — — — — — — — — — — — — — — 316,148 — (868,147) — — — — — — — — — — — — 8,946 (8,946) Balance as of December 31, 2018 — 28,798,464 11,459,641 Issuance of noncontrolling interests Net income (loss) Other comprehensive loss Distribution to noncontrolling interests Cash dividends on Class A and Class B common stock - $0.74 per share Issuance of common stock, net of forfeitures Compensation expense for stock based awards Repurchase of common stock Impact of adoption of new accounting standard Conversion of common stock — — — — — — — — — — — — — — — 198,272 — (726,273) — — — — — — — — — — 188,032 (188,032) Balance as of December 31, 2019 — 28,458,495 11,271,609 $ See accompanying notes to consolidated financial statements. — — — — — — — — — — — — — — — — — — — — — — — — — — — — — — — — — — — — — — — 2 — (15) — 293 — — — — — 3 — (8) — — — — — — — — — — — — — — — 173,166 — — — — — (24,097) 3,619 4,193 — — (7,711) (61,170) — — — — (113) 19,578 19,578 (11,345) 161,821 — (113) — — — — — — (1,645) (1,645) — — — — — (24,097) 3,621 4,193 (68,896) — 115 521 2,143,983 4,617 15,858 2,165,387 — — — — — — — — — — — — — — 227,913 — — — — — (26,839) 5,171 6,194 — — (11,264) (34,059) — — 9 — — — — — 2,007 (743) — — — 1,023 1,023 (389) 227,524 — 9 (525) (525) — — — — — (26,839) 5,174 6,194 (45,331) 1,264 (13,449) — — — (5,652) (19,101) — — 288 115 622 2,299,556 3,883 10,315 2,314,779 — — — — — — — — — (2) — — — 141,803 — — — — — (29,485) 4,849 6,401 — — (6,157) (34,247) — — — — — — (911) — — — — — — — 4,756 4,756 (509) 141,294 — (911) (4,103) (4,103) — — — — (29,485) 4,851 6,401 (40,411) (6,077) (6,077) — — 113 5,715 2,377,627 2,972 4,382 2,391,094 — — — — — 2 — (7) — 2 285 F - 7 NELNET, INC. AND SUBSIDIARIES Consolidated Statements of Cash Flows Years ended December 31, 2019, 2018, and 2017 2019 2018 2017 Net income attributable to Nelnet, Inc. Net loss attributable to noncontrolling interests Net income Adjustments to reconcile net income to net cash provided by operating activities, net of acquisitions: Depreciation and amortization, including debt discounts and loan premiums and deferred origination costs Loan discount accretion Provision for loan losses Derivative market value adjustments Unrealized foreign currency transaction adjustment (Payments to) proceeds from termination of derivative instruments, net Loss on extinguishment of debt (Payments to) proceeds from clearinghouse - initial and variation margin, net Gain from sale of loans Deferred income tax (benefit) expense Non-cash compensation expense Impairment expense Other Increase in accrued interest receivable (Increase) decrease in accounts receivable Increase in other assets (Decrease) increase in accrued interest payable Increase (decrease) in other liabilities Increase in due to customers Net cash provided by operating activities Cash flows from investing activities, net of acquisitions: Purchases of loans Net proceeds from loan repayments, claims, and capitalized interest Proceeds from sale of loans Purchases of available-for-sale securities Proceeds from sales of available-for-sale securities Purchases of investments and issuance of notes receivable Proceeds from investments and notes receivable Purchases of property and equipment Business (acquisitions) sale, net of cash and restricted cash acquired Net cash provided by (used in) investing activities Cash flows from financing activities: Payments on bonds and notes payable Proceeds from issuance of bonds and notes payable Payments of debt issuance costs Payments to extinguish debt Payment of contingent consideration Dividends paid Repurchases of common stock Proceeds from issuance of common stock Acquisition of noncontrolling interest Issuance of noncontrolling interests Distribution to noncontrolling interests Net cash (used in) provided by financing activities Net increase (decrease) in cash, cash equivalents and restricted cash Cash, cash equivalents, and restricted cash, beginning of year Cash, cash equivalents, and restricted cash, end of year F - 8 (Dollars in thousands) $ 141,803 227,913 (509) (389) 141,294 227,524 192,662 (35,824) 39,000 76,195 — (12,530) 16,689 (70,685) (17,261) (7,265) 6,781 — (2,647) (54,586) (55,949) (11,065) (14,394) 40,422 68,078 298,915 184,682 (40,800) 23,000 (1,014) — 10,283 — 40,382 — 10,981 6,539 11,721 (11,049) (248,869) 3,059 (4,069) 11,640 (12,506) 59,388 270,892 (2,008,207) (3,922,251) 3,462,391 196,564 (1,010) 105 (103,250) 70,472 (92,499) — 1,524,566 3,322,783 23,712 (46,424) 71,415 (67,040) 23,039 (125,023) (12,562) (732,351) 173,166 (11,345) 161,821 137,823 (44,812) 14,450 (26,379) 45,600 (30,382) — 76,325 — (1,544) 4,416 3,626 (2,410) (39,203) (4,234) (42,270) 4,362 (2,341) 67,419 322,267 (325,476) 3,363,526 53,203 (128,523) 156,540 (29,339) 11,545 (156,005) 4,511 2,949,982 (4,698,878) (3,113,503) (5,403,224) 2,997,972 3,922,962 1,984,558 (14,406) (14,030) — (29,485) (40,411) 1,552 — 4,650 (235) (1,793,271) 30,210 1,192,391 (13,808) — — (26,839) (45,331) 1,359 (13,449) 918 (525) 711,784 250,325 942,066 $ 1,222,601 1,192,391 (6,497) — (850) (24,097) (68,896) 678 — 19,473 (1,645) (3,500,500) (228,251) 1,170,317 942,066 NELNET, INC. AND SUBSIDIARIES CONSOLIDATED STATEMENTS OF CASH FLOWS (Continued) (Dollars in thousands) Supplemental disclosures of cash flow information: Cash disbursements made for interest Cash disbursements made for income taxes, net of refunds and credits (a) Noncash investing and financing activity: Receipt of beneficial interest in consumer loan securitizations Distribution to noncontrolling interests Year ended December 31, 2019 2018 2017 657,436 17,672 591,394 473 390,278 96,271 39,780 3,868 — — — — $ $ $ $ (a) For 2019 and 2018, the Company utilized $31.8 million and $14.7 million of federal and state tax credits, respectively, related primarily to renewable energy. Supplemental disclosures of noncash activities regarding the adoption of the new lease standard on January 1, 2019 are contained in notes 2 and 17. Supplemental disclosures of noncash operating and investing activities regarding the Company's business acquisitions during 2018 are contained in note 7. The following table provides a reconciliation of cash, cash equivalents, and restricted cash reported in the consolidated balance sheets to the total of the amounts reported in the consolidated statements of cash flows. As of December 31, 2019 As of December 31, 2018 As of December 31, 2017 As of December 31, 2016 Total cash and cash equivalents $ Restricted cash Restricted cash - due to customers 133,906 650,939 437,756 Cash, cash equivalents, and restricted cash $ 1,222,601 121,347 701,366 369,678 1,192,391 66,752 688,193 187,121 942,066 69,654 980,961 119,702 1,170,317 See accompanying notes to consolidated financial statements. F - 9 NELNET, INC. AND SUBSIDIARIES Notes to Consolidated Financial Statements (Dollars in thousands, except share amounts, unless otherwise noted) 1. Description of Business Nelnet, Inc. and its subsidiaries (“Nelnet” or the “Company”) is a diverse company with a purpose to serve others and a vision to make customers' dreams possible by delivering customer focused products and services. The largest operating businesses engage in loan servicing; education technology, services, and payment processing; and communications. 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 the Company 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. Substantially all revenue from external customers is earned, and all long-lived assets are located, in the United States. The Company was formed as a Nebraska corporation in 1978 to service federal student loans for two local banks. The Company built on this initial foundation as a servicer to become a leading originator, holder, and servicer of federal student loans, principally consisting of loans originated under the Federal Family Education Loan Program (“FFELP” or “FFEL Program”) of the U.S. Department of Education (the “Department”). The Health Care and Education Reconciliation Act of 2010 (the “Reconciliation Act of 2010”) discontinued new loan originations under the FFEL Program, effective July 1, 2010, and requires that all new federal student loan originations be made directly by the Department through the Federal Direct Loan Program. This law does not alter or affect the terms and conditions of existing FFELP loans. As a result of this law, the Company no longer originates new FFELP loans. To reduce its reliance on interest income on student loans, the Company has expanded its services and products. This expansion has been accomplished through internal growth and innovation as well as business acquisitions. The Company has four reportable operating segments. The Company's reportable operating segments include: • Loan Servicing and Systems (“LSS”) • Education Technology, Services, and Payment Processing (“ETS&PP”) • Communications • Asset Generation and Management (“AGM”) A description of each reportable operating segment is included below. See note 14 for additional information on the Company's segment reporting. Loan Servicing and Systems The primary service offerings of the Loan Servicing and Systems operating segment include: • • • • • Servicing federally-owned student loans for the Department of Education Servicing FFELP loans Originating and servicing private education and consumer loans Providing student loan servicing software and other information technology products and services Providing outsourced services including call center, processing, and marketing services LSS provides for the servicing of the Company's student loan portfolio and the portfolios of third parties. The loan servicing activities include loan conversion activities, application processing, borrower updates, customer service, payment processing, due diligence procedures, funds management reconciliations, and claim processing. These activities are performed internally for the Company's portfolio in addition to generating external fee revenue when performed for third-party clients. On February 7, 2018, the Company acquired Great Lakes Educational Loan Services, Inc. (“Great Lakes”). See note 7 for additional information related to this acquisition. Nelnet Servicing, LLC, (“Nelnet Servicing”), a subsidiary of the Company, and Great Lakes are two of four large private sector companies (referred to as Title IV Additional Servicers, or “TIVAS”) awarded a student loan servicing contract by the Department to provide additional servicing capacity for loans owned by the Department. This segment also provides student loan servicing software, which is used internally by the Company and licensed to third-party student loan holders and servicers. These software systems have been adapted so that they can be offered as hosted servicing software solutions usable by third parties to service various types of student loans, including Federal Direct Loan Program and FFEL Program loans. F - 10 NELNET, INC. AND SUBSIDIARIES Notes to Consolidated Financial Statements (Dollars in thousands, except share amounts, unless otherwise noted) This segment also provides business process outsourcing primarily specializing in contact center management. The contact center solutions and services include taking inbound calls, helping with outreach campaigns and sales, and interacting with customers through multi-channels. Education Technology, Services, and Payment Processing NBS provides service and technology to administrators, teachers, students, and families of K-12 schools and higher education institutions. The Company's payment processing services and technologies also serve customers outside of education. In the K-12 market, the Company (known as FACTS) offers (i) financial management, including actively managed tuition payment plans, financial needs assessment (grant and aid), incidental billing, advanced accounting, and payment forms; (ii) school administration solutions, including school information system software that automates the flow of information between school administrators, teachers, and parents and includes administrative processes such as admissions, enrollment, scheduling, cafeteria management, attendance, and grade book management; (iii) advancement (giving management), including a comprehensive donation platform that streamlines donor communications, organizes donor information, and provides access to data analysis and reporting; (iv) enrollment and communications, including website design and cost effective admissions software; (v) professional development and educational instruction services; and (vi) innovative technology products that aid in teacher and student evaluations. In the higher education market, the Company (known as Nelnet Campus Commerce) offers solutions including (i) actively managed tuition payment plans and (ii) payment technology and processing. Outside of the education market, the Company also offers technology and payment services including electronic transfer and credit card processing, reporting, billing and invoicing, mobile and virtual terminal solutions, and specialized integrations to business software. In addition, this operating segment offers mobile first technology focused on increasing engagement, online giving, and communication for church and not-for-profit customers. Additionally, the Company may earn revenue for payment processing fees when families make tuition payments. Communications ALLO Communications LLC (“ALLO”) provides pure fiber optic service to homes and businesses for internet, television, and telephone services. The acquisition of ALLO in 2015 provides additional diversification of the Company's revenues and cash flows outside of education. In addition, the acquisition leverages the Company's existing infrastructure, customer service capabilities and call centers, and financial strength and liquidity for continued growth. ALLO derives its revenue primarily from the sale of communication services to residential, governmental, and business customers in Nebraska and Colorado. Internet and television services include revenue from residential and business customers for subscriptions to ALLO's data and video products. ALLO data services provide high-speed internet access over ALLO's all- fiber network at various symmetrical speeds of up to 1 gigabit per second for residential customers and is capable of providing symmetrical speeds of over 1 gigabit per second for business customers. Telephone services include local and long distance telephone service, hostedPBX services, and other services. Asset Generation and Management The Company's Asset Generation and Management operating segment includes the acquisition, management, and ownership of the Company's loan assets. Substantially all loan assets included in this segment are student loans originated under the FFEL Program, including the Stafford Loan Program, the PLUS Loan program, and loans that reflect the consolidation into a single loan of certain previously separate borrower obligations (“Consolidation” loans). The Company also acquires private education and consumer loans. The Company generates a substantial portion of its earnings from the spread, referred to as the Company's loan spread, between the yield it receives on its loan portfolio and the associated costs to finance such portfolio. The loan assets are held in a series of lending subsidiaries and associated securitization trusts designed specifically for this purpose. In addition to the loan spread earned on its portfolio, all costs and activity associated with managing the portfolio, such as servicing of the assets and debt maintenance, are included in this segment. Corporate and Other Activities Other business activities and operating segments that are not reportable are combined and included in Corporate and Other Activities. Corporate and Other Activities include the following items: • The operating results of Whitetail Rock Capital Management, LLC (“WRCM”), the Company's SEC-registered investment advisor subsidiary F - 11 NELNET, INC. AND SUBSIDIARIES Notes to Consolidated Financial Statements (Dollars in thousands, except share amounts, unless otherwise noted) • • • Income earned on certain investment activities, including real estate and renewable energy (solar) Interest expense incurred on unsecured debt transactions Other product and service offerings that are not considered reportable operating segments Corporate and Other Activities also include certain corporate activities and overhead functions related to executive information technology, management, occupancy, and marketing. These costs are allocated to each operating segment based on estimated use of such activities and services. internal audit, human resources, accounting, legal, enterprise risk management, 2. Summary of Significant Accounting Policies and Practices Consolidation The consolidated financial statements include the accounts of Nelnet, Inc. and its consolidated subsidiaries. In addition, the accounts of all variable interest entities (“VIEs”) of which the Company has determined that it is the primary beneficiary are included in the consolidated financial statements. All significant intercompany balances and transactions have been eliminated in consolidation. Variable Interest Entities The Company assesses its partnerships and joint ventures to determine if the entity meets the qualifications of a VIE. The Company performs a qualitative assessment of each VIE to determine if it is the primary beneficiary. The primary beneficiary is the entity which has both: (1) the power to direct the activities of the VIE that most significantly impact the VIE’s economic performance, and (2) the obligation to absorb losses or receive benefits of the entity that could potentially be significant to the VIE. The Company examines specific criteria and uses judgment when determining whether an entity is a VIE and whether it is the primary beneficiary. The Company performs this review initially at the time it enters into a partnership or joint venture agreement and reassess upon reconsideration events. VIEs - Consolidated The Company is required to consolidate VIEs in which it has determined it is the primary beneficiary. The Company's education and other lending subsidiaries are engaged in the securitization of finance assets. These lending subsidiaries hold beneficial interests in eligible loans, subject to creditors with specific interests. The liabilities of the Company's lending subsidiaries are not the direct obligations of Nelnet, Inc. or any of its other subsidiaries. Each lending subsidiary is structured to be bankruptcy remote, meaning that it should not be consolidated in the event of bankruptcy of the parent company or any other subsidiary. The Company is generally the administrator and master servicer of the securitized assets held in its lending subsidiaries and owns the residual interest of the securitization trusts. For accounting purposes, the transfers of loans to the securitization trusts do not qualify as sales. Accordingly, all the financial activities and related assets and liabilities, including debt, of the securitizations are reflected in the Company's consolidated financial statements and are summarized as supplemental information on the balance sheet. As of December 31, 2019, the Company owned 98.9 percent of the economic rights of ALLO Communications LLC and has a disproportional 80 percent of the voting rights related to all operating decisions for ALLO's business. See note 1, “Description of Business,” for a description of ALLO, including the primary services offered. In addition to the Company’s original equity investment, Nelnet, Inc. (the parent) contributed additional equity with a yield-based preferred return of future earnings due on the newly contributed equity. The Company will continue to increase its ownership interests as it makes cash contributions to fund ALLO's operating losses and capital expenditures. In addition, ALLO's management, as current minority members, has the opportunity to earn ownership interests based on the financial performance of ALLO. Nelnet, Inc.’s maximum exposure to loss as a result of its involvement with ALLO is equal to its ownership interests investment. All of ALLO’s financial activities and related assets and liabilities are reflected in the Company’s consolidated financial statements. See note 14, “Segment Reporting,” for disclosure of ALLO’s total assets and results of operations (included in the "Communications" operating segment), note 15, "Disaggregated Revenue and Deferred Revenue," for disclosure of ALLO's disaggregated revenue and deferred revenue, note 9, "Goodwill," for disclosure of ALLO's goodwill, and note 10, “Property and Equipment,” for disclosure of ALLO’s fixed assets. ALLO's goodwill and property and equipment comprise the majority of its assets. The assets recognized as a result of consolidating ALLO are the property of ALLO and are not available for any other purpose. F - 12 NELNET, INC. AND SUBSIDIARIES Notes to Consolidated Financial Statements (Dollars in thousands, except share amounts, unless otherwise noted) VIEs - Not consolidated The Company is not required to consolidate VIEs in which it has determined it is not the primary beneficiary. The Company makes investments in entities that promote renewable energy sources (solar). The Company’s investments in these entities generate a return primarily through the realization of federal income tax credits, operating cash flows, and other tax benefits, such as tax deductions from operating losses of the investments, over specified time periods. These investments are included in "investments and notes receivable" on the consolidated balance sheets. The carrying value of these investments are reduced by tax credits earned when the solar project is placed in service. The Company’s unfunded capital and other commitments related to these unconsolidated VIEs are included in “other liabilities” on the consolidated balance sheet. The Company’s maximum exposure to loss from these unconsolidated VIEs include the investment, unfunded capital commitments, and previously recorded tax credits which remain subject to recapture by taxing authorities based on compliance features required to be met at the project level. The tax credit recapture period ratably decreases over five years from when the project is placed in service. While the Company believes potential losses from these investments are remote, the maximum exposure was determined by assuming a scenario where the energy-producing projects completely fail and do not meet certain government compliance requirements resulting in recapture of the related tax credits. The following table provides a summary of solar investment VIEs that the Company has not consolidated: As of December 31, 2019 2018 Investment carrying amount Tax credits subject to recapture Unfunded capital and other commitments Maximum exposure to loss (a) $ $ 7,562 67,069 14,006 88,637 2,724 11,345 — 14,069 (a) Amount includes $3.0 million as of December 31, 2019 syndicated to other investors in certain solar projects. Accounting Standard Adopted in 2019 In February 2016, the Financial Accounting Standards Board ("FASB") issued Accounting Standards Codification Topic 842, Leases ("ASC Topic 842"). The standard requires the identification of arrangements that should be accounted for as leases by lessees and the disclosure of key information about leasing arrangements. The standard establishes a right-of-use ("ROU") model that requires a lessee to recognize a ROU asset and lease liability for all leases with a term longer than twelve months and classify the lease as either operating or financing, with the income statement reflecting lease expense for operating leases and amortization/interest expense for financing leases. The Company adopted the standard effective January 1, 2019, using the effective date as its date of initial application. Consequently, financial information is not updated and the disclosures required under the new standard are not provided for dates and periods before January 1, 2019. The Company elected to utilize the ‘package of practical expedients’, which permitted it to not reassess under the new standard its prior conclusions about lease identification, lease classification, and initial direct costs. The most significant impact of the standard relates to (1) the recognition of new ROU assets and lease liabilities on the Company's consolidated balance sheet; (2) the deconsolidation of assets and liabilities for certain sale-leaseback transactions arising from build-to-suit lease arrangements for which construction was completed and the Company is leasing the constructed assets that did not qualify for sale accounting prior to the adoption of the new standard; and (3) significant new disclosures about the Company’s leasing activities. The build-to-suit lease arrangements have been reassessed as operating leases as of the effective date under ASC Topic 842. Adoption of the new standard resulted in recognizing lease liabilities of $33.7 million based on the present value of the remaining minimum rental payments. In addition, the Company recognized ROU assets of $32.8 million, which corresponds to the lease liabilities reduced by deferred rent expense as of the effective date. The Company also deconsolidated total assets of $43.8 million and total liabilities of $34.8 million for entities that had been consolidated due to sale-leaseback transactions that failed to qualify for recognition as sales under the prior guidance. Deconsolidation of these entities reduced noncontrolling F - 13 NELNET, INC. AND SUBSIDIARIES Notes to Consolidated Financial Statements (Dollars in thousands, except share amounts, unless otherwise noted) interests by $6.1 million. The cumulative effect of the changes made to the Company's consolidated balance sheet as of January 1, 2019 for the adoption of the new lease standard was as follows: Adjustments from adoption of new lease standard Balances at December 31, 2018 ROU assets and lease liabilities Deconsolidation of sale-leaseback transactions Balances at January 1, 2019 Assets Cash and cash equivalents $ Investments and notes receivable Accounts receivable Property and equipment, net Other assets Liabilities Bonds and notes payable Other liabilities Equity 121,347 249,370 59,531 344,784 45,533 22,218,740 256,092 — — — — 32,831 — 32,831 (646) (23,134) (89) (16,974) (27) 120,701 226,236 59,442 327,810 78,337 (33,182) 22,185,558 (1,611) 287,312 Noncontrolling interests 10,315 — (6,077) 4,238 Reclassifications Certain amounts previously reported within the Company’s consolidated statements of income have been reclassified to conform to the current period presentation. These reclassifications include: • • Reclassifying “gain from debt repurchases” to “other income”; and Reclassifying “loan servicing fees to third parties” to “other expenses.” Noncontrolling Interests Amounts for noncontrolling interests reflect the proportionate share of membership interest (equity) and net income attributable to the holders of minority membership interests in the following entities: • Whitetail Rock Capital Management, LLC - WRCM is the Company’s SEC-registered investment advisor subsidiary. WRCM issued 10 percent minority membership interests on January 1, 2012. • ALLO Communications LLC - On December 31, 2015, the Company purchased 92.5 percent of the ownership interests in ALLO. On January 1, 2016, the Company sold a 1.0 percent ownership interest in ALLO to a non-related third party. Subsequently, the Company contributed additional equity to increase its ownership interest in ALLO to 98.9 percent. Per ALLO's operating agreement, currently all operating results of ALLO are allocated to the Company. In addition, the Company has established entities for the purpose of investing in renewable energy (solar) and federal opportunity zone programs in which it has noncontrolling members. Use of Estimates The preparation of the consolidated financial statements in conformity with U.S. generally accepted accounting principles (“GAAP”) requires management to make a number of estimates and assumptions that affect the reported amounts of assets and liabilities, reported amounts of revenues and expenses, and other disclosures. Actual results may differ from those estimates. Loans Receivable Loans consist of federally insured student loans, private education loans, and consumer loans. If the Company has the ability and intent to hold loans for the foreseeable future, such loans are held for investment and carried at amortized cost. Amortized cost includes the unamortized premium or discount and capitalized origination costs and fees, all of which are amortized to interest income. Loans which are held-for-investment also have an allowance for loan loss as needed. Any loans the Company has the ability and intent to sell are classified as held for sale and are carried at the lower of cost or fair value. Loans which are held for sale do not have the associated premium or discount and origination costs and fees amortized into interest income and F - 14 NELNET, INC. AND SUBSIDIARIES Notes to Consolidated Financial Statements (Dollars in thousands, except share amounts, unless otherwise noted) there is also no related allowance for loan losses. There were no loans classified as held for sale as of December 31, 2019 and 2018. Federally insured loans were originated under the FFEL Program by certain eligible lenders as defined by the Higher Education Act of 1965, as amended (the “Higher Education Act”). These loans, including related accrued interest, are guaranteed at their maximum level permitted under the Higher Education Act by an authorized guaranty agency, which has a contract of reinsurance with the Department. The terms of the loans, which vary on an individual basis, generally provide for repayment in monthly installments of principal and interest. Generally, Stafford and PLUS loans have repayment periods between five and ten years. Consolidation loans have repayment periods of twelve to thirty years. FFELP loans do not require repayment while the borrower is in-school, and during the grace period immediately upon leaving school. The borrower may also be granted a deferment or forbearance for a period of time based on need, during which time the borrower is not considered to be in repayment. Interest continues to accrue on loans in the in-school, deferment, and forbearance program periods. In addition, eligible borrowers may qualify for income-driven repayment plans offered by the Department. These plans determine the borrower's payment amount based on their discretionary income and may extend their repayment period. Interest rates on federally insured student loans may be fixed or variable, dependent upon the type of loan, terms of the loan agreements, and date of origination. Substantially all FFELP loan principal and related accrued interest is guaranteed as provided by the Higher Education Act. These guarantees are subject to the performance of certain loan servicing due diligence procedures stipulated by applicable Department regulations. If these due diligence requirements are not met, affected student loans may not be covered by the guarantees in the event of borrower default. Such student loans are subject to “cure” procedures and reinstatement of the guarantee under certain circumstances. Loans also include private education and consumer loans. Private education loans are loans to students or their families that are non-federal loans and loans not insured or guaranteed under the FFEL Program. These loans are used primarily to bridge the gap between the cost of higher education and the amount funded through financial aid, federal loans, or borrowers' personal resources. The terms of the private education loans, which vary on an individual basis, generally provide for repayment in monthly installments of principal and interest over a period of up to 30 years. The private education loans are not covered by a guarantee or collateral in the event of borrower default. Consumer loans are unsecured loans to an individual for personal, family, or household purposes. The terms of the consumer loans, which vary on an individual basis, generally provide for repayment in weekly or monthly installments of principal and interest over a period of up to 6 years. Allowance for Loan Losses The allowance for loan losses represents management's estimate of probable losses on loans. The provision for loan losses reflects the activity for the applicable period and provides an allowance at a level that the Company's management believes is appropriate to cover probable losses inherent in the loan portfolio. The Company evaluates the adequacy of the allowance for loan losses using a historical loss rate methodology adjusted for qualitative factors separately on each of its federally insured, private education, and consumer loan portfolios. These evaluation processes are subject to numerous judgments and uncertainties including the selection of loss rates over time and determination of the loss emergence period. The allowance for the federally insured loan portfolio is based on periodic evaluations of the Company's loan portfolios considering loans in repayment versus those in a nonpaying status, delinquency status, trends in defaults in the portfolio based on Company and industry data, past experience, trends in student loan claims rejected for payment by guarantors, changes to federal student loan programs, current economic conditions, and other relevant qualitative factors. The federal government guarantees 97 percent of the principal of and the interest on federally insured student loans disbursed on and after July 1, 2006 (and 98 percent for those loans disbursed on and after October 1, 1993 and prior to July 1, 2006), which limits the Company's loss exposure on the outstanding balance of the Company's federally insured portfolio. Student loans disbursed prior to October 1, 1993 are fully insured. In determining the appropriate allowance for loan losses on the private education and consumer loans, the Company considers several factors, including: loans in repayment versus those in a nonpaying status, delinquency status, type of program, trends in defaults in the portfolio based on Company and industry data, past experience, current economic conditions, and other relevant qualitative factors. The Company places private education and consumer loans on nonaccrual status when the collection of principal and interest is 90 days past due, and charges off the loan when the collection of principal and interest is 120 days or 180 days past due, depending on type of loan program. Collections, if any, are reflected as a recovery through the allowance for loan losses. F - 15 NELNET, INC. AND SUBSIDIARIES Notes to Consolidated Financial Statements (Dollars in thousands, except share amounts, unless otherwise noted) Management has determined that each of the 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. Accordingly, the portfolio segment disclosures are presented on this basis in note 3 for each of these portfolios. The Company does not disaggregate its portfolio segment loan portfolios into classes of financing receivables. The Company collectively evaluates loans for impairment and as of December 31, 2019 and 2018, the Company did not have any impaired loans as defined in the Receivables Topic of the FASB Accounting Standards Codification. For loans purchased where there is evidence of credit deterioration since the origination of the loan, the Company records a credit discount, separate from the allowance for loan losses, which is non-accretable to interest income. Remaining discounts and premiums for purchased loans are recognized in interest income over the remaining estimated lives of the loans. The Company continues to evaluate credit losses associated with purchased loans based on current information and changes in expectations to determine the need for any additional allowance for loan losses. Cash and Cash Equivalents and Statements of Cash Flows For purposes of the consolidated statements of cash flows, the Company considers all investments with original maturities of three months or less to be cash equivalents. Accrued interest on loans purchased and sold is included in cash flows from operating activities in the respective period. Net purchased loan accrued interest was $112.9 million and $181.0 million in 2019 and 2018, respectively. The amount of purchased loan accrued interest in 2017 was not significant. Investments The Company classifies its debt securities, primarily student loan and other asset-backed securities, as available-for-sale. These securities are carried at fair value, with the temporary changes in fair value, net of taxes, carried as a separate component of shareholders’ equity. The amortized cost of debt securities in this category is adjusted for amortization of premiums and accretion of discounts, which are amortized using the effective interest rate method. Other-than-temporary impairment is evaluated by considering several factors, including the length of time and extent to which the fair value has been less than the amortized cost basis, the financial condition and near-term prospects of the issuer of the security (considering factors such as adverse conditions specific to the security and ratings agency actions), and the intent and ability of the Company to retain the investment to allow for any anticipated recovery in fair value. The entire fair value loss on a security that has experienced an other-than-temporary impairment is recorded in earnings if the Company intends to sell the security or if it is more likely than not that the Company will be required to sell the security before the expected recovery of the loss. However, if the impairment is other-than-temporary, and either of those two conditions does not exist, the portion of the impairment related to credit losses is recorded in earnings and the impairment related to other factors is recorded in other comprehensive income. When an investment is sold, the cost basis is determined through specific identification of the security sold. The Company classifies its residual interest in consumer loan securitizations as held-to-maturity beneficial interest investments. The Company measures accretable yield initially as the excess of all cash flows expected to be collected attributable to the beneficial interest estimated at the acquisition/transaction date over the initial investment and recognizes interest income over the life of the beneficial interest using the effective interest method. The Company continues to update, over the life of the beneficial interest, the expectation of cash flows to be collected. Beneficial interest investments are evaluated for impairment by comparing the present value of the remaining cash flows as estimated at the initial transaction date (or the last date previously revised) to the present value of the cash flows expected to be collected at the current financial reporting date, both discounted using the same effective rate equal to the current yield used to accrete the beneficial interest. Equity investments with readily determinable fair values are measured at fair value, with changes in the fair value recognized through net income (other than those equity investments accounted for under the equity method of accounting or those that result in consolidation of the investee). For equity investments without readily determinable fair value, the Company uses the measurement alternative of cost minus impairment, if any, plus or minus changes resulting from observable price changes in orderly transactions for the identical or a similar investment of the same issuer. The Company uses qualitative factors to identify impairment on these investments. The Company accounts for equity investments over which it has significant influence but not a controlling financial interest using the equity method of accounting. Equity method investments are recorded at cost and subsequently increased or decreased by the amount of the Company’s proportionate share of the net earnings or losses and other comprehensive income of the F - 16 NELNET, INC. AND SUBSIDIARIES Notes to Consolidated Financial Statements (Dollars in thousands, except share amounts, unless otherwise noted) investee. Equity method investments are evaluated for other-than-temporary impairment using certain impairment indicators such as a series of operating losses of an investee or other factors. These factors may indicate that a decrease in value of the investment has occurred that is other-than-temporary and shall be recognized. For periods prior to January 1, 2018, equity securities with readily determinable fair values were primarily classified as available-for-sale and stated at fair value with unrealized gains and losses reported as a separate component of accumulated other comprehensive income, net of tax. Equity securities without readily determinable fair values were recorded at cost less impairment, if any. Restricted Cash Restricted cash primarily includes amounts for student loan securitizations and other secured borrowings. This cash must be used to make payments related to trust obligations. Amounts on deposit in these accounts are primarily the result of timing differences between when principal and interest is collected on the student loans held as trust assets and when principal and interest is paid on the trust's asset-backed debt securities. Restricted cash also includes collateral deposits with derivative counterparties and third-party clearinghouses. Restricted Cash - Due to Customers As a servicer of student loans, the Company collects student loan remittances and subsequently disburses these remittances to the appropriate lending entities. In addition, as part of the Company's Education Technology, Services, and Payment Processing operating segment, the Company collects tuition payments and subsequently remits these payments to the appropriate schools. Cash collected for customers and the related liability are included in the accompanying consolidated balance sheets. Accounts Receivable Accounts receivable are presented at their net realizable values, which include allowances for doubtful accounts. Allowance estimates are based upon individual customer experience, as well as the age of receivables and likelihood of collection. Business Combinations The Company uses the acquisition method in accounting for acquired businesses. Under the acquisition method, the financial statements reflect the operations of an acquired business starting from the completion of the acquisition. The assets acquired and liabilities assumed are recorded at their respective estimated fair values at the date of acquisition. Any excess of the purchase price over the estimated fair values of the identifiable net assets acquired is recorded as goodwill. All contingent consideration is measured at fair value on the acquisition date and included in the consideration transferred in the acquisition. Contingent consideration classified as a liability is remeasured to fair value at each reporting date until the contingency is resolved, and changes in fair value are recognized in earnings. Goodwill The Company reviews goodwill for impairment annually (in the fourth quarter) and whenever triggering events or changes in circumstances indicate its carrying value may not be recoverable. Goodwill is tested for impairment using a fair value approach at the reporting unit level. A reporting unit is the operating segment, or a business one level below that operating segment if discrete financial information is prepared and regularly reviewed by segment management. However, components are aggregated as a single reporting unit if they have similar economic characteristics. The Company tests goodwill for impairment in accordance with applicable accounting guidance. The guidance provides an entity the option to first assess qualitative factors to determine whether the existence of events or circumstances leads to a determination that it is more likely than not (more than 50%) that the estimated fair value of a reporting unit is less than its carrying amount. If an entity elects to perform a qualitative assessment and determines that an impairment is more likely than not, the entity is then required to perform a quantitative impairment test (described below), otherwise no further analysis is required. An entity also may elect not to perform the qualitative assessment and, instead, proceed directly to the quantitative impairment test. If the Company elects to not perform a qualitative assessment or if the Company determines it is more likely than not that the fair value of a reporting unit is less than the carrying amount, then the Company performs a quantitative impairment test on goodwill. In the quantitative test, the Company compares the fair value of each reporting unit to its carrying value. If the fair value of the reporting unit exceeds the carrying value of the net assets assigned to that unit, goodwill is considered not impaired F - 17 NELNET, INC. AND SUBSIDIARIES Notes to Consolidated Financial Statements (Dollars in thousands, except share amounts, unless otherwise noted) and the Company is not required to perform further testing. If the carrying value of the net assets assigned to the reporting unit exceeds the fair value of the reporting unit, then the Company would record an impairment loss equal to the difference. Determining the fair value of a reporting unit involves the use of significant estimates and assumptions. These estimates and assumptions include revenue growth rates and operating margins used to calculate projected future cash flows, risk-adjusted discount rates, future economic and market conditions, and determination of appropriate market comparables. Actual future results may differ from those estimates. See note 9, "Goodwill," for information regarding the Company's annual goodwill impairment review. Intangible Assets The Company uses estimates to determine the fair value of acquired assets to allocate the purchase price to acquired intangible assets. Such estimates are generally based on estimated future cash flows or cost savings associated with particular assets and are discounted to present value using an appropriate discount rate. The estimates of future cash flows associated with intangible assets are generally prepared using a cost savings method, a lost income method, or an excess return method, as appropriate. In utilizing such methods, management must make certain assumptions about the amount and timing of estimated future cash flows and other economic benefits from the assets, the remaining economic useful life of the assets, and general economic factors concerning the selection of an appropriate discount rate. The Company may also use replacement cost or market comparison approaches to estimate fair value if such methods are determined to be more appropriate. Intangible assets with finite lives are amortized over their estimated lives. Such assets are amortized using a method of amortization that reflects the pattern in which the economic benefits of the intangible asset are consumed or otherwise used up. If that pattern cannot be reliably determined, the Company uses a straight-line amortization method. The Company evaluates the estimated remaining useful lives of purchased intangible assets and whether events or changes in circumstances warrant a revision to the remaining periods of amortization. Property and Equipment Property and equipment are carried at cost, net of accumulated depreciation. Maintenance and repairs are charged to expense as incurred, and major improvements, including leasehold improvements, are capitalized. Gains and losses from the sale of property and equipment are included in determining net income. The Company uses the straight-line method for recording depreciation and amortization. Leasehold improvements are amortized straight-line over the shorter of the lease term or estimated useful life of the asset. Leases At the inception of an arrangement, the Company determines if the arrangement is, or contains, a lease and records the lease in the consolidated financial statements upon lease commencement, which is the date when the underlying asset is made available by the lessor. The Company primarily leases dark fiber to support its telecommunications operations and office and data center space. Leases with an initial term of 12 months or less are not recorded on the balance sheet. The lease expense for these leases is recognized on a straight-line basis over the lease term. All other lease assets (ROU assets) and lease liabilities are recognized based on the present value of lease payments over the lease term at the commencement date. The Company classifies each lease as operating or financing, with the income statement reflecting lease expense for operating leases and amortization/interest expense for financing leases. When the discount rate implicit in the lease cannot be readily determined, the Company uses its incremental borrowing rate. The Company has elected to utilize the practical expedient to account for lease and non-lease components together as a single, combined lease component for its office and data center space. In addition, the Company has identified itself as the lessor in its Communications operating segment for services provided to customers that include customer-premise equipment. The Company has also elected to utilize the practical expedient to account for those services and associated leases as a single, combined component. The non-lease services are 'predominant' in those contracts. Therefore, the combined component is considered a single performance obligation under ASC Topic 606, Revenue from Contracts with Customers. Most leases include one or more options to renew, with renewal terms that can be extended. The exercise of lease renewal options for the majority of leases is at the Company's discretion. Renewal options that the Company is reasonably certain to exercise are included in the lease term. F - 18 NELNET, INC. AND SUBSIDIARIES Notes to Consolidated Financial Statements (Dollars in thousands, except share amounts, unless otherwise noted) Certain leases include escalating rental payments or rental payments adjusted periodically for inflation. None of the lease agreements include any residual value guarantees, a transfer of title, or a purchase option that is reasonably certain to be exercised. Impairment of Long-Lived Assets The Company reviews its long-lived assets, such as ROU assets, property and equipment, and purchased intangibles subject to amortization, for impairment whenever events or changes in circumstances indicate that the carrying amount of an asset may not be recoverable. Recoverability of assets to be held and used is measured by a comparison of the carrying amount of an asset to estimated undiscounted future cash flows expected to be generated by the asset. If the carrying amount of an asset exceeds its estimated future cash flows, an impairment charge is recognized by the amount by which the carrying amount of the asset exceeds the fair value of the asset. Assumptions and estimates about future cash flows generated by, remaining useful lives of, and fair values of the Company's intangible and other long-lived assets are complex and subjective. They can be affected by a variety of factors, including external factors such as industry and economic trends, and internal factors such as changes in the Company's business strategy and internal forecasts. Although the Company believes the historical assumptions and estimates used are reasonable and appropriate, different assumptions and estimates could materially impact the reported financial results. Fair Value Measurements The Company uses estimates of fair value in applying various accounting standards for its financial statements. Fair value is defined as the price to sell an asset or transfer a liability in an orderly transaction between willing and able market participants. In general, the Company's policy in estimating fair values is to first look at observable market prices for identical assets and liabilities in active markets, where available. When these are not available, other inputs are used to model fair value, such as prices of similar instruments, yield curves, volatilities, prepayment speeds, default rates, and credit spreads, relying first on observable data from active markets. Depending on current market conditions, additional adjustments to fair value may be based on factors such as liquidity, credit, and bid/offer spreads. In some cases fair values are based on estimates using present value or other valuation techniques. Those techniques are significantly affected by the assumptions used, including the discount rate and estimates of future cash flows. Transaction costs are not included in the determination of fair value. When possible, the Company seeks to validate the model's output to market transactions. Depending on the availability of observable inputs and prices, different valuation models could produce materially different fair value estimates. The values presented may not represent future fair values and may not be realizable. Additionally, there may be inherent weaknesses in any calculation technique, and changes in the underlying assumptions used, including discount rates and estimates of future cash flows, could significantly affect the estimates of current or future values. The Company categorizes its fair value estimates based on a hierarchical framework associated with three levels of price transparency utilized in measuring assets and liabilities at fair value. Classification is based on the lowest level of input that is significant to the fair value of the instrument. The three levels include: • • • Level 1: Quoted prices for identical instruments in active markets. The types of financial instruments included in Level 1 are highly liquid instruments with quoted prices. Level 2: Quoted prices for similar instruments in active markets; quoted prices for identical or similar instruments in markets that are not active; and model-derived valuations whose inputs are observable or whose primary value drivers are observable. Level 3: Instruments whose primary value drivers are unobservable. Inputs are developed based on the best information available; however, significant judgment is required by management in developing the inputs. Revenue Recognition The Company applies the provisions of ASC Topic 606, Revenue from Contracts with Customers ("ASC Topic 606"), to its fee- based operating segments. The majority of the Company’s revenue earned in its Asset Generation and Management operating segment, including loan interest and derivative activity, is explicitly excluded from the scope of ASC Topic 606. The Company recognizes revenue under the core principle of ASC Topic 606 to depict the transfer of control of products and services to the Company’s customers in an amount reflecting the consideration to which the Company expects to be entitled. In order to achieve that core principle, the Company applies the following five-step approach: (1) identify the contract with a customer, (2) F - 19 NELNET, INC. AND SUBSIDIARIES Notes to Consolidated Financial Statements (Dollars in thousands, except share amounts, unless otherwise noted) identify the performance obligations in the contract, (3) determine the transaction price, (4) allocate the transaction price to the performance obligations in the contract, and (5) recognize revenue when a performance obligation is satisfied. The Company’s contracts with customers often include promises to transfer multiple products and services to a customer. Determining whether products and services are considered distinct performance obligations that should be accounted for separately versus together may require significant judgment. Timing of revenue recognition may differ from the timing of invoicing to customers. The Company records deferred revenue when revenue is received or receivable in advance of the delivery of service. For multi-year contracts, the Company generally invoices customers annually at the beginning of each annual coverage period. Payment terms and conditions vary by contract type, although terms generally include a requirement of payment within 30 to 60 days. In instances where the timing of revenue recognition differs from the timing of invoicing, the Company has determined its contracts do not include a significant financing component. The Company recognizes an asset for the incremental costs of obtaining a contract with a customer if it expects the benefit of those costs to be longer than one year. The Company has determined that certain sales incentive programs and pre-production contract fulfillment costs meet the requirements to be capitalized. Total capitalized costs to obtain a contract were immaterial during the periods presented and are included in “other assets” on the consolidated balance sheets. Additional information related to revenue earned in its Asset Generation and Management operating segment is provided below. See note 15, "Disaggregated Revenue and Deferred Revenue" for additional information related to the Company's fee- based operating segments. Loan interest income - Loan interest on federally insured student loans is paid by the Department or the borrower, depending on the status of the loan at the time of the accrual. The Department makes quarterly interest subsidy payments on certain qualified FFELP loans until the student is required under the provisions of the Higher Education Act to begin repayment. Borrower repayment of FFELP loans normally begins within six months after completion of the borrower's course of study, leaving school, or ceasing to carry at least one-half the normal full-time academic load, as determined by the educational institution. Borrower repayment of PLUS and Consolidation loans normally begins within 60 days from the date of loan disbursement. Borrower repayment of private education loans typically begins six months following the borrower's graduation from a qualified institution, and the interest is either paid by the borrower or capitalized annually or at repayment. Repayment of consumer loans typically starts upon origination of the loan. The Department provides a special allowance to lenders participating in the FFEL Program. The special allowance is accrued based upon the fiscal quarter average rate of 13-week Treasury Bill auctions (for loans originated prior to January 1, 2000), the fiscal quarter average rate of the daily three-month financial commercial paper rates (for loans originated on and after January 1, 2000), or the fiscal quarter average rate of daily one-month LIBOR rates (for loans originated on and after January 1, 2000, and for lenders which elected to change the special allowance index to one-month LIBOR effective April 1, 2012) relative to the yield of the student loan. The Company recognizes loan interest income as earned, net of amortization of loan premiums and deferred origination costs and the accretion of loan discounts. Loan interest income is recognized based upon the expected yield of the loan after giving effect to interest rate reductions resulting from borrower utilization of incentives such as timely payments ("borrower benefits") and other yield adjustments. Loan premiums or discounts, deferred origination costs, and borrower benefits are amortized/ accreted over the estimated life of the loans, which includes an estimate of forecasted payments in excess of contractually required payments (the constant prepayment rate). The constant prepayment rate used by the Company to amortize/accrete loan premiums/discounts is 5 percent for Stafford loans and 3 percent for Consolidation loans. The Company periodically evaluates the assumptions used to estimate the life of the loans and prepayment rates. In instances where there are changes to the assumptions, amortization/accretion is adjusted on a cumulative basis to reflect the change since the acquisition of the loan. The Company also pays the Department an annual 105 basis point rebate fee on Consolidation loans. These rebate fees are netted against loan interest income. Interest Expense Interest expense is based upon contractual interest rates, adjusted for the amortization of debt issuance costs and the accretion of discounts. The amortization of debt issuance costs and accretion of discounts are recognized using the effective interest method. F - 20 NELNET, INC. AND SUBSIDIARIES Notes to Consolidated Financial Statements (Dollars in thousands, except share amounts, unless otherwise noted) Transfer of Financial Assets and Extinguishments of Liabilities The Company accounts for loan sales and debt repurchases in accordance with applicable accounting guidance. If a transfer of loans qualifies as a sale, the Company derecognizes the loan and recognizes a gain or loss as the difference between the carrying basis of the loan sold and the consideration received. The Company from time to time repurchases its outstanding debt and records a gain or loss on the early extinguishment of debt based upon the difference between the carrying amount of the debt and the amount paid to the third party. The Company recognizes the results of a transfer of loans and the extinguishment of debt based upon the settlement date of the transaction. Derivative Accounting All over-the-counter derivative contracts executed by the Company are cleared post-execution at the Chicago Mercantile Exchange (“CME”), a regulated clearinghouse. Clearing is a process by which a third-party, the clearinghouse, steps in between the original counterparties and guarantees the performance of both, by requiring that each post liquid collateral on an initial (initial margin) and mark-to-market (variation margin) basis to cover the clearinghouse’s potential future exposure in the event of default. The CME legally characterizes variation margin payments for over-the-counter derivatives they clear as settlements of the derivatives’ exposure rather than collateral against the exposure. For accounting and presentation purposes, the Company considers variation margin and the corresponding derivative instrument as a single unit of account. As such, variation margin payments are considered in determining the fair value of the centrally cleared derivative portfolio. The Company records derivative contracts on its balance sheet with a fair value of zero due to the payment or receipt of variation margin between the Company and the CME settling the outstanding mark-to-market exposure on such derivatives to a balance of zero on a daily basis, and records the underlying daily changes in the market value of such derivative contracts that result in such receipts or payments on its consolidated statements of income as realized derivative market value adjustments in "derivative market value and foreign currency transaction adjustments and derivative settlements, net." The Company records derivative instruments that are not required to be cleared at a clearinghouse (non-centrally cleared derivatives) in the consolidated balance sheets on a gross basis as either an asset or liability measured at its fair value. Certain non-centrally cleared derivatives are subject to right of offset provisions with counterparties. For these derivatives, the Company does not offset fair value amounts executed with the same counterparty under a master netting arrangement. In addition, the Company does not offset fair value amounts recognized for derivative instruments with respect to the right to reclaim cash collateral (a receivable) or the obligation to return cash collateral (a payable). The Company determines the fair value for its derivative instruments using either (i) pricing models that consider current market conditions and the contractual terms of the derivative instrument or (ii) counterparty valuations. The factors that impact the fair value of the Company's derivatives include interest rates, time value, forward interest rate curve, and volatility factors. Pricing models and their underlying assumptions impact the amount and timing of realized and unrealized gains and losses recognized, and the use of different pricing models or assumptions could produce different financial results. 