Nelnet (NNI) Risk Analysis

Natural disasters, widespread health crises, terrorist activities, or international hostilities could affect the financial markets or the economy in general or in any particular region and 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, as well as have adverse effects on our other assets and business operations. We cannot predict specifically when and where such events will occur, or the full nature and extent thereof, and our resiliency planning may not be sufficient to mitigate the adverse consequences of such events. The adverse impact of such events could also be increased to the extent that there is insufficient 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.

Credit risk - loans Our loan portfolio is subject to credit risk, including the risk that borrowers may be unable or unwilling to repay their obligations. We estimate our allowance for loan losses using a range of quantitative and qualitative factors, including repayment and delinquency status; loan program type; historical and current default trends based on internal experience and industry data; prior loss experience; trends in claims rejected by guarantors on federally insured student loans; changes to federal student loan programs; borrower FICO scores; and current and forecasted macroeconomic conditions, including unemployment levels, gross domestic product, and consumer price inflation, as well as other relevant qualitative considerations. As of December 31, 2025, 78.8% of our loan portfolio is federally guaranteed, which substantially limits our exposure to credit losses on those loans. However, our private education and consumer loan portfolios are unsecured and expose us to the full risk of loss in the event of borrower default. We are actively expanding our acquisition of private education and consumer loan portfolios, which increases our overall exposure to credit risk. If defaults on loans we hold are higher than anticipated, whether due to adverse economic conditions, changes in regulatory or operating environments, inaccurate underwriting assumptions, or other unforeseen factors, or if actual credit performance is significantly worse than our estimates, we may be required to increase our allowance for loan losses. Many of our consumer loans, including Pay Later receivables, are underwritten, serviced, and collected by third-parties that we do not control. Any increase in defaults would result in higher provisions for loan losses and could materially and adversely affect our consolidated results of operations and financial condition. Credit risk - beneficial interest in loan securitizations We own partial ownership in consumer, private education, and federally insured student loan third-party securitizations that are classified as "beneficial interest in loan securitizations" and included in "other investments and notes receivable, net" on our consolidated balance sheets. As of the latest remittance reports filed by the various trusts prior to or as of December 31, 2025, our ownership correlates to approximately $1.83 billion of loans included in these securitizations. As of December 31, 2025, the investment balance on our consolidated balance sheet of its beneficial interest in loan securitizations was $194.8 million. Our partial ownership percentage in each loan securitization grants us the right to receive the corresponding percentage of cash flows generated by the securitization. The cash flows generated from the securitizations are highly subject to credit risk (defaults). If defaults are higher than management's current estimate, future cash flows and investment interest income (earnings) from these securitizations would be adversely impacted. In addition, the value of the current investment balance may not be recoverable, resulting in an adverse impact to our operating results. A change in the Company's estimate of future cash flows based on cumulative loss expectations may result in an increase to the Company's established allowance for credit losses (and related provision expense) related to these investments. Prepayment risk Higher rates of prepayments of loans reduces our loan interest income from our loan portfolio and investment interest income on our beneficial interest in loan securitizations. The Higher Education Act allows borrowers to prepay FFEL Program loans at any time without penalty. Prepayments on our federally insured loan portfolio have resulted and may continue to 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 on federally insured loans, which will result in the receipt of a guaranty payment; and from voluntary full or partial prepayments; among other things. Beginning in late 2021, we experienced accelerated run-off of our FFELP loan portfolio as borrowers consolidated into the Federal Direct Loan Program, driven by Department initiatives under the Biden Administration and the CARES Act payment and interest pause beginning in March 2020 through August 2023. Subsequent developments, including the Supreme Court's invalidation of broad-based debt relief, withdrawal of rulemaking efforts, and litigation pausing implementation of the SAVE income-driven repayment plan, have reduced consolidation incentives. These factors have resulted in a significant decrease in FFELP borrowers consolidating their loans into the Federal Direct Program since August 2024. While more unlikely now under the Trump Administration, if the federal government or the Department initiate additional loan forgiveness or cancellation, other repayment options or plans, or consolidation loan programs, such initiatives could increase prepayments and reduce interest income. Even if a broad debt cancellation program only applied to student loans held by the Department, such program could result in a significant increase in consolidations of FFELP loans to Federal Direct Loan Program loans and a corresponding increase in prepayments with respect to our FFELP loan portfolio, and also a decrease in our third-party FFELP loan servicing revenues. We cannot predict how or what programs or policies will be impacted by any actions that the Trump