Description of Business

Nelnet, Inc. and its subsidiaries (“Nelnet” or the “Company”) is a diverse company with a focus on delivering education-related products and services and loan asset management. The largest operating businesses engage in loan servicing, tuition payment processing and school information systems, 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 and start-up ventures. 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 Systems and Servicing

• Tuition Payment Processing and Campus Commerce

• Communications

• Asset Generation and Management

A description of each reportable operating segment is included below. See note 15 for additional information on the Company's segment reporting.

Loan Systems and Servicing

The primary service offerings of the Loan Systems and Servicing 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

In addition, this segment provided servicing and outsourcing services for FFELP guaranty agencies, including FFELP guaranty collection services, through June 30, 2016.

The Loan Systems and Servicing operating segment 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.

The Company is one of four 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 operating 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.

This segment also provides business process outsourcing 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.

In addition, this operating segment provided servicing activities for guaranty agencies, which serve as intermediaries between the Department and FFELP lenders, and are responsible for paying the claims made on defaulted loans. The services provided by the Company included providing software and data center services, borrower and loan updates, default aversion tracking services, claim processing services, and post-default collection services. The Company's guaranty servicing and collection revenue was earned from two guaranty servicing clients. A contract with one client expired on October 31, 2015, and was not renewed. The remaining guaranty servicing client exited the FFELP guaranty business at the end of their contract term on June 30, 2016, and after this date the Company has no remaining guaranty servicing and collection revenue.

Tuition Payment Processing and Campus Commerce

The Company's Tuition Payment Processing and Campus Commerce operating segment provides products and services to help students and families manage the payment of education costs at all levels (K-12 and higher education). In addition, this operating segment provides K-12 private and faith-based schools (i) school information system software that help schools automate administrative processes such as admissions, scheduling, student billing, attendance, and grade book management and (ii) professional development and educational instruction services. This segment also provides innovative education-focused technologies, services, and support solutions to help schools with the everyday challenges of collecting and processing commerce data.

In the K-12 market, the Company offers actively managed tuition payment plans and billing services, school information system and learning management software, professional development and educational instruction services, and assistance with financial needs assessment and donor management. In the higher education market, the Company primarily offers actively managed tuition payment plans and campus commerce technologies and payment processing.

Outside of the education market, the Company also offers payment services including electronic transfer and credit card processing, reporting, billing and invoicing, mobile and virtual terminal solutions, and specialized integrations to business software.

Communications

On December 31, 2015, the Company purchased the majority of the ownership interests of ALLO Communications LLC (“ALLO”). ALLO provides pure fiber optic service to homes and businesses for internet, broadband, television, and telephone services. The acquisition of ALLO 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. For financial reporting purposes, the Company provides the operating results of ALLO as a separate reportable operating segment. The ALLO assets acquired and liabilities assumed were recorded by the Company at their respective estimated fair values at the date of acquisition. As such, ALLO’s assets and liabilities as of December 31, 2015 are included in the Company’s consolidated balance sheet. However, ALLO had no impact on the consolidated statement of income for 2015. Beginning January 1, 2016, the Company began to reflect the operations of ALLO in the consolidated statements of income.

ALLO derives its revenue primarily from the sale of communication services to residential and business customers in Nebraska. Internet, broadband, and television services include revenue from residential and business customers for subscriptions to ALLO's video and data 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. Local calling services include fiber telephone service and other basic services. Long-distance services include traditional domestic and international long distance which enables customers to make calls that terminate outside their local calling area.

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 student loan assets are held in a series of education 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


•	Income earned on certain investment activities, including real estate and start-up ventures


•	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 management, human resources, accounting, legal, enterprise risk management, information technology, occupancy, and marketing. These costs are allocated to each operating segment based on estimated use of such activities and services.