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. Changes or shifts in the forward yield curve can significantly impact the valuation of the Company’s derivatives, and therefore impact the financial position and results of operations of the Company. Any proceeds received or payments made by the Company to terminate a derivative in advance of its expiration date, or to amend the terms of an existing derivative, are included in the Company's consolidated statements of income and are accounted for as a change in fair value of such derivative. The changes in fair value of derivative instruments, as well as the settlement payments made on such derivatives, are included in “derivative market value and foreign currency adjustments and derivative settlements, net” on the consolidated statements of income. Foreign Currency During 2006, the Company issued Euro-denominated bonds, which were included in “bonds and notes payable” on the consolidated balance sheets. Transaction gains and losses resulting from exchange rate changes when re-measuring these bonds to U.S. dollars at the balance sheet date were included in “derivative market value and foreign currency adjustments and derivative settlements, net” on the consolidated statements of income. The Company entered into a cross-currency interest rate swap in connection with the issuance of the Euro-denominated bonds. On October 25, 2017, the Company completed a remarketing of its Euro notes which reset the principal amount outstanding on the notes to U.S. dollars and the Company terminated the cross-currency interest rate swap. F - 21 NELNET, INC. AND SUBSIDIARIES Notes to Consolidated Financial Statements (Dollars in thousands, except share amounts, unless otherwise noted) Income Taxes Income taxes are accounted for under the asset and liability method. Deferred tax assets and liabilities are recognized for the future tax consequences attributable to differences between the financial statement carrying amounts of existing assets and liabilities and their respective tax bases and operating loss and tax credit carry forwards. Deferred tax assets and liabilities are measured using enacted tax rates expected to apply to taxable income in the years in which those temporary differences are expected to be recovered or settled. The effect on deferred tax assets and liabilities of a change in tax rates is recognized in income in the period that includes the enactment date. The Company uses the deferred method of accounting for its credits related to state tax incentives and investments that generate investment tax credits. The investment tax credits are recognized as a reduction to the related asset. Income tax expense includes deferred tax expense, which represents a portion of the net change in the deferred tax asset or liability balance during the year, plus any change made in the valuation allowance, and current tax expense, which represents the amount of tax currently payable to or receivable from a tax authority plus amounts for expected tax deficiencies. Compensation Expense for Stock Based Awards The Company has a restricted stock plan that is intended to provide incentives to attract, retain, and motivate employees in order to achieve long term growth and profitability objectives. The restricted stock plan provides for the grant to eligible employees of awards of restricted shares of Class A common stock. The fair value of restricted stock awards is determined on the grant date based on the Company's stock price and is amortized to compensation cost over the related vesting periods, which range up to ten years. For those awards with only service conditions that have graded vesting schedules, the Company recognizes compensation expense on a straight-line basis over the requisite service period for each separately vesting portion of the award, as if the award was, in substance, multiple awards. Holders of restricted stock are entitled to receive dividends from the date of grant whether or not vested. The Company accounts for forfeitures as they occur. The Company also has a directors stock compensation plan pursuant to which non-employee directors can elect to receive their annual retainer fees in the form of fully vested shares of Class A common stock, and also elect to defer receipt of such shares until the termination of their service on the board of directors. The fair value of grants under this plan is determined on the grant date based on the Company's stock price, and is expensed over the board member's annual service period. 3. Loans Receivable and Allowance for Loan Losses Loans receivable consisted of the following: Federally insured student loans: Stafford and other Consolidation Total Private education loans Consumer loans Loan discount, net of unamortized loan premiums and deferred origination costs Non-accretable discount (a) Allowance for loan losses: Federally insured loans Private education loans Consumer loans As of December 31, 2019 2018 $ 4,684,314 15,644,229 20,328,543 244,258 225,918 4,969,667 17,186,229 22,155,896 225,975 138,627 20,798,719 22,520,498 (35,036) (32,398) (36,763) (9,597) (15,554) (53,572) (29,396) (42,310) (10,838) (7,240) $ 20,669,371 22,377,142 (a) At December 31, 2019 and 2018, the non-accretable discount related to purchased loan portfolios of $5.4 billion and $5.7 billion, respectively. F - 22 NELNET, INC. AND SUBSIDIARIES Notes to Consolidated Financial Statements (Dollars in thousands, except share amounts, unless otherwise noted) On May 1, 2019 and October 17, 2019, the Company sold $47.7 million (par value) and $179.3 million (par value) of consumer loans, respectively, to an unrelated third party who securitized such loans. The Company recognized a $1.7 million (pre-tax) and $15.6 million (pre-tax) gain, respectively, as part of these transactions. As partial consideration received for the consumer loans sold, the Company received an 11.0 percent and 28.7 percent residual interest, respectively, in the consumer loan securitizations that are included in "investments and notes receivable" on the Company's consolidated balance sheet. Activity in the Allowance for Loan Losses The provision for loan losses represents the periodic expense of maintaining an allowance sufficient to absorb losses, net of recoveries, inherent in the portfolio of loans. Activity in the allowance for loan losses is shown below. Federally insured loans Private education loans Consumer loans Federally insured loans Private education loans Consumer loans Federally insured loans Private education loans Consumer loans Balance at beginning of period Provision for loan losses Charge-offs Recoveries Year ended December 31, 2019 Loan sale and other Balance at end of period $ $ $ $ $ $ 42,310 10,838 7,240 60,388 38,706 12,629 3,255 54,590 37,268 14,574 — 51,842 8,000 — 31,000 39,000 14,000 — 9,000 23,000 13,000 (2,000) 3,450 14,450 (13,547) (1,965) (12,498) (28,010) — 724 812 1,536 — — (11,000) (11,000) Year ended December 31, 2018 (11,396) (2,415) (5,056) (18,867) — 624 41 665 Year ended December 31, 2017 (11,562) (1,313) (195) (13,070) — 768 — 768 1,000 — — 1,000 — 600 — 600 36,763 9,597 15,554 61,914 42,310 10,838 7,240 60,388 38,706 12,629 3,255 54,590 F - 23 NELNET, INC. AND SUBSIDIARIES Notes to Consolidated Financial Statements (Dollars in thousands, except share amounts, unless otherwise noted) Student Loan Status and Delinquencies Delinquencies have the potential to adversely impact the Company’s earnings through increased servicing and collection costs and account charge-offs. The table below shows the Company’s loan delinquency amounts. Federally insured loans: Loans in-school/grace/deferment (a) Loans in forbearance (b) Loans in repayment status: Loans current Loans delinquent 31-60 days (c) Loans delinquent 61-90 days (c) Loans delinquent 91-120 days (c) Loans delinquent 121-270 days (c) Loans delinquent 271 days or greater (c)(d) As of December 31, 2019 2018 2017 $ 1,074,678 1,339,821 $ 1,298,493 1,430,291 $ 1,260,394 1,774,405 15,410,993 86.0 % 16,882,252 86.9 % 16,477,004 88.2 % 650,796 428,879 310,851 812,107 300,418 3.6 2.4 1.7 4.5 1.8 683,084 427,764 283,831 806,692 343,489 3.5 2.2 1.5 4.2 1.7 682,586 374,534 287,922 629,480 235,281 3.7 2.0 1.5 3.4 1.2 Total loans in repayment 17,914,044 100.0 % 19,427,112 100.0 % 18,686,807 100.0 % Total federally insured loans $ 20,328,543 $ 22,155,896 $ 21,721,606 Private education loans: Loans in-school/grace/deferment (a) Loans in forbearance (b) Loans in repayment status: Loans current Loans delinquent 31-60 days (c) Loans delinquent 61-90 days (c) Loans delinquent 91 days or greater (c) Total loans in repayment Total private education loans Consumer loans: Loans in repayment status: Loans current Loans delinquent 31-60 days (c) Loans delinquent 61-90 days (c) Loans delinquent 91 days or greater (c) Total loans in repayment Total consumer loans $ $ $ 4,493 3,108 $ 4,320 1,494 $ 6,053 2,237 227,013 95.9 % 208,977 95.0 % 196,720 96.5 % 2,814 1,694 5,136 1.2 0.7 2.2 3,626 1,560 5,998 1.6 0.7 2.7 1,867 1,052 4,231 0.9 0.5 2.1 236,657 100.0 % 220,161 100.0 % 203,870 100.0 % 244,258 $ 225,975 $ 212,160 220,404 97.5 % $ 136,130 98.2 % $ 61,344 98.7 % 2,046 1,545 1,923 0.9 0.7 0.9 1,012 832 653 0.7 0.6 0.5 289 198 280 0.5 0.3 0.5 225,918 100.0 % 138,627 100.0 % 62,111 100.0 % $ 225,918 $ 138,627 $ 62,111 (a) (b) (c) (d) Loans for borrowers who still may be attending school or engaging in other permitted educational activities and are not yet required to make payments on the loans, e.g., residency periods for medical students or a grace period for bar exam preparation for law students. Loans for borrowers who have temporarily ceased making full payments due to hardship or other factors, according to a schedule approved by the servicer consistent with the established loan program servicing procedures and policies. The period of delinquency is based on the number of days scheduled payments are contractually past due and relate to repayment loans, that is, receivables not charged off, and not in school, grace, deferment, or forbearance. A portion of loans included in loans delinquent 271 days or greater includes loans in claim status, which are loans that have gone into default and have been submitted to the guaranty agency. F - 24 NELNET, INC. AND SUBSIDIARIES Notes to Consolidated Financial Statements (Dollars in thousands, except share amounts, unless otherwise noted) 4. Bonds and Notes Payable The following tables summarize the Company’s outstanding debt obligations by type of instrument: Variable-rate bonds and notes issued in FFELP loan asset-backed securitizations: Bonds and notes based on indices Bonds and notes based on auction As of December 31, 2019 Carrying amount Interest rate range Final maturity $ 18,428,998 1.98% - 3.61% 5/27/25 - 1/25/68 768,626 2.75% - 3.60% 3/22/32 - 11/26/46 Total FFELP variable-rate bonds and notes Fixed-rate bonds and notes issued in FFELP loan asset-backed securitizations FFELP warehouse facilities Consumer loan warehouse facility 19,197,624 512,836 778,094 116,570 2.00% - 3.45% 10/25/67 / 11/25/67 1.98% / 2.07% 5/20/21 / 5/31/22 1.99% 4/23/22 Variable-rate bonds and notes issued in private education loan asset-backed securitizations Fixed-rate bonds and notes issued in private education loan asset-backed securitization Unsecured line of credit Unsecured debt - Junior Subordinated Hybrid Securities Other borrowings Discount on bonds and notes payable and debt issuance costs Total 73,308 3.15% / 3.54% 12/26/40 / 6/25/49 3.60% / 5.35% 12/26/40 / 12/28/43 3.29% 5.28% 3.44% 12/16/24 9/15/61 5/30/22 49,367 50,000 20,381 5,000 20,803,180 (274,126) $ 20,529,054 Variable-rate bonds and notes issued in FFELP loan asset-backed securitizations: Bonds and notes based on indices Bonds and notes based on auction As of December 31, 2018 Carrying amount Interest rate range Final maturity $ 20,192,123 2.59% - 4.52% 11/25/24 - 2/25/67 793,476 2.84% - 3.55% 3/22/32 - 11/26/46 Total FFELP variable-rate bonds and notes 20,985,599 FFELP warehouse facilities 986,886 2.65% / 2.71% 5/20/20 / 5/31/21 Variable-rate bonds and notes issued in private education loan asset- backed securitization Fixed-rate bonds and notes issued in private education loan asset-backed securitization Unsecured line of credit Unsecured debt - Junior Subordinated Hybrid Securities Other borrowings 50,720 4.26% 12/26/40 63,171 310,000 20,381 120,342 3.60% / 5.35% 12/26/40 / 12/28/43 3.92% - 4.01% 6.17% 6/22/23 9/15/61 3.05% - 5.22% 1/3/19 - 12/15/45 Discount on bonds and notes payable and debt issuance costs Total 22,537,099 (318,359) $ 22,218,740 F - 25 NELNET, INC. AND SUBSIDIARIES Notes to Consolidated Financial Statements (Dollars in thousands, except share amounts, unless otherwise noted) Secured Financing Transactions The Company has historically relied upon secured financing vehicles as its most significant source of funding for loans. The net cash flow the Company receives from the securitized loans generally represents the excess amounts, if any, generated by the underlying loans over the amounts required to be paid to the bondholders, after deducting servicing fees and any other expenses relating to the securitizations. The Company’s rights to cash flow from securitized loans are subordinate to bondholder interests, and the securitized loans may fail to generate any cash flow beyond what is due to bondholders. The Company’s secured financing vehicles during the periods presented include loan warehouse facilities and asset-backed securitizations. The majority of the bonds and notes payable are primarily secured by the loans receivable, related accrued interest, and by the amounts on deposit in the accounts established under the respective bond resolutions or financing agreements. FFELP warehouse facilities loan The Company funds the majority of its FFELP loan acquisitions using its FFELP warehouse facilities. Student warehousing allows the Company to buy and manage student loans prior to transferring them into more permanent financing arrangements. As of December 31, 2019, the Company had two FFELP warehouse facilities as summarized below. Maximum financing amount Amount outstanding Amount available Expiration of liquidity provisions Final maturity date Advanced as equity support $ $ $ NFSLW-I NHELP-II 550,000 489,303 60,697 500,000 288,791 211,209 Total 1,050,000 778,094 271,906 May 20, 2020 May 20, 2021 May 31, 2020 May 31, 2022 21,670 20,882 42,552 The FFELP warehouse facilities are supported by liquidity provisions, which are subject to the respective expiration date shown in the above table. In the event the Company is unable to renew the liquidity provisions by such date, the facility would become a term facility at a stepped-up cost, with no additional student loans being eligible for financing, and the Company would be required to refinance the existing loans in the facility by the facility's final maturity date. The NFSLW-I warehouse facility has a static advance rate until the expiration date of the liquidity provisions. 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. The NHELP-II warehouse facility has a static advance rate that requires initial equity for loan funding and does not require increased equity based on market movements. The FFELP warehouse facilities contain financial covenants relating to levels of the Company’s consolidated net worth, ratio of recourse indebtedness to adjusted EBITDA, and unencumbered cash. Any noncompliance with these covenants could result in a requirement for the immediate repayment of any outstanding borrowings under the facilities. F - 26 NELNET, INC. AND SUBSIDIARIES Notes to Consolidated Financial Statements (Dollars in thousands, except share amounts, unless otherwise noted) Asset-backed securitizations The following tables summarize the asset-backed securitization transactions completed in 2019 and 2018. Securitizations completed during the year ended December 31, 2019 Private education loan 2019-A 2019-2 2019-3 2019-4 2019-5 2019-6 2019-1 Class A-2 Notes Class A-1 Notes 2019-1 total 2019-7 Class A-2 Notes Class A-1 Notes 2019-7 total Total 2/27/19 2/27/19 2/27/19 4/30/19 6/25/19 7/24/19 8/22/19 9/25/19 10/30/19 12/19/19 12/19/19 12/19/19 $ 35,700 448,000 496,800 416,100 47,159 498,300 418,600 374,500 145,200 210,300 200,000 420,800 2,817,459 $ 35,700 448,000 483,700 405,000 47,159 485,800 408,000 364,500 140,200 210,300 200,000 410,300 2,744,659 Date securities issued Total original principal amount Class A senior notes: Total principal amount Bond discount — — — — — — — (114) (26) — — — (140) Issue price $ 35,700 448,000 483,700 405,000 47,159 485,800 408,000 364,386 140,174 210,300 200,000 410,300 2,744,519 1-month LIBOR plus 0.30% 1-month LIBOR plus 0.75% 1-month LIBOR plus 0.90% 1-month LIBOR plus 0.80% 1-month LIBOR plus 0.87% Prime rate less 1.60% Cost of funds 2.53% 2.46% 1-month LIBOR plus 0.50% 1-month LIBOR plus 1.00% Final maturity date 4/25/67 4/25/67 6/27/67 6/25/49 8/25/67 9/26/67 10/25/67 11/25/67 1/25/68 1/25/68 Class B subordinated notes: Total principal amount Bond discount Issue price Cost of funds Final maturity date $ 13,100 11,100 12,500 10,600 10,000 5,000 — — — — (4) (913) $ 13,100 11,100 12,500 10,600 9,996 4,087 1-month LIBOR plus 1.40% 1-month LIBOR plus 1.50% 4/25/67 6/27/67 1-month LIBOR plus 1.55% 1-month LIBOR plus 1.65% 3.45% 2.00% 8/25/67 9/26/67 10/25/67 11/25/67 10,500 72,800 — (917) 10,500 71,883 1-month LIBOR plus 1.75% 1/25/68 During 2019, the Company extinguished $1.05 billion of notes payable included in certain FFELP asset-backed securitizations prior to the notes’ contractual maturities. To extinguish the notes, the Company paid premiums of $14.0 million and wrote off $2.7 million of debt issuance costs. In total, the Company recognized $16.7 million (pre-tax) in expenses to extinguish these notes, which is included in “other expenses” on the consolidated statements of income. F - 27 NELNET, INC. AND SUBSIDIARIES Notes to Consolidated Financial Statements (Dollars in thousands, except share amounts, unless otherwise noted) Securitizations completed during the year ended December 31, 2018 2018-1 Class A-2 Notes Class A-1 Notes 2018-1 total 2018-2 2018-3 Class A-1 Notes Class A-2 Notes Class A-3 Notes 2018-3 total Class A-1 Notes 2018-5 Total 2018-4 Class A-2 Notes 2018-4 total Date securities issued 3/29/18 3/29/18 3/29/18 6/7/18 7/26/18 7/26/18 7/26/18 7/26/18 8/30/18 8/30/18 8/30/18 12/13/18 Total original principal amount Class A senior notes: $ 98,000 375,750 473,750 509,800 220,000 546,900 220,000 1,001,900 30,500 451,900 495,700 511,500 2,992,650 Total principal amount $ 98,000 375,750 473,750 509,800 220,000 546,900 220,000 986,900 30,500 451,900 482,400 498,000 2,950,850 Cost of funds (1-month LIBOR plus:) 0.32% 0.76% 0.65% 0.30% 0.44% 0.75% 0.26% 0.70% Final maturity date 5/25/66 5/25/66 7/26/66 9/27/66 9/27/66 9/27/66 10/25/66 10/25/66 0.68% 2/25/67 Class B subordinated notes: Total original principal amount Bond discount Issue price Cost of funds (1-month LIBOR plus:) Final maturity date Auction Rate Securities $ 15,000 (229) $ 14,771 1.20% 9/27/66 13,300 13,500 41,800 — — (229) 13,300 13,500 41,571 1.40% 1.45% 10/25/66 2/25/67 The interest rates on certain of the Company's FFELP asset-backed securities were set and provide for interest rates to be periodically reset via a "dutch auction" ("Auction Rate Securities"). As of December 31, 2019, the Company is currently the sponsor on $768.6 million of Auction Rate Securities. Since the auction feature has essentially been inoperable for substantially all auction rate securities since 2008, the Auction Rate Securities generally pay interest to the holder at a maximum rate as defined by the indenture. While these rates will vary, they will generally be based on a spread to LIBOR or Treasury Securities, or the Net Loan Rate as defined in the financing documents. Consumer Loan Warehouse Facility During 2019, the Company obtained a consumer loan warehouse facility that has an aggregate maximum financing amount available of $200.0 million, an advance rate of 70 or 75 percent depending on the type of collateral and subject to certain concentration limits, liquidity provisions to April 23, 2021, and a final maturity date of April 23, 2022. As of December 31, 2019, $116.6 million was outstanding under this warehouse facility and $83.4 million was available for future funding. Additionally, as of December 31, 2019, the Company had $41.3 million advanced as equity support under this facility. Unsecured Line of Credit The Company has a $455.0 million unsecured line of credit that has a maturity date of December 16, 2024. 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. As of December 31, 2019, $50.0 million was outstanding on the line of credit and $405.0 million was available for future use. Interest on amounts borrowed under the line of credit is payable, at the Company's election, at an alternate base rate or a Eurodollar rate, plus a variable rate (LIBOR), in each case as defined in the credit agreement. The initial margin applicable to Eurodollar borrowings is 150 basis points and may vary from 100 to 200 basis points depending on the Company's credit rating. The line of credit agreement contains certain financial covenants that, if not met, lead to an event of default under the agreement. The covenants include, among others, maintaining: • A minimum consolidated net worth • A minimum recourse indebtedness to adjusted EBITDA (over the last four rolling quarters) • A limitation on recourse indebtedness • A limitation on the amount of unsecuritized private education and consumer loans in the Company’s portfolio F - 28 NELNET, INC. AND SUBSIDIARIES Notes to Consolidated Financial Statements (Dollars in thousands, except share amounts, unless otherwise noted) • A limitation on permitted investments, including business acquisitions that are not in one of the Company's existing lines of business As of December 31, 2019, the Company was in compliance with all of these requirements. Many of these covenants are duplicated in the Company's other lending facilities, including its warehouse facilities. The Company's operating line of credit does not have any covenants related to unsecured debt ratings. However, changes in the Company's ratings have modest implications on the pricing level at which the Company obtains funds. A default on the Company's other debt facilities would result in an event of default on the Company's unsecured line of credit that would result in the outstanding balance on the line of credit becoming immediately due and payable. Junior Subordinated Hybrid Securities On September 27, 2006, the Company issued $200.0 million aggregate principal amount of Junior Subordinated Hybrid Securities ("Hybrid Securities"). The Hybrid Securities are unsecured obligations of the Company. The interest rate on the Hybrid Securities through September 29, 2036 ("the scheduled maturity date") is equal to three-month LIBOR plus 3.375%, payable quarterly, which was 5.28% at December 31, 2019. The principal amount of the Hybrid Securities will become due on the scheduled maturity date only to the extent that prior to such date the Company has received proceeds from the sale of certain qualifying capital securities (as defined in the Hybrid Securities' indenture). If any amount is not paid on the scheduled maturity date, it will remain outstanding and bear interest at a floating rate as defined in the indenture, payable monthly. On September 15, 2061, the Company must pay any remaining principal and interest on the Hybrid Securities in full whether or not the Company has sold qualifying capital securities. At the Company's option, the Hybrid Securities are redeemable in whole or in part at their principal amount plus accrued and unpaid interest. Other Borrowings During 2017, the Company entered into a repurchase agreement, the proceeds of which are collateralized by FFELP asset- backed security investments. Included in "other borrowings" as of December 31, 2018 was $41.4 million, subject to this repurchase agreement. During 2018, the Company entered into a repurchase agreement, the proceeds of which were collateralized by private education loans. On June 25, 2019, the Company terminated this repurchase agreement. Included in "other borrowings" as of December 31, 2018 was $45.0 million subject to this repurchase agreement. On May 30, 2019, the Company entered into a $22.0 million secured line of credit agreement with a maturity date of May 30, 2022 and an interest rate of one-month LIBOR plus 1.75%. As of December 31, 2019, $5.0 million was outstanding under this line of credit and $17.0 million was available for future use. The line of credit is secured by several Company-owned properties. The Company had other notes payable included in its consolidated financial statements which were issued by partnerships for certain real estate development projects in Lincoln, Nebraska. Although the Company’s ownership interests in these partnerships are 50 percent or less, because the Company was the developer of and is a current tenant in the associated buildings, the operating results of these partnerships were included in the Company’s consolidated financial statements. On January 1, 2019, the Company adopted a new accounting standard for leases (see note 2). As a result of the adoption of this new standard, these real estate entities were deconsolidated, including $33.9 million of related debt. Prior to January 1, 2019, this debt was included in "other borrowings." Debt Covenants Certain bond resolutions and related credit agreements contain, among other requirements, covenants relating to restrictions on additional indebtedness, limits as to direct and indirect administrative expenses, and maintaining certain financial ratios. Management believes the Company is in compliance with all covenants of the bond indentures and related credit agreements as of December 31, 2019. F - 29 NELNET, INC. AND SUBSIDIARIES Notes to Consolidated Financial Statements (Dollars in thousands, except share amounts, unless otherwise noted) Maturity Schedule Bonds and notes outstanding as of December 31, 2019 are due in varying amounts as shown below. 2020 2021 2022 2023 2024 2025 and thereafter $ $ — 489,303 410,361 — 50,000 19,853,516 20,803,180 Generally, the Company's secured financing instruments can be redeemed on any interest payment date at par plus accrued interest. Subject to certain provisions, all bonds and notes are subject to redemption prior to maturity at the option of certain lending subsidiaries. Debt Repurchases The following table summarizes the Company's repurchases of its own debt in 2018 and 2017. There were no debt repurchases in 2019. Gains (losses) recorded by the Company from the repurchase of debt are included in "other income" on the Company’s consolidated statements of income. Par value Purchase price Gain (loss) Par value Purchase price Gain (loss) Unsecured debt - Hybrid Securities $ — Asset-backed securities 12,905 $ 12,905 Year ended December 31, 2018 — 12,546 12,546 — 359 359 29,803 154,407 184,210 2017 25,357 155,951 181,308 4,446 (1,544) 2,902 5. Derivative Financial Instruments The Company uses derivative financial instruments primarily to manage interest rate risk. In addition, the Company previously used derivative financial instruments to manage foreign currency exchange risk associated with student loan asset-backed notes that were denominated in Euros prior to a remarketing of such notes in October 2017. The Company is exposed to interest rate risk in the form of basis risk and repricing risk because the interest rate characteristics of the Company's assets do not match the interest rate characteristics of the funding for those assets. The Company periodically reviews the mismatch related to the interest rate characteristics of its assets and liabilities together with the Company's outlook as to current and future market conditions. Based on those factors, the Company uses derivative instruments as part of its overall risk management strategy. Derivative instruments used as part of the Company's interest rate risk management strategy are discussed below. Basis Swaps Interest earned on the majority of the Company's FFELP student loan assets is indexed to the one-month LIBOR rate. Meanwhile, the Company funds a portion of its FFELP loan assets with three-month LIBOR indexed floating rate securities. The differing interest rate characteristics of the Company's loan assets versus the liabilities funding these assets results in basis risk, which impacts the Company's excess spread earned on its loans. The Company also faces repricing risk due to the timing of the interest rate resets on its liabilities, which may occur as infrequently as once a quarter, in contrast to the timing of the interest rate resets on its assets, which generally occur daily. As of December 31, 2019, the Company had $18.9 billion, $0.8 billion, and $0.6 billion of FFELP loans indexed to the one- month LIBOR rate, three-month commercial paper rate, and the three-month treasury bill rate, respectively, the indices for which reset daily, and $7.5 billion of debt indexed to three-month LIBOR, the indices for which reset quarterly, and $11.0 billion of debt indexed to one-month LIBOR, the indices for which reset monthly. F - 30 NELNET, INC. AND SUBSIDIARIES Notes to Consolidated Financial Statements (Dollars in thousands, except share amounts, unless otherwise noted) The Company has used derivative instruments to hedge its basis risk and repricing risk. The Company has entered into basis swaps in which the Company receives three-month LIBOR set discretely in advance and pays one-month LIBOR plus or minus a spread as defined in the agreements (the 1:3 Basis Swaps). The following table summarizes the Company’s 1:3 Basis Swaps outstanding: As of December 31, 2019 2018 Maturity Notional amount Notional amount $ 2019 2020 2021 2022 (a) 2023 2024 2026 2027 2028 2029 2031 — 1,000,000 250,000 2,000,000 750,000 1,750,000 1,150,000 250,000 — — — 3,500,000 1,000,000 250,000 2,000,000 750,000 250,000 1,150,000 375,000 325,000 100,000 300,000 $ 7,150,000 10,000,000 (a) $750 million of the notional amount of these derivatives have forward effective start dates of May 2020. The weighted average rate paid by the Company on the 1:3 Basis Swaps as of December 31, 2019 and 2018, was one-month LIBOR plus 9.7 basis points and 9.4 basis points, respectively. Interest rate swaps – floor income hedges FFELP loans originated prior to April 1, 2006 generally earn interest at the higher of the borrower rate, which is fixed over a period of time, or a floating rate based on the Special Allowance Payments ("SAP") formula set by the Department. The SAP rate is based on an applicable index plus a fixed spread that depends on loan type, origination date, and repayment status. The Company generally finances its student loan portfolio with variable rate debt. In low and/or certain declining interest rate environments, when the fixed borrower rate is higher than the SAP rate, these student loans earn at a fixed rate while the interest on the variable rate debt typically continues to reflect the low and/or declining interest rates. In these interest rate environments, the Company may earn additional spread income that it refers to as floor income. Depending on the type of loan and when it was originated, the borrower rate is either fixed to term or is reset to an annual rate each July 1. As a result, for loans where the borrower rate is fixed to term, the Company may earn floor income for an extended period of time, which the Company refers to as fixed rate floor income, and for those loans where the borrower rate is reset annually on July 1, the Company may earn floor income to the next reset date, which the Company refers to as variable rate floor income. All FFELP loans first originated on or after April 1, 2006 effectively earn at the SAP rate, since lenders are required to rebate fixed rate floor income and variable rate floor income for these loans to the Department. Absent the use of derivative instruments, a rise in interest rates may reduce the amount of floor income received and this may have an impact on earnings due to interest margin compression caused by increasing financing costs, until such time as the federally insured loans earn interest at a variable rate in accordance with their SAP formulas. In higher interest rate environments, where the interest rate rises above the borrower rate and fixed rate loans effectively become variable rate loans, the impact of the rate fluctuations is reduced. As of December 31, 2019 and 2018, the Company had $3.3 billion and $2.6 billion, respectively, of FFELP student loan assets that were earning fixed rate floor income, of which the weighted average estimated variable conversion rate for these loans, which is the estimated short-term interest rate at which loans would convert to a variable rate, was 3.72% and 4.24%, respectively. F - 31 NELNET, INC. AND SUBSIDIARIES Notes to Consolidated Financial Statements (Dollars in thousands, except share amounts, unless otherwise noted) The following table summarizes the outstanding derivative instruments used by the Company to economically hedge loans earning fixed rate floor income. As of December 31, 2019 As of December 31, 2018 Maturity Notional amount $ 2019 2020 2021 2022 (b) 2023 2024 2027 — 1,500,000 600,000 250,000 150,000 — — Weighted average fixed rate paid by the Company (a) Notional amount Weighted average fixed rate paid by the Company (a) — % $ 1.01 2.15 1.65 2.25 — — 3,250,000 1,500,000 100,000 — 400,000 300,000 25,000 0.97 % 1.01 2.95 — 2.24 2.28 2.35 $ 2,500,000 1.42 % $ 5,575,000 1.18 % (a) (b) For all interest rate derivatives, the Company receives discrete three-month LIBOR. These derivatives have forward effective start dates in June 2021. Interest Rate Swap Options – Floor Income Hedges During 2014 and 2018, the Company paid $9.1 million and $4.6 million, respectively for interest rate swap options to economically hedge loans earning fixed rate floor income. The interest rate swap options gave the Company the right, but not the obligation, to enter into interest rate swaps during the third quarter of 2019 in which the Company would pay a weighted average fixed amount of 3.21 percent and receive discrete one-month or three-month LIBOR through 2024. The Company did not exercise its rights on these options, and such swap options expired. Interest Rate Caps In June 2015 and June 2019, the Company paid $2.9 million and $0.3 million, respectively, for interest rate cap contracts to mitigate a rise in interest rates and its impact on earnings related to its student loan portfolio earning a fixed rate. In the event that the one-month LIBOR or three-month LIBOR rate rises above the applicable strike rate, the Company will receive monthly payments related to the spread difference. The following table summarizes these derivative instruments as of December 31, 2019. Notional Amount Strike rate Maturity date $ 125,000 2.50% (1-month LIBOR) July 15, 2020 150,000 4.99 (1-month LIBOR) July 15, 2020 500,000 2.25 (3-month LIBOR) September 25, 2020 Interest Rate Swaps - Unsecured Debt Hedges The Company has unsecured debt (Hybrid Securities) outstanding in which it pays interest at three-month LIBOR plus 3.375%. The Company had $25.0 million (notional amount) of derivative financial instruments that were used to effectively convert the variable interest rate on a designated notional amount of this debt to a fixed rate. These derivatives were terminated during the fourth quarter of 2018. Derivative Terminations During the year ended December 31, 2019, the Company terminated certain derivatives for net payments of $12.5 million, including payments of $14.4 million on the termination of floor income hedges, proceeds of $1.4 million on the termination of other hedges, and proceeds of $0.5 million on the termination of 1:3 basis swaps. During the year ended December 31, 2018, the Company terminated certain derivatives for net proceeds of $10.3 million, including proceeds of $14.2 million on the termination of floor income hedges, and payments of $3.9 million on the termination of hybrid debt hedges. During the year ended December 31, 2017, the Company terminated certain derivatives for net payments of $30.4 million, including proceeds of $2.1 million and $0.9 million on the termination of 1:3 basis swaps and interest rate caps, respectively, and payments of $33.4 million on the termination of its cross-currency interest rate swap. F - 32 NELNET, INC. AND SUBSIDIARIES Notes to Consolidated Financial Statements (Dollars in thousands, except share amounts, unless otherwise noted) Consolidated Financial Statement Impact Related to Derivatives Balance Sheet The following table summarizes the fair value of the Company’s derivatives as reflected on the consolidated balance sheets. There is no difference between the gross amounts of recognized assets presented in the consolidated balance sheets related to the Company's derivative portfolio and the net amount when excluding derivatives subject to enforceable master netting arrangements and cash collateral received. Fair value of asset derivatives Fair value of liability derivatives As of As of As of As of December 31, 2019 December 31, 2018 December 31, 2019 December 31, 2018 $ $ — — — 1,465 353 1,818 — — — — — — Interest rate swap options - floor income hedges Interest rate caps Total Income Statement Impact The following table summarizes the components of "derivative market value and foreign currency transaction adjustments and derivative settlements, net" included in the consolidated statements of income. Settlements: 1:3 basis swaps Interest rate swaps - floor income hedges Interest rate swaps - hybrid debt hedges Cross-currency interest rate swap Total settlements - income Change in fair value: 1:3 basis swaps Interest rate swaps - floor income hedges Interest rate swap options - floor income hedges Interest rate caps Interest rate swaps - hybrid debt hedges Cross-currency interest rate swap Other Total change in fair value - (expense) income Re-measurement of Euro Notes (foreign currency transaction adjustment) Derivative market value and foreign currency transaction adjustments and derivative settlements, net - (expense) income Derivative Instruments - Credit and Market Risk Year ended December 31, 2019 2018 2017 $ 5,214 40,192 — — 45,406 1,515 (77,027) (1,465) (628) — — 1,410 (76,195) — 5,577 64,901 (407) — 70,071 12,573 (10,962) (3,848) 78 3,173 — — 1,014 — (3,069) 10,838 (781) (6,321) 667 (8,224) 3,585 (2,433) (893) 279 34,208 (143) 26,379 (45,600) $ (30,789) 71,085 (18,554) For non-centrally cleared derivatives, the Company is exposed to credit risk. However, the majority of the Company's derivatives currently outstanding and anticipated to be executed in future periods are and will be executed and cleared at a regulated clearinghouse, thus, significantly reducing counterparty credit risk associated with the Company's derivative portfolio. Interest rate movements have an impact on the amount of collateral the Company is required to deposit with its derivative instrument counterparties and variation margin payments to its third-party clearinghouse. The Company attempts to manage market risk associated with interest rates by establishing and monitoring limits as to the types and degree of risk that may be undertaken. The Company's derivative portfolio and hedging strategy is reviewed periodically by its internal risk committee and board of directors' Risk and Finance Committee. With the Company's current derivative portfolio, the Company does F - 33 NELNET, INC. AND SUBSIDIARIES Notes to Consolidated Financial Statements (Dollars in thousands, except share amounts, unless otherwise noted) not currently anticipate any movement in interest rates having a material impact on its liquidity or capital resources, nor expects future movements in interest rates to have a material impact on its ability to meet potential collateral deposits with its counterparties and/or make variation margin payments to its third-party clearinghouse. Due to the existing low interest rate environment, the Company's exposure to downward movements in interest rates on its interest rate swaps is limited. In addition, the historical high correlation between one-month and three-month LIBOR limits the Company's exposure to interest rate movements on the 1:3 Basis Swaps. 6. Investments and Notes Receivable A summary of the Company's investments and notes receivable follows: As of December 31, 2019 Amortized cost Gross unrealized gains Gross unrealized losses Fair value Amortized cost As of December 31, 2018 Gross unrealized gains Gross unrealized losses Fair value Investments (at fair value): Student loan asset-backed and other debt securities - available-for-sale (a) Equity securities Total investments (at fair value) Other Investments and Notes Receivable (not measured at fair value): Venture capital and funds: Measurement alternative (b) Equity method Other Total venture capital and funds Real estate: Equity method Other Total real estate Solar: Equity method Beneficial interest in consumer loan securitizations (c) Tax liens and affordable housing Notes receivable Total investments and notes receivable (not measured at fair value) Total investments and notes receivable $ 48,790 9,622 3,911 4,561 — (1,283) 52,701 12,900 47,931 12,909 5,109 5,145 — (407) 53,040 17,647 $ 58,412 8,472 (1,283) 65,601 60,840 10,254 (407) 70,687 72,760 15,379 1,175 89,314 44,159 867 45,026 7,562 33,187 6,283 — 181,372 $ 246,973 70,939 16,191 900 88,030 29,483 34,211 63,694 2,724 — 7,862 16,373 178,683 249,370 (a) (b) (c) As of December 31, 2019, the stated maturities of substantially all of the Company's student loan asset-backed and other debt securities classified as available-for-sale were greater than 10 years. During 2018, the Company recorded upward adjustments of $7.2 million (pre-tax) on these investments, which are included in "other income" in the consolidated statements of income. The upward adjustments were made as a result of observable price changes. The Company also recorded $0.8 million (pre-tax) in impairments in 2018 on these investments. The Company's current expectation of cash flows from the beneficial interest in consumer loan securitizations is approximately three years. F - 34 NELNET, INC. AND SUBSIDIARIES Notes to Consolidated Financial Statements (Dollars in thousands, except share amounts, unless otherwise noted) 7. Business Combinations Great Lakes Educational Loan Services, Inc. ("Great Lakes") On February 7, 2018, the Company acquired 100 percent of the outstanding stock of Great Lakes for total cash consideration of $150.0 million. Great Lakes provides servicing for federally-owned student loans for the Department of Education, FFELP loans, and private education loans. The acquisition of Great Lakes has expanded the Company's portfolio of loans it services. The operating results of Great Lakes are included in the Loan Servicing and Systems operating segment. As part of the acquisition, the Company acquired the remaining 50 percent ownership in GreatNet Solutions, LLC ("GreatNet"), a joint venture formed prior to the acquisition between Nelnet Servicing, a subsidiary of the Company, and Great Lakes. Prior to the acquisition of the remaining 50 percent of GreatNet, the Company consolidated the operating results of GreatNet, as the Company was deemed to have control over the joint venture. The proportionate share of membership interest (equity) and net loss of GreatNet that was attributable to Great Lakes was reflected as a noncontrolling interest in the Company's consolidated financial statements. The Company recognized a $19.1 million reduction to consolidated shareholders' equity as a result of acquiring Great Lakes' 50 percent ownership in GreatNet. This transaction resulted in a $5.7 million decrease in noncontrolling interests and a $13.4 million decrease in retained earnings. The following table summarizes the estimated fair values of the assets acquired and liabilities assumed at the acquisition date. The fair value assigned to the acquisition of the noncontrolling interest in GreatNet reduced the total consideration allocated to the assets acquired and liabilities assumed of Great Lakes from $150.0 million to $136.6 million. Cash and cash equivalents Accounts receivable Property and equipment Other assets Intangible assets Excess cost over fair value of net assets acquired (goodwill) Other liabilities Net assets acquired $ $ 27,399 23,708 35,919 14,018 75,329 15,043 (54,865) 136,551 The $75.3 million of acquired intangible assets on the date of acquisition had a weighted-average useful life of approximately 4 years. The intangible assets that made up this amount include customer relationships of $70.2 million (4-year average useful life) and a trade name of $5.1 million (7-year useful life). The $15.0 million of goodwill was assigned to the Loan Servicing and Systems operating segment and is not expected to be deductible for tax purposes. The amount allocated to goodwill was primarily attributed to the deferred tax liability related to the difference between the carrying amount and tax bases of acquired identifiable intangible assets and the synergies and economies of scale expected from combining the operations of the Company and Great Lakes. The Great Lakes assets acquired and liabilities assumed were recorded by the Company at their respective fair values at the date of acquisition, and Great Lakes' operating results from the date of acquisition forward are included in the Company's consolidated operating results. During 2018, the Company converted Great Lakes' FFELP and private education loan servicing volume to Nelnet Servicing's servicing platform. In addition, the Company began to combine certain shared services and overhead functions between Great Lakes and the Company. As a result of these operational changes, the results of operations for the year ended December 31, 2018 attributed to Great Lakes since the acquisition are not provided since the results of the Great Lakes legal entity are no longer reflective of the entity acquired. F - 35 NELNET, INC. AND SUBSIDIARIES Notes to Consolidated Financial Statements (Dollars in thousands, except share amounts, unless otherwise noted) The following unaudited pro forma information for the Company has been prepared as if the acquisition of Great Lakes had occurred on January 1, 2017. The information is based on the historical results of the separate companies and may not necessarily be indicative of the results that could have been achieved or of results that may occur in the future. The pro forma adjustments include the impact of depreciation and amortization of property and equipment and intangible assets acquired. Year ended December 31, 2018 2017 Loan servicing and systems revenue Net income attributable to Nelnet, Inc. Net income per share - basic and diluted $ $ $ 460,074 229,409 5.61 452,760 185,369 4.44 Tuition Management Systems, LLC ("TMS") On November 20, 2018, the Company acquired 100 percent of the membership interests of TMS for total cash consideration of $27.0 million. TMS provides tuition payment plans, billing services, payment technology solutions, and refund management to educational institutions. The TMS acquisition added both K-12 and higher education schools to the Company's existing customer base, further enhancing the Company's market share leading position with private faith based K-12 schools and advancing to a market leading position in higher education. The operating results of TMS are included in the Education Technology, Services, and Payment Processing operating segment from the date of acquisition. The following table summarizes the estimated fair values of the assets acquired and liabilities assumed at the acquisition date. Cash and cash equivalents Restricted cash - due to customers Accounts receivable Other assets Intangible assets Excess cost over fair value of net assets acquired (goodwill) Other liabilities Due to customers Net assets acquired $ $ 438 123,169 1,019 381 26,390 3,110 (4,321) (123,169) 27,017 The $26.4 million of acquired intangible assets on the date of acquisition had a weighted-average useful life of approximately 10 years. The intangible assets that made up this amount include customer relationships of $25.4 million (10-year useful life) and computer software of $1.0 million (2-year useful life). The $3.1 million of goodwill was assigned to the Education Technology, Services, and Payment Processing operating segment and is expected to be deductible for tax purposes. The amount allocated to goodwill was primarily attributed to the synergies and economies of scale expected from combining the operations of the Company and TMS. The pro forma impacts of the TMS acquisition on the Company's historical results prior to the acquisition were not material. F - 36 NELNET, INC. AND SUBSIDIARIES Notes to Consolidated Financial Statements (Dollars in thousands, except share amounts, unless otherwise noted) 8. Intangible Assets Intangible assets consist of the following: Weighted average remaining useful life as of December 31, 2019 (months) As of December 31, 2019 2018 Amortizable intangible assets, net: Customer relationships (net of accumulated amortization of $60,553 and $33,968, respectively) Trade names (net of accumulated amortization of $2,792 and $5,825, respectively) Computer software (net of accumulated amortization of $3,233 and $15,420, respectively) Total - amortizable intangible assets, net 80 $ 71,900 96 14 7,478 2,154 98,484 10,868 4,938 80 $ 81,532 114,290 The Company recorded amortization expense on its intangible assets of $32.8 million, $30.2 million, and $9.4 million during the years ended December 31, 2019, 2018, and 2017, respectively. The Company will continue to amortize intangible assets over their remaining useful lives. As of December 31, 2019, the Company estimates it will record amortization expense as follows: 2020 2021 2022 2023 2024 2025 and thereafter $ $ 29,515 18,761 7,172 6,925 6,511 12,648 81,532 9. Goodwill The change in the carrying amount of goodwill by reportable operating segment was as follows: Loan Servicing and Systems Education Technology, Services, and Payment Processing Communications Asset Generation and Management (a) Corporate and Other Activities Balance as of December 31, 2017 $ Goodwill acquired Balance as of December 31, 2018 and 2019 $ 8,596 15,043 23,639 67,168 3,110 70,278 21,112 — 21,112 41,883 — 41,883 — — — Total 138,759 18,153 156,912 (a) As a result of the Reconciliation Act of 2010, the Company no longer originates new FFELP loans, and net interest income from the Company's existing FFELP loan portfolio will decline over time as the Company's portfolio pays down. As a result, as this revenue stream winds down, goodwill impairment will be triggered for the Asset Generation and Management reporting unit due to the passage of time and depletion of projected cash flows stemming from its FFELP student loan portfolio. Management believes the elimination of new FFELP loan originations will not have an adverse impact on the fair value of the Company's other reporting units. The Company reviews goodwill for impairment annually. This annual review is completed by the Company as of November 30 of each year and whenever triggering events or changes in circumstances indicate its carrying value may not be recoverable. For the 2019 and 2018 annual reviews of goodwill, the Company assessed qualitative factors and concluded it was not more likely than not that the fair value of its reporting units were less than their carrying amount. As such, the Company was not required to perform further impairment testing and concluded there was no impairment of goodwill. In 2017, due to the sale of a reporting unit at the Corporate segment, the Company recognized an impairment expense of $3.6 million (pre-tax) which is included in "other expenses" in the consolidated statements of income. F - 37 NELNET, INC. AND SUBSIDIARIES Notes to Consolidated Financial Statements (Dollars in thousands, except share amounts, unless otherwise noted) 10. Property and Equipment Property and equipment consisted of the following: Useful life 2019 2018 As of December 31, Non-communications: Computer equipment and software Building and building improvements Office furniture and equipment Leasehold improvements Transportation equipment Land Construction in progress Accumulated depreciation - non-communications Non-communications, net property and equipment Communications: Network plant and fiber Customer located property Central office Transportation equipment Computer equipment and software Other Land Construction in progress 1-5 years 5-48 years 1-10 years 1-15 years 5-10 years — — 4-15 years 2-4 years 5-15 years 4-10 years 1-5 years 1-39 years — — Accumulated depreciation - communications Communications, net property and equipment Total property and equipment, net $ $ 160,319 37,904 21,245 9,517 5,049 1,400 13,738 249,172 (142,270) 106,902 254,560 27,011 17,672 6,611 5,574 3,702 70 54 315,254 (73,897) 241,357 348,259 137,705 50,138 22,796 9,327 5,123 3,328 3,578 231,995 (123,003) 108,992 215,787 21,234 15,688 6,580 4,943 3,219 70 6,344 273,865 (38,073) 235,792 344,784 The Company recorded depreciation expense on its property and equipment of $72.3 million, $56.7 million, and $30.2 million during the years ended December 31, 2019, 2018, and 2017, respectively. Impairment charges As part of integrating technology and becoming more efficient and effective in meeting borrower needs, the Company continues to evaluate the best use of its servicing systems on a post-Great Lakes acquisition basis. As a result of this evaluation, in 2018, the Company recorded an impairment charge of $3.9 million (pre-tax) within its Loan Servicing and Systems operating segment related to certain external software development costs that were previously capitalized. On October 16, 2018, the Company terminated its investment in a proprietary payment processing platform. This decision was made as a result of decreases in price and advancements of technology by established processors in the industry. As a result of this decision, in 2018, the Company recorded an impairment charge of $7.8 million (pre-tax) within its Education Technology, Services, and Payment Processing operating segment. The charge primarily represents computer equipment and external software development costs related to the payment processing platform. The above impairment charges are included in "other expenses" in the consolidated statements of income. F - 38 NELNET, INC. AND SUBSIDIARIES Notes to Consolidated Financial Statements (Dollars in