Administration or Congress may take, the timing of when such programs or policies may be implemented, and/or the ultimate outcome thereof. In addition, any changes to government programs or policies may be legally challenged, which may affect the extent and timing of these changes and the resulting impact they may have on our businesses, financial condition, or results of operations. New or modified Government programs or policies may lead to increased call volumes and have a negative effect on the level of service we are able to provide. Sustained higher prepayment levels and/or a significant increase in prepayment levels could have a material adverse effect on our revenues, cash flows, profitability, and business outlook, and, as a result, could have a material adverse effect on our business, financial condition, or results of operations, including loan interest income in our AGM and Nelnet Bank segments, investment interest income on our beneficial interest in loan securitizations, FFELP servicing revenue in our LSS segment, investment advisory services revenue earned by WRCM on FFELP loan asset-backed securities under management, and interest income earned on our FFELP loan asset-backed securities investments. Interest rate risk - basis and repricing risk We fund the majority of the FFELP student loan assets in our AGM segment with 30-day or 90-day Secured Overnight Financing Rate (SOFR) indexed floating rate securities. Meanwhile, the interest earned on our FFELP student loan assets is indexed to 30-day average SOFR, three-month commercial paper, and three-month 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 variable student loan spread to compress, while in a rising interest rate environment, it may cause the variable spread to increase. As of December 31, 2025, our AGM segment had $7.0 billion, $0.2 billion, and $0.2 billion of FFELP loans indexed to the 30-day average SOFR, three-month commercial paper, and three-month Treasury bill rate, respectively, all of which reset daily, and $1.4 billion of debt indexed to 90-day SOFR, which resets quarterly, and $5.0 billion of debt indexed to 30-day SOFR, 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, the indices' historically high level of correlation may be disrupted in the future due to capital market dislocations or other factors not within our control. In such circumstances, our business, financial condition, or results of operations could be materially adversely affected. Interest rate risk - use of derivatives We use derivative instruments to manage interest rate sensitivity. See note 6 of the notes to consolidated financial statements included in this report for additional information on derivatives used by us to manage interest rate risk. Most of these derivatives do not qualify for hedge accounting, and changes in their fair value are recognized in earnings. As a result, movements in interest rates and shifts in the yield curve can materially affect the valuation of our derivatives and our results of operations. Interest rate risk management is complex, and our strategies may not fully mitigate exposure. Because certain derivatives are not fully matched to specific loan pools or hedged on a notional or duration basis, we may be under or over hedged, which could result in material losses. In addition, if interest rates move differently than expected, our derivatives may generate significant mark-to-market losses and increase earnings volatility, which could have a material adverse effect on our business, financial condition, and results of operations. Certain derivative transactions are subject to clearing requirements, which require us to post substantial collateral and may negatively affect liquidity or limit our ability to use derivatives, although they reduce counterparty risk. Non-centrally cleared derivatives expose us to counterparty credit risk. Nelnet Bank's derivatives are non-centrally cleared and are entered into with high-quality counterparties. If a counterparty fails to perform, we could incur a loss equal to the recorded fair value of the derivative, net of collateral. As of December 31, 2025, Nelnet Bank had $245.0 million in notional derivative contracts, with gross fair values of $0.6 million in asset positions and $1.7 million in liability positions. Interest rate movements also affect daily settlement payments and collateral requirements. Material adverse rate movements or additional derivatives with negative fair values could require significant margin or collateral payments, which could materially and adversely affect our results of operations, liquidity, or capital resources.

The banking industry is highly regulated, and the regulatory framework, together with any future legislative changes, may have a significant adverse effect on Nelnet Bank's operations. The regulatory landscape surrounding industrial banks continues to be scrutinized and banking policy changes may be difficult to predict in advance. Nelnet Bank's current product offerings are primarily concentrated in loan products for higher education and unsecured consumer lending. Such concentrations and the competitive environment for those products subject the bank to risks that could adversely affect its financial condition. Consumer access to alternative means of financing, the costs of education, interest rates, economic conditions, and other factors may reduce demand for, or adversely affect Nelnet Bank's ability to originate new and/or retain private education loans. Nelnet Bank has FDIC-required agreements with Nelnet, Inc. and Michael S. Dunlap (Nelnet, Inc.'s controlling shareholder) in connection with Nelnet, Inc.'s role as a source of financial strength for Nelnet Bank. For additional information, see the MD&A - "Liquidity and Capital Resources - Sources and Needs of Liquidity - Nelnet Bank." However, any failure to meet minimum capital requirements and FDIC regulations can initiate certain mandatory and possibly additional discretionary actions by regulators that, if undertaken, could have a material adverse impact on our business, financial condition, or results of operations.