thousands, except share amounts, unless otherwise noted) 11. Shareholders’ Equity Classes of Common Stock The Company's common stock is divided into two classes. The Class B common stock has ten votes per share and the Class A common stock has one vote per share on all matters to be voted on by the Company's shareholders. Each Class B share is convertible at any time at the holder's option into one Class A share. With the exception of the voting rights and the conversion feature, the Class A and Class B shares are identical in terms of other rights, including dividend and liquidation rights. Stock Repurchases The Company has a stock repurchase program that expires on May 7, 2022 in which it can repurchase up to five million shares of its Class A common stock on the open market, through private transactions, or otherwise. As of December 31, 2019, 4.8 million shares may still be purchased under the Company's stock repurchase program. Shares repurchased by the Company during 2019, 2018, and 2017 are shown in the table below. In accordance with the corporate laws of the state in which the Company is incorporated, all shares repurchased by the Company are legally retired upon acquisition by the Company. Year ended December 31, 2019 Year ended December 31, 2018 Year ended December 31, 2017 12. Earnings per Common Share Total shares repurchased Purchase price (in thousands) Average price of shares repurchased (per share) 726,273 $ 40,411 $ 868,147 1,473,054 45,331 68,896 55.64 52.22 46.77 Presented below is a summary of the components used to calculate basic and diluted earnings per share. The Company applies the two-class method in computing both basic and diluted earnings per share, which requires the calculation of separate earnings per share amounts for common stock and unvested share-based awards. Unvested share-based awards that contain nonforfeitable rights to dividends are considered securities which participate in undistributed earnings with common stock. Year ended December 31, 2019 Unvested restricted stock shareholders Common shareholders Total Common shareholders 2018 Unvested restricted stock shareholders Total Common shareholders 2017 Unvested restricted stock shareholders Total Numerator: Net income attributable to Nelnet, Inc. Denominator: Weighted- average common shares outstanding - basic and diluted Earnings per share - basic and diluted $ 139,946 1,857 141,803 225,170 2,743 227,913 171,442 1,724 173,166 39,523,082 524,320 40,047,402 40,416,719 492,303 40,909,022 41,375,964 415,977 41,791,941 $ 3.54 3.54 3.54 5.57 5.57 5.57 4.14 4.14 4.14 Unvested restricted stock awards are the Company's only potential common shares and, accordingly, there were no awards that were antidilutive and not included in average shares outstanding for the diluted earnings per share calculation. As of December 31, 2019, a cumulative amount of 193,411 shares have been deferred by non-employee directors under the Directors Stock Compensation Plan and will become issuable upon the termination of service by the respective non-employee director on the board of directors. These shares are included in the Company's weighted average shares outstanding calculation. F - 39 NELNET, INC. AND SUBSIDIARIES Notes to Consolidated Financial Statements (Dollars in thousands, except share amounts, unless otherwise noted) 13. Income Taxes The Company is subject to income taxes in the United States, Canada, and Australia. Significant judgment is required in evaluating the Company's tax positions and determining the provision for income taxes. During the ordinary course of business, there are many transactions and calculations for which the ultimate tax determination is uncertain. As required by the Income Taxes Topic of the FASB Accounting Standards Codification ("ASC Topic 740"), the Company recognizes in the consolidated financial statements only those tax positions determined to be more likely than not of being sustained upon examination, based on the technical merits of the positions. It further requires that a change in judgment related to the expected ultimate resolution of uncertain tax positions be recognized in earnings in the period of such change. As of December 31, 2019, the total amount of gross unrecognized tax benefits (excluding the federal benefit received from state positions) was $20.1 million, which is included in “other liabilities” on the consolidated balance sheet. Of this total, $15.9 million (net of the federal benefit on state issues) represents the amount of unrecognized tax benefits that, if recognized, would favorably affect the effective tax rate in future periods. The Company currently anticipates uncertain tax positions will decrease by $6.4 million prior to December 31, 2020 as a result of a lapse of applicable statutes of limitations, settlements, correspondence with examining authorities, and recognition or measurement considerations with federal and state jurisdictions; however, actual developments in this area could differ from those currently expected. Of the anticipated $6.4 million decrease, $5.1 million, if recognized, would favorably affect the Company's effective tax rate. A reconciliation of the beginning and ending amount of gross unrecognized tax benefits follows: Year ended December 31, 2019 2018 Gross balance - beginning of year Additions based on tax positions of prior years Additions based on tax positions related to the current year Settlements with taxing authorities Reductions for tax positions of prior years Reductions due to lapse of applicable statutes of limitations Gross balance - end of year $ $ 23,445 651 1,339 (1,810) (380) (3,097) 20,148 28,421 1,405 2,044 (915) (5,109) (2,401) 23,445 All the reductions shown in the table above that are due to prior year tax positions, settlements, and the lapse of statutes of limitations impacted the effective tax rate. The Company's policy is to recognize interest and penalties accrued on uncertain tax positions as part of interest expense and other expense, respectively. As of December 31, 2019 and 2018, $5.0 million and $4.9 million in accrued interest and penalties, respectively, were included in “other liabilities” on the consolidated balance sheets. The Company recognized interest expense of $0.1 million, $0.4 million, and $0.8 million related to uncertain tax positions for the years ended December 31, 2019, 2018, and 2017, respectively. The impact to the consolidated statements of income related to penalties for uncertain tax positions was not significant for the years 2019, 2018, and 2017. The impact of timing differences and tax attributes are considered when calculating interest and penalty accruals associated with the unrecognized tax benefits. The Company and its subsidiaries file a consolidated federal income tax return in the U.S. and the Company or one of its subsidiaries files income tax returns in various state, local, and foreign jurisdictions. The Company is no longer subject to U.S. federal income tax examinations for years prior to 2016. The Company is no longer subject to U.S. state and local income tax examinations by tax authorities prior to 2010. As of December 31, 2019, the Company has tax uncertainties that remain unsettled in the jurisdiction of California (2010 through 2015). F - 40 NELNET, INC. AND SUBSIDIARIES Notes to Consolidated Financial Statements (Dollars in thousands, except share amounts, unless otherwise noted) The provision for income taxes consists of the following components: Year ended December 31, 2019 2018 2017 Current: Federal State Foreign Total current provision Deferred: Federal State Foreign Total deferred provision $ 38,931 3,546 239 42,716 (4,280) (2,922) (63) (7,265) Provision for income tax expense $ 35,451 45,822 1,969 (2) 47,789 11,783 (883) 81 10,981 58,770 65,196 1,246 (35) 66,407 (8,270) 6,618 108 (1,544) 64,863 The differences between the income tax provision computed at the statutory federal corporate tax rate and the financial statement provision for income taxes are shown below: Tax expense at federal rate Increase (decrease) resulting from: State tax, net of federal income tax benefit Tax credits Provision for uncertain federal and state tax matters Reduction of statutory federal rate (a) Other Effective tax rate Year ended December 31, 2019 2018 2017 21.0 % 21.0 % 35.0 % 2.5 (3.0) (0.7) — 0.2 2.4 (1.9) (1.0) — — 1.6 (1.3) — (8.0) — 20.0 % 20.5 % 27.3 % (a) The Tax Cuts and Jobs Act (the “Tax Act”), signed into law on December 22, 2017, changed existing United States tax law and included numerous provisions that affect businesses, including the Company. The Tax Act, for instance, introduced changes that impact U.S. corporate tax rates, business-related exclusions, and deductions and credits. The Company accounted for the change in tax laws in accordance with ASC Topic 740 that provides guidance that a change in tax law or rates be recognized in the financial reporting period that includes the enactment date, which is the date the changes were signed into law. The income tax accounting effect of a change in tax laws or tax rates includes, for example, adjusting (or re-measuring) deferred tax liabilities and deferred tax assets, as well as evaluating whether a valuation allowance is needed for deferred tax assets. The Company re-measured its deferred tax liabilities and deferred tax assets as of December 22, 2017 which resulted in a decrease to income tax expense of $19.3 million. The Company determined no valuation allowance was needed for any deferred tax assets as a result of the Tax Act. F - 41 NELNET, INC. AND SUBSIDIARIES Notes to Consolidated Financial Statements (Dollars in thousands, except share amounts, unless otherwise noted) The tax effect of temporary differences that give rise to deferred tax assets and liabilities include the following: As of December 31, 2019 2018 Deferred tax assets: Deferred revenue Student loans Tax credit carryforwards Lease liability Accrued expenses Stock compensation Securitizations State net operating losses Total gross deferred tax assets Less valuation allowance Net deferred tax assets Deferred tax liabilities: Partnership basis Depreciation Lease right of use asset Intangible assets Loan origination services Debt and equity investments Basis in certain derivative contracts Other Total gross deferred tax liabilities Net deferred tax asset (liability) $ $ 18,037 15,479 9,394 5,891 4,112 2,167 1,261 551 56,892 (548) 56,344 56,741 11,489 5,684 5,399 4,647 3,775 2,730 1,003 91,468 (35,124) 16,633 15,054 — — 3,254 2,041 2,014 528 39,524 (527) 38,997 47,488 9,469 — 9,903 6,243 1,363 22,042 1,172 97,680 (58,683) The Company has performed an evaluation of the recoverability of deferred tax assets. In assessing the realizability of the Company's deferred tax assets, management considers whether it is more likely than not that some portion or all of the deferred tax assets will be realized. The ultimate realization of deferred tax assets is dependent upon the generation of future taxable income during the period in which those temporary differences become deductible or eligible for utilization of a tax credit carryforward. Management considers the scheduled reversals of deferred tax liabilities, projected taxable income, carry back opportunities, and tax planning strategies in making the assessment of the amount of the valuation allowance. With the exception of a portion of the Company's state net operating losses, it is management's opinion that it is more likely than not that the deferred tax assets will be realized and should not be reduced by a valuation allowance. The amount of deferred tax assets considered realizable could be reduced in the near term if estimates of future taxable income during the carry forward period are reduced. As of December 31, 2019 and 2018, the Company had a current income tax receivable of $27.3 million and $6.4 million, respectively, that is included in "other assets" on the consolidated balance sheets. F - 42 NELNET, INC. AND SUBSIDIARIES Notes to Consolidated Financial Statements (Dollars in thousands, except share amounts, unless otherwise noted) 14. Segment Reporting The Company has four reportable operating segments. The Company's reportable operating segments include: • Loan Servicing and Systems • Education Technology, Services, and Payment Processing • Communications • Asset Generation and Management The Company earns fee-based revenue through its Loan Servicing and Systems; Education Technology, Services, and Payment Processing; and Communications operating segments. In addition, the Company earns interest income on its loan portfolio in its Asset Generation and Management operating segment. The Company’s operating segments are defined by the products and services they offer and the types of customers they serve, and they reflect the manner in which financial information is currently evaluated by management. See note 1, "Description of Business," for a description of each operating segment, including the primary products and services offered. The management reporting process measures the performance of the Company’s operating segments based on the management structure of the Company, as well as the methodology used by management to evaluate performance and allocate resources. Executive management (the "chief operating decision maker") evaluates the performance of the Company’s operating segments based on their financial results prepared in conformity with U.S. GAAP. The accounting policies of the Company’s operating segments are the same as those described in the summary of significant that provides a product or service to another accounting policies. Intersegment revenues are charged by a segment segment. Intersegment revenues and expenses are included within each segment consistent with the income statement presentation provided to management. As a result of the Tax Cuts and Jobs Act, beginning January 1, 2018, income taxes are allocated based on 24% of income before taxes for each individual operating segment. Prior to January 1, 2018, income taxes were allocated based on 38% of income before taxes for each individual operating segment. The difference between the consolidated income tax expense and the sum of taxes calculated for each operating segment is included in income taxes in Corporate and Other Activities. Corporate and Other Activities Other business activities and operating segments that are not reportable are combined and included in Corporate and Other Activities. Corporate and Other Activities includes the following items: • • • Income earned on certain investment activities, including real estate and renewable energy (solar) Interest expense incurred on unsecured debt transactions Other product and service offerings that are not considered reportable operating segments including, but not limited to, WRCM, the SEC-registered investment advisor subsidiary Corporate and Other Activities also includes certain corporate activities and overhead functions related to executive management, information technology, occupancy, and marketing. These costs are allocated to each operating segment based on estimated use of such activities and services. internal audit, human resources, accounting, legal, enterprise risk management, Segment Results The following tables include the results of each of the Company's reportable operating segments reconciled to the consolidated financial statements. F - 43 NELNET, INC. AND SUBSIDIARIES Notes to Consolidated Financial Statements (Dollars in thousands, except share amounts, unless otherwise noted) Year ended December 31, 2019 Loan Servicing and Systems Education Technology, Services, and Payment Processing Asset Generation and Management Corporate and Other Activities Communications Eliminations Total Total interest income Interest expense Net interest income (expense) Less provision for loan losses Net interest income (loss) after provision for loan losses Other income: Loan servicing and systems revenue Intersegment servicing revenue Education technology, services, and payment processing revenue Communications revenue Other income Derivative settlements, net Derivative market value and foreign currency transactions adjustments, net Total other income Cost of services: Cost to provide education technology, services, and payment processing services Cost to provide communications services Total cost of services Operating expenses: Salaries and benefits Depreciation and amortization Other expenses Intersegment expenses, net Total operating expenses Income (loss) before income taxes Income tax (expense) benefit Net income (loss) Net loss (income) attributable to noncontrolling interests Net income (loss) attributable to Nelnet, Inc. Total assets as of December 31, 2019 $ $ $ 2,031 115 1,916 — 1,916 455,255 46,751 — — 9,736 — — 9,244 46 9,198 — 9,198 — — 277,331 — 259 — — 3 — 3 — 3 — — — 64,269 1,509 — — 931,963 693,375 238,588 39,000 9,232 9,587 (355) — 199,588 (355) — — — — 30,349 45,406 (76,195) — — — — 23,327 — — (3,796) (3,796) — — — — (46,751) — — — — — 948,677 699,327 249,350 39,000 210,350 455,255 — 277,331 64,269 65,179 45,406 (76,195) 511,742 277,590 65,778 (440) 23,327 (46,751) 831,245 — — — 276,136 34,755 71,064 54,325 436,280 77,378 81,603 — 81,603 94,666 12,820 22,027 13,405 142,918 62,267 (18,571) (14,944) 58,807 47,323 — 20,423 20,423 21,004 37,173 15,165 2,962 76,304 — — — 1,545 — 34,445 47,362 83,352 (30,946) 115,796 7,427 (23,519) (27,792) 88,004 — — — 70,152 20,300 51,571 (71,303) 70,720 (47,748) 18,428 (29,320) — 58,807 — 47,323 — — 509 (23,519) 88,004 (28,811) — — — — — — (46,751) (46,751) — — — — — 81,603 20,423 102,026 463,503 105,049 194,272 — 762,824 176,745 (35,451) 141,294 509 141,803 290,311 506,382 303,347 22,128,917 627,897 (147,884) 23,708,970 F - 44 NELNET, INC. AND SUBSIDIARIES Notes to Consolidated Financial Statements (Dollars in thousands, except share amounts, unless otherwise noted) Year ended December 31, 2018 Education Technology, Services, and Payment Processing Asset Generation and Management Corporate and Other Activities Communications Eliminations Total Total interest income Interest expense Net interest income (expense) Less provision for loan losses Net interest income (loss) after provision for loan losses Other income: Loan servicing and systems revenue Intersegment servicing revenue Education technology, services, and payment processing revenue Communications revenue Other income Derivative settlements, net Derivative market value and foreign currency transaction adjustments, net Total other income Cost of services: Cost to provide education technology, services, and payment processing services Cost to provide communications revenue Total cost of services Operating expenses: Salaries and benefits Depreciation and amortization Other expenses Intersegment expenses, net Total operating expenses Income (loss) before income taxes Income tax (expense) benefit Net income (loss) Net loss (income) attributable to noncontrolling interests Net income (loss) attributable to Nelnet, Inc. Total assets as of December 31, 2018 $ $ Loan Servicing and Systems $ 1,351 — 1,351 — 1,351 440,027 47,082 — — 7,284 — — 4,453 9 4,444 — 4,444 — — 221,962 — — — — — — — 267,458 32,074 67,336 59,042 425,910 69,834 (16,954) 52,880 808 53,688 59,566 — 59,566 81,080 13,484 28,137 10,681 133,382 33,458 (8,030) 25,428 — 25,428 494,393 221,962 45,728 4 9,987 (9,983) — 911,502 662,360 249,142 23,000 19,944 10,540 9,404 — (9,983) 226,142 9,404 — — — 44,653 1,075 — — — 16,926 16,926 18,779 23,377 11,900 2,578 56,634 — — — — 12,723 70,478 (2,159) 81,042 — — — 1,526 — 15,961 47,870 65,357 (37,815) 241,827 9,075 (58,038) (28,740) 183,789 — — (28,740) 183,789 — — — — 33,724 (407) 3,173 36,490 — — — 67,336 17,960 54,697 (73,088) 66,905 (21,011) 15,177 (5,834) (419) (6,253) (12,989) (12,989) — — — — (47,082) — — — — — 924,266 669,906 254,360 23,000 231,360 440,027 — 221,962 44,653 54,805 70,071 1,014 (47,082) 832,532 — — — — — — (47,082) (47,082) — — — — — 59,566 16,926 76,492 436,179 86,896 178,031 — 701,106 286,294 (58,770) 227,524 389 227,913 226,445 471,719 286,816 23,806,321 563,841 (134,174) 25,220,968 F - 45 NELNET, INC. AND SUBSIDIARIES Notes to Consolidated Financial Statements (Dollars in thousands, except share amounts, unless otherwise noted) Year ended December 31, 2017 Loan Servicing and Systems Education Technology, Services, and Payment Processing Asset Generation and Management Corporate and Other Activities Communications Eliminations Total Total interest income Interest expense Net interest income (expense) Less provision for loan losses Net interest income (loss) after provision for loan losses Other income: Loan servicing and systems revenue Intersegment servicing revenue Education technology, services, and payment processing revenue Communications revenue Other income Derivative settlements, net Derivative market value and foreign currency transaction adjustments, net Total other income Cost of services: Cost to provide education technology, services, and payment processing services Cost to provide communications services Total cost of services Operating expenses: Salaries and benefits Depreciation and amortization Other expenses Intersegment expenses, net Total operating expenses Income (loss) before income taxes Income tax (expense) benefit Net income (loss) Net loss (income) attributable to noncontrolling interests Net income (loss) attributable to Nelnet, Inc. Total assets as of December 31, 2017 $ $ $ 513 3 510 — 510 223,000 41,674 — — — — — 17 — 17 — 17 — — 193,188 — — — — — — — 156,256 2,864 39,126 31,871 230,117 35,067 (18,128) 16,939 12,640 29,579 48,678 — 48,678 69,500 9,424 17,897 9,079 105,900 38,627 (14,678) 23,949 — 23,949 3 5,427 (5,424) — 764,225 464,256 299,969 14,450 13,643 3,477 10,166 — (5,424) 285,519 10,166 — — — 25,700 — — — — 9,950 9,950 14,947 11,835 8,074 2,101 36,957 — — — — 11,857 1,448 (19,357) (6,052) — — — 1,548 — 26,634 42,830 71,012 (26,631) 208,455 10,120 (79,213) (16,511) 129,242 — — (16,511) 129,242 — — — — 43,871 (781) 136 43,226 — — — 59,633 15,418 51,381 (44,208) 82,224 (28,832) 37,036 8,204 (1,295) 6,909 (7,976) (7,976) — — — — (41,674) — — — — — 770,426 465,188 305,238 14,450 290,788 223,000 — 193,188 25,700 55,728 667 (19,221) (41,674) 479,062 — — — — — — (41,674) (41,674) — — — — — 48,678 9,950 58,628 301,885 39,541 143,112 — 484,538 226,684 (64,863) 161,821 11,345 173,166 264,674 193,188 25,700 122,330 250,351 214,336 22,910,974 877,859 (411,415) 23,964,435 F - 46 NELNET, INC. AND SUBSIDIARIES Notes to Consolidated Financial Statements (Dollars in thousands, except share amounts, unless otherwise noted) 15. Disaggregated Revenue and Deferred Revenue The following provides additional revenue recognition information for the Company’s fee-based reportable operating segments. Loan Servicing and Systems Revenue Loan servicing and systems revenue consists of the following items: • • • Loan servicing revenue - Loan servicing revenue consideration is determined from individual contracts with customers and is calculated monthly based on the dollar value of loans, number of loans, number of borrowers serviced for each customer, or number of transactions. Loan servicing requires a significant level of integration and the individual components are not considered distinct. The Company will perform various services, including, but not limited to, (i) application processing, (ii) monthly servicing, (iii) conversion processing, and (iv) fulfillment services, during each distinct service period. Even though the mix and quantity of activities that the Company performs each period may differ, the nature of the activities are substantially the same. Revenue is allocated to the distinct service period, typically a month, and recognized as control transfers as customers simultaneously receive and consume benefits. Software services revenue - Software services revenue consideration is determined from individual contracts with customers and includes license and maintenance fees associated with loan software products, generally in a remote hosted environment, and computer and software consulting. Usage-based revenue from remote hosted licenses is allocated to the distinct service period, transfers as customers simultaneously receive and consume benefits. Revenue from any non-refundable up-front fee is recognized ratably over the contract period, as the fee relates to set-up activities that provide no incremental benefit to the customers. Computer and software consulting is also capable of being distinct and accounted for as a separate performance obligation. Revenue allocated to computer and software consulting is recognized as services are provided. typically a month, and recognized as control Outsourced services revenue - Outsourced services revenue consideration is determined from individual contracts with customers and is calculated monthly based on the volume of services. Revenue is allocated to the distinct service period, typically a month, and recognized as control transfers as customers simultaneously receive and consume benefits. The following table provides disaggregated revenue by service offering: Year ended December 31, 2019 2018 2017 Government servicing - Nelnet Government servicing - Great Lakes Private education and consumer loan servicing FFELP servicing Software services Outsourced services and other Loan servicing and systems revenue $ $ 157,991 185,656 36,788 25,043 41,077 8,700 455,255 157,091 168,298 41,474 31,542 32,929 8,693 440,027 155,829 — 28,060 15,542 17,782 5,787 223,000 Education Technology, Services, and Payment Processing Revenue Education technology, services, and payment processing revenue consists of the following items: • • Tuition payment plan services - Tuition payment plan services consideration is determined from individual plan agreements, which are governed by plan service agreements, and includes access to a remote hosted environment and management of payment processing. The management of payment processing is considered a distinct performance obligation when sold with the remote hosted environment. Revenue for each performance obligation is allocated to the distinct service period, the academic school term, and recognized ratably over the service period as customers simultaneously receive and consume benefits. Payment processing - Payment processing consideration is determined from individual contracts with customers and terminal solutions, and specialized includes electronic transfer and credit card processing, reporting, virtual F - 47 NELNET, INC. AND SUBSIDIARIES Notes to Consolidated Financial Statements (Dollars in thousands, except share amounts, unless otherwise noted) integrations to business software for education and non-education markets. Volume-based revenue from payment processing is allocated and recognized to the distinct service period, based on when each transaction is completed, and recognized as control transfers as customers simultaneously receive and consume benefits. The electronic transfer and credit card processing consideration is recognized as revenue on a gross basis as the Company is the principal in the delivery of the payment processing. The Company has concluded it is the principal as it controls the services before delivery to the educational institution or business, it is primarily responsible for the delivery of the services, and it has discretion in setting prices charged to its customers. In addition, the Company has the unilateral ability to accept or reject a transaction based on criteria established by the Company. The Company is liable for the costs of processing the transactions and records such costs within "cost to provide education technology, services, and payment processing services." • Education technology and services - Education technology and services consideration is determined from individual contracts with customers and is based on the services selected by the customer. Services in K-12 private and faith based schools primarily includes (i) assistance with financial needs assessment, (ii) school information system software that automates administrative processes such as admissions, enrollment, scheduling, cafeteria management, attendance, and grade book management, and (iii) professional development and educational instruction services. Revenue for these services is recognized for the consideration the Company has a right to invoice, the amount of which corresponds directly with the value provided to the customer based on the performance completed. Services provided to the higher education market include payment technology and processing that allow for electronic billing and payment of campus charges. These services are considered distinct performance obligations. Revenue for each performance obligation is allocated to the distinct service period, typically a month or based on when each transaction is completed, and recognized as control transfers as customers simultaneously receive and consume benefits. The following table provides disaggregated revenue by service offering: Tuition payment plan services Payment processing Education technology and services Other $ Education technology, services, and payment processing revenue $ Year ended December 31, 2019 2018 2017 106,682 110,848 58,578 1,223 277,331 85,381 84,289 51,155 1,137 221,962 76,753 71,652 44,539 244 193,188 Cost to provide education technology, services, and payment processing services is primarily associated with providing payment processing services. Interchange and payment network fees are charged by the card associations or payment networks. Depending upon the transaction type, the fees are a percentage of the transaction’s dollar value, a fixed amount, or a combination of the two methods. Other items included in cost to provide education technology, services, and payment processing services include salaries and benefits and third-party professional service costs directly related to providing professional development and educational instruction services to teachers, school leaders, and students. Communications Revenue Communications revenue is derived principally from internet, television, and telephone services and is billed as a flat fee in advance of providing the service. Revenues for usage-based services, such as access charges billed to other telephone carriers for originating and terminating long-distance calls on the Company's network, are billed in arrears. These are each considered distinct performance obligations. Revenue is recognized monthly for the consideration the Company has a right to invoice, the amount of which corresponds directly with the value provided to the customer based on the performance completed. The Company recognizes revenue from these services in the period the services are rendered rather than billed. Revenue received or receivable in advance of the delivery of services is included in deferred revenue. Earned but unbilled usage-based services are recorded in accounts receivable. F - 48 NELNET, INC. AND SUBSIDIARIES Notes to Consolidated Financial Statements (Dollars in thousands, except share amounts, unless otherwise noted) The following table provides disaggregated revenue by service offering and customer type: Internet Television Telephone Other Communications revenue Residential revenue Business revenue Other Communications revenue Year ended December 31, 2019 2018 2017 $ $ $ $ 38,239 16,196 9,705 129 64,269 48,344 15,689 236 64,269 24,069 12,949 7,546 89 44,653 33,434 10,976 243 44,653 11,976 8,018 5,603 103 25,700 17,696 7,744 260 25,700 Cost to provide communications services is primarily associated with television programming costs. The Company has various contracts to obtain television programming from programming vendors whose compensation is typically based on a flat fee per customer. The cost of the right to exhibit network programming under such arrangements is recorded in the month the programming is available for exhibition. Programming costs are paid each month based on calculations performed by the Company and are subject to periodic audits performed by the programmers. Other items in cost to provide communications services include connectivity, franchise, and other regulatory costs directly related to providing internet and telephone services. Other Income The following table provides the components of "other income" on the consolidated statements of income: Gain on sale of loans Borrower late fee income Management fee revenue Gain on investments and notes receivable, net of losses Investment advisory services Peterson's revenue Other Other income Year ended December 31, 2019 2018 2017 $ $ 17,261 12,884 8,838 6,136 2,941 — 17,119 65,179 — 12,302 6,497 9,579 6,009 — 20,418 54,805 — 11,604 — 939 12,723 12,572 17,890 55,728 • Borrower late fee income - Late fee income is earned by the education lending subsidiaries. Revenue is allocated to the distinct service period, based on when each transaction is completed. • Management fee revenue - Management fee revenue is earned for providing administrative support and marketing services provided primarily to Great Lakes' former parent company. Revenue is allocated to the distinct service period, based on when each transaction is completed. • • Investment advisory fees - Investment advisory services are provided by WRCM, the Company's SEC-registered investment advisor subsidiary, under various arrangements. The Company earns monthly fees based on the monthly outstanding balance of investments and certain performance measures, which are recognized monthly as the uncertainty of the transaction price is resolved. Peterson's revenue - The Company earned revenue related to educational digital marketing and content solution products and services under the brand name Peterson's. On December 31, 2017, the Company sold Peterson's. F - 49 NELNET, INC. AND SUBSIDIARIES Notes to Consolidated Financial Statements (Dollars in thousands, except share amounts, unless otherwise noted) Deferred Revenue Activity in the deferred revenue balance, which is included in "other liabilities" on the consolidated balance sheets, is shown below: Loan Servicing and Systems Education, Technology, Services, and Payment Processing Communications Balance as of December 31, 2016 $ Deferral of revenue Recognition of revenue Balance as of December 31, 2017 Deferral of revenue Recognition of revenue Balance as of December 31, 2018 Deferral of revenue Recognition of revenue 6,105 3,406 (4,543) 4,968 5,117 (5,672) 4,413 3,585 (5,286) Balance as of December 31, 2019 $ 2,712 24,708 73,445 (73,989) 24,164 77,297 (70,905) 30,556 93,373 (91,855) 32,074 Corporate and Other Activities 1,365 2,721 Total 33,141 94,789 (2,607) (95,654) 1,479 5,553 32,276 113,292 963 15,217 (14,515) 1,665 25,325 (24,439) (5,430) (106,446) 2,551 36,024 (35,343) 3,232 1,602 3,505 39,122 136,487 (3,479) (135,963) 1,628 39,646 16. Major Customer Nelnet Servicing earns loan servicing revenue from a servicing contract with the Department. Revenue earned by Nelnet Servicing related to this contract was $158.0 million, $157.1 million, and $155.8 million for the years ended December 31, 2019, 2018, and 2017, 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 $185.7 million for the year ended December 31, 2019. Revenue of $168.3 million was earned for the period from February 7, 2018 to December 31, 2018. Nelnet Servicing and Great Lakes' servicing contracts with the Department previously provided for expiration on June 16, 2019. On May 15, 2019, Nelnet Servicing and Great Lakes each received a contract extension from the Department's Office of Federal Student Aid (“FSA”) pursuant to which FSA extended the expiration date of the current contracts to December 15, 2019. On November 26, 2019, Nelnet Servicing and Great Lakes each received an additional extension from FSA on their contracts through December 14, 2020. The contract extensions also provided the potential for two additional six-month extensions at the Department’s discretion through December 14, 2021. FSA is conducting a contract procurement process entitled Next Generation Financial Services Environment (“NextGen”) for a new framework for the servicing of all student loans owned by the Department. On January 15, 2019, FSA issued solicitations for three NextGen components: • • • NextGen Enhanced Processing Solution (“EPS”) NextGen Business Process Operations (“BPO”) NextGen Optimal Processing Solution (“OPS”) On April 1, 2019 and October 4, 2019, the Company responded to the EPS component. On January 16, 2020, FSA released an amendment to the EPS component and the company responded on February 3, 2020. In addition, on August 1, 2019, the Company responded to the BPO component. On January 10, 2020, FSA released an amendment to the BPO component and the Company responded on January 30, 2020. The Company is also part of a team that has responded and intends to respond to various aspects of the OPS component; however, on November 12, 2019, FSA put an indefinite hold on the OPS solicitation. The Company cannot predict the timing, nature, or outcome of these solicitations. F - 50 NELNET, INC. AND SUBSIDIARIES Notes to Consolidated Financial Statements (Dollars in thousands, except share amounts, unless otherwise noted) 17. Leases The following table provides supplemental balance sheet information related to leases: Operating lease ROU assets, which is included in "other assets" on the consolidated balance sheet Operating lease liabilities, which is included in "other liabilities" on the consolidated balance sheet The following table provides components of lease expense: Rental expense, which is included in "other expenses" on the consolidated statements of income (a) Rental expense, which is included in "cost to provide communications services" on the consolidated statements of income (a) Total operating rental expense As of December 31, 2019 32,770 33,689 Year ended December 31, 2019 11,171 1,609 12,780 $ $ $ $ (a) Includes short-term and variable lease costs, which are immaterial. The following table provides supplemental cash flow information related to leases: Year ended December 31, 2019 9,966 8,731 As of December 31, 2019 7.29 3.93 % 10,178 6,905 4,652 3,640 2,567 10,941 38,883 (5,194) 33,689 $ $ $ $ Cash paid for amounts included in the measurement of lease liabilities: Operating cash outflows related to operating leases Supplemental noncash activity: Operating ROU assets obtained in exchange for lease obligations, excluding impact of adoption Weighted average remaining lease term and discount rate are shown below: Weighted average remaining lease term (years) Weighted average discount rate Maturity of lease liabilities are shown below: 2020 2021 2022 2023 2024 2025 and thereafter Total lease payments Imputed interest Total F - 51 NELNET, INC. AND SUBSIDIARIES Notes to Consolidated Financial Statements (Dollars in thousands, except share amounts, unless otherwise noted) The Company adopted the new lease standard using the effective date as its date of initial application (January 1, 2019) as noted above, and as required, the following disclosure is provided for periods prior to adoption. Future minimum lease payments as of December 31, 2018 are shown below: 2019 2020 2021 2022 2023 2024 and thereafter $ 9,181 8,261 5,776 3,745 2,904 5,479 Total minimum lease payments $ 35,346 Total rental expense incurred by the Company prior to the adoption of the new lease standard was $8.4 million and $5.7 million during 2018 and 2017, respectively. 18. Defined Contribution Benefit Plan The Company has a 401(k) savings plan that covers substantially all of its employees. Employees may contribute up to 100 percent of their pre-tax salary, subject to IRS limitations. The Company matches up to 100 percent on the first 3 percent of contributions and 50 percent on the next 2 percent. The Company made contributions to the plan of $10.8 million, $9.8 million, and $6.2 million during the years ended December 31, 2019, 2018, and 2017, respectively. 19. Stock Based Compensation Plans Restricted Stock Plan The following table summarizes restricted stock activity: Non-vested shares at beginning of year Granted Vested Canceled Non-vested shares at end of year Year ended December 31, 2019 2018 2017 532,336 186,281 (109,651) (59,121) 549,845 398,210 279,441 (100,035) (45,280) 532,336 447,380 107,237 (131,988) (24,419) 398,210 As of December 31, 2019, there was $17.0 million of unrecognized compensation cost included in equity on the consolidated balance sheet related to restricted stock, which is expected to be recognized as compensation expense in future periods as shown in the table below. 2020 2021 2022 2023 2024 2025 and thereafter $ 5,927 3,839 2,587 1,731 1,157 1,793 $ 17,034 For the years ended December 31, 2019, 2018, and 2017, the Company recognized compensation expense of $6.4 million, $6.2 million, and $4.2 million, respectively, related to shares issued under the restricted stock plan, which is included in "salaries and benefits" on the consolidated statements of income. F - 52 NELNET, INC. AND SUBSIDIARIES Notes to Consolidated Financial Statements (Dollars in thousands, except share amounts, unless otherwise noted) Employee Share Purchase Plan The Company has an employee share purchase plan pursuant to which employees are entitled to purchase Class A common stock from payroll deductions at a 15 percent discount from market value. During the years ended December 31, 2019, 2018, and 2017, the Company recognized compensation expense of $0.3 million, $0.3 million, and $0.2 million respectively, in connection with issuing 33,250 shares, 28,744 shares, and 16,989 shares, respectively, under this plan, which is included in "salaries and benefits" on the consolidated statements of income. Non-employee Directors Compensation Plan The Company has a compensation plan for non-employee directors pursuant to which non-employee directors can elect to receive their annual retainer fees in the form of cash or Class A common stock. If a non-employee director elects to receive Class A common stock, the number of shares of Class A common stock that are awarded is equal to the amount of the annual retainer fee otherwise payable in cash divided by 85 percent of the fair market value of a share of Class A common stock on the date the fee is payable. Non-employee directors who choose to receive Class A common stock may also elect to defer receipt of the Class A common stock until termination of their service on the board of directors. For the years ended December 31, 2019, 2018, and 2017, the Company recognized $1.2 million, $1.0 million, and $0.9 million, respectively, of expense related to this plan, which is included in "other expenses" on the consolidated statements of income. The following table provides the number of shares awarded under this plan for the years ended December 31, 2019, 2018, and 2017. Year ended December 31, 2019 Year ended December 31, 2018 Year ended December 31, 2017 Shares issued - not deferred Shares issued- deferred Total 9,588 8,029 6,855 11,212 10,680 10,974 20,800 18,709 17,829 As of December 31, 2019, a cumulative amount of 193,411 shares have been deferred by directors and will be issued upon the termination of their service on the board of directors. These shares are included in the Company's weighted average shares outstanding calculation. 20. Related Parties (dollar amounts in this note are not in thousands) Transactions with Union Bank and Trust Company Union Bank and Trust Company ("Union Bank") is controlled by Farmers & Merchants Investment Inc. (“F&M”), which owns a majority of Union Bank's common stock and a minority share of Union Bank's non-voting non-convertible preferred stock. Michael S. Dunlap, Executive Chairman and a member of the board of directors and a significant shareholder of the Company, along with his spouse and children, owns or controls a significant portion of the stock of F&M, and Mr. Dunlap's sister, Angela L. Muhleisen, along with her spouse and children, also owns or controls a significant portion of F&M stock. Mr. Dunlap serves as a Director and Chairman of F&M, and as a Director of Union Bank. Ms. Muhleisen serves as a Director and Chief Executive Officer of F&M and as a Director, Chairperson, President, and Chief Executive Officer of Union Bank. Union Bank is deemed to have beneficial ownership of a significant number of shares of the Company because it serves in a capacity of trustee or account manager for various trusts and accounts holding shares of the Company, and may share voting and/or investment power with respect to such shares. Mr. Dunlap and Ms. Muhleisen beneficially own a significant percent of the voting rights of the Company's outstanding common stock. The Company has entered into certain contractual arrangements with Union Bank. These transactions are summarized below. Loan Purchases The Company purchased $67.7 million (par value) and $2.9 million (par value) of private education loans from Union Bank in 2019 and 2017, respectively. There were no private education loan purchases in 2018. In addition, the Company purchased $32.6 million (par value), $74.7 million (par value), and $10.3 million (par value) of consumer loans from Union Bank in 2019, 2018, and 2017, respectively. The net premium paid by the Company on these loan acquisitions was $1.2 million in 2019. The premiums paid by the Company in 2018 and 2017 were not significant. F - 53 NELNET, INC. AND SUBSIDIARIES Notes to Consolidated Financial Statements (Dollars in thousands, except share amounts, unless otherwise noted) The Company has an agreement with Union Bank in which the Company provides marketing, origination, and loan servicing services to Union Bank related to private education loans. Union Bank paid $1.8 million in marketing fees to the Company in 2019 under this agreement. Loan Servicing The Company serviced $395.5 million, $405.5 million, and $462.3 million of FFELP and private education loans for Union Bank as of December 31, 2019, 2018, and 2017, respectively. Servicing and origination fee revenue earned by the Company from servicing loans for Union Bank was $0.6 million, $0.5 million, and $0.5 million for the years ended December 31, 2019, 2018, and 2017, respectively. Funding - Participation Agreement The Company maintains 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 loans (the “FFELP Participation Agreement”). The Company uses this facility as a source to fund FFELP student loans. As of December 31, 2019 and 2018, $749.6 million and $664.3 million, respectively, 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 on a short-term basis. The Company can participate loans to Union Bank to the extent of availability under the grantor trusts, up to $900 million or an amount in excess of $900 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. Funding - Real Estate 12100.5 West Center, LLC ("West Center") is an entity that was established in 2016 for the sole purpose of acquiring, developing, and owning a commercial real estate property in Omaha, Nebraska. The Company owns 33.33% of West Center. On October 31, 2019, Union Bank, as lender, received a $2.9 million promissory note from West Center. The promissory note carries an interest rate of 3.85% and has a maturity date of October 30, 2024. Operating Cash Accounts The majority of the Company's cash operating accounts are maintained at Union Bank. The Company also invests amounts in the Short term Federal Investment Trust (“STFIT”) of the Student Loan Trust Division of Union Bank, which are included in “cash and cash equivalents - held at a related party” and “restricted cash - due to customers” on the accompanying consolidated balance sheets. As of December 31, 2019 and 2018, the Company had $390.5 million and $147.2 million, respectively, invested in the STFIT or deposited at Union Bank in operating accounts, of which $270.5 million and $35.3 million as of December 31, 2019 and 2018, respectively, represented cash collected for customers. Interest income earned by the Company on the amounts invested in the STFIT and in cash operating accounts for the years ended December 31, 2019, 2018, and 2017, was $1.6 million, $1.0 million, and $0.9 million, respectively. 529 Plan Administration Services The Company provides certain 529 Plan administration services to certain college savings plans (the “College Savings Plans”) through a contract with Union Bank, as the program manager. Union Bank is entitled to a fee as program manager pursuant to its program management agreement with the College Savings Plans. For the years ended December 31, 2019, 2018, and 2017, the Company has received fees of $3.7 million, $3.2 million, and $2.0 million, respectively, from Union Bank related to the administration services provided to the College Savings Plans. Lease Arrangements Union Bank leases approximately 4,000 square feet in the Company's corporate headquarters building. Union Bank paid the Company approximately $79,000, $76,000, and $74,000 for commercial rent and storage income during 2019, 2018, and 2017, respectively. The lease agreement expires on June 30, 2023. F - 54 NELNET, INC. AND SUBSIDIARIES Notes to Consolidated Financial Statements (Dollars in thousands, except share amounts, unless otherwise noted) Other Fees Paid to Union Bank During the years ended December 31, 2019, 2018, and 2017, the Company paid Union Bank approximately $213,000, $128,000, and $127,000, respectively, in cash management and trustee fees. Other Fees Received from Union Bank During the years ended December 31, 2019, 2018, and 2017, Union Bank paid the Company approximately $317,000, $231,000, and $231,000, respectively, under certain employee sharing arrangements. During the years ended December 31, 2019, 2018, and 2017, Union Bank paid the Company approximately $92,000, $34,000, and $5,000, respectively, for communications services. In addition, during the years ended December 31, 2019, 2018, and 2017, Union Bank paid the Company approximately $1,000, $4,000, and $11,000 in payment processing fees (net of merchant fees of approximately $4,000, $13,000, and $1,000), respectively. 401(k) Plan Administration Union Bank administers the Company's 401(k) defined contribution plan. Fees paid to Union Bank to administer the plan are paid by the plan participants and were approximately $366,000, $313,000, and $241,000 during the years ended December 31, 2019, 2018, and 2017, respectively. Investment Services Union Bank has established various trusts whereby Union Bank serves as trustee for the purpose of purchasing, holding, managing, and selling investments in student loan asset-backed securities. WRCM, an SEC-registered investment advisor and a subsidiary of the Company, has a management agreement with Union Bank under which WRCM performs various advisory and management services on behalf of Union Bank with respect to investments in securities by the trusts, including identifying securities for purchase or sale by the trusts. The agreement provides that Union Bank will pay to WRCM annual fees of 25 basis points on the outstanding balance of the investments in the trusts. As of December 31, 2019, the outstanding balance of investments in the trusts was $756.3 million. In addition, Union Bank will pay additional fees to WRCM of up to 50 percent of the gains from the sale of securities from the trusts or securities being called prior to the full contractual maturity. For the years ended December 31, 2019, 2018, and 2017, the Company earned $1.8 million, $4.5 million, and $9.2 million, respectively, of fees under this agreement. WRCM also has management agreements with Union Bank under which it is designated to serve as investment advisor with respect to the assets (principally Nelnet stock) within several trusts established by Mr. Dunlap and his spouse and Stephen F. Butterfield, former Vice Chairman and former member of the board of directors of the Company who passed away in April 2018, and his spouse Shelby J. Butterfield. Union Bank serves as trustee for the trusts. Per the terms of the agreements, Union Bank pays WRCM five basis points of the aggregate value of the assets of the trusts as of the last day of each calendar quarter. As of December 31, 2019, WRCM was the investment advisor with respect to a total of 6.3 million shares of the Company's Class B common stock held directly by these trusts, and the 50% interest held by the Butterfield Family Trust, an estate planning trust for the family of Mr. Butterfield, in Union Financial Services, Inc. (“UFS”), which holds a total of 1.6 million shares of the Company’s Class B common stock and the other 50% interest in which is owned by Mr. Dunlap. For the years ended December 31, 2019, 2018, and 2017, the Company earned approximately $219,000, $172,000, and $161,000, respectively, of fees under these agreements. WRCM has established private investment funds for the primary purpose of purchasing, selling, investing, and trading, directly or indirectly, in student loan asset-backed securities, and to engage in financial transactions related thereto. Mr. Dunlap, Jeffrey R. Noordhoek (an executive officer of the Company), Ms. Muhleisen and her spouse, and WRCM have invested in certain of these funds. Based upon the current level of holdings by non-affiliated limited partners, the management agreements provide non-affiliated limited partners the ability to remove WRCM as manager without cause. WRCM earns 50 basis points (annually) on the outstanding balance of the investments in these funds, of which WRCM pays approximately 50 percent of such amount to Union Bank as custodian. As of December 31, 2019, the outstanding balance of investments in these funds was $152.1 million. The Company paid Union Bank $0.3 million in each of 2019, 2018, and 2017 as custodian of the funds. Transactions with F&M During the third quarter of 2019, the Company, F&M, and the holding company of BankFirst of Norfolk, Nebraska ("BankFirst"), of which Mr. Dunlap is a member of the Board of Directors, co-invested $0.7 million, $2.1 million, and $2.1 million, respectively, in a Company-managed limited liability company that invests in renewable energy (solar). As part of F - 55 NELNET, INC. AND SUBSIDIARIES Notes to Consolidated Financial Statements (Dollars in thousands, except share amounts, unless otherwise noted) these transactions, the Company receives management and performance fees under a management agreement. During the third quarter of 2019, the Company earned a total of approximately $138,000 of management fees under this agreement, allocable in equal amounts of approximately $69,000 to the investments of each of F&M and BankFirst. Transactions with UFS UFS is owned 50 percent by Mr. Dunlap and 50 percent by the Butterfield Family Trust, an estate planning trust for the family of Mr. Butterfield. Historically, the Company owned a 65 percent interest in an aircraft due to the frequent business travel needs of the Company's executives and the limited availability of commercial flights in Lincoln, Nebraska, where the Company's headquarters are located. UFS owned the remaining interest in the same aircraft. On December 31, 2018, the Company purchased an additional 17.5 percent interest in the aircraft from UFS for $717,500, which reflected what available information indicated was the aircraft's fair market value at the time of sale. As a result of this transaction, the Company's ownership in the aircraft increased to 82.5 percent. On December 31, 2018, UFS also contributed a 17.5 percent interest in the aircraft to an entity owned by Mr. Dunlap. Transactions with Agile Sports Technologies, Inc. (doing business as "Hudl") David Graff, who has served on the Company's Board of Directors since 2014, is CEO, co-founder, and a director of Hudl. The Company and Mr. Dunlap, along with his children, currently hold combined direct and indirect equity ownership interests in Hudl of 19.2% and 3.7%, respectively. The Company's and Mr. Dunlap's direct and indirect equity ownership interests in Hudl consist of preferred stock with certain liquidation preferences that are considered substantive. Accordingly, for accounting purposes, the Company's and Mr. Dunlap's equity ownership interests are not considered in-substance common stock and the Company is accounting for its equity investment in Hudl using the measurement alternative method. As of December 31, 2019, the carrying amount of the Company's investment in Hudl is $51.8 million, and is included in "investments and notes receivable" in the Company's consolidated balance sheet. On July 26, 2019, the Company, as lender, received a $16.0 million promissory note from Hudl. The promissory note carried a 14 percent interest rate and was due 180 days from the date of issuance. In connection with this promissory note, the Company entered into a Subordination Agreement with Union Bank, effective as of July 26, 2019, which required the Company to subordinate its promissory note from Hudl to existing notes Union Bank holds from Hudl. The $16.0 million promissory note from Hudl was paid in full to the Company in August 2019. The Company makes investments to further diversify the Company both within and outside of its historical core education- related businesses, including investments in real estate. Recent real estate investments have been focused on the development of commercial properties in the Midwest, and particularly in Lincoln, Nebraska, where the Company's headquarters are located. One investment includes the development of a building in Lincoln's Haymarket District that is the new headquarters of Hudl, in which Hudl is the primary tenant in this building. Transaction with Assurity Life Insurance Company ("Assurity") Thomas Henning, who has served on the Company's Board of Directors since 2003, is the President and Chief Executive Officer of Assurity. During the years ended December 31, 2019, 2018, and 2017, Nelnet Business Solutions, a subsidiary of the Company, paid $1.7 million, $1.7 million, and $1.5 million, respectively, to Assurity for insurance premiums for insurance on certain tuition payment plans. As part of providing the tuition payment plan insurance to Nelnet Business Solutions, Assurity entered into a reinsurance agreement with the Company's insurance subsidiary, under which Assurity paid the Company's insurance subsidiary reinsurance premiums of $1.3 million, $1.3 million, and $1.4 million in 2019, 2018, and 2017, respectively, and the Company's insurance subsidiary paid claims on such reinsurance to Assurity of $0.9 million, $0.9 million, and $0.7 million in 2019, 2018, and 2017, respectively. In addition, Assurity pays Nelnet Business Solutions a partial refund annually based on claim experience, which was approximately $56,000, $84,000, and $10,000 for the years ended December 31, 2019, 2018, and 2017, respectively. F - 56 NELNET, INC. AND SUBSIDIARIES Notes to Consolidated Financial Statements (Dollars in thousands, except share amounts, unless otherwise noted) 21. Fair Value The following tables present the Company’s financial assets and liabilities that are measured at fair value on a recurring basis. There were no transfers into or out of level 1, level 2, or level 3 for the year ended December 31, 2019. As of December 31, 2019 As of December 31, 2018 Level 1 Level 2 Total Level 1 Level 2 Total Assets: Investments (a): Student loan asset-backed securities - available-for-sale $ Equity securities Equity securities measured at net asset value (b) Debt securities - available-for-sale Total investments Derivative instruments (c) Total assets $ — 6 104 110 — 110 52,597 52,597 — 52,936 6 2,722 — — 12,894 104 52,597 65,601 — — 52,597 65,601 — — 52,936 1,818 54,754 52,936 2,722 14,925 104 70,687 1,818 72,505 104 2,826 — 2,826 (a) (b) (c) Investments represent investments recorded at fair value on a recurring basis. Level 1 investments are measured based upon quoted prices and include investments traded on an active exchange, such as the New York Stock Exchange, and corporate bonds, mortgage-backed securities, U.S. government bonds, and U.S. Treasury securities that trade in active markets. Level 2 investments include student loan asset-backed securities. The fair value for the student loan asset-backed securities is determined using indicative quotes from broker-dealers or an income approach valuation technique (present value using the discount rate adjustment technique) that considers, among other things, rates currently observed in publicly traded debt markets for debt of similar terms issued by companies with comparable credit risk. In accordance with the Fair Value Measurements Topic of the FASB Accounting Standards Codification, certain investments that are measured at fair value using the net asset value per share (or its equivalent) practical expedient have not been classified in the fair value hierarchy. All derivatives are accounted for at fair value on a recurring basis. The fair value of derivative financial instruments is determined using a market approach in which derivative pricing models use the stated terms of the contracts, observable yield curves, and volatilities from active markets. When determining the fair value of derivatives, the Company takes into account counterparty credit risk for positions where it is exposed to the counterparty on a net basis by assessing exposure net of collateral held. The net exposures for each counterparty are adjusted based on market information available for the specific counterparty. F - 57 NELNET, INC. AND SUBSIDIARIES Notes to Consolidated Financial Statements (Dollars in thousands, except share amounts, unless otherwise noted) The following table summarizes the fair values of all of the Company’s financial instruments on the consolidated balance sheets: Financial assets: Loans receivable Cash and cash equivalents Investments (at fair value) Beneficial interest in consumer loan securitizations Restricted cash Restricted cash – due to customers Accrued interest receivable Financial liabilities: Bonds and notes payable Accrued interest payable Due to customers Financial assets: Loans receivable Cash and cash equivalents Investments (at fair value) Notes receivable Restricted cash Restricted cash – due to customers Accrued interest receivable Derivative instruments Financial liabilities: Bonds and notes payable Accrued interest payable Due to customers Fair value Carrying value Level 1 Level 2 Level 3 As of December 31, 2019 $ 21,477,630 20,669,371 — — 21,477,630 133,906 133,906 133,906 65,601 33,258 650,939 437,756 733,623 65,601 33,187 650,939 437,756 733,623 20,479,095 20,529,054 47,285 437,756 47,285 437,756 121,347 70,687 16,373 701,366 369,678 679,197 1,818 70,687 16,373 701,366 369,678 679,197 1,818 22,270,462 22,218,740 61,679 369,678 61,679 369,678 110 — 650,939 437,756 — — — 437,756 2,826 — 701,366 369,678 — — — — 369,678 — 52,597 — — — 733,623 20,479,095 47,285 — — — 33,258 — — — — — — — 52,936 16,373 — — 679,197 1,818 22,270,462 61,679 — — — — — — — — — — — Fair value Carrying value Level 1 Level 2 Level 3 As of December 31, 2018 $ 23,521,171 22,377,142 — — 23,521,171 121,347 121,347 The methodologies for estimating the fair value of financial assets and liabilities that are measured at fair value on a recurring basis are previously discussed. The remaining financial assets and liabilities were estimated using the following methods and assumptions: Loans Receivable Fair values for loans receivable were determined by modeling loan cash flows using stated terms of the assets and internally- developed assumptions. The significant assumptions used to project cash flows are prepayment speeds, default rates, cost of funds, required return on equity, and future interest rate and index relationships. A number of significant inputs into the models are internally derived and not observable to market participants. Beneficial Interest in Consumer Loan Securitizations Fair values for beneficial interest in consumer loan securitizations were determined by modeling securitization cash flows and internally-developed assumptions. The significant assumptions used to project cash flows are prepayment speeds, default rates, cost of funds, required return on equity, and future interest rate and index relationships. A number of significant inputs into the models are internally derived and not observable to market participants. F - 58 NELNET, INC. AND SUBSIDIARIES Notes to Consolidated Financial Statements (Dollars in thousands, except share amounts, unless otherwise noted) Notes Receivable Fair values for notes receivable were determined by using model-derived valuations with observable inputs, including current market rates. Cash and Cash Equivalents, Restricted Cash, Restricted Cash – Due to Customers, Accrued Interest Receivable, Accrued Interest Payable, and Due to Customers The carrying amount approximates fair value due to the variable rate of interest and/or the short maturities of these instruments. Bonds and Notes Payable The fair value of bonds and notes payable was determined from quotes from broker-dealers or through standard bond pricing models using the stated terms of the borrowings, observable yield curves, market credit spreads, and weighted average life of underlying collateral. Fair value adjustments for unsecured corporate debt are made based on indicative quotes from observable trades. Limitations The fair value estimates are made at a specific point in time based on relevant market information and information about the financial instruments. Because no market exists for a significant portion of the Company's financial instruments, fair value estimates are based on judgments regarding future expected loss experience, current economic conditions, risk characteristics of various financial instruments, and other factors. These estimates are subjective in nature and involve uncertainties and matters of significant judgment and therefore cannot be determined with precision. Therefore, the calculated fair value estimates in many instances cannot be substantiated by comparison to independent markets and, in many cases, may not be realizable in a current sale of the instrument. Changes in assumptions could significantly affect the estimates. 22. Legal Proceedings The Company is subject to various claims, lawsuits, and proceedings that arise in the normal course of business. These matters frequently involve claims by student loan borrowers disputing the manner in which their student loans have been serviced or the accuracy of reports to credit bureaus, claims by student loan borrowers or other consumers alleging that state or Federal consumer protection laws have been violated in the process of collecting loans or conducting other business activities, and disputes with other business entities. In addition, from time to time, the Company receives information and document requests from state or federal regulators concerning its business practices. The Company cooperates with these inquiries and responds to the requests. While the Company cannot predict the ultimate outcome of any regulatory examination, inquiry, or investigation, the Company believes its activities have materially complied with applicable law, including the Higher Education Act, the rules and regulations adopted by the Department thereunder, and the Department's guidance regarding those rules and regulations. On the basis of present information, anticipated insurance coverage, and advice received from counsel, it is the opinion of the Company's management that the disposition or ultimate determination of these claims, lawsuits, and proceedings will not have a material adverse effect on the Company's business, financial position, or results of operations. F - 59 NELNET, INC. AND SUBSIDIARIES Notes to Consolidated Financial Statements (Dollars in thousands, except share amounts, unless otherwise noted) 2019 First quarter Second quarter Third quarter Fourth quarter $ 58,816 7,000 51,816 59,825 9,000 50,825 66,457 10,000 56,457 64,252 13,000 51,252 114,898 113,985 113,286 113,086 79,159 14,543 9,067 60,342 15,758 16,152 74,251 16,470 13,439 63,578 17,499 26,522 (11,539) (24,088) 1,668 3,170 (21,059) (4,759) (15,871) (5,101) (25,671) (5,236) (19,002) (5,327) (111,059) (111,214) (116,670) (124,561) (24,213) (43,816) (11,391) 41,647 (56) 41,591 (24,484) (45,417) (6,209) 24,678 (59) 24,619 (27,701) (58,329) (8,829) 33,135 77 33,212 (28,651) (46,710) (9,022) 41,834 546 42,380 1.03 0.61 0.83 1.06 23. Quarterly Financial Information (Unaudited) Net interest income Less provision for loan losses Net interest income after provision for loan losses Loan servicing and systems revenue Education technology, services, and payment processing revenue Communications revenue Other income Derivative market value and foreign currency transaction adjustments and derivative settlements, net Cost to provide education technology, services, and payment processing services Cost to provide communications services Salaries and benefits Depreciation and amortization Other operating expenses Income tax (expense) benefit Net income Net loss (income) attributable to noncontrolling interests Net income attributable to Nelnet, Inc. Earnings per common share: Net income attributable to Nelnet, Inc. shareholders - basic and diluted $ $ F - 60 NELNET, INC. AND SUBSIDIARIES Notes to Consolidated Financial Statements (Dollars in thousands, except share amounts, unless otherwise noted) 2018 First quarter Second quarter Third quarter Fourth quarter $ 67,307 4,000 63,307 57,739 3,500 54,239 59,773 10,500 49,273 69,539 5,000 64,539 100,141 114,545 112,579 112,761 60,221 9,189 18,557 48,742 10,320 9,580 58,409 11,818 16,673 54,589 13,326 9,998 66,799 17,031 17,098 (29,843) (13,683) (3,717) (96,643) (18,457) (36,553) (35,976) 113,185 740 113,925 (11,317) (3,865) (19,087) (4,310) (15,479) (5,033) (111,118) (114,172) (114,247) (21,494) (43,613) (13,511) 49,539 (104) 49,435 (22,992) (48,281) (13,882) 43,126 (199) 42,927 (23,953) (49,583) 4,599 21,674 (48) 21,626 2.78 1.21 1.05 0.53 Net interest income Less provision for loan losses Net interest income after provision for loan losses Loan servicing and systems revenue Education technology, services, and payment processing revenue Communications revenue Other income Derivative market value and foreign currency transaction adjustments and derivative settlements, net Cost to provide education technology, services, and payment processing services Cost to provide communications services Salaries and benefits Depreciation and amortization Other operating expenses Income tax (expense) benefit Net income Net loss (income) attributable to noncontrolling interests Net income attributable to Nelnet, Inc. Earnings per common share: Net income attributable to Nelnet, Inc. shareholders - basic and diluted $ $ F - 61 NELNET, INC. AND SUBSIDIARIES Notes to Consolidated Financial Statements (Dollars in thousands, except share amounts, unless otherwise noted) 24. Condensed Parent Company Financial Statements The following represents the condensed balance sheets as of December 31, 2019 and 2018 and condensed statements of income, comprehensive income, and cash flows for each of the years in the three-year period ended December 31, 2019 for Nelnet, Inc. The Company is limited in the amount of funds that can be transferred to it by its subsidiaries through intercompany loans, advances, or cash dividends. These limitations relate to the restrictions by trust indentures under the lending subsidiaries debt financing arrangements. The amounts of cash and investments restricted in the respective reserve accounts of the education lending subsidiaries are shown on the consolidated balance sheets as restricted cash. Balance Sheets (Parent Company Only) As of December 31, 2019 and 2018 Assets: Cash and cash equivalents Investments and notes receivable Investment in subsidiary debt Restricted cash Investment in subsidiaries Notes receivable from subsidiaries Other assets Fair value of derivative instruments Total assets Liabilities: Notes payable Other liabilities Total liabilities Equity: Nelnet, Inc. shareholders' equity: Common stock Additional paid-in capital Retained earnings Accumulated other comprehensive earnings Total Nelnet, Inc. shareholders' equity Noncontrolling interest Total equity Total liabilities and shareholders' equity 2019 2018 73,144 137,229 13,818 9,567 36,890 140,582 13,818 16,217 2,181,122 2,448,540 42,552 100,059 — 56,973 57,555 1,818 2,557,491 2,772,393 67,655 97,952 165,607 398 5,715 2,377,627 2,972 2,386,712 5,172 2,391,884 2,557,491 369,725 94,016 463,741 403 622 2,299,556 3,883 2,304,464 4,188 2,308,652 2,772,393 $ $ $ $ F - 62 NELNET, INC. AND SUBSIDIARIES Notes to Consolidated Financial Statements (Dollars in thousands, except share amounts, unless otherwise noted) Statements of Income (Parent Company Only) Years ended December 31, 2019, 2018, and 2017 2019 2018 2017 Investment interest income Interest expense on bonds and notes payable Net interest (expense) income Other income: Other income Gain from debt repurchases Equity in subsidiaries income Derivative market value adjustments and derivative settlements, net Total other income Operating expenses Income before income taxes Income tax benefit (expense) Net income Net loss attributable to noncontrolling interest $ 4,925 9,588 (4,663) 8,384 136 182,346 (30,789) 160,077 19,561 135,853 5,950 141,803 — Net income attributable to Nelnet, Inc. $ 141,803 17,707 9,270 8,437 13,944 359 158,364 71,085 243,752 4,795 247,394 (19,481) 227,913 — 227,913 13,060 3,315 9,745 3,483 2,964 170,897 (603) 176,741 6,117 180,369 (7,491) 172,878 288 173,166 Statements of Comprehensive Income (Parent Company Only) Years ended December 31, 2019, 2018, and 2017 2019 2018 2017 $ 141,803 227,913 172,878 Net income Other comprehensive (loss) income: Available-for-sale securities: Unrealized holding (losses) gains arising during period, net (1,199) 1,056 Reclassification adjustment for gains recognized in net income, net of losses Income tax effect Total other comprehensive (loss) income Comprehensive income Comprehensive loss attributable to noncontrolling interest — 288 (911) 140,892 — Comprehensive income attributable to Nelnet, Inc. $ 140,892 (978) (69) 9 227,922 — 227,922 2,349 (2,528) 66 (113) 172,765 288 173,053 F - 63 NELNET, INC. AND SUBSIDIARIES Notes to Consolidated Financial Statements (Dollars in thousands, except share amounts, unless otherwise noted) Statements of Cash Flows (Parent Company Only) Years ended December 31, 2019, 2018, and 2017 Net income attributable to Nelnet, Inc. Net loss attributable to noncontrolling interest Net income Adjustments to reconcile net income to net cash (used in) provided by operating activities: Depreciation and amortization Derivative market value adjustments (Payments to) proceeds from termination of derivative instruments, net (Payments to) proceeds from clearinghouse - initial and variation margin, net Equity in earnings of subsidiaries Deferred income tax (benefit) expense Non-cash compensation expense Other (Increase) decrease in other assets Increase (decrease) in other liabilities Net cash (used in) provided by operating activities Cash flows from investing activities: Purchases of available-for-sale securities Proceeds from sales of available-for-sale securities Capital distributions/contributions from/to subsidiaries, net Decrease (increase) in notes receivable from subsidiaries Increase in guaranteed payment from subsidiary Proceeds from investments and notes receivable Proceeds from (purchases of) subsidiary debt, net Purchases of investments and issuances of notes receivable Net cash provided by (used in) investing activities Cash flows from financing activities: Payments on notes payable Proceeds from issuance of notes payable Payments of debt issuance costs Dividends paid Repurchases of common stock Proceeds from issuance of common stock Acquisition of noncontrolling interest Issuance of noncontrolling interest Net cash (used in) provided by financing activities Net increase (decrease) in cash, cash equivalents, and restricted cash Cash, cash equivalents, and restricted cash, beginning of period Cash, cash equivalents, and restricted cash, end of period Cash disbursements made for: Interest Income taxes, net of refunds and credits Noncash investing and financing activities: Recapitalization of accrued interest payable to accrued guaranteed payment Recapitalization of note payable to guaranteed payment Recapitalization of guaranteed payment to investment in subsidiary Contributions to subsidiaries F - 64 2019 141,803 $ — 2018 227,913 — 2017 173,166 (288) 141,803 227,913 172,878 467 76,195 (12,530) (70,685) (182,346) (19,183) 6,781 (4,586) (10,672) 29,384 (45,372) — — 449,602 14,421 — 27,926 — (47,106) 444,843 (361,272) 60,000 (1,129) (29,485) (40,411) 1,552 — 878 (369,867) 29,604 53,107 82,711 442 (1,014) 10,283 40,382 420 7,591 2,100 76,325 (158,364) (170,897) 21,814 6,539 (16,306) 25,252 (9,621) 147,320 (46,382) 75,605 (334,280) (31,325) (70,270) 7,783 61,841 (28,610) (365,638) (8,651) 300,000 (827) (26,839) (45,331) 1,359 (13,449) 13 206,275 (12,043) 65,150 53,107 (8,056) 4,416 (3,454) 4,171 10,104 95,598 (127,567) 156,727 29,426 (50,793) — 4,823 (3,844) (18,023) (9,251) (27,480) 61,059 — (24,097) (68,896) 678 — — (58,736) 27,611 37,539 65,150 9,501 17,672 8,628 473 2,882 96,721 — — — — 6,674 186,429 273,360 — — — — 2,092 $ $ $ $ $ $ $ APPENDIX A Description of The Federal Family Education Loan Program The Federal Family Education Loan Program The Higher Education Act provided for a program of federal insurance for student loans as well as reinsurance of student loans guaranteed or insured by state agencies or private non-profit corporations. The Higher Education Act authorized certain student loans to be insured and reinsured under the Federal Family Education Loan Program (“FFELP”). The Student Aid and Fiscal Responsibility Act, enacted into law on March 30, 2010, as part of the Health Care and Education Reconciliation Act of 2010, terminated the authority to make FFELP loans. As of July 1, 2010, no new FFELP loans have been made. Generally, a student was eligible for loans made under the Federal Family Education Loan Program only if he or she: • Had been accepted for enrollment or was enrolled in good standing at an eligible institution of higher education; • Was carrying or planning to carry at least one-half the normal full-time workload, as determined by the institution, for the course of study the student was pursuing; • Was not in default on any federal education loans; • Had not committed a crime involving fraud in obtaining funds under the Higher Education Act which funds had not been fully repaid; and • Met other applicable eligibility requirements. Eligible institutions included higher educational institutions and vocational schools that complied with specific federal regulations. Each loan is evidenced by an unsecured note. The Higher Education Act also establishes maximum interest rates for each of the various types of loans. These rates vary not only among loan types, but also within loan types depending upon when the loan was made or when the borrower first obtained a loan under the Federal Family Education Loan Program. The Higher Education Act allows lesser rates of interest to be charged. Types of loans Four types of loans were available under the Federal Family Education Loan Program: • • • • Subsidized Stafford Loans Unsubsidized Stafford Loans PLUS Loans Consolidation Loans These loan types vary as to eligibility requirements, interest rates, repayment periods, loan limits, eligibility for interest subsidies, and special allowance payments. Some of these loan types have had other names in the past. References to these various loan types include, where appropriate, their predecessors. The primary loan under the Federal Family Education Loan Program is the Subsidized Stafford Loan. Students who were not eligible for Subsidized Stafford Loans based on their economic circumstances might have obtained Unsubsidized Stafford Loans. Graduate or professional students and parents of dependent undergraduate students might have obtained PLUS Loans. Consolidation Loans were available to borrowers with existing loans made under the Federal Family Education Loan Program and other federal programs to consolidate repayment of the borrower's existing loans. Prior to July 1, 1994, the Federal Family Education Loan Program also offered Supplemental Loans for Students (“SLS Loans”) to graduate and professional students and independent undergraduate students and, under certain circumstances, dependent undergraduate students, to supplement their Stafford Loans. A - 1 Subsidized Stafford Loans General. Subsidized Stafford Loans were eligible for insurance and reinsurance under the Higher Education Act if the eligible student to whom the loan was made was accepted or was enrolled in good standing at an eligible institution of higher education or vocational school and carried at least one-half the normal full-time workload at that institution. Subsidized Stafford Loans had limits as to the maximum amount which could be borrowed for an academic year and in the aggregate for both undergraduate and graduate or professional study. Both annual and aggregate limitations excluded loans made under the PLUS Loan Program. The Secretary of Education had discretion to raise these limits to accommodate students undertaking specialized training requiring exceptionally high costs of education. Subsidized Stafford Loans were made only to student borrowers who met the needs tests provided in the Higher Education Act. Provisions addressing the implementation of needs analysis and the relationship between unmet need for financing and the availability of Subsidized Stafford Loan Program funding have been the subject of frequent and extensive amendments. Interest rates for Subsidized Stafford Loans. For Stafford Loans first disbursed to a “new” borrower (a “new” borrower is defined for purposes of this section as one who had no outstanding balance on a FFELP loan on the date the new promissory note was signed) for a period of enrollment beginning before January 1, 1981, the applicable interest rate is fixed at 7%. For Stafford Loans first disbursed to a “new” borrower, for a period of enrollment beginning on or after January 1, 1981, but before September 13, 1983, the applicable interest rate is fixed at 9%. For Stafford Loans first disbursed to a “new” borrower, for a period of enrollment beginning on or after September 13, 1983, but before July 1, 1988, the applicable interest rate is fixed at 8%. For Stafford Loans first disbursed to a borrower with an outstanding balance on a PLUS, SLS, or Consolidation Loan, but not on a Stafford Loan, where the new loan is intended for a period of enrollment beginning before July 1, 1988, the applicable interest rate is fixed at 8%. For Stafford Loans first disbursed before October 1, 1992, to a “new” borrower or to a borrower with an outstanding balance on a PLUS, SLS, or Consolidation Loan, but not a Stafford Loan, where the new loan is intended for a period of enrollment beginning on or after July 1, 1988, the applicable interest rate is as follows: • Original fixed interest rate of 8% for the first 48 months of repayment. Beginning on the first day of the 49th month of repayment, the interest rate increased to a fixed rate of 10% thereafter. Loans in this category were subject to excess interest rebates and have been converted to a variable interest rate based on the bond equivalent rate of the 91-day Treasury bill auctioned at the final auction before the preceding June 1, plus 3.25%. The variable interest rate is adjusted annually on July 1. The maximum interest rate for loans in this category is 10%. For Stafford Loans first disbursed on or after July 23, 1992, but before July 1, 1994, to a borrower with an outstanding Stafford Loan made with a 7%, 8%, 9%, or 8%/10% fixed interest rate, the original, applicable interest rate is the same as the rate provided on the borrower's previous Stafford Loan (i.e., a fixed rate of 7%, 8%, 9%, or 8%/10%). Loans in this category were subject to excess interest rebates and have been converted to a variable interest rate based on the bond equivalent rate of the 91- day Treasury bill auctioned at the final auction before the preceding June 1, plus 3.1%. The variable interest rate is adjusted annually on July 1. The maximum interest rate for a loan in this category is equal to the loan's previous fixed rate (i.e., 7%, 8%, 9%, or 10%). For Stafford Loans first disbursed on or after October 1, 1992, but before December 20, 1993, to a borrower with an outstanding balance on a PLUS, SLS, or Consolidation Loan, but not on a Stafford Loan, the original, applicable interest rate is fixed at 8%. Loans in this category were subject to excess interest rebates and have been converted to a variable interest rate based on the bond equivalent rate of the 91-day Treasury bill auctioned at the final auction before the preceding June 1, plus 3.1%. The variable interest rate is adjusted annually on July 1. The maximum interest rate for a loan in this category is 8%. For Stafford Loans first disbursed on or after October 1, 1992, but before July 1, 1994, to a “new” borrower, the applicable interest rate is variable and is based on the bond equivalent rate of the 91-day Treasury bill auctioned at the final auction before the preceding June 1, plus 3.1%. The variable interest rate is adjusted annually on July 1. The maximum interest rate for a loan in this category is 9%. For Stafford Loans first disbursed on or after December 20, 1993, but before July 1, 1994, to a borrower with an outstanding balance on a PLUS, SLS, or Consolidation Loan, but not on a Stafford Loan, the applicable interest rate is variable and is based on the bond equivalent rate of the 91-day Treasury bill auctioned at the final auction before the preceding June 1, plus 3.1%. The variable interest rate is adjusted annually on July 1. The maximum interest rate for a loan in this category is 9%. A - 2 For Stafford Loans first disbursed on or after July 1, 1994, but before July 1, 1995, where the loan is intended for a period of enrollment that includes or begins on or after July 1, 1994, the applicable interest rate is variable and is based on the bond equivalent rate of the 91-day Treasury bill auctioned at the final auction before the preceding June 1, plus 3.1%. The variable interest rate is adjusted annually on July 1. The maximum interest rate for a loan in this category is 8.25%. For Stafford Loans first disbursed on or after July 1, 1995, but before July 1, 1998, the applicable interest rate is as follows: • When the borrower is in school, in grace, or in an authorized period of deferment, the applicable interest rate is variable and is based on the bond equivalent rate of the 91-day Treasury bill auctioned at the final auction before the preceding June 1, plus 2.5%. The variable interest rate is adjusted annually on July 1. The maximum interest rate is 8.25%. • When the borrower is in repayment or in a period of forbearance, the applicable interest rate is variable and is based on the bond equivalent rate of the 91-day Treasury bill auctioned at the final auction before the preceding June 1, plus 3.1%. The variable interest rate is adjusted annually on July 1. The maximum interest rate is 8.25%. For Stafford Loans first disbursed on or after July 1, 1998, but before July 1, 2006, the applicable interest rate is as follows: • When the borrower is in school, in grace, or in an authorized period of deferment, the applicable interest rate is variable and is based on the bond equivalent rate of the 91-day Treasury bill auctioned at the final auction before the preceding June 1, plus 1.7%. The variable interest rate is adjusted annually on July 1. The maximum interest rate is 8.25%. • When the borrower is in repayment or in a period of forbearance, the applicable interest rate is variable and is based on the bond equivalent rate of the 91-day Treasury bill auctioned at the final auction before the preceding June 1, plus 2.3%. The variable interest rate is adjusted annually on July 1. The maximum interest rate is 8.25%. For Stafford Loans first disbursed on or after July 1, 2006, the applicable interest rate is fixed at 6.80%. However, for Stafford Loans for undergraduates, the applicable interest rate was reduced in phases for which the first disbursement was made on or after: • • July 1, 2008 and before July 1, 2009, the applicable interest rate is fixed at 6.00%, July 1, 2009 and before July 1, 2010, the applicable interest rate is fixed at 5.60%. Unsubsidized Stafford Loans General. The Unsubsidized Stafford Loan program was created by Congress in 1992 for students who did not qualify for Subsidized Stafford Loans due to parental and/or student income and assets in excess of permitted amounts. These students were entitled to borrow the difference between the Stafford Loan maximum for their status (dependent or independent) and their Subsidized Stafford Loan eligibility through the Unsubsidized Stafford Loan Program. The general requirements for Unsubsidized Stafford Loans, including special allowance payments, are essentially the same as those for Subsidized Stafford Loans. However, the terms of the Unsubsidized Stafford Loans differ materially from Subsidized Stafford Loans in that the federal government will not make interest subsidy payments and the loan limitations were determined without respect to the expected family contribution. The borrower is required to either pay interest from the time the loan is disbursed or the accruing interest is capitalized when repayment begins at the end of a deferment or forbearance, when the borrower is determined to no longer have a partial financial hardship under the Income-Based Repayment plan or when the borrower leaves the plan. Unsubsidized Stafford Loans were not available before October 1, 1992. A student meeting the general eligibility requirements for a loan under the Federal Family Education Loan Program was eligible for an Unsubsidized Stafford Loan without regard to need. Interest rates for Unsubsidized Stafford Loans. Unsubsidized Stafford Loans are subject to the same interest rate provisions as Subsidized Stafford Loans, with the exception of Unsubsidized Stafford Loans first disbursed on or after July 1, 2008, which retain a fixed interest rate of 6.80%. A - 3 PLUS Loans General. PLUS Loans were made to parents, and under certain circumstances spouses of remarried parents, of dependent undergraduate students. Effective July 1, 2006, graduate and professional students were eligible borrowers under the PLUS Loan program. For PLUS Loans made on or after July 1, 1993, the borrower could not have an adverse credit history as determined by criteria established by the Secretary of Education. The basic provisions applicable to PLUS Loans are similar to those of Stafford Loans with respect to the involvement of guarantee agencies and the Secretary of Education in providing federal insurance and reinsurance on the loans. However, PLUS Loans differ significantly, particularly from the Subsidized Stafford Loans, in that federal interest subsidy payments are not available under the PLUS Loan Program and special allowance payments are more restricted. Interest rates for PLUS Loans. For PLUS Loans first disbursed on or after January 1, 1981, but before October 1, 1981, the applicable interest rate is fixed at 9%. For PLUS Loans first disbursed on or after October 1, 1981, but before November 1, 1982, the applicable interest rate is fixed at 14%. For PLUS Loans first disbursed on or after November 1, 1982, but before July 1, 1987, the applicable interest rate is fixed at 12%. Beginning July 1, 2001, for PLUS Loans first disbursed on or after July 1, 1987, but before October 1, 1992, the applicable interest rate is variable and is based on the weekly average one-year constant maturity Treasury bill yield for the last calendar week ending on or before June 26 preceding July 1 of each year, plus 3.25%. The variable interest rate is adjusted annually on July 1. The maximum interest rate is 12%. Prior to July 1, 2001, PLUS Loans in this category had interest rates which were based on the 52-week Treasury bill auctioned at the final auction held prior to the preceding June 1, plus 3.25%. The annual (July 1) variable interest rate adjustment was applicable prior to July 1, 2001, as was the maximum interest rate of 12%. PLUS Loans originally made at a fixed interest rate, which have been refinanced for purposes of securing a variable interest rate, are subject to the variable interest rate calculation described in this paragraph. Beginning July 1, 2001, for PLUS Loans first disbursed on or after October 1, 1992, but before July 1, 1994, the applicable interest rate is variable and is based on the weekly average one-year constant maturity Treasury yield for the last calendar week ending on or before June 26 preceding July 1 of each year, plus 3.1%. The variable interest rate is adjusted annually on July 1. The maximum interest rate is 10%. Prior to July 1, 2001, PLUS Loans in this category had interest rates which were based on the 52-week Treasury bill auctioned at the final auction held prior to the preceding June 1, plus 3.1%. The annual (July 1) variable interest rate adjustment was applicable prior to July 1, 2001, as was the maximum interest rate of 10%. Beginning July 1, 2001, for PLUS Loans first disbursed on or after July 1, 1994, but before July 1, 1998, the applicable interest rate is variable and is based on the weekly average one-year constant maturity Treasury yield for the last calendar week ending on or before June 26 preceding July 1 of each year, plus 3.1%. The variable interest rate is adjusted annually on July 1. The maximum interest rate is 9%. Prior to July 1, 2001, PLUS Loans in this category had interest rates which were based on the 52- week Treasury bill auctioned at the final auction held prior to the preceding June 1, plus 3.1%. The annual (July 1) variable interest rate adjustment was applicable prior to July 1, 2001, as was the maximum interest rate of 9%. For PLUS Loans first disbursed on or after July 1, 1998, but before July 1, 2006, the applicable interest rate is variable and is based on the bond equivalent rate of the 91-day Treasury bill auctioned at the final auction before the preceding June 1 of each year, plus 3.1%. The variable interest rate is adjusted annually on July 1. The maximum interest rate is 9%. For PLUS Loans first disbursed on or after July 1, 2006, the applicable interest rate is fixed at 8.5%. SLS Loans General. SLS Loans were limited to graduate or professional students, independent undergraduate students, and dependent undergraduate students, if the students' parents were unable to obtain a PLUS Loan. Except for dependent undergraduate students, eligibility for SLS Loans was determined without regard to need. SLS Loans were similar to Stafford Loans with respect to the involvement of guarantee agencies and the Secretary of Education in providing federal insurance and reinsurance on the loans. However, SLS Loans differed significantly, particularly from Subsidized Stafford Loans, because federal interest subsidy payments were not available under the SLS Loan Program and special allowance payments were more restricted. The SLS Loan Program was discontinued on July 1, 1994. A - 4 Interest rates for SLS Loans. The applicable interest rates on SLS Loans made before October 1, 1992, and on SLS Loans originally made at a fixed interest rate, which have been refinanced for purposes of securing a variable interest rate, are identical to the applicable interest rates described for PLUS Loans made before October 1, 1992. For SLS Loans first disbursed on or after October 1, 1992, but before July 1, 1994, the applicable interest rate is as follows: • Beginning July 1, 2001, the applicable interest rate is variable and is based on the weekly average one-year constant maturity Treasury yield for the last calendar week ending on or before June 26 preceding July 1 of each year, plus 3.1%. The variable interest rate is adjusted annually on July 1. The maximum interest rate is 11%. Prior to July 1, 2001, SLS Loans in this category had interest rates which were based on the 52-week Treasury bill auctioned at the final auction held prior to the preceding June 1, plus 3.1%. The annual (July 1) variable interest rate adjustment was applicable prior to July 1, 2001, as was the maximum interest rate of 11%. Consolidation Loans General. The Higher Education Act authorized a program under which certain borrowers could consolidate their various federally insured education loans into a single loan insured and reinsured on a basis similar to Stafford Loans. Consolidation Loans could be obtained in an amount sufficient to pay outstanding principal, unpaid interest, late charges, and collection costs on federally insured or reinsured student loans incurred under the Federal Family Education Loan and Direct Loan Programs, including PLUS Loans made to the consolidating borrower, as well as loans made under the Perkins Loan (formally National Direct Student Loan Program), Federally Insured Student Loan (FISL), Nursing Student Loan (NSL), Health Education Assistance Loan (HEAL), and Health Professions Student Loan (HPSL) Programs. To be eligible for a FFELP Consolidation Loan, a borrower had to: • • Have outstanding indebtedness on student loans made under the Federal Family Education Loan Program and/or certain other federal student loan programs; and Be in repayment status or in a grace period on loans to be consolidated. Borrowers who were in default on loans to be consolidated had to first make satisfactory arrangements to repay the loans to the respective holder(s) or had to agree to repay the consolidating lender under an income-based repayment arrangement in order to include the defaulted loans in the Consolidation Loan. For applications received on or after January 1, 1993, borrowers could add additional loans to a Consolidation Loan during the 180-day period following the origination of the Consolidation Loan. A married couple who agreed to be jointly liable on a Consolidation Loan for which the application was received on or after January 1, 1993, but before July 1, 2006, was treated as an individual for purposes of obtaining a Consolidation Loan. Interest rates for Consolidation Loans. For Consolidation Loans disbursed before July 1, 1994, the applicable interest rate is fixed at the greater of: • • 9%, or The weighted average of the interest rates on the loans consolidated, rounded to the nearest whole percent. For Consolidation Loans disbursed on or after July 1, 1994, based on applications received by the lender before November 13, 1997, the applicable interest rate is fixed and is based on the weighted average of the interest rates on the loans consolidated, rounded up to the nearest whole percent. For Consolidation Loans on which the application was received by the lender between November 13, 1997, and September 30, 1998, inclusive, the applicable interest rate is variable according to the following: • • For the portion of the Consolidation Loan which is comprised of FFELP, Direct, FISL, Perkins, HPSL, or NSL loans, the variable interest rate is based on the bond equivalent rate of the 91-day Treasury bills auctioned at the final auction before the preceding June 1, plus 3.1%. The variable interest rate for this portion of the Consolidation Loan is adjusted annually on July 1. The maximum interest rate for this portion of the Consolidation Loan is 8.25%. For the portion of the Consolidation Loan which is attributable to HEAL Loans (if applicable), the variable interest rate is based on the average of the bond equivalent rates of the 91-day Treasury bills auctioned for the quarter ending June 30, plus 3.0%. The variable interest rate for this portion of the Consolidation Loan is adjusted annually on July 1. There is no maximum interest rate for the portion of a Consolidation Loan that is represented by HEAL Loans. A - 5 For Consolidation Loans on which the application was received by the lender on or after October 1, 1998, the applicable interest rate is determined according to the following: • • For the portion of the Consolidation Loan which is comprised of FFELP, Direct, FISL, Perkins, HPSL, or NSL loans, the applicable interest rate is fixed and is based on the weighted average of the interest rates on the non- HEAL loans being consolidated, rounded up to the nearest one-eighth of one percent. The maximum interest rate for this portion of the Consolidation Loan is 8.25%. For the portion of the Consolidation Loan which is attributable to HEAL Loans (if applicable), the applicable interest rate is variable and is based on the average of the bond equivalent rates of the 91-day Treasury bills auctioned for the quarter ending June 30, plus 3.0%. The variable interest rate for this portion of the Consolidation Loan is adjusted annually on July 1. There is no maximum interest rate for the portion of the Consolidation Loan that is represented by HEAL Loans. For a discussion of required payments that reduce the return on Consolidation Loans, see “Fees - Rebate fee on Consolidation Loans” in this Appendix. Interest rate during active duty The Higher Education Opportunity Act of 2008 revised the Servicemembers Civil Relief Act to include FFEL Program loans. Interest charges on FFEL Program loans are capped at 6% during a period of time on or after August 14, 2008, in which a borrower has served or is serving on active duty in the Armed Forces, National Oceanic and Atmospheric Administration, Public Health Services, or National Guard. The interest charge cap includes the interest rate in addition to any fees, service charges, and other charges related to the loan. The cap is applicable to loans made prior to the date the borrower was called to active duty. Maximum loan amounts Each type of loan was subject to certain limits on the maximum principal amount, with respect to a given academic year and in the aggregate. Consolidation Loans were limited only by the amount of eligible loans to be consolidated. PLUS Loans were limited to the difference between the cost of attendance and the other aid available to the student. Stafford Loans, subsidized and unsubsidized, were subject to both annual and aggregate limits according to the provisions of the Higher Education Act. Loan limits for Subsidized Stafford and Unsubsidized Stafford Loans. Dependent and independent undergraduate students were subject to the same annual loan limits on Subsidized Stafford Loans; independent students were allowed greater annual loan limits on Unsubsidized Stafford Loans. A student who had not successfully completed the first year of a program of undergraduate education could borrow up to $3,500 in Subsidized Stafford Loans in an academic year. A student who had successfully completed the first year, but who had not successfully completed the second year, could borrow up to $4,500 in Subsidized Stafford Loans per academic year. An undergraduate student who had successfully completed the first and second years, but who had not successfully completed the remainder of a program of undergraduate education, could borrow up to $5,500 in Subsidized Stafford Loans per academic year. Dependent students could borrow an additional $2,000 in Unsubsidized Stafford Loans for each year of undergraduate study. Independent students could borrow an additional $6,000 of Unsubsidized Stafford Loans for each of the first two years and an additional $7,000 for the third, fourth, and fifth years of undergraduate study. For students enrolled in programs of less than an academic year in length, the limits were generally reduced in proportion to the amount by which the programs were less than one year in length. A graduate or professional student could borrow up to $20,500 in an academic year where no more than $8,500 was representative of Subsidized Stafford Loan amounts. The maximum aggregate amount of Subsidized Stafford and Unsubsidized Stafford Loans, including that portion of a Consolidation Loan used to repay such loans, which a dependent undergraduate student may have outstanding is $31,000 (of which only $23,000 may be Subsidized Stafford Loans). An independent undergraduate student may have an aggregate maximum of $57,500 (of which only $23,000 may be Subsidized Stafford Loans). The maximum aggregate amount of Subsidized Stafford and Unsubsidized Stafford Loans, including the portion of a Consolidation Loan used to repay such loans, for a graduate or professional student, including loans for undergraduate education, is $138,500, of which only $65,500 may be Subsidized Stafford Loans. In some instances, schools could certify loan amounts in excess of the limits, such as for certain health profession students. Loan limits for PLUS Loans. For PLUS Loans made on or after July 1, 1993, the annual amounts of PLUS Loans were limited only by the student's unmet need. There was no aggregate limit for PLUS Loans. A - 6 Repayment Repayment periods. Loans made under the Federal Family Education Loan Program, other than Consolidation Loans and loans being repaid under an income-based or extended repayment schedule, must provide for repayment of principal in periodic installments over a period of not less than five, nor more than ten years. A borrower may request, with concurrence of the lender, to repay the loan in less than five years with the right to subsequently extend the minimum repayment period to five years. Since the 1998 Amendments, lenders have been required to offer extended repayment schedules to new borrowers disbursed on or after October 7, 1998 who accumulate outstanding FFELP Loans of more than $30,000, in which case the repayment period may extend up to 25 years, subject to certain minimum repayment amounts. Consolidation Loans must be repaid within maximum repayment periods which vary depending upon the principal amount of the borrower's outstanding student loans, but may not exceed 30 years. For Consolidation Loans for which the application was received prior to January 1, 1993, the repayment period cannot exceed 25 years. Periods of authorized deferment and forbearance are excluded from the maximum repayment period. In addition, if the repayment schedule on a loan with a variable interest rate does not provide for adjustments to the amount of the monthly installment payment, the maximum repayment period may be extended for up to three years. Repayment of principal on a Stafford Loan does not begin until a student drops below at least a half-time course of study. For Stafford Loans for which the applicable rate of interest is fixed at 7%, the repayment period begins between nine and twelve months after the borrower ceases to pursue at least a half-time course of study, as indicated in the promissory note. For other Stafford Loans, the repayment period begins six months after the borrower ceases to pursue at least a half-time course of study. These periods during which payments of principal are not due are the “grace periods.” In the case of SLS, PLUS, and Consolidation Loans, the repayment period begins on the date of final disbursement of the loan, except that the borrower of a SLS Loan who also has a Stafford Loan may postpone repayment of the SLS Loan to coincide with the commencement of repayment of the Stafford Loan. During periods in which repayment of principal is required, unless the borrower is repaying under an income-based repayment schedule, payments of principal and interest must in general be made at a rate of at least $600 per year, except that a borrower and lender may agree to a lesser rate at any time before or during the repayment period. However, at a minimum, the payments must satisfy the interest that accrues during the year. Borrowers may make accelerated payments at any time without penalty. Income-sensitive repayment schedule. Since 1993, lenders have been required to offer income-sensitive repayment schedules, in addition to standard and graduated repayment schedules, for Stafford, SLS, and Consolidation Loans. Beginning in 2000, lenders have been required to offer income-sensitive repayment schedules to PLUS borrowers as well. Use of income-sensitive repayment schedules may extend the maximum repayment period for up to five years if the payment amount established from the borrower's income will not repay the loan within the maximum applicable repayment period. Income-based repayment schedule. Effective July 1, 2009, a borrower in the Federal Family Education Loan Program or Federal Direct Loan Program, other than a PLUS Loan made to a parent borrower or any Consolidation Loan that repaid one or more parent PLUS loans, may qualify for an income-based repayment schedule regardless of the disbursement dates of the loans if he or she has a partial financial hardship. A borrower has a financial hardship if the annual loan payment amount based on a 10-year repayment schedule exceeds 15% of the borrower's adjusted gross income, minus 150% of the poverty line for the borrower's actual family size. Interest will be paid by the Secretary of Education for subsidized loans for the first three years for any borrower whose scheduled monthly payment is not sufficient to cover the accrued interest. Interest will capitalize at the end of the partial financial hardship period, or when the borrower begins making payments under a standard repayment schedule. The Secretary of Education will cancel any outstanding balance after 25 years if a borrower who has made payments under this schedule meets certain criteria. Deferment periods. No principal payments need be made during certain periods of deferment prescribed by the Higher Education Act. For a borrower who first obtained a Stafford or SLS loan which was disbursed before July 1, 1993, deferments are available: • • • During a period not exceeding three years while the borrower is a member of the Armed Forces, an officer in the Commissioned Corps of the Public Health Service or, with respect to a borrower who first obtained a student loan disbursed on or after July 1, 1987, or a student loan for a period of enrollment beginning on or after July 1, 1987, an active duty member of the National Oceanic and Atmospheric Administration Corps; During a period not exceeding three years while the borrower is a volunteer under the Peace Corps Act; During a period not exceeding three years while the borrower is a full-time paid volunteer under the Domestic Volunteer Act of 1973; A - 7 • • • • • • • • • • During a period not exceeding three years while the borrower is a full-time volunteer in service which the Secretary of Education has determined is comparable to service in the Peace Corp or under the Domestic Volunteer Act of 1970 with an organization which is exempt from taxation under Section 501(c)(3) of the Internal Revenue Code; During a period not exceeding two years while the borrower is serving an internship necessary to receive professional recognition required to begin professional practice or service, or a qualified internship or residency program; During a period not exceeding three years while the borrower is temporarily totally disabled, as established by sworn affidavit of a qualified physician, or while the borrower is unable to secure employment because of caring for a dependent who is so disabled; During a period not exceeding two years while the borrower is seeking and unable to find full-time employment; During any period that the borrower is pursuing a full-time course of study at an eligible institution (or, with respect to a borrower who first obtained a student loan disbursed on or after July 1, 1987, or a student loan for a period of enrollment beginning on or after July 1, 1987, is pursuing at least a half-time course of study); During any period that the borrower is pursuing a course of study in a graduate fellowship program; During any period the borrower is receiving rehabilitation training services for qualified individuals, as defined by the Secretary of Education; During a period not exceeding six months per request while the borrower is on parental leave; Only with respect to a borrower who first obtained a student loan disbursed on or after July 1, 1987, or a student loan for a period of enrollment beginning on or after July 1, 1987, during a period not exceeding three years while the borrower is a full-time teacher in a public or nonprofit private elementary or secondary school in a “teacher shortage area” (as prescribed by the Secretary of Education), and during a period not exceeding one year for mothers, with preschool age children, who are entering or re-entering the work force and who are paid at a rate of no more than $1 per hour more than the federal minimum wage; and For loans that are in repayment status on or before September 28, 2018, the borrower is eligible for deferment during periods the borrower is undergoing treatment for cancer and the 6 months following treatment. For a borrower who first obtained a loan on or after July 1, 1993, deferments are available: • • • • • • During any period that the borrower is pursuing at least a half-time course of study at an eligible institution; During any period that the borrower is pursuing a course of study in a graduate fellowship program; During any period the borrower is receiving rehabilitation training services for qualified individuals, as defined by the Secretary of Education; During a period not exceeding three years while the borrower is seeking and unable to find full-time employment; During a period not exceeding three years for any reason which has caused or will cause the borrower economic hardship. Economic hardship includes working full-time and earning an amount that does not exceed the greater of the federal minimum wage or 150% of the poverty line applicable to a borrower's family size and state of residence. Additional categories of economic hardship are based on the receipt of payments from a state or federal public assistance program, service in the Peace Corps, or until July 1, 2009, the relationship between a borrower's educational debt burden and his or her income; and For loans that are in repayment status on or before September 28, 2018, the borrower is eligible for deferment during periods the borrower is undergoing treatment for cancer and the 6 months following treatment. Effective October 1, 2007, a borrower serving on active duty during a war or other military operation or national emergency, or performing qualifying National Guard duty during a war or other military operation or national emergency may obtain a military deferment for all outstanding Title IV loans in repayment. For all periods of active duty service that include October 1, 2007 or begin on or after that date, the deferment period includes the borrower's service period and 180 days following the demobilization date. A - 8 A borrower serving on or after October 1, 2007, may receive up to 13 months of active duty student deferment after the completion of military service if he or she meets the following conditions: • • • Is a National Guard member, Armed Forces reserves member, or retired member of the Armed Forces; Is called or ordered to active duty; and Is enrolled at the time of, or was enrolled within six months prior to, the activation in a program at an eligible institution. The active duty student deferment ends the earlier of when the borrower returns to an enrolled status, or at the end of 13 months. PLUS Loans first disbursed on or after July 1, 2008, are eligible for the following deferment options: • • A parent PLUS borrower, upon request, may defer the repayment of the loan during any period during which the student for whom the loan was borrowed is enrolled at least half time. Also upon request, the borrower can defer the loan for the six-month period immediately following the date on which the student for whom the loan was borrowed ceases to be enrolled at least half time, or if the parent borrower is also a student, the date after he or she ceases to be enrolled at least half time. A graduate or professional student PLUS borrower may defer the loan for the six-month period immediately following the date on which he or she ceases to be enrolled at least half time. This option does not require a request and may be granted each time the borrower ceases to be enrolled at least half time. Prior to the 1992 Amendments, only some of the deferments described above were available to PLUS and Consolidation Loan borrowers. Prior to the 1986 Amendments, PLUS Loan borrowers were not entitled to certain deferments. Forbearance periods. The Higher Education Act also provides for periods of forbearance during which the lender, in case of a borrower's temporary financial hardship, may postpone any payments. A borrower is entitled to forbearance for a period not exceeding three years while the borrower's debt burden under Title IV of the Higher Education Act (which includes the Federal Family Education Loan Program) equals or exceeds 20% of the borrower's gross income. A borrower is also entitled to forbearance while he or she is serving in a qualifying internship or residency program, a “national service position” under the National and Community Service Trust Act of 1993, a qualifying position for loan forgiveness under the Teacher Loan Forgiveness Program, or a position that qualifies him or her for loan repayment under the Student Loan Repayment Program administered by the Department of Defense. In addition, administrative forbearances are provided in circumstances such as, but not limited to, a local or national emergency, a military mobilization, or when the geographical area in which the borrower or endorser resides has been designated a disaster area by the President of the United States or Mexico, the Prime Minister of Canada, or by the governor of a state. Interest payments during grace, deferment, forbearance, and applicable income-based repayment ("IBR") periods. The Secretary of Education makes interest payments on behalf of the borrower for Subsidized loans while the borrower is in school, grace, deferment, and during the first 3 years of the IBR plan for any remaining interest that is not satisfied by the IBR payment amount. Interest that accrues during forbearance periods, and, if the loan is not eligible for interest subsidy payments during school, grace, deferment, and IBR periods, may be paid monthly or quarterly by the borrower. At the appropriate time, any unpaid accrued interest may be capitalized by the lender. For a borrower who is eligible for the Cancer Treatment Deferment, interest that accrues during the period of deferment on any subsidized loan is subsidized. For cancer treatment deferment periods on any Unsubsidized Stafford Loan, the interest during such periods is not charged to the borrower. Fees Guarantee fee and Federal default fee. For loans for which the date of guarantee of principal was on or after July 1, 2006, a guarantee agency was required to collect and deposit into the Federal Student Loan Reserve Fund a Federal default fee in an amount equal to 1% of the principal amount of the loan. The fee was collected either by deduction from the proceeds of the loan or by payment from other non-Federal sources. Federal default fees could not be charged to borrowers of Consolidation Loans. A - 9 Origination fee. Beginning with loans first disbursed on or after July 1, 2006, the maximum origination fee which could be charged to a Stafford Loan borrower decreased according to the following schedule: • • • 1.5% with respect to loans for which the first disbursement was made on or after July 1, 2007, and before July 1, 2008; 1.0% with respect to loans for which the first disbursement was made on or after July 1, 2008, and before July 1, 2009; and 0.5% with respect to loans for which the first disbursement was made on or after July 1, 2009, and before July 1, 2010. A lender could charge a lesser origination fee to Stafford Loan borrowers as long as the lender did so consistently with respect to all borrowers who resided in or attended school in a particular state. Regardless of whether the lender passed all or a portion of the origination fee on to the borrower, the lender had to pay the origination fee owed on each loan it made to the Secretary of Education. An eligible lender was required to charge the borrower of a PLUS Loan an origination fee equal to 3% of the principal amount of the loan. This fee had to be deducted proportionately from each disbursement of the PLUS Loan and had to be remitted to the Secretary of Education. Lender fee. The lender of any loan made under the Federal Family Education Loan Program was required to pay a fee to the Secretary of Education. For loans made on or after October 1, 2007, the fee was equal to 1.0% of the principal amount of such loan. This fee could not be charged to the borrower. Rebate fee on Consolidation Loans. The holder of any Consolidation Loan made on or after October 1, 1993, was required to pay to the Secretary of Education a monthly rebate fee. For loans made on or after October 1, 1993, from applications received prior to October 1, 1998, and after January 31, 1999, the fee is equal to 0.0875% (1.05% per annum) of the principal and accrued interest on the Consolidation Loan. For loans made from applications received during the period beginning on or after October 1, 1998, through January 31, 1999, the fee is 0.0517% (0.62% per annum). Interest subsidy payments Interest subsidy payments are interest payments paid on the outstanding principal balance of an eligible loan before the time the loan enters repayment and during deferment periods. The Secretary of Education and the guarantee agencies enter into interest subsidy agreements whereby the Secretary of Education agrees to pay interest subsidy payments on a quarterly basis to the holders of eligible guaranteed loans for the benefit of students meeting certain requirements, subject to the holders' compliance with all requirements of the Higher Education Act. Subsidized Stafford Loans are eligible for interest payments. Consolidation Loans for which the application was received on or after January 1, 1993, are eligible for interest subsidy payments. Consolidation Loans made from applications received on or after August 10, 1993, are eligible for interest subsidy payments only if all underlying loans consolidated were Subsidized Stafford Loans. Consolidation Loans for which the application is received by an eligible lender on or after November 13, 1997, are eligible for interest subsidy payments on that portion of the Consolidation Loan that repaid subsidized FFELP Loans or similar subsidized loans made under the Direct Loan Program. The portion of the Consolidation Loan that repaid HEAL Loans is not eligible for interest subsidy, regardless of the date the Consolidation Loan was made. Special allowance payments The Higher Education Act provides for special allowance payments (SAP) to be made by the Secretary of Education to eligible lenders. The rates for special allowance payments are based on formulas that differ according to the type of loan, the date the loan was originally made or insured, and the type of funds used to finance the loan (taxable or tax-exempt). Stafford Loans. The effective formulas for special allowance payment rates for Subsidized Stafford and Unsubsidized Stafford Loans are summarized in the following chart. The T-Bill Rate mentioned in the chart refers to the average of the bond equivalent yield of the 91-day Treasury bills auctioned during the preceding quarter. A - 10 Date of Loans On or after October 1, 1981 On or after November 16, 1986 On or after October 1, 1992 On or after July 1, 1995 On or after July 1, 1998 On or after January 1, 2000 On or after October 1, 2007 and held by a Department of Education certified not-for-profit holder or Eligible Lender Trustee holding on behalf of a Department of Education certified not-for-profit entity All other loans on or after October 1, 2007 Annualized SAP Rate T-Bill Rate less Applicable Interest Rate + 3.5% T-Bill Rate less Applicable Interest Rate + 3.25% T-Bill Rate less Applicable Interest Rate + 3.1% T-Bill Rate less Applicable Interest Rate + 3.1%(1) T-Bill Rate less Applicable Interest Rate + 2.8%(2) 3 Month Commercial Paper Rate less Applicable Interest Rate + 2.34%(3)(6) 3 Month Commercial Paper Rate less Applicable Interest Rate + 1.94%(4)(6) 3 Month Commercial Paper Rate less Applicable Interest Rate + 1.79%(5)(6) (1) Substitute 2.5% in this formula while such loans are in-school, grace, or deferment status (2) Substitute 2.2% in this formula while such loans are in-school, grace, or deferment status. (3) Substitute 1.74% in this formula while such loans are in-school, grace, or deferment status. (4) Substitute 1.34% in this formula while such loans are in-school, grace, or deferment status. (5) Substitute 1.19% in this formula while such loans are in-school, grace, or deferment status. (6) The Military Construction and Veterans Affairs and Related Agencies Appropriations Act of 2012 provides an alternate calculation method that substitutes for 3 Month Commercial Paper Rate “1 Month London Inter Bank Offered Rate (LIBOR) for United States dollars in effect for each of the days in such quarter as compiled and released by the British Banker's Association." This method has to be selected by each lender or beneficial holder before April 1, 2012 and applies to all loans held under the same lender identification number for the quarter beginning April 1, 2012 and all succeeding 3-month periods. PLUS, SLS, and Consolidation Loans. The formula for special allowance payments on PLUS, SLS, and Consolidation Loans are as follows: Date of Loans On or after October 1, 1992 On or after January 1, 2000 PLUS loans on or after October 1, 2007 and held by a Department of Education certified not-for-profit holder or Eligible Lender Trustee holding on behalf of a Department of Education certified not-for-profit entity All other PLUS loans on or after October 1, 2007 Consolidation loans on or after October 1, 2007 and held by a Department of Education certified not-for-profit holder or Eligible Lender Trustee holding on behalf of a Department of Education certified not-for-profit entity All other Consolidation loans on or after October 1, 2007 Annualized SAP Rate T-Bill Rate less Applicable Interest Rate + 3.1% 3 Month Commercial Paper Rate less Applicable Interest Rate + 2.64%(1) 3 Month Commercial Paper Rate less Applicable Interest Rate + 1.94%(1) 3 Month Commercial Paper Rate less Applicable Interest Rate + 1.79%(1) 3 Month Commercial Paper Rate less Applicable Interest Rate + 2.24%(1) 3 Month Commercial Paper Rate less Applicable Interest Rate + 2.09%(1) (1) The Military Construction and Veterans Affairs and Related Agencies Appropriations Act of 2012 provides an alternate calculation method that substitutes for 3 Month Commercial Paper Rate “1 Month London Inter Bank Offered Rate (LIBOR) for United States dollars in effect for each of the days in such quarter as compiled and released by the British Banker's Association." This method has to be selected by each lender or beneficial holder before April 1, 2012 and applies to all loans held under the same lender identification number for the quarter beginning April 1, 2012 and all succeeding 3-month periods. For PLUS and SLS Loans made prior to July 1, 1994, and PLUS loans made on or after July 1, 1998, which bear interest at rates adjusted annually, special allowance payments are made only in quarters during which the interest rate ceiling on such loans operates to reduce the rate that would otherwise apply based upon the applicable formula. See “Interest Rates for PLUS Loans” and “Interest Rates for SLS Loans.” Special allowance payments are available on variable rate PLUS Loans and SLS A - 11 Loans made on or after July 1, 1987, and before July 1, 1994, and on any PLUS Loans made on or after July 1, 1998, and before January 1, 2000, only if the variable rate, which is reset annually, based on the weekly average one-year constant maturity Treasury yield for loans made before July 1, 1998, and based on the 91-day or 52-week Treasury bill, as applicable for loans made on or after July 1, 1998, exceeds the applicable maximum borrower rate. The maximum borrower rate is between 9% and 12% per annum. The portion, if any, of a Consolidation Loan that repaid a HEAL Loan is ineligible for special allowance payments. Recapture of excess interest. The Higher Education Reconciliation Act of 2005 provides that, with respect to a loan for which the first disbursement of principal was made on or after April 1, 2006, if the applicable interest rate for any three-month period exceeds the special allowance support level applicable to the loan for that period, an adjustment must be made by calculating the excess interest and crediting such amounts to the Secretary of Education not less often than annually. The amount of any adjustment of interest for any quarter will be equal to: • • • The applicable interest rate minus the special allowance support level for the loan, multiplied by The average daily principal balance of the loan during the quarter, divided by Four. Special allowance payments for loans financed by tax-exempt bonds. The effective formulas for special allowance payment rates for Stafford Loans and Unsubsidized Stafford Loans differ depending on whether loans to borrowers were acquired or originated with the proceeds of tax-exempt obligations. The formula for special allowance payments for loans financed with the proceeds of tax-exempt obligations originally issued prior to October 1, 1993 is: T-Bill Rate less Applicable Interest Rate + 3.5% 2 provided that the special allowance applicable to the loans may not be less than 9.5% less the Applicable Interest Rate. Special rules apply with respect to special allowance payments made on loans • • Originated or acquired with funds obtained from the refunding of tax-exempt obligations issued prior to October 1, 1993, or Originated or acquired with funds obtained from collections on other loans made or purchased with funds obtained from tax-exempt obligations initially issued prior to October 1, 1993. Amounts derived from recoveries of principal on loans eligible to receive a minimum 9.5% special allowance payment may only be used to originate or acquire additional loans by a unit of a state or local government, or non-profit entity not owned or controlled by or under common ownership of a for-profit entity and held directly or through any subsidiary, affiliate or trustee, which entity has a total unpaid balance of principal equal to or less than $100,000,000 on loans for which special allowances were paid in the most recent quarterly payment prior to September 30, 2005. Such entities may originate or acquire additional loans with amounts derived from recoveries of principal until December 31, 2010. Loans acquired with the proceeds of tax- exempt obligations originally issued after October 1, 1993, receive special allowance payments made on other loans. Beginning October 1, 2006, in order to receive 9.5% special allowance payments, a lender must undergo an audit arranged by the Secretary of Education attesting to proper billing for 9.5% payments on only eligible “first generation” and “second generation” loans. First generation loans include those loans acquired using funds directly from the issuance of the tax-exempt obligation. Second-generation loans include only those loans acquired using funds obtained directly from first-generation loans. Furthermore, the lender must certify compliance of its 9.5% billing on such loans with each request for payment. Adjustments to special allowance payments. Special allowance payments and interest subsidy payments are reduced by the amount which the lender is authorized or required to charge as an origination fee. In addition, the amount of the lender origination fee is collected by offset to special allowance payments and interest subsidy payments. The Higher Education Act provides that if special allowance payments or interest subsidy payments have not been made within 30 days after the Secretary of Education receives an accurate, timely, and complete request, the special allowance payable to the lender must be increased by an amount equal to the daily interest accruing on the special allowance and interest subsidy payments due the lender. A - 12 PROXY 121 SOUTH 13TH STREET, SUITE 100 p 402.458.2370 www.nelnet.com LINCOLN, NE 68508 April 9, 2020 Dear Shareholder: On behalf of the Board of Directors, we are pleased to invite you to Nelnet, Inc.'s Annual Shareholders' Meeting to be held on Friday, May 22, 2020 at 8:30 a.m. Central Time at the Hudl Building, 600 P Street, Suite 100, Lincoln, Nebraska. In light of public health concerns regarding the coronavirus outbreak and to support the health and well-being of our shareholders, this year we are offering a hybrid virtual meeting format whereby shareholders may attend, participate in, and vote at the Annual Meeting online at http://www.virtualshareholdermeeting.com/NNI2020, and we encourage shareholders to attend and participate in the Annual Meeting virtually, rather than in person. The notice of the meeting and proxy statement on the following pages contain information about the meeting. Your participation in the Annual Meeting is important. We hope that you will be able to attend the meeting and encourage you to read our annual report and proxy statement. At the meeting, members of the Company's management team will discuss the Company's results of operations and business plans and will be available to answer your questions. Regardless of whether you plan to attend, we urge you to vote your proxy at your earliest convenience. Thank you for your support of Nelnet, Inc. Sincerely, Michael S. Dunlap Executive Chairman of the Board of Directors Nelnet, Inc. 121 South 13th Street, Suite 100, Lincoln, Nebraska 68508 NOTICE OF ANNUAL MEETING OF SHAREHOLDERS April 9, 2020 TIME AND DATE 8:30 a.m., Central Time, on Friday, May 22, 2020 PLACE Hudl Building 600 P Street, Suite 100 Lincoln, Nebraska 68508 In light of public health concerns regarding the coronavirus outbreak and to support the health and well-being of our shareholders, this year we are offering a hybrid virtual meeting format whereby the meeting online at http:// shareholders may attend, participate www.virtualshareholdermeeting.com/NNI2020, and we encourage shareholders to attend and participate in the meeting virtually, rather than in person. in, and vote at ITEMS OF BUSINESS (1) To elect three Class III directors nominated by the Board of Directors to serve for three-year terms until the 2023 Annual Meeting of Shareholders (2) To ratify the appointment of KPMG LLP as the Company's independent registered public accounting firm for 2020 (3) To conduct an advisory vote to approve the Company's executive compensation (4) To transact such other business as may be properly introduced RECORD DATE You can vote if you were a shareholder as of the close of business on March 27, 2020 OTHER INFORMATION The Letter to Shareholders from the Chief Executive Officer and our 2019 Annual Report on Form 10-K, which are not part of the proxy soliciting materials, are enclosed. PROXY VOTING The Board of Directors solicits your proxy and asks you to vote your proxy at your earliest convenience to be sure your vote is received and counted. Instructions on how to vote are contained in our proxy statement and in the Notice of Internet Availability of Proxy Materials. Whether or not you plan to attend the meeting, we ask you to vote over the Internet as described in those materials as promptly as possible in order to make sure that your shares will be voted in accordance with your wishes at the meeting. Alternatively, if you requested a copy of the proxy/voting instruction card by mail, you may mark, sign, date, and return the proxy/voting instruction card in the envelope provided. The Board of Directors encourages you to attend the meeting virtually in light of the public health impact of the coronavirus outbreak and to support the health and well-being of the Company's shareholders. If you attend the meeting virtually or in person, you may vote by proxy or you may revoke your proxy and cast your vote virtually or in person, respectively. We recommend you vote by proxy even if you plan to attend the meeting. By Order of the Board of Directors, William J. Munn Corporate Secretary Nelnet, Inc. NELNET, INC. 2020 PROXY STATEMENT TABLE OF CONTENTS PROXY STATEMENT General Information............................................................................................................................................................ VOTING.................................................................................................................................................................................. PROPOSAL 1 - ELECTION OF DIRECTORS...................................................................................................................... Class III Director Nominees to Hold Office for a Term Expiring at the 2023 Annual Meeting of Shareholders .............. Class I Directors Continuing in Office for a Term Expiring at the 2021 Annual Meeting of Shareholders....................... Class II Directors Continuing in Office for a Term Expiring at the 2022 Annual Meeting of Shareholders ..................... CORPORATE GOVERNANCE Code of Business Conduct and Ethics for Directors, Officers, and Employees................................................................. Board Composition and Director Independence................................................................................................................. Governance Guidelines of the Board.................................................................................................................................. Shareholder Communications with the Board.................................................................................................................... Board Diversity................................................................................................................................................................... The Board's Role in Risk Oversight ................................................................................................................................... Board Leadership Structure ................................................................................................................................................ Board Committees .............................................................................................................................................................. Meetings of the Board ........................................................................................................................................................ Attendance at Annual Meetings of Shareholders................................................................................................................ Director Compensation Overview ...................................................................................................................................... Director Compensation Elements ....................................................................................................................................... Other Compensation ........................................................................................................................................................... Director Compensation Table for Fiscal Year 2019............................................................................................................ Share Ownership Guidelines for Board Members.............................................................................................................. EXECUTIVE OFFICERS ....................................................................................................................................................... EXECUTIVE COMPENSATION Compensation Discussion and Analysis ............................................................................................................................. People Development and Compensation Committee Report ............................................................................................. Summary Compensation Table for Fiscal Years 2019, 2018, and 2017 ............................................................................. Grants of Plan-Based Awards Table for Fiscal Year 2019.................................................................................................. Outstanding Equity Awards at Fiscal Year-End Table (As of December 31, 2019) ........................................................... Stock Vested Table for Fiscal Year 2019 ............................................................................................................................ Stock Option, Stock Appreciation Right, Long-Term Incentive, and Defined Benefit Plans ............................................ Potential Payments Upon Termination or Change-in-Control............................................................................................ Pay Ratio Disclosure........................................................................................................................................................... SECURITY OWNERSHIP OF DIRECTORS, EXECUTIVE OFFICERS, AND PRINCIPAL SHAREHOLDERS Stock Ownership................................................................................................................................................................. Delinquent Section 16(a) Reports....................................................................................................................................... CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS ..................................................................................... AUDIT COMMITTEE REPORT............................................................................................................................................ PROPOSAL 2 - RATIFICATION OF APPOINTMENT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM..................................................................................................................................................... Independent Accountant Fees and Services........................................................................................................................ PROPOSAL 3 - ADVISORY VOTE TO APPROVE EXECUTIVE COMPENSATION ...................................................... OTHER SHAREHOLDER MATTERS Householding...................................................................................................................................................................... Other Business .................................................................................................................................................................... Shareholder Proposals for 2021 Annual Meeting............................................................................................................... MISCELLANEOUS................................................................................................................................................................ 1 2 5 7 8 9 10 10 10 10 11 11 12 12 14 14 14 14 15 15 16 16 17 25 25 26 27 27 27 28 28 29 35 36 42 44 44 45 46 47 47 47 Nelnet, Inc. 121 South 13th Street Suite 100 Lincoln, Nebraska 68508 PROXY STATEMENT General Information This proxy statement is furnished in connection with the solicitation of proxies by the Board of Directors of Nelnet, Inc. (the “Company”) for the 2020 Annual Meeting of Shareholders (the “Annual Meeting”) to be held on Friday, May 22, 2020, at 8:30 a.m., Central Time, at the Hudl Building, 600 P Street, Suite 100, Lincoln, Nebraska 68508. The Annual Meeting will be held for the purposes set forth in the notice of such Annual Meeting on the cover page hereof. In light of public health concerns regarding the coronavirus outbreak and to support the health and well-being of our shareholders, this year we are offering a hybrid virtual meeting format whereby shareholders may attend, participate in, and vote at the Annual Meeting online at http://www.virtualshareholdermeeting.com/NNI2020, and we encourage shareholders to attend and participate in the Annual Meeting virtually, rather than in person. In order to facilitate the use of the new hybrid virtual meeting format, we changed the date of the Annual Meeting to May 22, 2020 from the originally scheduled date of May 21, 2020 that was indicated in our 2019 annual report on Form 10-K filed on February 27, 2020. Important Notice Regarding the Availability of Proxy Materials for the 2020 Annual Meeting of Shareholders to be held on May 22, 2020 Our notice of annual meeting and proxy statement, 2019 annual report on Form 10-K, letter to shareholders, electronic proxy card, and other annual meeting materials are available on the Internet at www.proxyvote.com. We intend to begin mailing our Notice of Internet Availability of Proxy Materials to shareholders on or about April 9, 2020. At that time, we also will begin mailing paper copies of our proxy materials to shareholders who requested them. Additional information on how these materials will be distributed is provided below. Under U.S. Securities and Exchange Commission (the “SEC”) rules, we are allowed to mail a notice to our shareholders informing them that our proxy statement, annual report on Form 10-K, electronic proxy card, and related materials are available for viewing, free of charge, on the Internet. Shareholders may then access these materials and vote their shares over the Internet, or request delivery of a full set of proxy materials by mail or email. These rules give us the opportunity to serve shareholders more efficiently by making the proxy materials available online and reducing the environmental impact and costs associated with printing and physical delivery. We are utilizing this process for the 2020 Annual Meeting. We intend to begin mailing the required notice, called the Notice of Internet Availability of Proxy Materials (the "Notice"), to shareholders on or about April 9, 2020. The proxy materials will be posted on the Internet, at www.proxyvote.com, no later than the day we begin mailing the Notice. If you receive a Notice, you will not receive a paper or email copy of the proxy materials unless you request one in the manner set forth in the Notice. The Notice contains important information, including: • The date, time, and location of the Annual Meeting, and information regarding virtual participation in the Annual Meeting online • A brief description of the matters to be voted on at the meeting • A list of the proxy materials available for viewing at www.proxyvote.com and the control number you will need to • use to access the site Instructions on how to access and review the proxy materials online, how to vote your shares over the Internet, and how to get a paper or email copy of the proxy materials if that is your preference You may vote online at the Annual Meeting through the virtual meeting process, in person at the Annual Meeting, or you may vote by proxy. To obtain directions to attend the Annual Meeting and vote in person, please call 402-458-3038. To support the health and well-being of our shareholders in view of the coronavirus outbreak, we may take precautionary measures with respect to attendance in person at the Annual Meeting, including measures under public heath protocols. Giving the Board of Directors your proxy means that you authorize representatives of the Board to vote your shares at the Annual Meeting in the manner you specify. We recommend that you vote by proxy even if you plan to attend the Annual Meeting. If your share ownership is registered directly, you may refer to voting instructions contained in this proxy statement and in the Notice. If your share ownership is beneficial (that is, your shares are held in the name of a bank, broker, or other nominee, referred to as being held in “street name”), 1 your broker will issue you a voting instruction form that you use to instruct them how to vote your shares. Your broker must follow your voting instructions. Although most brokers and nominees offer mail, telephone, and Internet voting, availability and specific procedures will depend on their voting arrangements. Your vote is important. For this reason, the Board of Directors is requesting that you permit your common stock to be voted by proxy at the Annual Meeting. This proxy statement contains important information for you to consider when deciding how to vote on the matters brought before the Annual Meeting. Please read it carefully. VOTING Who Can Vote You may vote if you owned Nelnet, Inc. Class A common stock, par value $0.01 per share, or Class B common stock, par value $0.01 per share, as of the close of business on March 27, 2020 (the “record date”). At the close of business on March 27, 2020 28,582,076 and 11,271,609 shares of the Company's Class A and Class B common stock, respectively, were outstanding and eligible to vote. The Class A common stock is listed on the New York Stock Exchange under the symbol “NNI.” The Class B common stock is not listed on any exchange or market. At the Annual Meeting, each Class A and Class B shareholder will be entitled to one vote and 10 votes, respectively, in person or by proxy, for each share of Class A and Class B common stock, respectively, owned of record as of the record date. The stock transfer books of the Company will not be closed. The Secretary of the Company will make a complete record of the shareholders entitled to vote at the Annual Meeting available for inspection by any shareholder beginning two business days after the Notice of the Annual Meeting is given and continuing through the Annual Meeting, at the Company's headquarters in Lincoln, Nebraska at any time during regular business hours. Any shareholder who would like to inspect such records should call Investor Relations at (402) 458-3038 to request access and schedule an appointment. Such records will also be available for inspection at the Annual Meeting, and will also be available for review by shareholders during the Annual Meeting through the virtual meeting website. As a matter of policy, the Company keeps private all proxies, ballots, and voting tabulations that identify individual shareholders. Such documents are available for examination only by certain representatives associated with processing proxy voting instructions and tabulating the vote. No vote of any shareholder is disclosed, except as may be necessary to meet legal requirements. How You Vote You may vote your shares prior to the Annual Meeting by following the instructions provided in the Notice, this proxy statement, and the voter website, www.proxyvote.com. If you requested a paper copy of the proxy materials, voting instructions are also contained on the proxy card enclosed with those materials. • If you are a registered shareholder, there are three ways to vote your shares before the meeting: By Internet (www.proxyvote.com): Use the Internet to transmit your voting instructions until 11:59 p.m. EDT on May 21, 2020. Have your Notice of Internet Availability of Proxy Materials with you when you access the website and follow the instructions to obtain your records and to create an electronic voting instruction form. By mail: You can vote by mail by requesting a paper copy of the materials, which will include a proxy card. There is no charge for requesting a paper copy of materials. To be valid, proxy cards must be received before the start of the Annual Meeting. If you want to receive a paper or e-mail copy of the proxy materials, please choose one of the following methods to make your request: • • • By internet: By telephone: By e-mail*: www.proxyvote.com 1-800-579-1639 sendmaterial@proxyvote.com * If requesting materials by e-mail, please send a blank e-mail with your 16-Digit Control Number in the subject line. By telephone (1-800-690-6903): Use any touch-tone phone to transmit your voting instructions until 11:59 p.m. EDT on May 21, 2020. Have your proxy card with you when you call and follow the instructions. 2 • If your shares are held in street name, your broker, bank, or other holder of record may provide you with a Notice of Internet Availability of Proxy Materials. Follow the instructions on the Notice to access our proxy materials and vote online or to request a paper or e-mail copy of our proxy materials. If you receive these materials in paper form, the materials will include a voting instruction card so you can instruct your broker, bank, or other holder of record how to vote your shares. You may vote your shares by attending the Annual Meeting through the virtual meeting process or in person. If you are a registered shareholder, you can vote at the meeting any shares that were registered in your name as the shareholder of record as of the record date. If your shares are held in street name, you are not a holder of record of those shares and cannot vote them at the Annual Meeting unless you have a legal proxy from the holder of record. If you plan to attend in person and vote your street name shares at the Annual Meeting, you should request a legal proxy from your broker, bank, or other holder of record and bring it with you to the meeting along with proof of identification. If you plan to vote your shares in person at the Annual Meeting, please pick up a ballot at the registration table upon your arrival. You may then submit your ballot to a meeting usher at the time designated during the meeting. Ballots will not be distributed during the meeting. Shares may not be voted after the final vote at the meeting. Even if you plan to attend the Annual Meeting through the virtual meeting process or in person, we encourage you to vote your shares by proxy. Description of Virtual Meeting Process Shareholders are encouraged to attend and participate in the Annual Meeting via the Internet through the virtual meeting process, and may do so by visiting http://www.virtualshareholdermeeting.com/NNI2020. The Annual Meeting will begin promptly at 8:30 a.m. Central Time on May 22, 2020 and online check-in will begin at 8:15 a.m. Central Time. Please allow ample time for the online check-in procedures. Interested persons who were not shareholders as of the close of business on the record date may listen, but not participate, in the Annual Meeting via http://www.virtualshareholdermeeting.com/NNI2020. In order to attend, participate in, and vote at the Annual Meeting through the virtual meeting process, registered shareholders will need to use their 15-digit control number received with their proxy card or Notice to log into http://www.virtualshareholdermeeting.com/NNI2020 and follow the provided instructions. Holders of shares in street name who do not have a control number may gain access to the Annual Meeting by logging into their brokerage firm’s web site and selecting the shareholder communications mailbox to link through to the Annual Meeting. Instructions should also be provided on the voting instruction card provided by their broker, bank, or other nominee. Shareholders who wish to submit a question may do so during the Annual Meeting through http:// www.virtualshareholdermeeting.com/NNI2020. What Items Require Your Vote There are three proposals that will be presented for your consideration at the meeting: • Electing the three Class III director nominees named in this proxy statement to the Board of Directors for three-year terms • Ratifying the appointment of KPMG LLP as the Company's independent registered public accounting firm (“independent auditor”) for 2020 • Approving on an advisory basis the Company's executive compensation Each of the proposals have been submitted on behalf of the Company's Board of Directors. How You Can Change Your Vote If you are a registered shareholder, you can revoke your proxy and change your vote prior to the Annual Meeting by: • Sending a written notice of revocation to our Corporate Secretary at 121 South 13th Street, Suite 100, Lincoln, Nebraska 68508 (the notification must be received by the close of business on May 21, 2020) • Voting again by Internet prior to 11:59 p.m. EDT on May 21, 2020 (only the latest vote you submit will be counted) • Submitting a new properly signed and dated paper proxy card with a later date (your proxy card must be received before the start of the Annual Meeting) 3 If your shares are held in street name, you should contact your broker, bank, or other holder of record about revoking your voting instructions and changing your vote prior to the meeting. If you are eligible to vote at the Annual Meeting, you also can revoke your proxy or voting instructions and change your vote at the Annual Meeting by submitting a written or virtual ballot before the final vote at the meeting. Your attendance at the Annual Meeting will not automatically revoke your proxy; you must specifically revoke your proxy. Quorum Needed To Hold the Meeting In order to conduct the Annual Meeting, the Company's Articles of Incorporation and Bylaws provide that shares constituting a majority of the voting power of all the shares of the Company's stock entitled to vote must be present in person or by proxy. This is called a quorum. If you return valid proxy instructions or vote in person at the Annual Meeting, your shares will be considered part of the quorum. Abstentions and broker “non-votes” will be counted as present and entitled to vote for purposes of determining a quorum. New York Stock Exchange rules allow banks, brokers, and other nominees to vote in their discretion the shares held by them for a customer on matters that the New York Stock Exchange considers to be routine, even though the bank, broker, or nominee has not received voting instructions from the customer. A broker “non-vote” occurs when a bank, broker, or other nominee has not received voting instructions from the customer and the bank, broker, or other nominee cannot vote the shares because the matter is not considered to be routine under New York Stock Exchange rules. Under New York Stock Exchange rules, the election of directors and the advisory vote to approve executive compensation will not be considered to be “routine” matters, and banks, brokers, and other nominees who are members of the New York Stock Exchange will not be permitted to vote shares held by them for a customer on these matters without instructions from the beneficial owner of the shares. Counting Your Vote If you provide specific voting instructions, your shares will be voted as instructed. If you hold shares in your name and submit a valid proxy without giving specific voting instructions, your shares will be voted as recommended by our Board of Directors. If you hold your shares in your name and do not return a valid proxy and do not vote through the virtual meeting process for the Annual Meeting or in person at the Annual Meeting, your shares will not be voted. If you hold your shares in the name of a bank, broker, or other nominee, and you do not give that nominee instructions on how you want your shares to be voted, the nominee has the authority to vote your shares in the nominee’s discretion on the ratification of the appointment of KPMG LLP as independent auditor. However, as discussed above, the nominee will not be permitted to vote your shares without your instructions on the election of directors or on the advisory vote to approve executive compensation. Giving the Board your proxy also means that you authorize their representatives to vote in their discretion on any other matter that may be properly presented at the Annual Meeting. As of the date of this proxy statement, the Company does not know of any other matters to be presented at the Annual Meeting. What Vote is Needed Our Articles of Incorporation provide that directors are elected by a majority of the votes cast by the shares entitled to vote at the Annual Meeting. Although abstentions and broker “non-votes” will be counted for purposes of determining whether there is a quorum (as discussed above), they will not be counted as votes cast in the election of directors and thus will not have the effect of votes for or against any director. With respect to the election of the Class III directors, shareholders of the Company, or their proxy if one is appointed, have cumulative voting rights under the Nebraska Model Business Corporation Act. That is, shareholders, or their proxy, may vote their shares for as many directors as are to be elected, or may cumulate such shares and give one nominee as many votes as the number of directors to be elected multiplied by the number of their shares, or may distribute votes on the same principle among as many or as few nominees as they may desire. If a shareholder desires to vote cumulatively, he or she must vote in person or give his or her specific cumulative voting instructions to the designated proxy that the number of votes represented by his or her shares are to be cast for one or more designated nominees. Cumulative voting is not available for internet voting, including online voting through the virtual meeting process. The Nebraska Model Business Corporation Act and our Bylaws provide that a majority of votes cast at the meeting is required to approve Proposals 2 and 3 (ratifying the appointment of KPMG LLP and approving on an advisory basis the Company's executive compensation, respectively). Although abstentions and broker “non-votes” will be counted for purposes of determining whether 4 there is a quorum (as discussed above), they will not be counted as votes cast with respect to Proposals 2 and 3 and thus will not have the effect of votes for or against Proposals 2 and 3. Voting Recommendations The Company's Board of Directors recommends that you vote: • • • “FOR” the election of each of the Class III director nominees to the Board of Directors for a three-year term “FOR” the ratification of the appointment of KPMG LLP as the Company's independent registered public accounting firm for 2020 “FOR” the approval of the compensation of the Company's named executive officers, as disclosed in this proxy statement A proxy, when properly executed and not revoked, will be voted in accordance with the authorization and instructions contained therein. Unless a shareholder specifies otherwise, all shares represented will be voted in accordance with the recommendations of the Company's Board of Directors. Voting Results The preliminary voting results will be announced at the Annual Meeting. The final voting results will be reported in a current report on Form 8-K to be filed within four business days after the Annual Meeting date. Cost of This Proxy Solicitation The Company will pay the cost of soliciting proxies, including the preparation, assembly, and furnishing of proxy solicitation and other required annual meeting materials. Directors, officers, and regular employees of the Company may solicit proxies by telephone, electronic communications, or personal contact, for which they will not receive any additional compensation in respect of such solicitations. The Company will also reimburse brokerage firms and others for all reasonable expenses for furnishing proxy solicitation and other required annual meeting materials to beneficial owners of the Company's stock. PROPOSAL 1 - ELECTION OF DIRECTORS The Company’s Board of Directors consists of nine directors who are divided into three classes, designated as Class I, Class II, and Class III. In accordance with the Company’s Articles of Incorporation, the number of directors constituting the entire Board is fixed exclusively by the Board from time to time. The classes of directors serve for staggered three-year terms, with their current terms ending at the annual meeting of shareholders in the following years: Class I directors - 2021; Class II directors - 2022; and Class III directors - 2020. Shareholders are asked to elect three Class III directors to serve on the Board of Directors for a three-year term ending at the 2023 annual meeting of shareholders. The nominees for these Class III directorships are Kathleen A. Farrell, David S. Graff and Thomas E. Henning. Each nominee is currently serving on the Board as a Class III director, and each of the nominees was most recently elected to the Board by the shareholders at the 2017 annual meeting of shareholders, at which annual meeting the shareholders also approved an amendment to the Articles of Incorporation to classify the Board into three classes, with the directors in each class serving staggered three-year terms of office implemented by the directors in Class I, Class II, and Class III having initial terms of office expiring at the Company's annual meeting of shareholders in 2018, 2019, and 2020, respectively. In making these nominations, the Board and the Nominating and Corporate Governance Committee considered each nominee’s specific experience, qualifications, and skills as described below. Upon the recommendation of the Nominating and Corporate Governance Committee of the Board, the Board has nominated each of the Class III director nominees named below to serve on the Board of Directors as Class III directors. The Board of Directors recommends that shareholders vote FOR the election of each Class III director nominee (named below) to the Board of Directors. In the event that before the election any Class III director nominee becomes unable to serve or for good cause unwilling to serve, if elected, the shares represented by proxy will be voted for any substitute nominees designated by the Board, unless the proxy does not indicate that the shares are to be voted for all Class III director nominees, or, if the Board does not designate any substitute nominees, the shares represented by proxy may be voted for a reduced number of nominees. The Board of Directors knows of no 5 reason why any of the persons nominated for election as Class III directors might be unable or unwilling to serve if elected, and each nominee has consented to and expressed an intention to serve if elected. There are no arrangements or understandings between any of the nominees and any other person pursuant to which any of the nominees was selected as a nominee. The following sets forth certain information about (i) each of the three nominees for election as Class III directors to serve for a three-year term expiring at the 2023 annual meeting of shareholders, and (ii) each of the current Class I and Class II directors whose term of office continues beyond the 2020 Annual Meeting. The information includes, with respect to each such person: (a) their age, (b) the year during which they were first elected a director of the Company, (c) their principal occupation(s) and any other directorships with publicly-held companies (if applicable) during the past five years, and (d) the qualifications of such person that led to the conclusion that such person should serve as a director of the Company. Michael D. Reardon, who had served on the Board of Directors since December 2003, resigned from the Board on March 20, 2020. Mr. Reardon was serving as a Class I director and a member of the People Development and Compensation Committee and Nominating and Corporate Governance Committee at the time of his resignation. 6 Class III Director Nominees to Hold Office for a Term Expiring at the 2023 Annual Meeting of Shareholders Kathleen A. Farrell, 56 Director since October 2007 David S. Graff, 37 Director since May 2014 Dean and Professor of Finance, College of Business, University of Nebraska-Lincoln College of Business, University of Nebraska - Lincoln Dean, December 2017 - present Professor of Finance, August 2009 - present Interim Dean, January 2017 - December 2017 Chair, Finance Department, August 2014 - December 2016 Senior Associate Dean of Academic Programs, August 2011 - July 2014 Associate Dean of Academic Programs, August 2010 - August 2011 Associate Professor of Finance, 2001 - July 2009 Assistant Professor of Finance, August 1993 - 2001 Dr. Farrell's qualifications include her expertise in corporate finance, executive turnover, and executive compensation, and her prior experience as an auditor at a national public accounting firm. Dr. Farrell has achieved designation as a Certified Public Accountant (inactive), has over 25 years of experience teaching university courses in the areas of banking and finance, and has conducted extensive research on these topics. Dr. Farrell has also published articles on these topics in numerous scholarly journals. Chief Executive Officer, Agile Sports Technologies, Inc. (doing business as Hudl) Hudl provides online video analysis and coaching tools software for professional, college, high school, club, and youth teams and athletes, and Hudl software is used by more than 160,000 teams around the world, serving more than 30 different sports, including the National Hockey League, National Football League, National Basketball Association, and English Premier League. Chief Executive Officer, May 2006 - present Mr. Graff's qualifications include his experience and expertise in computer science, marketing, and sales. In addition, as co-founder of Hudl, Mr. Graff provides the Board of Directors and the Company significant expertise in business development and innovation. Mr. Graff serves on the Advisory Board for the Jeffrey S. Raikes School of Computer Science and Management at the University of Nebraska. In 2010, Mr. Graff was featured on Inc. Magazine's 30 Under 30 list along with the other Hudl co- founders, and in 2016 was named one of Fast Company's Most Creative People. In addition, Mr. Graff served as a member of the board of directors for certain of the Company's asset-backed securities special purpose corporations. Thomas E. Henning, 67 Director since August 2003 President and Chief Executive Officer, Assurity Group, Inc. and its subsidiary, Assurity Life Insurance Company Assurity Group, Inc. and its subsidiary, Assurity Life Insurance Company, which offers a variety of disability income and critical illness protection, life insurance, and annuity products. President and Chief Executive Officer, 1990 - present Great Western Bancorp, Inc. ("GWB") and Great Western Bank; GWB is a publicly traded full service regional bank holding company. Director, August 2015 - present Federal Home Loan Bank Topeka, a part of the 12-member Federal Home Loan Bank system. The bank serves the states of Oklahoma, Kansas, Nebraska, and Colorado and provides liquidity to member institutions to assist in financing real estate. Director, March 2007 - October 2015 Mr. Henning's qualifications include 30 years of experience as President and Chief Executive Officer of a large insurance company, his prior experience as President of a regional bank, his financial expertise, including being a Chartered Financial Analyst, his experience in risk assessment and management, and his vast knowledge and experience in leadership and management. Mr. Henning also completed a comprehensive program of study by the National Association of Corporate Directors ("NACD") and has been named a NACD Fellow. 7 Class I Directors Continuing in Office for a Term Expiring at the 2021 Annual Meeting of Shareholders Michael S. Dunlap, 56 Director since January 1996 Executive Chairman, Nelnet, Inc. Nelnet, Inc. Executive Chairman, January 2014 - present Chairman, January 1996 - December 2013 Preeta D. Bansal, 54 Director since November 2018 JoAnn M. Martin, 65 Director since March 2020 Chief Executive Officer, May 2007 - December 2013 and December 2001 - August 2003 Co-Chief Executive Officer, August 2003 - May 2007 Farmers & Merchants Investment Inc. (“F&M”), the parent of Union Bank and Trust Company (“Union Bank”) (F&M is an affiliate of the Company) Chairman, January 2013 - present Co-President and Director, January 2007 - January 2013 Mr. Dunlap's qualifications include more than 30 years of experience in the areas of banking and financial services, leadership, strategic operations, and management, including as one of our co- founders and our Chairman since the Company's inception, as well as his experience as a member of the boards of directors of numerous other organizations. Mr. Dunlap's knowledge of every part of our business and his intense focus on innovation and excellence are keys to our Board's success. Founder, Social Emergence Corporation Social Emergence Corporation, a not-for-profit, social benefit organization, Chair and Chief Executive Officer - 2015 - 2019 Massachusetts Institute of Technology, Lecturer, Senior Advisor, and Visiting Scholar - 2014 - 2019 HSBC Holdings plc, a multinational investment bank and financial services company, Global General Counsel for Litigation and Regulatory Affairs, 2012 - 2013 Office of Management and Budget, Executive Office of the President of the United States, General Counsel and Senior Policy Advisor, 2009 - 2011 Skadden, Arps, Slate, Meagher & Flom LLC, an international law firm, Partner, 2003 - 2009 United States Commission on International Religious Freedom, Commissioner, 2003 - 2009 (Chair, 2004 - 2005) University of Nebraska College of Law, Visiting Professor, 2001 - 2003 State of New York, Solicitor General, 1999 - 2001 Ms. Bansal's qualifications include over 30 years of experience in banking, financial services, government, regulation, public policy, and academia as a distinguished lawyer and global business leader. Ms. Bansal provides to the Board of Directors and the Company valuable insight and leadership on various business, compliance, regulatory, and policy issues. Vice Chair, Ameritas Mutual Holding Company and Ameritas Life Insurance Corp. Ameritas Mutual Holding Company is the parent company and owns Ameritas Holding Company, which owns 100 percent of the stock of Ameritas Life Insurance Corp. These entities offer a wide range of insurance and financial products and services to individuals, families, and businesses. Vice Chair, Ameritas Mutual Holding Company and Ameritas Life Insurance Corp., January 2020 - present Chair, Ameritas Life Insurance Corp., August 2008 - January 2020 Chief Executive Officer, Ameritas Mutual Holding Company, 2009 - January 2020 President, Ameritas Mutual Holding Company, January 2009 - April 2017 Chief Operating Officer, Ameritas Mutual Holding Company, August 2008 - March 2009 National Research Corporation ("NRC"), a Lincoln, Nebraska-based publicly traded health care consumer data analytics company. Director, June 2001 - present American Council of Life Insurers Director, October 2011 - present; Chair, October 2018 - October 2019 8 Ms. Martin's qualifications include a financial background as a certified public accountant and as the former Chief Executive Officer of a mutual insurance holding company. She also has past leadership experiences as a director of the Omaha branch of the Federal Reserve Bank of Kansas City and other organizations, including as the immediate past Chair of the American Council of Life Insurers. Class II Directors Continuing in Office for a Term Expiring at the 2022 Annual Meeting of Shareholders James P. Abel, 69 Director since August 2003 Chief Executive Officer, NEBCO, Inc. NEBCO, Inc., a company with interests in the manufacture of concrete building materials, road construction, insurance, mining, railroading, farming, and real estate. Chief Executive Officer, 2004 - present President and Chief Executive Officer, 1983 - 2004 Ameritas Mutual Holding Company is the parent company and owns Ameritas Holding Company, which owns 100 percent of the stock of Ameritas Life Insurance Corp. These entities offer a wide range of insurance and financial products and services to individuals, families, and businesses. Chairman of the Board of Directors, Ameritas Mutual Holding Company and Ameritas Holding Company Director, Ameritas Life Insurance Corp. Mr. Abel's qualifications include his experience on boards of directors of other private companies and his demonstrated executive leadership abilities and management experience as Chief Executive Officer of a complex diversified organization, as well as his knowledge of operations and experience with mergers and acquisitions, all of which give him critical insights into the operational requirements of the Company. William R. Cintani, 67 Director since May 2012 Chairman and Chief Executive Officer, Mapes Industries Mapes Industries, a diversified manufacturer of specialty architectural products with distribution across the United States and Canada. Chairman and Chief Executive Officer, 1993 - present Mr. Cintani's qualifications include more than 40 years of managing a diverse, nationwide manufacturing business with distribution in all 50 states and Canada. Mr. Cintani's service on numerous civic, philanthropic, and service boards has provided him with a wide array of experience in both corporate governance and operations. His practical knowledge and board experience provide the Company with a resource for all aspects of finance, operations, IT, and strategic planning. In addition, Mr. Cintani served 10 years as a member of the board of directors for certain of the Company's asset-backed securities special purpose corporations. Kimberly K. Rath, 59 Director since October 2007 Co-Chair, Talent Plus, Inc. Talent Plus, Inc., a global human resources consulting firm. Co-Chair, August 2013 - present President, Talent Plus, Inc., June 2016 - February 2020 Co-Founder, Talent Plus, Inc., 1989 - present Ms. Rath's qualifications include over 30 years of experience in the field of human resources, with expertise in executive development, employee engagement, and human capital management. Ms. Rath also has over 30 years of experience leading an international executive management consulting and training organization, working with major global companies. Ms. Rath serves as an executive strategic advisor to many leaders across the globe in both private and public sectors. 9 CORPORATE GOVERNANCE Code of Business Conduct and Ethics for Directors, Officers, and Employees The Company has a written code of business conduct and ethics that applies to all of the Company's directors, officers, and employees, including the Company's Executive Chairman, Chief Executive Officer, President, Chief Operating Officer, and Chief Financial Officer (who is also the Company's principal accounting officer), and is designed to promote ethical and legal conduct. Among other items, the code addresses the ethical handling of actual or potential conflicts of interest, compliance with laws, accurate financial reporting, and procedures for promoting compliance with, and reporting violations of, the code. This code is available on the Company's investor relations website at www.nelnetinvestors.com under “Corporate Governance” and is available in print to any shareholder who requests it. Any future amendments to or waivers of the code, to the extent applicable to any executive officer or director, will be posted at this location on the Company's website. Board Composition and Director Independence The Board of Directors is composed of a majority of independent directors as defined by the rules of the New York Stock Exchange. A director does not qualify as an independent director unless the Board has determined, pursuant to applicable legal and regulatory requirements, that such director has no material relationship with the Company (either directly or as a partner, shareholder, or officer of an organization that has a relationship with the Company). The Nominating and Corporate Governance Committee reviews compliance with the definition of “independent” director annually. Mr. Dunlap beneficially owns 81.9% of the combined voting power of the Company's shareholders. Because of his beneficial ownership, Mr. Dunlap can effectively elect each member of the Board of Directors and has the power to defeat or remove each member of the Board of Directors. The Board has evaluated commercial, consulting, charitable, familial, and other relationships with each of its directors, director nominees, and entities with respect to which they are an executive officer, partner, member, and/or significant shareholder. As part of this evaluation, the Board noted that none of the current directors received any consulting, advisory, or other compensatory fees from the Company, other than those described under "Certain Relationships and Related Transactions" and "Director Compensation Table for Fiscal Year 2019." Based on this independence review and evaluation, and on other facts and circumstances the Board deemed relevant, the Board, in its business judgment, has determined that all of the Company's current directors are independent, with the exception of Mr. Dunlap, who is currently an employee of the Company. The Company's Nominating and Corporate Governance Committee is responsible for reviewing and approving all new transactions, and any material amendments or modifications to existing transactions, between the Company and related parties, and taking such actions as the Committee deems necessary and appropriate in relation to such transactions, including reporting to the Board of Directors with respect to such transactions as the Committee deems necessary and appropriate. See “Certain Relationships and Related Transactions.” Governance Guidelines of the Board The Board's governance is guided by the Company's Corporate Governance Guidelines. The Board's current guidelines are available on the Company's investor relations website at www.nelnetinvestors.com under “Corporate Governance” and are available in print to any shareholder who requests them. Among other matters, the guidelines provide for the following: • A majority of the members of the Board must be independent directors. • The Board undertakes an annual self-review. • The Board and each Board Committee has the authority to engage independent or outside counsel, accountants, or other advisors, as it determines to be necessary or appropriate. All related fees and costs of such advisors are paid by the Company. • Board members have open communication access to all members of management and counsel. Shareholder Communications with the Board Directors who are not employees or officers of the Company or any of its subsidiaries ("Non-Employee Directors") meet in executive session, without the presence of management. Mr. Henning currently presides at these executive sessions. Anyone who has a concern about the Company may communicate that concern directly to these Non-Employee Directors. Such communication may be mailed to the Corporate Secretary at Nelnet, Inc., 121 South 13th Street, Suite 100, Lincoln, Nebraska 68508 or anonymously submitted via the Company's investor relations website at www.nelnetinvestors.com under "Corporate Governance" - “Anonymous 10 Reporting.” All such communications will be forwarded to the appropriate Non-Employee Directors for their review. The Non- Employee Directors may take any action deemed appropriate or necessary, including the retention of independent or outside counsel, accountants, or other advisors, with respect to any such communication addressed to them. No adverse action will be taken against any individual making any such communication in good faith to the Non-Employee Directors. Board Diversity In considering whether to recommend any candidate for election to the Board, including candidates recommended by shareholders, the Nominating and Corporate Governance Committee will apply the criteria set forth in Nelnet's Corporate Governance Guidelines. These criteria include the candidate's independence, wisdom, integrity, understanding and acceptance of the Company's corporate philosophy, business or professional knowledge and experience, record of accomplishment, and willingness to commit time and energy to the Company. Our Corporate Governance Guidelines also specify that the value of diversity on the Board should be considered by the Nominating and Corporate Governance Committee in the director identification and nomination process. The Board is committed to a strong and diverse membership and a thorough process to identify those individuals who can best contribute to the Company's continued success. As part of this process, the Nominating and Corporate Governance Committee will continue to take all reasonable steps to identify and consider for Board membership all candidates who satisfy the business needs of the Company at the time of appointment. The Committee seeks nominees with a broad diversity of experience, professional skills, and backgrounds. The Committee does not assign specific weights to particular criteria and no particular criterion is necessarily applicable to all prospective nominees. The Company believes that the backgrounds and qualifications of the directors, considered as a group, should provide a significant composite mix of experience, knowledge, and abilities that will allow the Board to fulfill its responsibilities. Nominees are not discriminated against on the basis of race, gender, religion, national origin, sexual orientation, disability, or any other basis proscribed by law. The Board's Role in Risk Oversight Our Board of Directors oversees an enterprise-wide approach to risk management, designed to support the achievement of organizational objectives, including strategic objectives, to improve long-term organizational performance and enhance shareholder value. A fundamental part of risk management is not only understanding the risks a company faces and what steps management is taking to manage those risks, but also understanding what level of risk is appropriate for the company in fostering a culture of risk-aware and risk-adjusted decision-making that allows the Company to avoid adverse financial and operational impacts. The involvement of the full Board of Directors in setting the Company's business strategy is a key part of its assessment of management's appetite for risk and also a determination of what constitutes an appropriate level of risk for the Company. While the Board of Directors has the ultimate oversight responsibility for the risk management process, various committees of the Board also have responsibility for risk management. In particular, the Risk and Finance Committee assists the Board of Directors in fulfilling its responsibilities with respect to oversight of the Company's enterprise-wide risk management framework and oversight of the Company's strategies relating to capital management, including risks related to the availability/transition of LIBOR as a benchmark rate applicable to significant amounts of the Company's assets and liabilities. The Audit Committee focuses on the integrity of the Company's financial statements, system of internal controls, and policies for risk assessment and risk management. The Nominating and Corporate Governance Committee assists the Board of Directors in fulfilling its oversight responsibility with respect to regulatory, compliance, related-party transactions, and public policy issues that affect the Company, and works closely with the Company's legal and policy services groups. The Compliance Committee assists the Board of Directors in fulfilling its responsibility to oversee the Company's Compliance Management Program, which is designed to ensure compliance with consumer protection laws, regulations, and corporate policies. In addition, the Audit Committee and the Risk and Finance Committee oversee various aspects of the Company’s initiatives, procedures, controls, plans, and other measures related to cybersecurity risks, including measures designed to prevent, detect, and respond to cybersecurity threats, with the Board of Directors receiving frequent updates with respect to such measures and related cybersecurity risk management activities. Finally, in setting compensation philosophy and strategy, the People Development and Compensation Committee strives to create incentives that encourage an appropriate level of risk-taking behavior consistent with the Company's business strategy. 11 Board Leadership Structure Mr. Dunlap serves as Executive Chairman of the Board and Jeffrey R. Noordhoek serves as Chief Executive Officer. While the Board of Directors and management do not believe either a combined Chairman and CEO or separate roles necessarily guarantee better governance or the absence of risk, they believe the Company's current leadership structure is appropriate for our business at this time. The Board believes that its current leadership structure best serves the objectives of the Board's oversight of management, the ability of the Board to carry out its roles and responsibilities on behalf of the shareholders, and the Company's overall corporate governance. The Board also believes that the current separation of the Chairman and CEO roles allows the CEO to focus his time and energy on operating and managing the Company, while leveraging the experience and perspectives of the Executive Chairman. It also allows the Executive Chairman to focus on leadership of the Board in addition to providing management direction on company-wide issues. The Board periodically reviews the leadership structure and may make changes in the future. In addition, Mr. Henning is currently serving as the independent Lead Director of the Board. The Board believes having a lead independent director is an important governance practice, given that the Executive Chairman is not an independent director under our Corporate Governance Guidelines and applicable rules. Mr. Dunlap, as Executive Chairman, provides leadership to the Board and works with the Board to define its structure and activities in the fulfillment of its responsibilities. In conjunction with Mr. Henning as the independent Lead Director, Mr. Dunlap sets the Board agendas with Board and management input, facilitates communication among directors, works with Mr. Henning to provide appropriate information flow to the Board, and presides at meetings of the Board of Directors and shareholders. Mr. Henning works with Mr. Dunlap and other Board members to provide strong, independent oversight of the Company's management and affairs. Among other things, Mr. Henning is involved in the development of Board meeting agendas as well as the quality, quantity, and timeliness of information sent to the Board, serves as the principal liaison between Mr. Dunlap and the independent directors, and chairs an executive session of the Non-Employee Directors at most regularly scheduled Board meetings. This structure allows the Company to optimize the roles of Chairman, CEO, and independent Lead Director and follow sound governance practices. Board Committees The Board uses committees to assist it in the performance of its duties. During 2019, the standing committees of the Board were the Audit Committee, People Development and Compensation Committee (previously known as the Compensation Committee), Compliance Committee, Nominating and Corporate Governance Committee, Risk and Finance Committee, and Executive Committee. During 2019, all Board committees, with the exception of the Executive Committee, were composed entirely of independent directors, and each committee other than the Executive Committee operates pursuant to a formal written charter, approved by the Board, which sets forth the committees' functions and responsibilities. Each committee charter is posted on the Company's investor relations website at www.nelnetinvestors.com under “Corporate Governance” - “Governance Documents” and is available in print to any shareholder who requests it. The purposes of each committee and their current members are set forth below. Audit Committee The Audit Committee is composed of Ms. Farrell and Messrs. Cintani and Henning. The Committee held six meetings in 2019. Each member of the Audit Committee is (1) “independent” in accordance with the rules and regulations of the New York Stock Exchange and the rules and regulations of the SEC and (2) sufficiently financially literate to enable them to discharge the responsibilities of an Audit Committee member. The Board has determined that all of the members of the Audit Committee have accounting and related financial management expertise which qualifies each of them as an “audit committee financial expert,” as defined in the applicable rules and regulations of the SEC. The Audit Committee provides assistance to the Board of Directors in its oversight of the integrity of the Company's financial statements, the Company's system of internal controls, the Company's policy standards and guidelines for risk assessment and risk management, the qualifications and independence of the Company's independent auditor, the performance of the Company's internal and independent auditors, and the Company's compliance with other regulatory and legal requirements. The Audit Committee discusses with management and the independent auditor the Company's annual audited financial statements, including the Company's disclosures made under “Management's Discussion and Analysis of Financial Condition and Results of Operations” in its filings with the SEC, and recommends to the Board of Directors whether such audited financial statements should be included in the Company's annual report on Form 10-K. The Audit Committee also selects the independent auditors for the next year and presents such selection to the shareholders for ratification. 12 People Development and Compensation Committee The People Development and Compensation Committee is composed of Mses. Rath and Bansal, and Mr. Abel. The Committee held four meetings in 2019. The members of the People Development and Compensation Committee are “independent” in accordance with the rules and regulations of the New York Stock Exchange and the rules and regulations of the SEC. The People Development and Compensation Committee oversees the Company's compensation and benefit policies, succession planning, and leadership and people development. The Company's compensation policies are designed with the goal of maximizing the success of our customers, associates, and shareholder value over the long term. The People Development and Compensation Committee believes this goal is best realized by utilizing a compensation program which serves to attract and retain superior executive talent by providing management with performance-based incentives and closely aligning the financial interests of management with those of the Company's shareholders. The level of compensation is based on numerous factors, including achievement of results and financial objectives established by this Committee and the Board of Directors. See “Executive Compensation.” Compliance Committee The Compliance Committee is composed of Mses. Farrell and Bansal, and Messrs. Abel and Graff. The Committee held four meetings in 2019. The Compliance Committee has principal oversight responsibility with respect to the Company's Compliance Management Program, including approval of applicable corporate policies, ensuring adequate resources are available for training and communications, ensuring the Program is designed to adequately address consumer complaints and other compliance issues, and receiving periodic reporting from management regarding compliance activities. Nominating and Corporate Governance Committee The Nominating and Corporate Governance Committee is composed of Mses. Rath and Bansal and Messrs. Abel and Graff. The Committee held four meetings in 2019. The members of the Nominating and Corporate Governance Committee are “independent” as determined in accordance with the rules and regulations of the New York Stock Exchange and the rules and regulations of the SEC. The Nominating and Corporate Governance Committee is responsible for identifying and recommending qualified nominees to serve on the Company's Board of Directors, identifying members of the Board to serve on each Board committee, overseeing the evaluation by the Board of itself and its committees, identifying individuals to serve as officers of the Company and recommending such individuals to the Board, as well as developing and overseeing the Company's internal corporate governance processes. The Nominating and Corporate Governance Committee reviews related party transactions in accordance with the written policies and procedures adopted by the Board of Directors for the Committee's review of related party transactions, and takes such actions as the Committee deems necessary and appropriate in relation to such transactions, including reporting to the Board of Directors with respect to such transactions as the Committee deems necessary and appropriate. The Company's Corporate Governance Guidelines establish criteria for specific qualities and skills to be considered by the Nominating and Corporate Governance Committee as necessary for the Company's directors to possess. These criteria include, among other items, independence, diversity, integrity, understanding the Company's corporate philosophy, valid business or professional knowledge, proven record of accomplishment with excellent organizations, ability to challenge and stimulate management, and willingness to commit time and energy. The Nominating and Corporate Governance Committee has been given the responsibility to take all reasonable steps to identify and evaluate nominees for director and has adopted a policy requiring it to consider written proposals for director nominees received from shareholders of the Company. No such proposals were received during 2019 from a beneficial owner of more than 5% of Nelnet's stock (other than current management). There is no difference in the manner in which the Committee evaluates director nominees based on whether the nominee is recommended by a shareholder. All of the nominees identified in this proxy statement have been recommended by the Committee. When seeking candidates for director, the Nominating and Corporate Governance Committee solicits suggestions from incumbent directors, management, shareholders, and others. The Committee has authority under its charter to retain a search firm for this purpose. If the Committee believes a candidate would be a valuable addition to the Board of Directors, it recommends his or her candidacy to the full Board of Directors. Most recently, after the Ameritas companies announced in October 2019 that JoAnn M. Martin, a prominent leader in the Lincoln, Nebraska business community, was retiring from her executive officer positions at Ameritas in January 2020, members of the Nominating and Corporate Governance Committee and the Executive Chairman identified Ms. Martin as having leadership skills, experiences, qualifications, and other characteristics that would significantly add to and further diversify the Board of Directors. Based on these and other factors, the Nominating and Corporate Governance Committee recommended Ms. Martin as a director. The Company's Bylaws include provisions setting forth the specific conditions under which persons may be nominated by shareholders for election as directors at an annual meeting of shareholders. The provisions include the condition that nominee proposals from shareholders must be in writing and that shareholders comply with the time-frame requirements described under 13 “Other Shareholder Matters - Shareholder Proposals for 2021 Annual Meeting” for shareholder proposals not included in the Company's Proxy Statement. A copy of such provisions is available upon written request to: Nelnet, Inc., 121 South 13th Street, Suite 100, Lincoln, Nebraska 68508, Attention: Corporate Secretary. The Company's Bylaws are also posted on the Company's investor relations website at www.nelnetinvestors.com under “Corporate Governance” - “Governance Documents.” Risk and Finance Committee The Risk and Finance Committee is composed of Ms. Farrell, and Messrs. Cintani, Graff, and Henning. The Committee held four meetings in 2019. The Risk and Finance Committee has principal oversight responsibility with respect to the Company's enterprise- wide risk management framework, including the significant strategies, policies, procedures, and systems used to identify, assess, measure, and manage the major risks facing the Company and oversight of the Company's material financial matters, including capital management, funding strategy, investments, and acquisitions that are material to the Company's business. Executive Committee The Executive Committee is composed of Ms. Farrell and Messrs. Dunlap and Henning. The Executive Committee held no formal meetings in 2019. The Executive Committee exercises all of the powers of the full Board in the management of the business and affairs of the Company during the intervals between meetings of the full Board, subject only to limitations as the Board may impose from time to time, or as limited by applicable law. Meetings of the Board The Board of Directors held five meetings in 2019. All directors attended at least 75% of the meetings of the Board and committees on which they serve. Attendance at Annual Meetings of Shareholders The Company does not have a policy regarding director attendance at the annual meetings of shareholders. All directors attended the prior year's annual meeting of shareholders, with the exception of Messrs. Abel and Reardon. Director Compensation Overview The Company’s compensation program for Non-Employee Directors is designed to reasonably compensate Non-Employee Directors for their service on the Board of Directors and its committees, in amounts commensurate with their roles and involvement, and taking into consideration the significant amount of time they devote in fulfilling their duties in view of the Company’s size, complexity, and risks, as well as the experience and skill levels required of members of the Board. The Company intends to compensate its Non-Employee Directors in a manner that attracts and retains high quality Board members, and ensures that their interests are aligned with the shareholders. The People Development and Compensation Committee reviews the compensation program for Non-Employee Directors on an annual basis and makes recommendations regarding the program to the Board. In addition to the various components of the Company’s compensation program for Non-Employee Directors discussed under the "Director Compensation Elements," “Director Compensation Table for Fiscal Year 2019,” and “Share Ownership Guidelines for Board Members” captions below, the Company has a policy prohibiting members of the Board of Directors from short sales of the Company’s stock, buying or selling call or put options or other derivatives related to the Company’s stock, or engaging in hedging or monetization transactions with respect to any of their direct or indirect interest in the Company’s stock, including through the use of financial instruments such as prepaid variable forwards, equity swaps, collars, and exchange funds. The Company's policy also requires members of the Board who wish to buy or sell the Company’s stock to do so only through Rule 10b5-1 stock trading plans, and limits the use of margin accounts or other pledge arrangements by Board members with respect to the Company's stock. See "Compensation Discussion and Analysis" - "Prohibition on Hedging and Short Sales, and Limits on Share Pledging." Director Compensation Elements Non-Employee Directors are primarily compensated through an annual retainer in the base amount of $100,000 for each Non- Employee Director. An additional annual retainer of $10,000 is paid to Non-Employee Directors who serve as members on each of the Audit Committee, People Development and Compensation Committee, Compliance Committee, Nominating and Corporate Governance Committee, Risk and Finance Committee, or Executive Committee, as applicable. The Chair of the Audit Committee is also paid an additional $12,500 annual retainer fee. Non-Employee Directors are also compensated for Board meeting and 14 committee meeting attendance, earning $1,000 for each Board and committee meeting attended. Mr. Dunlap, who is an employee of the Company, does not receive any consideration for participation in Board or committee meetings. The Company has a Directors Stock Compensation Plan for Non-Employee Directors that was approved by the Board of Directors and shareholders, pursuant to which Non-Employee Directors can elect to receive their annual retainer fees in the form of cash or in shares of the Company's Class A common stock. If a Non-Employee Director elects to receive Class A common stock, the number of shares of Class A common stock that will be granted will be equal to the amount of the annual retainer fee otherwise payable in cash divided by 85 percent of the fair market value of a share of Class A common stock on the date the fee is payable. Non-Employee Directors who choose to receive Class A common stock may also elect to defer receipt of the Class A common stock until termination of their service on the Board of Directors. Any dividends paid in respect of deferred shares during the deferral period will also be deferred in the form of additional shares and paid out at termination of service on the Board of Directors. This plan may be amended or terminated by the Board of Directors at any time, but no amendment or termination will adversely affect a Non-Employee Director's rights with respect to previously deferred shares without the consent of the Non-Employee Director. Other Compensation The Company offers health, dental, and vision insurance coverage benefits under the Company’s insurance plans to Non-Employee Directors who do not currently participate in another similar group insurance plan. Such insurance coverage is provided on generally the same terms and conditions that apply to employees of the Company. The Company offers a matching gift program in which all employees with at least six months of service and all members of the Board of Directors are eligible to participate. Under this program, for every dollar ($100 minimum) that an employee or Board member contributes in cash and securities to an eligible charitable organization or educational institution, the Company will make matching donations of additional funds, subject to terms and conditions applicable in an equal manner to all employees and Board members. The total maximum dollar amount payable under the program is $25,000 per director or employee per calendar year. Director Compensation Table for Fiscal Year 2019 The following table sets forth summary information regarding compensation of Non-Employee Directors for the fiscal year ended December 31, 2019. 2019 Compensation All other compensation ($) Director name James P. Abel Preeta D. Bansal William R. Cintani Kathleen A. Farrell David S. Graff Thomas E. Henning JoAnn M. Martin (e) Kimberly K. Rath Michael D. Reardon (f) Fees paid in cash ($) (a) Stock awards ($) (b) Matching gift program (c) Insurance premiums Total ($) 21,000 21,000 19,000 23,000 21,000 19,000 — 17,000 137,000 152,978 152,978 141,206 164,750 152,978 167,707 — 141,206 — — 24,950 25,000 11,250 — — — 25,000 — — 8,891 (d) — — — — — — — 173,978 207,819 185,206 199,000 173,978 186,707 — 183,206 137,000 (a) (b) Amounts represent cash paid to Non-Employee Directors for attendance at Board and committee meetings. The amount for Mr. Reardon also includes his annual retainer fees ($120,000), which he elected to receive in cash. Each of the Non-Employee Directors, with the exception of Mr. Reardon, elected to receive their annual retainer fees for 2019 in the form of awards of the Company's Class A common stock or deferred shares under the Directors Stock Compensation Plan, which awards are within the scope of Financial Accounting Standards Board Accounting Standards Codification Topic 718 ("FASB ASC Topic 718"). As such, the amounts under “stock awards” in the table above represent the grant date fair value of the stock or deferred shares computed in accordance with FASB ASC 15 Topic 718 based on the closing market price of the Company's Class A common stock on the date of issuance, June 21, 2019, of $57.99 per share. Under this plan, the Company uses 85 percent of the closing market price of the Company's Class A common stock on the date the annual retainer fees are payable to calculate the number of shares to be issued under this plan. Additional information about the Company’s accounting for stock-based compensation under FASB ASC Topic 718 can be found in Note 2 - “Summary of Significant Accounting Policies and Practices - Compensation Expense for Stock Based Awards” and Note 19 - “Stock Based Compensation Plans - Non-employee Directors Compensation Plan” of the Notes to Consolidated Financial Statements included in the Company’s Annual Report on Form 10-K for the fiscal year ended December 31, 2019. (c) (d) (e) Amounts represent contributions by the Company to charitable organizations during 2019 under to the Company's matching gift program. Ms. Bansal received health, dental, and vision insurance coverage benefits from the Company during 2019, since Ms. Bansal does not currently participate in another similar group insurance plan. This amount represents the dollar value of insurance premiums paid by the Company in 2019 related to these benefits. Ms. Martin was elected to the Board by the Board of Directors on March 19, 2020, thus had no compensation in 2019. (f) Mr. Reardon resigned from the Board of Directors on March 20, 2020. Share Ownership Guidelines for Board Members The People Development and Compensation Committee of the Board of Directors believes that Board members should have a significant equity interest in the Company. In order to promote equity ownership and further align the interests of Board members with the Company's shareholders, the Committee has recommended and the Board has adopted Share Ownership Guidelines for Board members. Under these guidelines, each Non-Employee Director is encouraged to own shares of the Company's Class A common stock with a value of 50% of the amount obtained by multiplying the base annual retainer fee ($100,000) by the number of years the Director has served on the Board. As of February 28, 2020, all Non-Employee Directors, with the exception of Mr. Reardon, whose ownership was less than one percent under the calculated guideline, owned an amount of shares in excess of that suggested by the guidelines. EXECUTIVE OFFICERS Under the Company's Bylaws, each executive officer holds office for a term of one year or until his or her successor is elected and qualified. The executive officers of the Company are elected by the Board of Directors at its annual meeting immediately following the annual meeting of shareholders. The following sets forth the executive officers of the Company, including their names, their ages, their positions with the Company, and if different, their business experience during the last five years. See "Proposal 1 - Election of Directors" for biographical information regarding Mr. Dunlap. Name and Age Position and Business Experience Terry J. Heimes, 55 James D. Kruger, 57 William J. Munn, 52 Chief Operating Officer, Nelnet, Inc., January 2014 - present Chief Financial Officer, Nelnet, Inc., October 1998 - December 2013 Chief Financial Officer, Nelnet, Inc., January 2014 - present Controller, Nelnet, Inc., October 1998 - December 2013 Corporate Secretary, Chief Governance Officer, and General Counsel, Nelnet, Inc., September 2006 - present Jeffrey R. Noordhoek, 54 Chief Executive Officer, Nelnet, Inc., January 2014 - present President, Nelnet, Inc., January 2006 - December 2013 Timothy A. Tewes, 61 President, Nelnet, Inc., January 2014 - present President and Chief Executive Officer, Nelnet Business Solutions, Inc., a subsidiary of Nelnet, Inc., May 2007 - December 2013 16 EXECUTIVE COMPENSATION Compensation Discussion and Analysis In this Compensation Discussion and Analysis ("CD&A"), we provide a detailed description of our executive compensation philosophy and program for our named executive officers (the “Named Executive Officers”) for fiscal 2019: Name Michael S. Dunlap Jeffrey R. Noordhoek Terry J. Heimes James D. Kruger Title Executive Chairman Chief Executive Officer Chief Operating Officer Chief Financial Officer Timothy A. Tewes President Executive Summary This CD&A describes the key principles and measures that underlie the Company's executive compensation policies for the Named Executive Officers. The Company's stated compensation philosophy is clear and consistent, that it pays for performance. Its Named Executive Officers are accountable for the performance of the Company and the business segment or segments they manage, and are compensated based on that performance. For 2019, the Company had net income, excluding derivative market value adjustments, of $199.7 million, or $4.99 per share. Net income, excluding derivative market value adjustments, and the corresponding per share measure are non-GAAP financial measures, and there is no comprehensive, authoritative guidance for the presentation of these measures. For information on how these measures are calculated from the Company’s financial statements, reconciliations to the most directly comparable financial measures for 2019 under GAAP, and other information about these measures, please refer to Item 7. Management’s Discussion and Analysis of Financial Condition and Results of Operations - Overview - GAAP Net Income and Non-GAAP Net Income, Excluding Adjustments on pages 38-39 of the Company’s 2019 Annual Report on Form 10-K filed with the SEC on February 27, 2020. The Company has delivered strong financial results supported by achievement of its key objectives of growing its core businesses, driving diversification around its core, and improving customer experiences. The Company believes that its executive compensation program contributes to a high-performance culture where executives deliver results that drive sustained growth. The following discussion summarizes the Company's executive compensation program, compensation philosophy, objectives, and process considered in determining compensation for its Named Executive Officers. People Development and Compensation Committee Governance and Processes The Company's Board of Directors has designated the People Development and Compensation Committee (referred to in this CD&A as the "Committee") to assist the Board in discharging its responsibilities relating to: • • • • determining and administering the compensation of the Named Executive Officers and other executive officers of the Company administering certain compensation plans, including stock, incentive, and commission compensation plans assessing the effectiveness of succession planning relative to key executive officers of the Company reviewing, approving, and overseeing certain other benefit plans The Committee consists solely of independent members (as defined by the rules of the New York Stock Exchange) of the Board of Directors, and operates under a written charter adopted by the Board. The Committee policy requires that all of the Company's compensation plans and practices shall comply with applicable laws, rules, and regulations. As discussed below, the Committee works with members of management to ensure a strong company culture and robust practices for people development and executive compensation exist, in order to deliver quality products and services and serve the Company's multiple stakeholders - customers, employees, shareholders, and the communities in which it operates. The Committee or a 17 subcommittee reviews and approves the Company's compensation framework and specific executive compensation determinations. The Committee also coordinates with the Board of Directors to monitor the performance of the Named Executive Officers throughout the year to ensure that the compensation being provided meets the performance incentive objectives of the Company's compensation framework. Role of Management in Recommending Executive Compensation The Executive Director of People Services, the Chief Executive Officer, and the Chief Operating Officer, referred to herein as the internal committee, are directed by the Committee to develop, recommend, and administer in a consistent manner, compensation objectives and programs for the Committee and the Board of Directors to consider and approve. As part of this process, each year the internal committee, with the assistance of other members of management, reviews and updates as necessary the Company's compensation philosophy and strategy statement, and develops a proposed executive compensation framework. The internal committee is also tasked with ensuring that the objectives of the programs are aligned with the Company's long-term strategy. The Executive Chairman makes compensation recommendations for himself and the other Named Executive Officers for the Committee's review and approval. Objectives of Executive Compensation The general compensation philosophy of the Company, as an organization that values the long-term success of its shareholders, customers, and employees (referred to by the Company as associates), is that the Company will pay fair, competitive, and equitable compensation that is designed to encourage focus on the long-term performance objectives of the Company and is differentiated based on both the individual’s performance and the performance of their respective business segment. In carrying out this philosophy, the Company structures its overall compensation framework with the general objectives of encouraging ownership, savings, wellness, productivity, and innovation. In addition, total compensation is intended to be market competitive compared to select industry surveys, internally consistent, and aligned with the philosophy of a performance-based organization. The Company believes this approach will enable it to attract, retain, develop, and motivate the talent required for the Company's long- term success, encourage the creation of shareholder value, and recognize high levels of associate performance. To build a strong work environment and culture that encourages innovation, development, and high performance, the Company structures its total compensation to be comprised of: Element Base salary Purpose Competitive cash compensation to retain and attract executive talent. Annual performance-based incentive bonuses Drive the achievement of key short-term business results and recognize individual contributions to these results. Characteristics Fixed cash compensation based upon the scope and complexity of the role, individual experience, performance, and market competitiveness. Reviewed annually and adjusted as warranted. Primary mode to differentiate compensation based on performance. Annual incentives based on a combination of financial metrics and individual goals. Potential cash-equity mix through performance-based incentive program stock election framework. Restricted stock awards Promote long-term focus on shareholder value, serve as an important retention tool, and encourage equity stake in the Company. Equity-based compensation subject to vesting periods, or other restrictions on sale, generally for three to ten years. Health, retirement, and other benefits Intrinsic rewards Designed to provide competitive health insurance options and income replacement upon retirement, death, or disability. Non-cash rewards to increase engagement, provide opportunities for individual growth, and subsidize learning initiatives. Benefits for Named Executive Officers are the same as those available to all associates. Professional training and development, coaching, mentoring, tuition reimbursement, and community activity support. The annual and long-term performance measures used by the Compensation Committee in reviewing and determining executive compensation are reflected in the Executive Officers Incentive Compensation Plan described below. 18 Summary of Executive Compensation Policies and Practices What we do What we don't do No employment contracts No significant additional perks to executive officers No individual change in control/severance compensation arrangements No stock options Pay for performance Periodically utilize external, independent compensation consulting firm(s) Mitigate undue risk in compensation programs Provide guidelines for stock ownership Maintain minimum vesting periods for stock awards Consider market data across industries to obtain a general sense of current compensation practices and decisions Prohibit hedging and short sales of stock Provide for clawback of incentive-based compensation Compensation Policies and Practices - Risk Management The Committee and the internal committee review incentive compensation arrangements to ensure that the arrangements do not encourage associates to take unnecessary and excessive risks. This risk assessment process includes a review of program policies and practices; program analysis to identify risk and risk control related to the programs; and determinations as to the sufficiency of risk identification, the balance of potential risk to potential reward, risk control, and the support of the programs and their risks to the Company's strategy. A balance between Company and business segment performance is required to protect against unnecessary risks being taken. Based on their review and evaluation of the Company's compensation policies and practices for its associates, the Committee, the internal committee, and the Company’s Enterprise Risk Management team believe that the Company’s policies and practices do not create inappropriate or unintended significant risks that are reasonably likely to have a material adverse effect on the Company. Prohibition on Hedging and Short Sales, and Limits on Share Pledging The Company has a policy prohibiting members of the Board of Directors and all associates and officers, including senior management, from engaging in short sales of the Company’s stock or buying or selling call or put options or other derivatives related to the Company’s stock. The policy also prohibits these persons from engaging in hedging or monetization transactions with respect to any of their direct or indirect interest in the Company’s stock, including through the use of financial instruments such as prepaid variable forwards, equity swaps, collars, and exchange funds. The policy discourages Board members, officers and associates from holding the Company’s stock in a margin account or otherwise pledging the Company’s stock as collateral for a loan, unless such activity receives the prior approval of the Company, which may be granted in the Company’s discretion if the individual can clearly demonstrate the financial capacity and the ability to promptly meet a margin call or repay the loan without resorting to the pledged stock. In addition, such margin account or other pledge arrangements by a Board member or an officer are limited by the policy to no more than 25 percent of such individual’s total shares of the Company’s stock held. Clawback Policy The Company has a Clawback Policy, which gives the Board of Directors or any appropriate committee of the Board (such as the Committee), the discretion to recover incentive awards paid to any current or former executive officers of the Company if the financial results used to determine the amount of the incentive awards are materially restated and/or such person engaged in fraud or intentional misconduct. The policy was adopted in advance of final rules or regulations to be issued by the SEC and/or the New York Stock Exchange to implement the incentive-based compensation recovery requirements under the Dodd-Frank Wall Street Reform and Consumer Protection Act. The Board has reserved the right to revise or restate the policy to any extent necessary to comply with such final rules or regulations, and application may be made on a retroactive basis, if necessary, to comply with such final rules or regulations. Say on Pay The Company has determined, consistent with the preference expressed by the Company’s shareholders at the 2017 annual meeting of shareholders and the related prior recommendation by the Board of Directors, that it is important for the shareholders to have an opportunity to cast an advisory vote on executive compensation on an annual basis as a means to express their views regarding 19 the Company's executive compensation philosophy, plans, programs, policies, and decisions, all as disclosed in the Company's proxy statement. Accordingly, shareholders will have the opportunity to cast an advisory vote on executive compensation at this year's annual meeting. See Proposal 3 in this proxy statement with respect to a shareholder advisory vote on the compensation of the Company's Named Executive Officers as disclosed in this proxy statement. Although the shareholder vote on this proposal is non-binding, the Committee will consider the outcome of the vote when making future compensation decisions for Named Executive Officers. Consideration of Prior Say on Pay Votes In making executive compensation determinations, the Committee has also considered the results of last year's advisory shareholder vote approving the compensation of the Company's Named Executive Officers as disclosed in the proxy statement for the 2019 annual meeting of shareholders. At the 2019 annual meeting, the Company's shareholders overwhelmingly approved such executive compensation by 99.9 percent of the votes cast. These voting results, and similar previous say on pay voting results, have strongly communicated the shareholders' endorsement of the Committee's decisions and policies to date. The Board of Directors and the Committee reviewed these final vote results and determined that, given the significant level of support from the shareholders, no significant changes to the Company's executive compensation plans, practices, and policies were necessary at this time based on the say on pay vote results. The Committee will continue to consider the results from this year's and future advisory shareholder votes regarding the Company's executive compensation programs. Use of Compensation Consultant To assist in establishing and maintaining a competitive overall compensation program, the Committee periodically engages a nationally recognized compensation consulting firm to review the compensation levels and practices for the most highly compensated executive officers of the Company, and compare those to the compensation levels and practices for executives holding comparable positions within select industries and companies. Through comparisons of the base salaries, the annual performance- based incentives, other benefit programs, and total compensation for the Company's Executive Chairman, Chief Executive Officer, Chief Operating Officer, Chief Financial Officer, President, and other executives, the consultant's analysis is used to develop a complete executive compensation package that is designed to be competitive in the marketplace. The study is also used by the Committee to identify potential gaps or inconsistencies in total compensation and to identify appropriate compensation levels and compensation design features and trends. The study is conducted as part of the Committee's oversight of the Company's continuing efforts to attract, retain, and motivate top executive talent that will drive the Company's performance results. In 2019, the Committee engaged Towers Watson as its independent compensation consultant to review executive compensation at the Company. The result of this review showed that executive compensation at the Company is generally comparable to that of similar companies in terms of revenue and size. In connection with the 2019 engagement of Towers Watson, the Committee determined that Towers Watson does not perform any other services for the Company or have any relationship that would raise a conflict of interest or impair the independence of Towers Watson with respect to its 2019 services or its expected future services for the Committee. In making this determination, the Committee discussed and considered the following factors: (i) the fact that Towers Watson does not perform any other services for the Company; (ii) the amount of fees received by Towers Watson from the Company as a percentage of the total revenue of Towers Watson; (iii) the policies and procedures of Towers Watson that are designed to prevent conflicts of interest; (iv) any business or personal relationship between any individual Towers Watson consultant involved in the engagement by the Committee and a member of the Committee; (v) any stock of the Company owned by an individual Towers Watson consultant involved in the engagement; and (vi) any business or personal relationship between Towers Watson or any individual Towers Watson consultant involved in the engagement and any executive officer of the Company. When developing the proposed compensation framework for the Committee to consider each year, the internal committee also reviews broad-based third party surveys of executive compensation to obtain a general sense of current compensation levels and practices in the marketplace. These reviews are based on information from various publicly available databases and publications. The purpose of these reviews is to ensure compensation is aligned with the market for comparable jobs so the Company can continue to attract, retain, motivate, and reward qualified executives. In addition, the internal committee considers the average salary adjustments anticipated in the marketplace each year, and develops proposed target increases for the Company's Named Executive Officers accordingly. In this way, the Company seeks to ensure that any changes to compensation are appropriate and reflect material changes in the market. 20 Elements of Executive Compensation The Company's Named Executive Officers are compensated with a combination of annual base salary, annual performance-based incentive bonus payments, and, with respect to the Named Executive Officers other than Mr. Dunlap, the issuance of shares of the Company's Class A common stock, which are typically restricted from sale for some period of time. Mr. Dunlap has historically not received equity compensation because he already owns a significant amount of the Company's common stock and controls the majority of voting rights of the Company, and thus already has significant interests aligned with the other shareholders of the Company. In determining levels of compensation, the Committee and the internal committee work together to establish targeted total compensation for each executive and then allocate that compensation among base salary and performance-based incentive compensation. Each element of compensation is designed to be competitive with comparable companies and to align management's incentives with the long-term interests of the Company's shareholders. The Committee considers the Executive Chairman's recommendations and determines the amount of each element of compensation by reviewing the current compensation mix for each of the Named Executive Officers in view of the Company's performance, the Company's long-term objectives, and the scope of that executive's responsibilities. The Committee seeks to achieve an appropriate balance between base salaries, annual performance-based bonus incentives, and longer-term equity incentives for all of the Company's Named Executive Officers. See "Objectives of Executive Compensation" above for a summary of the various elements of executive compensation. Further details are provided below. Base Salaries Base salaries for the Company's Named Executive Officers are based on an evaluation of individual responsibilities of each person, market comparisons from publicly available compensation surveys to obtain a general sense of current compensation levels and practices in the marketplace, and an assessment of each individual's performance. Changes in base salaries of Named Executive Officers depend on projected changes in the external market as well as individual contributions to the Company's performance. Base salaries for Messrs. Dunlap, Noordhoek, and Heimes were increased by 3% for 2019, and base salaries for Messrs. Tewes and Kruger were increased by 18.2% for 2019, primarily as a result of strong individual performances and Company results in the prior year, increased responsibilities for these officers resulting from the Company’s continued focus on growing our core, diversifying with focus, and developing and implementing asset replacement strategies to mitigate the eventual runoff of all Federal Family Education Loan Program (“FFELP”) student loans. The executives’ salary adjustments also reflected the Committee’s determination of amounts appropriate to maintain the competitiveness of the base salary levels for the corresponding officer positions. Specific increased responsibilities included those related to the successful integration of Tuition Management Solutions; the continued work on the Company's analyses of and responses to the Department of Education's (the "Department") contract procurement proposals for servicing all loans owned by the Department; submission of an application to establish Nelnet Bank as an FDIC-insured Utah industrial bank intended to provide a reliable source of education funding for families; increase and extension of the Company’s corporate line of credit; the substantial completion of the build-out in Lincoln, Nebraska and expansion to other communities of ALLO Communication's ("ALLO") fiber network, as well as continued growth of market share and efficient operations in ALLO's communities; development of a new state of the art platform for consumer loan servicing and relaunch of private education loan originations with Union Bank; enhancement of payment products and services and market share growth in the Company's Education Technology, Services, and Payment Processing operating segment; continued real estate investments focused on the development of commercial properties in the Midwest, and particularly in Lincoln, Nebraska, where the Company's headquarters are located; expansion of the Company’s investments in tax-advantaged projects promoting renewable energy resources (solar projects) nationally; and continued success in attracting, retaining and developing top notch talent for the Company. Executive Officers Incentive Compensation Plan In 2019, the Board of Directors established an Executive Officers Incentive Compensation Plan (the "Plan"), which provides the Company's executive officers with an opportunity to earn performance-based incentive compensation that aligns their interests with the interests of shareholders, including the achievement of long-term strategic business objectives. The Plan, which is administered by the Committee or a subcommittee of the Committee, was approved by the Company's shareholders at the 2019 annual meeting of shareholders. The performance measures upon which incentive compensation under the Plan is based are generally described as follows: • Levels of earnings per share; net income; income before income taxes; net interest income; earnings per share or net income excluding derivative market value and other adjustments as the Committee deems appropriate in the Committee’s sole discretion; revenues from fee-based businesses (including measures related to the diversification 21 of revenues from fee-based businesses and increases in revenues through both organic growth and acquisitions); federally insured student loan assets; private education loan assets; consumer loan assets; and total assets; • Return on equity (including return on tangible equity), return on assets or net assets, return on capital (including return on total capital or return on invested capital), return on investments, and ratio of equity to total assets; • • Student loan servicing and other education finance or service customer measures (including loan servicing volume and service rating levels under contracts with the Department); Success or progress made in efforts to obtain new contracts with the Department, as well as other loan servicing business; • Cash flow measures (including cash flows from operating activities, cash flow return on investment, assets, equity, or capital, and generation of long-term cash flows (including net cash flows from the Company’s securitized loan portfolios)); • Market share; • Customer satisfaction levels, and employee engagement, productivity, retention, and satisfaction measures; • Operating performance and efficiency targets and ratios, as well as productivity targets and ratios; • Levels of, or increases or decreases in, operating margins, operating expenses, and/or nonoperating expenses; • Business segment, division or unit profitability and other performance measures (including growth in customer base, revenues, earnings before interest, taxes, depreciation and amortization, and segment profitability, as well as management of operating expense levels); • Acquisitions, dispositions, projects, or other specific events or transactions (including specific events or transactions intended to enhance the long-term strategic positioning of the Company); • Performance of investments; • Regulatory compliance measures; or • Any other criteria as determined by the Committee in its sole discretion. The Plan provides that in no event shall the amount paid under the Plan to a participant with respect to any calendar year exceed 150% of that participant’s base salary for that year. While the Company strives for overall consistency in executive compensation, the Named Executive Officers' potential incentive bonus amounts can vary by business segment due to differences in roles, business models, and business performance. Incentives are generally positioned to be within a median range of the marketplace based on available broad based data. The Company's 2019 annual performance-based incentive bonuses were paid, at the Named Executive Officers' option (other than Mr. Dunlap, who received his incentive in cash), as either 100 percent cash, 100 percent stock, or 50 percent cash/50 percent stock. Those electing stock also received an additional number of shares representing 15 percent of the amount of their bonus they elected to receive in stock, in order to promote increased and continued share ownership. All shares issued as part of the incentive bonus awards were issued pursuant to the Company's Restricted Stock Plan discussed below, and were fully vested but may not be transferred for three years from the date of issuance. Performance of Named Executive Officers for 2019 In 2019, the Executive Chairman (Mr. Dunlap), Chief Executive Officer (Mr. Noordhoek), Chief Operating Officer (Mr. Heimes), Chief Financial Officer (Mr. Kruger), and President (Mr. Tewes) were selected by the Committee to participate in and be eligible for incentive compensation awards under the Plan for the year ended December 31, 2019. The Committee established performance goals for these individuals in early 2019 utilizing certain of the performance measures under the Plan referred to above and described in more detail below, and in early 2020 the Committee reviewed the level of attainment of the performance goals for these individuals for 2019 under the terms of the Plan in establishing incentive awards for each. For 2019, the Committee considered 22 the Named Executive Officers’ performance in respect of the Plan measures described above, including achievements in strategic positioning and growth of the Company's core segments' operating results, including diversification; positive response, position, or award with respect to the Department's proposed new student loan servicing contract(s); increase in the number of ALLO customers; the preparation and filing of an application for an industrial bank charter to establish Nelnet Bank in Utah; the origination or acquisition of private education and consumer loans; the development and implementation of certain technology projects, including a multi-asset class origination and servicing system and various cloud strategies; business segment performance; loan acquisitions and future cash flow from the Company's loan portfolio; cash position and liquidity; successful completion of ALLO's fiber optic communications network in Lincoln, Nebraska; improved stabilization and enhancements to operating systems and infrastructure; real estate and solar project investments; and individual achievement. Under the Plan, the Named Executive Officers could qualify for total incentives up to 150% of their base salary. Based on the Named Executive Officers’ performance in 2019, the Committee awarded the Named Executive Officers incentives equal to 112.5% of their respective base salaries, as reflected in the Summary Compensation Table below. Restricted Stock Plan The Company maintains a Restricted Stock Plan to reward performance by associates, including the Named Executive Officers other than Mr. Dunlap. This plan permits the Committee to reward a recipient with an award of shares of the Company's Class A common stock, which, in the Committee's sole discretion, may have vesting requirements or other restrictions. These awards are designed to recognize and reward associates, and to connect the associates' financial interests directly to the Company's performance, thereby encouraging associates to focus their efforts as owners of the Company. As discussed above, shares issued in payment of annual performance-based incentive bonuses and other equity compensation awards are issued under the Restricted Stock Plan. The Company does not grant stock options, since management and the Committee believe that awards of shares of restricted stock are a better method of encouraging associates, including the Named Executive Officers, to focus on the long-term value of the Company. Employee Share Purchase Plan The Company also has an Employee Share Purchase Plan (“ESPP”) that assists all associates, including the Named Executive Officers, in becoming owners and increasing their ownership of the Company. Under the ESPP, associates may purchase shares of the Company's Class A common stock through payroll deductions, at a discount of 15% to the lower of the average market price of the Company's stock on the first and last trading days of each calendar quarter. Termination or Change-in-Control Compensation Other than with respect to provisions in restricted stock award agreements for certain previous grants of restricted stock to Messrs. Kruger and Tewes whereby any unvested shares of restricted stock will become fully vested upon a termination of employment as a result of death, disability, or retirement after reaching the age to receive full social security benefits, which provisions are generally included in all agreements for restricted stock awards granted to associates, the Company does not have any contracts, agreements, plans, or arrangements with the Named Executive Officers that provide for payment in connection with any termination of employment or change-in-control of the Company. Share Ownership Guidelines and Trading Requirements The Compensation Committee believes that the Named Executive Officers should have a significant equity interest in the Company. In order to promote equity ownership and further align the interests of management with the Company's shareholders, the Board of Directors has adopted Share Ownership Guidelines for management associates at certain levels. Under these guidelines, each Named Executive Officer is encouraged to own at least 15,000 shares of Company stock. As of February 28, 2020, all of the Named Executive Officers met these guidelines, and are thereby subject to downside risk in the Company's equity performance. The Company has adopted a policy requiring officers who wish to buy or sell the Company's stock to do so only through Rule 10b5-1 stock trading plans. This requirement is designed to enable officers to diversify a portion of their holdings in an orderly manner as part of their retirement and tax planning or other financial planning activities. The use of Rule 10b5-1 stock trading plans serves to reduce the risk that investors will view routine portfolio diversification stock sales by executive officers as a signal of negative expectations with respect to the future value of the Company's stock. In addition, the use of Rule 10b5-1 stock trading plans reduces the potential for concerns about trading on the basis of material non-public information that could damage the reputation of the Company. 23 Other Compensation In addition to base salaries and annual performance-based incentive compensation, the Company provides the Named Executive Officers with certain other customary benefits, including health, dental, and vision coverage to assist the Company in remaining competitive for superior talent and to encourage executive retention. A critical aspect of the Company's health benefits program is its focus on associate health and wellness. The Company encourages all associates, including the Named Executive Officers, to take a proactive approach to their personal health and wellbeing. The Company has implemented wellness programs which encourage and reward associates for healthy habits by offering the opportunity to lower their insurance premiums. The Company owns a controlling interest in an aircraft due to the frequent business travel needs of the Named Executive Officers and the limited availability of commercial flights in Lincoln, Nebraska, where the Company's headquarters are located. An entity owned by Mr. Dunlap owns the remaining interest in the aircraft. Consistent with guidance issued in 2010 from the Federal Aviation Administration, the Company can be reimbursed for the pro rata cost of owning, operating, and maintaining the aircraft when used for routine personal travel by certain individuals whose positions with the Company require them to routinely change travel plans within a short time period. Accordingly, the Company allows certain members of executive management to utilize its interest in the aircraft for personal travel when it is not required for business travel. The value of the personal use of the aircraft is computed based on the Company's aggregate incremental costs, which include variable operating costs such as fuel costs, mileage costs, trip-related maintenance and hangar costs, on-board catering, landing/ramp fees, and other miscellaneous variable costs. Any amounts regarding the value of any personal use of the aircraft by a Named Executive Officer are included in the separate table for all other compensation under the Summary Compensation Table below. The Company also offers the Named Executive Officers other perquisites, including indoor parking and use of Company-sponsored suites at local venues for personal use when not occupied for business purposes. Tax Treatment of Compensation The Committee considers and evaluates the impact of applicable tax laws with respect to the Company’s executive compensation policies, plans, and arrangements. For example, Section 162(m) of the Internal Revenue Code generally imposes a $1,000,000 limitation on a public company's income tax deductibility in any tax year with respect to compensation paid to any individual who served as the chief executive officer or the chief financial officer at any time during the taxable year and the three other most highly compensated executive officers of the company (other than the chief executive officer or the chief financial officer) for the taxable year, and once an executive becomes covered by Section 162(m), any compensation paid to him or her in future years (including post-employment) becomes subject to the Section 162(m) limitation on tax deductibility. While the Committee considers tax consequences to the Company as a factor when it makes compensation determinations, the Committee reserves discretion to award compensation to the Named Executive Officers that is not deductible under Section 162(m) as the Committee deems appropriate. Matching Gift Program The Company offers a matching gift program in which all associates with at least six months of service and all members of the Board of Directors are eligible to participate. Under this program, for every dollar ($100 minimum) that an associate or Board member contributes in cash or securities to an eligible charitable organization or educational institution, the Company will make matching donations of additional funds, subject to terms and conditions applicable in an equal manner to all associates and Board members. The total maximum dollar amount payable under the program is $25,000 per associate or Board member per calendar year. Any amounts matched by the Company for the Named Executive Officers per the provisions of the program are included in the summary compensation table below. Conclusion By ensuring market competitive compensation that is aligned with a performance-based organization philosophy, the Company expects to attract, motivate, and retain the executive talent required to achieve the Company's long-term goals. This is critical, as management and the Committee know that the Company's success hinges on having engaged executives who are committed to the Company. 24 People Development and Compensation Committee Report The People Development and Compensation Committee has reviewed and discussed the above Compensation Discussion and Analysis with management. Based on this review and discussion, and such other matters deemed relevant and appropriate by the People Development and Compensation Committee, the People Development and Compensation Committee recommended to the Board of Directors that the Compensation Discussion and Analysis be included in this proxy statement and incorporated by reference in the Company's Annual Report on Form 10-K for the year ended December 31, 2019. Respectfully submitted, Kimberly K. Rath, Chair James P. Abel Preeta D. Bansal Summary Compensation Table for Fiscal Years 2019, 2018, and 2017 The following table sets forth summary information with respect to the compensation paid and bonuses granted for services rendered by the Company's Chief Executive Officer and Chief Financial Officer, as well as each of the Company's other three most highly compensated executive officers during the year ended December 31, 2019 (collectively, the “Named Executive Officers”). The information presented in the table relates to the fiscal years ended December 31, 2019, 2018, and 2017. Salaries and bonuses are paid at the discretion of the Board of Directors. Name and principal position Michael S. Dunlap Executive Chairman Jeffrey R. Noordhoek Chief Executive Officer Terry J. Heimes Chief Operating Officer James D. Kruger Chief Financial Officer Timothy A. Tewes President Year 2019 2018 2017 2019 2018 2017 2019 2018 2017 2019 2018 2017 2019 2018 2017 Annual compensation Salary ($) Bonus ($) (a) All other compensation ($) (b) 546,343 530,450 515,000 737,591 716,107 695,250 737,591 716,107 695,250 650,000 550,000 515,000 650,000 550,000 515,000 615,000 663,063 643,750 892,265 1,029,447 999,436 892,265 962,290 869,063 786,941 687,500 643,750 786,941 687,500 643,750 33,666 21,522 50,199 36,623 38,203 43,956 35,173 38,078 36,645 17,003 33,860 39,573 38,275 38,880 20,327 Total ($) 1,195,009 1,215,035 1,208,949 1,666,479 1,783,757 1,738,642 1,665,029 1,716,475 1,600,958 1,453,944 1,271,360 1,198,323 1,475,216 1,276,380 1,179,077 (a) Amounts represent bonuses paid in 2020, 2019, and 2018 for services rendered during the 2019, 2018, and 2017 calendar years, respectively. The Company's annual performance-based incentive bonuses were paid, at the executives' option (other than to the Executive Chairman, who received his incentive in cash), as either 100 percent cash, 100 percent stock, or 50 percent cash/50 percent stock. Those electing stock also received an additional number of shares representing 15 percent of the amount of their bonus they elected to receive in stock, to promote increased and continued share ownership. All shares issued as part of the incentive bonus award were issued pursuant to the Company's Restricted Stock Plan and were fully vested, but may not be transferred for three years from the date of issuance. The stock issuances for annual performance bonuses were not made as equity incentive plan awards contemplating future service or performance. See "Grants of Plan- Based Awards Table for Fiscal Year 2019" below for information relating to the shares issued in 2019 with respect to 2018 annual incentive bonus payments. 25 (b) “All other compensation” includes the following: All other compensation Employer matching contributions under 401(k) Plan ($) Premiums on life insurance ($) Matching gift program ($) (1) Dividends on restricted stock ($) (2) Personal use of company aircraft ($) (3) Personal use of company suite at sporting events ($) (3) Other ($) (4) Total ($) 11,200 11,000 10,800 11,200 11,000 10,800 11,200 11,000 10,800 11,200 11,000 10,800 11,200 11,000 10,800 423 390 420 423 390 420 423 390 420 423 390 420 423 390 420 — — — 25,000 25,000 25,000 22,750 24,375 23,100 2,500 18,780 18,780 24,900 25,000 4,000 — — — — — — — — — 911 1,990 3,382 911 1,990 3,382 22,043 10,132 33,441 — 1,813 2,492 — 1,813 — — — — — — 725 — — 5,538 — — 5,244 — — 2,325 — — 4,591 — — 500 — — — — — — 800 500 — 1,969 1,700 1,600 841 500 500 33,666 21,522 50,199 36,623 38,203 43,956 35,173 38,078 36,645 17,003 33,860 39,573 38,275 38,880 20,327 Michael S. Dunlap Year 2019 2018 2017 Jeffrey R. Noordhoek 2019 2018 2017 Terry J. Heimes James D. Kruger Timothy A. Tewes 2019 2018 2017 2019 2018 2017 2019 2018 2017 (1) See “Compensation Discussion and Analysis - Matching Gift Program” above for a description of this program. (2) The Company's cash dividend payments on its Class A and Class B common stock include dividend payments on unvested shares of Class A common stock issued pursuant to the Company's Restricted Stock Plan. Dividends paid to the Named Executive Officers on unvested restricted stock are included in the table above. (3) See "Compensation Discussion and Analysis - Other Compensation" above for a description of these arrangements. (4) Executive officers may receive other perquisites and other personal benefits, the aggregate annual dollar amounts of which are below the current SEC threshold of $10,000 for reporting. Grants of Plan-Based Awards Table for Fiscal Year 2019 The following table sets forth summary information relating to each grant of an award made to the Company's Named Executive Officers in the fiscal year ended December 31, 2019 under the Company's Restricted Stock Plan. Name Grant date Approval of grant by Compensation Committee Number of shares of stock Grant date fair value of stock awards ($) Michael S. Dunlap — — Jeffrey R. Noordhoek March 15, 2019 (a) January 29, 2019 Terry J. Heimes March 15, 2019 (a) January 29, 2019 James D. Kruger Timothy A. Tewes — — — — — 18,882 9,441 — — — 1,029,447 514,723 (b) (b) — — (a) (b) On March 15, 2019, the Company issued stock to pay fiscal year 2018 bonuses for those employees who elected to receive stock instead of cash for such bonuses. The stock issuances were not made as equity incentive plan awards. All 2018 bonuses paid in 2019 to employees who elected to receive stock were paid in fully vested shares of Class A common stock issued pursuant to the Company's Restricted Stock Plan. The Company determined the value of these awards based on the average of the closing market prices for the Company's Class A common stock on February 28, 2019 through March 6, 2019, which was $54.52. 26 Outstanding Equity Awards at Fiscal Year-End Table (As of December 31, 2019) The following table sets forth summary information relating to the outstanding unvested equity awards for the Company's Named Executive Officers as of December 31, 2019. Name Michael S. Dunlap Jeffrey R. Noordhoek Terry J. Heimes James D. Kruger Timothy A. Tewes Stock awards Number of shares of stock that have not vested Market value of shares of stock that have not vested ($) (b) — — — 849 (a) 849 (a) — — — 49,446 49,446 (a) Amount represents shares of restricted Class A common stock issued to each of Mr. Kruger and Mr. Tewes on March 13, 2015 pursuant to the Company's Restricted Stock Plan. These shares vested on March 10, 2020. (b) Based on the closing market price of the Company's Class A common stock on December 31, 2019 ($58.24). Stock Vested Table for Fiscal Year 2019 The following table sets forth summary information relating to the stock vested for the Company's Named Executive Officers during the fiscal year ended December 31, 2019. Name Number of shares acquired on vesting Value realized on vesting ($) (b) Stock awards Michael S. Dunlap Jeffrey R. Noordhoek Terry J. Heimes James D. Kruger Timothy A. Tewes — — — 1,570 (a) 1,570 (a) — — — 85,235 85,235 (a) Amount includes 718 and 852 shares of restricted Class A common stock issued on March 10, 2014 and March 13, 2015, respectively, pursuant to the Company's Restricted Stock Plan. (b) The closing market price of the Company's Class A common stock as of March 11, 2019 (the next market trading day from the March 10, 2019 vesting date for the shares) was $54.29 per share. Stock Option, Stock Appreciation Right, Long-Term Incentive, and Defined Benefit Plans The Company does not have any stock option, stock appreciation right, long-term incentive, or defined benefit plans covering its Named Executive Officers. 27 Potential Payments Upon Termination or Change-in-Control Other than with respect to provisions in restricted stock award agreements for certain previous grants of restricted stock to James D. Kruger and Timothy A. Tewes whereby any unvested shares of restricted stock will become fully vested upon a termination of employment as a result of death, disability, or retirement after reaching the age to receive full social security benefits, which provisions are generally included in all agreements for restricted stock awards granted to employees, the Company does not have any contracts, agreements, plans, or arrangements with the Named Executive Officers that provide for payment in connection with any termination of employment or change-in-control of the Company. As set forth above under “Outstanding Equity Awards at Fiscal Year-End Table (As of December 31, 2019),” the market value of the 849 shares of unvested restricted stock held by each of Messrs. Kruger and Tewes as of December 31, 2019 was $49,446, based on the closing market price of the Company's Class A common stock on December 31, 2019 of $58.24. On March 10, 2020, a total of 849 of such shares for each of Messrs. Kruger and Tewes vested pursuant to the normal time-based employment service vesting provisions of the underlying restricted stock award agreements. Pay Ratio Disclosure As required by Section 953(b) of the Dodd-Frank Wall Street Reform and Consumer Protection Act, and Item 402(u) of the SEC’s Regulation S-K, the Company is providing the following information about the relationship of the annual total compensation of the employees of the Company and its consolidated subsidiaries and the annual total compensation of Jeffrey R. Noordhoek, the Company’s Chief Executive Officer (the “CEO”). For 2019, the Company’s last completed fiscal year: • • the median of the annual total compensation of all employees of the Company and its consolidated subsidiaries (other than the CEO) was $42,595; and the annual total compensation of the CEO, as disclosed above in the "Summary Compensation Table for Fiscal Years 2019, 2018, and 2017", was $1,666,479. Based on this information, for 2019 the ratio of the annual total compensation of the CEO to the median of the annual total compensation of all employees was 39 to 1. This ratio is a reasonable estimate calculated in a manner consistent with Item 402(u) of the SEC’s Regulation S-K. Given the different methodologies that various public companies may use to compute estimates of their pay ratios, the Company’s estimated pay ratio may not be comparable with the estimated pay ratios of other public companies. For purposes of the pay ratio disclosure, SEC rules permit registrants to identify the median employee once every three years, so long as there have not been significant changes in the registrant's employee population or employee compensation arrangements that the registrant reasonably believes would result in a significant change in the pay ratio disclosure. The Company identified no significant changes to its employee population or employee compensation arrangements during 2019, and as such, used the same median employee identified in 2018 for the 2019 pay ratio calculation. To identify the median of the annual total compensation of all employees of the Company and its consolidated subsidiaries in 2018, as well as to determine the annual total compensation of the median employee and the CEO in 2019, the methodology and the material assumptions, adjustments, and estimates that the Company used were as follows: 1. The Company determined that, as of December 31, 2018, the last Monday of 2018 that was a business day, the total number of employees of the Company and its consolidated subsidiaries (excluding the CEO) was 5,991, with 5,972 (99.7%) of these employees located in the United States, and 19 (less than 1%) of these employees located in Australia. Accordingly, the total numbers of U.S. employees and non-U.S. employees, before taking into consideration the adjustments permitted by SEC rules (as described below), were 5,972 and 19, respectively. These employees included all full-time, part-time, seasonal, and temporary employees of the Company and its consolidated subsidiaries. The Company selected the last Monday of 2018 that was a business day as the date within the last three months of the Company’s last completed fiscal year that the Company would use to identify the median employee because it enabled the Company to make such identification for 2018 in a reasonably efficient and economical manner from its existing internal payroll reporting system. 2. The employee population used to identify the median employee, after taking into consideration the adjustments permitted by SEC rules, consisted of all of the 5,972 employees (excluding the CEO) located in the U.S as of December 31, 2018. As permitted by SEC rules, the Company chose to exclude all non-U.S. employees, consisting of all of the 19 employees who are employed in Australia, from the employee population used to identify the median employee, given the small number of employees in that jurisdiction and the estimated additional costs of obtaining, analyzing, and including their 28 compensation information for purposes of identifying the median employee and determining the annual total compensation of the median employee. Based on the total numbers of U.S. employees and non-U.S. employees (before taking into consideration the adjustments permitted by SEC rules) as set forth above, the Company excluded a total of less than 5% of the total workforce of the Company and its consolidated subsidiaries (19 employees) from the employee population used to identify the median employee, as permitted by SEC rules. 3. To identify the median employee from the employee population, the Company compared the amounts of salary and wages of the employees for 2018 that are taxable for U.S. federal income tax purposes and reportable to the U.S. Internal Revenue Service on Form W-2, as reflected in the Company’s existing internal payroll system reports as of December 31, 2018, and this compensation measure was consistently applied to all employees included in the calculation. In making this determination, the Company annualized the compensation of all permanent employees (full-time or part-time) included in the employee population who were hired during 2018 but did not work for the Company or a consolidated subsidiary for the entire fiscal year. 4. Using the same median employee identified in 2018 as described above, the Company combined all of the elements of such employee’s compensation for 2019 in accordance with the requirements of Item 402(c)(x) of the SEC’s Regulation S-K, resulting in annual total compensation of $42,595. 5. With respect to the annual total compensation of the CEO, the Company used the amount disclosed in the “Total” column of the 2019 row for Mr. Noordhoek in the "Summary Compensation Table for Fiscal Years 2019, 2018, and 2017" included in this Proxy Statement and incorporated by reference under Item 11 of Part III of the Company’s 2019 Annual Report on Form 10-K. SECURITY OWNERSHIP OF DIRECTORS, EXECUTIVE OFFICERS, AND PRINCIPAL SHAREHOLDERS Stock Ownership The authorized common stock of the Company consists of 660,000,000 shares, $0.01 par value per share. The authorized common stock is divided into two classes, consisting of 600,000,000 shares of Class A common stock and 60,000,000 shares of Class B common stock. The Company also has authorized 50,000,000 shares of preferred stock, $0.01 par value per share. The following table sets forth information as of February 28, 2020, regarding the beneficial ownership of each class of the Company's common stock by: • • • • each person, entity, or group known by the Company to beneficially own more than five percent of the outstanding shares of any class of common stock each of the Named Executive Officers each incumbent director and each nominee for director all executive officers and directors as a group Beneficial ownership is determined in accordance with the rules and regulations of the SEC. Under these rules, a person is deemed to beneficially own a share of the Company's common stock if that person has or shares voting power or investment power with respect to that share, or has the right to acquire beneficial ownership of that share within 60 days, including through the exercise of any option, warrant, or other right or the conversion of any other security. With respect to the shares for which certain non- employee directors have elected to defer delivery of pursuant to the deferral election provisions of the Company’s Directors Stock Compensation Plan as indicated in certain footnotes to the following table, such shares are reported as beneficially owned by the respective director since, pursuant to such deferral election provisions, such shares shall be distributed to such director as the lump sum payment of deferred shares at the time of the termination of the director’s service on the Board (which the director has the unilateral right to cause within 60 days if the director were to resign from the Board within such time period), or as the initial installment of up to five annual installments commencing at the time of termination of the director’s service on the Board, as elected by the director. Each share of Class B common stock is convertible at any time at the holder's option into one share of Class A common stock. The number of shares of Class B common stock for each person in the table below assumes such person does not convert any Class B common stock into Class A common stock. Unless otherwise indicated in a footnote, the address of each five percent beneficial owner is c/o Nelnet, Inc., 121 South 13th Street, Suite 100, Lincoln, Nebraska 68508. Unless otherwise indicated in a 29 Percentage of combined voting power of all classes of stock (2) 81.9% 25.1% 12.0% 11.3% 10.0% 3.3% 1.7% 1.3% 1.5% 56.2% 11.2% * * * * * * * * * * — * * footnote, the persons named in the table below have sole voting and investment power with respect to all shares of common stock shown as being beneficially owned by them. Beneficial Ownership - As of February 28, 2020 Number of shares beneficially owned Percentage of shares beneficially owned (1) Name Class A Class B Total Class A Class B Total Michael S. Dunlap Shelby J. Butterfield Angela L. Muhleisen Dunlap Holdings, LLC Union Bank and Trust Company Dan D. Muhleisen Dimensional Fund Advisors LP Deborah Bartels The Vanguard Group Whitetail Rock Capital Management, LLC Union Financial Services, Inc. Terry J. Heimes James D. Kruger Jeffrey R. Noordhoek Timothy A. Tewes James P. Abel Preeta D. Bansal William R. Cintani Kathleen A. Farrell David S. Graff Thomas E. Henning JoAnn M. Martin Kimberly K. Rath Michael D. Reardon Executive officers and directors as a group (15 persons) * Less than 1%. 5,247,863 (3) 510 (5) 6,008,402 (7) — 3,230,931 (10) 4,678,299 (12) 2,385,687 (13) 1,864,177 (14) 2,058,819 (15) — — 208,524 (18) 154,114 (19) 513,238 (20) 53,669 (21) 67,536 (22) 4,007 24,331 (23) 37,806 (24) 16,213 57,363 (25) — 45,845 (26) 15,000 (27) 11,041,120 (4) 3,536,722 (6) 1,093,768 (8) 1,600,000 (9) 1,093,768 (11) — — — — 7,935,895 (16) 1,586,691 (17) — — — — — — — — — — — — — 16,288,983 3,537,232 7,102,170 1,600,000 4,324,699 4,678,299 2,385,687 1,864,177 2,058,819 7,935,895 1,586,691 208,524 154,114 513,238 53,669 67,536 4,007 24,331 37,806 16,213 57,363 — 45,845 15,000 98.0% 31.4% 9.7% 14.2% 9.7% 18.4% * 21.1% — 11.4% 16.4% — 8.4% — 6.6% — 7.2% — 70.4% 14.1% — — — — * * 1.8% — — * — * — * — * — * — * — * — — — * — * 41.0% 8.9% 17.9% 4.0% 10.9% 11.8% 6.0% 4.7% 5.2% 20.0% 4.0% * * 1.3% * * * * * * * — * * 6,330,558 11,041,120 17,371,678 22.2% 98.0% 43.7% 82.7% (1) (2) (3) Based on 28,458,089 shares of Class A common stock and 11,271,609 shares of Class B common stock outstanding as of February 28, 2020. These percentages reflect the different voting rights of the Company's Class A common stock and Class B common stock under the Company's Articles of Incorporation. Each share of Class A common stock has one vote and each share of Class B common stock has ten votes on all matters to be voted upon by the Company's shareholders. As reported in a Schedule 13D/A filed by Mr. Dunlap (on a joint basis with Dunlap Holdings, LLC and Union Financial Services, Inc. (“UFS”)) on January 23, 2020, Mr. Dunlap is deemed to have sole voting and investment power over 2,009,574 shares of Class A common stock. Mr. Dunlap may be deemed to have shared voting and investment power over a total of 3,238,289 shares of Class A common stock, which includes (i) a total of 7,358 shares held in various increments by each of Mr. Dunlap's three adult sons, and (ii) a total of 3,230,931 shares held for the accounts of miscellaneous trusts, IRAs, and investment accounts at Union Bank and Trust Company (“Union Bank”) (some of which shares may under certain circumstances be pledged as security by Union Bank's customers under the terms of the accounts) with respect to which Union Bank may be deemed to have or share voting or investment power. Mr. Dunlap controls Union Bank through F&M. Mr. Dunlap disclaims beneficial ownership of the shares held for the accounts of miscellaneous trusts, IRAs, and investment accounts at Union Bank, except to the extent that he actually has or shares voting power or investment power with respect to such shares. With respect to the number of shares of Class A common stock reported as beneficially owned by Mr. Dunlap that are held by Union Bank, the number of shares set forth in the table reflects the number of shares held by Union Bank as of December 31, 2019, as reported in a Schedule 13G/A filed by Union Bank with the SEC on January 23, 2020. The total of 3,230,931 shares held for the accounts of miscellaneous trusts, IRAs, and investment accounts at Union Bank may also be deemed to be beneficially owned by Union Bank and Angela L. Muhleisen (a sister of Mr. Dunlap) and are also included in the total number of shares beneficially owned by each of them as set forth in this table. Such number of 30 (4) shares held by Union Bank includes a total of 141,296 shares held by Union Bank as trustee under a post-annuity trust and a charitable remainder unitrust ("CRUT") established by Jeffrey R. Noordhoek, which shares may also be deemed to be beneficially owned by Mr. Noordhoek and are also included in the total number of shares beneficially owned by Mr. Noordhoek as set forth in this table, a total of 349,987 shares held by Union Bank in various managed agency accounts and trusts for Deborah Bartels (a sister of Mr. Dunlap and Ms. Muhleisen), her spouse, and the adult sons of Ms. Bartels and her spouse, which shares may also be deemed to be beneficially owned by Ms. Bartels, and are also included in the total number of shares beneficially owned by Ms. Bartels as set forth in this table, and 510 shares held by Union Bank in an account for the Estate of Stephen F. Butterfield (the “Butterfield Estate”), the former Vice Chairman of the Board of Directors and significant shareholder of the Company who passed away on April 16, 2018 and for which estate Shelby J. Butterfield serves as the Personal Representative, which shares are also reported as beneficially owned by Ms. Butterfield, and are also included in the total number of shares beneficially owned by Ms. Butterfield as set forth in this table. Mr. Dunlap is deemed to have sole voting and investment power over a total of 410,957 shares of Class B common stock, which includes 245,216 shares owned by Mr. Dunlap's spouse and 165,741 shares held by Mr. Dunlap. Mr. Dunlap is deemed to have shared voting and investment power over a total of 10,630,163 shares of Class B common stock, which includes (i) a total of 1,600,000 shares held by Dunlap Holdings, LLC, a family limited liability company which is controlled by Mr. Dunlap, (ii) 1,586,691 shares owned by UFS, of which Mr. Dunlap is chairman, president, and treasurer and owns 50.0% of the outstanding capital stock, of which Ms. Butterfield is the other director, and of which the Butterfield Family Trust, an estate planning trust for the family of Mr. Butterfield and for which trust Whitetail Rock Capital Management, LLC ("WRCM"), a majority owned subsidiary of the Company, serves as investment adviser with respect to shares of the Company’s stock held therein, including shares of the Company’s stock held by such trust indirectly through UFS, as discussed in footnote 16 below, owns the remaining 50.0% of the outstanding capital stock, (iii) 889,660 shares held by Union Bank as trustee for a grantor retained annuity trust (“GRAT”) established by Mr. Dunlap in 2003, (iv) a total of 2,387,212 shares held in four separate GRATs established by Mr. Dunlap in 2011, three separate dynasty trusts established by Mr. Dunlap in 2011, and three separate post- annuity irrevocable trusts established under two separate other GRATs in connection with the expiration of the annuity terms of such GRATs that were established by Mr. Dunlap in 2011, for which trusts WRCM serves as investment adviser, (v) a total of 2,254,684 shares held in six separate GRATs established by Mr. Dunlap's spouse in 2015, for which GRATs WRCM serves as investment adviser, (vi) a total of 938,167 shares held in twelve separate GRATs established in 2015 by Ms. Butterfield and Mr. Butterfield, for which GRATs WRCM serves as investment adviser, (vii) 688,089 shares held by the Butterfield Family Trust, for which trust WRCM serves as investment adviser with respect to shares of the Company’s stock held therein, (viii) a total of 36,089 shares held by four separate trusts for the benefit of children of Mr. Butterfield established under the restated agreement for the Stephen F. Butterfield Revocable Living Trust, for which trusts WRCM serves as investment adviser with respect to shares of the Company’s stock held therein, (ix) 44,963 shares held by a charitable lead annuity trust ("CLAT") established by Mr. Butterfield in 2016, for which CLAT WRCM serves as investment adviser, (x) a total of 204,108 shares held by Union Bank as trustee under five separate irrevocable trusts for the benefit of Mr. Butterfield's children established upon the expiration in 2013 of the annuity term of a GRAT previously established by Mr. Butterfield, (xi) a total of 300 shares held in increments of 100 shares by each of Mr. Dunlap's three adult sons, and (xii) a total of 200 shares held in increments of 100 shares by each of two separate dynasty trusts established by each of Mr. Dunlap and his spouse in 2019. Other than the shares discussed above for which it is noted that Mr. Dunlap is deemed to have sole voting and investment power, Mr. Dunlap disclaims beneficial ownership of the shares discussed above, except to the extent that Mr. Dunlap actually has or shares voting power or investment power with respect to such shares. The 1,586,691 shares owned by UFS are also reported as beneficially owned by UFS and by Ms. Butterfield, and are included in the total number of shares beneficially owned by UFS and Ms. Butterfield as set forth in this table. The 889,660 shares held by Union Bank as trustee for a GRAT established by Mr. Dunlap in 2003 and the total of 204,108 shares held by Union Bank as trustee for five separate irrevocable trusts for the benefit of Mr. Butterfield's children may also be deemed to be beneficially owned by Union Bank and Ms. Muhleisen, and are also included in the total number of shares beneficially owned by each of them as set forth in this table. The total of 938,167 shares held in twelve separate GRATs established in 2015 by Ms. Butterfield and Mr. Butterfield, the 688,089 shares held by the Butterfield Family Trust, a total of 27,067 shares held in two of the four separate trusts for the benefit of children of Mr. Butterfield established under the restated agreement for the Stephen F. Butterfield Revocable Living Trust, the 44,963 shares held by a CLAT established by Mr. Butterfield in 2016, and a total of 100,650 shares held by Union Bank as trustee under two of the five separate irrevocable trusts for the benefit of Mr. Butterfield's children established upon the expiration in 2013 of the annuity term of a GRAT previously established by Mr. Butterfield may also be deemed to be beneficially owned by Ms. Butterfield, and are also included in the total number of shares beneficially owned by Ms. Butterfield as set forth in this table. The total of 7,935,895 shares beneficially owned by trusts for which WRCM serves as investment adviser, including, with respect to the Butterfield Family Trust, shares beneficially owned indirectly 31 (5) (6) through the holding of 50.0% of the outstanding capital stock of UFS, which holds a total of 1,586,691 shares, are also deemed to be beneficially owned by WRCM, and are also included in the total number of shares beneficially owned by WRCM as set forth in this table. Ms. Butterfield is deemed to have shared voting and investment power with respect to 510 shares of Class A common stock held at Union Bank in an account for the Butterfield Estate, for which Ms. Butterfield is the Personal Representative. Such shares are also deemed to be beneficially owned by Union Bank, Mr. Dunlap, and Ms. Muhleisen, and are included in the total number of shares reported as beneficially owned by each of them in this table. The business address for Ms. Butterfield is c/o Gallagher & Kennedy, 2575 East Camelback Road, Phoenix, Arizona 85016. Based on information in Form 4s filed by Ms. Butterfield on March 31, 2020 and information in the Company’s records, the Company believes that, as of February 28, 2020, Ms. Butterfield had sole voting and investment power with respect to a total of 151,095 shares of Class B common stock, which included 121,562 shares held by Ms. Butterfield, 29,333 shares held by the Butterfield Estate, and a total of 200 shares held by Ms. Butterfield as UTMA custodian for Mr. and Ms. Butterfield’s minor children. Based on the same information, the Company believes that, as of February 28, 2020, Ms. Butterfield had shared voting and investment power with respect to a total of 3,385,627 shares of Class B common stock, which included (i) 1,586,691 shares owned by UFS, of which the Butterfield Family Trust, an estate planning trust for the family of Mr. Butterfield, owns 50.0% of the outstanding capital stock, (ii) 688,089 shares held directly by the Butterfield Family Trust, for which trust WRCM serves as investment adviser with investment power with respect to shares of the Company’s stock held by the trust and voting power with respect to shares of the Company’s stock held by the trust, including shares of the Company’s stock held indirectly through the holding of 50% of the outstanding capital stock of UFS, (iii) a total of 656,204 shares held in eight separate GRATs established by Ms. Butterfield in 2015, for which GRATs WRCM serves as investment adviser, (iv) a total of 281,963 shares held in four separate GRATs established by Mr. Butterfield in 2015, for which GRATs WRCM serves as investment adviser, (v) a total of 100,650 shares held by Union Bank as trustee for two separate irrevocable trusts for the benefit of Mr. and Ms. Butterfield's minor children established upon the 2013 expiration of an annuity term of a GRAT previously established by Mr. Butterfield, (vi) 44,963 shares held by a CLAT established by Mr. Butterfield in 2016, for which CLAT WRCM serves as investment adviser, and (vii) a total of 27,067 shares held in two of the four separate trusts for the benefit of children of Mr. Butterfield established under the restated agreement for the Stephen F. Butterfield Revocable Living Trust, for which trusts WRCM serves as investment adviser with investment power with respect to shares of the Company’s stock held by the trusts and voting power with respect to shares of the Company’s stock held by the trusts. Ms. Butterfield may disclaim beneficial ownership of the shares held by UFS and the trusts discussed in this footnote, except to the extent that she actually has or shares voting power or investment power with respect to such shares. The 1,586,691 shares owned by UFS are also deemed to be beneficially owned by UFS and Mr. Dunlap, and are also included in the total number of shares beneficially owned by each of them as set forth in this table. The total of 100,650 shares held by Union Bank as trustee for two separate irrevocable trusts established upon the 2013 expiration of an annuity term of a GRAT previously established by Mr. Butterfield may also be deemed to be beneficially owned by Union Bank, Mr. Dunlap, and Ms. Muhleisen, and are also included in the total number of shares beneficially owned by each of them as set forth in this table. The total of 3,284,977 shares held in trusts for which WRCM serves as investment adviser, including, with respect to the Butterfield Family Trust, shares held indirectly through the holding of 50% of the outstanding capital stock of UFS, which holds a total of 1,586,691 shares, are also deemed to be beneficially owned by WRCM and may also be deemed to be beneficially owned by Mr. Dunlap, and are also included in the total number of shares beneficially owned by each of them as set forth in this table. (7) As reported in a Schedule 13G/A filed by Ms. Muhleisen on January 23, 2020, Ms. Muhleisen is deemed to have sole voting and investment power over 430,109 shares of Class A common stock. Ms. Muhleisen is deemed to have shared voting and investment power over a total of 5,578,293 shares of Class A common stock, which includes (i) 52,344 shares jointly owned by Ms. Muhleisen and her spouse, Dan D. Muhleisen, (ii) 2,347,362 shares owned by Ms. Muhleisen’s spouse, (iii) 692,885 shares owned by Ms. Muhleisen's adult daughter, (iv) 681,538 shares owned by Ms. Muhleisen's adult son, (v) a total of 552,000 shares held in two separate irrevocable trusts established by Ms. Muhleisen and her spouse, of which the adult daughter and the adult son of Ms. Muhleisen and her spouse are the initial beneficiaries and for which Union Bank serves as trustee, (vi) a total of 352,170 shares held in four separate irrevocable trusts established upon the expiration of the annuity term of GRATs established by Ms. Muhleisen and her spouse, of which the adult daughter and the adult son of Ms. Muhleisen and her spouse are the beneficiaries and for which Union Bank serves as trustee, and (vii) shares that are owned by entities that Ms. Muhleisen may be deemed to control, consisting of a total of 899,994 shares held by Union Bank for the accounts of miscellaneous other trusts, IRAs, and investment accounts at Union Bank (some of which shares may under certain circumstances be pledged 32 as security by Union Bank's customers under the terms of the accounts) with respect to which Union Bank may be deemed to have or share voting or investment power. Ms. Muhleisen, a sister of Mr. Dunlap, is a director, chairperson, president, and chief executive officer of and controls Union Bank through F&M. Ms. Muhleisen disclaims beneficial ownership of the shares held for the accounts of miscellaneous trusts, IRAs, and investment accounts at Union Bank, except to the extent that she actually has or shares voting power or investment power with respect to such shares. The address for Ms. Muhleisen is c/o Union Bank and Trust Company, P.O. Box 82529, Lincoln, Nebraska 68501. With respect to the number of shares beneficially owned by Ms. Muhleisen that are held by Union Bank, the number of shares set forth in the table reflects the number of shares held by Union Bank as of December 31, 2019, as reported in a Schedule 13G/A filed by Union Bank on January 23, 2020. Ms. Muhleisen is deemed to have shared voting and investment power over a total of 1,093,768 shares of Class B common stock that are held by Union Bank as trustee, which includes 889,660 shares held by Union Bank as trustee for a GRAT established by Mr. Dunlap in 2003, and a total of 204,108 shares held by Union Bank as trustee for five separate irrevocable trusts for the benefit of Mr. Butterfield's children established upon the 2013 expiration of an annuity term of a GRAT previously established by Mr. Butterfield. Ms. Muhleisen disclaims beneficial ownership of the shares held by Union Bank as trustee for such GRAT and such five separate other trusts, except to the extent that she actually has or shares voting power or investment power with respect to such shares. The total of 1,093,768 shares held by Union Bank as trustee for such GRAT and such five separate other trusts are also deemed to be beneficially owned by Union Bank and Mr. Dunlap, and are also included in the total number of shares beneficially owned by each of them as set forth in this table. A total of 100,650 shares held by Union Bank as trustee for two of the five separate trusts for the benefit of Mr. Butterfield's children may also be deemed to be beneficially owned by Ms. Butterfield, and are also included in the total number of shares beneficially owned by Ms. Butterfield as set forth in this table. On January 23, 2020, Dunlap Holdings, LLC, a family limited liability company which is controlled by Mr. Dunlap, filed (on a joint basis with Mr. Dunlap and UFS) a Schedule 13D/A with the SEC indicating that it owned 1,600,000 shares of the Company’s Class B common stock, with shared voting and dispositive power over such shares. The 1,600,000 shares owned by Dunlap Holdings, LLC are also included in the total number of shares beneficially owned by Mr. Dunlap as set forth in this table. Union Bank is deemed to have sole voting and investment power over 30,000 shares of Class A common stock that are held by the Union Bank profit sharing plan. Union Bank is deemed to have shared voting and investment power over 3,200,931 shares of Class A common stock, which includes (i) 18,000 shares held as trustee for a charitable foundation, (ii) a total of 141,296 shares held by Union Bank as trustee under a post-annuity trust and a CRUT established by Mr. Noordhoek, (iii) a total of 2,330,937 shares held by Union Bank in individual accounts for Ms. Muhleisen, Mr. Muhleisen, their adult daughter, and their adult son; and (iv) a total of 710,698 shares held for the accounts of miscellaneous trusts, IRAs, and investment accounts at Union Bank (some of which shares may under certain circumstances be pledged as security by Union Bank's customers under the terms of the accounts) with respect to which Union Bank may be deemed to have or share voting or investment power. Union Bank disclaims beneficial ownership of such shares except to the extent that Union Bank actually has or shares voting power or investment power with respect to such shares. The address for Union Bank is P.O. Box 82529, Lincoln, Nebraska 68501; Attention: Angela L. Muhleisen, President. The number of shares of Class A common stock set forth in the table for Union Bank reflects the number of shares held by Union Bank as of December 31, 2019, as reported in a Schedule 13G/A filed by Union Bank on January 23, 2020. Union Bank is deemed to have shared voting and investment power over a total of 1,093,768 shares of Class B common stock that are held by Union Bank as trustee for a GRAT established by Mr. Dunlap in 2003 and as trustee for five separate irrevocable trusts for the benefit of Mr. Butterfield's children, as discussed in footnote 8 above. Union Bank disclaims beneficial ownership of such shares except to the extent that Union Bank actually has or shares voting power or investment power with respect to such shares. As reported in a Schedule 13G/A filed by Mr. Muhleisen on January 23, 2020, Mr. Muhleisen is deemed to have shared voting and investment power over a total of 4,678,299 shares of Class A common stock, which includes (i) 2,347,362 shares owned by Mr. Muhleisen; (ii) 52,344 shares owned jointly by Mr. Muhleisen and his spouse, Angela L. Muhleisen, (iii) 692,885 shares owned by Mr. Muhleisen's adult daughter, (iv) 681,538 shares owned by Mr. Muhleisen's adult son, (v) a total of 552,000 shares held in two separate irrevocable trusts established by Mr. Muhleisen and his spouse, of which the adult daughter and the adult son of Mr. Muhleisen and his spouse are the initial beneficiaries and for which Union Bank serves as trustee, and (vi) a total of 352,170 shares held in four separate irrevocable trusts established upon the expiration of the annuity term of GRATs established by Mr. Muhleisen and 33 (8) (9) (10) (11) (12) (13) (14) (15) (16) his spouse, of which the adult daughter and the adult son of Mr. Muhleisen and his spouse are the beneficiaries and for which Union Bank serves as trustee. All of the shares included as beneficially owned by Mr. Muhleisen are also included in the total number of shares beneficially owned by Ms. Muhleisen as set forth in this table. Mr. Muhleisen disclaims beneficial ownership of the shares held in the trusts discussed above, except to the extent that he actually has or shares voting power or investment power with respect to such shares. The address for Mr. Muhleisen is 6321 Doecreek Circle, Lincoln, Nebraska 68516. On February 12, 2020, Dimensional Fund Advisors LP ("Dimensional") filed a Schedule 13G/A indicating that they beneficially owned 8.40% of the Company's Class A common stock as of December 31, 2019, with sole voting power over a total of 2,348,640 shares and sole dispositive power over a total of 2,385,687 shares. The amount set forth in the table reflects the number of shares reported in the Schedule 13G/A. Dimensional acts as investment advisor and manager to certain funds, and indicated that all shares reported in their 13G/A were owned by such funds. The address of Dimensional is Building One, 6300 Bee Cave Road, Austin, Texas 78746. On January 23, 2020, Deborah Bartels filed a Schedule 13G/A indicating that she beneficially owned 6.6% of the Company's Class A common stock as of December 31, 2019, with sole voting and dispositive power over 1,297,040 shares and shared voting and dispositive power over a total of 567,137 shares. The amount set forth in the table reflects the number of shares reported in the Schedule 13G/A and includes (i) 1,297,040 shares held by Ms. Bartels, (ii) a total of 118,807 shares held in managed agency accounts for Ms. Bartels and her spouse by Union Bank, which is controlled by F&M, of which Ms. Bartels' brother, Mr. Dunlap, and sister, Ms. Muhleisen, are directors, executive officers, and significant shareholders; (iii) 217,150 shares held by Ms. Bartels' spouse; (iv) a total of 71,180 shares held by Union Bank as trustee for certain irrevocable trusts for the benefit of the adult sons of Ms. Bartels and her spouse ("Post-GRAT Trusts") established in connection with the expiration of the annuity term of GRATs established by Ms. Bartels and her spouse; and (v) a total of 160,000 shares held by Union Bank as trustee for certain irrevocable trusts established by Ms. Bartels and her spouse, of which the adult sons of Ms. Bartels and her spouse are the initial beneficiaries (the "Dynasty Trusts"). Ms. Bartels disclaims beneficial ownership of the shares held in the Post-GRAT Trusts and the Dynasty Trusts except to the extent that she actually has or shares voting power or dispositive power with respect to such shares. The total of 349,987 shares held in the managed agency accounts, the Post-GRAT Trusts, and the Dynasty Trusts may also be deemed to be beneficially owned by Union Bank, Mr. Dunlap, and Ms. Muhleisen, and are included in the total number of shares beneficially owned by each of them as set forth in this table. On February 12, 2020, The Vanguard Group ("Vanguard") filed a Schedule 13G/A indicating that they beneficially owned 7.24% of the Company's Class A common stock as of December 31, 2019, with sole voting power over 18,033 shares, shared voting power over 4,051 shares, sole dispositive power over 2,039,227 shares, and shared dispositive power over 19,592 shares. The amount set forth in the table reflects the number of shares reported in the Schedule 13G/A. The address of Vanguard is 100 Vanguard Blvd., Malvern, Pennsylvania 19355. Includes shares held in four separate GRATs and three separate other irrevocable trusts established by Mr. Dunlap in 2011, three separate post-annuity trusts established upon the expiration of the annuity term of two other separate GRATs established by Mr. Dunlap in 2011, six separate GRATs established by Mr. Dunlap's spouse in 2015, eight separate GRATs established by Ms. Butterfield in 2015, four separate GRATs established by Mr. Butterfield in 2015, a CLAT established by Mr. Butterfield in 2016, the Butterfield Family Trust, and four separate trusts for the benefit of children of Mr. Butterfield established under the restated agreement for the Stephen F. Butterfield Revocable Living Trust. Under the trusts, WRCM serves as investment adviser with investment power with respect to shares of the Company’s stock held by the trusts and voting power with respect to shares of the Company’s stock held by the trusts, including, with respect to the Butterfield Family Trust, shares of the Company’s stock held indirectly through the holding of 50% of the outstanding capital stock of UFS, which holds a total of 1,586,691 shares of Class B common stock. WRCM is not a beneficiary of any of the trusts, and is a majority owned subsidiary of the Company. The shares deemed to be beneficially owned by WRCM are also deemed to be beneficially owned by Mr. Dunlap, and the shares held in the twelve separate GRATs established by Ms. Butterfield and Mr. Butterfield in 2015, the CLAT established by Mr. Butterfield in 2016, the Butterfield Family Trust, and two of the four separate trusts for the benefit of children of Mr. Butterfield established under the restated agreement for the Stephen F. Butterfield Revocable Living Trust are also reported as beneficially owned by Ms. Butterfield. For additional information regarding the shares held in trusts established by Mr. Dunlap and his spouse, and the shares held in trusts established by Ms. Butterfield and Mr. Butterfield, see footnotes 4 and 6, respectively, above. (17) On January 23, 2020, UFS filed (on a joint basis with Mr. Dunlap and Dunlap Holdings, LLC) a Schedule 13D/A indicating that it beneficially owned 1,586,691 shares of the Company’s Class B common stock, with shared voting and dispositive power over such shares. The address for UFS is 502 East John Street, Carson City, Nevada 89706. 34 (18) (19) (20) Mr. Dunlap and the Butterfield Family Trust each own 50.0% of the outstanding capital stock of UFS, and the 1,586,691 shares of the Company’s Class B common stock owned by UFS are also reported as beneficially owned by each of Mr. Dunlap and Ms. Butterfield. Includes 50,087 shares owned by Mr. Heimes' spouse. A total of 50,000 shares are pledged as collateral for a line of credit agreement, under which approximately $65,000 was drawn as of February 28, 2020. On March 23 2020, a Form 4 was filed by Mr. Heimes to report that a total of 40,000 shares were transferred as gifts by Mr. Heimes and his spouse to various estate planning trusts, with Mr. Heimes continuing to report beneficial ownership of such shares. Includes 150,593 shares jointly owned by Mr. Kruger and his spouse, and 849 shares issued under the Company's Restricted Stock Plan that vested in March 2020. Includes 294,582 shares held by Mr. Noordhoek’s restated revocable trust dated August 9, 2016, 126,462 shares held by Union Bank as trustee under an irrevocable trust established upon the expiration of the annuity term of a GRAT established by Mr. Noordhoek in 2003, and 14,834 shares held by Union Bank as trustee under a CRUT established by Mr. Noordhoek. Mr. Noordhoek is deemed to have shared voting and investment power with respect to the shares held in the post-annuity trust and the CRUT. The total of 141,296 shares held by Union Bank as trustee under the post-annuity trust and the CRUT may also be deemed to be beneficially owned by Union Bank, Mr. Dunlap, and Ms. Muhleisen, and are included in the total number of shares beneficially owned by each of them as set forth in this table. (21) Includes 849 shares issued under the Company's Restricted Stock Plan that vested in March 2020. (22) (23) (24) (25) (26) Includes 56,811 shares that Mr. Abel has elected to defer delivery of pursuant to the deferral election provisions of the Company's Directors Stock Compensation Plan. Also includes 500 shares owned by Mr. Abel's spouse. Includes 20,383 shares that Mr. Cintani has elected to defer delivery of pursuant to the deferral election provisions of the Company's Directors Stock Compensation Plan. Includes 29,310 shares that Ms. Farrell has elected to defer delivery of pursuant to the deferral election provisions of the Company's Directors Stock Compensation Plan. Includes 41,062 shares that Mr. Henning has elected to defer delivery of pursuant to the deferral election provisions of the Company's Directors Stock Compensation Plan and 3,102 shares owned by Mr. Henning's spouse. Includes 45,845 shares that Ms. Rath has elected to defer delivery of pursuant to the deferral election provisions of the Company's Directors Stock Compensation Plan. (27) Mr. Reardon's shares are owned jointly with his spouse and 15,000 shares are held in a margin securities account at a brokerage firm. Positions held in such account, including shares of the Company's Class A common stock, may under certain circumstances be pledged as collateral security for the repayment of debit balances, if any, in such account. Mr. Reardon resigned as a director on March 20, 2020. Delinquent Section 16(a) Reports Section 16(a) of the Exchange Act requires the Company’s executive officers and directors, and persons who beneficially own more than ten percent of a registered class of the Company’s equity securities, to file with the SEC reports of ownership of Company securities and changes in reported ownership. Based solely on a review of information furnished to the Company and contained in reports filed with the SEC, as well as written representations from reporting persons that all reportable transactions were reported, the Company believes that during the year ended December 31, 2019, the Company’s executive officers, directors, and greater than ten percent beneficial owners timely filed all reports they were required to file under Section 16(a) of the Exchange Act, except as noted below. As previously disclosed in the Company’s proxy statement for the 2019 annual meeting of shareholders, at the time of his passing on April 16, 2018, Mr. Butterfield filed reports under Section 16(a) of the Exchange Act as a director and as a more than ten percent beneficial owner of the Company. Under SEC Rule 16a-2(d), transactions by an executor or administrator of the estate of a decedent are exempt from Section 16 for the 12 months following appointment and qualification, and are subject to Section 16 after such 12-month period only where the estate is a more than ten percent beneficial owner. An SEC staff interpretation indicates that such exemption does not apply with respect to the reporting of the holding of more than ten percent beneficial ownership. On March 35 31, 2020, a Form 3 was filed by Ms. Butterfield to report the holding of more than ten percent beneficial ownership of the Company, in connection with her appointment as the Personal Representative of Mr. Butterfield’s estate on May 4, 2018, and Form 4s were filed to report (i) the sale of shares by Ms. Butterfield and the Butterfield Family Trust to the Company on June 17, 2019 in a privately negotiated transaction under the Company’s stock repurchase program that was separately approved by the Company’s Board of Directors and separately reported by the Company in a Current Report on Form 8-K filed on June 18, 2019; and (ii) two gifts of shares by a charitable lead annuity trust established by Mr. Butterfield to a charitable organization under Section 501(c) (3) of the Internal Revenue Code on December 31, 2018 and December 31, 2019, two testamentary transactions in 2019 involving Mr. Butterfield's estate, and two gift distributions in 2019 from an estate planning trust established by Mr. Butterfield, which gifts and testamentary transactions were eligible for deferred reporting on two Form 5s. Such reports were not filed on a timely basis due in part to various Butterfield estate and estate planning trusts organization and administration requirements and uncertainty regarding related beneficial ownership determinations and the application of Section 16(a) reporting requirements with respect thereto. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS Policies and Procedures on Transactions with Related Persons The Company has adopted written policies and procedures for the Nominating and Corporate Governance Committee's review of any transaction, arrangement, or relationship (including any indebtedness or guarantee of indebtedness) or series of similar transactions, arrangements, or relationships in which (i) the Company is a participant, (ii) the aggregate amount involved will or may be expected to exceed $120,000, and (iii) a related person has or will have a direct or indirect material interest. For purposes of this policy, a “related person” means (i) any of our directors, executive officers, or nominees for director, (ii) any stockholder that beneficially owns more than five percent of the Company's outstanding shares of common stock, and (iii) any immediate family member of the foregoing. The Nominating and Corporate Governance Committee approves or ratifies only those transactions that it determines in good faith are in, or are not inconsistent with, the best interests of the Company and its stockholders. The Nominating and Corporate Governance Committee may, in its discretion, submit certain transactions to the full Board of Directors for approval where it deems appropriate. In determining whether to approve or ratify a transaction, the Nominating and Corporate Governance Committee takes into account the factors it deems appropriate, which may include, among others, the benefits to the Company, the availability of other sources for comparable products or services, the impact on a director's independence in the event the related person is a director, and the extent of the related person's interest in the transaction. The policy also provides for the delegation of its authority to the Chairman of the Nominating and Corporate Governance Committee for any related person transaction requiring pre-approval or ratification between meetings of the Nominating and Corporate Governance Committee. The Nominating and Corporate Governance Committee reviews and assesses ongoing relationships with a related person on at least an annual basis to see that they are in compliance with the policy and remain appropriate. All approved related party transactions are communicated to the full Board of Directors by the Chairman of the Nominating and Corporate Governance Committee, or his designee. Mr. Dunlap beneficially owns shares representing 81.9% of the combined voting power of the Company's shareholders as of February 28, 2020. Because of his beneficial ownership, Mr. Dunlap can effectively elect each member of the Board of Directors, including all members of the Nominating and Corporate Governance Committee, and has the power to defeat or remove each member. Although there is no formal requirement for executive management of the Company to approve related party transactions, executive management reviews all related party transactions. Upon reviewing related party transactions, executive management takes into account the factors it deems appropriate, which may include, among others, the benefits to the Company, the availability of other sources for comparable products or services, the impact on a director's independence in the event the related person is a director, and the extent of the related person's interest in the transaction. As Executive Chairman and controlling shareholder of the Company, Mr. Dunlap effectively has control over each member of the Company's executive management, who were initially hired by Mr. Dunlap and can be fired or otherwise penalized at his direction. During 2019, the Company entered into certain transactions and had business arrangements with Union Bank and Trust Company, Farmers & Merchants Investment Inc. ("F&M"), Mr. Dunlap, Hudl, Assurity Life Insurance Company ("Assurity"), Shelby J. Butterfield and the Butterfield Family Trust, and various Ameritas entities. These transactions (except for the Ameritas transactions, which commenced prior to Ameritas becoming a related party by virtue of Ms. Martin’s becoming a member of the Company’s Board of Directors on March 19, 2020 after her retirement from chief executive officer positions at Ameritas effective January 10, 2020) were reviewed and approved by the Nominating and Corporate Governance Committee and reviewed by executive management. Union Bank and Trust Company, F&M, Union Financial Services, Hudl, Assurity, Ms. Butterfield and the Butterfield 36 Family Trust, and the Ameritas entities are related persons as discussed below. We cannot affirm whether or not the fees and terms of each transaction are substantially the same terms as those prevailing at the time for transactions with persons that do not have a relationship with the Company (either directly or as a partner, shareholder, or officer of an organization that has a relationship with the Company). However, all related party transactions are based on available market information for comparable assets, products, and services and are extensively negotiated. • Union Bank and Trust Company and Farmers & Merchants Investment Inc. - Union Bank is controlled by F&M, which owns 81.4% of Union Bank's common stock and 15.4% of Union Bank's non-voting non-convertible preferred stock. Michael S. Dunlap, a significant shareholder, Executive Chairman, and a member of the Board of Directors of the Company, along with his spouse and children, owns or controls a total of 33.0% of the stock of F&M, including a total of 48.6% of the outstanding voting common stock of F&M, and Mr. Dunlap’s sister, Angela L. Muhleisen, along with her spouse and children, owns or controls a total of 31.7% of F&M stock, including a total of 47.5% of the outstanding voting common stock of F&M. Mr. Dunlap serves as a Director and Chairman of F&M, and as a Director of Union Bank. Ms. Muhleisen serves as a Director and Chief Executive Officer of F&M and as a Director, Chairperson, President, and Chief Executive Officer of Union Bank. Union Bank is deemed to have beneficial ownership of a significant number of shares of Nelnet because it serves in a capacity of trustee or account manager for various trusts and accounts holding shares of the Company, and may share voting and/or investment power with respect to such shares. At February 28, 2020, Union Bank was deemed to beneficially own 10.9% of the Company's common stock. The stock holdings of Union Bank are deemed to be beneficially owned by both Mr. Dunlap and Ms. Muhleisen. At February 28, 2020, Mr. Dunlap beneficially owned 41.0% of the Company's outstanding common stock and Ms. Muhleisen beneficially owned 17.9% of the Company's outstanding common stock. • Union Financial Services, Inc. - Union Financial Services, Inc. (“UFS”) is owned 50% by Michael S. Dunlap, a significant shareholder, Executive Chairman, and a member of the Board of Directors of the Company, and 50% by the Butterfield Family Trust, an estate planning trust for the family of Stephen F. Butterfield, former significant shareholder, Vice Chairman, and member of the Board of Directors of the Company who passed away on April 16, 2018. • Hudl - Hudl is an online video and coaching tools software company for athletes of all levels, of which Mr. Graff, who has served on the Company's Board of Directors since 2014, is CEO, co-founder, and a director. • Assurity - Assurity is a company which offers a variety of disability income and critical illness protection, life insurance, and annuity products, of which Mr. Henning, who has served on the Company's Board of Directors since 2003, is President and CEO. • Ms. Butterfield and the Butterfield Family Trust - As indicated above, at the time of his passing on April 16, 2018, Mr. Butterfield was a significant shareholder of the Company. Ms. Butterfield is Mr. Butterfield’s widow, is the personal representative of Mr. Butterfield’s estate, and serves as co-trustee for the Butterfield Family Trust and certain other Butterfield estate planning trusts. The Butterfield Family Trust holds 688,089 shares of the Company’s Class B common stock, and 50% of the outstanding capital stock of UFS, which holds 1,586,691 shares of the Company’s Class B common stock. Accordingly, the Company considers Ms. Butterfield to be a significant shareholder of the Company. . • Ameritas - Ameritas Mutual Holding Company, Ameritas Holding Company, and Ameritas Life Insurance Corp. (collectively referred to herein as “Ameritas”) are entities based in Lincoln, Nebraska that offer a wide range of insurance and financial products and services to individuals, families, and businesses. Ms. Martin, who became a member of the Company’s Board of Directors on March 19, 2020, serves as a director and vice chair for the Ameritas entities. Ms. Martin served for many years as chief executive officer of Ameritas Mutual Holding Company and as chair of Ameritas Life Insurance Corp., which is owned by Ameritas Holding Company, until her retirement from those positions effective January 10, 2020. In addition, Mr. Abel is chair of Ameritas Mutual Holding Company and Ameritas Holding Company, and a director of Ameritas Life Insurance Corp. Transactions with Union Bank The Company has entered into certain contractual arrangements with Union Bank. These transactions include: • Loan purchases - During 2019, the Company purchased $100.3 million (par value) of private education and consumer loans from Union Bank. The net premium paid by the Company on these loan acquisitions was $1.2 million. 37 In addition, the Company has an agreement with Union Bank in which the Company provides marketing, origination, and loan servicing services to Union Bank related to private education loans. Union Bank paid $1.8 million in marketing fees to the Company in 2019 under this agreement. • Loan servicing - As of December 31, 2019, the Company serviced $395.5 million of loans for Union Bank. Servicing and origination fee revenue earned by the Company from servicing loans for Union Bank was $0.6 million for the year ended December 31, 2019. • • Funding - Participation Agreement - The Company maintains 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 loans. The Company uses this facility as a source to fund FFELP student loans. As of December 31, 2019, $749.6 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 on a short term basis. The Company can participate loans to Union Bank to the extent of availability under the grantor trusts, up to $900 million or an amount in excess of $900 million if mutually agreed to by both parties. Funding - Real Estate - 12100.5 West Center, LLC ("West Center") is an entity that was established in 2016 for the sole purpose of acquiring, developing, and owning a commercial real estate property in Omaha, Nebraska. The Company owns 33.33% of West Center. On October 31, 2019, Union Bank, as lender, received a $2.9 million promissory note from West Center. The promissory note carries an interest rate of 3.85% and has a maturity date of October 30, 2024. • Operating cash - The majority of the Company's cash operating bank accounts are maintained at Union Bank. The Company also invests cash in the Short term Federal Investment Trust (“STFIT”) of the Student Loan Trust Division of Union Bank, which the Company uses as operating cash accounts. As of December 31, 2019, the Company had $390.5 million deposited at Union Bank in operating accounts or invested in the STFIT. Interest income earned from cash deposited in these accounts for the year ended December 31, 2019 was $1.6 million. • 529 Plan administration - The Company provides certain 529 Plan administration services to certain college savings plans (the “College Savings Plans”) through a contract with Union Bank, as the program manager. Union Bank is entitled to a fee as program manager pursuant to its program management agreement with the College Savings Plans. In 2019, the Company received fees of $3.7 million from Union Bank related to the Company's administration services provided to the College Savings Plans. • Lease arrangements - Union Bank leases approximately 4,000 square feet of office space in the Company's corporate headquarters building. During 2019, Union Bank paid the Company approximately $79,000 for rent. The lease agreement expires on June 30, 2023. • Other fees paid to Union Bank - During 2019, the Company paid Union Bank approximately $213,000 for cash management and trustee fees. • Other fees received from Union Bank - During 2019, the Company received approximately $410,000 from Union Bank related to employee sharing arrangements and for providing communications services and payment processing services. • Investment services - Union Bank has established various trusts whereby Union Bank serves as trustee for the purpose of purchasing, holding, managing, and selling investments in student loan asset-backed securities. WRCM, an SEC- registered investment advisor and a majority owned subsidiary of the Company, has a management agreement with Union Bank, under which WRCM performs various advisory and management services on behalf of Union Bank with respect to investments in securities by the trusts, including identifying securities for purchase or sale by the trusts. The agreement provides that Union Bank will pay to WRCM annual fees of 25 basis points on the outstanding balance of the investments in the trusts. As of December 31, 2019, the outstanding balance of investments in the trusts was $756.3 million. In addition, Union Bank will pay additional fees to WRCM of up to 50 percent of the gains from the sale of securities from the trusts or securities being called prior to the full contractual maturity. During 2019, the Company earned $1.8 million of fees under this agreement. WRCM also has management agreements with Union Bank under which it is designated to serve as investment advisor with respect to the assets (principally Nelnet stock) within several trusts established by Mr. Dunlap and his spouse and by Mr. Butterfield and Ms. Butterfield. Union Bank serves as trustee for the trusts. Per the terms of the agreements, Union 38 Bank pays WRCM five basis points of the aggregate value of the assets of the trusts as of the last day of each calendar quarter. As of December 31, 2019, WRCM was the investment advisor with respect to a total of 6.3 million shares of the Company's Class B common stock held directly by these trusts, and the 50% interest held by the Butterfield Family Trust in UFS, which holds a total of 1.6 million shares of the Company’s Class B common stock and the other 50% interest in which is owned by Mr. Dunlap. During 2019, the Company earned approximately $219,000 of fees under these agreements. In connection with the above, effective as of March 14, 2019, the estate of Mr. Butterfield transferred 778,089 shares of the Company’s Class B common stock to the Butterfield Family Trust, for which trust Union Bank serves as a co-trustee. In addition, also effective as of March 14, 2019, the Stephen F. Butterfield Revocable Living Trust transferred 135,332 shares of the Company’s Class B common stock to the restated Stephen F. Butterfield Revocable Living Trust, for which restated trust Union Bank serves as a co-trustee and WRCM serves as investment adviser with respect to shares of the Company’s stock held in such trust and subsequent trusts established thereunder. Further, on April 5, 2019, the estate of Mr. Butterfield transferred, also effective as of March 14, 2019, its 50% of the outstanding capital stock of UFS to the Butterfield Family Trust, for which trust WRCM serves as investment adviser with respect to shares of the Company’s stock held therein, including shares of the Company’s stock held by such trust indirectly through UFS. WRCM has established private investment funds for the primary purpose of purchasing, selling, investing, and trading, directly or indirectly, in student loan asset-backed securities, and to engage in financial transactions related thereto. Mr. Dunlap, Jeffrey R. Noordhoek (Chief Executive Officer of the Company), Ms. Muhleisen and Mr. Muhleisen, and WRCM have invested $1.2 million, $1.1 million, $5.3 million, and $0.3 million, respectively, in certain of these funds. Based upon the current level of holdings by non-affiliated limited partners, the management agreements provide non-affiliated limited partners the ability to remove WRCM as manager without cause. WRCM earns 50 basis points (annually) on the outstanding balance of the investments in these funds, of which WRCM pays approximately 50 percent of such amount to Union Bank as custodian. As of December 31, 2019, the total outstanding balance of investments in these funds was $152.1 million. During 2019, the Company paid Union Bank $0.3 million as custodian of the funds. • Defined contribution plan - Union Bank administers the Company's 401(k) defined contribution plan. Fees paid to Union Bank to administer the plan, approximately $366,000 in 2019, are paid by the plan's participants. The net aggregate impact on the Company's consolidated statements of income for the year ended December 31, 2019 related to the transactions with Union Bank as described above was income (before income taxes) of $9.7 million. The Company intends to maintain its relationship with Union Bank, which the Company's management believes provides certain benefits to the Company. Those benefits include Union Bank's knowledge of and experience in the FFELP industry, its willingness to provide services, and at times liquidity and capital resources, on an expedient basis, and the proximity of Union Bank to the Company's corporate headquarters located in Lincoln, Nebraska. The majority of the transactions and arrangements with Union Bank are not offered to unrelated third parties or subject to competitive bids. Accordingly, these transactions and arrangements not only present conflicts of interest, but also pose the risk to the Company's shareholders that the terms of such transactions and arrangements may not be as favorable to the Company as it could receive from unrelated third parties. Moreover, the Company may have and/or may enter into contracts and business transactions with related parties that benefit Mr. Dunlap and his sister, as well as other related parties, that may not benefit the Company and/or its minority shareholders. Transactions with F&M During 2019, the Company, F&M, and BankFirst, the holding company of BankFirst of Norfolk, Nebraska, of which Mr. Dunlap is a member of the Board of Directors, co-invested $0.7 million, $2.1 million, and $2.1 million, respectively, in a Company- managed limited liability company that invests in renewable energy (solar). As part of these transactions, the Company receives management and performance fees under a management agreement. During 2019, the Company earned a total of approximately $138,000 of management fees under this agreement, allocable in equal amounts of approximately $69,000 to the investments of each of F&M and BankFirst. Transactions with Mr. Dunlap The Company owns an 82.5% interest in an aircraft due to the frequent business travel needs of the Company's executives and the limited availability of commercial flights in Lincoln, Nebraska, where the Company's headquarters are located. An entity owned by Mr. Dunlap (which entity is referred to herein as “MSD”) owns the remaining 17.5% interest in the same aircraft. The aircraft joint ownership agreement between the Company and MSD for this aircraft provides that it will continue in effect on a month to 39 month basis until terminated by mutual agreement, and that MSD has the right to require the Company to purchase MSD’s interest in the aircraft for an amount equal to MSD’s pro rata portion (determined on the basis of its ownership percentage) of the aircraft's fair market value at that time. If the term of the joint ownership agreement is not extended by agreement of the Company and MSD, the aircraft must be sold and the net proceeds from the sale distributed to the Company and MSD in proportion to their ownership percentages. Under an aircraft maintenance agreement among the Company, MSD, and an unrelated aviation service company, a total of approximately $0.4 million in management fees was paid to the service company in 2019, which amount was allocated to the Company and MSD based on their respective ownership percentages. The maintenance agreement also provides that the Company must pay for all flight operating expenses for each flight conducted on its behalf, with a corresponding obligation by MSD, and that both the Company and MSD must pay their pro-rata portion, based on actual use percentages, of the cost of maintaining the aircraft. Transactions with Hudl The Company and Mr. Dunlap, along with his children, currently hold combined direct and indirect equity ownership interests in Hudl of 19.2% and 3.7%, respectively. The Company's and Mr. Dunlap's direct and indirect equity ownership interests in Hudl consist of preferred stock with certain liquidation preferences that are considered substantive. On July 26, 2019, the Company, as lender, received a $16.0 million promissory note from Hudl. The promissory note carried a 14 percent interest rate and was due 180 days from the date of issuance. In connection with this promissory note, the Company entered into a Subordination Agreement with Union Bank, effective as of July 26, 2019, which required the Company to subordinate its promissory note from Hudl to existing notes Union Bank holds from Hudl. The $16.0 million promissory note from Hudl was paid in full to the Company in August 2019. The Company holds a promissory note issued by Hudl for approximately $120,000 in certain fees paid by the Company on behalf of Hudl in December 2015 related to the construction of a building for Hudl's corporate headquarters in Lincoln, Nebraska. The promissory note is interest-free and repayment by Hudl is contingent upon its receipt of certain future refunds from the City of Lincoln based on future job creation. The Company owns 25 percent of TDP Phase Three, LLC ("TDP"), an entity established during 2015 for the sole purpose of developing and operating a commercial building in Lincoln, Nebraska that is the corporate headquarters for Hudl. As of December 31, 2019, TDP had four notes payable outstanding totaling $23.7 million, of which recourse to the Company on these notes is equal to its ownership percentage of TDP. Hudl has a $30.0 million unsecured line of credit with Union Bank, which expires on September 30, 2020. During 2019, the Company's communications subsidiary, ALLO, paid Hudl approximately $7,000 for two Hudl clients' annual camera system subscription, which is used to record sporting events. ALLO paid the subscription fee in exchange for access to the Hudl clients' recorded content so that ALLO could make such sporting events available to its television service customers. Transactions with Assurity Life Insurance Company During the year ended December 31, 2019, Nelnet Business Solutions, a subsidiary of the Company, paid $1.7 million to Assurity for insurance premiums for insurance on certain tuition payment plans. As part of providing the tuition payment plan insurance to Nelnet Business Solutions, Assurity entered into a reinsurance agreement with the Company's insurance subsidiary, under which Assurity paid the Company's insurance subsidiary reinsurance premiums of $1.3 million in 2019, and the Company's insurance subsidiary paid claims on such reinsurance to Assurity of $0.9 million in 2019. In addition, Assurity pays Nelnet Business Solutions a partial refund annually based on claim experience, which was approximately $56,000 in 2019. During the year ended December 31, 2019, the Company made available to its employees certain voluntary insurance products through Assurity. Premiums are paid by participants and are remitted to Assurity by the Company on behalf of the participants. The Company remitted to Assurity approximately $466,000 in premiums related to these products during 2019. Both the aggregate of the payments made by the Company to Assurity during 2019, and the aggregate of the payments received by the Company from Assurity during 2019, were less than 2% of Assurity's gross revenues for 2019. 40 Other Transactions with Ms. Butterfield and the Butterfield Family Trust On June 17, 2019, the Company repurchased, in a privately negotiated transaction under the Company’s existing stock repurchase program, a total of 180,000 shares of the Company’s Class A common stock (the “Repurchased Shares”) from Ms. Butterfield and the Butterfield Family Trust. The shares were repurchased at a discount to the closing market price of the Company's Class A common stock as of June 17, 2019, which closing market price was $58.46 per share, and the transaction was separately approved by the Company’s Board of Directors. Immediately prior to the Company’s repurchase of the Repurchased Shares, the Repurchased 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. Transactions with Ameritas The Company and Ameritas have each invested approximately $800,000 for a 50 percent ownership interest in BenefitEd, a joint venture started in 2017 to help employers offer student loan repayment as an employee benefit by directly contributing toward an employee’s student loan balance. The Company does not consolidate or control BenefitEd. The Company provides accounting and payment processing services to BenefitEd, and Ameritas provides marketing services. The total value of these services in 2019 was approximately $420,000 and $208,000, respectively. In connection with the Company’s regular assessment of its insurance-based employee benefits and the costs associated therewith, in 2018, the Company began to use Ameritas Life Insurance Corp. to process claims related to the dental insurance plan the Company makes available to its employees and of which the Company self-insures. The total fee paid to Ameritas Life Insurance Corp. in 2019 was approximately $150,000. The Company and Ameritas have co-investments in certain real estate projects focused on the development of commercial and multi-family properties throughout the United States. As of December 31, 2019, the book value of the Company’s co-investments in these projects was $2.3 million. Additionally, as part of the co-investment transactions with Ameritas, the Company and Ameritas entered into an agreement under which the Company pays Ameritas a management fee related to each real estate project. The total fee paid in 2019 to Ameritas under this agreement was approximately $170,000. Ameritas owns a building in Lincoln, Nebraska where the Company leases approximately 40,000 square feet of office space. During 2019, the Company paid Ameritas approximately $580,000 in rent for this space. Other Employment Relationships Mr. Cintani, who serves on the Company's Board of Directors, has a son, Brian Cintani, 43, who is employed by the Company as an experienced financial analyst in the Company's capital markets group. During the year ended December 31, 2019, Brian Cintani's total compensation was approximately $162,000. Brian Cintani has been employed by the Company since 2002 and his employment preceded Mr. Cintani's service as a director which began in May 2012. Mr. Dunlap has a son, Matthew Dunlap, 30, who is employed by the Company as a Managing Director in the Nelnet Business Solutions operating segment. During the year ended December 31, 2019, Matthew Dunlap's total compensation was approximately $190,000. Matthew Dunlap has been employed by the Company since 2017. Other Transactions Though not required to be disclosed under Item 404(a) of Regulation S-K, below are transactions and relationships the Company had with other related parties during 2019. NEBCO, Inc. is a family-owned company based in Lincoln, Nebraska with interests in the manufacture of concrete building materials, road construction, insurance, mining, railroading, farming, and real estate, of which Mr. Abel, who has served on the Company's Board of Directors since 2003, is CEO. During 2019, ALLO paid a subsidiary of NEBCO $43,000 for construction rock products related to the construction and expansion of ALLO's fiber optic network in Lincoln, Nebraska. In addition, the Company has 50 percent ownership interests in several real estate joint venture entities that were established for the purpose of developing and operating various properties in Lincoln, Nebraska. The Company does not consolidate or control these entities, and the other 50 percent owner is an unrelated third party and the developer that makes the day-to-day operating and development decisions for the various real estate development projects. During the development phase of certain projects, the developer, general contractor, or a subcontractor may select NEBCO to be a supplier of materials, and these entities may pay NEBCO directly or 41 indirectly for such materials. The Company has no participation or input with respect to any involvement of NEBCO with such projects. Unico Group, Inc. ("Unico"), an insurance agency of which Mr. Dunlap and Ms. Muhleisen's children own approximately 4.0%, provided real estate related insurance services to TDP during 2019. TDP paid Unico approximately $33,000 for these services during 2019. During 2019, the Company paid approximately $2,000 to Union Title Company, LLC, a 74.0% owned subsidiary of F&M, for fees related to the Company's real estate development activity. The Company has engaged Talent Plus to provide talent acquisition, selection, and development solutions to the Company. The Company paid Talent Plus approximately $16,000 related to these services in 2019. Ms. Rath, who serves on the Company's Board of Directors, is the Chairperson of Talent Plus, and with her spouse is a principal owner. In addition to the foregoing, from time to time, the Company, some of the Company's executive officers, and some of the members of the Company's Board of Directors invest in small or startup companies, often in the Company's local community. In some cases, executive officers of the Company may also serve as members of the Board of Directors of such companies in connection with the investment. The Company and certain executive officers have invested a total of $2.0 million in Capricorn Healthcare and Special Opportunities, LP ("Capricorn"). Capricorn is located in Palo Alto, California and is a limited partnership that primarily invests in healthcare- related companies. As of December 31, 2019, the investors and amount invested include the Company $973,000, Mr. Dunlap $973,000, and Mr. Noordhoek $97,000. Neither the Company, the Company's executive officers, nor members of the Company's Board of Directors, individually or in the aggregate, owns a majority interest in any of these companies. While the Company does not deem these investments to be related party transactions, the Company reports investment activity of this type to the Board of Directors. AUDIT COMMITTEE REPORT Report of the Board Audit Committee The Audit Committee of the Board of Directors (the “Committee”) is responsible for the oversight of the integrity of the Company's consolidated financial statements, the Company's system of internal control over financial reporting, the Company's policy standards and guidelines for risk assessment and risk management and compliance with legal and regulatory requirements, the qualifications and independence of the Company's independent auditor, and the performance of the Company's internal and independent auditors. The Committee has the sole authority and responsibility to select, determine the compensation of, evaluate, and, when appropriate, replace the Company's independent auditor. The Committee, with input from management, regularly monitors the performance of the key members of the independent auditors’ team, including the lead partner. In the case of rotation of the lead partner, the Committee is involved in the selection of the new lead audit partner, and considers such factors as the individual’s professional and relevant industry experience, other current assignments, and the proximity of their office location to the Company’s headquarters. The Committee is also responsible under the Sarbanes-Oxley Act of 2002 for establishing procedures for the receipt, retention, and treatment of complaints received by the Company regarding accounting, internal accounting controls, or auditing matters, and the confidential, anonymous submission by employees of concerns regarding questionable accounting or auditing matters. The Committee is currently comprised of three independent directors and operates under a written charter adopted by the Board, a copy of which is available at www.nelnetinvestors.com. The Board has determined that each Committee member is independent under the standards of director independence established under the Company's Corporate Governance Guidelines and the New York Stock Exchange listing requirements and is also independent under applicable independence standards of the Exchange Act and the SEC rules thereunder. The Committee serves in an oversight capacity and is not part of the Company's managerial or operational decision-making process. Management is responsible for the financial reporting process, including the system of internal controls, for the preparation of consolidated financial statements in accordance with generally accepted accounting principles, and for the report on the Company's internal control over financial reporting. The Company's independent auditor, KPMG LLP, is responsible for auditing the Company's financial statements and expressing an opinion as to their conformity with generally accepted accounting principles and for expressing an opinion on the effectiveness of the Company's internal control over financial reporting. The Committee's responsibility is to oversee the financial reporting process and to review and discuss management's report on the Company's internal control over financial reporting. The Committee relies, without independent verification, on the information provided to it and on the representations made by management, the internal auditor, and the independent auditor. 42 The Committee held six meetings during 2019. The Committee, among other things: • Reviewed and discussed the Company's earnings releases, Quarterly Reports on Form 10-Q, and Annual Report on Form 10-K, including the consolidated financial statements and compliance with legal and regulatory requirements • Reviewed and discussed, in conjunction with the Risk and Finance Committee, the Company's policies and procedures for risk assessment and risk management and the major risk exposures of the Company and its business units, as appropriate • Reviewed and discussed the annual plan and the scope of the work of the internal auditor for fiscal 2019 and reviewed all completed reports of the internal auditor • Reviewed management's progress on addressing internal and certain external audit findings • Reviewed and discussed the annual plan and scope of the work of the independent auditor • Reviewed and discussed, in conjunction with the Compliance Committee, reports from management on the Company's policies regarding applicable consumer-oriented legal and regulatory requirements • Met with KPMG LLP, the internal auditor, and Company management in separate executive sessions The Committee reviewed and discussed the audited consolidated financial statements for the year ended December 31, 2019 with management, the internal auditor, and KPMG LLP. The Committee reviewed and discussed the critical accounting policies and estimates as set forth in the Company's Annual Report on Form 10-K, management's annual report on the Company's internal control over financial reporting, and KPMG LLP's opinion on the effectiveness of internal control over financial reporting. The Committee also discussed with management and the internal auditor the process used to support certifications by the Company's Chief Executive Officer and Chief Financial Officer that are required by the SEC and the Sarbanes-Oxley Act of 2002 to accompany the Company's periodic filings with the SEC and the processes used to support management's annual report on the Company's internal control over financial reporting. The Committee discussed with KPMG LLP matters related to the audit of the Company's consolidated financial statements and the matters required to be discussed by Auditing Standard No. 1301, Communications with Audit Committees, issued by the Public Company Accounting Oversight Board (“PCAOB”), and in connection therewith discussed with KPMG LLP the matters required to be discussed by the applicable requirements of the PCAOB and the SEC. This review included a discussion with management and KPMG LLP as to the quality (not merely the acceptability) of the Company's accounting principles, the reasonableness of significant estimates and judgments, and the disclosures within the Company's consolidated financial statements, including the disclosures relating to critical accounting policies. KPMG LLP also provided to the Committee the written disclosures and the letter required by applicable requirements of the PCAOB regarding KPMG LLP's communications with the Committee concerning independence. The Committee discussed with KPMG LLP their independence from the Company. When considering KPMG LLP's independence, the Committee considered if services they provided to the Company beyond those rendered in connection with their audit of the Company's consolidated financial statements, reviews of the Company's interim condensed consolidated financial statements included in its Quarterly Reports on Form 10-Q, and their opinion on the effectiveness of the Company's internal control over financial reporting were compatible with maintaining their independence. The Committee also reviewed and pre- approved, among other things, the audit, audit-related, and tax services performed by KPMG LLP. For tax services, the pre-approval included discussion with KPMG concerning their independence as required by PCAOB Rule 3524 (Audit Committee Pre-approval of Certain Tax Services). The Committee received regular updates on the amount of fees and scope of audit, audit-related, and tax services provided. Based on the Committee's review and these meetings, discussions, and reports, and subject to the limitations on the Committee's role and responsibilities referred to above and in the Audit Committee Charter, the Committee recommended to the Board that the Company's audited consolidated financial statements for the year ended December 31, 2019 be included in the Company's 2019 Annual Report on Form 10-K for filing with the SEC. The Committee has also selected KPMG LLP as the Company's independent auditor for the year ending December 31, 2020 and is presenting the selection to the shareholders for ratification. 43 KPMG has been the Company’s independent auditor since 1998. The Committee last went through a Request for Proposal for independent audit and non-audit services effective for the year ended December 31, 2012. Respectfully submitted, Thomas E. Henning, Chairman Kathleen A. Farrell William R. Cintani PROPOSAL 2 - RATIFICATION OF APPOINTMENT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM The Audit Committee selects the Company's independent registered public accounting firm. This proposal is put before the shareholders because the Board believes that it is good corporate governance practice to seek shareholder ratification of the selection of the independent registered public accounting firm. If the appointment of KPMG LLP is not ratified, the Audit Committee will evaluate the basis for the shareholders' vote when determining whether to continue the firm's engagement. The Board of Directors of the Company recommends a vote FOR the ratification of the appointment of KPMG LLP as the independent registered public accounting firm for 2020. The affirmative vote of the majority of votes cast at the Annual Meeting is required to ratify the appointment of KPMG LLP. Unless marked to the contrary, proxies will be voted FOR the ratification of the appointment of KPMG LLP as the independent registered public accounting firm for 2020. Representatives of KPMG LLP are expected to attend the Annual Meeting and to respond to appropriate questions from shareholders present at the meeting and will have an opportunity to make a statement if they desire to do so. Independent Accountant Fees and Services Aggregate fees for professional services rendered by KPMG LLP for the years ended December 31, 2019 and 2018 are set forth below. 2019 2018 Audit fees Audit-related fees Tax fees All other fees Total $ $ 827,910 1,476,500 30,898 1,780 2,337,088 765,120 1,227,594 55,553 1,780 2,050,047 Audit-related fees were for assurance and other services related to service provider compliance reports, including Service Organization Controls (SOC1) reports on the effectiveness of the Company's controls for student loan servicing and other services provided for its customers, employee benefit plan audits, agreed-upon procedures for Company-sponsored student loan securitization financings and other matters, and consultations concerning financial accounting and reporting standards. Tax fees were for services related to tax compliance and planning. All other fees represent the amount paid by the Company for access to an on-line accounting and tax reference tool. In addition to the services and fees described above, KPMG was engaged to perform audits of and provide tax services for certain private investment funds which are managed by WRCM, for which KPMG received total fees of $82,500 and $77,500 in 2019 and 2018, respectively. Additionally, TDP Phase Three, LLC, an entity of which the Company owns 25 percent and was established for the sole purpose of developing and operating a building, engaged KPMG to perform audits in 2019 and 2018, for which KPMG received total fees of $25,000 and $23,800, respectively. The Audit Committee's pre-approval policy with respect to audit and permitted non-audit services by the independent auditor is set forth in its charter. The Audit Committee has the sole authority to appoint, retain, and terminate the Company's independent auditor, which reports directly to the Audit Committee. The Audit Committee is directly responsible for the evaluation, compensation (including as to fees and terms), and oversight of the work of the Company's independent auditor (including resolution of disagreements between management and the independent auditor regarding financial reporting) for the purpose of preparing or 44 issuing an audit report or performing other audit, review, or attestation services for the Company. All related fees and costs of the independent auditor, as determined by the Audit Committee, are paid promptly by the Company in accordance with its normal business practices. All auditing services and permitted non-audit services performed for the Company by the independent auditor, including the services for 2019 and 2018 described above, are pre-approved by the Audit Committee, subject to applicable laws, rules, and regulations. The Audit Committee may form and delegate to a subcommittee the authority to grant pre-approvals with respect to auditing services and permitted non-auditing services, provided that any such grant of pre-approval shall be reported to the full Audit Committee at its next meeting. PROPOSAL 3 - ADVISORY VOTE TO APPROVE EXECUTIVE COMPENSATION Section 14A of the Exchange Act requires that the Company provide its shareholders with the opportunity to vote to approve, on a nonbinding, advisory basis, the compensation of the Company's Named Executive Officers as disclosed pursuant to the compensation disclosure rules of the SEC, and the Company is therefore providing its shareholders with the opportunity to cast such an advisory vote on executive compensation at this year’s Annual Meeting as described below. The Company believes that it is appropriate to seek the views of shareholders on the design and effectiveness of the Company's executive compensation program. Based on the results of an advisory vote on the frequency of advisory votes on executive compensation at the Company's 2017 annual meeting of shareholders, where the Board of Directors recommended and the shareholders voted in favor of holding an advisory vote on executive compensation every year, the Board of Directors determined that, until the next vote on the frequency of holding advisory votes on executive compensation, the Company will hold a shareholder advisory vote on executive compensation every year. Therefore, the next advisory vote on executive compensation will occur at the Company’s 2021 annual meeting of shareholders. Section 14A of the Exchange Act requires that at least once every six years the Company provide its shareholders with the opportunity to vote, on a nonbinding, advisory basis, on whether the frequency of future advisory votes on executive compensation will be every one, two, or three years. As described in the Compensation Discussion and Analysis section of this Proxy Statement, the Company's objective for its executive compensation program is to attract, motivate, develop, and retain executives who will contribute to the Company's long- term success and the creation of shareholder value. The Company seeks to accomplish this objective in a way that rewards performance and is aligned with its shareholders' long-term interests, and the Company's compensation programs are designed to reward the Named Executive Officers for the achievement of short-term and long-term strategic and operational goals and the achievement of increased shareholder return, while at the same time avoiding the encouragement of unnecessary or excessive risk- taking. The framework and executive compensation philosophy are established by an independent People Development and Compensation Committee of the Board of Directors. The following items reflect our commitment to pay for performance and to maintain a strong executive compensation governance framework: • Incentive plans that are based upon financial and operational goals that are reviewed annually by the People Development and Compensation Committee. • An annual risk assessment conducted by the People Development and Compensation Committee to evaluate whether incentive programs drive behaviors that are demonstrably within the risk management parameters it deems prudent. • A robust share ownership and retention policy. The Compensation Discussion and Analysis and the compensation tables and disclosures provided in this Proxy Statement describe the Company's executive compensation program in more detail, and discuss the following key elements of the program: • We pay for performance, both in setting base salaries and awarding incentives via an Executive Officers Incentive Compensation Plan. This plan is used to assess the participating Named Executive Officers’ performance based on numerous criteria, including certain financial measures such as levels of earnings, growth of assets, return on equity and assets, cash flow, market share, operating margins and operating expenses; certain service measures including performance of the Company's operating segments; employee engagement; and strategic positioning. • Periodically, we retain external, independent compensation consultants to review the compensation levels and practices for the Named Executive Officers, compare those levels to executives in comparable positions in select industries and companies, and identify potential gaps or inconsistencies in our compensation practices. 45 • None of the Named Executive Officers has an employment agreement or severance arrangement. In addition, the Company generally does not provide significant perquisites, tax reimbursements, or change in control benefits to the Named Executive Officers that are not available to other employees, and we do not issue stock options. • Each of the Named Executive Officers is employed at-will and is expected to demonstrate exceptional personal performance in order to continue serving as a member of the executive team. The Company believes the compensation program for the Named Executive Officers is instrumental in helping the Company achieve its strong financial performance, and is asking shareholders to approve the compensation of the Company's Named Executive Officers as disclosed in this Proxy Statement, including in the Compensation Discussion and Analysis, the compensation tables, and the narrative disclosures that accompany the compensation tables. The vote on this proposal is not intended to address any specific element of compensation; rather, the vote relates to the compensation of our Named Executive Officers, as described in this Proxy Statement in accordance with the compensation disclosure rules of the SEC. As an advisory vote, the vote on this proposal is not binding upon the Company, the Board of Directors, or the People Development and Compensation Committee. However, the People Development and Compensation Committee, which is responsible for designing and administering the Company's executive compensation program, values the opinions expressed by shareholders in their vote on this proposal and will consider the outcome of the vote when making future compensation decisions for Named Executive Officers. Accordingly, the Company's shareholders are asked to vote on the following resolution at the Annual Meeting: “RESOLVED, that the Company's shareholders approve, on an advisory basis, the compensation of the Named Executive Officers, as disclosed in the Company's Proxy Statement for the 2020 Annual Meeting of Shareholders pursuant to the compensation disclosure rules of the Securities and Exchange Commission, including the Compensation Discussion and Analysis, the Summary Compensation Table, and the other related tables and disclosure.” The Board of Directors recommends a vote FOR the approval of the compensation of the Company's Named Executive Officers, as disclosed in this Proxy Statement. OTHER SHAREHOLDER MATTERS Householding Under SEC rules, we are allowed to send in a single envelope our Notice of Internet Availability of Proxy Materials or a single copy of our proxy solicitation and other required annual meeting materials to two or more shareholders sharing the same address. We may do this only if the shareholders at that address share the same last name or if we reasonably believe that the shareholders are members of the same family or group. If we are sending a Notice, the envelope must contain a separate Notice for each shareholder at the shared address. Each Notice must also contain a unique control number that each shareholder will use to gain access to our proxy materials and vote online. If we are mailing a paper copy of our proxy materials, the rules require us to send each shareholder at the shared address a separate proxy card. We believe these rules are beneficial to both our shareholders and to us. Our printing and postage costs are lowered anytime we eliminate duplicate mailings to the same household. However, shareholders at a shared address may revoke their consent to the householding program and receive their Notice in a separate envelope, or, if they have elected to receive a full copy of our proxy materials in the mail, receive a separate copy of these materials. If you receive a single set of proxy materials but prefer to receive separate copies for each registered account in your household, please contact our agent, Broadridge, at: 1-866-540-7095, or in writing at: Broadridge Householding Department, 51 Mercedes Way, Edgewood, New York 11717. Broadridge will remove you from the householding program within 30 days of receipt of your request, following which you will begin receiving an individual copy of the material. You can also contact Broadridge at the phone number above if you received multiple copies of the proxy materials and would prefer to receive a single copy in the future. 46 Other Business On the date that this Proxy Statement was first made available to shareholders, the Board of Directors had no knowledge of any other matter which will come before the Annual Meeting other than the matters described herein. However, if any such matter is properly presented at the Annual Meeting, the proxy solicited hereby confers discretionary authority to the proxies to vote in their sole discretion with respect to such matters, as well as other matters incident to the conduct of the Annual Meeting. Shareholder Proposals for 2021 Annual Meeting Shareholder proposals intended to be presented at the 2021 Annual Meeting of Shareholders, currently scheduled for May 20, 2021, must be received at the Company's offices at 121 South 13th Street, Suite 100, Lincoln, Nebraska 68508, Attention: Corporate Secretary, on or before December 10, 2020, to be eligible for inclusion in the Company's 2021 proxy materials. The inclusion of any such proposal in such proxy materials shall be subject to the requirements of the proxy rules adopted under the Exchange Act, (the “Proxy Rules”). The submission of a shareholder proposal does not guarantee that it will be included in the Company's Proxy Statement. A shareholder may otherwise propose business for consideration or nominate persons for election to the Board of Directors, in compliance with federal proxy rules, applicable state law, and other legal requirements and without seeking to have the proposal included in the Company's Proxy Statement pursuant to the Proxy Rules. Under the Company's Bylaws, the Secretary of the Company must receive notice of any such proposal or nominations for the Company's 2021 Annual Meeting between January 22 and February 21, 2021 (90 to 120 days before the first anniversary of this year's Annual Meeting date). The notice must contain the information required by the Company's Bylaws. A proxy may confer discretionary authority to vote on any matter at a meeting if the Company does not receive notice of the matter within the time frame described above. A copy of the Company's Bylaws is available at the Company's investor relations website at www.nelnetinvestors.com under “Corporate Governance” - “Governance Documents” or is available upon request to: Nelnet, Inc., 121 South 13th Street, Suite 100, Lincoln, Nebraska 68508, Attention: Corporate Secretary. The Chairman of the meeting may exclude matters that are not properly presented in accordance with these requirements. MISCELLANEOUS The information under the captions “People Development and Compensation Committee Report” and “Audit Committee Report” (i) shall not be deemed to be “soliciting material” or to be “filed” with the SEC or subject to Regulation 14A or the liabilities of Section 18 of the Exchange Act, and (ii) shall not be deemed to be incorporated by reference in any filing under the Securities Act of 1933 or the Exchange Act, except to the extent that the Company specifically incorporates such information by reference in such filing. 47 

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